10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

    x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
   For the Quarterly Period Ended June 30, 2012.

or

 

    ¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   For the Transition Period from                     to                     

Commission File Number 001-32504

TreeHouse Foods, Inc.

(Exact name of the registrant as specified in its charter)

 

LOGO

 

Delaware    20-2311383
(State or other jurisdiction of incorporation or organization)    (I.R.S. employer identification no.)
2021 Spring Road, Suite 600   
Oak Brook, IL    60523
(Address of principal executive offices)    (Zip Code)

(Registrant’s telephone number, including area code) (708) 483-1300

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes    x     No    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer                                                x            Accelerated filer       ¨                  
Non-accelerated filer   ¨    Smaller reporting Company       ¨  
(Do not check if a smaller reporting company)    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    ¨     No    x

Number of shares of Common Stock, $0.01 par value, outstanding as of July 31, 2012: 36,160,528


Table of Contents

Table of Contents

 

     Page  

Part I — Financial Information

  

Item 1 — Financial Statements (Unaudited)

     3   

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

     27   

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

     38   

Item 4 — Controls and Procedures

     40   

Report of Independent Registered Public Accounting Firm

     41   

Part II — Other Information

  

Item 1 — Legal Proceedings

     42   

Item 1A — Risk Factors

     42   

Item 5 — Other Information

     42   

Item 6 — Exhibits

     42   

Signatures

     43   

 

2


Table of Contents

Part I — Financial Information

Item 1. Financial Statements

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $                 74,244      $             3,279   

Receivables, net

     119,027        115,168   

Inventories, net

     349,901        329,374   

Deferred income taxes

     3,306        3,854   

Prepaid expenses and other current assets

     11,395        12,638   

Assets held for sale

     4,081        4,081   
  

 

 

   

 

 

 

Total current assets

     561,954        468,394   

Property, plant and equipment, net

     423,712        406,558   

Goodwill

     1,067,864        1,068,419   

Intangible assets, net

     426,758        437,860   

Other assets, net

     22,280        23,298   
  

 

 

   

 

 

 

Total assets

   $ 2,502,568      $ 2,404,529   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 191,169      $ 169,525   

Current portion of long-term debt

     2,028        1,954   
  

 

 

   

 

 

 

Total current liabilities

     193,197        171,479   

Long-term debt

     940,220        902,929   

Deferred income taxes

     204,990        202,258   

Other long-term liabilities

     45,796        54,346   
  

 

 

   

 

 

 

Total liabilities

     1,384,203        1,331,012   

Commitments and contingencies (Note 17)

    

Stockholders’ equity:

    

Preferred stock, par value $0.01 per share, 10,000 shares authorized, none issued

              

Common stock, par value $0.01 per share, 90,000 shares authorized, 36,156

and 35,921 shares issued and outstanding, respectively

     361        359   

Additional paid-in capital

     719,337        714,932   

Retained earnings

     422,171        380,588   

Accumulated other comprehensive loss

     (23,504     (22,362
  

 

 

   

 

 

 

Total stockholders’ equity

     1,118,365        1,073,517   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,502,568      $ 2,404,529   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2012     2011     2012      2011  
     (Unaudited)     (Unaudited)  

Net sales

   $       527,421      $     492,620      $     1,051,232       $     986,133   

Cost of sales

     420,830        383,180        829,709         755,767   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     106,591        109,440        221,523         230,366   

Operating expenses:

         

Selling and distribution

     33,858        35,558        68,152         71,818   

General and administrative

     22,704        30,602        49,308         59,845   

Other operating (income) expense, net

     (49     1,348        411         3,998   

Amortization expense

     8,624        8,319        16,887         16,368   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     65,137        75,827        134,758         152,029   
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     41,454        33,613        86,765         78,337   

Other expense (income):

         

Interest expense

     12,438        13,470        25,650         27,321   

(Gain) loss on foreign currency exchange

     (450     (875     406         555   

Other expense (income), net

     1,970        (225     1,509         (717
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other expense

     13,958        12,370        27,565         27,159   
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income taxes

     27,496        21,243        59,200         51,178   

Income taxes

     7,985        6,898        17,615         17,025   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income

   $ 19,511      $ 14,345      $ 41,585       $ 34,153   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net earnings per common share:

         

Basic

   $ .54      $ .40      $ 1.15       $ .96   

Diluted

   $ .53      $ .39      $ 1.12       $ .93   

Weighted average common shares:

         

Basic

     36,057        35,600        36,038         35,566   

Diluted

     37,132        36,950        37,113         36,871   

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2012     2011     2012     2011  
     (Unaudited)     (Unaudited)  

Net income

   $     19,511      $     14,345      $     41,585      $     34,153   

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (9,271     (1,428     (1,784     7,375   

Pension and post-retirement reclassification adjustment (1)

     282        169        561        338   

Derivative reclassification adjustment (2)

     41        40        81        80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (8,948     (1,219     (1,142     7,793   

Comprehensive income

   $ 10,563      $ 13,126      $ 40,443      $ 41,946   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Net of tax of $177 and $106 for the three months ended June 30, 2012 and 2011, respectively, and $353 and $211 for the six months ended June 30, 2012 and 2011, respectively.

 

  (2) Net of tax of $25 for the three months ended June 30, 2012 and 2011, respectively, and $51 for the six months ended June 30, 2012 and 2011, respectively.

See Notes to Condensed Consolidated Financial Statements

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Six Months Ended  
     June 30,  
     2012     2011  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $       41,585      $           34,153   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     26,064        23,979   

Amortization

     16,887        16,368   

Loss on foreign currency exchange

     88        720   

Mark to market adjustment on derivative contracts

     1,581        (753

Excess tax benefits from stock-based compensation

     (2,440     (3,671

Stock-based compensation

     5,748        9,449   

Loss on disposition of assets

     1,263        237   

Write-down of tangible assets

            2,330   

Deferred income taxes

     3,387        907   

Other

     1,320        27   

Changes in operating assets and liabilities, net of acquisitions:

    

Receivables

     2,655        6,763   

Inventories

     (12,285     (32,427

Prepaid expenses and other assets

     2,399        3,610   

Accounts payable, accrued expenses and other liabilities

     6,366        9,344   
  

 

 

   

 

 

 

Net cash provided by operating activities

     94,618        71,036   

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (30,019     (29,839

Additions to other intangible assets

     (4,302     (6,183

Acquisition of business, net of cash acquired

     (25,000     3,243   

Proceeds from sale of fixed assets

     46        56   
  

 

 

   

 

 

 

Net cash used in investing activities

     (59,275     (32,723

Cash flows from financing activities:

    

Borrowings under revolving credit facility

     198,900        125,600   

Payments under revolving credit facility

     (160,400     (162,200

Payments on capitalized lease obligations

     (1,033     (599

Net payments related to stock-based award activities

     (3,878     (9,394

Excess tax benefits from stock-based compensation

     2,440        3,671   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     36,029        (42,922
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (407     633   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     70,965        (3,976

Cash and cash equivalents, beginning of period

     3,279        6,323   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 74,244      $ 2,347   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, 2012

(Unaudited)

1. Basis of Presentation

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. (the “Company,” “we,” “us,” or “our”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to quarterly reporting on Form 10-Q. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations. The Condensed Consolidated Financial Statements and related notes should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Results of operations for interim periods are not necessarily indicative of annual results.

The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to use our judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates.

A detailed description of the Company’s significant accounting policies can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

2. Recent Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income which revises the manner in which entities present comprehensive income in their financial statements. This ASU removes the current presentation guidance and requires comprehensive income to be presented either in a single continuous statement of comprehensive income or two separate but consecutive statements. This guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. ASU 2011-05 does not change current accounting and adoption of this ASU did not have a significant impact on the Company’s financial statements. The Company adopted this guidance using the two separate but consecutive statements approach.

On May 12, 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU provides converged guidance on how (not when) to measure fair value. The ASU provides expanded disclosure requirements and other amendments, including those that eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRSs”). This ASU is effective for interim and annual periods beginning after December 15, 2011 and adoption of this ASU did not have a significant impact on the Company’s disclosures or fair value measurements as presented in Note 19.

3. Facility Closings

As of December 31, 2011, the Company closed its pickle plant in Springfield, Missouri. Production ceased in August 2011 and has been transferred to other pickle facilities. Production at the Springfield facility was primarily related to the Food Away From Home segment. Closure costs for the three and six months ended June 30, 2012 were insignificant. For the three months ended June 30, 2011, costs of $0.8 million consisted of severance and disposal costs. For the six months ended June 30, 2011, costs relating to this closure consisted of a fixed asset impairment charge of $2.3 million; $0.3 million of severance and $0.6 million for disposal costs. These costs are included in Other operating (income) expense, net line in our Condensed Consolidated Statements of Income.

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

4. Acquisitions

On April 13, 2012, the Company closed its previously announced acquisition of substantially all the assets of Naturally Fresh, Inc. (“Naturally Fresh”), a privately owned Atlanta, Georgia based manufacturer of refrigerated dressings, sauces, marinades, dips and specialty items sold within each of our segments. Naturally Fresh has annual revenues of approximately $80 million. The purchase price is approximately $26 million, net of cash, subject to an adjustment for working capital and taxes. The acquisition was financed through borrowings under the Company’s revolving credit facility. The acquisition will expand the Company’s refrigerated manufacturing and packaging capabilities, broaden its distribution footprint and further develop its presence within the growing category of fresh foods. Naturally Fresh’s Atlanta facility coupled with the Company’s existing West Coast and Chicago based refrigerated food plants, will allow the Company to more efficiently service customers from coast to coast.

The acquisition is being accounted for under the acquisition method of accounting and the results of operations are included in our financial statements from the date of acquisition and are in each of our segments. Included in the Company’s Condensed Consolidated Statements of Income are net sales of $18.6 million and a loss of $1.6 million from the Naturally Fresh acquisition. At the date of acquisition, the purchase price was allocated to the assets and liabilities acquired based upon fair market values, and is subject to working capital and tax adjustments. No goodwill was created with this acquisition and an insignificant bargain purchase gain was recognized and recorded in the Other operating (income) expense, net line of the Condensed Consolidated Statement of Income. Prior to recognizing the gain, the Company reassessed the fair value of the assets acquired and liabilities assumed in the acquisition. The insignificant bargain purchase gain is the result of the difference between the fair value of the assets acquired and the purchase price. Pro forma disclosures related to the transaction are not included since they are not considered material. We have made an allocation to net tangible and intangible assets acquired and liabilities assumed as follows:

 

     (In thousands)  

Cash

   $         975   

Receivables

     6,603   

Inventory

     8,574   

Property plant and equipment

     17,046   

Customer relationships

     1,300   

Trade Names

     800   

Non-compete agreement

     120   

Other intangible assets

     111   

Other assets

     1,176   

Assumed liabilities

     (9,641
  

 

 

 

Fair value of net assets acquired

     27,064   

Gain on bargain purchase

     (134
  

 

 

 

Total purchase price

   $ 26,930   
  

 

 

 

The Company allocated $1.3 million to customer relationships that have an estimated life of twenty years, $0.8 million to trade names that have an estimated life of ten years, $0.1 million to a non-compete agreement with a life of 5 years, and $0.1 million to other intangible assets. The Company increased the cost of inventories by $0.4 million, and expensed the amount as a component of cost of goods sold in the second quarter of 2012. The Company incurred approximately $0.8 million in acquisition related costs. These costs are included in the General and administrative expense line of the Condensed Consolidated Statements of Income.

