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 March 31, 2014.

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   ¨  (Do not check if a smaller reporting company)    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 April 30, 2014: 36,778,877

 

 

 


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

     29   

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

     39   

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)

 

     March 31,
2014
    December 31,
2013
 
     (Unaudited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 15,786      $ 46,475   

Investments

     8,615        8,680   

Receivables, net

     151,072        152,763   

Inventories, net

     413,296        405,698   

Deferred income taxes

     21,830        21,909   

Prepaid expenses and other current assets

     16,863        14,164   
  

 

 

   

 

 

 

Total current assets

     627,462        649,689   

Property, plant and equipment, net

     455,767        462,275   

Goodwill

     1,112,699        1,119,204   

Intangible assets, net

     464,334        475,756   

Other assets, net

     16,160        14,130   
  

 

 

   

 

 

 

Total assets

   $ 2,676,422      $ 2,721,054   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 217,028      $ 238,813   

Current portion of long-term debt

     1,549        1,551   
  

 

 

   

 

 

 

Total current liabilities

     218,577        240,364   

Long-term debt

     900,463        938,945   

Deferred income taxes

     227,875        228,569   

Other long-term liabilities

     37,530        40,058   
  

 

 

   

 

 

 

Total liabilities

     1,384,445        1,447,936   

Commitments and contingencies (Note 18)

    

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, 36,754 and 36,493 shares issued and outstanding, respectively

     367        365   

Additional paid-in capital

     764,917        748,577   

Retained earnings

     570,260        555,939   

Accumulated other comprehensive loss

     (43,567     (31,763
  

 

 

   

 

 

 

Total stockholders’ equity

     1,291,977        1,273,118   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,676,422      $ 2,721,054   
  

 

 

   

 

 

 

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
March 31,
 
     2014     2013  
     (Unaudited)  

Net sales

   $ 618,903      $ 540,110   

Cost of sales

     485,912        425,938   
  

 

 

   

 

 

 

Gross profit

     132,991        114,172   

Operating expenses:

  

Selling and distribution

     38,017        32,402   

General and administrative

     33,768        27,473   

Other operating expense, net

     873        1,418   

Amortization expense

     10,034        8,499   
  

 

 

   

 

 

 

Total operating expenses

     82,692        69,792   
  

 

 

   

 

 

 

Operating income

     50,299        44,380   

Other expense (income):

  

Interest expense

     10,873        12,778   

Interest income

     (168     (678

Loss (gain) on foreign currency exchange

     2,951        (361

Loss on extinguishment of debt

     16,685        —     

Other income, net

     (85     (713
  

 

 

   

 

 

 

Total other expense

     30,256        11,026   
  

 

 

   

 

 

 

Income before income taxes

     20,043        33,354   

Income taxes

     5,721        10,380   
  

 

 

   

 

 

 

Net income

   $ 14,322      $ 22,974   
  

 

 

   

 

 

 

Net earnings per common share:

  

Basic

   $ .39      $ .63   

Diluted

   $ .38      $ .62   

Weighted average common shares:

  

Basic

     36,682        36,301   

Diluted

     37,665        37,234   

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
March 31,
 
     2014     2013  
     (Unaudited)  

Net income

   $ 14,322      $ 22,974   

Other comprehensive (loss) income:

  

Foreign currency translation adjustments

     (11,907     (7,858

Pension and post-retirement reclassification adjustment (1)

     103        410   

Derivative reclassification adjustment (2)

     —          40   
  

 

 

   

 

 

 

Other comprehensive loss

     (11,804     (7,408
  

 

 

   

 

 

 

Comprehensive income

   $ 2,518      $ 15,566   
  

 

 

   

 

 

 

 

(1) Net of tax of $64 and $217 for the three months ended March 31, 2014 and 2013, respectively.
(2) Net of tax of $25 for the three months ended March 31, 2013.

See Notes to Condensed Consolidated Financial Statements.

 

 

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Three Months Ended
March 31,
 
     2014     2013  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 14,322      $ 22,974   

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

    

Depreciation

     16,972        18,385   

Amortization

     10,034        8,499   

Stock-based compensation

     4,180        3,418   

Excess tax benefits from stock-based compensation

     (4,630     (395

Loss on extinguishment of debt

     16,685        —     

Mark to market gain on derivative contracts

     (117     (773

Mark to market gain on investments

     (79     (352

(Gain) loss on disposition of assets

     (208     218   

Deferred income taxes

     (1,699     (2,214

Other

     2,950        (319

Changes in operating assets and liabilities, net of acquisitions:

    

Receivables

     697        (2,868

Inventories

     (9,907     (17,583

Prepaid expenses and other assets

     (1,945     (89

Accounts payable, accrued expenses and other liabilities

     (11,385     28,085   
  

 

 

   

 

 

 

Net cash provided by operating activities

     35,870        56,986   

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (18,339     (13,788

Additions to other intangible assets

     (3,316     (1,060

Acquisitions, less cash acquired

     1,325        —     

Proceeds from sale of fixed assets

     525        160   

Purchase of investments

     (236     (7,477

Proceeds from sale of investments

     63        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (19,978     (22,165

Cash flows from financing activities:

    

Borrowings under revolving credit facility

     25,000        54,550   

Payments under revolving credit facility

     (165,000     (90,050

Proceeds from issuance of new debt

     400,000        —     

Payments on 2018 notes

     (298,213     —     

Payments on capitalized lease obligations and other debt

     (319     (457

Payment of deferred financing costs

     (6,897     —     

Payment of debt premium for extinguishment of debt

     (12,749     —     

Net receipts related to stock-based award activities

     7,530        166   

Excess tax benefits from stock-based compensation

     4,630        395   
  

 

 

   

 

 

 

Net cash used in financing activities

     (46,018     (35,396

Effect of exchange rate changes on cash and cash equivalents

     (563     (2,031
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (30,689     (2,606

Cash and cash equivalents, beginning of period

     46,475        94,407   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 15,786      $ 91,801   
  

 

 

   

 

 

 

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 three months ended March 31, 2014

(Unaudited)

1. Basis of Presentation

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. (the “Company,” “Treehouse,” “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, 2013. 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, 2013.

2. Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, clarifying how entities are required to measure obligations resulting from joint and several liability arrangements and outlining the required disclosures around these liabilities. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. See Note 11, Long-Term Debt, for related disclosures. The Company adopted this standard during the first quarter of 2014, the impact of which was not significant.

3. Restructuring

Soup restructuring In August of 2012, following a strategic review of the soup category, the Company announced a restructuring plan that included reductions to the cost structure of the Pittsburgh, Pennsylvania facility by reorganizing and simplifying the soup business there and the closure of its Mendota, Illinois soup plant. The restructuring is expected to reduce manufacturing costs by streamlining operations and transferring production from the Mendota plant to the Pittsburgh plant. Production at the Mendota facility was primarily related to the North American Retail Grocery segment and ended as of December 31, 2012, with full plant closure in the second quarter of 2013. Total costs of the restructuring are expected to be approximately $27.8 million as detailed below, of which $5.2 million is expected to be in cash. Expenses associated with the restructuring plan are primarily aggregated in the Other operating expense, net line of the Condensed Consolidated Statements of Income, with the exception of accelerated depreciation, which is recorded in Cost of sales.

Seaforth, Ontario, Canada — On August 7, 2012, the Company announced the closure of its salad dressing plant in Seaforth, Ontario, Canada and the transfer of production to facilities where the Company has lower production costs. Production at the Seaforth, Ontario facility was primarily related to the North American Retail Grocery segment and ended in the fourth quarter of 2013, with full plant closure occurring in the first quarter of 2014. Total costs to close the Seaforth facility are expected to be approximately $13.2 million

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

as detailed below, of which $6.2 million is expected to be in cash. Expenses incurred associated with the facility closure are primarily aggregated in the Other operating expense, net line of the Condensed Consolidated Statements of Income. Certain costs, primarily accelerated depreciation, are recorded in Cost of sales.

Below is a summary of the restructuring costs:

 

     Soup Restructuring      Seaforth Closure  
     Three
Months Ended
March 31, 2014
     Cumulative
Costs
To Date
     Total Expected
Costs
     Three
Months Ended
March 31, 2014
     Cumulative
Costs
To Date
     Total Expected
Costs
 
     (In thousands)      (In thousands)  

Accelerated depreciation

   $ —         $ 22,590       $ 22,590       $ —         $ 6,582       $ 6,582   

Severance and outplacement

     —           769         769         5         2,889         2,889   

Other closure costs

     800         2,471         4,426         3         3,731         3,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 800       $ 25,830       $ 27,785       $ 8       $ 13,202       $ 13,224   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

4. Acquisitions

The Company acquired all of the outstanding equity interests of Associated Brands Management Holdings Inc., Associated Brands Holdings Limited Partnership, Associated Brands GP Corporation and 6726607 Canada Ltd. (collectively, “Associated Brands”) from TorQuest Partners LLC and other shareholders in October of 2013. Associated Brands is a privately owned Canadian company and a private label manufacturer of powdered drinks, specialty teas, and sweeteners. The purchase price, after adjusting for working capital, was approximately CAD $191 million. The acquisition was financed through cash on hand and borrowings under the Company’s existing $750 million credit facility. The acquisition of Associated Brands strengthened the Company’s retail presence in the private label dry grocery segment and introduced a line of specialty tea products to complement its single serve coffee business, and is being accounted for under the acquisition method of accounting. 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 adjustments, primarily for taxes. During the first quarter of 2014, the working capital adjustment was finalized and resulted in a CAD $1.4 million reduction to goodwill.

