The Hain Celestial Group, Inc. 10Q - quarterly period ended 12/31/06
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act
of 1934
For
the
quarterly period ended December 31, 2006
|_|
Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act
of 1934 for the transition period from ______ to _______.
THE
HAIN CELESTIAL GROUP, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
22-3240619
(I.R.S.
Employer
Identification
No.)
|
58
South Service Road
Melville,
New York
(Address
of principal executive offices)
|
11747
(Zip
Code)
|
Registrant’s
telephone number, including area code: (631) 730-2200
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes |X| No
|_|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [X] Accelerated
filer [ ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes |_| No |X|
As
of
February 5, 2007 there were 39,442,908 shares outstanding of the registrant’s
Common Stock, par value $.01 per share.
THE
HAIN CELESTIAL GROUP, INC.
INDEX
Part
I
Financial Information
Item
1.
|
Financial
Statements
|
|
Condensed
Consolidated Balance Sheets - December 31, 2006 (unaudited)
and June 30, 2006
|
2
|
|
|
|
|
Condensed
Consolidated Statements of Income - Three
months and six months ended December 31, 2006 and 2005
(unaudited)
|
3
|
|
|
|
|
Condensed
Consolidated Statement of Stockholders' Equity -
|
|
|
Six
months ended December 31, 2006 (unaudited)
|
4
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows -
|
|
|
Six
months ended December 31, 2006 and 2005 (unaudited)
|
5
|
Notes to Condensed Consolidated Financial Statements
|
6
|
Item
2.
|
Management's
Discussion and Analysis of Financial
|
|
|
Condition
and Results of Operations
|
13
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures
|
|
|
About
Market Risk
|
18
|
|
|
|
Item
4.
|
Controls
and Procedures
|
18
|
|
|
|
Part
II
Other Information
Item
1 - Legal Proceedings
|
18
|
|
|
Items
1A, 2, 3 and 5 are not applicable
|
|
|
|
Item
4 - Submission of Matters to a Vote of Security Holders
|
18
|
|
|
Item
6 - Exhibits
|
19
|
|
|
Signatures
|
20
|
PART
I - FINANCIAL INFORMATION
ITEM
1.
FINANCIAL STATEMENTS
THE
HAIN
CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except per share and share amounts)
|
|
December
31,
2006
|
|
June
30,
2006
|
|
ASSETS
|
|
(Unaudited)
|
|
(Note)
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
83,079
|
|
$
|
48,875
|
|
Accounts
receivable, less allowance for doubtful
accounts
of $2,135 and $2,104
|
|
|
104,106
|
|
|
80,764
|
|
Inventories
|
|
|
115,665
|
|
|
105,883
|
|
Deferred
income taxes
|
|
|
3,872
|
|
|
2,986
|
|
Other
current assets
|
|
|
17,860
|
|
|
21,968
|
|
Total
current assets
|
|
|
324,582
|
|
|
260,476
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
117,704
|
|
|
119,830
|
|
Goodwill
|
|
|
399,666
|
|
|
421,002
|
|
Trademarks
and other intangible assets, net
|
|
|
79,939
|
|
|
61,626
|
|
Other
assets
|
|
|
16,043
|
|
|
14,750
|
|
Total
assets
|
|
$
|
937,934
|
|
$
|
877,684
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
98,775
|
|
$
|
81,894
|
|
Income
taxes payable
|
|
|
10,940
|
|
|
3,083
|
|
Current
portion of long-term debt
|
|
|
400
|
|
|
1,065
|
|
Total
current liabilities
|
|
|
110,115
|
|
|
86,042
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
151,409
|
|
|
151,229
|
|
Deferred
income taxes
|
|
|
19,086
|
|
|
19,086
|
|
Total
liabilities
|
|
|
280,610
|
|
|
256,357
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
5,378
|
|
|
4,926
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock - $.01 par value, authorized 5,000,000
shares, no shares issued
|
|
|
-
|
|
|
-
|
|
Common
stock - $.01 par value, authorized 100,000,000
shares, issued 40,304,164 and 39,583,671 shares
|
|
|
403
|
|
|
396
|
|
Additional
paid-in capital
|
|
|
459,098
|
|
|
446,319
|
|
Retained
earnings
|
|
|
188,836
|
|
|
165,034
|
|
Foreign
currency translation adjustment
|
|
|
16,354
|
|
|
17,397
|
|
|
|
|
664,691
|
|
|
629,146
|
|
Less:
861,256 shares of treasury stock, at cost
|
|
|
(12,745
|
)
|
|
(12,745
|
)
|
Total
stockholders' equity
|
|
|
651,946
|
|
|
616,401
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
937,934
|
|
$
|
877,684
|
|
Note:
The
balance sheet at June 30, 2006 has been derived from the audited financial
statements at that date.
See
notes
to condensed consolidated financial statements.
THE
HAIN
CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In
thousands, except per share amounts)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
230,909
|
|
$
|
186,227
|
|
$
|
441,116
|
|
$
|
347,324
|
|
Cost
of sales
|
|
|
160,319
|
|
|
128,061
|
|
|
311,384
|
|
|
243,309
|
|
Gross profit
|
|
|
70,590
|
|
|
58,166
|
|
|
129,732
|
|
|
104,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and
administrative expenses
|
|
|
44,799
|
|
|
36,988
|
|
|
86,645
|
|
|
70,857
|
|
Operating income
|
|
|
25,791
|
|
|
21,178
|
|
|
43,087
|
|
|
33,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other
expenses, net
|
|
|
1,754
|
|
|
1,309
|
|
|
3,574
|
|
|
2,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
24,037
|
|
|
19,869
|
|
|
39,513
|
|
|
30,981
|
|
Provision
for income taxes
|
|
|
9,269
|
|
|
7,531
|
|
|
15,711
|
|
|
11,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
14,768
|
|
$
|
12,338
|
|
$
|
23,802
|
|
$
|
19,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
0.33
|
|
$
|
0.61
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.36
|
|
$
|
0.32
|
|
$
|
0.59
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
39,173
|
|
|
37,165
|
|
|
38,960
|
|
|
36,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
41,202
|
|
|
38,434
|
|
|
40,613
|
|
|
37,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed consolidated financial statements.
