XNYS:THS Treehouse Foods Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012.

 

or

 

¨

 

 

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

  For the Transition Period from                      to                     

Commission File Number 001-32504

TreeHouse Foods, Inc.

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

 

LOGO

 

Delaware   20-2311383
(State or other jurisdiction of incorporation or organization)   (I.R.S. employer identification no.)

2021 Spring Road, Suite 600

Oak Brook, IL

  60523
(Address of principal executive offices)   (Zip Code)

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

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

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

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

 

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

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

Yes    ¨    No    x

Number of shares of Common Stock, $0.01 par value, outstanding as of April 30, 2012: 35,951,836.

 

 

 


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

     23   

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

     30   

Item 4 — Controls and Procedures

     31   
Report of Independent Registered Public Accounting Firm      32   

Part II — Other Information

  

Item 1 — Legal Proceedings

     33   

Item 1A — Risk Factors

     33   

Item 6 — Exhibits

     33   

Signatures

     34   

 

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,
2012
    December 31,
2011
 
     (Unaudited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 67,324      $ 3,279   

Receivables, net

     120,410        115,168   

Inventories, net

     338,725        329,374   

Deferred income taxes

     3,520        3,854   

Prepaid expenses and other current assets

     14,217        12,638   

Assets held for sale

     4,081        4,081   
  

 

 

   

 

 

 

Total current assets

     548,277        468,394   

Property, plant and equipment, net

     408,217        406,558   

Goodwill

     1,070,943        1,068,419   

Intangible assets, net

     432,895        437,860   

Other assets, net

     22,671        23,298   
  

 

 

   

 

 

 

Total assets

   $       2,483,003      $       2,404,529   
  

 

 

   

 

 

 
    

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 185,756      $ 169,525   

Current portion of long-term debt

     1,960        1,954   
  

 

 

   

 

 

 

Total current liabilities

     187,716        171,479   

Long-term debt

     931,301        902,929   

Deferred income taxes

     203,924        202,258   

Other long-term liabilities

     54,207        54,346   
  

 

 

   

 

 

 

Total liabilities

     1,377,148        1,331,012   

Commitments and contingencies (Note 17)

    

Stockholders’ equity:

    

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

              

Common stock, par value $0.01 per share, 90,000 shares authorized, 35,951 and 35,921 shares issued and outstanding, respectively

     359        359   

Additional paid-in capital

     717,392        714,932   

Retained earnings

     402,660        380,588   

Accumulated other comprehensive loss

     (14,556     (22,362
  

 

 

   

 

 

 

Total stockholders’ equity

     1,105,855        1,073,517   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,483,003      $ 2,404,529   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

 

 


Table of Contents

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (Unaudited)  

Net sales

   $       523,811      $       493,513   

Cost of sales

     408,879        372,587   
  

 

 

   

 

 

 

Gross profit

     114,932        120,926   

Operating expenses:

    

Selling and distribution

     34,294        36,260   

General and administrative

     26,604        29,243   

Other operating expense, net

     460        2,650   

Amortization expense

     8,263        8,049   
  

 

 

   

 

 

 

Total operating expenses

     69,621        76,202   
  

 

 

   

 

 

 

Operating income

     45,311        44,724   

Other expense (income):

    

Interest expense

     13,212        13,851   

Loss on foreign currency exchange

     856        1,430   

Other income, net

     (461     (492
  

 

 

   

 

 

 

Total other expense

     13,607        14,789   
  

 

 

   

 

 

 

Income before income taxes

     31,704        29,935   

Income taxes

     9,630        10,127   
  

 

 

   

 

 

 

Net income

   $ 22,074      $ 19,808   
  

 

 

   

 

 

 

Net earnings per common share:

    

Basic

   $ .61      $ .56   

Diluted

   $ .60      $ .54   

Weighted average common shares:

    

Basic

     36,019        35,534   

Diluted

     37,094        36,785   

See Notes to Condensed Consolidated Financial Statements

 

4

 

 

 


Table of Contents

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Three Months Ended
March 31,
 
     2012      2011  
     (Unaudited)  

Net income

   $ 22,074       $ 19,808   
     

Other comprehensive income:

     

Foreign currency translation adjustments

     7,487         8,803   

Pension and post-retirement reclassification adjustment, net of tax of $177 and $106, respectively

     279         169   

Derivative reclassification adjustment, net of tax of $25, respectively

     40         40   
  

 

 

    

 

 

 

Other comprehensive income

     7,806         9,012   
     

Comprehensive income

   $         29,880       $       28,820   
  

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5

 

 

 


Table of Contents

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $         22,074      $           19,808   

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

    

Depreciation

     12,458        11,787   

Amortization

     8,263        8,049   

(Gain) loss on foreign currency exchange

     (112     800   

Mark to market adjustment on derivative contracts

     (517     (575

Excess tax benefits from stock-based compensation

     (302     (422

Stock-based compensation

     2,685        4,774   

Loss on disposition of assets

     778          

Write-down of tangible assets

            2,352   

Deferred income taxes

     1,610        463   

Other

     44        31   

Changes in operating assets and liabilities, net of acquisitions:

    

Receivables

     (4,725     (3,782

Inventories

     (8,307     (10,693

Prepaid expenses and other assets

     (18     1,748   

Accounts payable, accrued expenses and other liabilities

     18,303        (1,592
  

 

 

   

 

 

 

Net cash provided by operating activities

     52,234        32,748   

Cash flows from investing activities:

    

Additions to property, plant and equipment

     (15,566     (10,578

Additions to other intangible assets

     (2,507     (4,150

Acquisition of business, net of cash acquired

            1,401   

Proceeds from sale of fixed assets

     34        33   
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,039     (13,294

Cash flows from financing activities:

    

Borrowings under revolving credit facility

     104,200        80,600   

Payments under revolving credit facility

     (75,300     (105,000

Payments on capitalized lease obligations

     (407     (196

Net payments related to stock-based award activities

     (655     (18

Excess tax benefits from stock-based compensation

     302        422   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     28,140        (24,192
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1,710        790   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     64,045        (3,948

Cash and cash equivalents, beginning of period

     3,279        6,323   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 67,324      $ 2,375   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three months ended March 31, 2012

(Unaudited)

1. Basis of Presentation

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

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

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

2. Recent Accounting Pronouncements

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

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

3. Facility Closings

As of December 31, 2011, the Company closed its pickle plant in Springfield, Missouri. Production ceased in August 2011 and has been transferred to other pickle facilities. Production at the Springfield facility was primarily related to the Food Away From Home segment. For the three months ended March 31, 2012, the Company recorded closure costs of approximately $0.2 million primarily to move equipment and for the three months ended March 31, 2011, costs of $2.4 million that consisted of a fixed asset impairment charge of $2.3 million and $0.1 million for severance, respectively. These costs are included in Other operating expense, net line in our Condensed Consolidated Statements of Income.

