HAIN CELESTIAL GROUP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto for the period ended September 30, 2021 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. Forward looking statements in this Form 10-Q are qualified by the cautionary statement included in this Form 10-Q under the sub-heading “Forward-Looking Statements” in the introduction of this Form 10-Q. Overview The Hain Celestial Group, Inc., a Delaware corporation (collectively with its subsidiaries, the “Company,” “Hain Celestial,” “we,” “us” or “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 80 countries worldwide. The Company operates under two reportable segments: North America and International. The Company manufactures, markets, distributes and sells organic and natural products under brand names providing consumers with the opportunity to lead A Healthier Way of Life ® . Hain Celestial is a leader in many organic and natural products categories, with ma ny recognized brands in the various market categories it serves, including Celestial Seasonings ® , Clarks™, Cully & Sully ® , Earth’s Best ® , Ella’s Kitchen ® , Frank Cooper’s ® , Gale's ® , Garden of Eatin' ® , Hain Pure Foods ® , Hartley’s ® , Health Valley ® , Imagine ® , Joya ® , Lima ® , Linda McCartney's ® (under license), MaraNatha ® , Natumi ® , New Covent Garden Soup Co. ® , Robertson’s ® , Rose's ® (under license), Sensible Portions ® , Spectrum ® , Sun-Pat ® , Terra ® , The Greek Gods ® , Yorkshire Provender ® and Yves Veggie Cuisine ® . The Company’s personal care products are marketed under the Alba Botanica ® , Avalon Organics ® , JASON ® , Live Clean ® , and Queen Helene ® brands. Since fiscal 2019, we have been executing the four key pillars of our strategy—(1) simplify our portfolio; (2) strengthen our capabilities; (3) expand profit margins and cash flow; and (4) reinvigorate profitable top line growth—which we refer to as Hain 2.0. This strategy, which is on schedule to be completed ahead of our planned timeline, 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 singularly 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 are migrating 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 Growth, Targeted Investment, and Fuel: • The Turbocharge Growth brands are leading-share brands in very high-growth categories. The Turbocharge Growth brands are made up of plant-based meat and non-dairy beverages as well as snacks. Our meat and dairy alternatives are concentrated outside the United States, while the snacks businesses include brands both within the United States and in International. • 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. In contrast with Hain 2.0, baby is now one of our growth focus areas, due to its strong brands, scale, profitability, and growth prospects. • The Fuel brands are stable brands that will be leveraged to fuel investment in the Turbocharge Growth 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. 32 Table of Contents 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. 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. Acquisitions are expected to play a role in Hain 3.0 and part of our capital allocation strategy is focused on actively looking for targets in the market. As we continue to simplify and stabilize the organization and consolidate sales into fewer priority categories, 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. COVID-19 The COVID-19 pandemic has resulted in a net increase in overall demand for our products. The impact was particularly pronounced during the early stages of the pandemic as consumers reacted to stay-at-home measures and the uncertainty of the pandemic. In particular, our net sales during the third quarter of fiscal 2020 through the second quarter of fiscal 2021 benefited from pandemic-driven demand. The pandemic-driven demand for our products has subsided as effective vaccines have become available, governments have eased safety measures and consumer purchasing behaviors have started to return to pre-pandemic norms. As a result, net sales were lower in the third and fourth quarters of fiscal 2021 compared to the third and fourth quarters of fiscal 2020, respectively. Further, net sales in the first quarter of fiscal 2022 were lower than our net sales during the first quarter of fiscal 2021 as a result of normalizing consumer demand, among other factors as described more fully below under the heading " Comparison of Three Months Ended September 30, 2021 to Three Months Ended September 30, 2020 ." The pandemic and the measures being taken by governments, businesses and consumers to limit the spread of COVID-19 have led to operational challenges in our business and may result in broader and longer-term challenges and uncertainty that we will need to manage successfully. Such challenges include but are not limited to: • manufacturing, supply chain and logistics challenges resulting