THE
HAIN
CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR
THE
SIX MONTHS ENDED DECEMBER 31, 2006
(In
thousands, except per share and share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
Amount
|
|
Paid-in
|
|
Retained
|
|
Treasury
Stock
|
|
Translation
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
at
$.01
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Amount
|
|
Adjustment
|
|
Total
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
|
39,583,671
|
|
$
|
396
|
|
$
|
446,319
|
|
$
|
165,034
|
|
|
861,256
|
|
$
|
(12,745
|
)
|
$
|
17,397
|
|
$
|
616,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
720,493
|
|
|
7
|
|
|
11,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
compensation charge
|
|
|
|
|
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
23,802
|
|
|
|
|
|
|
|
|
|
|
|
23,802
|
|
$
23,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,043
|
)
|
|
(1,043
|
)
|
(1,043)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$22,759
|
Balance
at December 31, 2006
|
|
|
40,304,164
|
|
$
|
403
|
|
$
|
459,098
|
|
$
|
188,836
|
|
|
861,256
|
|
$
|
(12,745
|
)
|
$
|
16,354
|
|
$
|
651,946
|
|
|
See
notes
to condensed consolidated financial statements.
THE
HAIN
CELESTIAL GROUP, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In
thousands)
|
|
Six
Months Ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
23,802
|
|
$
|
19,229
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,088
|
|
|
6,016
|
|
Deferred
income tax benefit
|
|
|
(857
|
)
|
|
-
|
|
Non-cash
compensation
|
|
|
1,043
|
|
|
1,808
|
|
Gain
on sale of Biomarché
|
|
|
(2,527
|
)
|
|
-
|
|
Excess
tax benefits from share-based compensation
|
|
|
(596
|
)
|
|
-
|
|
Other
non-cash items, net
|
|
|
431
|
|
|
348
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash attributable to changes in operating assets
and
liabilities,
net of amounts applicable to acquired/disposed businesses:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(21,937
|
)
|
|
(11,650
|
)
|
Inventories
|
|
|
(5,401
|
)
|
|
(16,622
|
)
|
Other
current assets
|
|
|
4,341
|
|
|
(126
|
)
|
Other
assets
|
|
|
(635
|
)
|
|
1,386
|
|
Accounts
payable and accrued expenses
|
|
|
18,320
|
|
|
(226
|
)
|
Income
taxes, net
|
|
|
7,603
|
|
|
7,356
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
30,675
|
|
|
7,519
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(6,521
|
)
|
|
(6,335
|
)
|
Proceeds
from disposals of property and equipment
|
|
|
2,664
|
|
|
-
|
|
Acquisitions
of business, net of cash acquired
|
|
|
(11,194
|
)
|
|
(32,217
|
)
|
Proceeds
from sale of Biomarché
|
|
|
8,160
|
|
|
-
|
|
Loan
to affiliate
|
|
|
(1,911
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(8,802
|
)
|
|
(38,552
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Borrowings
under bank revolving credit facility, net
|
|
|
-
|
|
|
17,000
|
|
Proceeds
from exercises of stock options, net of related expenses
|
|
|
11,743
|
|
|
7,276
|
|
Excess
tax benefits from share-based compensation
|
|
|
596
|
|
|
-
|
|
Repayments
of other long-term debt, net
|
|
|
(432
|
)
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
11,907
|
|
|
24,210
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
424
|
|
|
43
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
34,204
|
|
|
(6,780
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
48,875
|
|
|
24,139
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
83,079
|
|
$
|
17,359
|
|
See
notes
to condensed consolidated financial statements.
THE
HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
The
Hain
Celestial Group,
Inc., a
Delaware corporation, and its subsidiaries (collectively, the “Company”, and
herein
referred to as “we”,“us”,
and
“our”) manufacture,
market, distribute and sell
natural
and organic food products
and natural personal care products under brand names which are sold as
“better-for-you” products.
We are a
leader in many of the top natural food categories, with such well-known
food
brands as Celestial Seasonings®, Hain Pure Foods®, Westbrae®, WestSoy®, Rice
Dream®, Soy Dream®, Imagine™, Walnut Acres Organic™,
Ethnic
Gourmet®, Rosetto®, Little Bear Organic Foods®, Bearitos®, Arrowhead Mills®,
Health Valley®, Breadshop®, Casbah®, Spectrum Naturals®,
Spectrum Essentials®, Garden
of
Eatin’®, Terra®, Harry’s Premium Snacks®, Boston’s®, Lima®,
Grains Noirs®, Natumi®,
,
Yves Veggie Cuisine®, DeBoles®,
Earth’s Best®, Nile Spice®, Linda McCartney®, Realeat® and Granose®.
The
Company’s
principal
specialty product lines include Hollywood® cooking oils, Estee® sugar-free
products, Boston Better Snacks®, and Alba Foods®.
Our
natural personal care product line is marketed under the JASON®, Zia®, Orjene®,
Shaman Earthly Organics™,
Heather’s®, Queen Helene®, Batherapy®, Shower Therapy®, Footherapy®, Avalon
Organic®
and
Alba
Botanica®
brands.
Our
natural and organic antibiotic-free chicken is marketed under the FreeBird™
brand.
We
operate
in one business segment: the sale of natural and organic food and personal
care
products. In our 2006 fiscal year, approximately 47% of our revenues were
derived from products that were manufactured within our own facilities with
53%
produced by various co-packers.
All
dollar
amounts in our condensed consolidated financial statements and tables have
been
rounded to the nearest thousand dollars, except per share amounts. Share amounts
in the notes to condensed consolidated financial statements are presented in
thousands.
2. BASIS
OF PRESENTATION
Our
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10
of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States. The condensed consolidated financial statements reflect all normal
recurring adjustments which, in management’s opinion, are necessary for a fair
presentation for interim periods. Operating results for the three months and
six
months ended December 31, 2006 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2007. Please refer to the
footnotes to our consolidated financial statements as of June 30, 2006 and
for
the year then ended included in our Annual Report on Form 10-K, for information
not included in these condensed footnotes.
Results
previously reported for the three months and six months ended December 31,
2005
have been adjusted to reflect charges in connection with the requirements of
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based
Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires that contractual
commitments to issue stock options be recorded as compensation cost whether
or
not the options have been granted. The Company’s employment agreement with its
Chief Executive Officer (“CEO”) contains such a commitment; however the options
which were to be awarded in July 2005 and July 2006 have not been granted,
principally due to an insufficient number of shares available under the
Company’s Long Term Incentive and Stock Award Plans. Under SFAS No. 123(R),
regardless of whether the options are ever granted, either currently or in
the
future, a non-cash accounting expense is required to be recorded during the
year
leading up to the anticipated grant date under the contract. This period is
defined in SFAS No. 123(R) as the “requisite service period.” The requisite
service period related to the July 2006 un-granted options was completed during
the fiscal year ended June 30, 2006. These options remain un-granted at February
9, 2007. Results for the three months ended December 31, 2005 have been reduced
from those previously reported by $0.5 million ($0.3 million net of tax) or
$0.01 per diluted share. Results for the six months ended December 31, 2005
have
been reduced from those previously reported by $1.3 million ($0.8 million net
of
tax) or $.02 per diluted share. The requisite service period related to the
July
2005 un-granted options was completed on June 30, 2005, which was prior to
the
required implementation of SFAS No. 123(R) and, therefore, no expense has been
recorded for the July 2005 options. The Company will incur a charge to earnings
at such time as those options are granted. Until such time as the July 2006
options are granted, the Company will be required to revalue (mark-to-market
based on Black-Scholes value) the un-granted options at the end of each quarter,
with the change in value charged or credited to compensation expense, included
in selling, general and administrative expenses.