 

7

 

 

 


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

4. Acquisitions

On March 20, 2012, the Company announced it had entered into a definitive agreement to acquire substantially all of the assets of Naturally Fresh, Inc. (“Naturally Fresh”), a privately owned Atlanta, Georgia based manufacturer of refrigerated dressings, sauces, marinades, dips and specialty items sold within each of our segments. Naturally Fresh has annual revenues of approximately $80 million. On April 13, 2012, the Company completed the acquisition and paid approximately $25 million for the business, subject to an adjustment for working capital. The acquisition was financed through borrowings under the Company’s existing $750 million credit facility. The acquisition will expand the Company’s refrigerated manufacturing and packaging capabilities, broaden its distribution footprint and further develop its presence within the growing category of fresh foods. Naturally Fresh’s Atlanta facility coupled with the Company’s existing West Coast and Chicago based refrigerated foods plants will allow the Company to more efficiently service customers from coast to coast.

5. Inventories

 

         March 31,    
2012
     December 31, 
2011
 
     (In thousands)  

Raw materials and supplies

   $ 115,618      $ 115,719   

Finished goods

     243,173        233,408   

LIFO reserve

     (20,066     (19,753
  

 

 

   

 

 

 

Total

   $ 338,725      $ 329,374   
  

 

 

   

 

 

 

Approximately $62.8 million and $82.0 million of our inventory was accounted for under the LIFO method of accounting at March 31, 2012 and December 31, 2011, respectively.

6. Property, Plant and Equipment

 

         March 31,    
2012
     December 31, 
2011
     
     (In thousands)      

Land

   $ 20,409      $ 19,256     

Buildings and improvements

     166,043        158,370     

Machinery and equipment

     420,253        417,156     

Construction in progress

     42,914        42,683     
  

 

 

   

 

 

   

Total

     649,619        637,465     

Less accumulated depreciation

     (241,402     (230,907  
  

 

 

   

 

 

   

Property, plant and equipment, net

   $ 408,217      $ 406,558     
  

 

 

   

 

 

   

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

7. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the three months ended March 31, 2012 are as follows:

 

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

Balance at December 31, 2011

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

Currency exchange adjustment

     2,207         317                 2,524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2012

   $         845,008       $         92,353       $         133,582       $         1,070,943   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2012 and December 31, 2011 are as follows:

 

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

Intangible assets with indefinite lives:

               

Trademarks

   $ 32,750       $      $ 32,750       $ 32,155       $      $ 32,155   

Intangible assets with finite lives:

               

Customer-related

     446,080         (88,879     357,201         444,540         (82,152     362,388   

Non-compete agreement

     1,000         (1,000             1,000         (1,000       

Trademarks

     20,010         (4,767     15,243         20,010         (4,555     15,455   

Formulas/recipes

     6,828         (3,664     3,164         6,799         (3,302     3,497   

Computer software

     37,131         (12,594     24,537         35,721         (11,356     24,365   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $     543,799       $     (110,904   $     432,895       $     540,225       $     (102,365   $     437,860   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Amortization expense on intangible assets for the three months ended March 31, 2012 and 2011 was $8.3 million and $8.0 million, respectively. Estimated amortization expense on intangible assets for 2012 and the next four years is as follows:

 

     (In thousands)  

2012

   $         32,683   

2013

   $ 31,650   

2014

   $ 31,244   

2015

   $ 30,283   

2016

   $ 30,117   

8. Accounts Payable and Accrued Expenses

 

     March 31,
2012
     December 31,
2011
 
     (In thousands)  

Accounts payable

   $ 121,757       $     109,178   

Payroll and benefits

     25,559         17,079   

Interest and taxes

     15,472         20,659   

Health insurance, workers’ compensation and other insurance costs

     5,797         5,584   

Marketing expenses

     6,125         7,148   

Other accrued liabilities

     11,046         9,877   
  

 

 

    

 

 

 

Total

   $     185,756       $ 169,525   
  

 

 

    

 

 

 

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

9. Income Taxes

Income tax expense was recorded at an effective rate of 30.4% and 33.8% for the three months ended March 31, 2012 and 2011, respectively. The Company’s effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith Foods, Ltd. (“E.D. Smith”) Canadian acquisition. The decrease in the effective tax rate for the three months ended March 31, 2012 as compared to 2011 is attributable to the tax impact of the repayment of certain intercompany debt and a decrease in the Canadian statutory tax rate.

As of March 31, 2012, the Company does not believe that its gross recorded unrecognized tax benefits will materially change within the next 12 months.

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

10. Long-Term Debt

 

     March 31,
2012
    December 31,
2011
 
     (In thousands)  

Revolving credit facility

   $ 424,700      $ 395,800   

High yield notes

     400,000        400,000   

Senior notes

     100,000        100,000   

Tax increment financing and other

     8,561        9,083   
  

 

 

   

 

 

 

Total debt outstanding

     933,261        904,883   

Less current portion

     (1,960     (1,954
  

 

 

   

 

 

 

Total long-term debt

   $         931,301      $         902,929   
  

 

 

   

 

 

 

Revolving Credit Facility — The Company is party to an unsecured revolving credit facility with an aggregate commitment of $750 million, of which $316.1 million was available as of March 31, 2012. The revolving credit facility matures September 23, 2016. In addition, as of March 31, 2012, there were $9.2 million in letters of credit under the revolving credit facility that were issued but undrawn. Our revolving credit facility contains various financial and other restrictive covenants and requires that the Company maintains certain financial ratios, including a leverage and interest coverage ratio. The Company is in compliance with all applicable covenants as of March 31, 2012. The Company’s average interest rate on debt outstanding under our revolving credit facility for the three months ended March 31, 2012 was 1.73%.