5. Inventories

 

     June 30,
2012
    December 31,
2011
 
     (In thousands)  

Raw materials and supplies

   $         120,748      $         115,719   

Finished goods

     249,173        233,408   

LIFO reserve

     (20,020     (19,753
  

 

 

   

 

 

 

Total

   $ 349,901      $ 329,374   
  

 

 

   

 

 

 

Approximately $65.0 million and $82.0 million of our inventory was accounted for under the LIFO method of accounting at June 30, 2012 and December 31, 2011, respectively.

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

6. Property, Plant and Equipment

 

     June 30,
2012
    December 31,
2011
 
     (In thousands)  

Land

   $         25,233      $         19,256   

Buildings and improvements

     173,121        158,370   

Machinery and equipment

     439,926        417,156   

Construction in progress

     39,350        42,683   
  

 

 

   

 

 

 

Total

     677,630        637,465   

Less accumulated depreciation

     (253,918     (230,907
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 423,712      $ 406,558   
  

 

 

   

 

 

 

7. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the six months ended June 30, 2012 are as follows:

 

     North American
Retail Grocery
    Food Away
From  Home
    Industrial
and  Export
     Total  
     (In thousands)  

Balance at December 31, 2011

   $         842,801      $         92,036      $         133,582       $       1,068,419   

Currency exchange adjustment

     (486     (69             (555
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2012

   $ 842,315      $ 91,967      $ 133,582       $ 1,067,864   
  

 

 

   

 

 

   

 

 

    

 

 

 

The Company has not incurred any goodwill impairments since its inception.

The gross carrying amount and accumulated amortization of intangible assets other than goodwill as of June 30, 2012 and December 31, 2011 are as follows:

 

     June 30, 2012      December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 
     (In thousands)      (In thousands)  

Intangible assets with indefinite lives:

               

Trademarks

   $         32,025       $               —      $         32,025       $         32,155       $               —      $         32,155   

Intangible assets with finite lives:

               

Customer-related

     445,499         (94,515     350,984         444,540         (82,152     362,388   

Non-compete agreement

     120         (6     114         1,000         (1,000       

Trademarks

     20,810         (5,086     15,724         20,010         (4,555     15,455   

Formulas/recipes

     6,872         (3,972     2,900         6,799         (3,302     3,497   

Computer software

     38,992         (13,981     25,011         35,721         (11,356     24,365   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 544,318       $ (117,560   $ 426,758       $ 540,225       $ (102,365   $ 437,860   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense on intangible assets for the three months ended June 30, 2012 and 2011 was $8.6 million and $8.3 million, respectively, and $16.9 million and $16.4 million for the six months ended June 30, 2012 and 2011, respectively. Estimated amortization expense on intangible assets for 2012 and the next four years is as follows:

 

     (In thousands)  

2012

   $         33,214   

2013

   $ 32,461   

2014

   $ 32,055   

2015

   $ 30,632   

2016

   $ 30,312   

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

8. Accounts Payable and Accrued Expenses

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Accounts payable

   $         123,813       $         109,178   

Payroll and benefits

     32,906         17,079   

Interest and taxes

     15,701         20,659   

Health insurance, workers’ compensation and other insurance costs

     5,963         5,584   

Marketing expenses

     5,795         7,148   

Other accrued liabilities

     6,991         9,877   
  

 

 

    

 

 

 

Total

   $ 191,169       $ 169,525   
  

 

 

    

 

 

 

9. Income Taxes

Income tax expense was recorded at an effective rate of 29.0% and 29.8% for the three and six months ended June 30, 2012, respectively, compared to 32.5% and 33.3% for the three and six months ended June 30, 2011, respectively. The Company’s effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith acquisition in 2007. The decrease in the effective tax rate for the three and six months ended June 30, 2012 as compared to 2011 is attributable to the tax impact of the repayment of certain intercompany debt and a decrease in the Canadian statutory tax rate.

As of June 30, 2012, the Company does not believe that its gross recorded unrecognized tax benefits will materially change within the next 12 months.

During the second quarter of 2012, the IRS initiated an examination of TreeHouse Foods’ 2010 tax year, the Canadian Revenue Agency (CRA) initiated an examination of the E.D. Smith 2008 and 2009 tax years, and during the fourth quarter of 2011 the IRS initiated an examination of S.T. Specialty Foods, Inc.’s (“S.T. Specialty Foods”) pre-acquisition tax year ended October 28, 2010. The outcome of the examinations is not expected to have a material effect on the Company’s financial position, results of operations or cash flows. The Company has various state tax examinations in process, which are expected to be completed in 2012 or 2013. The outcome of the various state tax examinations is not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

10. Long-Term Debt

 

     June 30,
2012
    December 31,
2011
 
     (In thousands)  

Revolving credit facility

   $         434,300      $         395,800   

High yield notes

     400,000        400,000   

Senior notes

     100,000        100,000   

Tax increment financing and other debt

     7,948        9,083   
  

 

 

   

 

 

 

Total debt outstanding

     942,248        904,883   

Less current portion

     (2,028     (1,954
  

 

 

   

 

 

 

Total long-term debt

   $ 940,220      $ 902,929   
  

 

 

   

 

 

 

Revolving Credit Facility — The Company is party to an unsecured revolving credit facility with an aggregate commitment of $750 million, of which $306.5 million was available as of June 30, 2012. The revolving credit facility matures September 23, 2016. In addition, as of June 30, 2012, there were $9.2 million in letters of credit under the revolving credit facility that were issued but undrawn. Our revolving credit facility contains various financial and other restrictive covenants and requires that the Company maintains certain financial ratios, including a leverage and interest coverage ratio. The Company is in compliance with all applicable covenants as of June 30, 2012. The Company’s average interest rate on debt outstanding under its revolving credit facility for the three and six months ended June 30, 2012 was 1.70% and 1.72%, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

On January 10, 2012, the Company repaid its cross-border intercompany loans with its Canadian subsidiary, E.D. Smith. The repayment totaled $67.7 million and included both principal and interest. Payment was financed with borrowings under the revolving credit facility. The loans were fully repaid and canceled at the time of payment. The cash will be held by E.D. Smith in short term investments, and the Company expects to use the cash for general corporate purposes in Canada, including capital projects and acquisitions. The cash relates to foreign earnings that, if repatriated, would result in a tax liability.

High Yield Notes — The Company’s 7.75% high yield notes in aggregate principal amount of $400 million are due March 1, 2018. The high yield notes are guaranteed by the Company’s 100 percent owned subsidiary Bay Valley Foods, LLC and its 100 percent owned subsidiaries EDS Holdings, LLC; Sturm Foods, Inc.; and S.T. Specialty Foods and certain other of the Company’s subsidiaries that may become guarantors from time to time in accordance with the applicable Indenture and may fully, jointly, severally and unconditionally guarantee the Company’s payment obligations under any series of debt securities offered. The Indenture governing the high yield notes provides, among other things, that the high yield notes will be senior unsecured obligations of the Company. The Indenture contains various restrictive covenants of which the Company is in compliance as of June 30, 2012.

Senior Notes — The Company has outstanding $100 million in aggregate principal amount of 6.03% senior notes due September 30, 2013, issued in a private placement pursuant to a Note Purchase Agreement among the Company and a group of purchasers. The Note Purchase Agreement contains covenants that will limit the ability of the Company and its subsidiaries to, among other things, merge with other entities, change the nature of the business, create liens, incur additional indebtedness or sell assets. The Note Purchase Agreement also requires the Company to maintain certain financial ratios. The Company is in compliance with the applicable covenants as of June 30, 2012.

Tax Increment Financing —The Company owes $2.1 million related to redevelopment bonds pursuant to a Tax Increment Financing Plan and has agreed to make certain payments with respect to the principal amount of the bonds through May 2019.

11. Earnings Per Share

Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding during the reporting period. The weighted average number of common shares used in the diluted earnings per share calculation is determined using the treasury stock method and includes the incremental effect related to the Company’s outstanding stock-based compensation awards.

The following table summarizes the effect of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings per share:

 

     Three Months Ended
June  30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     (In thousands)      (In thousands)  

Weighted average common shares outstanding

             36,057                 35,600                 36,038                 35,566   

Assumed exercise/vesting of equity awards (1)

     1,075         1,350         1,075         1,305   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     37,132         36,950         37,113         36,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Incremental shares from stock-based compensation awards (equity awards) are computed by the treasury stock method. Equity awards excluded from our computation of diluted earnings per share because they were anti-dilutive were 553 thousand for the three and six months ended June 30, 2012, and 110 thousand and 366 thousand for the three and six months ended June 30, 2011.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

12. Stock-Based Compensation

Income before income taxes for the three and six month periods ended June 30, 2012 and 2011 includes share-based compensation expense of $3.1 million, $5.7 million, $4.7 million and $9.4 million, respectively. The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.0 million, $1.8 million, $1.8 million and $3.7 million for the three and six month periods ended June 30, 2012 and 2011, respectively.

The following table summarizes stock option activity during the six months ended June 30, 2012. Stock options are granted under our long-term incentive plan, and generally have a three year vesting schedule, which vest one-third on each of the first three anniversaries of the grant date. Stock options expire ten years from the grant date.

 

     Employee
Options
    Director
Options
    Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term (yrs)
     Aggregate
Intrinsic
Value
 
     (In thousands)                   (In thousands)  

Outstanding, December 31, 2011

                 2,243                    95      $         29.76                     4.8       $             83,292   

Granted

     256             $ 61.41               $   

Forfeited

     (3          $ 25.72               $   

Exercised

     (31     (23   $ 27.17               $   
  

 

 

   

 

 

         

Outstanding, June 30, 2012

     2,465        72      $ 33.01         4.9       $ 74,298   
  

 

 

   

 

 

         

Vested/expected to vest, at June 30, 2012

     2,426        72      $ 32.58         4.8       $ 74,236   
  

 

 

   

 

 

         

Exercisable, June 30, 2012

     2,092        72      $ 28.64         4.1       $ 72,843   
  

 

 

   

 

 

         

Compensation costs related to unvested options totaled $6.8 million at June 30, 2012 and will be recognized over the remaining vesting period of the grants, which averages 2.5 years. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used to calculate the fair value of stock options issued in 2012 include the following: expected volatility of 32.85%, expected term of six years, risk free rate of 1.15% and no dividends. The average grant date fair value of stock options granted in the six months ended June 30, 2012 was $20.85. Stock options issued during the six months ended June 30, 2012 totaled 256 thousand. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2012 and 2011 was approximately $1.7 million and $2.3 million, respectively. The tax benefit recognized from stock option exercises was $0.6 million and $0.9 million for the six months ended June 30, 2012 and 2011, respectively.

