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 December 31, 2022 contained in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended June 30, 2022. 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, along with its subsidiaries, the “Company,” and herein referred to as “Hain Celestial,” “we,” “us” and “our”), was founded in 1993 and is headquartered in Lake Success, New York. The Company’s mission has continued to evolve since its founding, with health and wellness being the core tenet. The Company continues to be a leading marketer, manufacturer and seller of organic and natural, “better-for-you” products by anticipating and exceeding consumer expectations in providing quality, innovation, value and convenience. The Company is committed to growing sustainably while continuing to implement environmentally sound business practices and manufacturing processes. Hain Celestial sells its products through specialty and natural food distributors, supermarkets, natural food stores, mass-market and e-commerce retailers, food service channels and club, drug and convenience stores in over 75 countries worldwide. The Company manufactures, markets, distributes, and sells organic and natural products, providing consumers with the opportunity to lead A Healthier Way of Life ® . The Company’s food and beverage brands include Celestial Seasonings ® , Clarks™, Cully & Sully ® , Earth’s Best ® , Ella’s Kitchen ® , Frank Cooper’s ® , Garden of Eatin’ ® , Hartley’s ® , Health Valley ® , Imagine ® , Joya ® , Lima ® , Linda McCartney’s ® (under license), MaraNatha ® , Natumi ® , New Covent Garden Soup Co. ® , ParmCrisps ® , Robertson’s ® , Rose’s ® (under license), Sensible Portions ® , Spectrum ® , Sun-Pat ® , Terra ® , The Greek Gods ® , Thinsters ® , Yorkshire Provender ® and Yves Veggie Cuisine ® . The Company’s personal care brands include Alba Botanica ® , Avalon Organics ® , JASON ® , Live Clean ® and Queen Helene ® . Global Economic Environment Economic conditions during fiscal year 2022 and the first half of fiscal year 2023 have been marked by inflationary pressures, rising interest rates and shifts in consumer demand. • Inflation – The inflationary environment has led to higher costs for ingredients, packaging, energy, transportation and other supply chain components. We expect this higher cost environment to continue, although we expect these higher costs to be partially mitigated by pricing actions we have implemented to date and further pricing actions that we may implement. • Interest Rates – Loans under our credit agreement bear interest at a variable rate, and the interest rate on our outstanding indebtedness has increased as market interest rates have risen significantly starting in the second half of fiscal year 2022. These higher interest rates, together with a higher outstanding debt balance, has led to an increase in our interest expense, which we expect to continue. • Consumer Demand – Recent economic conditions have resulted in changes in consumer spending patterns, which has had an impact on our sales. During an economic downturn, factors such as increased unemployment, decreases in disposable income and declines in consumer confidence can cause changes in consumer spending behavior, particularly with respect to higher priced better-for-you products. Economic conditions have prompted some consumers, particularly in Europe, to shift to lower-priced products. Supply Chain Disruptions We continue to experience disruption in our supply chain network, including the supply of certain ingredients, packaging, and other sourced materials. These disruptions, in addition to the higher costs described above, have resulted in higher inventory levels. In some cases the disruptions result in an inability to fulfill certain customer orders, which can lead to fines from the customers. Although we believe the unprecedented industry-wide supply chain disruptions are largely behind us, it is possible that additional disruptions to our supply chain could occur. 33 Table of Contents Russia-Ukraine War Although we have no material assets in Russia, Belarus or Ukraine, our supply chain was adversely impacted by the Russia-Ukraine war during the second half of fiscal year 2022 and the first half of fiscal year 2023 and we continue to face other challenges and risks arising from the war. In particular, the war has added significant costs to existing inflationary pressures through increased energy and raw material prices. Further, beyond increased costs, labor challenges and other factors have led to supply chain disruptions. While, to date, we have been able to identify replacement raw materials where necessary, we have incurred increased costs in doing so. The war has also negatively impacted consumer sentiment, particularly in Europe, with some consumers shifting to lower-priced products, which has somewhat affected demand for our products. Additionally, we face increased cybersecurity risks, as companies based in the United States and its allied countries have become targets of malicious cyber activity. While we are continuing to monitor and manage the impacts of the war on our business, the extent to which the Russia-Ukraine war and the related economic impact may affect our financial condition or results of operations in the future remains uncertain. COVID-19 The COVID-19 pandemic continues to contribute to the challenging economic conditions described above, including manufacturing and supply chain challenges, labor market shortages and changing consumer behaviors amid uncertain economic conditions. Acquisition On December 28, 2021, the Company acquired all outstanding stock of Proven Brands, Inc. (and its subsidiary That's How We Roll LLC) and KTB Foods Inc., collectively