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

High Yield Notes — The Company’s 7.75% high yield notes in aggregate principal amount of $400 million are due March 1, 2018 (the “Notes”). The Notes are guaranteed by the Company’s 100 percent owned subsidiary Bay Valley Foods, LLC and its 100 percent owned subsidiaries EDS Holdings, LLC; Sturm Foods, Inc.; and S.T. Specialty Foods and certain other of the Company’s subsidiaries that may become guarantors from time to time in accordance with the applicable Indenture and may fully, jointly, severally and unconditionally guarantee the Company’s payment obligations under any series of debt securities offered. The Indenture governing the Notes provides, among other things, that the Notes will be senior unsecured obligations of the Company. The Indenture contains various restrictive covenants of which the Company is in compliance as of March 31, 2012.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Senior Notes — The Company has outstanding $100 million in aggregate principal amount of 6.03% senior notes due September 30, 2013, issued in a private placement pursuant to a Note Purchase Agreement among the Company and a group of purchasers. The Note Purchase Agreement contains covenants that will limit the ability of the Company and its subsidiaries to, among other things, merge with other entities, change the nature of the business, create liens, incur additional indebtedness or sell assets. The Note Purchase Agreement also requires the Company to maintain certain financial ratios. The Company is in compliance with the applicable covenants as of March 31, 2012.

Tax Increment Financing —The Company owes $2.3 million related to redevelopment bonds pursuant to a Tax Increment Financing Plan and has agreed to make certain payments with respect to the principal amount of the bonds through May 2019.

11. Earnings Per Share

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

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

 

                 Three Months Ended             
March 31,
 
     2012      2011  
     (In thousands)  

Weighted average common shares outstanding

     36,019         35,534   

Assumed exercise/vesting of equity awards (1)

     1,075         1,251   
  

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     37,094         36,785   
  

 

 

    

 

 

 

 

  (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 110 thousand and 131 thousand for the three months ended March 31, 2012 and March 31, 2011, respectively.

12. Stock-Based Compensation

Income before income taxes for the three month periods ended March 31, 2012 and 2011 includes share-based compensation expense of $2.7 million and $4.8 million, respectively. The tax benefit recognized related to the compensation cost of these share-based awards was approximately $0.9 million and $1.8 million for the three month periods ended March 31, 2012 and 2011, respectively.

The following table summarizes stock option activity during the three months ended March 31, 2012. Stock options are granted under our long-term incentive plan, and have a three year vesting schedule, which vest one-third on each of the first three anniversaries of the grant date. Stock options expire ten years from the grant date.

 

         Employee    
    Options     
    Director
    Options    
       Weighted  
Average
Exercise
Price
     Weighted
Average
Remaining
  Contractual  
Term (yrs.)
             Aggregate        
Intrinsic

Value
 
     (In thousands)                    (In thousands)  

Outstanding, December 31, 2011

     2,243        95       $ 29.76         4.8       $ 83,292   

Granted

                                      

Forfeited

     (2           $ 25.72                   

Exercised

     (7           $ 25.97                   
  

 

 

   

 

 

          

Outstanding, March 31, 2012

     2,234        95       $ 29.77         4.6       $ 69,219   
  

 

 

   

 

 

          

Vested/expected to vest, at March 31, 2012

     2,229        95       $ 29.72         4.5       $ 69,184   
  

 

 

   

 

 

          

Exercisable, March 31, 2012

     2,037        95       $ 27.80         4.2       $ 67,579   
  

 

 

   

 

 

          

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Compensation costs related to unvested options totaled $2.7 million at March 31, 2012 and will be recognized over the remaining vesting period of the grants, which averages 1.9 years. The Company uses the Black-Scholes option pricing model to value its stock option awards. No stock options were issued during the three months ended March 31, 2012. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2012 was approximately $0.2 million. The tax benefit recognized from stock option exercises was $0.1 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively.

In addition to stock options, the Company also grants restricted stock, restricted stock units and performance unit awards. These awards are granted under our long-term incentive plan. Employee restricted stock and restricted stock unit awards generally vest based on the passage of time. These awards generally vest one-third on each anniversary of the grant date. Director restricted stock units vest, generally, on the anniversary of the thirteenth month of the award. Certain directors have deferred receipt of their awards until their departure from the Board of Directors. The following table summarizes the restricted stock and restricted stock unit activity during the three months ended March 31, 2012:

 

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

Outstanding, at December 31, 2011

     15      $ 26.35         368      $ 44.66         71       $ 35.51   

Granted

                    2      $ 57.48                   

Vested

     (14   $ 26.35         (21   $ 44.63                   

Forfeited

     (1   $         26.35         (9   $ 47.52                   
  

 

 

      

 

 

      

 

 

    

Outstanding, at March 31, 2012

                    340      $         44.64         71       $         35.51   
  

 

 

      

 

 

      

 

 

    

Future compensation costs related to restricted stock and restricted stock units are approximately $8.9 million as of March 31, 2012, and will be recognized on a weighted average basis, over the next 1.7 years. The grant date fair value of the awards granted in 2012 is equal to the Company’s closing stock price on the grant date. The restricted stock and restricted stock units vested during the three months ended March 31, 2012 and 2011 had a fair value of $2.0 million and $2.4 million, respectively.

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, 2012:

 

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

Unvested, at December 31, 2011

     130      $ 42.11   

Granted

              

Vested

              

Forfeited

     (3   $ 45.57   
  

 

 

   

Unvested, at March 31, 2012

     127      $ 42.01   
  

 

 

   

Future compensation costs related to the performance units are estimated to be approximately $2.0 million as of March 31, 2012, and is expected to be recognized over the next 1.7 years. The grant date 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)

 

13. Accumulated Other Comprehensive Loss

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

 

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

Balance at December 31, 2011

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

Other comprehensive income

     7,487        279        40        7,806   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ (2,781   $ (11,546   $ (229   $ (14,556
  

 

 

   

 

 

   

 

 

   

 

 

 

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

14. Employee Retirement and Postretirement Benefits

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

Components of net periodic pension expense are as follows:

 

             Three Months Ended         
March 31,
 
     2012     2011  
     (In thousands)  

Service cost

   $ 633      $ 560   

Interest cost

     591        560   

Expected return on plan assets

     (581     (592

Amortization of unrecognized net loss

     309        144   

Amortization of prior service costs

     151        151   
  

 

 

   

 

 

 

Net periodic pension cost

   $ 1,103      $ 823   
  

 

 

   

 

 

 

The Company contributed $1.5 million to the pension plans in the first three months of 2012 and expects to contribute approximately $4.2 million in 2012.

