ths-10q_20180331.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

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

For the Quarterly Period Ended March 31, 2018.

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)

 

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      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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting Company

(Do not check if a smaller reporting company)

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Yes      No  

Number of shares of Common Stock, $0.01 par value, outstanding as of April 30, 2018: 56,325,844

 

 

 


 

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

34

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

48

 

 

Item 4 — Controls and Procedures

49

 

 

Report of Independent Registered Public Accounting Firm

50

 

 

Part II — Other Information

 

 

 

Item 1 — Legal Proceedings

51

 

 

Item 1A — Risk Factors

51

 

 

Item 2 — Unregistered Sale of Equity Securities and Use of Proceeds

51

 

 

Item 6 — Exhibits

53

 

 

Signatures

54

 

2


 

Part I — Financial Information

Item 1. Financial Statements

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

128.5

 

 

$

132.8

 

Investments

 

 

13.7

 

 

 

14.1

 

Receivables, net (Note 3)

 

 

345.2

 

 

 

329.8

 

Inventories

 

 

940.6

 

 

 

918.3

 

Prepaid expenses and other current assets

 

 

104.9

 

 

 

89.7

 

Total current assets

 

 

1,532.9

 

 

 

1,484.7

 

Property, plant, and equipment, net

 

 

1,279.2

 

 

 

1,294.4

 

Goodwill

 

 

2,178.7

 

 

 

2,182.0

 

Intangible assets, net

 

 

752.8

 

 

 

773.0

 

Other assets, net

 

 

41.9

 

 

 

45.2

 

Total assets

 

$

5,785.5

 

 

$

5,779.3

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

648.7

 

 

$

589.7

 

Current portion of long-term debt

 

 

10.1

 

 

 

10.1

 

Total current liabilities

 

 

658.8

 

 

 

599.8

 

Long-term debt

 

 

2,533.2

 

 

 

2,535.7

 

Deferred income taxes

 

 

175.8

 

 

 

178.4

 

Other long-term liabilities

 

 

197.9

 

 

 

202.1

 

Total liabilities

 

 

3,565.7

 

 

 

3,516.0

 

Commitments and contingencies (Note 17)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share, 10.0 shares authorized, none issued

 

 

 

 

 

 

Common stock, par value $0.01 per share, 90.0 shares authorized, 56.4 and 56.6

   shares issued and outstanding, respectively

 

 

0.6

 

 

 

0.6

 

Treasury stock

 

 

(45.8

)

 

 

(28.7

)

Additional paid-in capital

 

 

2,124.2

 

 

 

2,107.0

 

Retained earnings

 

 

213.3

 

 

 

245.9

 

Accumulated other comprehensive loss

 

 

(72.5

)

 

 

(61.5

)

Total stockholders’ equity

 

 

2,219.8

 

 

 

2,263.3

 

Total liabilities and stockholders’ equity

 

$

5,785.5

 

 

$

5,779.3

 

 

See Notes to Condensed Consolidated Financial Statements.

3


 

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Net sales

 

$

1,481.2

 

 

$

1,536.2

 

Cost of sales

 

 

1,249.3

 

 

 

1,249.8

 

Gross profit

 

 

231.9

 

 

 

286.4

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling and distribution

 

 

108.4

 

 

 

104.6

 

General and administrative

 

 

81.1

 

 

 

79.1

 

Amortization expense

 

 

22.2

 

 

 

28.6

 

Other operating expense, net

 

 

28.9

 

 

 

6.8

 

Total operating expenses

 

 

240.6

 

 

 

219.1

 

Operating (loss) income

 

 

(8.7

)

 

 

67.3

 

Other expense:

 

 

 

 

 

 

 

 

Interest expense

 

 

28.5

 

 

 

29.7

 

Interest income

 

 

(2.0

)

 

 

(2.8

)

Loss on foreign currency exchange

 

 

2.5

 

 

 

0.1

 

Other expense, net

 

 

6.2

 

 

 

0.6

 

Total other expense

 

 

35.2

 

 

 

27.6

 

(Loss) income before income taxes

 

 

(43.9

)

 

 

39.7

 

Income taxes

 

 

(9.8

)

 

 

11.5

 

Net (loss) income

 

$

(34.1

)

 

$

28.2

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.60

)

 

$

0.50

 

Diluted

 

$

(0.60

)

 

$

0.49

 

Weighted average common shares:

 

 

 

 

 

 

 

 

Basic

 

 

56.5

 

 

 

56.9

 

Diluted

 

 

56.5

 

 

 

57.6

 

See Notes to Condensed Consolidated Financial Statements.