On July 1, 2013, the Company completed its acquisition of all of the outstanding shares of Cains Foods, L.P. (“Cains”), a privately owned Ayer, Massachusetts based manufacturer of shelf stable mayonnaise, dressings, and sauces. The Cains product portfolio offers retail and foodservice customers a wide array of packaging sizes, sold as private label and branded products. The purchase price was approximately $35 million, net of acquired cash, after adjusting for working capital and taxes. The acquisition was financed through borrowings under the Company’s existing $750 million credit facility. The acquisition expanded the Company’s footprint in the Northeast United States, enhanced its foodservice presence, and enriched its packaging capabilities. The acquisition was accounted for under the acquisition method of accounting and the results of operations are included in our financial statements from the date of acquisition. There have been no changes to the purchase price allocation in 2014.

5. Investments

 

     March 31, 2014      December 31, 2013  
     (In thousands)      (In thousands)  

U.S. equity

   $ 5,252       $ 5,254   

Non-U.S. equity

     1,666         1,669   

Fixed income

     1,697         1,757   
  

 

 

    

 

 

 

Total investments

   $ 8,615       $ 8,680   
  

 

 

    

 

 

 

We determine the appropriate classification of our investments at the time of purchase and reevaluate such designation as of each balance sheet date. The Company accounts for investments in debt and marketable equity securities as held-to-maturity, available-for-sale, or trading, depending on their classification. The investments held by the Company are classified as trading securities and are stated at fair value, with changes in fair value recorded as a component of the Interest income line on the Condensed Consolidated Statements of Income. Cash flows from purchases, sales and maturities of trading securities are included in cash flows from investing activities in the Condensed Consolidated Statements of Cash Flows based on the nature and purpose for which the securities were acquired.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Our investments include U.S. equity, non-U.S. equity and fixed income securities that are classified as short-term investments on the Condensed Consolidated Balance Sheets. The U.S. equity, non-U.S. equity, and fixed income securities are classified as short-term investments as they have characteristics of other current assets and are actively managed.

We recognized insignificant unrealized gains for the three months ended March 31, 2014 and $0.4 million of unrealized gains for the three months ended March 31, 2013. The unrealized gains are included in Interest income in the Condensed Consolidated Statements of Income. When securities are sold, their cost is determined based on the first-in, first-out method.

We consider temporary cash investments with an original maturity of three months or less to be cash equivalents. As of March 31, 2014 and December 31, 2013, $10.6 million and $19.3 million, respectively, represent cash and equivalents held in Canada, in local currency, and is convertible into other currencies. The cash and equivalents held in Canada are expected to be used for general corporate purposes in Canada, including capital projects and acquisitions.

6. Inventories

 

     March 31,
2014
    December 31,
2013
 
     (In thousands)  

Raw materials and supplies

   $ 166,607      $ 162,751   

Finished goods

     268,422        264,829   

LIFO reserve

     (21,733     (21,882
  

 

 

   

 

 

 

Total

   $ 413,296      $ 405,698   
  

 

 

   

 

 

 

Approximately $61.4 million and $84.6 million of our inventory was accounted for under the Last-in, First-out (“LIFO”) method of accounting at March 31, 2014 and December 31, 2013, respectively.

7. Property, Plant and Equipment

 

     March 31,
2014
    December 31,
2013
 
     (In thousands)  

Land

   $ 26,396      $ 26,492   

Buildings and improvements

     194,174        194,439   

Machinery and equipment

     534,155        536,256   

Construction in progress

     36,390        43,146   
  

 

 

   

 

 

 

Total

     791,115        800,333   

Less accumulated depreciation

     (335,348     (338,058
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 455,767      $ 462,275   
  

 

 

   

 

 

 

Depreciation expense was $17.0 million and $18.4 million for the three months ended March 31, 2014 and 2013, respectively.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

8. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 31, 2014 are as follows:

 

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

Balance at December 31, 2013

   $ 884,768      $ 95,572      $ 138,864      $ 1,119,204   

Currency exchange adjustment

     (4,535     (527     (118     (5,180

Purchase price adjustments

     (1,156     (38     (131     (1,325
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

   $ 879,077      $ 95,007      $ 138,615      $ 1,112,699   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 March 31, 2014 and December 31, 2013 are as follows:

 

     March 31, 2014      December 31, 2013  
     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

   $ 30,142       $ —        $ 30,142       $ 31,067       $ —        $ 31,067   

Intangible assets with finite lives:

               

Customer-related

     521,567         (139,476     382,091         525,820         (133,063     392,757   

Contractual agreements

     1,215         (127     1,088         1,249         (87     1,162   

Trademarks

     26,382         (7,590     18,792         26,466         (7,164     19,302   

Formulas/recipes

     8,827         (6,005     2,822         8,882         (5,708     3,174   

Computer software

     53,922         (24,523     29,399         51,087         (22,793     28,294   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total other intangibles

   $ 642,055       $ (177,721   $ 464,334       $ 644,571       $ (168,815   $ 475,756   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense on intangible assets for the three months ended March 31, 2014 and 2013 was $10.0 million and $8.5 million, respectively. Estimated amortization expense on intangible assets for 2014 and the next four years is as follows:

 

     (In thousands)  

2014

   $ 40,685   

2015

   $ 39,061   

2016

   $ 38,847   

2017

   $ 38,140   

2018

   $ 32,784   

9. Accounts Payable and Accrued Expenses

 

     March 31,
2014
     December 31,
2013
 
     (In thousands)  

Accounts payable

   $ 162,765       $ 154,378   

Payroll and benefits

     31,755         40,155   

Interest and taxes

     2,677         22,190   

Health insurance, workers’ compensation and other insurance costs

     7,637         8,164   

Marketing expenses

     5,843         7,568   

Other accrued liabilities

     6,351         6,358   
  

 

 

    

 

 

 

Total

   $ 217,028       $ 238,813   
  

 

 

    

 

 

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

10. Income Taxes

Income tax expense was recorded at an effective rate of 28.5% and 31.1% for the three months ended March 31, 2014 and 2013, respectively. The Company’s effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith Foods, Ltd. (“E.D. Smith”) acquisition in 2007. The decrease in the effective tax rate for the three months ended March 31, 2014 as compared to 2013 is attributable to the settlement of unrecognized tax benefits associated with the Company’s 2011 examination by the United States Internal Revenue Services (“IRS”).

The IRS completed its examination of TreeHouse’s 2011 tax year during the first quarter of 2014, resulting in a small cash payment by the Company. The Canadian Revenue Agency (“CRA”) is currently examining the 2008, 2009, and 2010 tax years of E.D. Smith. The E.D. Smith examinations are expected to be completed in 2014 or 2015. The Company also has examinations in process with various state taxing authorities, which are expected to be completed in 2014 or 2015.

Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $8.5 million within the next 12 months, primarily as a result of the resolution of audits currently in progress and the lapsing of statutes of limitations.

11. Long-Term Debt

 

     March 31,
2014
    December 31,
2013
 
     (In thousands)  

Revolving credit facility

   $ 395,000      $ 535,000   

2018 Notes

     101,787        400,000   

2022 Notes

     400,000        —     

Tax increment financing and other debt

     5,225        5,496   
  

 

 

   

 

 

 

Total debt outstanding

     902,012        940,496   

Less current portion

     (1,549     (1,551
  

 

 

   

 

 

 

Total long-term debt

   $ 900,463      $ 938,945   
  

 

 

   

 

 

 

Revolving Credit Facility — As of March 31, 2014, the Company was party to an unsecured revolving credit facility with an aggregate commitment of $750 million, of which $344.2 million was available. The revolving credit facility had a maturity date of September 23, 2016. In addition, as of March 31, 2014, there were $10.8 million in letters of credit under the revolving credit facility that were issued but undrawn. The revolving credit facility contained various financial and other restrictive covenants and required that the Company maintained certain financial ratios, including a leverage and interest coverage ratio. The Company’s average interest rate on debt outstanding under its revolving credit facility for the three months ended March 31, 2014 was 1.38%.

2018 Notes — The Company previously issued 7.75% notes in aggregate principal amount of $400 million due on March 1, 2018 (the “2018 Notes”). As of March 31, 2014, the 2018 Notes were guaranteed, jointly and severally, by the Company’s 100 percent owned subsidiary Bay Valley Foods, LLC (“Bay Valley”) and Bay Valley’s 100 percent owned subsidiaries EDS Holdings, LLC, Sturm Foods, Inc. (“Sturm Foods”), and S.T. Specialty Foods. The 2018 Notes were senior unsecured obligations of the Company.

On February 25, 2014, the Company commenced a tender offer and consent solicitation to repurchase and extinguish $400 million in aggregate principal amount of the 2018 Notes. Pursuant to the terms of the tender offer, the Company offered to repurchase the 2018 Notes at a price of 104.275% of the principal amount (plus any accrued but unpaid interest to, but excluding the payment date), for any 2018 Notes validly tendered and not withdrawn prior to the consent expiration time on March 10, 2014. As of the consent expiration time, the holders had tendered approximately $298 million in aggregate principal amount of 2018 Notes, and the Company accepted all such 2018 Notes tendered for purchase and extinguishment on March 11, 2014. The remaining holders had until March 24, 2014 to tender their 2018 Notes at a reduced rate of 101.275% of the principal amount; no additional 2018 Notes were tendered prior to the final expiration of the tender offer and consent solicitation. During the quarter, the Company incurred a loss on extinguishment of the 2018 Notes totaling $16.7 million that included the write-off of $3.9 million in deferred financing costs.