Components of net periodic postretirement expenses are as follows:

 

             Three Months Ended         
March 31,
 
     2012     2011  
     (In thousands)  

Service cost

   $ 8      $ 9   

Interest cost

     39        31   

Amortization of unrecognized net loss (gain)

     14        (2

Amortization of prior service credit

     (18     (18
  

 

 

   

 

 

 

Net periodic postretirement cost

   $ 43      $ 20   
  

 

 

   

 

 

 

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

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

15. Other Operating Expense, Net

The Company incurred Other operating expense, net of $0.5 million and $2.7 million, for the three months ended March 31, 2012 and 2011, respectively, which consisted of the following:

 

             Three Months Ended         
March 31,
 
     2012      2011  
     (In thousands)  

Facility closing costs

   $ 427       $ 2,697   

Other

     33         (47
  

 

 

    

 

 

 

Total other operating expense, net

   $ 460       $ 2,650   
  

 

 

    

 

 

 

16. Supplemental Cash Flow Information

 

             Three Months Ended,         
March 31,
 
     2012      2011  
     (In thousands)  

Interest paid

   $ 18,209       $ 22,151   

Income taxes paid

   $ 5,614       $ 6,010   

Accrued purchase of property and equipment

   $ 2,821       $ 2,194   

Accrued other intangible assets

   $ 1,293       $ 1,400   

Non-cash financing activities for the three months ended March 31, 2012 and 2011 include the settlement of 35,347 shares and 44,949 shares, respectively, of restricted stock and restricted stock units, where shares were withheld to satisfy the minimum statuary tax withholding requirements.

17. Commitments and Contingencies

Litigation, Investigations and Audits — The Company is a 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 matter. The settlement of any such currently pending or threatened matters is not expected to have a material impact on our financial position, annual results of operations or cash flows.

18. Derivative Instruments

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

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

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

 

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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 a combination of derivative contracts, purchase orders and various short and long term supply arrangements in connection with the purchase of raw materials to manage commodity price risk. Commodity forward contracts generally qualify for the normal purchase exception under the guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions.

The Company’s commodity contracts may include diesel fuel, oil and certain plastics such as high density polyethylene (“HDPE”) or polypropylene. The Company’s diesel fuel contracts are used to manage the Company’s risk associated with the underlying cost of diesel fuel used to deliver products. The contracts for oil and plastics are used to manage the Company’s risk associated with the underlying commodity cost of a significant component used in packaging materials. As of December 31, 2011, the Company had outstanding oil contracts with a notional amount of 18,000 barrels which expired March 31, 2012. As of March 31, 2012, the Company had outstanding diesel fuel contracts with a notional amount of 750,000 gallons and 10.5 million pounds of polypropylene, expiring June 30, 2012 and December 31, 2012, respectively.

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

 

                                      Fair Value                        
                       Balance  Sheet Location                                      March 31, 2012              December 31, 2011      
               (In thousands)  

Asset Derivative:

           

Commodity contracts

   Prepaid expenses and other current assets         $ 679           $ 163     
        

 

 

    

 

 

 
           $ 679           $ 163     
        

 

 

    

 

 

 

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

 

                       Three Months Ended         
March 31,
 
     Location of Gain (Loss)         2012      2011  
    

                      Recognized in Income                     

        (In thousands)  

Mark to market unrealized gain (loss):

           

Interest rate swap

   Other income, net       $       $ 314   

Foreign currency contract

   Loss on foreign currency exchange                 (390

Commodity contracts

   Other income, net         517         261   
        

 

 

    

 

 

 
           517         185   

Realized gain (loss):

           

Interest rate swap

   Interest expense                 (330

Commodity contracts

   Cost of sales         215         63   

Commodity contracts

   Selling and distribution         58           
        

 

 

    

 

 

 
           273         (267
        

 

 

    

 

 

 

Total gain (loss)

         $ 790       $ (82
        

 

 

    

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

19. Fair Value

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

 

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

Not measured at fair value:

              

Revolving credit facility

   $       424,700       $       426,429       $       395,800       $       396,728       2

Senior notes

   $ 100,000       $ 102,517       $ 100,000       $ 101,529       2

7.75% high yield notes

   $ 400,000       $ 434,000       $ 400,000       $ 433,000       2
              

Measured at fair value:

              

Commodity contracts

   $ 679       $ 679       $ 163       $ 163       2

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

The fair value of the revolving credit facility, senior notes, 7.75% high yield notes and commodity contracts are determined using Level 2 inputs. Level 2 inputs are inputs other than quoted market prices that are observable for an asset or liability, either directly or indirectly. The fair value of the revolving credit facility and senior notes were estimated using present value techniques and market based interest rates and credit spreads. The fair value of the Company’s 7.75% high yield notes was estimated based on quoted market prices.

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

20. Segment and Geographic Information and Major Customers

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

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

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

               Three Months Ended           
March 31,
 
     2012     2011  
     (In thousands)  

Net sales to external customers:

    

North American Retail Grocery

   $ 379,041      $ 353,463   

Food Away From Home

     75,349        74,227   

Industrial and Export

     69,421        65,823   
  

 

 

   

 

 

 

Total

   $ 523,811      $ 493,513   
  

 

 

   

 

 

 

Direct operating income:

    

North American Retail Grocery

   $ 61,605      $ 65,521   

Food Away From Home

     9,797        10,762   

Industrial and Export

     10,998        12,830   
  

 

 

   

 

 

 

Total

     82,400        89,113   

Unallocated selling and distribution expenses

     (1,762     (4,447

Unallocated corporate expense

     (35,327     (39,942
  

 

 

   

 

 

 

Operating income

     45,311        44,724   

Other expense

     (13,607     (14,789
  

 

 

   

 

 

 

Income before income taxes

   $ 31,704      $ 29,935   
  

 

 

   

 

 

 

Geographic Information — The Company had net sales to customers outside of the United States of approximately 12.9% and 12.2% of total consolidated net sales in the three months ended March 31, 2012 and 2011, respectively, with 11.9% and 11.3% going to Canada, respectively.

Major Customers — Wal-Mart Stores, Inc. and affiliates accounted for approximately 19.6% and 20.5% of consolidated net sales in the three months ended March 31, 2012 and 2011, respectively. No other customer accounted for more than 10% of our consolidated net sales.

Product Information — The following table presents the Company’s net sales by major products for the three months ended March 31, 2012 and 2011.