In addition to stock options, the Company may also grant restricted stock, restricted stock units and performance unit awards. These awards are granted under our long-term incentive plan. Employee restricted stock and restricted stock unit awards generally vest based on the passage of time. These awards generally vest one-third on each anniversary of the grant date. Director restricted stock units vest, generally, on the anniversary of the thirteenth month of the award. Beginning with the 2012 grant, Director restricted stock units will vest on the first annual anniversary of the grant date. Certain directors have deferred receipt of their awards until their departure from the Board of Directors. The following table summarizes the restricted stock and restricted stock unit activity during the six months ended June 30, 2012:

 

     Employee
Restricted
Stock
    Weighted
Average
Grant Date
Fair Value
     Employee
Restricted
Stock Units
    Weighted
Average
Grant Date
Fair Value
     Director
Restricted
Stock Units
     Weighted
Average
Grant Date
Fair Value
 
     (In thousands)            (In thousands)            (In thousands)         

Outstanding, at December 31, 2011

                 15      $         26.35                     368      $         44.66                     71       $         35.51   

Granted

          $         178      $ 61.24         15       $ 61.41   

Vested

     (14   $ 26.35         (158   $ 42.46               $   

Forfeited

     (1   $ 26.35         (9   $ 47.71               $   
  

 

 

      

 

 

      

 

 

    

Outstanding, at June 30, 2012

          $         379      $ 53.32         86       $ 40.08   
  

 

 

      

 

 

      

 

 

    

Future compensation costs related to restricted stock units is approximately $17.3 million as of June 30, 2012, and will be recognized on a weighted average basis, over the next 2.3 years. The grant date fair value of the awards granted in 2012 is equal to the Company’s closing stock price on the grant date. The restricted stock and restricted stock units vested during the six months ended June 30, 2012 and 2011 had a fair value on the vest date of $8.5 million and $20.1 million, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Performance unit awards are granted to certain members of management. These awards contain service and performance conditions. For each of the three performance periods, one third of the units will accrue, multiplied by a predefined percentage between 0% and 200%, depending on the achievement of certain operating performance measures. Additionally, for the cumulative performance period, a number of units will accrue, equal to the number of units granted multiplied by a predefined percentage between 0% and 200%, depending on the achievement of certain operating performance measures, less any units previously accrued. Accrued units will be converted to stock or cash, at the discretion of the compensation committee, generally, on the third anniversary of the grant date. The Company intends to settle these awards in stock and has the shares available to do so. On June 29, 2012, based on achievement of operating performance measures, 46,959 performance units were converted into 93,918 shares of stock. Conversion of these shares was based on attainment of at least 120% of the target performance goals, and resulted in the vesting awards being converted into two shares of stock for each performance unit. The following table summarizes the performance unit activity during the six months ended June 30, 2012:

 

     Performance
Units
    Weighted
Average
Grant Date
Fair Value
 
     (In thousands)        

Unvested, at December 31, 2011

                 130      $             42.11   

Granted

     89      $ 61.41   

Vested

     (47   $ 28.47   

Forfeited

     (4   $ 45.57   
  

 

 

   

Unvested, at June 30, 2012

     168      $ 56.02   
  

 

 

   

Future compensation cost related to the performance units is estimated to be approximately $5.7 million as of June 30, 2012, and is expected to be recognized over the next 2.7 years. The grant fair value of the awards is equal to the Company’s closing stock price on the date of grant.

13. Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss consists of the following components all of which are net of tax, except for the foreign currency translation adjustment:

 

                                                                                           
     Foreign
Currency
Translation (1)
    Unrecognized
Pension and
Postretirement
Benefits
    Derivative
Financial
Instrument
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at December 31, 2011

   $ (10,268   $ (11,825   $ (269   $ (22,362

Other comprehensive (loss) income

     (1,784     561        81        (1,142
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ (12,052   $ (11,264   $ (188   $ (23,504
  

 

 

   

 

 

   

 

 

   

 

 

 

(1) The foreign currency translation adjustment is not net of tax, as it pertains to the Company’s permanent investment in its Canadian subsidiary, E.D. Smith

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

14. Employee Retirement and Postretirement Benefits

Pension, Profit Sharing and Postretirement Benefits — Certain employees and retirees participate in pension and other postretirement benefit plans. Employee benefit plan obligations and expenses included in the Condensed Consolidated Financial Statements are determined based on plan assumptions, employee demographic data, including years of service and compensation, benefits and claims paid, and employer contributions.

Components of net periodic pension expense are as follows:

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2012     2011     2012     2011  
     (In thousands)     (In thousands)  

Service cost

   $         633      $         560      $       1,266      $         1,120   

Interest cost

     591        560        1,182        1,120   

Expected return on plan assets

     (581     (592     (1,162     (1,184

Amortization of unrecognized net loss

     309        144        618        288   

Amortization of prior service costs

     151        151        302        302   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 1,103      $ 823      $ 2,206      $ 1,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $2.4 million to the pension plans in the first six months of 2012 and expects to contribute approximately $4.2 million in 2012.

Components of net periodic postretirement expenses are as follows:

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2012     2011     2012     2011  
     (In thousands)     (In thousands)  

Service cost

   $             8      $             9      $             16      $             18   

Interest cost

     39        31        78        62   

Amortization of prior service credit

     (18     (17     (36     (35

Amortization of unrecognized net loss

     14        (3     28        (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement cost

   $ 43      $ 20      $ 86      $ 40   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company expects to contribute approximately $0.2 million to the postretirement health plans during 2012.

15. Other Operating (Income) Expense, Net

The Company incurred Other operating expense (income), for the three and six months ended June 30, 2012 and 2011, respectively, which consisted of the following:

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2012     2011     2012     2011  
     (In thousands)     (In thousands)  

Facility closing costs

   $         (8   $         1,368      $         419      $         4,065   

Other

     (41     (20     (8     (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating (income) expense, net

   $ (49   $ 1,348      $ 411      $ 3,998   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

16. Supplemental Cash Flow Information

 

     Six Months Ended,
June  30,
 
     2012      2011  
     (In thousands)  

Interest paid

   $         24,166       $         26,005   

Income taxes paid

   $ 17,482       $ 19,582   

Accrued purchase of property and equipment

   $ 3,187       $ 5,083   

Accrued other intangible assets

   $ 1,333       $ 1,101   

Accrued purchase price

   $ 956       $   

Non cash financing activities for the six months ended June 30, 2012 and 2011 include the settlement of 224,259 shares and 555,322 shares, respectively, of restricted stock, restricted stock units and performance units, where shares were withheld to satisfy the minimum statuary tax withholding requirements.

17. Commitments and Contingencies

Litigation, Investigations and Audits — The Company is party in the ordinary course of business to certain claims, litigation, audits and investigations. The Company believes that it has established adequate reserves to satisfy any liability that may be incurred in connection with any such currently pending or threatened matters. The settlement of any such currently pending or threatened matters is not expected to have a material impact on our financial position, annual results of operations or cash flows.

18. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by derivative instruments include interest rate risk, foreign currency risk and commodity price risk. Derivative contracts are entered into for periods consistent with the related underlying exposure and do not constitute positions independent of those exposures.

The Company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps to hedge our exposure to changes in interest rates, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions, with a bias toward fixed-rate debt.

Due to the Company’s operations in Canada, we are exposed to foreign currency risks. The Company enters into foreign currency contracts to manage the risk associated with foreign currency cash flows. The Company’s objective in using foreign currency contracts is to establish a fixed foreign currency exchange rate for the net cash flow requirements for purchases that are denominated in U.S. dollars. These contracts do not qualify for hedge accounting and changes in their fair value are recorded in the Condensed Consolidated Statements of Income, with their fair value recorded on the Condensed Consolidated Balance Sheets.

Certain commodities we use in the production and distribution of our products are exposed to market price risk. The Company utilizes a combination of derivative contracts, purchase orders and various short and long term supply arrangements in connection with the purchase of raw materials to manage commodity price risk. Commodity forward contracts generally qualify for the normal purchase exception under the guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions.

The Company’s commodity contracts may include diesel, oil and certain plastics. The Company’s diesel contracts are used to manage the Company’s risk associated with the underlying cost of diesel fuel used to deliver products. The contracts for oil and plastics are used to manage the Company’s risk associated with the underlying commodity cost of a significant component used in packaging materials. As of December 31, 2011, the Company had outstanding oil contracts with a notional amount of 18,000 barrels which expired March 31, 2012. As of June 30, 2012, the Company had outstanding contracts for plastics with a notional amount of 7.0 million pounds and diesel contracts with a notional amount of 1.9 million gallons both expiring December 31, 2012.

 

15


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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table identifies the derivative, its fair value, and location on the Condensed Consolidated Balance Sheet:

 

        Fair Value  
   

Balance Sheet Location

  June 30, 2012     December 31, 2011  
        (In thousands)  

Asset Derivative:

     

Commodity contracts

  Prepaid expenses and other current assets     $                 26          $                 163     
   

 

 

   

 

 

 
      $ 26          $ 163     
   

 

 

   

 

 

 
        Fair Value  
   

Balance Sheet Location

  June 30, 2012     December 31, 2011  
        (In thousands)  

Liability Derivative:

     

Commodity contracts

  Accounts payable and accrued expenses     $ 1,445          $ —     
   

 

 

   

 

 

 
      $ 1,445          $ —     
   

 

 

   

 

 

 

We recorded the following gains and losses on our derivative contracts in the Condensed Consolidated Statements of Income:

 

        Three Months Ended
June  30,
    Six Months Ended
June  30,
 
    Location of Gain (Loss)   2012     2011     2012     2011  
   

Recognized in Income

  (In thousands)     (In thousands)  

Mark to market unrealized gain (loss):

         

Interest rate swap

  Other income, net   $      $ 331      $      $ 645   

Foreign currency contract

  Loss on foreign currency exchange            481               91   

Commodity contracts

  Other income, net     (2,098     (153     (1,581     108   
   

 

 

   

 

 

   

 

 

   

 

 

 
      (2,098     659        (1,581     844   

Realized gain (loss):

         

Interest rate swap

  Interest expense            (340            (670

Commodity contracts

  Cost of sales     (187     135        28        198   

Commodity contracts

  Selling and distribution     15               73          
   

 

 

   

 

 

   

 

 

   

 

 

 
      (172     (205     101        (472
   

 

 

   

 

 

   

 

 

   

 

 

 

Total gain (loss)

    $         (2,270   $         454      $         (1,480   $         372   
   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

19. Fair Value

The following table presents the carrying value and fair value of our financial instruments as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011       
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
     Level
     (In thousands)      (In thousands)       

Not recorded at fair value:

              

Revolving credit facility

   $       434,300       $       435,524       $       395,800       $       396,728       2

Senior notes

   $ 100,000       $ 102,321       $ 100,000       $ 101,529       2

High yield notes

   $ 400,000       $ 431,000       $ 400,000       $ 433,000       2

Recorded on a recurring basis at fair value:

              

Commodity contracts

   $ 1,419       $ 1,419       $ 163       $ 163       2

Cash and cash equivalents and accounts receivable are financial assets with carrying values that approximate fair value. Accounts payable are financial liabilities with carrying values that approximate fair value.