On March 11, 2014, the Company issued a redemption notice for all of its remaining outstanding 2018 Notes. On April 10, 2014, all remaining outstanding 2018 Notes, or approximately $101.8 million in aggregate principal amount, were redeemed at a price of 103.875% of the principal amount of the 2018 Notes, plus accrued but unpaid interest. Accordingly, no 2018 Notes remain outstanding as of the date of this Report.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

2022 Notes — On March 11, 2014, the Company completed its underwritten public offering of $400 million in aggregate principal amount of 4.875% notes due March 15, 2022 (the “2022 Notes”). The net proceeds of $394 million ($400 million less underwriting discount of $6 million, providing an effective interest rate of 4.99%) were used to extinguish $298 million of the 2018 Notes with the balance of the proceeds being used to temporarily pay down the revolving credit facility. The Company issued the 2022 Notes pursuant to an Indenture, dated March 2, 2010 (the “Base Indenture”), between the Company, the 100% owned subsidiary guarantors (which, as of March 31, 2014, were comprised of its 100% owned direct and indirect subsidiaries Bay Valley, EDS Holdings, LLC, Sturm Foods, and S.T. Specialty Foods, known collectively as the “Guarantors”) and Wells Fargo Bank, National Association as trustee (the “Trustee”), as supplemented by the Fifth Supplemental Indenture, dated as of March 11, 2014, (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), among the Company, the Guarantors, and the Trustee.

The Indenture provides, among other things, that the 2022 Notes will be senior unsecured obligations of the Company. The Company’s payment obligations under the 2022 Notes are fully and unconditionally, as well as jointly and severally, guaranteed on a senior unsecured basis by the Guarantors, in addition to any future domestic subsidiaries that guarantee or become borrowers under its credit facility, or guarantee certain other indebtedness incurred by the Company or its restricted subsidiaries. Interest is payable on March 15 and September 15 of each year, beginning September 15, 2014. The 2022 Notes will mature on March 15, 2022.

The Company may redeem some or all of the 2022 Notes at any time prior to March 15, 2017 at a price equal to 100% of the principal amount of the 2022 Notes redeemed, plus an applicable “make-whole” premium. On or after March 15, 2017, the Company may redeem some or all of the 2022 Notes at redemption prices set forth in the Indenture. In addition, at any time prior to March 15, 2017, the Company may redeem up to 35% of the 2022 Notes at a redemption price of 104.875% of the principal amount of the 2022 Notes redeemed with the net cash proceeds of certain equity offerings.

Subject to certain limitations, in the event of a change of control of the Company, the Company will be required to make an offer to purchase the 2022 Notes at a purchase price equal to 101% of the principal amount of the 2022 Notes, plus accrued and unpaid interest.

The Indenture contains restrictive covenants that, among other things, limit the ability of the Company and the Guarantors to: (i) pay dividends or make other restricted payments, (ii) make certain investments, (iii) incur additional indebtedness or issue preferred stock, (iv) create liens, (v) pay dividends or make other payments (except for certain dividends and payments to the Company and certain subsidiaries of the Company), (vi) merge or consolidate with other entities or sell substantially all of its assets, (vii) enter into transactions with affiliates and (viii) engage in certain sale and leaseback transactions. The foregoing limitations are subject to exceptions as set forth in the Indenture. In addition, if in the future the 2022 Notes have an investment grade credit rating by both Moody’s Investors Services, Inc. and Standard & Poor’s Ratings Services, certain of these covenants will, thereafter, no longer apply to the 2022 Notes for so long as the 2022 Notes are rated investment grade by the two rating agencies.

Tax Increment Financing —The Company owes $1.8 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.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

12. 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
March 31,
 
     2014      2013  
     (In thousands)  

Weighted average common shares outstanding

     36,682         36,301   

Assumed exercise/vesting of equity awards (1)

     983         933   
  

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     37,665         37,234   
  

 

 

    

 

 

 

 

(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 0.3 million and 0.4 million for the three months ended March 31, 2014 and 2013, respectively.

13. Stock-Based Compensation

Income before income taxes for the three month periods ended March 31, 2014 and 2013 includes share-based compensation expense of $4.2 million and $3.4 million, respectively. The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.5 million and $1.3 million for the three month periods ended March 31, 2014 and 2013, respectively.

The following table summarizes stock option activity during the three months ended March 31, 2014. 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, 2013

     2,570        64       $ 36.71         4.1       $ 84,840   

Granted

     7        —         $ 70.73         

Forfeited

     —          —         $ —           

Exercised

     (260     —         $ 29.13         
  

 

 

   

 

 

          

Outstanding, March 31, 2014

     2,317        64       $ 37.63         4.1       $ 81,810   
  

 

 

   

 

 

          

Vested/expected to vest, at March 31, 2014

     2,257        64       $ 36.92         4.0       $ 81,410   
  

 

 

   

 

 

          

Exercisable, March 31, 2014

     1,825        64       $ 30.89         2.9       $ 77,648   
  

 

 

   

 

 

          

Compensation costs related to unvested options totaled $5.8 million at March 31, 2014 and will be recognized over the remaining vesting period of the grants, which averages 1.8 years. The Company uses the Black-Scholes option pricing model to value its stock option awards. The weighted average grant date fair value of awards granted during the first quarter of 2014 was $21.93. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2014 and 2013 was approximately $10.9 million and $1.1 million, respectively. The tax benefit recognized from stock option exercises was $4.2 million and $0.4 million for the three months ended March 31, 2014 and 2013, respectively.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 generally vest on the first anniversary of the grant date. Certain directors have deferred receipt of their awards until their departure from the Board of Directors, or a specified date. The following table summarizes the restricted stock unit activity during the three months ended March 31, 2014.

 

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

Outstanding, at December 31, 2013

     317      $ 58.98         93       $ 44.06   

Granted

     13      $ 67.20         —         $ —     

Vested

     (1   $ 54.42         —         $ —     

Forfeited

     —        $ —           —         $ —     
  

 

 

      

 

 

    

Outstanding, at March 31, 2014

     329      $ 59.32         93       $ 44.06   
  

 

 

      

 

 

    

Future compensation costs related to restricted stock units are approximately $10.1 million as of March 31, 2014, and will be recognized on a weighted average basis, over the next 1.6 years. The grant date fair value of the awards granted in 2014 is equal to the Company’s closing stock price on the grant date. The fair value of vested restricted stock units was insignificant during the three months ended March 31, 2014 and $1.2 million for the three months ended March 31, 2013.

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. The following table summarizes the performance unit activity during the three months ended March 31, 2014:

 

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

Unvested, at December 31, 2013

     216       $ 62.03   

Granted

     —         $ —     

Vested

     —         $ —     

Forfeited

     —         $ —     
  

 

 

    

Unvested, at March 31, 2014

     216       $ 62.03   
  

 

 

    

Future compensation costs related to the performance units is estimated to be approximately $9.6 million as of March 31, 2014, and is expected to be recognized over the next 1.9 years. The grant fair value of the awards is equal to the Company’s closing stock price on the date of grant.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

14. 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 (2)
    Derivative
Financial
Instrument (3)
     Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at December 31, 2013

   $ (24,689   $ (7,074   $ —         $ (31,763

Other comprehensive loss

     (11,907     —          —           (11,907

Reclassifications from accumulated other comprehensive loss

     —          103        —           103   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income

     (11,907     103        —           (11,804
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at March 31, 2014

   $ (36,596   $ (6,971   $ —         $ (43,567
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Foreign
Currency
Translation (1)
    Unrecognized
Pension and
Postretirement
Benefits (2)
    Derivative
Financial
Instrument (3)
    Accumulated
Other
Comprehensive
Loss
 
     (In thousands)  

Balance at December 31, 2012

   $ (2,007   $ (14,525   $ (108   $ (16,640

Other comprehensive loss

     (7,858     —          —          (7,858

Reclassifications from accumulated other comprehensive loss

     —          410        40        450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (7,858     410        40        (7,408
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ (9,865   $ (14,115   $ (68   $ (24,048
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The foreign currency translation adjustment is not net of tax, as it pertains to the Company’s permanent investment in its Canadian subsidiaries.
(2) The unrecognized pension and post-retirement benefits reclassification is presented net of tax of $64 and $217 for the three months ended March 31, 2014 and 2013, respectively. The reclassification is included in the computation of net periodic pension cost, which is recorded in the Cost of sales and General and administrative lines of the Condensed Consolidated Statements of Income.
(3) The derivative financial instrument reclassification is presented net of tax of $25 for the three months ended March 31, 2013.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Condensed Consolidated Statements of Income lines impacted by reclassifications out of Accumulated Other Comprehensive Loss are outlined below:

 

     Reclassifications from Accumulated
Other Comprehensive Loss
     Affected line in
The Condensed Consolidated
Statements of Income
     Three months ended
March 31,
      
     2014      2013       
     (In thousands)       

Derivative financial instrument

   $ —         $ 65       Interest expense

Income taxes

     —           25       Income taxes
  

 

 

    

 

 

    

Net of tax

   $ —         $ 40      
  

 

 

    

 

 

    

Amortization of defined benefit pension items:

        

Prior service costs

   $ 36       $ 96       (a)

Unrecognized net loss

     131         470       (a)

Other

     —           61      
  

 

 

    

 

 

    

Total before tax

     167         627      

Income taxes

     64         217       Income taxes
  

 

 

    

 

 

    

Net of tax

   $ 103       $ 410      
  

 

 

    

 

 

    

 

(a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 15 for additional details.