 

               Three Months Ended           
March 31,
 
     2012      2011  
     (In thousands)  

Products:

     

Non-dairy creamer

   $ 89,159       $ 82,030   

Soup and infant feeding

     71,939         73,399   

Pickles

     70,876         70,454   

Salad dressings

     63,117         51,353   

Powdered drinks

     53,333         55,888   

Mexican and other sauces

     51,641         47,190   

Hot cereals

     43,168         40,754   

Dry dinners

     33,175         28,770   

Aseptic products

     24,167         21,936   

Jams

     16,537         16,104   

Other products

     6,699         5,635   
  

 

 

    

 

 

 

Total net sales

   $ 523,811       $ 493,513   
  

 

 

    

 

 

 

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

21. Guarantor and Non-Guarantor Financial Information

The Company’s $400 million, 7.75% high yield notes are guaranteed by its 100 percent owned subsidiary Bay Valley Foods, LLC and its 100 percent owned subsidiaries EDS Holdings, LLC, Sturm Foods, Inc. and S.T. Specialty Foods. There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan. The following condensed supplemental consolidating financial information presents the results of operations, financial position and cash flows of TreeHouse, its guarantor subsidiaries, its non-guarantor subsidiaries and the eliminations necessary to arrive at the information for TreeHouse on a consolidated basis as of March 31, 2012 and 2011 and for the three months ended March 31, 2012, and 2011. The equity method has been used with respect to investments in subsidiaries. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

Condensed Supplemental Consolidating Balance Sheet

March 31, 2012

(In thousands)

 

     Parent
 Company 
       Guarantor
    Subsidiaries 
     Non-Guarantor
Subsidiaries
       Eliminations        Consolidated   

Assets

           

Current assets:

           

Cash and cash equivalents

   $       $ 82      $ 67,242      $      $ 67,324   

Receivables, net

     129         99,647        20,634               120,410   

Inventories, net

             285,688        53,037               338,725   

Deferred income taxes

             3,383        137               3,520   

Assets held for sale

             4,081                      4,081   

Prepaid expenses and other current assets

     1,088         12,615        514               14,217   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,217         405,496        141,564               548,277   

Property, plant and equipment, net

     14,145         357,892        36,180               408,217   

Goodwill

             957,429        113,514               1,070,943   

Investment in subsidiaries

     1,609,519         187,335               (1,796,854       

Intercompany accounts receivable (payable), net

     388,133         (238,835     (149,298              

Deferred income taxes

     15,479                       (15,479       

Identifiable intangible and other assets, net

     49,636         327,645        78,285               455,566   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $   2,078,129       $ 1,996,962      $ 220,245      $   (1,812,333   $ 2,483,003   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
           

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Accounts payable and accrued expenses

   $ 21,306       $ 147,455      $ 16,995      $      $ 185,756   

Current portion of long-term debt

             1,960                      1,960   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     21,306         149,415        16,995               187,716   

Long-term debt

     924,700         6,601                      931,301   

Deferred income taxes

     2,663         200,825        15,915        (15,479 )`      203,924   

Other long-term liabilities

     23,605         30,602                      54,207   

Stockholders’ equity

     1,105,855         1,609,519        187,335        (1,796,854     1,105,855   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $   2,078,129       $ 1,996,962      $ 220,245      $   (1,812,333   $ 2,483,003   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Supplemental Consolidating Balance Sheet

December 31, 2011

(In thousands)

 

         Parent
      Company  
       Guarantor
    Subsidiaries  
      Non-Guarantor 
Subsidiaries
        Eliminations             Consolidated    

Assets

           

Current assets:

           

Cash and cash equivalents

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

Accounts receivable, net

     1         98,477        16,690               115,168   

Inventories, net

             283,212        46,162               329,374   

Deferred income taxes

             3,615        239               3,854   

Assets held for sale

             4,081                      4,081   

Prepaid expenses and other current assets

     1,397         10,719        522               12,638   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

Property, plant and equipment, net

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

Goodwill

             957,429        110,990               1,068,419   

Investment in subsidiaries

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

Intercompany accounts receivable (payable), net

     356,291         (275,721     (80,570              

Deferred income taxes

     14,874                       (14,874       

Identifiable intangible and other assets, net

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
           

Liabilities and Shareholders’ Equity

           

Current liabilities:

           

Accounts payable and accrued expenses

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

Current portion of long-term debt

             1,953        1               1,954   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

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

Long-term debt

     895,800         7,129                      902,929   

Deferred income taxes

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

Other long-term liabilities

     19,858         34,488                      54,346   

Shareholders’ equity

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Supplemental Consolidating Statement of Income

Three Months Ended March 31, 2012

(In thousands)

 

     Parent
  Company 
        Guarantor
    Subsidiaries 
        Non-Guarantor 
  Subsidiaries
         Eliminations         Consolidated   
           

Net sales

   $      $ 463,631      $ 71,928       $ (11,748   $ 523,811   

Cost of sales

            364,852        55,775         (11,748     408,879   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

            98,779        16,153                114,932   

Selling, general and administrative expense

     13,979        40,424        6,495                60,898   

Amortization

     1,036        5,986        1,241                8,263   

Other operating expense, net

            460                       460   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating (loss) income

     (15,015     51,909        8,417                45,311   

Interest expense (income), net

     12,935        (3,299     3,576                13,212   

Other expense (income), net

            (811     1,206                395   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income before income taxes

     (27,950     56,019        3,635                31,704   

Income taxes (benefit)

     (10,636     19,326        940                9,630   

Equity in net income of subsidiaries

     39,388        2,695                (42,083       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 22,074      $ 39,388      $ 2,695       $ (42,083   $ 22,074   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended March 31, 2011

(In thousands)

 

         Parent
      Company  
        Guarantor
      Subsidiaries 
        Non-Guarantor
    Subsidiaries
         Eliminations        Consolidated   
           

Net sales

   $      $ 437,336      $ 64,130       $ (7,953   $ 493,513   

Cost of sales

            330,552        49,988         (7,953     372,587   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

            106,784        14,142                120,926   

Selling, general and administrative expense

     14,505        46,251        4,747                65,503   

Amortization

     564        6,224        1,261                8,049   

Other operating expense, net

            2,650                       2,650   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating (loss) income

     (15,069     51,659        8,134                44,724   

Interest expense (income), net

     13,657        (3,320     3,514                13,851   

Other expense (income), net

     (314     622        630                938   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income before income taxes

     (28,412     54,357        3,990                29,935   

Income taxes (benefit)

     (11,720     20,781        1,066                10,127   

Equity in net income of subsidiaries

     36,500        2,924                (39,424       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 19,808      $ 36,500      $ 2,924       $ (39,424   $ 19,808   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2012

(In thousands)

 

     Parent
   Company  
      Guarantor
   Subsidiaries  
       Non-Guarantor 
Subsidiaries
        Eliminations         Consolidated   

Net income

   $ 22,074       $ 39,388       $ 2,695       $ (42,083   $ 22,074   
             

Other comprehensive income:

             

Foreign currency translation adjustments

             3,346         4,141                7,487   

Pension and post-retirement reclassification adjustment, net of tax

             279                        279   

Derivative reclassification adjustment, net of tax

     40                                40   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income