4


 

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME  

(In millions)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Net (loss) income

 

$

(34.1

)

 

$

28.2

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

(10.1

)

 

 

3.6

 

Pension and postretirement reclassification adjustment (2)

 

 

0.2

 

 

 

0.3

 

Adoption of ASU 2018-02 reclassification to retained earnings

 

 

(1.1

)

 

 

 

Other comprehensive (loss) income

 

 

(11.0

)

 

 

3.9

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(45.1

)

 

$

32.1

 

 

 

(1)

The tax impact for the three months ended March 31, 2018 was insignificant.  

 

(2)

Net of tax of $0.2 million for the three months ended March 31, 2017.  

 

 

 

See Notes to Condensed Consolidated Financial Statements.

5


 

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(34.1

)

 

$

28.2

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

67.0

 

 

 

72.4

 

Stock-based compensation

 

 

16.3

 

 

 

7.5

 

Other

 

 

13.4

 

 

 

(15.0

)

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

 

Receivables

 

 

(16.5

)

 

 

45.0

 

Inventories

 

 

(24.9

)

 

 

(10.6

)

Prepaid expenses and other assets

 

 

(10.5

)

 

 

3.3

 

Accounts payable, accrued expenses, and other liabilities

 

 

47.1

 

 

 

(52.3

)

Net cash provided by operating activities

 

 

57.8

 

 

 

78.5

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(38.5

)

 

 

(34.7

)

Additions to intangible assets

 

 

(2.9

)

 

 

(8.7

)

Proceeds from sale of fixed assets

 

 

 

 

 

0.2

 

Other

 

 

(0.3

)

 

 

(0.3

)

Net cash used in investing activities

 

 

(41.7

)

 

 

(43.5

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Revolving Credit Facility

 

 

5.9

 

 

 

115.0

 

Payments under Revolving Credit Facility

 

 

(5.9

)

 

 

(137.0

)

Payments on capitalized lease obligations and other debt

 

 

(0.3

)

 

 

(1.4

)

Payments on Term Loans

 

 

(3.5

)

 

 

(12.7

)

Repurchases of common stock

 

 

(17.1

)

 

 

 

Receipts related to stock-based award activities

 

 

1.9

 

 

 

6.7

 

Payments related to stock-based award activities

 

 

(1.1

)

 

 

(0.9

)

Net cash used in financing activities

 

 

(20.1

)

 

 

(30.3

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(0.3

)

 

 

0.4

 

Net (decrease) increase in cash and cash equivalents

 

 

(4.3

)

 

 

5.1

 

Cash and cash equivalents, beginning of period

 

 

132.8

 

 

 

62.1

 

Cash and cash equivalents, end of period

 

$

128.5

 

 

$

67.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Interest paid

 

 

44.3

 

 

 

43.7

 

Income taxes paid

 

 

2.4

 

 

 

6.2

 

 

 

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

 

 

 

Accrued purchase of property and equipment

 

 

21.0

 

 

 

12.3

 

Accrued other intangible assets

 

 

4.8

 

 

 

5.7

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

6


 

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the three months ended March 31, 2018

(Unaudited)

1. BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. and its consolidated subsidiaries (the “Company,” “TreeHouse,” “we,” “us,” or “our”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to quarterly reporting on Form 10-Q. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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, 2017. Results of operations for interim periods are not necessarily indicative of annual results.

The preparation of our Condensed Consolidated Financial Statements in conformity with 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, 2017.