The fair value of the revolving credit facility, senior notes, high yield notes and commodity contracts are determined using Level 2 inputs. Level 2 inputs are inputs other than quoted market prices that are observable for an asset or liability, either directly or indirectly. The fair value of the revolving credit facility and senior notes were estimated using present value techniques and market based interest rates and credit spreads. The fair value of the Company’s high yield notes was estimated based on quoted market prices for similar instruments.

The value of the commodity contracts is based on an analysis comparing the contract rates to the forward curve rates throughout the term of the contracts. The commodity contracts are recorded at fair value on the Condensed Consolidated Balance Sheets.

20. Segment and Geographic Information and Major Customers

The Company manages operations on a company-wide basis, thereby making determinations as to the allocation of resources in total rather than on a segment-level basis. The Company has designated reportable segments based on how management views its business. The Company does not segregate assets between segments for internal reporting. Therefore, asset-related information has not been presented. The reportable segments, as presented below, are consistent with the manner in which the Company reports its results to the chief operating decision maker.

The Company evaluates the performance of its segments based on net sales dollars and direct operating income (gross profit less freight out, sales commissions and direct selling and marketing expenses). The amounts in the following tables are obtained from reports used by senior management and do not include income taxes. Other expenses not allocated include unallocated selling and distribution expenses and corporate expenses which consist of general and administrative expenses, amortization expense, other operating expense, interest expense, foreign currency exchange and other income. The accounting policies of the Company’s segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

17


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2012     2011     2012     2011  
     (In thousands)     (In thousands)  

Net sales to external customers:

        

North American Retail Grocery

   $         371,500      $             350,861      $         750,541      $             704,324   

Food Away From Home

     87,885        79,179        163,234        153,406   

Industrial and Export

     68,036        62,580        137,457        128,403   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 527,421      $ 492,620      $ 1,051,232      $ 986,133   
  

 

 

   

 

 

   

 

 

   

 

 

 

Direct operating income:

        

North American Retail Grocery

   $ 54,899      $ 54,102      $ 116,504      $ 117,046   

Food Away From Home

     10,479        10,089        20,276        20,141   

Industrial and Export

     8,302        10,592        19,300        23,414   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     73,680        74,783        156,080        160,601   

Unallocated selling and distribution expenses

     (947     (901     (2,709     (2,053

Unallocated corporate expense

     (31,279     (40,269     (66,606     (80,211
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     41,454        33,613        86,765        78,337   

Other expense

     (13,958     (12,370     (27,565     (27,159
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 27,496      $ 21,243      $ 59,200      $ 51,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Geographic Information — The Company had revenues to customers outside of the United States of approximately 13.3% and 12.9% of total consolidated net sales in the six months ended June 30, 2012 and 2011, respectively, with 12.1% and 12.1% going to Canada, respectively.

Major Customers — Wal-Mart Stores, Inc. and affiliates accounted for approximately 20.0% of consolidated net sales in the six months ended June 30, 2012 and 2011, respectively. No other customer accounted for more than 10% of our consolidated net sales.

Product Information — The following table presents the Company’s net sales by major products for the three and six months ended June 30, 2012 and 2011.

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2012      2011      2012      2011  
     (In thousands)      (In thousands)  

Products:

           

Non-dairy creamer

   $     83,738       $     74,372       $     172,897       $         156,402   

Pickles

     88,624         87,682         159,500         158,136   

Salad dressings

     77,529         61,297         140,646         112,650   

Soup and infant feeding

     52,684         59,094         124,623         132,493   

Mexican and other sauces

     63,428         52,489         115,069         99,679   

Powdered drinks

     52,340         57,918         105,673         113,806   

Hot cereals

     33,801         30,971         76,969         71,725   

Dry dinners

     28,189         24,032         61,364         52,802   

Aseptic products

     24,519         23,083         48,686         45,019   

Jams

     15,007         19,200         31,544         35,304   

Other products

     7,562         2,482         14,261         8,117   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 527,421       $ 492,620       $ 1,051,232       $ 986,133   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

21. Guarantor and Non-Guarantor Financial Information

The Company’s high yield notes are guaranteed by its 100 percent owned subsidiary Bay Valley Foods, LLC and its 100 percent owned subsidiaries EDS Holdings, LLC, Sturm Foods, Inc. and S.T. Specialty Foods. There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan. The following condensed supplemental consolidating financial information presents the results of operations, financial position and cash flows of the parent company, its guarantor subsidiaries, its non-guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of June 30, 2012 and 2011 and for the three and six months ended June 30, 2012, and 2011. The equity method has been used with respect to investments in subsidiaries. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

Condensed Supplemental Consolidating Balance Sheet

June 30, 2012

(In thousands)

 

     Parent
Company
     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

           

Current assets:

           

Cash and cash equivalents

   $       $ 157      $ 74,087      $      $ 74,244   

Receivables, net

     76         98,098        20,853               119,027   

Inventories, net

             298,682        51,219               349,901   

Deferred income taxes

             3,172        134               3,306   

Assets held for sale

             4,081                      4,081   

Prepaid expenses and other current assets

     619         10,658        118               11,395   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     695         414,848        146,411               561,954   

Property, plant and equipment, net

     14,037         373,111        36,564               423,712   

Goodwill

             957,429        110,435               1,067,864   

Investment in subsidiaries

     1,635,062         186,546               (1,821,608       

Intercompany accounts receivable (payable), net

     368,326         (215,385     (152,941              

Deferred income taxes

     15,022                       (15,022       

Identifiable intangible and other assets, net

     49,628         324,463        74,947               449,038   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $     2,082,770       $     2,041,012      $     215,416      $     (1,836,630   $     2,502,568   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Accounts payable and accrued expenses

   $ 12,134       $ 165,768      $ 13,267      $      $ 191,169   

Current portion of long-term debt

             2,028                      2,028   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     12,134         167,796        13,267               193,197   

Long-term debt

     934,300         5,920                      940,220   

Deferred income taxes

     2,655         201,754        15,603        (15,022     204,990   

Other long-term liabilities

     15,316         30,480                      45,796   

Stockholders’ equity

     1,118,365         1,635,062        186,546        (1,821,608     1,118,365   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,082,770       $ 2,041,012      $ 215,416      $ (1,836,630   $ 2,502,568   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Balance Sheet

December 31, 2011

(In thousands)

 

     Parent
Company
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
      Eliminations       Consolidated  

Assets

           

Current assets:

           

Cash and cash equivalents

   $       $ 6      $ 3,273      $      $ 3,279   

Accounts receivable, net

     1         98,477        16,690               115,168   

Inventories, net

             283,212        46,162               329,374   

Deferred income taxes

             3,615        239               3,854   

Assets held for sale

             4,081                      4,081   

Prepaid expenses and other current assets

     1,397         10,719        522               12,638   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,398         400,110        66,886               468,394   

Property, plant and equipment, net

     15,034         355,823        35,701               406,558   

Goodwill

             957,429        110,990               1,068,419   

Investment in subsidiaries

     1,562,365         180,497               (1,742,862       

Intercompany accounts receivable (payable), net

     356,291         (275,721     (80,570              

Deferred income taxes

     14,874                       (14,874       

Identifiable intangible and other assets, net

     49,143         334,251        77,764               461,158   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $     1,999,105       $     1,952,389      $     210,771      $     (1,757,736   $       2,404,529   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

           

Current liabilities:

           

Accounts payable and accrued expenses

   $ 7,264       $ 147,654      $ 14,607      $      $ 169,525   

Current portion of long-term debt

             1,953        1               1,954   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     7,264         149,607        14,608               171,479   

Long-term debt

     895,800         7,129                      902,929   

Deferred income taxes

     2,666         198,800        15,666        (14,874     202,258   

Other long-term liabilities

     19,858         34,488                      54,346   

Shareholders’ equity

     1,073,517         1,562,365        180,497        (1,742,862     1,073,517   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,999,105       $ 1,952,389      $ 210,771      $ (1,757,736   $ 2,404,529   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended June 30, 2012

(In thousands)

 

 
    Parent
  Company  
    Guarantor
  Subsidiaries   
      Non-Guarantor  
Subsidiaries
      Eliminations         Consolidated    

Net sales

  $      $ 463,960      $ 74,659      $ (11,198   $ 527,421   

Cost of sales

           373,332        58,696        (11,198     420,830   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

           90,628        15,963               106,591   

Selling, general and administrative expense

    10,664        39,862        6,036               56,562   

Amortization

    1,190        6,201        1,233               8,624   

Other operating income, net

           (49                   (49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (11,854     44,614        8,694               41,454   

Interest expense (income), net

    12,391        (3,495     3,542               12,438   

Other (income) expense, net

           2,346        (826            1,520   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (24,245     45,763        5,978               27,496   

Income taxes (benefit)

    (9,225     15,629        1,581               7,985   

Equity in net income of subsidiaries

    34,531        4,397               (38,928       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 19,511      $ 34,531      $ 4,397      $ (38,928   $ 19,511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended June 30, 2011

(In thousands)

 

    Parent
  Company  
    Guarantor
  Subsidiaries   
      Non-Guarantor  
Subsidiaries
      Eliminations         Consolidated    

Net sales

  $      $ 424,684      $ 75,141      $ (7,205   $ 492,620   

Cost of sales

           332,516        57,869        (7,205     383,180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

           92,168        17,272               109,440   

Selling, general and administrative expense

    14,587        43,646        7,927               66,160   

Amortization

    741        6,292        1,286               8,319   

Other operating expense, net

           1,348                      1,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (15,328     40,882        8,059               33,613   

Interest expense (income), net

    12,571        (2,724     3,623               13,470   

Other (income) expense, net

    (331     26        (795            (1,100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (27,568     43,580        5,231               21,243   

Income taxes (benefit)

    (9,369     14,858        1,409               6,898   

Equity in net income of subsidiaries

    32,544        3,822               (36,366       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 14,345      $ 32,544      $ 3,822      $ (36,366   $ 14,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Income

Six Months Ended June 30, 2012

(In thousands)

 

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

   $             —      $         927,591      $             146,587      $         (22,946   $     1,051,232   

Cost of sales

            738,184        114,471        (22,946     829,709   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

            189,407        32,116               221,523   

Selling, general and administrative expense

     24,643        80,286        12,531               117,460   

Amortization

     2,226        12,187        2,474               16,887   

Other operating expense, net

            411                      411   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (26,869     96,523        17,111               86,765   

Interest expense (income), net

     25,326        (6,794     7,118               25,650   

Other (income) expense, net

            1,535        380               1,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (52,195     101,782        9,613               59,200   