THE
HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)-Continued
3. EARNINGS
PER SHARE
We
report
basic and diluted earnings per share in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS No. 128"). Basic earnings per share excludes the dilutive
effects of options and warrants. Diluted earnings per share includes only the
dilutive effects of common stock equivalents such as stock options and
warrants.
The
following table sets forth the computation of basic and diluted earnings per
share pursuant to SFAS No. 128:
|
|
Three
Months Ended
December
31,
|
|
Six
Months Ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
Net
income
|
|
$
|
14,768
|
|
$
|
12,338
|
|
$
|
23,802
|
|
$
|
19,229
|
|
Denominator
for basic earnings per
share
- weighted average shares
outstanding
during the period
|
|
|
39,173
|
|
|
37,165
|
|
|
38,960
|
|
|
36,900
|
|
Effect
of dilutive stock options
|
|
|
2,029
|
|
|
1,269
|
|
|
1,653
|
|
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per
share
- adjusted weighted average
shares
and assumed conversions
|
|
|
41,202
|
|
|
38,434
|
|
|
40,613
|
|
|
37,997
|
|
Basic
net income per share
|
|
$
|
0.38
|
|
$
|
0.33
|
|
$
|
0.61
|
|
$
|
0.52
|
|
Diluted
net income per share
|
|
$
|
0.36
|
|
$
|
0.32
|
|
$
|
0.59
|
|
$
|
0.51
|
|
Options
totaling 204 for the three months and 808 for the six months ended December
31,
2006 and 2,596 for the three months and 2,805 for the six months ended December
31, 2005 were excluded from our earnings per share calculations as their effects
would have been anti-dilutive.
4. INVENTORIES
Inventories
consisted of the following:
|
|
December
31,
2006
|
|
June
30,
2006
|
|
Finished
goods
|
|
$
|
65,841
|
|
$
|
64,771
|
|
Raw
materials, work-in-progress and packaging
|
|
|
49,824
|
|
|
41,112
|
|
|
|
$
|
115,665
|
|
$
|
105,883
|
|
THE
HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)-Continued
5. PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following:
|
|
December
31,
2006
|
|
June
30,
2006
|
|
Land
|
|
$
|
9,473
|
|
$
|
10,958
|
|
Buildings
and improvements
|
|
|
34,825
|
|
|
38,483
|
|
Machinery
and equipment
|
|
|
118,282
|
|
|
113,958
|
|
Furniture
and fixtures
|
|
|
6,398
|
|
|
6,107
|
|
Leasehold
improvements
|
|
|
2,582
|
|
|
3,120
|
|
Construction
in progress
|
|
|
3,743
|
|
|
2,257
|
|
|
|
|
175,303
|
|
|
174,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
and
amortization
|
|
|
57,599
|
|
|
55,053
|
|
|
|
$
|
117,704
|
|
$
|
119,830
|
|
|
|
|
|
|
|
|
|
6.
GOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
and indefinite-life intangible assets must be tested for impairment at least
annually. We perform a test for impairment during the fourth quarter of our
fiscal year. In accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets,” we have evaluated the fair value of our goodwill and indefinite-life
intangible assets and, based on such evaluations, no impairment existed through
June 30, 2006. Amounts assigned to indefinite-life intangible assets primarily
represent the values of trademarks.
Changes
in
the carrying amount of goodwill for the six months ended December 31, 2006
were
as follows:
Balance
as of July 1, 2006
|
|
$
|
421,002
|
|
Addition
|
|
|
1,498
|
|
Sale
of Biomarché
|
|
|
(3,350
|
)
|
Reallocation
to intangible assets
|
|
|
(17,000
|
)
|
Translation
and other adjustments
|
|
|
(2,484
|
)
|
Balance
as of December 31, 2006
|
|
$
|
399,666
|
|
During
the
quarter ended December 31, 2006, based on the results of an independent
appraisal, we reallocated approximately $17.0 million preliminarily allocated
to
goodwill related to the acquisition of Spectrum Organic Products, Inc. to other
intangibles, predominantly non-amortized trademarks. Included in translation
and
other adjustments during the six months ended December 31, 2006 are the impacts
of changes in foreign currency exchange rates on goodwill and adjustments to
our
estimates of fair value of net assets acquired. We are continuing to evaluate
the initial purchase price allocations of certain other acquisitions and will
adjust the allocations as additional information relative to the fair values
of
the assets and liabilities of the acquired businesses becomes known.
Accordingly, management has used its best estimate in the initial purchase
price
allocation as of the date of these financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)-Continued
At
December 31, 2006, included in trademarks and other intangible assets on the
balance sheet is approximately $4.6 million of intangible assets deemed to
have
a finite life, which are being amortized over their estimated useful lives.
The
following table reflects the components of trademarks and other intangible
assets:
|
|
December
31, 2006
|
|
June
30, 2006
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangibles
|
|
$
|
4,643
|
|
$
|
2,018
|
|
$
|
4,025
|
|
$
|
2,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
83,981
|
|
|
6,667
|
|
|
67,017
|
|
|
6,653
|
|
Amortization
of amortized intangible assets amounted to $0.6 million in the six months ended
December 31, 2006, and these intangibles are expected to be completely amortized
over the next five years.
7.
ACQUISITIONS
AND DISPOSAL
On
December 8, 2006, we acquired the business and certain assets of Haldane Foods
Limited, a United Kingdom-based producer of meat-free food and non-dairy
beverage products. Haldane’s product lines include Realeat®
frozen
foods; Granose®,
Direct
Foods and Realeat®
dry
mixes; and Granose®
and White
Wave®
non-dairy
beverages. The Haldane frozen meat-free business is a complementary fit with
our
Linda McCartney® brand, acquired last fiscal year. The addition of the Haldane
non-dairy beverage manufacturing capability enhances our growing non-diary
beverage business in the United Kingdom. The total consideration paid was
approximately $11.0 million in cash, including transaction costs. As a result
of
the initial purchase price allocation, we recorded goodwill of $1.5 million
at
December 31, 2006 in connection with this acquisition. The purchase price
allocation for this acquisition is preliminary and may be revised as additional
information becomes available. Any change in the fair value of the net assets
acquired will change the amount of the purchase price allocable to goodwill.