2. RESTRUCTURING AND MARGIN IMPROVEMENT ACTIVITIES

 

The Company’s restructuring and margin improvement activities are part of an enterprise-wide transformation to improve long-term profitability of the Company. These activities are aggregated into three categories: (1) Structure to Win – a selling, general, and administrative reduction initiative; (2) TreeHouse 2020 – a long-term growth and margin improvement strategy; and (3) Pre-2020 other restructuring and plant closing costs. For additional detail on each activity, see subsequent sections of this note. Total costs associated with these categories are outlined below:

 

 

 

Three Months Ended March 31, 2018

 

 

Three Months Ended March 31, 2017

 

 

(In millions)

 

Structure to Win

 

$

8.4

 

 

$

 

TreeHouse 2020

 

 

27.7

 

 

 

 

Other Restructuring and Plant Closing Costs

 

 

2.5

 

 

 

11.0

 

Total

 

$

38.6

 

 

$

11.0

 

 

Expenses associated with these programs are recorded in the Cost of sales and Other operating expense, net lines in the Condensed Consolidated Statements of Operations.  The Company does not allocate restructuring and margin improvement activities costs to reportable segments when evaluating the performance of its segments.  As a result, restructuring and margin improvement activities costs by reportable segment has not been presented. See Note 20 for more information. 

 

Below is a summary of costs by line item:

 

 

 

Three Months Ended March 31, 2018

 

 

Three Months Ended March 31, 2017

 

 

(In millions)

 

Cost of sales

 

$

9.7

 

 

$

4.2

 

Other operating expenses, net

 

 

28.9

 

 

 

6.8

 

Total

 

$

38.6

 

 

$

11.0

 

 


7

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Structure to Win

In the first quarter of 2018, the Company announced an Operating expenses improvement program (“Structure to Win”) designed to align our organization structure with strategic priorities.  The program is intended to support operational effectiveness, cost reduction, and position the Company for growth with a focus on a lean customer focused go-to-market team, centralized supply chain, and streamlined back office.  We expect to spend $30.1 million in 2018 primarily on employee-related costs and consulting services.  

All of the costs associated with Structure to Win are recorded in the Other operating expense, net line of the Condensed Consolidated Statements of Operations.  Below is a summary of costs by type associated with this program:

 

 

Three Months Ended

 

 

Cumulative Costs

 

 

Total Expected

 

 

 

March 31, 2018

 

 

To Date

 

 

Costs

 

 

 

(In millions)

 

Employee-related

 

$

5.5

 

 

$

5.5

 

 

$

16.0

 

Other costs

 

 

2.9

 

 

 

2.9

 

 

 

14.1

 

Total

 

$

8.4

 

 

$

8.4

 

 

$

30.1

 

 

For the three months ended March 31, 2018, employee-related costs primarily consisted of severance and other costs primarily consisted of consulting services. These costs were recorded in the Other operating expense, net line.  There were no costs related to this program during the three months ended March 31, 2017.

 

TreeHouse 2020

 

In the third quarter of 2017, the Company announced TreeHouse 2020, a program intended to accelerate long-term growth through optimization of our manufacturing network, transformation of our mixing centers and warehouse footprint, and leveraging of systems and processes to drive performance.  The Company’s workstreams related to these activities and selling, general, and administrative reductions continue to deliver value by increasing our capacity utilization, expanding operating margins, and streamlining our plant structure to optimize our supply chain.  TreeHouse 2020 is expected to produce significant savings to achieve our operating margin expansion targets creating reinvestment opportunities to drive future growth.

 

This program began in 2017 and will be executed in multiple phases through 2020.  The key elements of Phase 1 include the closure of the Company’s Brooklyn Park, Minnesota and Plymouth, Indiana facilities, as well as the downsizing of the Dothan, Alabama facility, which are successfully tracking toward their closure dates noted in the table below.  Key elements of Phase 2, which was announced in the first quarter of 2018, include the closure of the Company’s Visalia, CA and Battle Creek, MI facilities.  

 

The key information regarding the Company’s announced facility closures related to TreeHouse 2020 is outlined in the table below:

 

Facility Location

 

Date of Closure

Announcement

 

Full Facility

Closure

 

Primary Products

Produced

 

Primary Segment(s)

Affected

 

Total

Costs to

Close

 

 

Total Cash

Costs to

Close

 

Dothan, Alabama

 

August 3, 2017

 

Partial closure Q2 2018

 

Trail mix and snack nuts

 

Snacks

 

$

5.7

 

 

$

3.0

 

Brooklyn Park, Minnesota

 

August 3, 2017

 

Completed in Q4 2017

 

Dry dinners

 

Baked Goods

 

 

19.5

 

 

 

12.2

 