doing business as "That's How We Roll" ("THWR"), the producer and marketer of ParmCrisps ® and Thinsters ® . See Note 4, Acquisitions and Dispositions , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Disposition On December 15, 2022, the Company completed the divestiture of its Westbrae Natural ® brand ("Westbrae") for total cash consideration of $7,498. The sale of Westbrae is consistent with the Company’s portfolio simplification process, to focus on the brands and categories with the most growth potential. Westbrae operated out of the United States and was part of the Company’s North America reportable segment. CEO Succession On November 22, 2022, the Board of Directors (the "Board") of the Company approved a succession plan pursuant to which Mark L. Schiller transitioned from his position as President and Chief Executive Officer of the Company effective as of December 31, 2022 (the “Transition Date”). Mr. Schiller remains as a director on the Board following the Transition Date. The Board appointed Wendy P. Davidson to the role of President and Chief Executive Officer and as a director on the Board, in each case effective as of January 1, 2023 (the “Start Date”). 34 Table of Contents Comparison of Three Months Ended December 31, 2022 to Three Months Ended December 31, 2021 Consolidated Results The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the three months ended December 31, 2022 and 2021 (amounts in thousands, other than per share data and percentages, which may not add due to rounding): Three Months Ended Change in December 31, 2022 December 31, 2021 Dollars Percentage Net sales $ 454,208 100.0% $ 476,941 100.0% $ (22,733) (4.8)% Cost of sales 350,351 77.1% 359,646 75.4% (9,295) (2.6)% Gross profit 103,857 22.9% 117,295 24.6% (13,438) (11.5)% Selling, general and administrative expenses 72,357 15.9% 80,136 16.8% (7,779) (9.7)% Amortization of acquired intangible assets 2,785 0.6% 2,049 0.4% 736 35.9% Productivity and transformation costs 986 0.2% 2,786 0.6% (1,800) (64.6)% Long-lived asset impairment 340 0.1% 303 0.1% 37 12.2% Operating income 27,389 6.0% 32,021 6.7% (4,632) (14.5)% Interest and other financing expense, net 10,812 2.4% 2,592 0.5% 8,220 317.1% Other income, net (1,062) (0.2)% (9,070) (1.9)% 8,008 (88.3)% Income before income taxes and equity in net loss of equity-method investees 17,639 3.9% 38,499 8.1% (20,860) (54.2)% Provision for income taxes 6,357 1.4% 7,145 1.5% (788) (11.0)% Equity in net loss of equity-method investees 316 0.1% 465 0.1% (149) (32.0)% Net income $ 10,966 2.4% $ 30,889 6.5% $ (19,923) (64.5)% Adjusted EBITDA $ 49,817 11.0% $ 59,264 12.4% $ (9,447) (15.9)% Diluted net income per common share $ 0.12 $ 0.33 $ (0.21) (63.6)% Net Sales Net sales for the three months ended December 31, 2022 were $454.2 million, a decrease of $22.7 million, or 4.8%, as compared to $476.9 million in the three months ended December 31, 2021. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales decreased approximately $11.5 million, or 2.4%, from the prior year quarter driven by both the North America and International reportable segments. Further details of changes in net sales by segment are provided below in the Segment Results section. Gross Profit Gross profit for the three months ended December 31, 2022 was $103.9 million, a decrease of $13.4 million, or 11.5%, as compared to the prior year quarter. Additionally, gross profit margin of 22.9% was lower when compared with 24.6% in the prior year quarter. The decrease in gross profit was driven primarily by the International reportable segment mainly resulting from lower net sales in the United Kingdom and Europe operating segments, higher energy and supply chain costs, and under-absorption of overhead costs at our manufacturing facilities when compared to the prior year period. The North America reportable segment had an increase in gross profit mainly driven by pricing increases and cost improvements due to higher productivity, partly offset by inflation and lower net sales in the Canada operating segment when compared with the prior year quarter. 35 Table of Contents Selling, General and Administrative Expenses Selling, general and administrative expenses were $72.4 million for the three months ended December 31, 2022, a decrease of $7.8 million, or 9.7%, from $80.1 million for the prior year quarter. The decrease was driven by lower labor-related expenses primarily in Corporate, marketing costs primarily in the North America reportable segment as well as efficiencies gained from the Company's productivity and transformation initiatives. Amortization of Acquired Intangible Assets Amortization of acquired intangibles was $2.8 million for the three months ended December 31, 2022, an increase of $0.7 million from $2.0 million in the prior year quarter due to the acquisition of THWR in the second quarter of the prior fiscal year. Productivity and Transformation Costs Productivity and transformation costs were $1.0 million for the three months ended December 31, 2022, a decrease of $1.8 million from $2.8 million in the prior year quarter. The decrease was primarily due to reduced spending related to productivity and transformation initiatives as the current transformation effort approaches its conclusion. Long-lived Asset Impairment During the three months ended December 31, 2022 the Company recognized an impairment charge of $0.3 million, relating to a facility in the United States. During the three months ended December 31, 2021, the Company recognized a pre-tax impairment charge of $0.3 million related to a facility in the United Kingdom. Operating Income Operating income for the three months ended December 31, 2022 was $27.4 million compared to $32.0 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 $10.8 million for the three months ended December 31, 2022, an increase of $8.2 million, or 317.1%, from $2.6 million in the prior year quarter. The increase resulted primarily from rising interest rates and a higher outstanding debt balance driven primarily by the acquisition of THWR in the second quarter of the prior fiscal year as well as share repurchase activity during fiscal 2022. 