     40         3,625         4,141                7,806   

Equity in other comprehensive income of subsidiaries

     7,766         4,141                 (11,907       
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 29,880       $ 47,154       $ 6,836       $ (53,990   $ 29,880   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended March 31, 2011

(In thousands)

 

     Parent
   Company  
      Guarantor
   Subsidiaries  
       Non-Guarantor 
Subsidiaries
        Eliminations         Consolidated  

Net income

   $ 19,808       $ 36,500       $ 2,924       $ (39,424   $ 19,808   
             

Other comprehensive income:

             

Foreign currency translation adjustments

             4,275         4,528                8,803   

Pension and post-retirement reclassification adjustment, net of tax

             169                        169   

Derivative reclassification adjustment, net of tax

     40                                40   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income

     40         4,444         4,528                9,012   

Equity in other comprehensive income of subsidiaries

     8,972         4,528                 (13,500       
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 28,820       $ 45,472       $ 7,452       $ (52,924   $ 28,820   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Condensed Supplemental Consolidating Statement of Cash Flows

Three Months Ended March 31, 2012

(In thousands)

 

    Parent
    Company   
      Guarantor
  Subsidiaries 
      Non-Guarantor
Subsidiaries
      Eliminations       Consolidated  

Net cash provided by operating activities

  $ 3,608      $ (15,177   $ 63,803      $      $ 52,234   

Cash flows from investing activities:

         

Additions to property, plant and equipment

    744        (14,766     (1,544            (15,566

Additions to other intangible assets

    (2,507                          (2,507

Acquisition of business, net of cash acquired

                                  

Proceeds from sale of fixed assets

           34                      34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (1,763     (14,732     (1,544            (18,039

Cash flows from financing activities:

         

Borrowings under revolving credit facility

    104,200                             104,200   

Payments under revolving credit facility

    (75,300                          (75,300

Payments on capitalized lease obligations

           (407                   (407

Intercompany transfer

    (30,392     30,392                        

Excess tax benefits from stock-based compensation

    302                             302   

Net payments related to stock-based award activities

    (655                          (655
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    (1,845     29,985                      28,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                  1,710               1,710   

Net increase in cash and cash equivalents

           76        63,969               64,045   

Cash and cash equivalents, beginning of period

           6        3,273               3,279   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $      $ 82      $ 67,242      $      $ 67,324   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Cash Flows

Three Months Ended March 31, 2011

(In thousands)

 

     Parent
    Company   
      Guarantor
  Subsidiaries 
      Non-Guarantor
Subsidiaries
      Eliminations        Consolidated  

Net cash provided by operating activities

   $ (26,843   $ 63,451      $ (3,860   $       $ 32,748   

Cash flows from investing activities:

           

Additions to property, plant and equipment

     1,073        (10,768     (883             (10,578

Additions to other intangible assets

     (2,628     (1,522                    (4,150

Acquisition of business, net of cash acquired

     1,401                              1,401   

Proceeds from sale of fixed assets

            33                       33   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (154     (12,257     (883             (13,294

Cash flows from financing activities:

           

Borrowings under revolving credit facility

     80,600                              80,600   

Payments under revolving credit facility

     (105,000                           (105,000

Payments on capitalized lease obligations

            (196                    (196

Intercompany transfer

     50,993        (50,993                      

Excess tax benefits from stock-based compensation

     422                              422   

Net payments related to stock-based award activities

     (18                           (18
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by financing activities

     26,997        (51,189                    (24,192
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                   790                790   

Net (decrease) increase in cash and cash equivalents

            5        (3,953             (3,948

Cash and cash equivalents, beginning of period

            6        6,317                6,323   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $      $ 11      $ 2,364      $       $ 2,375   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

The following discussion and analysis presents the factors that had a material effect on our results of operations for the three months ended March 31, 2012 and 2011. Also discussed is our financial position as of the end of those periods. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes to those Condensed Consolidated Financial Statements included elsewhere in this report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

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

Our current operations consist of the following:

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

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

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

The environment the Company operates in continues to be one that is challenged by the overall state of the economy, increased competition and reduced volume. While traditional grocery market volume trends were negative when comparing the first quarter of 2012 to the first quarter of 2011, the Company achieved an increase in volume in that same period.

Recent Developments

On March 20, 2012, the Company announced it had entered into a definitive agreement to acquire substantially all of the assets of Naturally Fresh, a privately owned Atlanta, Georgia based manufacturer of refrigerated dressings, sauces, marinades, dips and specialty items sold within each of our segments. Naturally Fresh has annual revenues of approximately $80 million. On April 13, 2012, the Company completed the acquisition and paid approximately $25 million for the business, subject to an adjustment for working capital. The acquisition was financed through borrowings under the Company’s existing $750 million credit facility. The acquisition will expand the Company’s refrigerated manufacturing and packaging capabilities, broaden its distribution footprint and further develop its presence within the growing category of fresh foods. Naturally Fresh’s Atlanta facility coupled with the Company’s existing West Coast and Chicago based refrigerated foods plants, will also allow the Company to more efficiently service customers from coast to coast.

 

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

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,  
     2012     2011  
         Dollars           Percent           Dollars           Percent    
           (Dollars in thousands)        

Net sales

   $     523,811        100.0   $       493,513        100.0

Cost of sales

     408,879        78.1        372,587        75.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     114,932        21.9        120,926        24.5   

Operating expenses:

        

Selling and distribution

     34,294        6.5        36,260        7.4   

General and administrative

     26,604        5.1        29,243        5.9   

Other operating expenses, net

     460        0.1        2,650        0.5   

Amortization expense

     8,263        1.6        8,049        1.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     69,621        13.3        76,202        15.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     45,311        8.6        44,724        9.1   

Other expenses (income):

        

Interest expense

     13,212        2.5        13,851        2.8   

Loss on foreign currency exchange

     856        0.2        1,430        0.3   

Other income, net

     (461     (0.1     (492     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     13,607        2.6        14,789        3.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     31,704        6.0        29,935        6.1   

Income taxes

     9,630        1.8        10,127        2.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,074        4.2   $ 19,808        4.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

Net Sales — First quarter net sales increased 6.1% to $523.8 million in 2012 compared to $493.5 million in the first quarter of 2011. Net sales by segment are shown in the following table:

 

     Three Months Ended March 31,  
          2012                2011             $ Increase/
   (Decrease)
       % Increase/  
(Decrease)
 
            (Dollars in thousands)         

North American Retail Grocery

   $     379,041       $     353,463       $     25,578         7.2

Food Away From Home

     75,349         74,227         1,122         1.5

Industrial and Export

     69,421         65,823         3,598         5.5
  

 

 

    

 

 

    

 

 

    

Total

   $ 523,811       $ 493,513       $ 30,298         6.1
  

 

 

    

 

 

    

 

 

    

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 78.1% in the first quarter of 2012 compared to 75.5% in 2011. Contributing to the increase in cost of sales, as a percent of net sales, is an increase in input costs. The underlying commodity cost of raw materials and packaging supplies continues to trend higher in 2012.