from health and safety precautions among our employees and the general population as well as macroeconomic factors resulting from the pandemic, including labor market shortages; • an uncertain future 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 during a global pandemic. Discontinued Operations On August 27, 2019, the Company and Ebro Foods S.A. (the “Purchaser”) entered into, and consummated the transactions contemplated by, an agreement relating to the sale and purchase of the entities comprising the Company’s Tilda operating segment and certain other assets. The Company's dispositions are described in more detail in Note 5, Dispositions , in the Notes to the Consolidated Financial Statements in the Form 10-K. 33 Table of Contents Comparison of Three Months Ended September 30, 2021 to Three Months Ended September 30, 2020 Consolidated Results The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the three months ended September 30, 2021 and 2020 (amounts in thousands, other than percentages, which may not add due to rounding): Three Months Ended Change in September 30, 2021 September 30, 2020 Dollars Percentage Net sales $ 454,903 100.0% $ 498,627 100.0% $ (43,724) (8.8)% Cost of sales 349,485 76.8% 379,463 76.1% (29,978) (7.9)% Gross profit 105,418 23.2% 119,164 23.9% (13,746) (11.5)% Selling, general and administrative expenses 73,989 16.3% 79,521 15.9% (5,532) (7.0)% Amortization of acquired intangible assets 2,095 0.5% 2,433 0.5% (338) (13.9)% Productivity and transformation costs 3,983 0.9% 1,433 0.3% 2,550 177.9% Proceeds from insurance claim (196) —% — —% (196) * Long-lived asset impairment — —% 32,497 6.5% (32,497) (100.0)% Operating income 25,547 5.6% 3,280 0.7% 22,267 678.9% Interest and other financing expense, net 1,856 0.4% 2,453 0.5% (597) (24.3)% Other income, net (788) (0.2)% (1,373) (0.3)% 585 (42.6)% Income from continuing operations before income taxes and equity in net loss of equity-method investees 24,479 5.4% 2,200 0.4% 22,279 1,012.7% Provision for income taxes 4,542 1.0% 12,962 2.6% (8,420) (65.0)% Equity in net loss of equity-method investees 526 —% 19 —% 507 2,668.4% Net income (loss) from continuing operations $ 19,411 4.3% $ (10,781) (2.2)% $ 30,192 * Net income from discontinued operations, net of tax — —% 11,266 2.3% (11,266) (100.0)% Net income $ 19,411 4.3% $ 485 0.1% $ 18,926 3,902.3% Adjusted EBITDA $ 47,316 10.4% $ 54,895 11.0% $ (7,579) (13.8)% Diluted net income (loss) per common share from continuing operations $ 0.20 $ (0.11) $ 0.31 * Diluted net income per common share from discontinued operations — 0.11 (0.11) (100.0)% Diluted net income per common share $ 0.20 $ — $ 0.20 100.0% * Percentage is not meaningful due to a comparison of a positive figure and a negative figure. Net Sales Net sales for the three months ended September 30, 2021 were $454.9 million, a decrease of $43.7 million, or 8.8%, as compared to $498.6 million in the three months ended September 30, 2020. On a constant currency basis, adjusted for the impact of divestitures and discontinued brands, net sales decreased approximately $0.6 million and 0.1% from the prior year quarter driven by the North America reportable segment. Further details of changes in net sales by segment are provided below in the Segment Results section. 34 Table of Contents Gross Profit Gross profit for the three months ended September 30, 2021 was $105.4 million, a decrease of $13.7 million, or 11.5%, as comp ared to the prior year quarter. Gross profit margin was 23.2% of net sales, compared to 23.9% in the prior year quarter. The gross profit decrease was driven primarily by our North America reportable segment, and mostly by the United States operating segment, as a result of lower net sales when compared with the prior year period as well as higher delivery and warehouse expenses. The decrease in the North America reportable segment was offset in part by an increase in the International reportable segment, due to the performance of the two UK operating segments. The Ella's Kitchen UK operating segment had higher net sales than the prior year quarter due to COVID-driven consumer demand issues in the prior year period which negatively impacted prior year net sales as well as lower cost of sales in the current year due to cost savings, partially offset by higher delivery and warehouse expense in the current year. The other UK operating segment, Hain United Kingdom, delivered improved gross margins versus prior year driven by the implementation of productivity initiatives and the divestiture of the low gross margin fruit business. Selling, General and Administrative Expenses Selling, general and administrative expenses were $74.0 million for the three months ended September 30, 2021, a decrease of $5.5 million, or 7.0%, from $79.5 million for the prior year quar ter. The decrease occurred primarily in the United States and Europe