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

15. 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
March 31,
 
     2014     2013  
     (In thousands)  

Service cost

   $ 545      $ 648   

Interest cost

     693        627   

Expected return on plan assets

     (798     (643

Amortization of prior service costs

     53        114   

Amortization of unrecognized net loss

     126        459   
  

 

 

   

 

 

 

Net periodic pension cost

   $ 619      $ 1,205   
  

 

 

   

 

 

 

The Company contributed $0.4 million to the pension plans in the first three months of 2014 and expects to contribute approximately $4.1 million in 2014.

Components of net periodic postretirement expenses are as follows:

 

     Three Months Ended
March 31,
 
     2014     2013  
     (In thousands)  

Service cost

   $ 5      $ 5   

Interest cost

     39        36   

Amortization of prior service credit

     (16     (17

Amortization of unrecognized net loss

     5        11   
  

 

 

   

 

 

 

Net periodic postretirement cost

   $ 33      $ 35   
  

 

 

   

 

 

 

The Company expects to contribute approximately $0.2 million to the postretirement health plans during 2014.

Net periodic pension costs are recorded in the Cost of sales and General and administrative lines of the Condensed Consolidated Statements of Income.

 

 

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

16. Other Operating Expense, Net

The Company incurred other operating expenses for the three months ended March 31, 2014 and 2013, which consisted of the following:

 

     Three Months Ended
March 31,
 
     2014      2013  
     (In thousands)  

Restructuring

   $ 867       $ 1,418   

Other

     6         —     
  

 

 

    

 

 

 

Total other operating expense, net

   $ 873       $ 1,418   
  

 

 

    

 

 

 

17. Supplemental Cash Flow Information

 

     Three Months Ended
March 31,
 
     2014      2013  
     (In thousands)  

Interest paid

   $ 18,732       $ 17,810   

Income taxes paid

   $ 17,260       $ 6,291   

Accrued purchase of property and equipment

   $ 2,915       $ 4,217   

Accrued other intangible assets

   $ 1,193       $ 1,082   

Non-cash financing activities for the three months ended March 31, 2014 and 2013 include the settlement of 1,242 shares and 23,713 shares, respectively, of restricted stock units and performance units, where shares were withheld to satisfy the minimum statutory tax withholding requirements.

18. 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.

19. 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 does not enter into derivative instruments for trading or speculative purposes.

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 risk. 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. As of March 31, 2014 and 2013, the Company did not have any foreign currency contracts outstanding.

 

 

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Certain commodities we use in the production and distribution of our products are exposed to market price risk. The Company utilizes derivative contracts to manage this risk. The majority of commodity forward contracts are not derivatives, and those that are, generally qualify for the normal purchases and normal sales scope exception under the guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions. For derivative commodity contracts that do not qualify for the normal purchases and normal sales scope exception, the Company records their fair value on the Company’s Condensed Consolidated Balance Sheets, with changes in value being recorded in the Condensed Consolidated Statements of Income.

The Company’s derivative commodity contracts may include contracts for diesel, oil, plastics, natural gas, electricity, and other commodity contracts that do not meet the requirements for the normal purchases and normal sales scope exception.

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. Contracts for natural gas and electricity are used to manage the Company’s risk associated with the utility costs of its manufacturing facilities, and commodity contracts that are derivatives that do not meet the normal purchases and normal sales scope exception are used to manage the price risk associated with raw material costs. As of March 31, 2014, the Company had outstanding contracts for the purchase of 30,748 megawatts of electricity, expiring throughout 2014.

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

 

          Fair Value  
    

Balance Sheet Location

   March 31, 2014      December 31, 2013  
          (In thousands)  

Asset Derivative:

        

Commodity contracts

   Prepaid expenses and other current assets    $ 124       $ 8   
     

 

 

    

 

 

 
      $ 124       $ 8   
     

 

 

    

 

 

 

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

 

          Three Months Ended  
     Location of Gain (Loss)    March 31,  
    

Recognized in Income

   2014      2013  
          (In thousands)  

Mark to market unrealized gain:

        

Commodity contracts

   Other income, net    $ 117       $ 773   
     

 

 

    

 

 

 

Total unrealized gain

        117         773   

Realized gain:

        

Commodity contracts

   Selling and distribution      —           34   
     

 

 

    

 

 

 

Total realized gain

        —           34   
     

 

 

    

 

 

 

Total gain

      $ 117       $ 807   
     

 

 

    

 

 

 

 

 

 

19


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

20. Fair Value

The following table presents the carrying value and fair value of our financial instruments as of March 31, 2014 and December 31, 2013:

 

     March 31, 2014     December 31, 2013        
     Carrying
Value
    Fair
Value
    Carrying
Value
    Fair
Value
    Level  
     (In thousands)     (In thousands)        

Not recorded at fair value (liability):

          

Revolving credit facility

   $ (395,000   $ (393,184   $ (535,000   $ (532,226     2   

2018 Notes

   $ (101,787   $ (105,731   $ (400,000   $ (435,520     2   

2022 Notes

   $ (400,000   $ (401,000   $ —        $ —          2   

Recorded on a recurring basis at fair value (liability) asset:

          

Commodity contracts

   $ 124      $ 124      $ 8      $ 8        2   

Investments

   $ 8,615      $ 8,615      $ 8,680      $ 8,680        1   

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, 2018 Notes, 2022 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 was estimated using present value techniques and market based interest rates and credit spreads. The fair value of the Company’s 2018 and 2022 Notes was estimated based on quoted market prices for similar instruments, where the inputs are considered Level 2, due to their infrequent trading volume.

The fair value of the commodity contracts is based on an analysis comparing the contract rates to the market rates at the balance sheet date. The commodity contracts are recorded at fair value on the Condensed Consolidated Balance Sheets.

The fair value of the investments is determined using Level 1 inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement dates. The investments are recorded at fair value on the Condensed Consolidated Balance Sheets.

21. 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, unallocated costs of sales and unallocated corporate expenses. 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, 2013.

 

 

 

20


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

     Three Months Ended
March 31,
 
     2014     2013  
     (In thousands)  

Net sales to external customers:

    

North American Retail Grocery

   $ 452,403      $ 386,081   

Food Away From Home

     88,673        81,813   

Industrial and Export

     77,827        72,216   
  

 

 

   

 

 

 

Total

   $ 618,903      $ 540,110   
  

 

 

   

 

 

 

Direct operating income:

    

North American Retail Grocery

   $ 75,090      $ 65,588   

Food Away From Home

     9,488        10,982   

Industrial and Export

     15,046        12,460   
  

 

 

   

 

 

 

Total

     99,624        89,030   

Unallocated selling and distribution expenses

     (2,383     (1,416

Unallocated costs of sales (1)

     (2,267     (5,844

Unallocated corporate expense

     (44,675     (37,390
  

 

 

   

 

 

 

Operating income

     50,299        44,380   

Other expense

     (30,256     (11,026
  

 

 

   

 

 

 

Income before income taxes

   $ 20,043      $ 33,354   
  

 

 

   

 

 

 

 

(1) Includes charges related to restructurings and other costs managed at corporate.

Geographic Information — The Company had revenues to customers outside of the United States of approximately 13.0% of total consolidated net sales in the three months ended March 31, 2014 and 2013, with 12.0% and 11.7% going to Canada, respectively.

Major Customers — Wal-Mart Stores, Inc. and affiliates accounted for approximately 18.4% and 20.3% of consolidated net sales in the three months ended March 31, 2014 and 2013, 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 months ended March 31, 2014 and 2013.

 

     Three Months Ended
March 31,
 
     2014      2013  
     (In thousands)  

Products:

     

Beverages

   $ 124,320       $ 68,695   

Salad dressings

     88,136         72,779   

Beverage enhancers

     84,765         91,174   

Pickles

     68,849         70,910   

Mexican and other sauces

     60,649         58,171   

Soup and infant feeding

     57,197         55,078   

Cereals

     44,901         47,789   

Dry dinners

     35,077         29,194   

Aseptic products

     21,887         23,929   

Jams

     13,611         14,855   

Other products

     19,511         7,536   
  

 

 

    

 

 

 

Total net sales

   $ 618,903       $ 540,110   
  

 

 

    

 

 

 

 

 

 

21


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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

22. Guarantor and Non-Guarantor Financial Information

As of March 31, 2014, the Company’s 2018 and 2022 Notes are guaranteed, jointly and severally, by its 100% owned direct and indirect subsidiaries Bay Valley, EDS Holdings, LLC, Sturm Foods, 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 March 31, 2014 and 2013, and for the three months ended March 31, 2014, and 2013. 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

March 31, 2014

(In thousands)

 

     Parent
Company
     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

  

Current assets:

            

Cash and cash equivalents

   $ 4,917       $ 150       $ 10,719      $ —        $ 15,786   

Investments

     —           —           8,615        —          8,615   

Receivables, net

     1,035         110,867         39,170        —          151,072   

Inventories, net

     —           312,898         100,398        —          413,296   

Deferred income taxes

     —           18,533         3,297        —          21,830   

Prepaid expenses and other current assets

     24,142         14,507         1,215        (23,001     16,863   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     30,094         456,955         163,414        (23,001     627,462   

Property, plant and equipment, net

     13,491         374,845         67,431        —          455,767   

Goodwill

     —           959,439         153,260        —          1,112,699   

Investment in subsidiaries

     2,021,219         253,309         —          (2,274,528     —     

Intercompany accounts receivable (payable), net

     82,592         132,772         (215,364     —          —     

Deferred income taxes

     15,818         —           —          (15,818     —     

Identifiable intangible and other assets, net

     50,156         283,413         146,925        —          480,494   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,213,370       $ 2,460,733       $ 315,666      $ (2,313,347   $ 2,676,422   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