Plymouth, Indiana

 

August 3, 2017

 

Completed in Q4 2017

 

Pickles

 

Condiments

 

 

19.3

 

 

 

14.5

 

Battle Creek, Michigan

 

January 31, 2018

 

Mid-2019

 

Ready-to-eat cereal

 

Meals

 

 

18.2

 

 

 

11.8

 

Visalia, California

 

February 15, 2018

 

Q1 2019

 

Pretzels

 

Baked Goods

 

 

23.6

 

 

 

11.0

 

 

 

 

 

 

 

 

 

 

 

$

86.3

 

 

$

52.5

 

 

           

 

Below is a summary of costs by type associated with TreeHouse 2020:

 

8


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Three Months Ended

 

 

Cumulative Costs

 

 

Total Expected

 

 

 

March 31, 2018

 

 

To Date

 

 

Costs

 

 

 

(In millions)

 

Asset-related

 

$

5.3

 

 

$

43.6

 

 

$

73.0

 

Employee-related

 

 

8.4

 

 

 

17.5

 

 

 

84.0

 

Other costs

 

 

14.0

 

 

 

24.3

 

 

 

183.0

 

Total

 

$

27.7

 

 

$

85.4

 

 

$

340.0

 

 

For the three months ended March 31, 2018, asset-related costs primarily consisted of accelerated depreciation; employee-related costs primarily consisted of severance; and other costs primarily consisted of third-party costs.  Asset-related costs were recorded in the Cost of sales line while employee-related and other costs were primarily recorded in the Other operating expense, net line of the Condensed Consolidated Statement of Operations. Total expected cost increased primarily due to the closure of the Visalia and Battle Creek plants announced in the first quarter of 2018.  There were no costs related to the TreeHouse 2020 program during the three months ended March 31, 2017.

 

Other Restructuring and Plant Closing Costs

 

The Company continually analyzes its plant network to align operations with the current and future needs of its customers. Facility closure decisions are made when the Company identifies opportunities to lower production costs or eliminate excess manufacturing capacity while maintaining a competitive cost structure, service levels, and product quality. Expenses associated with facility closures are primarily aggregated in the Other operating expense, net line of the Condensed Consolidated Statements of Operations, with the exception of asset-related costs, which are recorded in Cost of sales. The key information regarding the Company’s announced facility closures is outlined in the table below. 

 

Pre-TreeHouse 2020 facility closures and downsizing:

 

Facility Location

 

Date of Closure

Announcement

 

Full Facility

Closure

 

Primary Products

Produced

 

Primary Segment(s)

Affected

 

Total

Costs to

Close

 

 

Total

Cash

Costs to

Close

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

City of Industry, California

 

November 18, 2015

 

Completed in Q3 2016

 

Liquid non-dairy creamer and refrigerated salad dressings

 

Beverages, Condiments

 

$

6.8

 

 

$

3.6

 

Ayer, Massachusetts

 

April 5, 2016

 

Completed in Q3 2017

 

Mayonnaise

 

Condiments

 

 

5.6

 

 

 

4.0

 

Azusa, California

 

May 24, 2016

 

Completed in Q3 2017

 

Bars and fruit snacks

 

Snacks

 

 

21.2

 

 

 

17.0

 

Ripon, Wisconsin

 

May 24, 2016

 

Completed in Q4 2016

 

Sugar wafer cookies

 

Baked Goods

 

 

0.8

 

 

 

1.0

 

Delta, British Columbia

 

November 3, 2016

 

Completed in Q1 2018

 

Frozen griddle products

 

Baked Goods

 

 

3.7

 

 

 

2.7

 

Battle Creek, Michigan

 

November 3, 2016

 

(1)

 

Ready-to-eat cereal

 

Meals

 

 

10.4

 

 

 

2.2

 

 

 

 

 

 

 

 

 

 

 

$

48.5

 

 

$

30.5

 

 

 

(1)

The downsizing of this facility began in January 2017 and is expected to last approximately 15 months. On January 31, 2018, the Company announced the full closure of this facility. The costs associated with the full closure are included in the TreeHouse 2020 section of this footnote.