operating segments. The decrease in the United States operating segment was primarily due to lower marketing expenses in the current year. The decrease in the Europe operating segment was due to lower broker commissions. Amortization of Acquired Intangible Assets Amortization of acquired intangibles was $2.1 million for the three months ended September 30, 2021, a decrease of $0.3 million from $2.4 million in the prior year quarter due to prior year dispositions that occurred in the later part of fiscal 2021 . Productivity and Transformation Costs Productivity and transformation costs were $4.0 million for the three months ended September 30, 2021 , an increase of $2.6 million from $1.4 million in the prior year quarter. The increase was primarily due to a $1.6 million increase related to costs incurred for consulting fees related to supply chain optimization and other productivity and transformation initiatives. Long-lived Asset Impairment During the three months ended September 30, 2020, the Company recognized a pre-tax impairment charge of $32.5 million related to the reserve recorded against the assets of the Company's United Kingdom fruit business (see Note 4, Dispositions , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q). There was no impairment charge recorded in the corresponding period in the three months ended September 30, 2021. Operating Income Operating income for the three months ended September 30, 2021 was $25.5 million compared to $3.3 million in the prior year quarter as a result of the items described above. Interest and Other Financing Expense, Net Interest and other financing expense, net totaled $1.9 million for the three months ended September 30, 2021, a decrease of $0.6 million, or 24.3%, from $2.5 million in the prior year quarter. The decrease resulted primarily from lower variable interest rates applied to borrowings outstanding under our revolving credit facility. See Note 9, Debt and Borrowings , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Other Income, Net Other income, net totaled $0.8 million for the three months ended September 30, 2021, compared to $1.4 million in the prior year quarter. The change was primarily attributable to a lower gain on sale of business and higher realized foreign currency losses in the current year. 35 Table of Contents Income from Continuing Operations Before Income Taxes and Equity in Net Loss of Equity-Method Investees Income before income taxes and equity in net loss of our equity-method investees for the three months ended September 30, 2021 wa s $24.5 million compared to $2.2 million in the prior year quarter. The increase 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 $4.5 million for the three months ended September 30, 2021 compared to an income tax expense of $13.0 million in the prior year quarter. The effective income tax rate from continuing operations was expense of 18.6% and 589.2% for the three months ended September 30, 2021 and 2020 , respectively. Lower effective income tax rate relative to our statutory tax rates for the current quarter is mainly due to the reversal of uncertain tax position accruals based on filing and approval of certain elections by the tax authorities. In addition, t he effective income tax rates from continuing operations for the three months ended September 30, 2021 and 2020 were negatively impacted by provisions in the Tax Cuts and Jobs Act (the "Tax Act"), primarily related to Global Intangible Low Taxed Income ("GILTI") and limitations on the deductibility of executive compensation. Furthermore, the effective income tax rate from continuing operations for the three months ended September 30, 2020 was negatively impacted by various discrete items including the tax impact of the United Kingdom fruit business reserve, the legal entity reorganization, and the UK rate change . The effective income tax rates in each period were also impacted by the geographical mix of earnings and state valuation allowance. 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. Equity in Net Loss of Equity-Method Investees Our equity in net loss from our equity-method investments for the three months ended September 30, 2021 was $0.5 million and less than $0.1 million in the prior year quarter. See Note 13, Investments , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Net Income (Loss) from Continuing Operations Net income from continuing operations for the three months ended September 30, 2021 was $19.4 million, or $0.20 per diluted share, compared to net loss of $10.8 million, or $0.11 per diluted share, for the three months ended September 30, 2020. The change to income from loss was attributable to the factors noted above. Net Income from Discontinued Operations, Net of Tax Net income from discontinued operations, net of tax, for the three months ended September 30, 2020 was $11.3 million, or $0.11 per diluted