Income taxes (benefit)

     (19,861     34,955        2,521               17,615   

Equity in net income of subsidiaries

     73,919        7,092               (81,011       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 41,585      $ 73,919      $ 7,092      $ (81,011   $ 41,585   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Supplemental Consolidating Statement of Income

Six Months Ended June 30, 2011

(In thousands)

 

  

  

  

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

   $         —      $         862,020      $             139,271      $         (15,158   $     986,133   

Cost of sales

            663,068        107,857        (15,158     755,767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

            198,952        31,414               230,366   

Selling, general and administrative expense

     29,092        89,897        12,674               131,663   

Amortization

     1,305        12,516        2,547               16,368   

Other operating expense, net

            3,998                      3,998   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (30,397     92,541        16,193               78,337   

Interest expense (income), net

     26,228        (6,044     7,137               27,321   

Other (income) expense, net

     (645     648        (165            (162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (55,980     97,937        9,221               51,178   

Income taxes (benefit)

     (21,089     35,639        2,475               17,025   

Equity in net income of subsidiaries

     69,044        6,746               (75,790       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 34,153      $ 69,044      $ 6,746      $ (75,790   $ 34,153   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended June 30, 2012

(In thousands)

 

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income

   $     19,511      $         34,531      $             4,397      $     (38,928   $         19,511   

Other comprehensive income (loss):

          

Foreign currency translation adjustments

            (4,081     (5,190            (9,271

Pension and post-retirement reclassification

adjustment, net of tax

            282                      282   

Derivative reclassification adjustment, net of tax

     41                             41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     41        (3,799     (5,190            (8,948

Equity in other comprehensive income of

subsidiaries

     (8,989     (5,190            14,179          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 10,563      $ 25,542      $ (793   $ (24,749   $ 10,563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended June 30, 2011

(In thousands)

 

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income

   $     14,345      $         32,544      $             3,822      $     (36,366   $         14,345   

Other comprehensive income (loss):

          

Foreign currency translation adjustments

            (676     (752            (1,428

Pension and post-retirement reclassification

adjustment, net of tax

            169                      169   

Derivative reclassification adjustment, net of tax

     40                             40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     40        (507     (752            (1,219

Equity in other comprehensive income of

subsidiaries

     (1,259     (752            2,011          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 13,126      $ 31,285      $ 3,070      $ (34,355   $ 13,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Six Months Ended June 30, 2012

(In thousands)

 

    Parent
  Company  
    Guarantor
  Subsidiaries   
      Non-Guarantor  
Subsidiaries
      Eliminations         Consolidated    

Net income

  $ 41,585      $ 73,919      $ 7,092      $ (81,011   $ 41,585   

Other comprehensive income (loss):

         

Foreign currency translation adjustments

           (735     (1,049            (1,784

Pension and post-retirement reclassification

adjustment, net of tax

           561                      561   

Derivative reclassification adjustment, net of tax

    81                             81   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    81        (174     (1,049            (1,142

Equity in other comprehensive income of

subsidiaries

    (1,223     (1,049            2,272          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 40,443      $ 72,696      $ 6,043      $ (78,739   $ 40,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Six Months Ended June 30, 2011

(In thousands)

 

  

  

  

    Parent
  Company  
    Guarantor
  Subsidiaries   
      Non-Guarantor  
Subsidiaries
      Eliminations         Consolidated    

Net income

  $ 34,153      $ 69,044      $ 6,746      $ (75,790   $ 34,153   

Other comprehensive income:

              

Foreign currency translation adjustments

           3,599        3,776               7,375   

Pension and post-retirement reclassification

adjustment, net of tax

           338                      338   

Derivative reclassification adjustment, net of tax

    80                             80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    80        3,937        3,776               7,793   

Equity in other comprehensive income of

subsidiaries

    7,713        3,776               (11,489       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 41,946      $ 76,757      $ 10,522      $ (87,279   $ 41,946   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Statement of Cash Flows

Six Months Ended June 30, 2012

(In thousands)

 

 
    Parent
  Company  
    Guarantor
  Subsidiaries   
    Non-
Guarantor
  Subsidiaries  
      Eliminations         Consolidated    

Net cash provided by operating activities

  $ (22,807   $ 41,104      $ 76,321      $      $ 94,618   

Cash flows from investing activities:

         

Additions to property, plant and equipment

    607        (25,526     (5,100            (30,019

Additions to other intangible assets

    (4,302                          (4,302

Acquisition of business, net of cash acquired

           (25,000                   (25,000

Proceeds from sale of fixed assets

           46                      46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (3,695     (50,480     (5,100            (59,275

Cash flows from financing activities:

         

Borrowings under revolving credit facility

    198,900                             198,900   

Payments under revolving credit facility

    (160,400                          (160,400

Payments on capitalized lease obligations

           (1,033                   (1,033

Intercompany transfer

    (10,560     10,560                        

Excess tax benefits from stock-based compensation

    2,440                             2,440   

Net payments related to stock-based award activities

    (3,878                          (3,878
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    26,502        9,527                      36,029   

Effect of exchange rate changes on cash and cash equivalents

                  (407            (407
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

           151        70,814               70,965   

Cash and cash equivalents, beginning of period

           6        3,273               3,279   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $      $ 157      $ 74,087      $      $ 74,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Cash Flows

Six Months Ended June 30, 2011

(In thousands)

 

    Parent
  Company  
    Guarantor
  Subsidiaries   
    Non-
Guarantor
  Subsidiaries  
      Eliminations         Consolidated    

Net cash provided by operating activities

  $ (34,017   $ 108,219      $ (3,166   $      $ 71,036   

Cash flows from investing activities:

         

Additions to property, plant and equipment

    (1,518     (26,873     (1,448            (29,839

Additions to other intangible assets

    (4,035     (2,148                   (6,183

Acquisition of business, net of cash acquired

           3,243                      3,243   

Proceeds from sale of fixed assets

           56                      56   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (5,553     (25,722     (1,448            (32,723

Cash flows from financing activities:

         

Borrowings under revolving credit facility

    125,600                             125,600   

Payments under revolving credit facility

    (162,200                          (162,200

Payments on capitalized lease obligations

           (599                   (599

Intercompany transfer

    81,893        (81,893                     

Excess tax benefits from stock-based compensation

    3,671                             3,671   

Net payments related to stock-based award activities

    (9,394                          (9,394
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    39,570        (82,492              (42,922

Effect of exchange rate changes on cash and cash equivalents

                  633               633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

           5        (3,981            (3,976

Cash and cash equivalents, beginning of period

           6        6,317               6,323   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $      $ 11      $ 2,336      $      $ 2,347   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

22. Subsequent Event

On August 7, 2012, the Company decided, following a strategic review of the soup category and its related business, to streamline its manufacturing capacity and close the Mendota, Illinois soup plant. Production at the Mendota facility is expected to cease in the first quarter of 2013, with full plant closure expected in the second quarter of 2013. Total costs to close the Mendota facility are expected to be approximately $17.7 million. Components of the charges include non-cash asset write-offs of approximately $11.4 million, severance of approximately $2.6 million, and other closure costs of approximately $3.7 million. Production will be moved to the Company’s Pittsburgh soup facility.

The Company will also close its salad dressing plant in Seaforth, Ontario, Canada and move production to facilities where the Company has lower production costs resulting from the recently completed capacity expansion. Production at the Seaforth, Ontario facility is expected to cease in the second quarter of 2013, with full plant closure expected in the third quarter of 2013. Total costs to close the Seaforth facility are expected to be approximately $17.3 million. Components of the charges include non-cash asset write-offs of approximately $10.9 million, severance of approximately $4.0 million, and other closure costs of approximately $2.4 million.

 

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Table of Contents

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

Business Overview

TreeHouse is a food manufacturer servicing primarily the retail grocery and foodservice distribution channels. Our products include non-dairy powdered creamers, private label canned soups, salad dressings and sauces, powdered drink mixes, hot cereals, macaroni and cheese, skillet dinners, Mexican sauces, jams and pie fillings, pickles and related products, aseptic sauces, refrigerated salad dressings and liquid non-dairy creamer. TreeHouse believes it is the largest manufacturer of pickles and non-dairy powdered creamer in the United States and the largest manufacturer of private label salad dressings, powdered drink mixes and instant hot cereals in the United States and Canada based on sales volume.

The following discussion and analysis presents the factors that had a material effect on our results of operations for the three and six months ended June 30, 2012 and 2011. Also discussed is our financial position as of the end of those periods. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes to those Condensed Consolidated Financial Statements included elsewhere in this report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

We discuss the following segments in this Management’s Discussion and Analysis of Financial Condition and Results of Operations: North American Retail Grocery, Food Away From Home, and Industrial and Export. The key performance indicators of our segments are net sales dollars and direct operating income, which is gross profit less the cost of transporting products to customer locations (referred to in the tables below as “freight out”), commissions paid to independent sales brokers, and direct selling and marketing expenses.

Our current operations consist of the following:

Our North American Retail Grocery segment sells branded and private label products to customers within the United States and Canada. These products include non-dairy powdered creamers; condensed and ready to serve soups, broths and gravies; salad dressings and sauces; pickles and related products; Mexican sauces; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; hot cereals; macaroni and cheese and skillet dinners.

Our Food Away From Home segment sells non-dairy powdered creamers, pickle products, Mexican sauces, refrigerated dressings, aseptic products and hot cereals to foodservice customers, including restaurant chains and food distribution companies, within the United States and Canada.

Our Industrial and Export segment includes the Company’s co-pack business and non-dairy powdered creamer sales to industrial customers for use in industrial applications, including products for repackaging in portion control packages and for use as ingredients by other food manufacturers; pickles; Mexican sauces; infant feeding products and refrigerated dressings. Export sales are primarily to industrial customers outside of North America.

The environment the Company operates in continues to be one that is challenged by the overall state of the economy, increased competition, and reduced volume. Also impacting the industry is continued volatility in energy and commodity prices. While energy and commodity costs trended lower earlier this year, they have increased recently due in part, to hot and dry weather, resulting in reduced expected production volume of agricultural commodities, and thus increasing future input costs. However, as a result of our purchasing programs, the Company does not expect that these higher costs will impact a large portion of our input costs this year.

Throughout the year, and consistent with our peers, sales volume growth has been challenging. However, the Company has been able to achieve an increase in net sales on a year to date basis over the same period last year, due to price increases while maintaining a relatively flat volume/mix. Additionally, the Company has continued to see a shift in sales to alternate retail channels, including dollar store, discount and limited assortment formats.

 

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Table of Contents

Recent Developments

On August 7, 2012, the Company decided, following a strategic review of the soup category and its related business, to streamline its manufacturing capacity and close the Mendota, Illinois soup plant. Production at the Mendota facility is expected to cease in the first quarter of 2013, with full plant closure expected in the second quarter of 2013. Total costs to close the Mendota facility are expected to be approximately $17.7 million. Components of the charges include non-cash asset write-offs of approximately $11.4 million, severance of approximately $2.6 million, and other closure costs of approximately $3.7 million. Production will be moved to the Company’s Pittsburgh soup facility.