9


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Below is a summary of the plant closing costs by type of cost:

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Cumulative Costs

 

 

Total Expected

 

 

 

March 31, 2018

 

 

March 31, 2017

 

 

To Date

 

 

Costs

 

 

 

(In millions)

 

Asset-related

 

$

0.9

 

 

$

4.4

 

 

$

18.0

 

 

$

18.0

 

Employee-related

 

 

 

 

 

2.5

 

 

 

10.5

 

 

 

11.2

 

Other closure costs

 

 

(0.1

)

 

 

2.5

 

 

 

18.4

 

 

 

19.3

 

Total

 

$

0.8

 

 

$

9.4

 

 

$

46.9

 

 

$

48.5

 

 

For the three months ended March 31, 2018, asset-related costs primarily consisted of inventory dispositions and were recorded in the Cost of sales line of the Condensed Consolidated Statement of Operations. Employee-related and other closure costs were recorded in the Other operating expense, net line.

 

Other cost reduction activities not related to our plant closings above totaled $1.7 million for the three months ended March 31, 2018 and were primarily the result of a Private Brands plant closure initiated prior to TreeHouse’s acquisition.  Other cost reduction activities were $1.6 million for the three months ended March 31, 2017.   

 

Liabilities recorded as of March 31, 2018 associated with total exit cost reserves relate to severance, the partial withdrawal from a multiemployer pension plan, and lease termination costs. The severance and lease termination liabilities were included in the Accounts payable and accrued expenses line of the Condensed Consolidated Balance Sheets, while the multiemployer pension plan withdrawal liability was included in the Other long-term liabilities line of the Condensed Consolidated Balance Sheets. The table below presents a reconciliation of the liabilities as of March 31, 2018:

 

 

 

 

Severance

 

 

Multiemployer Pension

Plan Withdrawal

 

 

Other Costs

 

 

Total Liabilities

 

 

 

(In millions)

 

Balance as of December 31, 2017

 

$

6.1

 

 

$

0.8

 

 

$

2.7

 

 

$

9.6

 

Expense

 

 

6.7

 

 

 

 

 

 

 

 

 

6.7

 

Payments

 

 

(3.7

)

 

 

 

 

 

(2.0

)

 

 

(5.7

)

Adjustments

 

 

 

 

 

 

 

 

(0.7

)

 

 

(0.7

)

Balance as of March 31, 2018

 

$

9.1

 

 

$

0.8

 

 

$

 

 

$

9.9

 

 

3. REVENUE RECOGNITION

On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method. See Note 21 for additional information.  As a result of the adoption of Topic 606, we have updated our accounting policy for revenue recognition as follows:

 

Nature of products

 

We manufacture and sell the following:

 

private label products to retailers, such as supermarkets, mass merchandisers, and specialty retailers, for resale under the retailers’ own or controlled labels;

 

private label and branded products to the foodservice industry, including foodservice distributors and national restaurant operators;

 

branded products under our own proprietary brands, primarily on a regional basis to retailers;

 

branded products under co-pack agreements to other major branded companies for their distributions; and

 

products to our industrial customer base for repackaging in portion control packages and for use as ingredients by other food manufacturers.

 

Disaggregation of revenue

 

In the following tables, segment revenue is disaggregated by segment and product category groups.

 

10


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Products:

 

 

 

 

 

 

 

 

    Retail bakery

 

$

177.1

 

 

$

182.6

 

    Baked products

 

 

168.9

 

 

 

158.5

 

        Total Baked Goods

 

 

346.0

 

 

 

341.1

 

    Beverages

 

 

171.4

 

 

 

183.1

 

    Beverage enhancers

 

 

77.7

 

 

 

84.9

 

        Total Beverages

 

 

249.1

 

 

 

268.0

 

    Dressings and sauces

 

 

246.2

 

 

 

237.3

 

    Pickles

 

 

69.0

 

 

 

72.8

 

        Total Condiments

 

 

315.2

 

 

 

310.1

 

    Pasta and dry dinners

 

 

142.0

 

 

 

133.6

 

    Cereals and other meals (1)

 

 

135.0

 

 

 

190.4

 

        Total Meals

 

 

277.0

 

 

 

324.0

 

    Snack nuts

 

 

202.4

 

 

 

186.5

 

    Trail mix and bars

 

 

91.5

 

 

 

104.1

 

        Total Snacks

 

 

293.9

 

 

 

290.6

 

Unallocated net sales

 

 

 

 

 

2.4

 

Total net sales

 

$

1,481.2

 

 

$

1,536.2

 

 

(1)

On May 22, 2017, the Company sold the soup and infant feeding business (“SIF”). Included within this category, was $42.6 million of SIF related sales for the three months ended March 31, 2017.