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 $1.1 million for the three months ended December 31, 2022, compared to $9.1 million in the prior year quarter. The decrease in income was primarily attributable to the gain on sale of assets related to the sale of undeveloped land plots in Boulder, Colorado resulting in a gain of $8.7 million in the prior year quarter. Income 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 December 31, 2022 was $17.6 million compared to $38.5 million in the prior year quarter. T he decrease w as 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 was $6.4 million for the three months ended December 31, 2022 compared to an income tax expense of $7.1 million in the prior year quarter. The effective income tax rate was an expense of 36.0% and 18.6% for the three months ended December 31, 2022 and 2021, respectively. The effective income tax rate for the three months ended December 31, 2022 was impacted by the gain on sale of Westbrae, an operating lease modification during the second quarter, severance with respect to our former CEO (as part of the limitation on the deductibility of executive compensation) , stock-based compensation and uncertain tax positions. The effective income tax rate for the three months ended December 31, 2021 was impacted by deductions related to stock-based 36 Table of Contents compensation, non-deductible transaction costs related to the acquisition of THWR and the reversal of a valuation allowance due to the utilization of a capital loss carryover. The effective income tax rates in each period were also impacted by the geographical mix of earnings and state income taxes. Equity in Net Loss of Equity-Method Investees Our equity in net loss from our equity-method investments for the three months ended December 31, 2022 was $0.3 million and $0.5 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 Net income for the three months ended December 31, 2022 was $11.0 million, or $0.12 per diluted share, compared to $30.9 million, or $0.33 per diluted share, in the prior year quarter. The change was attributable to the factors noted above. Adjusted EBITDA Our Adjusted EBITDA was $49.8 million and $59.3 million for the three months ended December 31, 2022 and 2021, respectively, as a result of the factors discuss ed 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. On a constant currency basis, Adjusted EBITDA decreased by $6.5 million, or 11.0%, from $59.3 million for the three months ended December 31, 2021 to $52.7 million for the three months ended December 31, 2022. 37 Table of Contents Segment Results The following table provides a summary of net sales and operating income (loss) by reportable segment for the three months ended December 31, 2022 and 2021: (dollars in thousands) North America International Corporate and Other Consolidated Net sales Three months ended 12/31/22 $ 282,361 $ 171,847 $ — $ 454,208 Three months ended 12/31/21 275,014 201,927 — 476,941 $ change $ 7,347 $ (30,080) n/a $ (22,733) % change 2.7 % (14.9) % n/a (4.8) % Operating income (loss) Three months ended 12/31/22 $ 32,262 $ 11,940 $ (16,813) $ 27,389 Three months ended 12/31/21 27,162 27,368 (22,509) 32,021 $ change $ 5,100 $ (15,428) $ 5,696 $ (4,632) % change 18.8 % (56.4) % (25.3) % (14.5) % Operating income margin Three months ended 12/31/22 11.4 % 6.9 % n/a 6.0 % Three months ended 12/31/21 9.9 % 13.6 % n/a 6.7 % North America Our net sales in the North America reportable segment for the three months ended December 31, 2022 were $282.4 million, an increase of $7.3 million, or 2.7%, from net sales of $275.0 million in the prior year quarter. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales decreased by 1.9%. In the United States operating segment, adjusted sales were lower compared to the prior year quarter mainly due to retailer inventory adjustments, particularly in tea, and lower sales in personal care, partially offset by higher sales in snacks. Similar trends were noted in the Canada operating segment. Sales were also impacted by the industry-wide formula and pouch supply challenges in the baby food category. Operating income in North America for the three months ended December 31, 2022 was $32.3 million, an increase of $5.1 million from $27.2 million in the prior year quarter. The increase was mainly driven by pricing increases, cost improvements due to higher productivity, and lower marketing spend, partially offset by inflation. International Our net sales in the International reportable segment for the three months ended December 31, 2022 were $171.8 million, a decrease of $30.1 million, or 14.9%, from net sales of $201.9 million in the prior year quarter. On a constant currency basis, net sales decreased 3.2% from the prior year quarter primarily due to a decline in sales in the Europe operating segments, partially offset by an increase in sales in the Ella's Kitchen UK and United Kingdom operating segments. In the Europe operating segment, net sales were lower due to continued softness in plant-based categories and non-dairy beverages, including the impact of the loss of a large non-dairy co-manufacturing customer in the second half of the prior fiscal year. Operating income in our International reportable segment for the three months ended December 31, 2022 was $11.9 million, a decrease of $15.4 million from operating income of $27.4 million for the three months ended December 31, 2021. Operating income was lower in the current quarter when compared to the prior year quarter mainly due to lower gross profit resulting from a decline in sales, higher energy and supply chain costs, and under-absorption of overhead costs at our manufacturing facilities. 