            

Current liabilities:

            

Accounts payable and accrued expenses

   $ 10,986       $ 195,571       $ 33,472      $ (23,001   $ 217,028   

Current portion of long-term debt

     —           1,499         50        —          1,549   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     10,986         197,070         33,522        (23,001     218,577   

Long-term debt

     896,787         3,260         416        —          900,463   

Deferred income taxes

     144         215,785         27,764        (15,818     227,875   

Other long-term liabilities

     13,476         23,399         655        —          37,530   

Stockholders’ equity

     1,291,977         2,021,219         253,309        (2,274,528     1,291,977   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,213,370       $ 2,460,733       $ 315,666      $ (2,313,347   $ 2,676,422   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

22


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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Balance Sheet

December 31, 2013

(In thousands)

 

     Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

            

Current assets:

            

Cash and cash equivalents

   $ 23,268       $ 43       $ 23,164      $ —        $ 46,475   

Investments

     —           —           8,680        —          8,680   

Accounts receivable, net

     258         116,464         36,041        —          152,763   

Inventories, net

     —           314,912         90,786        —          405,698   

Deferred income taxes

     —           18,534         3,375        —          21,909   

Prepaid expenses and other current assets

     27,890         12,593         758        (27,077     14,164   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     51,416         462,546         162,804        (27,077     649,689   

Property, plant and equipment, net

     13,426         379,380         69,469        —          462,275   

Goodwill

     —           959,440         159,764        —          1,119,204   

Investment in subsidiaries

     1,970,351         258,305         —          (2,228,656     —     

Intercompany accounts receivable (payable), net

     154,742         68,407         (223,149     —          —     

Deferred income taxes

     13,545         —           —          (13,545     —     

Intangible and other assets, net

     46,943         288,873         154,070        —          489,886   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,250,423       $ 2,416,951       $ 322,958      $ (2,269,278   $ 2,721,054   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current liabilities:

            

Accounts payable and accrued expenses

   $ 26,127       $ 204,920       $ 34,843      $ (27,077   $ 238,813   

Current portion of long-term debt

     —           1,498         53        —          1,551   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     26,127         206,418         34,896        (27,077     240,364   

Long-term debt

     935,000         3,580         365        —          938,945   

Deferred income taxes

     206         213,219         28,689        (13,545     228,569   

Other long-term liabilities

     15,972         23,383         703        —          40,058   

Stockholders’ equity

     1,273,118         1,970,351         258,305        (2,228,656     1,273,118   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,250,423       $ 2,416,951       $ 322,958      $ (2,269,278   $ 2,721,054   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

 

 

23


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended March 31, 2014

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 535,162      $ 128,965      $ (45,224   $ 618,903   

Cost of sales

     —          421,900        109,236        (45,224     485,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          113,262        19,729        —          132,991   

Selling, general and administrative expense

     14,059        46,033        11,693        —          71,785   

Amortization

     1,512        5,775        2,747        —          10,034   

Other operating income, net

     —          861        12        —          873   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (15,571     60,593        5,277        —          50,299   

Interest expense

     10,689        184        3,836        (3,836     10,873   

Interest income

     —          (3,860     (144     3,836        (168

Loss on extinguishment of debt

     16,685        —          —          —          16,685   

Other expense, net

     —          1,684        1,182        —          2,866   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (42,945     62,585        403        —          20,043   

Income taxes (benefit)

     (17,292     22,847        166        —          5,721   

Equity in net income of subsidiaries

     39,975        237        —          (40,212     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 14,322      $ 39,975      $ 237      $ (40,212   $ 14,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended March 31, 2013

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 485,934      $ 71,347      $ (17,171   $ 540,110   

Cost of sales

     —          384,376        58,733        (17,171     425,938   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     —          101,558        12,614        —          114,172   

Selling, general and administrative expense

     14,401        39,188        6,286        —          59,875   

Amortization

     1,278        6,052        1,169        —          8,499   

Other operating income, net

     —          936        482        —          1,418   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (15,679     55,382        4,677        —          44,380   

Interest expense

     12,494        284        3,524        (3,524     12,778   

Interest income

     —          (3,524     (678     3,524        (678

Other income, net

     —          (689     (385     —          (1,074
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (28,173     59,311        2,216        —          33,354   

Income taxes (benefit)

     (13,392     23,197        575        —          10,380   

Equity in net income of subsidiaries

     37,755        1,641        —          (39,396     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,974      $ 37,755      $ 1,641      $ (39,396   $ 22,974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

24


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2014

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 14,322      $ 39,975      $ 237      $ (40,212   $ 14,322   

Other comprehensive (loss) income:

          

Foreign currency translation adjustments

     —          (5,206     (6,701     —          (11,907

Pension and post-retirement reclassification adjustment, net of tax

     —          103        —          —          103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     —          (5,103     (6,701     —          (11,804

Equity in other comprehensive income of subsidiaries

     (11,804     (6,701     —          18,505        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 2,518      $ 28,171      $ (6,464   $ (21,707   $ 2,518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2013

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 22,974      $ 37,755      $ 1,641      $ (39,396   $ 22,974   

Other comprehensive (loss) income:

          

Foreign currency translation adjustments

     —          (3,287     (4,571     —          (7,858

Pension and post-retirement reclassification adjustment, net of tax

     —          410        —          —          410   

Derivatives reclassification adjustment, net of tax

     40        —          —          —          40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     40        (2,877     (4,571     —          (7,408

Equity in other comprehensive income of subsidiaries

     (7,448     (4,571     —          12,019        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 15,566      $ 30,307      $ (2,930   $ (27,377   $ 15,566   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

25


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Cash Flows

Three Months Ended March 31, 2014

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash (used in) provided by operating activities

   $ (18,715   $ 64,006      $ (9,421   $ —         $ 35,870   

Cash flows from investing activities:

           —        

Additions to property, plant and equipment

     (338     (14,016     (3,985     —           (18,339

Additions to other intangible assets

     (2,816     (500     —          —           (3,316

Acquisitions, less cash acquired

     —          —          1,325        —           1,325   

Proceeds from sale of fixed assets

     —          153        372        —           525   

Purchase of investments

     —          —          (236     —           (236

Proceeds from sale of investments

     —          —          63        —           63   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (3,154     (14,363     (2,461     —           (19,978

Cash flows from financing activities:

           

Borrowings under revolving credit facility

     25,000        —          —          —           25,000   

Payments under revolving credit facility

     (165,000     —          —          —           (165,000

Proceeds from issuance of new debt

     400,000        —          —          —           400,000   

Payments on 2018 notes

     (298,213     —          —          —           (298,213

Payments on capitalized lease obligations and other debt

     —          (319     —          —           (319

Payments of deferred financing costs

     (6,897     —          —          —           (6,897

Payment of debt premium for extinguishment of debt

     (12,749     —          —          —           (12,749

Intercompany transfer

     49,217        (49,217     —          —           —     

Net receipts related to stock-based award activities

     7,530        —          —          —           7,530   

Excess tax benefits from stock-based compensation

     4,630        —          —          —           4,630   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     3,518        (49,536     —          —           (46,018

Effect of exchange rate changes on cash and cash equivalents

     —          —          (563     —           (563
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

(Decrease) increase in cash and cash equivalents

     (18,351     107        (12,445     —           (30,689

Cash and cash equivalents, beginning of period

     23,268        43        23,164        —           46,475   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 4,917      $ 150      $ 10,719      $ —         $ 15,786   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

 

 

26


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Cash Flows

Three Months Ended March 31, 2013

(In thousands)

 

     Parent
Company
    Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operating activities

   $ 10,100      $ 37,550      $ 9,336      $ —         $ 56,986   

Cash flows from investing activities:

           

Purchase of investments

     —          —          (7,477     —           (7,477

Additions to property, plant and equipment

     (200     (11,262     (2,326     —           (13,788

Additions to other intangible assets

     (842     (218     —          —           (1,060

Proceeds from sale of fixed assets

     —          —          160        —           160   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (1,042     (11,480     (9,643     —           (22,165

Cash flows from financing activities:

           

Borrowings under revolving credit facility

     54,550        —          —          —           54,550   

Payments under revolving credit facility

     (90,050     —          —          —           (90,050

Payments on capitalized lease obligations

     —          (457     —          —           (457

Intercompany transfer

     25,881        (25,881     —          —           —     

Net payments related to stock-based award activities

     166        —          —          —           166   

Excess tax benefits from stock-based compensation

     395        —          —          —           395   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in financing activities

     (9,058     (26,338     —          —           (35,396

Effect of exchange rate changes on cash and cash equivalents

     —          —          (2,031     —           (2,031
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Decrease in cash and cash equivalents

     —          (268     (2,338     —           (2,606

Cash and cash equivalents, beginning of period

     —          269        94,138        —           94,407   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ —        $ 1      $ 91,800      $ —         $ 91,801   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

23. Subsequent Events

On April 21, 2014, the Company announced it will acquire all of the outstanding equity interests of Protenergy Natural Foods (“Protenergy”) from Whitecastle Investments Limited, Whitecap Venture Partners and others. Protenergy is a privately owned Canadian company that produces carton and recart broth, soups and gravies, both for private label and corporate brands, and also serves as a co-manufacturer of national brands. The Company agreed to pay CAD $170 million in cash for the business, subject to an adjustment for working capital. The acquisition of Protenergy is expected to expand our existing packaging capabilities and enable us to offer customers a full range of soup products, both wet and dry, as well as leverage our research and development capabilities in the evolution of shelf stable liquids from cans to cartons. The transaction is expected to close in the second quarter of 2014 and will be financed through borrowings under the Company’s credit facility. The acquisition will be accounted for under the acquisition method of accounting.