 

When Performance Obligations Are Satisfied

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  The Company’s performance obligations are food and beverage products.

 

Revenue recognition is completed on a point in time basis when product control is transferred to the customer.  In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the remaining benefits from the asset at this point in time.  

 

Customer contracts generally do not include more than one performance obligation.  When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its relative standalone selling price.  The standalone selling price for each distinct good is generally determined by directly observable data.  

 

The performance obligations in our contracts are satisfied within one year. As such, we have not disclosed the transaction price allocated to remaining performance obligations as of March 31, 2018.

 

Significant Payment Terms

 

Our customer contracts identify the product, quantity, price, payment and final delivery terms.  Payment terms usually include early pay discounts.  We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception.  As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.  

 

Taxes

 

Taxes collected by the Company, which are assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions, are normally excluded from revenue.

 

 

11


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Shipping

 

All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are in included in the cost of sales; this includes shipping and handling costs after control over a product has transferred to a customer.

 

Variable Consideration

 

In addition to fixed contract consideration, most contracts include some form of variable consideration.  The most common forms of variable consideration include discounts, rebates and sales returns and allowances.  Variable consideration is treated as a reduction in revenue when product revenue is recognized.  Depending on the specific type of variable consideration, we use either the expected value or most likely amount method to determine the variable consideration.  We believe there will not be significant changes to our estimates of variable consideration when any related uncertainties are resolved with our customers.  The Company reviews and updates its estimates and related accruals of variable consideration each period based on the terms of the agreements, historical experience, and any recent changes in the market.  Any uncertainties in the ultimate resolution of variable consideration due to factors outside of the Company’s influence are typically resolved within a short timeframe therefore not requiring any additional constraint on the variable consideration.  

 

Warranties & Returns

 

TreeHouse provides all customers with a standard or assurance type warranty.  Either stated or implied, the Company provides assurance the related products will comply with all agreed-upon specifications and other warranties provided under the law.   No services beyond an assurance warranty are provided to customers.

 

The Company does not grant a general right of return.  However, customers may return defective or non-conforming products.  Customer remedies may include either a cash refund or an exchange of the product.  As a result, the right of return and related refund liability is estimated and recorded as a reduction in revenue.  This return estimate is reviewed and updated each period and is based on historical sales and return experience.

 

Contract balances

 

Contract asset and liability balances as of March 31, 2018 are immaterial.  The Company does not have significant deferred revenue or unbilled receivable balances because of transactions with customers.

 

Contract Costs

 

We have identified certain incremental costs to obtain a contract, primarily sales commissions, requiring capitalization under the new standard.  The Company continues to expense these costs as incurred because the amortization period for the costs would have been one year or less.  The Company does not incur significant fulfillment costs requiring capitalization.

 

Impact of Adoption

 

The following tables summarize the impact of our adoption of Topic 606 on a modified retrospective basis on select Condensed Consolidated Balance Sheet items.  There were no material impacts to the Condensed Consolidated Statement of Operations or the

Condensed Consolidated Statement of Cash Flows.  Upon adoption, the Company reclassified certain customer liabilities related to customer trade promotional activity from accounts receivable to current liabilities.

 

Condensed Consolidated Balance Sheets (in millions)

 

 

 

 

 

 

 

 

 

 

 

 

As of the Period Ended March 31, 2018

 

 

 

Unadjusted

 

Adoption of ASC 606

 

Effect of Change Higher / (Lower)

 

Receivables, net

 

$

294.2

 

$

345.2

 

$

51.0

 

Accounts payable and accrued expenses

 

$

597.7

 

$

648.7

 

$

51.0

 

 

12


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

4. RECEIVABLES SALES AGREEMENT

 

In December 2017, the Company entered into an agreement (the “Receivables Sales Agreement”), to sell, on a revolving basis, certain trade accounts receivable balances to an unrelated third-party financial institution. Transfers under this agreement are accounted for as sales of receivables resulting in the receivables being de-recognized from the Condensed Consolidated Balance Sheet. The Receivables Sales Agreement provides for the continuing sale of certain receivables on a revolving basis until terminated by either party. The maximum receivables that may be sold at any time is $200.0 million.