Management is currently developing integration plans which may result in
additional costs, including costs to terminate employees and costs to
consolidate facilities, which will be accrued as a liability in conjunction
with
recording the purchase of the Haldane business and which will result in an
increase to goodwill. The operating results of the Haldane business are
reflected in the accompanying condensed consolidated financial statements from
the date of acquisition and were not material.
On
December 18, 2006, we reached agreement to acquire Avalon Natural Products,
Inc., a leader in the natural products category in the areas of skin care,
hair
care, bath and body and sun care, for approximately $120 million in cash. The
acquisition closed on January 11, 2007. See Note 13, Subsequent
Event.
In
fiscal
2006, our acquisitions included Spectrum Organic Products, Inc., a
California-based leading manufacturer and marketer of natural and organic
culinary oils, vinegars, condiments and butter substitutes under the Spectrum
Naturals® brand and essential fatty acid nutritional supplements under the
Spectrum Essentials® brand; the business and assets of Para Laboratories, Inc.,
including the Queen Helene®, Batherapy®, Shower Therapy® and Footherapy® brands
of skin care, hair care, and body care products; and the fresh prepared foods
business based in Luton, England, and the Linda McCartney® brand (under license)
of frozen meat-free products, including its manufacturing facility, based in
Fakenham, England, both acquired from the H. J. Heinz Company. As of December
31, 2006, the purchase accounting for all of these acquisitions, except for
Spectrum, are still subject to final adjustment for valuations and certain
pre-acquisition contingencies.
THE
HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)-Continued
The
following table presents unaudited pro forma information about sales and net
income had the operations of the above described acquisitions been combined
with
our business as of the first day of the period shown. This information has
not
been adjusted to reflect any changes in the operations of these businesses
subsequent to their acquisition by us. Changes in operations of these acquired
businesses include, but are not limited to, discontinuation of products
(including discontinuation resulting from the integration of acquired and
existing brands with similar products, and discontinuation of sales of private
label products), changes in trade practices, application of our credit policies,
changes in manufacturing processes or locations, changes in marketing and
advertising programs and integration of systems and personnel. Had any of these
changes been implemented by the former management of the businesses acquired
prior to acquisition by us, the sales and net income information might have
been
materially different than the actual results achieved and from the pro forma
information provided below. Further, the pro forma sales and net income
information for the prior periods has not been adjusted to reflect, among other
things, brands which have been disposed of or licensed to others, or items
no
longer sold by us as the result of the 2005 SKU Rationalization Program (sales
of rationalized SKUs continued throughout fiscal 2006). As a result, sales
as
presented for the prior periods appear higher than what would have been
presented had these adjustments been reflected.
|
|
Three
months ended
December
31
|
|
Six
months ended
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
sales
|
|
$
|
235,309
|
|
$
|
230,788
|
|
$
|
451,575
|
|
$
|
438,347
|
|
Net
income
|
|
$
|
14,010
|
|
$
|
12,868
|
|
$
|
22,625
|
|
$
|
19,929
|
|
Earnings
per share:
Basic
|
|
$
|
0.36
|
|
$
|
0.34
|
|
$
|
0.58
|
|
$
|
0.53
|
|
Diluted
|
|
$
|
0.34
|
|
$
|
0.33
|
|
$
|
0.56
|
|
$
|
0.51
|
|
Weighted
average shares:
Basic
|
|
|
39,173
|
|
|
38,020
|
|
|
38,960
|
|
|
37,827
|
|
Diluted
|
|
|
41,202
|
|
|
39,289
|
|
|
40,613
|
|
|
38,924
|
|
In
management’s opinion, the unaudited pro forma results of operations are not
indicative of the actual results that would have occurred had the above
acquisitions been consummated at the beginning of the periods presented or
of
future operations of the combined companies under our management.
On
August
31, 2006, we completed the sale of Biomarché, our Belgium-based provider of
fresh organic fruits and vegetables, to Pro Natura, a French company
specializing in the distribution of organic produce. Biomarché generated
approximately $18.0 million in sales for the fiscal year ended June 30, 2006.
Total consideration received was €6.5 million (approximately $8.3 million), plus
a contingent additional payment of up to approximately €0.7 million based on
sales, all subject to an adjustment for working capital and other items. We
recognized a pretax gain of $2.5 million, net of a $3.3 million charge for
allocated goodwill ($1.1 million after tax) in connection with the sale, which
is included in “Interest and other expenses, net” in the accompanying condensed
consolidated statement of income. The results of operations and cash flows
for
Biomarché for the two months ended August 31, 2006, which were not material, are
included in the condensed consolidated statements of income and of cash flows,
respectively.
8. SENIOR
NOTES AND CREDIT FACILITY
On
May 2,
2006, we issued $150 million in aggregate principal amount of senior notes
due
May 2, 2016 in a private placement. The notes bear interest at 5.98%, payable
semi-annually on November 2 and May 2. Also on May 2, 2006, we entered into
an
Amended and Restated Credit Agreement, providing us with a $250 million credit
facility (the “Credit Facility”) expiring in May 2011. The Credit Facility
provides for an uncommitted $100 million accordion feature, under which the
facility may be increased to $350 million. The Credit Facility and the notes
are
guaranteed by substantially all of our current and future direct and indirect
domestic subsidiaries. Revolving credit loans under the Credit Facility bear
interest at a base rate (greater of the applicable prime rate or Federal Funds
Rate plus an applicable margin) or, at our option, the reserve adjusted LIBOR
rate plus an applicable margin. As of December 31, 2006, $150.0 million was
borrowed under the senior notes at an interest rate of 5.98%, and there were
no
borrowings outstanding under the Credit Facility.
THE
HAIN CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)-Continued
During
January 2007 we borrowed $75 million under the Credit Facility to fund a portion
of the acquisition of Avalon Natural Products, Inc. (See Note 13, Subsequent
Event.) We are required by the terms of the Credit Facility and the notes to
comply with customary affirmative and negative covenants for facilities and
notes of this nature.
9. STRATEGIC
ALLIANCE WITH YHS
On
September 6, 2005, the Company and Yeo Hiap Seng Limited (“YHS”), a Singapore
based natural food and beverage company listed on the Singapore Exchange,
exchanged $2 million in equity investments in each other resulting in the
issuance of 100,482 shares of the Company’s common stock to YHS and the issuance
of 1,326,938 ordinary shares of YHS (representing less than 1% of the
outstanding shares) to the Company. These investments represent the completion
of the first stage of an alliance established between the Company and YHS which
is expected to result in the pursuit of joint interests in marketing and
distribution of food and beverages and product development. The Company’s
investment in YHS shares is carried at cost and is included in other assets
in
the accompanying condensed consolidated balance sheet. The market value of
the
YHS shares on the Singapore Exchange at December 31, 2006 approximated their
carrying value.