On May 6, 2014, the Company entered into a new unsecured revolving credit facility (the “Revolving Facility”) with an aggregate commitment of $900 million and a $300 million senior unsecured term loan (the “Term Loan”) pursuant to a Credit Agreement (the “Credit Agreement”), with Bank of America, N.A., as administrative agent, and certain participating lenders party thereto. The Revolving Facility matures on May 6, 2019. We used the proceeds from the Term Loan and a draw at closing on the Revolving Facility to repay in full amounts outstanding under our prior $750 million unsecured revolving credit facility (the “Prior Credit Agreement”) . The Credit Agreement replaced the Prior Credit Agreement, and such Prior Credit Agreement was terminated upon the repayment of the amounts outstanding thereunder.

The initial pricing for the Revolving Facility is determined by LIBOR plus a margin of 1.50%, which includes a 0.30% facility fee. Thereafter, the Revolving Facility generally will bear interest at a rate per annum equal to (i) LIBOR, plus a margin ranging from 1.25% to 2.00% (inclusive of the facility fee), based on the Company’s consolidated leverage ratio or (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from 0.25% to 1.00% (inclusive of the facility fee), based on the Company’s consolidated leverage ratio.

The Term Loan matures in May 2021. The initial pricing of the Term Loan is determined by LIBOR plus a margin of 1.75%. Thereafter, the Term Loan generally will bear interest at a rate per annum equal to (i) LIBOR, plus a margin ranging from 1.50% to 2.25%, based on the Company’s consolidated leverage ratio or (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from 0.50% to 1.25%, based on the Company’s consolidated leverage ratio. The Term Loan is subject to substantially the same covenants as the Revolving Facility, and also has the same Guarantors.

The Credit Agreement contains substantially the same covenants as the Prior Credit Agreement. The Credit Agreement is guaranteed by our 100% owned direct and indirect subsidiaries Bay Valley, Sturm Foods, S.T. Specialty Foods and certain other subsidiaries that may become guarantors in the future (the aforementioned entities are known collectively as the “Guarantors”).

 

 

 

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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 and sweeteners; condensed, ready to serve and powdered soups; refrigerated and shelf stable salad dressings and sauces; powdered drink mixes; single serve hot beverages; specialty teas; hot and cold cereals; macaroni and cheese, skillet dinners, and other value-added side dishes and salads; salsa and Mexican sauces; jams and pie fillings; pickles and related products; aseptic sauces; and liquid non-dairy creamer. We believe we are 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 months ended March 31, 2014 and 2013. 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. The segment results are presented on a consistent basis with the manner in which the Company reports its results to the chief operating decision maker, and does not include an allocation of taxes and other corporate expenses, including those associated with restructurings. See footnote 21 of the Condensed Consolidated Financial Statements for additional information on the presentation of our reportable segments.

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; sweeteners; condensed, ready to serve and powdered soups, broths and gravies; refrigerated and shelf stable salad dressings and sauces; pickles and related products; salsa and Mexican sauces; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; single serve hot beverages; specialty teas; hot and cold cereals; baking and mix powders; macaroni and cheese; and skillet dinners.

Our Food Away From Home segment sells non-dairy powdered creamers; sweeteners; pickles and related products; Mexican sauces; refrigerated and shelf-stable dressings; aseptic products; hot cereals; powdered drinks; and single serve hot beverages 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. The most common products sold in this segment include non-dairy powdered creamer; baking and mix powders; pickles and related products; Mexican sauces; soup and infant feeding products; hot cereals; powdered drinks; single serve hot beverages; and specialty teas. Export sales are primarily to industrial customers outside of North America.

During the first quarter, volumes in the food industry were generally unchanged, showing little overall growth or reductions from the prior year or since year end. Continuing themes include shifting consumer patterns, less waste and the lack of real income growth for consumers. Shifting consumer patterns include increased awareness and desire for foods that are described as being “better for you” and a slight shift back to traditional grocers from alternate format stores. These shifts, while not significant, impact all food producers. Further impacting the entire industry is increased commodity costs and unfavorable weather patterns. During the first quarter of this year, commodity costs for the entire food industry increased moderately and the cold weather at the start of the year challenged distribution systems, consumer purchasing patterns and production processes. In addition to the items noted above, and more specific to the Company, is the impact of foreign exchange rates between the U.S. and Canadian dollars. During the first quarter of 2014, the average Canadian dollar exchange rate was approximately 8.6% weaker than the same period last year, impacting both our net sales and profitability.

 

 

 

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Table of Contents

Despite the challenges impacting the industry as described above, the Company achieved a 14.6% increase in net sales over the same period last year, primarily due to additional sales from acquisitions and improved product volume/mix, partially offset by the unfavorable impact of foreign exchange.

During the first quarter of 2014, sales and volumes shifted slightly back towards traditional grocers from alternate retail channels. The Company expects this trend to continue throughout 2014. In response to this continued shift, the Company has focused on lowering our “cost to serve” and aligned our offerings with shifting customer demands.

Total direct operating income, the measure of our segment profitability, increased 12%, primarily from acquisitions. Direct operating income as a percentage of net sales decreased 40 basis points from prior year to 16.1%, but increased by 70 basis points on a sequential basis over the fourth quarter of 2013. The change in direct operating income percentage between the first quarter of 2014 and 2013 is due to a combination of factors, including a higher mix of lower margin sales from recent acquisitions that were not part of the Company’s operations during the first quarter last year but were included for the fourth quarter of 2013. Also impacting the reduced profitability percentage are unfavorable foreign exchange rates and slightly higher distribution costs as compared to the first quarter last year.

Recent Developments

During the quarter, the Company issued $400 million of the 2022 Notes, the proceeds of which were intended to extinguish $400 million aggregate principal amount outstanding of the 2018 Notes. Due to timing, only $298 million of the proceeds were used in the quarter to extinguish the 2018 Notes. The remaining proceeds were used to temporarily pay down the revolving credit facility. On April 10, 2014, the Company extinguished the remaining 2018 Notes using borrowings under the revolving credit facility. In connection with the extinguishment of the 2018 Notes in the first quarter, the Company incurred costs totaling $16.7 million, which include the write off of $3.9 million in deferred financing fees. In connection with the issuance of the 2022 Notes, the Company incurred $6.9 million of costs, which have been deferred.

On April 21, 2014, the Company announced it will acquire all of the outstanding equity interests of Protenergy from Whitecastle Investments Limited, Whitecap Venture Partners and others. Protenergy is a privately owned Canadian company that produces carton and recart broth, soups and gravies, both for private label and corporate brands, and also serves as a co-manufacturer of national brands. The Company agreed to pay CAD $170 million in cash for the business, subject to an adjustment for working capital. The acquisition of Protenergy is expected to expand our existing packaging capabilities and enable us to offer customers a full range of soup products, both wet and dry, as well as leverage our research and development capabilities in the evolution of shelf stable liquids from cans to cartons. The transaction is expected to close in the second quarter of 2014 and will be financed through borrowings under the Company’s credit facility. The acquisition will be accounted for under the acquisition method of accounting.

On May 6, 2014, the Company entered into the new Revolving Facility with an aggregate commitment of $900 million and the $300 million Term Loan pursuant to the Credit Agreement, with Bank of America, N.A., as administrative agent, and certain participating lenders party thereto. The Revolving Facility matures on May 6, 2019. We used the proceeds from the Term Loan and a draw at closing on the Revolving Facility to repay in full amounts outstanding under the $750 million Prior Credit Agreement. The Credit Agreement replaced the Prior Credit Agreement, and such Prior Credit Agreement was terminated upon the repayment of the amounts outstanding thereunder.

The initial pricing for the Revolving Facility is determined by LIBOR plus a margin of 1.50%, which includes a 0.30% facility fee. Thereafter, the Revolving Facility generally will bear interest at a rate per annum equal to (i) LIBOR, plus a margin ranging from 1.25% to 2.00% (inclusive of the facility fee), based on the Company’s consolidated leverage ratio or (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from 0.25% to 1.00% (inclusive of the facility fee), based on the Company’s consolidated leverage ratio.

The Term Loan matures in May 2021. The initial pricing of the Term Loan is determined by LIBOR plus a margin of 1.75%. Thereafter, the Term Loan generally will bear interest at a rate per annum equal to (i) LIBOR, plus a margin ranging from 1.50% to 2.25%, based on the Company’s consolidated leverage ratio or (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from 0.50% to 1.25%, based on the Company’s consolidated leverage ratio. The Term Loan is subject to substantially the same covenants as the Revolving Facility, and also has the same Guarantors.

The Credit Agreement contains substantially the same covenants as the Prior Credit Agreement. The Credit Agreement is guaranteed by the Guarantors, certain of our 100% owned direct and indirect subsidiaries.