The Company will also close its salad dressing plant in Seaforth, Ontario, Canada and move production to facilities where the Company has lower production costs resulting from the recently completed capacity expansion. Production at the Seaforth, Ontario facility is expected to cease in the second quarter of 2013, with full plant closure expected in the third quarter of 2013. Total costs to close the Seaforth facility are expected to be approximately $17.3 million. Components of the charges include non-cash asset write-offs of approximately $10.9 million, severance of approximately $4.0 million, and other closure costs of approximately $2.4 million.

On June 6, 2012, the Company recalled 74,000 boxes of pasta mix products based on information from a supplier that it provided the Company with a seasoning blend that may potentially contain small metal fragments. There have been no reports of any injury or illness associated with the recalled products. The recall is not expected to impact the Company’s relationship with its customers and is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

On April 13, 2012, the Company completed its acquisition of substantially all of the assets of Naturally Fresh, Inc. (“Naturally Fresh”), a privately owned Atlanta, Georgia based manufacturer of refrigerated dressings, sauces, marinades, dips and specialty items sold within each of our segments. Naturally Fresh has annual revenues of approximately $80 million. The Company paid a purchase price of approximately $26 million for the business, net of cash, subject to an adjustment for working capital and taxes. The acquisition was financed through borrowings under the Company’s revolving credit facility. The acquisition will expand the Company’s refrigerated manufacturing and packaging capabilities, broaden its distribution footprint and further develop its presence within the growing category of fresh foods. Naturally Fresh’s Atlanta facility, coupled with the Company’s existing West Coast and Chicago based refrigerated food plants, will allow the Company to more efficiently service customers from coast to coast.

On January 10, 2012, the Company repaid its cross-border intercompany loans with its Canadian subsidiary, E.D. Smith. The repayment totaled $67.7 million and included both principal and interest. Payment was financed with borrowings under our revolving credit facility. The loans were fully repaid and canceled at the time of payment. The cash will be held by E.D. Smith in short term investments as cash and cash equivalents. We expect to use the cash for general corporate purposes in Canada, including capital projects and acquisitions. The cash relates to foreign earnings that, if repatriated, would result in a tax liability.

Results of Operations

The following table presents certain information concerning our financial results, including information presented as a percentage of net sales:

 

                                                                                                                                       
    Three Months Ended June 30,     Six Months Ended June 30,  
    2012     2011     2012     2011  
    Dollars     Percent     Dollars     Percent     Dollars     Percent     Dollars     Percent  
    (Dollars in thousands)     (Dollars in thousands)  

Net sales

  $ 527,421        100.0   $ 492,620        100.0   $ 1,051,232        100.0   $ 986,133        100.0

Cost of sales

    420,830        79.8        383,180        77.8        829,709        78.9        755,767        76.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    106,591        20.2        109,440        22.2        221,523        21.1        230,366        23.4   

Operating expenses:

               

Selling and distribution

    33,858        6.4        35,558        7.2        68,152        6.5        71,818        7.3   

General and

administrative

    22,704        4.3        30,602        6.2        49,308        4.7        59,845        6.1   

Other operating

(income) expense net

    (49            1,348        0.3        411               3,998        0.4   

Amortization expense

    8,624        1.6        8,319        1.7        16,887        1.6        16,368        1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating

expenses

    65,137        12.3        75,827        15.4        134,758        12.8        152,029        15.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    41,454        7.9        33,613        6.8        86,765        8.3        78,337        7.9   

Other expenses (income):

               

Interest expense, net

    12,438        2.4        13,470        2.7        25,650        2.5        27,321        2.7   

(Gain) loss on foreign

currency exchange

    (450     (0.1     (875     (0.2     406               555        0.1   

Other expense

(income), net

    1,970        .4        (225            1,509        0.2        (717     (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    13,958        2.7        12,370        2.5        27,565        2.7        27,159        2.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income

taxes

    27,496        5.2        21,243        4.3        59,200        5.6        51,178        5.2   

Income taxes

    7,985        1.5        6,898        1.4        17,615        1.6        17,025        1.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 19,511        3.7   $ 14,345        2.9   $ 41,585        4.0   $ 34,153        3.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

Net Sales — Second quarter net sales increased 7.1% to $527.4 million in 2012 compared to $492.6 million in the second quarter of 2011. The increase is primarily driven by increases in pricing needed to offset higher input costs and the acquisition of Naturally Fresh. Net sales by segment are shown in the following table:

 

     Three Months Ended June 30,  
                   $ Increase/      % Increase/  
     2012      2011      (Decrease)      (Decrease)  
     (Dollars in thousands)  

North American Retail Grocery

   $ 371,500       $ 350,861       $ 20,639         5.9

Food Away From Home

     87,885         79,179         8,706         11.0

Industrial and Export

     68,036         62,580         5,456         8.7
  

 

 

    

 

 

    

 

 

    

Total

   $     527,421       $             492,620       $       34,801         7.1
  

 

 

    

 

 

    

 

 

    

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 79.8% in the second quarter of 2012 compared to 77.8% in 2011. Contributing to the increase in cost of sales, as a percent of net sales, is an increase in input costs and higher cost of sales associated with the acquisition of Naturally Fresh. The underlying commodity costs of raw materials and packaging supplies continues to trend higher in 2012.

Operating Expenses — Total operating expenses were $65.1 million in the second quarter of 2012 compared to $75.8 million in 2011. The decrease in 2012 resulted from the following:

Selling and distribution expenses decreased $1.7 million or 4.8% in the second quarter of 2012 compared to 2011 primarily due to decreased distribution and delivery costs resulting from the efficiencies of last year’s warehouse consolidation program partially offset by higher fuel costs and the acquisition of Naturally Fresh.

General and administrative expenses decreased $7.9 million in the second quarter of 2012 compared to 2011. The decrease is primarily related to decreases in incentive based compensation expense partially offset by the acquisition of Naturally Fresh.

Other operating income in the second quarter of 2012 was insignificant compared to expense of $1.3 million in 2011 that was primarily due to facility closing costs of the Springfield, Missouri pickle plant.

Amortization expense increased $0.3 million in the second quarter of 2012 compared to 2011, due primarily to the amortization of additional ERP system costs.

Interest Expense — Interest expense decreased to $12.4 million in the second quarter of 2012, compared to $13.5 million in 2011 due to a decrease in interest rates.

Foreign Currency — The Company’s foreign currency gain was $0.5 million for the second quarter of 2012 compared to a gain of $0.9 million in 2011, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar.

Other Expense — Other expense was $2.0 million for the second quarter of 2012 compared to a gain of $0.2 million in 2011, primarily due to mark to market losses on commodity contracts.

Income Taxes — Income tax expense was recorded at an effective rate of 29.0% in the second quarter of 2012 compared to 32.5% in the prior year’s quarter. This decrease is due to the tax impact of the repayment of certain intercompany debt and a decrease in the Canadian statutory tax rate.

 

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Table of Contents

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011 — Results by Segment

North American Retail Grocery

 

     Three Months Ended June 30,  
     2012     2011  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $         371,500                 100.0   $         350,861                 100.0

Cost of sales

     291,373         78.4        268,627         76.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     80,127         21.6        82,234         23.4   

Freight out and commissions

     16,407         4.4        19,235         5.5   

Direct selling and marketing

     8,821         2.4        8,897         2.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 54,899         14.8   $ 54,102         15.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the North American Retail Grocery segment increased by $20.6 million, or 5.9% in the second quarter of 2012 compared to 2011. The change in net sales from 2011 to 2012 was due to the following:

 

     Dollars      Percent  
     (Dollars in thousands)  

2011 Net sales

   $ 350,861      

Volume/mix

     (3,557)         (1.0) 

Pricing

     16,837         4.8     

Acquisition

     9,830         2.8     

Foreign currency

     (2,471)         (0.7)    
  

 

 

    

 

 

 

2012 Net sales

   $         371,500               5.9  
  

 

 

    

 

 

 

The increase in net sales from 2011 to 2012 resulted primarily from price increases and the acquisition of Naturally Fresh. During the second quarter, the Company experienced volume losses primarily in the powder drinks and soup categories, that was partially offset by volume increases in pasta sauces and Mexican sauces.

Cost of sales as a percentage of net sales increased from 76.6% in the second quarter of 2011 to 78.4% in 2012 primarily due to higher ingredient and packaging costs and higher relative cost of sales associated with the acquisition of Naturally Fresh, partially offset by price increases.

Freight out and commissions paid to independent sales brokers were $16.4 million in the second quarter of 2012 compared to $19.2 million in 2011, a decrease of 14.7%, primarily due to the efficiencies resulting from last year’s warehouse consolidation program partially offset by higher fuel costs.

Direct selling and marketing expenses were $8.8 million in the second quarter of 2012 and $8.9 million in 2011.

 

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Table of Contents

Food Away From Home

 

     Three Months Ended June 30,  
     2012     2011  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $ 87,885             100.0   $ 79,179         100.0

Cost of sales

     71,996         81.9        64,156         81.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     15,889         18.1        15,023         19.0   

Freight out and commissions

     3,125         3.6        3,103         4.0   

Direct selling and marketing

     2,285         2.6        1,831         2.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $       10,479             11.9   $             10,089                   12.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Food Away From Home segment increased by $8.7 million, or 11.0%, in the second quarter of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

 

     Dollars      Percent  
     (Dollars in thousands)  

2011 Net sales

   $       79,179      

Volume/mix

     (2,963)         (3.7) 

Pricing

     3,926         4.9     

Acquisition

     8,142         10.3     

Foreign currency

     (399)         (0.5)    
  

 

 

    

 

 

 

2012 Net sales

   $ 87,885             11.0  
  

 

 

    

 

 

 

Net sales increased during the second quarter of 2012 compared to 2011 primarily due to the acquisition of Naturally Fresh and increased pricing. Volume in this segment was down from prior year, primarily in the pickle and Mexican sauce categories.

Cost of sales as a percentage of net sales increased from 81.0% in the second quarter of 2011 to 81.9% in 2012 due to higher cost of sales associated with the acquisition of Naturally Fresh.

Freight out and commissions paid to independent sales brokers were $3.1 million in the second quarter of 2012 and 2011, and declined as a percentage of net sales.

Direct selling and marketing was $2.3 million in the second quarter of 2012 and $1.8 million in 2011. The increase was due to the acquisition of Naturally Fresh.