 

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Operating Expenses — Total operating expenses were $69.6 million during the first quarter of 2012 compared to $76.2 million in 2011. The decrease in 2012 resulted from the following:

Selling and distribution expenses decreased $2.0 million or 5.4% in the first quarter of 2012 compared to 2011 primarily due to decreased distribution and delivery costs resulting from the efficiencies of last year’s warehouse consolidation program partially offset by higher fuel costs.

General and administrative expenses decreased $2.6 million in the first quarter of 2012 compared to 2011. The decrease is primarily related to a decrease in stock based compensation expense.

Other operating expenses were $0.5 million in the first quarter of 2012 and primarily consist of executory costs related to closed facilities, compared to expense of $2.7 million in 2011 that were primarily due to facility closing costs of the Springfield, Missouri pickle plant.

Amortization expense increased $0.2 million in the first quarter of 2012 compared to 2011, due primarily to the amortization of additional ERP system costs.

Interest Expense — Interest expense decreased to $13.2 million in the first quarter of 2012, compared to $13.9 million in 2011 due to a decrease in interest rates and lower debt levels.

Foreign Currency — The Company’s foreign currency loss was $0.9 million for the first three months of 2012 compared to a loss of $1.4 million in 2011, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar.

Income Taxes — Income tax expense was recorded at an effective rate of 30.4% in the first quarter of 2012 compared to 33.8% in the prior year’s quarter. This decrease is due to the tax impact of the repayment of certain intercompany debt and a decrease in the Canadian statutory tax rate.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011 — Results by Segment

North American Retail Grocery

 

    Three Months Ended March 31,  
    2012     2011  
        Dollars             Percent             Dollars          Percent   
    (Dollars in thousands)  

Net sales

  $     379,041        100.0   $     353,463        100.0

Cost of sales

    291,360        76.9        262,042        74.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    87,681        23.1        91,421        25.9   

Freight out and commissions

    18,232        4.8        19,530        5.6   

Direct selling and marketing

    7,844        2.0        6,370        1.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct operating income

  $ 61,605        16.3   $ 65,521        18.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Net sales in the North American Retail Grocery segment increased by $25.6 million, or 7.2% in the first quarter of 2012 compared to 2011. The change in net sales from 2011 to 2012 was due to the following:

 

         Dollars            Percent    
    (Dollars in thousands)  

2011 Net sales

  $ 353,463     

Volume/mix

    5,080        1.4

Pricing

    21,388        6.1   

Foreign currency

    (890     (0.3
 

 

 

   

 

 

 

2012 Net sales

  $     379,041        7.2
 

 

 

   

 

 

 

The increase in net sales from 2011 to 2012 resulted primarily from higher volume/mix and price increases. Volume is higher in the first quarter of 2012 compared to that of 2011 primarily due to increases in the salad dressings, pasta sauce and dry dinners categories.

Cost of sales as a percentage of net sales increased from 74.1% in the first quarter of 2011 to 76.9% in 2012 primarily due to higher input costs partially offset by increased pricing.

Freight out and commissions paid to independent sales brokers were $18.2 million in the first quarter of 2012 compared to $19.5 million in 2011, a decrease of 6.6%, primarily due to the efficiencies of last year’s warehouse consolidation program partially offset by higher fuel costs.

 

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Direct selling and marketing expenses were approximately $7.8 million in the first quarter of 2012 and $6.4 million in 2011, which represented a slight increase as a percentage of net sales, from 1.8% of net sales to 2.0%.

Food Away From Home

 

    Three Months Ended March 31,  
    2012     2011  
        Dollars            Percent            Dollars           Percent    
    (Dollars in thousands)  

Net sales

  $ 75,349        100.0   $ 74,227        100.0

Cost of sales

    60,794        80.7        59,424        80.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    14,555        19.3        14,803        20.0   

Freight out and commissions

    2,842        3.8        2,567        3.5   

Direct selling and marketing

    1,916        2.5        1,474        2.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct operating income

  $     9,797        13.0   $     10,762        14.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Net sales in the Food Away From Home segment increased by $1.1 million, or 1.5%, in the first quarter of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

 

        Dollars          Percent   
    (Dollars in thousands)  

2011 Net sales

  $ 74,227     

Volume/mix

    (1,261     (1.7 )% 

Pricing

    2,514        3.4   

Foreign currency

    (131     (0.2
 

 

 

   

 

 

 

2012 Net sales

  $ 75,349        1.5
 

 

 

   

 

 

 

Net sales increased during the first quarter of 2012 compared to 2011 as a result of price increases, partially offset by volume decreases in our sales of pickles and Mexican and other sauces.

Cost of sales as a percentage of net sales increased from 80.0% in the first quarter of 2011 to 80.7% in 2012, due to increases in raw material and ingredient costs partially offset by increased pricing.

Freight out and commissions paid to independent sales brokers were $2.8 million in the first quarter of 2012 compared to $2.6 million in 2011 due to increased freight costs primarily driven by higher fuel costs. The Company was unable to achieve similar freight and distribution savings as those achieved in the North American Retail Grocery segment.

Direct selling and marketing was $1.9 million in the first quarter of 2012 and $1.5 million in the first quarter of 2011.

Industrial and Export

 

    Three Months Ended March 31,  
    2012     2011  
        Dollars           Percent          Dollars         Percent   
    (Dollars in thousands)  

Net sales

  $ 69,421        100.0   $ 65,823        100.0

Cost of sales

    56,725        81.7        51,121        77.7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    12,696        18.3        14,702        22.3   

Freight out and commissions

    1,307        1.9        1,352        2.0   

Direct selling and marketing

    391        0.6        520        0.8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct operating income

  $     10,998        15.8   $     12,830        19.5
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Net sales in the Industrial and Export segment increased $3.6 million or 5.5% in the first quarter of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

 

         Dollars           Percent    
     (Dollars in thousands)  

2011 Net sales

   $ 65,823     

Volume/mix

     446        0.7

Pricing

     3,178        4.8   

Foreign currency

     (26       
  

 

 

   

 

 

 

2012 Net sales

   $     69,421        5.5
  

 

 

   

 

 

 

The increase in net sales is primarily due to price increases.