10. SEGMENT
INFORMATION
Our
company is engaged in one business segment: the manufacturing, distribution
and
marketing of natural and organic food and personal care products. We define
business segments as components of an enterprise about which separate financial
information is available that is evaluated on a regular basis by our chief
operating decision maker.
Outside
the United States, we primarily conduct business in Canada and Europe. Selected
information related to our operations by geographic area is as follows:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
177,641
|
|
$
|
155,632
|
|
$
|
334,310
|
|
$
|
285,961
|
|
Canada
|
|
|
14,339
|
|
|
12,288
|
|
|
28,608
|
|
|
24,288
|
|
Europe
|
|
|
38,929
|
|
|
18,307
|
|
|
78,198
|
|
|
37,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
230,909
|
|
$
|
186,227
|
|
$
|
441,116
|
|
$
|
347,324
|
|
Earnings
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
18,946
|
|
$
|
17,774
|
|
$
|
29,504
|
|
$
|
26,837
|
|
Canada
|
|
|
2,249
|
|
|
1,116
|
|
|
4,156
|
|
|
2,083
|
|
Europe
|
|
|
2,842
|
|
|
979
|
|
|
5,853
|
|
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,037
|
|
$
|
19,869
|
|
$
|
39,513
|
|
$
|
30,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
June
30, 2006
|
|
Long-lived
assets:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
505,319
|
|
$
|
508,001
|
|
Canada
|
|
|
51,818
|
|
|
56,349
|
|
Europe
|
|
|
56,215
|
|
|
52,858
|
|
|
|
|
|
|
|
|
|
|
|
$
|
613,352
|
|
$
|
617,208
|
|
Net
sales
are attributed to countries based on location of selling
subsidiary.
THE
HAIN
CELESTIAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)-Continued
11.
LITIGATION
From
time
to time the Company is involved in litigation incidental to the conduct of
its
business on a wide range of matters, including, among others, patent suits
and
employment claims. In the opinion of management, disposition of pending
litigation related to these matters is not expected to have a material adverse
effect on the Company’s business, results of operations or financial
condition.
A
second
purported shareholder derivative action was filed on October 31, 2006 in the
same court, against substantially the same defendants and containing
substantially the same allegations as the purported derivative action previously
disclosed in our Form 10-Q for the quarterly period ended September 30, 2006,
adding a claim of breach of fiduciary duty. The Company became aware of the
complaint on November 28, 2006. Although no assurances can be made as to the
resolution of these proceedings, the Company believes that both lawsuits are
without merit.
12. RECENT
ACCOUNTING PRONOUNCEMENTS
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN
No. 48 clarifies the accounting for uncertainty in income taxes recognized
in
financial statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes.” This Interpretation prescribes a recognition threshold and
measurement attribute of tax positions taken or expected to be taken on a tax
return. FIN 48 also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. This
Interpretation is effective for us for the fiscal year ending June 30, 2008.
We
are currently evaluating the impact FIN No. 48 may have on our consolidated
financial statements.
In
June
2006, the FASB’s Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation)” (“EITF No. 06-3”). The scope of EITF No. 06-3 includes any
tax assessed by a governmental authority that is directly imposed on a
revenue-producing activity between a seller and a customer and may include,
but
is not limited to, sales, use, value added, and some excise taxes. EITF No.
06-3
requires disclosure of the method of accounting for the applicable assessed
taxes and the amount of assessed taxes that are included in revenues if they
are
accounted for under the gross method. EITF No. 06-3 is effective for interim
and
annual periods beginning after December 15, 2006. EITF No. 06-3 will not impact
the method for recording these taxes in our consolidated financial statements.
We currently present these taxes on a net basis and have elected not to change
our presentation method.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. SFAS
No.
157 applies under other accounting pronouncements that require or permit fair
value measurements and accordingly, does not require any new fair value
measurements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We have not yet assessed the
impact, if any, that the implementation of SFAS No. 157 will have on our
consolidated results of operations or financial condition.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”).
SAB
No.
108 provides guidance on how prior year misstatements should be taken into
consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial
statements are materially misstated. SAB No. 108 requires registrants to apply
the new guidance for the first time that it identifies material errors in
existence at the beginning of the first fiscal year ending after November 15,
2006 by correcting those errors through a one-time cumulative effect adjustment
to beginning-of-year retained earnings. We are currently evaluating SAB No.
108
and have not yet determined the impact on our consolidated results of operations
or financial position.
13.
SUBSEQUENT
EVENT
On
January
11, 2007, we acquired Avalon Natural Products, Inc., a leader in the natural
products category in the areas of skin care, hair care, bath and body and sun
care, for approximately $120 million in cash, plus transaction costs. We believe
that the addition of the Avalon Organics® and Alba Botanica® brands provides us
with a stronger, broader personal care portfolio that helps solidify our
leadership position in the natural and organic personal care category. The
acquisition was funded with available cash balances and $75 million of
borrowings under our Credit Facility. The operating results of Avalon will
be
included in the consolidated financial statements from the date of
acquisition.
ITEM
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
Overview
We
manufacture, market, distribute and sell natural and organic food products
and
natural personal care products under brand names which are sold as
“better-for-you” products. We are a leader in many of the top natural food
categories, with such well-known food brands as Celestial Seasonings®, Hain Pure
Foods®, Westbrae®, Westsoy®, Rice Dream®, Soy Dream®, Imagine™, Walnut Acres
Organic™,
Ethnic
Gourmet®, Rosetto®, Little Bear Organic Foods®, Bearitos®, Arrowhead
Mills®, Health Valley®, Breadshop®, Casbah®, Spectrum Naturals®, Spectrum
Essentials®, Garden of Eatin’®,
Terra®, Harry’s Premium Snacks®, Boston’s®, Lima®, Grains Noirs®, Natumi®, Yves
Veggie Cuisine®, DeBoles®, Earth’s Best®, Nile Spice®, Linda McCartney®,
Realeat® and Granose®. The Company’s principal specialty product lines include
Hollywood® cooking oils, Estee® sugar-free products, Boston Better Snacks®, and
Alba Foods®. Our natural personal care product line is marketed under the
JASON®, Zia®, Queen Helene®, Batherapy®, Shower Therapy®, Footherapy®, Orjene®,
Shaman Earthly Organics™,
Heather’s®, Avalon Organics® and Alba Botanica® brands. Our natural and organic
antibiotic-free chicken is marketed under the FreeBird™
brand.
Our website is www.hain-celestial.com.
Our
products are sold primarily to specialty and natural food distributors,
supermarkets, natural food stores, and other retail classes of trade including
mass-market stores, drug stores, food service channels and club stores.
Our
brand
names are well recognized in the various market categories they serve. We have
acquired numerous brands and we will seek future growth through internal
expansion as well as the acquisition of additional complementary brands.