 

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Table of Contents

Industrial and Export

 

                                                                   
     Three Months Ended June 30,  
     2012     2011  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $ 68,036         100.0   $ 62,580         100.0

Cost of sales

     57,461         84.5        50,397         80.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     10,575         15.5        12,183         19.5   

Freight out and commissions

     1,855         2.7        1,048         1.7   

Direct selling and marketing

     418         0.6        543         0.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 8,302         12.2   $ 10,592         16.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Industrial and Export segment increased $5.5 million or 8.7% in the second quarter of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

 

     Dollars      Percent  
     (Dollars in thousands)  

2011 Net sales

   $ 62,580      

Volume/mix

     2,601         4.2  

Pricing

     2,242         3.6     

Acquisition

     668         1.0     

Foreign currency

     (55)         (0.1)    
  

 

 

    

 

 

 

2012 Net sales

   $         68,036             8.7  
  

 

 

    

 

 

 

The increase in net sales is primarily due to price increases and increased volume/mix. Volume increases in non-dairy creamer, due to higher export sales, and Mexican sauces, due to increased co-pack volumes, were partially offset by lower co-pack infant feeding volume.

Cost of sales as a percentage of net sales increased from 80.5% in the second quarter of 2011 to 84.5% in 2012 primarily due to higher ingredient and packaging costs.

Freight out and commissions paid to independent sales brokers were $1.9 million in the second quarter of 2012 and $1.0 million 2011. This increase is due to a shift in mix to higher export sales.

Direct selling and marketing was $0.4 million in the second quarter of 2012 and $0.5 million in 2011.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Net Sales — Net sales increased 6.6% to $1,051.2 million in the first six months of 2012 compared to $986.0 million in the first six months of 2011. The increase is primarily driven by increases in pricing needed to offset higher input costs and the acquisition of Naturally Fresh. Net sales by segment are shown in the following table:

 

                                                                                   
     Six Months Ended June 30,  
     2012      2011      $ Increase/
(Decrease)
     % Increase/
(Decrease)
 
     (Dollars in thousands)  

North American Retail Grocery

   $ 750,541       $ 704,324       $ 46,217         6.6

Food Away From Home

     163,234         153,406         9,828         6.4

Industrial and Export

     137,457         128,403         9,054         7.1
  

 

 

    

 

 

    

 

 

    

Total

   $ 1,051,232       $ 986,133       $ 65,099         6.6
  

 

 

    

 

 

    

 

 

    

 

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Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 78.9% in the first six months of 2012 compared to 76.6% in 2011. Contributing to the increase in cost of sales, as a percent of net sales, is an increase in input costs. The underlying commodity cost of most raw materials and packaging supplies continues to trend higher in 2012.

Operating Expenses — Total operating expenses were $134.8 million during the first six months of 2012 compared to $152.0 million in 2011. The decrease in 2012 resulted from the following:

Selling and distribution expenses decreased $3.7 million or 5.1% in the first six months of 2012 compared to 2011 primarily due to decreased distribution and delivery costs resulting from the efficiencies of last year’s warehouse consolidation program partially offset by higher fuel costs and the acquisition of Naturally Fresh.

General and administrative expenses decreased $10.5 million in the first six months of 2012 compared to 2011. The decrease is primarily related to decreases in incentive based compensation expense, partially offset by the acquisition of Naturally Fresh.

Amortization expense increased $0.5 million in the first six months of 2012 compared to the first six months of 2011, due primarily to the amortization of additional ERP systems costs.

Other operating expense was $0.4 million in the first six months of 2012 compared to $4.0 million in the first six months of 2011. Expenses in the first six months of 2012 primarily consist of executory costs related to closed facilities. Expenses in 2011 were primarily due to facility closing costs of the Springfield, Missouri pickle plant.

Interest Expense, net — Interest expense decreased to $25.7 million in the first six months of 2012, compared to $27.3 million in 2011, due to a decrease in interest rates.

Foreign Currency — The Company’s foreign currency loss was $0.4 million for the six months ended June 30, 2012 compared to a loss of $0.6 million in 2011, due to fluctuations in currency exchange rates between the U.S. and Canadian dollar.

Other Expenses — Other expense was $1.5 million in the first six months of 2012 compared to a gain of $0.7 million in 2011, primarily due to mark to market loss on commodity contracts.

Income Taxes — Income tax expense was recorded at an effective rate of 29.8% in the first six months of 2012 compared to 33.3% in 2011. This decrease is due to the tax impact of the repayment of certain intercompany debt and a decrease in the Canadian statutory tax rate.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011 — Results by Segment

North American Retail Grocery

 

     Six Months Ended June 30,  
     2012     2011  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $ 750,541         100.0   $ 704,324         100.0

Cost of sales

     582,733         77.6        530,670         75.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     167,808         22.4        173,654         24.6   

Freight out and commissions

     34,639         4.6        38,766         5.5   

Direct selling and marketing

     16,665         2.3        17,842         2.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $       116,504               15.5   $             117,046                     16.6
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Net sales in the North American Retail Grocery segment increased by $46.2 million, or 6.6% in the first six months of 2012 compared to the first six months of 2011. The change in net sales from 2011 to 2012 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2011 Net sales

   $ 704,324     

Volume/mix

     1,523        0.2  % 

Pricing

     38,225        5.4   

Acquisition

     9,830        1.4   

Foreign currency

     (3,361     (0.4
  

 

 

   

 

 

 

2012 Net sales

   $       750,541              6.6  % 
  

 

 

   

 

 

 

The increase in net sales from 2011 to 2012 is primarily due to increased pricing needed to offset higher input costs and the acquisition of Naturally Fresh. Increased volume in pasta sauces, Mexican sauces, and dressings was offset by lower soup and gravy, pickles, powdered drinks, and hot cereal volume.

Cost of sales as a percentage of net sales increased from 75.4% in the first six months of 2011 to 77.6% in 2012 primarily due to higher ingredient and packaging costs.

Freight out and commissions paid to independent sales brokers were $34.6 million in the first six months of 2012 compared to $38.8 million in 2011, a decrease of 10.6%, due to the efficiencies of last year’s warehouse consolidation program partially offset by higher fuel costs.

Direct selling and marketing expenses were $16.7 million in the first six months of 2012 compared to $17.8 million in 2011.

Food Away From Home

 

     Six Months Ended June 30,  
     2012     2011  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $ 163,234           100.0   $             153,406                     100.0

Cost of sales

     132,790         81.3        123,582         80.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     30,444         18.7        29,824         19.4   

Freight out and commissions

     5,967         3.7        5,670         3.7   

Direct selling and marketing

     4,201         2.6        4,013         2.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $       20,276         12.4   $ 20,141         13.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Food Away From Home segment increased by $9.8 million, or 6.4%, in the first six months of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

 

             Dollars     Percent  
             (Dollars in thousands)  

2011 Net sales

       $ 153,406     

Volume/mix

         (4,224     (2.8 ) % 

Pricing

         6,440        4.2   

Acquisition

         8,142        5.3   

Foreign currency

         (530     (0.3
      

 

 

   

 

 

 

2012 Net sales

       $         163,234        6.4 
      

 

 

   

 

 

 

 

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Net sales increased during the first six months of 2012 compared to 2011 as a result of price increases and the acquisition of Naturally Fresh offset by volume decreases in our pickle and Mexican and other sauces categories.

Cost of sales as a percentage of net sales increased from 80.6% in the first six months of 2011 to 81.3% in 2012, due to increases in raw material, ingredient and packaging costs.

Freight out and commissions paid to independent sales brokers were $6.0 million in the first six months of 2012 compared to $5.7 million in 2011 due to increased freight costs primarily driven by higher fuel costs and the acquisition of Naturally Fresh. Freight and commissions were 3.7% of net sales, consistent with prior year.

Direct selling and marketing was $4.2 million in the first six months of 2012 compared to $4.0 million in 2011.

Industrial and Export

 

     Six Months Ended June 30,  
     2012     2011  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $     137,457             100.0   $     128,403             100.0

Cost of sales

     114,186         83.1        101,515         79.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     23,271         16.9        26,888         20.9   

Freight out and commissions

     3,162         2.3        2,399         1.9   

Direct selling and marketing

     809         0.6        1,075         0.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 19,300         14.0   $ 23,414         18.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Industrial and Export segment increased $9.1 million or 7.1% in the first six months of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2011 Net sales

   $ 128,403     

Volume/mix

     3,047            2.4

Pricing

     5,420        4.2   

Acquisition

     668        0.5   

Foreign currency

     (81       
  

 

 

   

 

 

 

2012 Net sales

   $         137,457        7.1
  

 

 

   

 

 

 

The increase in net sales is primarily due to price increases and favorable volume/mix. Volume increases were primarily in the pickle, non-dairy creamer, and Mexican sauces categories.

Cost of sales, as a percentage of net sales, increased from 79.1% in the first six months of 2011 to 83.1% in 2012 primarily due to cost increases in raw material, ingredient and packaging costs offset by price increases.

Freight out and commissions paid to independent sales brokers were $3.2 million in the first six months of 2012 compared to $2.4 million in 2011. This increase is due to a change in customer mix.

Direct selling and marketing was $0.8 million in the first six months of 2012 compared to $1.1 million in 2011.

 

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Liquidity and Capital Resources

Cash Flow

Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company continues to generate substantial cash flow from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, acquisitions and managing its capital structure on a short and long-term basis. If additional borrowings are needed, approximately $306.5 million was available under the revolving credit facility as of June 30, 2012. See Note 10 to our Condensed Consolidated Financial Statements for additional information regarding our revolving credit facility. We believe that, given our cash flow from operating activities and our available credit capacity, we can comply with the current terms of the revolving credit facility and meet foreseeable financial requirements.

The Company’s cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows are summarized in the following tables:

 

     Six Months Ended
June 30,
 
     2012     2011  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 41,585      $ 34,153   

Depreciation and amortization

     42,951        40,347   

Stock-based compensation

     5,748        9,449   

Write-down of tangible assets

            2,330   

Deferred income taxes

     3,387        907   

Changes in operating assets and liabilities, net of acquisitions

     (865     (12,710

Other

     1,812        (3,440
  

 

 

   

 

 

 

Net cash provided by operating activities

   $         94,618      $             71,036   
  

 

 

   

 

 

 

Our cash from operations was $94.6 million in the first six months of 2012 compared to $71.0 million 2011, an increase of $23.6 million. The increase in cash from operating activities is primarily due to an increase in net income, and a smaller buildup of inventories relative to the prior year.

 

     Six Months Ended
June 30,
 
     2012     2011  
     (In thousands)  

Cash flows from investing activities:

    

Additions to property, plant and equipment

   $       (30,019   $           (29,839

Additions to other intangible assets

     (4,302     (6,183

Acquisition of business, net of cash acquired

     (25,000     3,243   

Other

     46        56   
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (59,275   $ (32,723
  

 

 

   

 

 

 

In the first six months of 2012, cash used in investing activities increased by $26.6 million compared to 2011 primarily due to the acquisition of Naturally Fresh.

We expect capital spending programs to be approximately $90 million in 2012. Capital spending in 2012 will focus on food safety, quality, productivity improvements, product line expansion at our Manawa, Wisconsin facility, continued implementation of an Enterprise Resource Planning system and routine equipment upgrades or replacements at our plants.