Cost of sales as a percentage of net sales increased from 77.7% in the first quarter of 2011 to 81.7% in 2012 primarily due to increased raw material, ingredient and packaging costs partially offset by price increases.

Freight out and commissions paid to independent sales brokers were $1.3 million and $1.4 million in the first quarter of 2012 and 2011, respectively.

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

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 $316.1 million was available under the revolving credit facility as of March 31, 2012. See Note 10 to our Condensed Consolidated Financial Statements for additional information regarding our revolving credit facility. We believe that, given our cash flow from operating activities and our available credit capacity, we can comply with the current terms of the revolving credit facility and meet foreseeable financial requirements.

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

 

     Three Months Ended
March  31,
 
         2012                2011         
     (In thousands)  

Cash flows from operating activities:

    
    

Net income

   $ 22,074      $ 19,808   

Depreciation and amortization

     20,721        19,836   

Stock-based compensation

     2,685        4,774   

Loss on foreign currency exchange

     (112     800   

Loss on disposition of assets

     778          

Write-down of tangible assets

            2,352   

Changes in operating assets and liabilities, net of acquisitions

     5,253        (14,319

Other

     835        (503
  

 

 

   

 

 

 

Net cash provided by operating activities

   $     52,234      $     32,748   
  

 

 

   

 

 

 

 

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Our cash from operations was $52.2 million in the first three months of 2012 compared to $32.7 million in the first three months of 2011, an increase of $19.5 million. The increase in cash from operating activities is due to a decrease in working capital, primarily due to an increase in current liabilities related to timing of vendor payments.

 

     Three Months Ended
March 31,
 
           2012                 2011        
     (In thousands)  

Cash flows from investing activities:

    
    

Additions to property, plant and equipment

   $ (15,566   $ (10,578

Additions to other intangible assets

     (2,507     (4,150

Acquisition of business, net of cash acquired

            1,401   

Other

     34        33   
  

 

 

   

 

 

 

Net cash used in investing activities

   $     (18,039   $     (13,294
  

 

 

   

 

 

 

In the first three months of 2012, cash used in investing activities increased by $4.7 million compared to 2011 primarily due to a planned increase in capital expenditures.

We expect capital spending programs to be approximately $90.0 million in 2012. Capital spending in 2012 will focus on food safety, quality, productivity improvements, product line expansion at our Manawa, Wisconsin facility, continued implementation of an Enterprise Resource Planning system and routine equipment upgrades or replacements at our plants.

 

     Three Months Ended
March 31,
 
           2012                 2011        
     (In thousands)  

Cash flows from financing activities:

    
    

Borrowings under revolving credit facility

   $ 104,200      $ 80,600   

Payments under revolving credit facility

     (75,300     (105,000

Net payments related to stock-based award activities

     (655     (18

Other

     (105     226   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   $     28,140      $     (24,192
  

 

 

   

 

 

 

Net cash flow from financing activities increased from a use of cash of $24.2 million in the first three months of 2011 to a source of cash of $28.1 million in 2012 as the result of additional borrowings in 2012 that were used to repay certain intercompany loans of $67.7 million with the Company’s Canadian subsidiary, E.D. Smith.

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

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

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

 

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Debt Obligations

At March 31, 2012, we had $424.7 million in borrowings outstanding under our revolving credit facility, $400 million of 7.75% High Yield Notes outstanding, $100 million of Senior Notes outstanding and $8.6 million of tax increment financing and other obligations. In addition, at March 31, 2012, there were $9.2 million in letters of credit under the revolving credit facility that were issued but undrawn.

Our revolving credit facility provides for an aggregate commitment of $750 million, of which $316.1 million was available at March 31, 2012. Interest rates on debt outstanding under our revolving credit facility as of March 31, 2012 averaged 1.73%.

We are in compliance with all debt covenants as of March 31, 2012.

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

Other Commitments and Contingencies

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

 

   

certain lease obligations, and

 

   

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

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

Recent Accounting Pronouncements

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

Critical Accounting Policies

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

Off-Balance Sheet Arrangements

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

Forward Looking Statements

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

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

 

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Fluctuations

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

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

We do not utilize financial instruments for trading purposes or hold any derivative financial instruments, which could expose us to significant interest rate market risk as of March 31, 2012. Our exposure to market risk for changes in interest rates relates primarily to the increase in the amount of interest expense we expect to pay with respect to our revolving credit facility, which is tied to variable market rates. Based on our outstanding debt balance of $424.7 million under our revolving credit facility at March 31, 2012, each 1% rise in our interest rate would increase our interest expense by approximately $4.2 million annually.

Input Costs

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

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

 

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

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

Fluctuations in Foreign Currencies

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

The Company’s financial statements are presented in U.S. dollars, which require the Canadian assets, liabilities, revenues, and expenses to be translated into U.S. dollars at the applicable exchange rates. Accordingly, we are exposed to volatility in the translation of foreign currency earnings due to fluctuations in the value of the Canadian dollar, which may negatively impact the Company’s results of operations and financial position. For the three months ended March 31, 2012 the Company recognized a net gain of $6.6 million, of which a gain of $7.5 million was recorded as a component of Accumulated other comprehensive loss and a loss of $0.9 million was recorded on the Company’s Condensed Consolidated Statements of Income within the Loss on foreign currency exchange. For the three months ended March 31, 2011, the Company recognized a net foreign currency exchange gain of $7.4 million, of which a gain of $8.8 million was, recorded as a component of Accumulated other comprehensive loss and a loss of $1.4 million was recorded on the Company’s Condensed Consolidated Statements of Income within the Loss on foreign currency exchange.

The Company, at times, 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. These contracts are entered into for the purchase of U.S. dollar denominated raw materials by our Canadian subsidiary. There are no foreign currency contracts outstanding as of March 31, 2012.

Item 4. Controls and Procedures

Evaluations were carried out under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon those evaluations, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2012, these disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are 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, 2012, and the related condensed consolidated statements of income, comprehensive income, and cash flows for the three-month periods ended March 31, 2012 and 2011. These interim financial statements are the responsibility of the Company’s management.

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

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

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

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

May 8, 2012

 

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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, 2011. There have been no material changes from the risk factors previously disclosed in the TreeHouse Foods, Inc. Annual Report on Form 10-K for the year ended December 31, 2011.

Item 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, 2012

 

34

 

 

 

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