38 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, acquisition and divestiture transaction costs, facilities, and other items which benefit the Company as a whole. Our operating loss in Corporate and Other for the three months ended December 31, 2022 was $16.8 million, a decrease of $5.7 million, from operating loss of $22.5 million for the three months ended December 31, 2021. This change was primarily due to lower general and administrative expenses mainly on account of lower salaries, wages, and benefits. Refer to Note 17, Segment Information , in the Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Comparison of Six Months Ended December 31, 2022 to Six Months Ended December 31, 2021 Consolidated Results The following table compares our results of operations, including as a percentage of net sales, on a consolidated basis, for the six months ended December 31, 2022 and 2021 (amounts in thousands, other than per share data and percentages, which may not add due to rounding): Six Months Ended Change in December 31, 2022 December 31, 2021 Dollars Percentage Net sales $ 893,559 100.0% $ 931,844 100.0% $ (38,285) (4.1)% Cost of sales 695,367 77.8% 709,131 76.1% (13,764) (1.9)% Gross profit 198,192 22.2% 222,713 23.9% (24,521) (11.0)% Selling, general and administrative expenses 147,308 16.5% 153,929 16.5% (6,621) (4.3)% Amortization of acquired intangible assets 5,573 0.6% 4,144 0.4% 1,429 34.5% Productivity and transformation costs 1,759 0.2% 6,769 0.7% (5,010) (74.0)% Long-lived asset impairment 340 —% 303 —% 37 12.2% Operating income 43,212 4.8% 57,568 6.2% (14,356) (24.9)% Interest and other financing expense, net 18,489 2.1% 4,448 0.5% 14,041 315.7% Other income, net (2,852) (0.3)% (9,858) (1.1)% 7,006 (71.1)% Income before income taxes and equity in net loss of equity-method investees 27,575 3.1% 62,978 6.8% (35,403) (56.2)% Provision for income taxes 8,988 1.0% 11,687 1.3% (2,699) (23.1)% Equity in net loss of equity-method investees 698 0.1% 991 0.1% (293) (29.6)% Net income $ 17,889 2.0% $ 50,300 5.4% $ (32,411) (64.4)% Adjusted EBITDA $ 85,846 9.6% $ 106,580 11.4% $ (20,734) (19.5)% Diluted net income per common share $ 0.20 $ 0.52 $ (0.32) (61.5)% 39 Table of Contents Net Sales Net sales for the six months ended December 31, 2022 were $893.6 million, a decrease of $38.3 million, or 4.1%, as compared to $931.8 million in the six months ended December 31, 2021. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales decreased approximately $15.3 million, or 1.7%, from the prior comparable period primarily driven by International reportable segment. Further details of changes in net sales by segment are provided below in the Segment Results section. Gross Profit Gross profit for the six months ended December 31, 2022 was $198.2 million, a decrease of $24.5 million, or 11.0%, as compared to the prior year comparable period. Gross profit margin was 22.2% of net sales, compared to 23.9% in the prior year comparable period. The decrease in gross profit was driven primarily by the International reportable segment mainly due to lower net sales in the Europe and United Kingdom operating segments, higher energy and supply chain costs, as well as under absorption of overhead costs at our manufacturing facilities when compared to the prior year period. The North America reportable segment had an increase in gross profit mainly driven by pricing increases and cost improvements driven by higher productivity, partially offset by inflation and lower net sales in the Canada operating segment when compared with the prior year comparable period. Selling, General and Administrative Expenses Selling, general and administrative expenses were $147.3 million for the six months ended December 31, 2022, a decrease of $6.6 million, or 4.3%, from $153.9 million for the prior year comparable period. The decrease was primarily driven by reductions in Corporate and the International reportable segment. The decrease was driven by lower labor-related expenses primarily in Corporate and lower marketing costs, as well as efficiencies gained from the Company's productivity and transformation initiatives. Amortization of Acquired Intangible Assets Amortization of acquired intangibles was $5.6 million for the six months ended December 31, 2022, an increase of $1.4 million from $4.1 million in the prior year comparable period due to the acquisition of THWR in the second quarter of the prior fiscal year. Productivity and Transformation Costs Productivity and transformation costs were $1.8 million for the six months ended December 31, 2022, a decrease of $5.0 million from $6.8 million in the prior year comparable period. The decrease was primarily due to reduced spending related to productivity and transformation initiatives as the current transformation effort approaches its conclusion. Long-lived Asset Impairment During the six months ended December 31, 2022, the Company recognized an impairment charge of $0.3 million relating to a facility in the United States. During the six months ended December 31, 2021, the Company recognized a pre-tax impairment charge of $0.3 million related to a facility in the United Kingdom. Operating Income Operating income for the six months ended December 31, 2022 was $43.2 million compared to $57.6 million in the prior year comparable period as a result of the items described above. Interest and Other Financing Expense, Net Interest and other financing expense, net totaled $18.5 million for the six months ended December 31, 2022, an increase of $14.0 million, or 315.7%, from $4.4 million in the prior year comparable period. The increase resulted primarily from a higher outstanding debt balance driven primarily by the acquisition of THWR in the second quarter of the prior fiscal year as well as share repurchase activity during fiscal 2022. Interest and other financing expense was also impacted by higher interest rates compared to the prior comparable period. 