share . During the three months ended September 30, 2020, the Company recognized a $11.3 million adjustment to the Tilda business primarily related to the recognition of a deferred tax benefit. See Note 4, Dispositions , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion. Net Income Net income for the three months ended September 30, 2021 was $19.4 million, or $0.20 per diluted share, compared to $0.5 million, or $0.00 per diluted share, in the prior year quarter. The change was attributable to the factors noted above. Adjusted EBITDA Our Adjusted EBITDA was $47.3 million and $54.9 million for the three months ended September 30, 2021 and 2020, respectively, as a result of the factors discussed above and the adjustments described in the Reconciliation of Non-U.S. GAAP Financial Measures to U.S. GAAP Measures presented following the discussion of our results of operations. 36 Table of Contents Segment Results The following table provides a summary of net sales and operating income by reportable segment for the three months ended September 30, 2021 and 2020: (dollars in thousands) North America International Corporate and Other Consolidated Net sales Three months ended 9/30/21 $ 265,525 $ 189,378 $ — $ 454,903 Three months ended 9/30/20 280,668 217,959 — 498,627 $ change $ (15,143) $ (28,581) n/a $ (43,724) % change (5.4) % (13.1) % n/a (8.8) % Operating income (loss) Three months ended 9/30/21 $ 16,842 $ 24,069 $ (15,364) $ 25,547 Three months ended 9/30/20 33,256 (15,889) (14,087) 3,280 $ change $ (16,414) $ 39,958 $ (1,277) $ 22,267 % change (49.4) % * (9.1) % 678.9 % Operating income (loss) margin Three months ended 9/30/21 6.3 % 12.7 % n/a 5.6 % Three months ended 9/30/20 11.8 % (7.3) % n/a 0.7 % * Percentage is not meaningful due to a comparison of a positive figure and a negative figure. North America Our net sales in the North America reportable segment for the three months ended September 30, 2021 were $265.5 million, a decrease of $15.1 million, or 5.4%, from net sales of $280.7 million in the prior year quarter. On a constant currency basis, adjusted for the impact of divestitures and discontinued brands, net sales decreased 1.3%. In the United States operating segment sales decreased due to sales normalization in the current year, given last year's COVID impact which positively impacted prior year sales, offset in part by stronger sales in tea, baby food and certain snack products in the current year. In the Canada operating segment sales decreased primarily due to lower hand sanitizer sales in the current year. Operating income in North America for the three months ended September 30, 2021 was $16.8 million, a decrease of $16.4 million from $33.3 million in the prior year quarter. The decrease was driven by lower sales in the current year when compared with the prior year period and higher cost of goods sold largely because of an increase in delivery and warehouse expenses, partially offset by lower selling, general and administrative expenses. I nternational Our net sales in the International reportable segment for the three months ended September 30, 2021 were $189.4 million, a decrease of $28.6 million, or 13.1%, from net sales of $218.0 million in the prior year quarter. On a constant currency basis, adjusted for the impact of divestitures and discontinued brands, net sales increased 1.6% from the prior year quarter due to the performance of the two UK operating segments. Ella's Kitchen UK benefited from improved demand given the COVID impact on baby food consumption in the prior year. Hain United Kingdom benefited from higher soup sales versus prior year. Operating income in our International reportable segment for the three months ended September 30, 2021 was $24.1 million, an increase of $40.0 million from operating loss of $15.9 million for the three months ended September 30, 2020. The increase reflects lower costs in the current year from productivity initiatives and non-recurring impairment charges associated with the fruit business impairment that was recognized in the prior year. 37 Table of Contents 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 as well as expenses for certain professional fees, facilities, and other items which benefit the Company as a whole. Our operating loss in Corporate and Other for the three months ended September 30, 2021 was $15.4 million, an increase of $1.3 million, from operating loss of $14.1 million for the three months ended September 30, 2020. This change was primarily related to productivity and transformation costs included in Corporate and Other of $2.1 million for the three months ended September 30, 2021, an increase of $1.3 million from $0.8 million for the three months ended September 30, 2020 primarily due to higher consulting costs. Refer to Note 18, Segment Information , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. 