The covenants and other material terms and conditions of the Term Loan and the Revolving Facility are substantially similar to those under our Prior Credit Agreement, which are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

 

 

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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 March 31,  
     2014     2013  
     Dollars     Percent     Dollars     Percent  
     (Dollars in thousands)  

Net sales

   $ 618,903        100.0   $ 540,110        100.0

Cost of sales

     485,912        78.5        425,938        78.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     132,991        21.5        114,172        21.1   

Operating expenses:

        

Selling and distribution

     38,017        6.1        32,402        6.0   

General and administrative

     33,768        5.6        27,473        5.1   

Other operating expense, net

     873        0.1        1,418        0.2   

Amortization expense

     10,034        1.6        8,499        1.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     82,692        13.4        69,792        12.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     50,299        8.1        44,380        8.2   

Other expenses (income):

        

Interest expense

     10,873        1.8        12,778        2.4   

Interest income

     (168     —          (678     (0.1

Loss (gain) on foreign currency exchange

     2,951        0.5        (361     (0.1

Loss on extinguishment of debt

     16,685        2.6        —          —     

Other income, net

     (85     —          (713     (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     30,256        4.9        11,026        2.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     20,043        3.2        33,354        6.2   

Income taxes

     5,721        0.9        10,380        1.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 14,322        2.3   $ 22,974        4.3
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

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Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net Sales — First quarter net sales increased 14.6% to $618.9 million in 2014 compared to $540.1 million in the first quarter of 2013. The increase is primarily driven by sales from acquisitions (Cains and Associated Brands) and improved volume/mix, partially offset by unfavorable foreign exchange. Net sales by segment are shown in the following table:

 

     Three Months Ended March 31,  
     2014      2013      $ Increase/
(Decrease)
     % Increase/
(Decrease)
 
     (Dollars in thousands)  

North American Retail Grocery

   $ 452,403       $ 386,081       $ 66,322         17.2

Food Away From Home

     88,673         81,813         6,860         8.4   

Industrial and Export

     77,827         72,216         5,611         7.8   
  

 

 

    

 

 

    

 

 

    

Total

   $ 618,903       $ 540,110       $ 78,793         14.6
  

 

 

    

 

 

    

 

 

    

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw material 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 78.5% in the first quarter of 2014, compared to 78.9% in 2013. Contributing to the decrease in cost of sales as a percentage of net sales was improved sales/mix that was partially offset by the impact of lower margin products from recent acquisitions and unfavorable exchange rates on raw material purchases by our Canadian operations.

Operating Expenses — Total operating expenses were $82.7 million in the first quarter of 2014 compared to $69.8 million in 2013. Operating expenses in 2014 resulted from the following:

Selling and distribution expenses increased $5.6 million, or 17.3% in the first quarter of 2014 compared to 2013. This increase was primarily due to increased distribution and delivery costs resulting from acquisitions.

General and administrative expenses increased by $6.3 million in the first quarter of 2014 compared to 2013. The increase was in line with management’s expectations, of which $2.7 million was due to acquisitions and the remaining increase was due to higher staffing levels.

Other operating expense in the first quarter of 2014 was $0.9 million, compared to $1.4 million in 2013. The decrease was due to reduced costs associated with the soup and Seaforth restructurings, as they are near completion.

Amortization expense increased $1.5 million in the first quarter of 2014 compared to 2013, due primarily to the amortization of intangible assets from acquisitions and additional ERP system costs.

Interest Expense — Interest expense decreased to $10.9 million in the first quarter of 2014, compared to $12.8 million in 2013, due to lower average interest rates.

Interest Income – Interest income of $0.2 million relates to interest earned on the cash held by our Canadian subsidiary and gains on investments as discussed in Note 5.

Foreign Currency — The Company’s foreign currency impact was a $3.0 million loss for the first quarter of 2014, compared to a gain of $0.4 million in 2013, primarily due to unfavorable fluctuations in currency exchange rates between the U.S. and Canadian dollar.

Loss on Extinguishment of Debt — The Company extinguished a portion of the 2018 Notes during the first quarter of 2014 and recorded a loss of $16.7 million on the extinguishment. The remaining 2018 Notes were extinguished in April 2014.

Other Income, net — Other income was $0.1 million for the first quarter of 2014, compared to income of $0.7 million in 2013.

Income Taxes — Income tax expense was recorded at an effective rate of 28.5% in the first quarter of 2014 compared to 31.1% in the prior year’s first quarter. The decrease in the effective tax rate for the three months ended March 31, 2014 as compared to 2013 is attributable to the settlement of unrecognized tax benefits associated with the Company’s 2011 examination by the United States Internal Revenue Services (“IRS”).

 

 

 

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Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 — Results by Segment

North American Retail Grocery

 

     Three Months Ended March 31,  
     2014     2013  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $ 452,403         100.0   $ 386,081         100.0

Cost of sales

     348,824         77.1        296,447         76.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     103,579         22.9        89,634         23.2   

Freight out and commissions

     18,808         4.2        15,443         4.0   

Direct selling and marketing

     9,681         2.1        8,603         2.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 75,090         16.6   $ 65,588         17.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the North American Retail Grocery segment increased by $66.3 million, or 17.2%, in the first quarter of 2014 compared to 2013. The change in net sales from 2013 to 2014 was due to the following:

 

     Dollars     Percent  
     (Dollars in
thousands)
 

2013 Net sales

   $ 386,081     

Volume/mix

     22,937        5.9

Pricing

     1,083        0.3   

Acquisitions

     46,928        12.2   

Foreign currency

     (4,626     (1.2
  

 

 

   

 

 

 

2014 Net sales

   $ 452,403        17.2
  

 

 

   

 

 

 

The increase in net sales from 2013 to 2014 resulted primarily from acquisitions and improved volume/mix, partially offset by the impact related to unfavorable foreign exchange rates. During the first quarter, the Company experienced volume gains in the beverages (primarily single serve hot beverages) and Mexican sauces categories that were offset by volume decreases in cereals, pickles, soup and salad dressings. The roll-out of the Company’s single serve hot beverage program continues to drive a significant portion of the volume/mix increase.

Cost of sales as a percentage of net sales in the first quarter of 2014 increased slightly from the first quarter of 2013, as lower margins from the Cains and Associated Brands acquisitions were mostly offset by improved volume/mix and cost savings from operating efficiencies. Also leading to higher cost of sales is the higher cost of U.S. sourced raw materials for the Canadian operations, as a result of a weaker Canadian dollar. The increase in cost of sales in the first quarter of 2014 of $52.4 million is primarily related to acquisitions.

Freight out and commissions paid to independent sales brokers were $18.8 million in the first quarter of 2014, compared to $15.4 million in 2013, an increase of 21.8%, primarily due to acquisitions.

Direct selling and marketing expenses were $9.7 million in the first quarter of 2014 and $8.6 million in 2013. The increase in direct selling and marketing expenses was due to the Cains and Associated Brands acquisitions. Despite the additional costs, the overall direct selling and marketing expenses as a percent of revenue decreased slightly.

 

 

 

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Food Away From Home

 

     Three Months Ended March 31,  
     2014     2013  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $ 88,673         100.0   $ 81,813         100.0

Cost of sales

     73,863         83.3        66,007         80.7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     14,810         16.7        15,806         19.3   

Freight out and commissions

     3,294         3.7        2,774         3.4   

Direct selling and marketing

     2,028         2.3        2,050         2.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 9,488         10.7   $ 10,982         13.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Food Away From Home segment increased by $6.9 million, or 8.4%, in the first quarter of 2014 compared to the prior year. The change in net sales from 2013 to 2014 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2013 Net sales

   $ 81,813     

Volume/mix

     (1,876     (2.3 )% 

Pricing

     362        0.4   

Acquisitions

     9,198        11.3   

Foreign currency

     (824     (1.0
  

 

 

   

 

 

 

2014 Net sales

   $ 88,673        8.4
  

 

 

   

 

 

 

Net sales increased during the first quarter of 2014 compared to 2013 primarily due to the Cains and Associated Brands acquisitions, partially offset by slightly lower volume/mix and foreign currency. Volume increases in the beverages category (primarily single serve hot beverages) were offset by reductions in the aseptic products and pickles categories. Volumes were challenged in the first quarter of 2014 versus 2013 as unfavorable weather conditions negatively impacted consumer buying patterns.

Cost of sales as a percentage of net sales in the first quarter of 2014 increased compared to the first quarter of 2013 due to the impact of lower margin sales from the Cains and Associated Brands acquisitions, along with operational inefficiencies at several of our legacy plants. Also leading to higher cost of sales is the higher cost of U.S. sourced raw materials for the Canadian operations, as a result of a weaker Canadian dollar. The increase in cost of sales in the first quarter of 2014 of $7.9 million is primarily related to acquisitions, partially offset by decreased volumes.

Freight out and commissions paid to independent sales brokers increased in the first quarter of 2014 by $0.5 million, compared to 2013. Higher costs related to the Cains and Associated Brands acquisitions were partially offset by lower volumes.

Direct selling and marketing was $2.0 million in the first quarter of 2014, flat as compared to 2013, as costs remained consistent with the prior period, despite the impact of acquisitions.

 

 

 

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Industrial and Export

 

     Three Months Ended March 31,  
     2014     2013  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $ 77,827         100.0   $ 72,216         100.0

Cost of sales

     60,958         78.3        57,640         79.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     16,869         21.7        14,576         20.2   

Freight out and commissions

     1,230         1.6        1,645         2.3   

Direct selling and marketing

     593         0.8        471         0.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 15,046         19.3   $ 12,460         17.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Industrial and Export segment increased $5.6 million, or 7.8%, in the first quarter of 2014, compared to the prior year. The change in net sales from 2013 to 2014 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2013 Net sales

   $ 72,216     

Volume/mix

     (2,914     (4.0 )% 

Pricing

     (661     (0.9

Acquisitions

     9,311        12.9   

Foreign currency

     (125     (0.2
  

 

 

   

 

 

 

2014 Net sales

   $ 77,827        7.8
  

 

 

   

 

 

 

Net sales increased during the first quarter of 2014 compared to 2013 due to acquisitions, the effect of which was partially offset by reduced volume/mix and pricing concessions. Lower volumes of infant feeding and non-dairy powdered creamer were partially offset by higher volumes of single serve hot beverages.