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. 40 Table of Contents Other Income, Net Other income, net totaled $2.9 million for the six months ended December 31, 2022, compared to $9.9 million in the prior year comparable period. The increase in income was primarily attributable to the gain on sale of assets related to the sale of undeveloped land plots in Boulder, Colorado resulting in a gain of $8.7 million in the prior year period. Income from 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 six months ended December 31, 2022 was income of $27.6 million compared to $63.0 million in the prior year comparable period. The decrease was due to the items discussed above. Provision for Income Taxes The provision for income taxes includes federal, foreign, state and local income taxes. Our income tax expense was $9.0 million for the six months ended December 31, 2022 compared to $11.7 million in the prior year comparable period. The effective income tax rate was an expense of 32.6% and 18.6% for the six months ended December 31, 2022 and 2021, respectively. The effective income tax rate for the six months ended December 31, 2022 was impacted by the gain on sale of Westbrae, an operating lease modification during the second quarter, severance with respect to our former CEO (as part of the limitation on the deductibility of executive compensation), stock-based compensation and uncertain tax positions. The effective income tax rate for the six months ended December 31, 2021 was impacted by the reversal of uncertain tax position accruals based on filing of certain elections by taxing authorities, deductions related to stock-based compensation, non-deductible transaction costs related to the acquisition of THWR, and the reversal of a valuation allowance due to the utilization of a capital loss carryover. The effective income tax rates in each period were also impacted by the geographical mix of earnings and state income taxes. Equity in Net Loss of Equity-Method Investees Our equity in net loss from our equity-method investments for the six months ended December 31, 2022 was $0.7 million compared to $1.0 million in the prior year comparable period. 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 Net income for the six months ended December 31, 2022 was $17.9 million, or $0.20 per diluted share, compared to $50.3 million, or $0.52 per diluted share, in the prior year comparable period. The change was attributable to the factors noted above. Adjusted EBITDA Our Adjusted EBITDA was $85.8 million and $106.6 million for the six months ended December 31, 2022 and 2021, 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. On a constant currency basis, Adjusted EBITDA decreased by $15.2 million, or 14.3%, from $106.6 million for the six months ended December 31, 2021 to $91.4 million for the six months ended December 31, 2022. 41 Table of Contents Segment Results The following table provides a summary of net sales and operating income by reportable segment for the six months ended December 31, 2022 and 2021: (dollars in thousands) North America International Corporate and Other Consolidated Net sales Six months ended 12/31/22 $ 570,757 $ 322,802 $ — $ 893,559 Six months ended 12/31/21 540,539 391,305 — 931,844 $ change $ 30,218 $ (68,503) n/a $ (38,285) % change 5.6 % (17.5) % n/a (4.1) % Operating income (loss) Six months ended 12/31/22 $ 56,707 $ 19,615 $ (33,110) $ 43,212 Six months ended 12/31/21 44,004 51,437 (37,873) 57,568 $ change $ 12,703 $ (31,822) $ 4,763 $ (14,356) % change 28.9 % (61.9) % (12.6) % (24.9) % Operating income margin Six months ended 12/31/22 9.9 % 6.1 % n/a 4.8 % Six months ended 12/31/21 8.1 % 13.1 % n/a 6.2 % North America Our net sales in the North America reportable segment for the six months ended December 31, 2022 were $570.8 million, an increase of $30.2 million, or 5.6%, from net sales of $540.5 million in the prior year comparable period. On a constant currency basis, adjusted for the impact of acquisitions, divestitures and discontinued brands, net sales increased by 0.7% due to increased sales in the United States operating segment due to stronger sales in snacks, partially offset by decreased sales in the Canada operating segment due to lower sales in personal care product categories. Operating income in North America for the six months ended December 31, 2022 was $56.7 million, an increase of $12.7 million from $44.0 million in the prior year comparable period. The increase was mainly driven by pricing increases, cost improvements driven by higher productivity, and lower marketing, partly offset by inflation, higher selling, general and administrative costs, and lower net sales in the Canada operating segment when compared with the prior year period. International Our net sales in the International reportable segment for the six months ended December 31, 2022 were $322.8 million, a decrease of $68.5 million, or 17.5%, from net sales of $391.3 million in the prior year comparable period. On a constant currency basis, net sales decreased 4.8% from the prior year comparable period mainly due to lower sales in the Europe and United Kingdom operating segments. Operating income in our International reportable segment for the six months ended December 31, 2022 was $19.6 million, a decrease of $31.8 million from operating income of $51.4 million for the six months ended December 31, 2021. Operating income was lower in the current period when compared to the prior year comparable period mainly due to lower gross profit resulting from a decline in sales, higher energy and supply chain costs, as well as change in sales mix of high margin products. 