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. We believe that our cash flows from operations and borrowing capacity under our Amended Credit Agreement will be adequate to meet anticipated operating and other expenditures for the foreseeable future. Our cash and cash equivalents balance decreased $46.9 million at September 30, 2021 to $29.0 million as co mpared to $75.9 million at June 30, 2021. Our working capital from continuing operations was $232.3 million at September 30, 2021, a decrease of $52.4 million from $284.7 million at the end of fiscal 2021 as we continued to reduce product inventories. Additionally, our long-term debt increased $114.9 million at September 30, 2021 to $345.4 million as compared to $230.5 million at June 30, 2021 as a result of $120.0 million of additional borrowings to support the share repurchases carried out in the quarter offset by $5.0 million of repayments. As of September 30, 2021, $648.6 million was available under the Amended Credit Agreement as compared with $763.6 million as of June 30, 2021, and the Company was in compliance with all associated covenants. 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, United Kingdom, Canada, Europe, Middle East and India. As of September 30, 2021, substantially all of the total cash balance from continuing operations was held outside of the United States. It is our current intent to indefinitely reinvest our remaining foreign earnings outside the United States. We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of September 30, 2021, 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) oper ating, investing and financing activities is summarized below. Three Months Ended September 30, Change in (amounts in thousands) 2021 2020 Dollars Cash flows provided by (used in): Operating activities from continuing operations $ 37,586 $ 40,669 $ (3,083) Investing activities from continuing operations (18,054) (7,728) (10,326) Financing activities from continuing operations (63,515) (35,959) (27,556) Effect of exchange rate changes on cash from continuing operations (2,926) 2,500 (5,426) Net decrease in cash and cash equivalents $ (46,909) $ (518) $ (46,391) Ca sh provided by operating activities from continuing operations was $37.6 million for the three months ended September 30, 2021, a decrease of $3.1 million from cash provided by operating activities from continuing operations of $40.7 million in the prior year period. This decrease versus the prior period resulted primarily f rom a reduction of $5.7 million in lower net income adjusted for non-cash charges netted by higher cash generation of $2.6 million from our working capital accounts. 38 Table of Contents Cas h used in investing activities from continuing operations was $18.1 million for the three months ended September 30, 2021, an increase of $10.3 million from $7.7 million in the prior year period primarily due to increased capital expenditures. Cas h used in fi nancing activities from continuing operations was $63.5 million for the three months ended September 30, 2021, an increase of $27.6 million compared to $36.0 million of cash used in the prior year period and the increase is primarily due to share repurchases. Operating Free Cash Flow from Continuing Operations Our operating free cash flow from continuing operations was $19.8 million f or the three months ended September 30, 2021, a decrease of $8.7 million from $28.5 million in the three months ended September 30, 2020. This decrease versus prior year resulted from a decrease in cash flow from operations of $3.1 million driven by the reasons explained above and higher capital expenditures of $5.7 million. See 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. Share Repurchase Program In June 2017 and August 2021, the Company's Board of Directors authorized the repurchase of up to $250 million and $300 million of the Company’s issued and outstanding common stock, respectively. Share repurchases under the 2021 authorization commenced in August 2021, after the 2017 authorization was 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 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 three months ended September 30, 2021, the Company repurchased 4.525 million shares under the repurchase program for a total of $175.6 million, excluding commissions, at an average price of $38.80 per share. As of September 30, 2021, the Company had $206.8 million of remaining authorization under the share repurchase program. During the three months ended September 30, 2020, the Company repurchased 1.281 million shares under the repurchase program for a total of $42.0 million, excluding commissions, at an average price of $32.81 per share. 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. 