 

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Table of Contents
     Six Months Ended
June 30,
 
     2012     2011  
     (In thousands)  

Cash flows from financing activities:

    

Borrowings under revolving credit facility

   $         198,900      $               125,600   

Payments under revolving credit facility

     (160,400     (162,200

Net payments related to stock-based award activities

     (3,878     (9,394

Other

     1,407        3,072   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

   $ 36,029      $ (42,922
  

 

 

   

 

 

 

Net cash flow from financing activities increased from a use of cash of $43.0 million in the first six months of 2011 to a source of cash of $36.0 million in 2012 as the result of additional borrowings in 2012 that were used to repay certain intercompany loans of $67.7 million with the Company’s Canadian subsidiary, E.D. Smith and $25.0 million for the acquisition of Naturally Fresh.

On January 10, 2012, the Company repaid its cross border intercompany loans with its Canadian subsidiary, E.D. Smith. The repayment totaled $67.7 million and included both principal and interest. Payment was financed with borrowings under our revolving credit facility. The loans were fully repaid and canceled at the time of payment. The cash will be held by E.D. Smith in short term investments and we expect to use the cash for general corporate purposes in Canada, including capital projects and acquisitions. The cash relates to foreign earnings that, if repatriated, would result in a tax liability.

Cash provided by operating activities is used to pay down debt and fund additions to property, plant and equipment and intangible assets.

Our short-term financing needs are primarily for financing working capital during the year. Due to the seasonality of harvest cycles which occur primarily during late spring and summer, inventories generally are at a low point in late spring and at a high point during the fall, increasing our working capital requirements. In addition, we build inventories of salad dressings in the spring and soup in the late summer months in anticipation of large seasonal shipments that begin late in the second and third quarters, respectively. Our long-term financing needs will depend largely on potential acquisition activity. We expect our revolving credit facility, plus cash flow from operations, to be adequate to provide liquidity for current operations.

Debt Obligations

At June 30, 2012, we had $434.3 million in borrowings outstanding under our revolving credit facility, $400 million of 7.75% high yield notes outstanding, $100 million of senior notes outstanding and $7.9 million of tax increment financing and other obligations. In addition, at June 30, 2012, there were $9.2 million in letters of credit under the revolving credit facility that were issued but undrawn.

Our revolving credit facility provides for an aggregate commitment of $750 million, of which $306.5 million was available at June 30, 2012. Interest rates on debt outstanding under our revolving credit facility as of June 30, 2012 averaged 1.71%.

We are in compliance with applicable debt covenants as of June 30, 2012.

See Note 10 to our Condensed Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.

Other Commitments and Contingencies

We also have the following commitments and contingent liabilities, in addition to contingent liabilities related to the ordinary course of litigation, investigations and tax audits:

 

   

certain lease obligations, and

 

   

selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and other casualty losses.

See Note 17 to our Condensed Consolidated Financial Statements in Part I — Item 1 of this Form 10-Q and Note 18 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for more information about our commitments and contingent obligations.

 

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Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is provided in Note 2 to the Company’s Condensed Consolidated Financial Statements.

Critical Accounting Policies

A description of the Company’s critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2011. There were no material changes to our critical accounting policies in the six months ended June 30, 2012.

Off-Balance Sheet Arrangements

We do not have any obligations that meet the definition of an off-balance sheet arrangement, other than operating leases and letters of credit, which have or are reasonably likely to have a material effect on our Condensed Consolidated Financial Statements.

Forward Looking Statements

From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Quarterly Report on Form 10-Q, which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words “anticipate,” “believe,” “estimate,” “project,” “expect,” “intend,” “plan,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We do not intend to update these forward-looking statements.

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q and other public statements we make. Such factors include, but are not limited to: the outcome of litigation and regulatory proceedings to which we may be a party; the impact of product recalls; actions of competitors; changes and developments affecting our industry; quarterly or cyclical variations in financial results; our ability to obtain suitable pricing for our products; development of new products and services; our level of indebtedness; the availability of financing on commercially reasonable terms; cost of borrowing; our ability to maintain and improve cost efficiency of operations; changes in foreign currency exchange rates; interest rates; raw material and commodity costs; changes in economic conditions; political conditions; reliance on third parties for manufacturing of products and provision of services; general U.S. and global economic conditions; the financial condition of our customers and suppliers; consolidations in the retail grocery and foodservice industries; our ability to continue to make acquisitions in accordance with our business strategy or effectively manage the growth from acquisitions; and other risks that are set forth in the Risk Factors section, the Legal Proceedings section, the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and other sections of this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2011 and from time to time in our filings with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Fluctuations

The Company is party to an unsecured revolving credit facility with an aggregate commitment of $750 million. The interest rate under the revolving credit facility is based on the Company’s consolidated leverage ratio, and will be determined by either LIBOR plus a margin ranging from 1.00% to 1.60% or a base rate (as defined in the revolving credit facility) plus a margin ranging from 0.00% to 0.60%.

 

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In July 2006, we entered into a forward interest rate swap transaction for a notional amount of $100 million as a hedge of the forecasted private placement of $100 million senior notes. The interest rate swap transaction was terminated on August 31, 2006, which resulted in a pre-tax loss of $1.8 million. The unamortized loss is reflected, net of tax, in Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets. The loss is reclassified ratably to our Condensed Consolidated Statements of Income as an increase to interest expense over the term of the senior notes, providing an effective interest rate of 6.29% over the term of our senior notes.

We do not utilize financial instruments for trading purposes or hold any derivative financial instruments, which could expose us to significant interest rate market risk, as of June 30, 2012. Our exposure to market risk for changes in interest rates relates primarily to the increase in the amount of interest expense we expect to pay with respect to our revolving credit facility, which is tied to variable market rates. Based on our outstanding debt balance of $434.3 million under our revolving credit facility at June 30, 2012, each 1% rise in our interest rate would increase our interest expense by approximately $4.3 million annually.

Input Costs

The costs of raw materials, packaging materials and fuel, have varied widely in recent years and future changes in such costs may cause our results of operations and our operating margins to fluctuate significantly. We experienced increases in costs of most raw materials, ingredients, and packaging materials in the first six months of 2012 compared to 2011. In addition, fuel costs, which represent the most important factor affecting utility costs at our production facilities, as well as our transportation costs increased in the first six months of 2012. We expect the volatile nature of these costs to continue with an overall upward trend.

We manage the cost of certain raw materials by entering into forward purchase contracts. Forward purchase contracts help us manage our business and reduce cost volatility.

We use a significant amount of fruits and vegetables in our operations as raw materials. Certain of these fruits and vegetables are purchased under seasonal grower contracts with a variety of growers strategically located to supply our production facilities. Bad weather or disease in a particular growing area can damage or destroy the crop in that area. If we are unable to buy the fruits and vegetables from local suppliers, we would purchase them from more distant locations, including other locations within the United States, Mexico or India, thereby increasing our production costs.

Changes in the prices of our products may lag behind changes in the costs of our products. Competitive pressures also may limit our ability to quickly raise prices in response to increased raw materials, packaging and fuel costs. Accordingly, if we are unable to increase our prices to offset increasing raw material, packaging and fuel costs, our operating profits and margins could be materially adversely affected. In addition, in instances of declining input costs, customers may be looking for price reductions in situations where we have locked into pricing at higher costs.

Fluctuations in Foreign Currencies

The Company is exposed to fluctuations in the value of our foreign currency investment in E.D. Smith, located in Canada. Input costs for certain Canadian sales are denominated in U.S. dollars, further impacting the effect foreign currency fluctuations may have on the Company.

The Company’s financial statements are presented in U.S. dollars, which require the Canadian assets, liabilities, revenues, and expenses to be translated into U.S. dollars at the applicable exchange rates. Accordingly, we are exposed to volatility in the translation of foreign currency earnings due to fluctuations in the value of the Canadian dollar, which may negatively impact the Company’s results of operations and financial position. For the six months ended June 30, 2012 the Company recognized a net loss of $2.2 million, of which a loss of $1.8 million was recorded as a component of Accumulated other comprehensive loss and a loss of $0.4 million was recorded on the Company’s Condensed Consolidated Statements of Income within the Loss on foreign currency exchange. For the six months ended June 30, 2011, the Company recognized a net foreign currency exchange gain of $6.8 million, of which a gain of $7.4 million was recorded as a component of Accumulated other comprehensive loss and a loss of $0.6 million was recorded on the Company’s Condensed Consolidated Statements of Income within the Loss on foreign currency exchange.

The Company enters into foreign currency contracts due to the exposure to Canadian/U.S. dollar currency fluctuations on cross border transactions. The Company does not apply hedge accounting to these contracts and records them at fair value on the Condensed Consolidated Balance Sheets. The contracts were entered into for the purchase of U.S. dollar denominated raw materials by our Canadian subsidiary. As of June 30, 2011, the Company had a liability of $0.1 million and realized a gain of approximately $0.1 million in the six months ended June 30, 2011. There were no foreign currency contracts outstanding as of June 30, 2012.

 

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Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.

As of June 30, 2012, the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective. We have excluded Naturally Fresh from our evaluation of disclosure controls and procedures as of June 30, 2012 because Naturally Fresh was acquired by the Company on April 13, 2012. The net sales and total assets of Naturally Fresh represented approximately 3.5% and 1.3%, respectively, of the Condensed Consolidated Financial Statement amounts as of and for the quarter ended June 30, 2012.

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2012 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

TreeHouse Foods, Inc.

Oak Brook, IL

We have reviewed the accompanying condensed consolidated balance sheet of TreeHouse Foods, Inc. and subsidiaries (the “Company”) as of June 30, 2012, and the related condensed consolidated statements of income and comprehensive income for the three and six month periods ended June 30, 2012 and 2011, and of cash flows for the six month periods ended June 30, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TreeHouse Foods, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

August 8, 2012

 

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Table of Contents

Part II — Other Information

Item 1. Legal Proceedings

We are party to a variety of legal proceedings arising out of the conduct of our business. While the results of proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our consolidated financial statements, annual results of operations or cash flows.

Item 1A. Risk Factors

Information regarding risk factors appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Information Related to Forward-Looking Statements, in Part I — Item 2 of this Form 10-Q and in Part I — Item 1A of the TreeHouse Foods, Inc. Annual Report on Form 10-K for the year ended December 31, 2011. There have been no material changes from the risk factors previously disclosed in the TreeHouse Foods, Inc. Annual Report on Form 10-K for the year ended December 31, 2011.

Item 5. Other Information

On August 8, 2012, the Company announced plans to close its plants in Mendota, Illinois and Seaforth, Ontario, Canada. For more information regarding the expected timing and costs associated with the closure of these plants, see Note 22 to our Condensed Consolidated Financial Statements.

Item 6. Exhibits

 

10.1    Amended and Restated TreeHouse Foods, Inc. Equity and Incentive Plan is incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement dated March 6, 2012.
12.1    Computation of Ratio of Earnings to Fixed Changes.
15.1    Awareness Letter from Deloitte & Touche LLP regarding unaudited financial information.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

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Table of Contents

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

TREEHOUSE FOODS, INC.

/s/ Dennis F. Riordan

Dennis F. Riordan
Executive Vice President and Chief Financial Officer

August 8, 2012

 

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