42 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, acquisition and divestiture transaction costs, facilities, and other items which benefit the Company as a whole. Our operating expenses in Corporate and Other for the six months ended December 31, 2022 were $33.1 million, a decrease of $4.8 million, from $37.9 million in the prior year period. This change was primarily due to lower general and administrative expenses. Refer to Note 17, 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 Credit Agreement (as defined below). We believe that our cash flows from operations and borrowing capacity under our Credit Agreement (as defined below) will be adequate to meet anticipated operating and other expenditures for the foreseeable future. Amended and Restated Credit Agreement On December 22, 2021, the Company refinanced its revolving credit facility by entering into a Fourth Amended and Restated Credit Agreement (as amended by a First Amendment dated December 16, 2022, the “Credit Agreement”). The Credit Agreement provides for senior secured financing of $1,100.0 million in the aggregate, consisting of (1) $300.0 million in aggregate principal amount of term loans (the “Term Loans”) and (2) an $800.0 million senior secured revolving credit facility (which includes borrowing capacity available for letters of credit, and is comprised of a $440.0 million U.S. revolving credit facility and $360.0 million global revolving credit facility) (the “Revolver”). Both the Revolver and the Term Loans mature on December 22, 2026. The Credit Agreement includes financial covenants that require compliance with a consolidated interest coverage ratio, a consolidated leverage ratio and a consolidated secured leverage ratio. The minimum consolidated interest coverage ratio is 2.75:1.00. The maximum consolidated leverage ratio is 6.00:1.00. Through December 31, 2023 or such earlier date as elected by the Company (the “Amendment Period”), the maximum consolidated secured leverage ratio is 5.00:1.00. Following the Amendment Period, the maximum consolidated secured leverage ratio will be 4.25:1.00, subject to possible temporary increase following certain corporate acquisitions. During the Amendment Period, loans under the Credit Agreement will bear interest at (a) the Secured Overnight Financing Rate, plus a credit spread adjustment of 0.10% (as adjusted, “Term SOFR”) plus 2.0% per annum or (b) the Base Rate (as defined in the Credit Agreement) plus 1.0% per annum. Following the Amendment Period, loans will bear interest at rates based on (a) Term SOFR plus a rate ranging from 0.875% to 1.750% per annum or (b) the Base Rate plus a rate ranging from 0.00% to 0.750% per annum, the relevant rate in each case being the Applicable Rate. The Applicable Rate following the Amendment Period will be determined in accordance with a leverage-based pricing grid, as set forth in the Credit Agreement. The weighted average interest rate on outstanding borrowings under the Credit Agreement at December 31, 2022 was 5.59%. Additionally, the Credit Agreement contains a Commitment Fee (as defined in the Credit Agreement) on the amount unused under the Credit Agreement ranging from 0.15% to 0.25% per annum, and such Commitment Fee is determined in accordance with a leverage-based pricing grid. As of December 31, 2022, there were $587.0 million of loans under the Revolver , $292.5 million of Term Loans, and $6.8 million let ters of credit outstanding under the Credit Agreement. As of December 31, 2022, $206.2 million was available under the Credit Agreement , subject to compliance with the financial covenants, as compared to $204.0 million as of June 30, 2022. As of December 31, 2022, the Company was in compliance with all associated covenants. In addition to obligations under the Credit Agreement, we are party to other contractual obligations involving commitments to make payments to third parties, including purchase commitments and lease obligations, which impact our short-term and long-term liquidity and capital resource needs. See Note 7, Leases. Our cash and cash equivalents balance decreased $22.1 million at December 31, 2022 to $43.4 million as compared to $65.5 million at June 30, 2022. Our working capital was $357.4 million at December 31, 2022, an increase of $28.4 million from 43 Table of Contents $329.0 million at the end of fiscal 2022. Additionally, our total debt decreased by $10.2 million at December 31, 2022 to $878.4 million as compared to $888.6 million at June 30, 2022 as a result of $9.8 million of net repayments carried out during the period. Our cash balances are held in the United States, United Kingdom, Canada, Europe, the Middle East and India. As of December 31, 2022, substantially all of the total cash balance from operations was held outside of the United States. We maintain our cash and cash equivalents primarily in money market funds or their equivalent. As of December 31, 2022, all of our investments were expected to mature in less than three months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk. Cash (used in) provided by operating, investing and financing activities is summarized below. Six Months Ended December 31, Change in (amounts in thousands) 2022 2021 Dollars Cash flows (used