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 believe the non-U.S. GAAP measure provides useful information to investors and any additional purposes for which our management and Board of Directors use the non-U.S. GAAP measures. These non-U.S. GAAP measures should be viewed in addition to, and not in lieu of, the comparable U.S. GAAP measures. 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. Divestitures and Discontinued Brands We also exclude the impact of 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 divestitures and discontinued brands when presenting period-over-period results of net sales aids in comparability. A reconciliation between reported and constant currency net sales increase (decrease) is as follows: 39 Table of Contents (amounts in thousands) North America International Hain Consolidated Net sales - Three months ended September 30, 2021 $ 265,525 $ 189,378 $ 454,903 Divestitures and discontinued brands (178) — (178) Impact of foreign currency exchange (1,719) (8,269) (9,988) Net sales on a constant currency basis adjusted for divestitures and discontinued brands - Three months ended September 30, 2021 $ 263,628 $ 181,109 $ 444,737 Net sales - Three months ended September 30, 2020 $ 280,668 $ 217,959 $ 498,627 Divestitures and discontinued brands (13,621) (39,630) (53,251) Net sales adjusted for divestitures and discontinued brands $ 267,047 $ 178,329 $ 445,376 Net sales decline (5.4) % (13.1) % (8.8) % Impact of divestitures and discontinued brands 4.7 % 18.5 % 10.7 % Impact of foreign currency exchange (0.6) % (3.8) % (2.0) % Net sales (decline) growth on a constant currency basis adjusted for divestitures and discontinued brands (1.3) % 1.6 % (0.1) % Adjusted EBITDA Adjusted EBITDA is defined as net income (loss) before income taxes, net interest expense, depreciation and amortization, impairment charges, equity in net loss of equity-method investees, stock-based compensation, restructuring activities, litigation and related expenses, acquisitions and divestitures, unrealized currency gains and losses and other adjustments. 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. 40 Table of Contents A reconciliation of net income (loss) to Adjusted EBITDA is as follows: Three Months Ended September 30, (amounts in thousands) 2021 2020 Net income $ 19,411 $ 485 Net income from discontinued operations — 11,266 Net income (loss) from continuing operations 19,411 (10,781) Depreciation and amortization 10,855 13,761 Equity in net loss of equity-method investees 526 19 Interest expense, net 1,146 2,154 Provision for income taxes 4,542 12,962 Stock-based compensation 4,287 4,367 Unrealized currency gains (1,023) (1,202) Litigation & related costs Litigation expenses 1,956 — Proceeds from insurance claim (196) — Restructuring activities Plant closure related costs 996 (6) Productivity and transformation costs 3,204 781 Warehouse/manufacturing consolidation and other costs 2,289 390 Acquisitions & divestitures Acquisitions & divestitures transaction costs, net (231) 369 Gain on sale of assets (446) — Gain on sale of businesses — (620) Impairment charges SKU rationalization and inventory write-down — 204 Long-lived asset impairment — 32,497 Adjusted EBITDA $ 47,316 $ 54,895 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 purchases of property, plant and equipment (capital spending). 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. 41 Table of Contents A reconciliation from Cash flow provided by operating activities from continuing operations to Operating Free Cash flow from continuing operations is as follows: Three Months Ended September 30, (amounts in thousands) 2021 2020 Cash flow provided by operating activities from continuing operations $ 37,586 $ 40,669 Purchases of property, plant and equipment (17,810) (12,155) Operating Free Cash Flow from continuing operations $ 19,776 $ 28,514 Off Balance Sheet Arrangements At September 30, 2021, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K that have had, or are likely to have, a material current or future effect on our consolidated financial statements. Critical Accounting Estimates 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, materially different amounts may be reported under different conditions or using assumptions different from those that we have applied. The accounting policies that have been identified as critical to our business operations and to understanding the results of our operations pertain to revenue recognition, trade promotions and sales incentives, valuation of accounts and chargeback receivable, valuation of long-lived assets, goodwill and intangible assets, stock-based compensation and valuation allowances for deferred tax assets. The application of each of these critical accounting policies and estimates is discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021. Recent Accounting Pronouncements Refer to Note 2, Basis of Presentation , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. 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.