Our
overall mission is to be a leading marketer and seller of natural, organic,
beverage, snack, specialty food and personal care products by integrating all
of
our brands under one management team and employing a uniform marketing, sales
and distribution program. Our business strategy is to capitalize on the brand
equity and the distribution previously achieved by each of our acquired product
lines and to enhance revenues by strategic introductions of new product lines
that complement existing products.
Results
of Operations
Three
months ended December 31, 2006
Net
sales
for the three months ended December 31, 2006 were $230.9 million, an increase
of
$44.7 million, or 24.0%, over net sales of $186.2 million in the December 31,
2005 quarter. Net sales in the second quarters of both fiscal 2007 and 2006
were
impacted by acquisitions and dispositions. Net sales in the second quarter
of
fiscal 2007 include $29.3 million from businesses acquired after the second
quarter of fiscal 2006, while the second quarter of fiscal 2006 includes sales
of $4.8 million from brands disposed of or licensed to others after the second
quarter of fiscal 2006. Sales
of
grocery and snacks increased with the strong performance of our Garden of
Eatin’, Arrowhead Mills, Earth’s Best, Health Valley and Spectrum brands and
from successful new product introductions, partially offset by a decline in
sales of Terra, and from successful new product introductions. Net sales of
our
Celestial Seasonings® tea brand were down principally as a result of continued
warmer than normal temperatures in North America and lower consumption of green
tea. Sales of our personal care brands increased as a result of strong growth
from our JASON® brand and sales of the brands we acquired from Para
Laboratories. Sales for our brands in Canada were up principally as a result
of
increased sales of our refrigerated and frozen products. Sales in Europe
increased primarily as a result of our recently-acquired United Kingdom
operations.
Gross
profit for the three months ended December 31, 2006 was $70.6 million, an
increase of $12.4 million from last year’s second quarter. Gross profit for the
three months ended December 31, 2006 was 30.6% of net sales as compared to
31.2%
of net sales for the December 31, 2005 quarter. The decrease in gross profit
percentage was principally the result of approximately $0.6 million, or 0.3%
of
consolidated net sales, of start-up costs associated with a new production
line
at our West Chester frozen foods facility, now complete, and the impact of
the
inclusion of our recently acquired United Kingdom operations. In the United
Kingdom, we continue to co-pack for the previous owner at one of the facilities
under an agreement allowing for a minimal margin and, as a result, during the
term of the co-pack arrangement our gross margin generated in the United Kingdom
will be depressed even though the arrangement helps absorb what otherwise may
be
unabsorbed overhead. The effect on our gross profit percentage this quarter
was
a 110 basis point reduction related to the inclusion of the lower margin
business in the United Kingdom. In addition, we have been able to offset the
impact of higher costs for ingredients with improvements in manufacturing
efficiencies.
Selling,
general and administrative expenses increased by $7.8 million, or 21.1%, to
$44.8 million for the three months ended December 31, 2006 as compared to $37.0
million in the December 31, 2005 quarter. Selling, general and administrative
expenses have increased primarily as a result of costs associated with the
businesses we acquired in 2006. We
have
been successful in leveraging our existing infrastructure with the acquisitions
we have made and have executed a disciplined strategy in building effective
marketing programs, resulting in our selling, general and administrative
expenses declining as a percentage of net sales to 19.4% in the second quarter
of fiscal 2007 as compared to 19.9% in the second quarter of last
year.
Operating
income was $25.8 million in the three months ended December 31, 2006 compared
to
$21.2 million in the December 31, 2005 quarter. The increase in operating income
is a result of our increased sales and gross profit. Operating income as a
percentage of net sales was 11.2% in the December 31, 2006 quarter compared
with
11.4% in the December 31, 2005 quarter. The decrease in operating income as
a
percentage of net sales resulted from the decrease in our gross profit ratio
to
net sales.
Interest
and other expenses, net were $1.8 million for the three months ended December
31, 2006 compared to $1.3 million for the three months ended December 31, 2005.
Interest expense totaled $2.3 million in this year’s second quarter, which was
primarily related to the $150 million of 5.98% senior notes we issued in the
fourth quarter of last fiscal year and was partially offset by $0.9 million
of
interest income earned on higher cash balances. Interest expense in last year’s
second quarter was approximately $1.3 million, which was partially offset by
$0.2 million of interest income.
Income
before income taxes for the three months ended December 31, 2006 amounted to
$24.0 million compared to $19.9 million in the comparable period of the prior
year. This increase was primarily attributable to the increase in operating
income.
Income
tax
expense for the three months ended December 31, 2006 was $9.3 million, or an
effective income tax rate of 38.6% of pre-tax income, and is based on our
estimated annual effective tax rate for fiscal 2007. Income tax expense was
$7.5
million for the three months ended December 31, 2005, or 37.9% of pre-tax
income.
Net
income
for the three months ended December 31, 2006 was $14.8 million compared to
$12.3
million in the December 31, 2005 quarter. The increase of $2.4 million in
earnings was primarily attributable to the increase in sales and the resultant
increase in gross profit.
Six
months ended December 31, 2006
Net
sales
for the six months ended December 31, 2006 were $441.1 million, an increase
of
$93.8 million, or 27.0%, over net sales of $347.3 million in the December 31,
2005 six-month period. Net sales were impacted by acquisitions and dispositions
in the first half of both fiscal 2007 and 2006. Net sales in the first half
of
fiscal 2007 include $72.1 million from businesses acquired after the second
quarter of fiscal 2006, while the first half of fiscal 2006 includes sales
of
$11.3 million from brands disposed of or licensed to others after the second
quarter of fiscal 2006. Sales
of
grocery and snacks increased with the strong performance our Garden of Eatin’,
Arrowhead Mills, Earth’s Best, Health Valley and Spectrum brands and from
successful new product introductions, partially offset by a decline in sales
of
Terra, and from successful new product introductions. Net sales of our Celestial
Seasonings® tea brand were down principally as a result of continued warmer than
normal temperatures in North America and lower consumption of green tea. Sales
of our personal care brands increased as a result of strong growth from our
JASON® brand and sales of the brands we acquired from Para Laboratories. Sales
for our brands in Canada were up principally as a result of increased sales
of
our refrigerated and frozen products. Sales in Europe increased primarily as
a
result of our recently-acquired United Kingdom operations.