in) provided by: Operating activities $ (2,652) $ 68,031 $ (70,683) Investing activities (6,014) (272,345) 266,331 Financing activities (10,892) 208,849 (219,741) Effect of exchange rate changes on cash (2,517) (3,204) 687 Net increase in cash and cash equivalents $ (22,075) $ 1,331 $ (23,406) Cash used in operating activities was $2.7 million for the six months ended December 31, 2022, a decrease of $70.7 million from cash provided by operating activities of $68.0 million in the prior year period. This decrease versus the prior period resulted primarily from a reduction of $25.5 million in net income adjusted for non-cash charges in the current period and lower cash generation of $45.2 million from our working capital accounts primarily due to higher inventory balances as a result of inflation, and a higher account receivable balance due to timing of cash receipts. Cash used in investing activities was $6.0 million for the six months ended December 31, 2022, a decrease of $266.3 million from $272.3 million in the prior year period primarily due to the acquisition of THWR in the same period of the prior year. Cash used in financing activities was $10.9 million for the six months ended December 31, 2022, a decrease in cash provided of $219.7 million compared to $208.8 million of cash provided in the prior year period. The decrease in cash provided by financing activities is primarily due to higher borrowings under the Credit Agreement to finance the THWR acquisition, higher share repurchases, and payment of shares withheld for employee payroll taxes during the same period in the prior year. Operating Free Cash Flows Operating free cash flows were negative $16.7 million for the six months ended December 31, 2022, a decrease of $56.7 million from $40.0 million provided by operating free cash flows in the six months ended December 31, 2021. This decrease versus prior year resulted primarily from a decrease in cash flow from operations of $70.7 million driven by the reasons explained above. 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 to operating free cash flows. Share Repurchase Program In January 2022, the Company’s Board of Directors authorized the repurchase of up to $200.0 million of the Company’s issued and outstanding common stock. Repurchases may be made from time to time in the open market, pursuant to pre-set trading plans, in private transactions or otherwise. The current 2022 authorization does not have a stated expiration date. The extent to which the Company repurchases its shares and the timing of such repurchases will depend upon market conditions and other corporate considerations. During the six months ended December 31, 2022, the Company did not repurchase any shares under the repurchase program. As of December 31, 2022, the Company had $173.5 million of remaining authorization under the share repurchase program. 44 Table of Contents 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. Net Sales - Constant Currency Presentation We believe that net sales adjusted for the impact of foreign currency 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 net sales adjusted for the impact of foreign currency, current period net sales for entities reporting in currencies other than the U.S. Dollar are translated into U.S. Dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average monthly exchange rate in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year. Net Sales - Adjusted for the Impact of Acquisitions, Divestitures and Discontinued Brands We also exclude the impact of acquisitions, divestitures and discontinued brands when comparing net sales to prior periods, which results in the presentation of certain non-U.S. GAAP financial measures. The Company's management believes that excluding the impact of acquisitions, divestitures and discontinued brands when presenting period-over-period results of net sales aids in comparability. To present net sales adjusted for the impact of acquisitions, the net sales of an acquired business are excluded from fiscal quarters constituting or falling within the current period and prior period where the applicable fiscal quarter in the prior period did not include the acquired business for the entire quarter. To present net sales adjusted for the impact of divestitures and discontinued brands, the net sales of a divested business or discontinued brand are excluded from all periods. A reconciliation between reported net sales and net sales adjusted for the impact of foreign currency, acquisitions, divestitures and discontinued brands is as follows: 45 Table of Contents (amounts in thousands) North America International Hain Consolidated Net sales - Three months ended December 31, 2022 $ 282,361 $ 171,847 $ 454,208 Acquisitions, divestitures and discontinued brands (16,849) — (16,849) Impact of foreign currency exchange 2,075 23,720 25,795 Net sales on a constant currency basis adjusted for acquisitions, divestitures and discontinued brands - Three months ended December 31, 2022 $ 267,587 $ 195,567 $ 463,154 Net sales - Three months ended December 31, 2021 $ 275,014 $ 201,927 $ 476,941 Acquisitions, divestitures and discontinued brands (2,280) — (2,280) Net sales adjusted for acquisitions, divestitures and discontinued brands - Three months ended December 31, 2021 $ 272,734 $ 201,927 $ 474,661 Net sales growth (decline) 2.7 % (14.9) % (4.8) % Impact of acquisitions, divestitures and discontinued brands (5.4) % — % (3.0) % Impact of foreign currency exchange 0.8 % 11.7 5.4 % Net sales decline on a constant currency basis adjusted for acquisitions, divestitures and discontinued brands (1.9) % (3.2) % (2.4) % Net sales - Six months ended December 31, 2022 $ 570,757 $ 322,802 $ 893,559 Acquisitions, divestitures