Cost of sales as a percentage of net sales decreased from 79.8% in the first quarter of 2013, to 78.3% in 2014, primarily due to a shift in sales mix to higher margin products, which was partially offset by the impact of lower margin sales associated with the Cains and Associated Brands acquisitions.

Freight out and commissions paid to independent sales brokers were $1.2 million in the first quarter of 2014 and $1.6 million 2013. This decrease was primarily due to lower volumes in 2014.

Direct selling and marketing was $0.6 million in the first quarter of 2014 and $0.5 million in 2013.

 

 

 

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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 $344.2 million was available under the revolving credit facility as of March 31, 2014. See Note 11 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. Upon completion of the financing as described in Note 23, the Company expects to have approximately $700 million in available funds under the revolving credit facility.

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:

 

     Three Months Ended
March 31,
 
     2014     2013  
     (In thousands)  

Cash flows from operating activities:

    

Net income

   $ 14,322      $ 22,974   

Depreciation and amortization

     27,006        26,884   

Stock-based compensation

     4,180        3,418   

Deferred income taxes

     (1,699     (2,214

Loss on extinguishment of debt

     16,685        —     

Changes in operating assets and liabilities, net of acquisitions

     (22,540     7,545   

Other

     (2,084     (1,621
  

 

 

   

 

 

 

Net cash provided by operating activities

   $ 35,870      $ 56,986   
  

 

 

   

 

 

 

Our cash from operations was $35.9 million in the first three months of 2014 compared to $57.0 million in 2013, a decrease of $21.1 million. The decrease in cash provided by operating activities was primarily due to increased use of cash for operations, as an increase in accounts payable to levels that were consistent with expectations was due to timing. Offsetting the increase in accounts payable were higher levels of inventories resulting from the impact of foreign exchange and build-up of inventory. While the Company’s net income for the three months ended March 31, 2014 is lower than prior year, it includes a loss on extinguishment of debt totaling $16.7 million. After adjusting for the loss on extinguishment of debt, net income would have been $31.0 million, or $8.0 million greater than prior year.

 

     Three Months Ended
March 31,
 
     2014     2013  
     (In thousands)  

Cash flows from investing activities:

    

Additions to property, plant and equipment

   $ (18,339   $ (13,788

Additions to other intangible assets

     (3,316     (1,060

Purchase of investments

     (236     (7,477

Other

     1,913        160   
  

 

 

   

 

 

 

Net cash used in investing activities

   $ (19,978   $ (22,165
  

 

 

   

 

 

 

In the first three months of 2014, cash used in investing activities decreased by $2.2 million compared to 2013 due to fewer investments in securities, partially offset by larger investments in property, plant and equipment.

We expect capital spending programs to be approximately $95 million in 2014. Capital spending in 2014 is focused on food safety, quality, additional capacity, productivity improvements, continued implementation of an Enterprise Resource Planning system, and routine equipment upgrades or replacements at our plants.

 

 

 

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     Three Months Ended
March 31,
 
     2014     2013  
     (In thousands)  

Cash flows from financing activities:

    

Net payments for debt

   $ (38,532   $ (35,957

Payment of deferred financing costs

     (6,897     —     

Payment of debt premium for extinguishment of debt

     (12,749     —     

Equity award financing activities

     12,160        561   
  

 

 

   

 

 

 

Net cash used in financing activities

   $ (46,018   $ (35,396
  

 

 

   

 

 

 

Net cash used in financing activities increased $10.6 million in the first three months of 2014 compared to 2013, as cash used for the extinguishment of a portion of the 2018 Notes and payment of deferred financing fees in connection with the issuance of the 2022 Notes more than offset the higher levels of cash provided from stock option exercises. The Company experienced an increased level of stock option exercises as compared to the prior period, resulting in the contribution of approximately $12 million of cash for financing activities. The Company expects stock option exercise activity to continue at higher than historical levels throughout 2014 as certain awards near expiration. The net pay down of debt was $2.6 million higher than the same period last year, further demonstrating that the first quarter is typically a strong cash-generating quarter that provides the ability to pay down our revolving credit facility.

Cash held by E.D. Smith as cash and cash equivalents and short term investments is expected to be used 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 investments in property, plant and equipment.

The Company’s short-term financing needs are primarily to finance working capital during the year. As the Company continues to add new product categories to our portfolio, spikes in financing needs are lessened. Vegetable and fruit production is driven by harvest cycles, which occur primarily during the spring and summer as inventories of pickles and jams generally are at a low point in late spring and at a high point during the fall, increasing our working capital requirements. In addition, the Company builds inventories of salad dressings in the spring and soup in the summer months in anticipation of large seasonal shipments that begin in the second and third quarters, respectively. Non-dairy creamer inventory builds in the fall for the expected winter sales. 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.

Subsequent to quarter end, but before the date of this report, the Company entered into a new $1.2 billion financing structure, consisting of (i) a new $900 million unsecured revolving credit facility that replaces our $750 million revolving credit facility under the Prior Credit Agreement and (ii)a new $300 million, seven year term loan, the proceeds of which were used to repay in full amounts outstanding under the Prior Credit Agreement. The covenants and other material terms and conditions of the Term Loan and the Revolving Facility are substantially similar to those under our Prior Credit Agreement, which are more fully described in our Annual Report on Form 10-K for the year ended December 31, 2013.

Debt Obligations

At March 31, 2014, we had $395 million in borrowings outstanding under our revolving credit facility, $101.8 million of the 2018 Notes outstanding, $400 million of the 2022 Notes outstanding, and $5.2 million of tax increment financing and other obligations. In addition, at March 31, 2014, there were $10.8 million in letters of credit under the revolving credit facility that were issued but undrawn.

Also, at March 31, 2014, our revolving credit facility provided for an aggregate commitment of $750 million, of which $344.2 million was available. Interest rates on debt outstanding under our revolving credit facility for the three months ended March 31, 2014 averaged 1.38%.

We are in compliance with all applicable debt covenants as of March 31, 2014. From an interest coverage ratio perspective, the Company’s actual ratio as of March 31, 2014 is nearly 62.4% higher than the minimum required level. As it relates to the leverage ratio, the Company was nearly 21.4% below the maximum level (where the maximum level is not increased in the event of an acquisition).

See Note 11 to our Condensed Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.

 

 

 

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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 18 to our Condensed Consolidated Financial Statements in Part I — Item 1 of this Form 10-Q and Note 17 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 for more information about our commitments and contingent obligations.

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, 2013. There were no material changes to our critical accounting policies in the three months ended March 31, 2014.

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 following the date of this report.

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, 2013 and from time to time in our filings with the Securities and Exchange Commission.

 

 

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Fluctuations

As of March 31, 2014, the Company was party to an unsecured revolving credit facility with an aggregate commitment of $750 million, with an interest rate based on the Company’s consolidated leverage ratio, and 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%.

We do not hold any derivative financial instruments which could expose us to significant interest rate market risk, as of March 31, 2014. 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 $395 million under our revolving credit facility at March 31, 2014, each 1% rise in our interest rate would increase our interest expense by approximately $3.95 million annually.

Input Costs

The costs of raw materials, packaging materials, fuel, and energy 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. When comparing the first quarter of 2014 to the first quarter of 2013, price increases in energy and commodity costs such as crude oil, vegetables, and dairy, were offset by price decreases in soybean oil, sugar, and sweeteners. 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. Some of these forward purchase contracts qualify as derivatives; however, the majority of commodity forward contracts are not derivatives. Those that are derivatives generally qualify for the normal purchases and normal sales scope exception under the guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions. For derivative commodity contracts that do not qualify for the normal purchases and normal sales scope exception, the Company records their fair value on the Company’s Condensed Consolidated Balance Sheets, with changes in value being recorded in the Condensed Consolidated Statements in Income.

We use a significant volume 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, fuel, and energy costs. Accordingly, if we are unable to increase our prices to offset increasing costs, our operating profits and margins could be materially 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 three months ended March 31, 2014 the Company recognized a net loss of $14.9 million, of which a loss of $11.9 million was recorded as a component of Accumulated other comprehensive loss and a loss of $3.0 million was recorded on the Company’s Condensed Consolidated Statements of Income within the Loss (gain) on foreign currency exchange line.

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 are entered into for the purchase of U.S. dollar denominated raw materials by our Canadian subsidiary. The Company had no foreign currency contracts outstanding as of March 31, 2014, or March 31, 2013.

 

 

 

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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 March 31, 2014, 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.

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2014 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, Illinois

We have reviewed the accompanying condensed consolidated balance sheet of TreeHouse Foods, Inc. and subsidiaries (the “Company”) as of March 31, 2014, and the related condensed consolidated statements of income and comprehensive income for the three month periods ended March 31, 2014 and 2013, and of cash flows for the three month periods ended March 31, 2014 and 2013. This interim financial information is 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 information 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 information for it 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, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 2014, 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, 2013 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

May 8, 2014

 

 

 

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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, 2013. 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, 2013.

Item 5. Other Information

None

Item 6. Exhibits

 

  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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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

May 8, 2014

 

 

 

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