Gross
profit for the six months ended December 31, 2006 was $129.7 million, an
increase of $25.7 million from last year’s six-month period. Gross profit for
the six months ended December 31, 2006 was 29.4% of net sales as compared to
30.0% of net sales for the December 31, 2005 period. The decrease in gross
profit percentage was principally the result of approximately $1.7 million
of
start-up costs associated with a new production line at our West Chester frozen
foods facility (a reduction of 40 basis points) and the inclusion of our
recently acquired United Kingdom operations. In the United Kingdom, we continue
to co-pack for the previous owner at one of the facilities under an agreement
allowing for a minimal margin and, as a result, during the term of the co-pack
arrangement our gross margin generated in the United Kingdom will be depressed
even though the arrangement helps absorb what otherwise may be unabsorbed
overhead. The effect on our gross profit percentage for the six months ended
December 31, 2006 was a 102 basis point reduction from the lower margins in
the
United Kingdom.
Selling,
general and administrative expenses increased by $15.8 million, or 22.3%, to
$86.6 million for the six months ended December 31, 2006 as compared to $70.9
million in the December 31, 2005 six-month period. Selling, general and
administrative expenses have increased primarily as a result of costs associated
with the businesses we acquired in fiscal 2006. We also increased spending
in
certain advertising and promotional programs in the first quarter of this year.
We have been successful in leveraging our existing infrastructure as selling,
general and administrative expenses as a percentage of net sales declined to
19.6% in the first six months of fiscal 2007 as compared to 20.4% in the first
six months of last year.
Operating
income was $43.1 million in the six months ended December 31, 2006 compared
to
$33.2 million in the December 31, 2005 comparable period. Operating income
as a
percentage of net sales was 9.8% in the December 31, 2006 period compared with
9.6% in the six months ended December 31, 2005. The increase in operating income
is a result of our increased net sales and gross profit. The improvement in
operating income as a percentage of net sales resulted from our ability to
leverage our selling, general and administrative expenses over the increased
sales base.
Interest
and other expenses, net were $3.6 million for the six months ended December
31,
2006 compared to $2.2 million for the six months ended December 31, 2005.
Interest expense totaled $4.7 million in this year’s first six months, which was
primarily related to the $150 million of 5.98% senior notes we issued in the
fourth quarter of last fiscal year and was partially offset by $1.4 million
of
interest income earned. Interest expense in last year’s first six months was
approximately $2.5 million and was partially offset by interest income earned
of
$0.3 million. We also recorded a $2.2 million charge in the first quarter of
fiscal 2007 for a value added tax assessment resulting from an unfavorable
decision by the German government in connection with our sales of non-dairy
beverages in Germany. At the end of August 2006 we sold Biomarché, our
Belgium-based provider of fresh organic fruits and vegetables and recognized
a
gain on the disposal of approximately $2.5 million, net of a $3.3 million charge
for allocated goodwill.
Income
before income taxes for the six months ended December 31, 2006 amounted to
$39.5
million compared to $31.0 million in the comparable period of the prior year.
This increase was primarily attributable to the increase in operating
income.
Our
income
tax expense was $15.7 million for the six months ended December 31, 2006, an
effective income tax rate of 39.8%, compared to $11.8 million for the six months
ended December 31, 2005, an effective income tax rate of 37.9%. The effective
tax rate for the first six months of fiscal 2007 was higher than the comparable
period in the prior year as a result of the unfavorable impact of the
nondeductible goodwill expensed in connection with the sale of Biomarché.
Net
income
for the six months ended December 31, 2006 was $23.8 million compared to $19.2
million for the six months ended December 31, 2005. The increase of $4.6 million
in earnings was primarily attributable to the increase in sales and the
resultant increase in gross profit.
Liquidity
and Capital Resources
We
finance
our operations and growth primarily with the cash flows we generate from our
operations and from both long-term fixed-rate borrowings and borrowings
available to us under our Credit Facility.
Our
cash
balance increased $34.2 million to $83.1 million during the six months ended
December 31, 2006. Net cash provided by operating activities was $30.7 million
for the first six months of fiscal 2007, compared to net cash provided by
operating activities of $7.5 million in the six months ended December 31, 2005.
The increase in cash provided by operations in 2007 resulted from improved
working capital management. Our working capital increased to $214.5 million
at
December 31, 2006 compared with $174.4 million at June 30, 2006. Accounts
receivable increased as a result of our higher sales volume, but our days’ sales
in receivables remained at 39 days. Improvements in our days’ sales in inventory
and accounts payable from December 31, 2005 resulted in the improved cash flows
provided by operating activities in fiscal 2007.
We
used
$8.8 million of cash in investing activities in the six months ended December
31, 2006. We used $11.2 million of cash in connection with the acquisition
of
the assets of Haldane Foods in the United Kingdom in December 2006, $6.5 million
for capital expenditures and $1.9 million for a loan to an affiliated joint
venture. This was partially offset by $8.2 million of proceeds from the sale
of
Biomarché, our Belgium-based provider of fresh organic fruits and vegetables,
and $2.7 million of proceeds from the disposals of fixed assets. In the six
months ended December 31, 2005, we used $38.6 million of cash in investing
activities, including $32.2 million for the acquisitions of the business that
became Hain Pure Protein and for Spectrum Organic Products, Inc. and $6.3
million for the purchase of property, plant and equipment.
Net
cash
of $11.9 million was provided by financing activities for the six months ended
December 31, 2006 compared to $24.2 million provided for the six months ended
December 31, 2005. The decrease was due principally to our not requiring any
new
borrowings under our revolving credit facility in the first six months of fiscal
2007 compared to $17.0 million of cash provided by borrowings in the first
six
months of fiscal 2006. The decrease was partially offset by increased proceeds
from exercises of stock options in the first six months of fiscal 2007 to $11.7
million from $7.3 million in fiscal 2006.
We
maintain our cash and cash equivalents primarily in money market funds or their
equivalent. As of December 31, 2006, all of our investments mature in less
than
three months. Accordingly, we do not believe that our investments have
significant exposure to interest rate risk.
On
May 2,
2006, we issued $150 million in aggregate principal amount of senior notes
due
May 2, 2016 in a private placement. The notes bear interest at 5.98%, which
is
payable semi-annually on November 2 and May 2. Also on May 2, 2006, we entered
into an Amended and Restated Credit Agreement, providing us with a $250 million
credit facility (the “Credit Facility”) expiring in May 2011. The Credit
Facility provides for an uncommitted $100 million accordion feature, under
which
the facility may be increased to $350 million. The Credit Facility and the
senior notes are guaranteed by substantially all of our current and future
direct and indirect domestic subsidiaries. Revolving credit loans under the
Credit Facility bear interest at a base rate (greater of the applicable prime
rate or Federal Funds Rate plus an applicable margin) or, at our option, the
reserve adjusted LIBOR rate plus an applicable margin. As of December 31, 2006,
$150.0 million was outstanding under the senior notes at an interest rate of
5.98%, and no borrowings were outstanding under the Credit Facility. During
January 2007 we borrowed $75 million under the Credit Facility to fund a portion
of the acquisition of Avalon Natural Products, Inc. (See Note 13 to the
Condensed Consolidated Financial Statements.) We are required by the terms
of
the Credit Facility and the senior notes to comply with customary affirmative
and negative covenants for facilities and notes of this nature.