and discontinued brands (34,499) — (34,499) Impact of foreign currency exchange 3,143 49,506 52,649 Net sales on a constant currency basis adjusted for acquisitions, divestitures and discontinued brands - Six months ended December 31, 2022 $ 539,401 $ 372,308 $ 911,709 Net sales - Six months ended December 31, 2021 $ 540,539 $ 391,305 $ 931,844 Acquisitions, divestitures and discontinued brands (4,832) — (4,832) Net sales adjusted for acquisitions, divestitures and discontinued brands - Six months ended December 31, 2021 $ 535,707 $ 391,305 $ 927,012 Net sales growth (decline) 5.6 % (17.5) % (4.1) % Impact of acquisitions, divestitures and discontinued brands (5.5) % — % (3.2) % Impact of foreign currency exchange 0.6 % 12.7 % 5.6 % Net sales growth (decline) on a constant currency basis adjusted for acquisitions, divestitures and discontinued brands 0.7 % (4.8) % (1.7) % Adjusted EBITDA The Company defines Adjusted EBITDA as net income before net interest expense, income taxes, depreciation and amortization, equity in net loss of equity-method investees, stock-based compensation, net, unrealized currency losses (gains), certain litigation and related costs, CEO succession costs, plant closure related costs, net, productivity and transformation costs, warehouse and manufacturing consolidation and other costs, costs associated with acquisitions, divestitures and other transactions, gains on sales of assets, certain inventory write-downs, long-lived asset impairments 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. 46 Table of Contents 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. A reconciliation of net income (loss) to Adjusted EBITDA is as follows: Three Months Ended December 31, Six Months Ended December 31, (amounts in thousands) 2022 2021 2022 2021 Net income $ 10,966 $ 30,889 $ 17,889 $ 50,300 Depreciation and amortization 12,155 10,903 24,125 21,758 Equity in net loss of equity-method investees 316 465 698 991 Interest expense, net 10,379 1,685 17,658 2,831 Provision for income taxes 6,357 7,145 8,988 11,687 Stock-based compensation, net 3,435 4,156 7,429 8,443 Unrealized currency losses (gains) 2,160 (480) 449 (1,503) Litigation and related costs Certain litigation expenses, net (a) 2,482 1,624 4,945 3,384 Restructuring activities CEO succession 5,113 — 5,113 — Plant closure related costs, net 53 (183) 51 813 Productivity and transformation costs 986 2,247 1,759 5,451 Warehouse/manufacturing consolidation and other costs, net (1,972) 249 (1,972) 2,538 Acquisitions, divestitures and other Transaction and integration costs, net 402 8,963 1,769 8,732 Gain on sale of assets (3,355) (8,656) (3,395) (9,102) Impairment charges Inventory write-down — (46) — (46) Long-lived asset impairment 340 303 340 303 Adjusted EBITDA $ 49,817 $ 59,264 $ 85,846 $ 106,580 (a) Expenses and items relating to securities class action and baby food litigation. Adjusted EBITDA - Constant Currency Presentation The Company provides Adjusted EBITDA and Adjusted EBITDA on a constant currency basis because the Company’s management believes that these presentations provide 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 these measures for reviewing the financial results of the Company as well as a component of performance-based executive compensation. The Company believes presenting Adjusted EBITDA on a constant currency basis provides useful information to investors because it provides transparency to underlying performance in the Company’s Adjusted EBITDA by excluding the effect that foreign currency exchange rate fluctuations have on period-to-period comparability given the volatility in foreign currency exchange markets. 47 Table of Contents A reconciliation between Adjusted EBITDA and constant currency Adjusted EBITDA for the three months ended December 31, 2022 and 2021 is as follows: (amounts in thousands) Hain Consolidated Adjusted EBITDA - Three months ended December 31, 2022 $ 49,817 Impact of foreign currency exchange 2,909 Adjusted EBITDA on a constant currency basis - Three months ended December 31, 2022 $ 52,726 Adjusted EBITDA - Three months ended December 31, 2021 $ 59,264 A reconciliation between Adjusted EBITDA and constant currency Adjusted EBITDA for the six months ended December 31, 2022 and 2021 is as follows: (amounts in thousands) Hain Consolidated Adjusted EBITDA - Six months ended December 31, 2022 $ 85,846 Impact of foreign currency exchange 5,527 Adjusted EBITDA on a constant currency basis - Six months ended December 31, 2022 $ 91,373 Adjusted EBITDA - Six months ended December 31, 2021 $ 106,580 Operating Free Cash Flows In our internal evaluations, we use the non-U.S. GAAP financial measure “Operating Free Cash Flows” The difference between Operating Free Cash Flows and cash flow provided by or used in operating activities, which is the most comparable U.S. GAAP financial measure, is that Operating Free Cash Flows 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 Flows 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 Flows in isolation or as an alternative to financial measures determined in accordance with U.S. GAAP. A reconciliation from cash flows (used in) provided by operating activities to Operating Free Cash Flows is as follows: Six Months Ended December 31, (amounts in thousands) 2022 2021 Net cash (used in) provided by operating activities $ (2,652) $ 68,031 Purchases of property, plant and equipment (14,055) (27,996) Operating free cash flows $ (16,707) $ 40,035 48 Table of Contents 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 variable consideration, 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, 2022 from which there have been no material changes. 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.