This
access to capital provides us with the flexibility to address our working
capital needs in the ordinary course of business, the opportunity to grow our
business through acquisitions and the ability to develop our existing
infrastructure through capital investment.
We
believe
that our cash on hand of $83.1 million at December 31, 2006, projected remaining
fiscal 2007 cash flows from operations, and availability under our Credit
Facility are sufficient to fund our working capital needs, anticipated capital
expenditures of approximately $15 million for the current fiscal year, scheduled
debt and lease payments of approximately $6 million over the next twelve months.
In connection with the acquisition of Avalon Natural Products, Inc., in January
2007, we used approximately $50 million of our available cash on hand to fund
a
portion of the purchase price.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The accounting principles we use
require us to make estimates and assumptions that affect the reported amounts
of
assets and liabilities at the date of the financial statements and amounts
of
income and expenses during the reporting periods presented. We believe in the
quality and reasonableness of our critical accounting policies; however, it
is
likely that materially different amounts would be reported under different
conditions or using assumptions different from those that we have consistently
applied. The accounting policies that have been identified as critical to our
business operations and understanding the results of our operations pertain
to
revenue recognition and sales incentives, valuation of accounts and chargebacks
receivable, inventories, property, plant and equipment, goodwill and intangibles
and segments. The application of each of these critical accounting policies
and
estimates was discussed in Item 7 of our Annual Report on Form 10-K for the
year
ended June 30, 2006. There have been no significant changes in the application
of these critical accounting policies or estimates during fiscal
2007.
Seasonality
Our
tea
brand primarily manufactures and markets hot tea products and, as a result,
its
quarterly results of operations reflect seasonal trends resulting from increased
demand for its hot tea products in the cooler months of the year. In
addition, some of our other products (e.g., baking and cereal products and
soups) also show stronger sales in the cooler months while our snack food
product lines are stronger in the warmer months. Quarterly
fluctuations in our sales volume and operating results are due to a number
of
factors relating to our business, including the timing of trade promotions,
advertising and consumer promotions and other factors, such as seasonality,
inclement weather and unanticipated increases in labor, commodity, energy,
insurance or other operating costs. The impact on sales volume and operating
results due to the timing and extent of these factors can significantly impact
our business. For these reasons, you should not rely on our quarterly operating
results as indications of future performance.
Note
Regarding Forward Looking Information
Certain
statements contained in this Quarterly Report constitute “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1934 and
Sections 21E of the Securities Exchange Act of 1934. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that
may cause the actual results, levels of activity, performance or achievements
of
the Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied
by
such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; our ability to implement our business and acquisition strategy;
the
ability to effectively integrate our acquisitions; competition; availability
of
key personnel; changes in, or the failure to comply with, government
regulations; and other risks detailed from time-to-time in the Company’s reports
filed with the Securities and Exchange Commission, including the report on
Form
10-K, and any amendments thereto, for the fiscal year ended June 30, 2006.
As a
result of the foregoing and other factors, no assurance can be given as to
future results, levels of activity and achievements and neither the Company
nor
any person assumes responsibility for the accuracy and completeness of these
statements.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There
have
been no material changes in the reported market risks since the end of the
most
recent fiscal year.
ITEM
4. CONTROLS
AND PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures.
Our
Chief
Executive Officer and Chief Financial Officer have reviewed our disclosure
controls and procedures as of the end of the period covered by this report.
Based upon this review, these officers concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company
in
the reports it files or submits under the Exchange Act is (1) recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms and (2) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in
Internal Control Over Financial Reporting.
There
was
no change in our internal control over financial reporting during the fiscal
quarter covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Part
II - OTHER INFORMATION
ITEM
1. LEGAL
PROCEEDINGS
A
second
purported shareholder derivative action was filed on October 31, 2006 in the
same court, against substantially the same defendants and containing
substantially the same allegations as the purported derivative action previously
disclosed in our Form 10-Q for the quarterly period ended September 30, 2006,
adding a claim of breach of fiduciary duty. The Company became aware of the
complaint on November 28, 2006. Although no assurances can be made as to the
resolution of these proceedings, the Company believes that both lawsuits are
without merit.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Annual
Meeting of Stockholders was held on November 30, 2006. The Company submitted
the
following matters to a vote of security holders:
1. |
To
elect a Board of Directors to serve until the next Annual Meeting
of
Stockholders and until their successors are duly elected and qualified;
|
2. |
To
approve an amendment to the Amended and Restated 2002 Long Term Incentive
and Stock Award Plan to increase the number of shares issuable under
the
Plan by 2,000,000 shares, to 5,380,000 shares in the aggregate;
and
|
3. |
To
ratify the appointment of Ernst & Young LLP as our registered
independent accountants for the fiscal year ending June 30,
2007.
|
The
stockholders elected the persons named below, the Company’s nominees for
directors, as directors for the Company, casting votes as shown
below:
ELECTION
OF DIRECTORS
|
FOR
|
WITHHELD
|
Irwin
D. Simon
|
32,059,620
|
4,145,337
|
Barry
J. Alperin
|
33,156,041
|
3,048,916
|
Beth
L. Bronner
|
31,217,600
|
4,987,357
|
Jack
Futterman
|
33,155,160
|
3,049,797
|
Daniel
R. Glickman
|
33,135,829
|
3,069,128
|
Marina
Hahn
|
32,037,748
|
4,167,209
|
Andrew
R. Heyer
|
31,203,335
|
5,001,622
|
Roger
Meltzer
|
31,515,070
|
4,689,887
|
Mitchell
A. Ring
|
33,133,133
|
3,071,824
|
Lewis
D. Schiliro
|
33,157,858
|
3,047,099
|
Larry
S. Zilavy
|
33,136,512
|
3,068,445
|
The
stockholders approved the amendment to the Amended and Restated 2002 Long Term
Incentive and Stock Award Plan, casting 18,611,258 votes in favor, 10,773,102
votes against, 112,182 abstaining and 6,708,415 not voted.
The
stockholders ratified the appointment of Ernst & Young LLP, casting
35,226,515 votes in favor, 948,013 votes against, and 30,429
abstaining.
ITEM
6. EXHIBITS
Exhibit
Number
|
Description
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended.
|
|
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
THE
HAIN CELESTIAL GROUP, INC.
|
|
|
|
|
|
|
Date:
February 9, 2007
|
/s/
Irwin D Simon
|
|
Irwin D. Simon,
|
|
Chairman, President and Chief
|
|
Executive Officer
|
Date:
February 9, 2007
|
/s/
Ira J. Lamel
|
|
Ira J. Lamel,
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
20