 

For the quarter ended March 31, 2018, $183.1 million of accounts receivable have been sold via this arrangement. The proceeds from these sales of receivables are included within the change in receivables in the operating activities section of the Condensed Consolidated Statements of Cash Flows. The recorded net loss on sale of receivables is $0.6 million for the quarter ended March 31, 2018 and is included in the Other expense, net line in the Condensed Consolidated Statements of Operations.

 

The Company has no retained interest in the receivables sold under the program above, however the Company does have collection and administrative responsibilities for the sold receivables. The Company has not recorded any servicing assets or liabilities as of March 31, 2018, as the fair value of the servicing arrangement as well as the fees earned were not material to the financial statements.

5. INVENTORIES

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Raw materials and supplies

 

$

450.0

 

 

$

416.5

 

Finished goods

 

 

519.5

 

 

 

530.0

 

LIFO reserve

 

 

(28.9

)

 

 

(28.2

)

Total inventories

 

$

940.6

 

 

$

918.3

 

 

Inventory was generally accounted for under the FIFO method and a portion was accounted for under the last-in, first-out (“LIFO”) method. Approximately $65.9 million and $92.9 million of our inventory was accounted for under the LIFO method of accounting at March 31, 2018 and December 31, 2017, respectively. In the first quarter of 2018, the Company changed the inventory costing methodology for a portion of the Snacks segment from weighted average cost to FIFO.  The FIFO costing method was preferable to the prior method used as it aligns all of the Snacks inventory costing with the majority of the Company, allows for more accurate matching of revenues and expenses, and is a more common industry practice.  The change in costing methodology was not material to the presented periods.  As such, prior period information was not retrospectively revised, and the impact of the change was recorded in the period ended March 31, 2018.  

6. PROPERTY, PLANT, AND EQUIPMENT

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(In millions)

 

Land

 

$

70.0

 

 

$

69.8

 

Buildings and improvements

 

 

460.4

 

 

 

454.6

 

Machinery and equipment

 

 

1,310.1

 

 

 

1,310.2

 

Construction in progress

 

 

102.2

 

 

 

93.8

 

Total

 

 

1,942.7

 

 

 

1,928.4

 

Less accumulated depreciation

 

 

(663.5

)

 

 

(634.0

)

Property, plant, and equipment, net

 

$

1,279.2

 

 

$

1,294.4

 

 

Depreciation expense was $44.8 million and $43.8 million for the three months ended March 31, 2018 and 2017, respectively.

13


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

7. GOODWILL AND INTANGIBLE ASSETS

   

 

 

 

Baked

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goods

 

 

Beverages

 

 

Condiments

 

 

Meals

 

 

Snacks

 

 

Total

 

 

 

(In millions)

 

Goodwill

 

$

555.6

 

 

$

716.7

 

 

$

449.5

 

 

$

471.7

 

 

$

609.8

 

 

$

2,803.3

 

Accumulated impairment losses

 

 

 

 

 

 

 

 

(11.5

)

 

 

 

 

 

(609.8

)

 

 

(621.3

)

Balance at January 1, 2018

 

 

555.6

 

 

 

716.7

 

 

 

438.0

 

 

 

471.7

 

 

 

 

 

 

2,182.0

 

Foreign currency exchange adjustments

 

 

 

 

 

(1.4

)

 

 

(1.9

)

 

 

 

 

 

 

 

 

(3.3

)

Balance at March 31, 2018

 

$

555.6

 

 

$

715.3

 

 

$

436.1

 

 

$

471.7

 

 

$

 

 

$

2,178.7

 

 

Indefinite Lived Intangible Assets

 

The carrying amounts of our intangible assets with indefinite lives, other than goodwill, as of March 31, 2018 and December 31, 2017 are as follows:

 

 

 

March 31,

2018

 

 

December 31,

2017

 

 

 

(In millions)

 

Trademarks

 

$

22.3

 

 

$

22.8

 

Total indefinite lived intangibles

 

$

22.3

 

 

$

22.8

 

 

The decrease in the indefinite lived intangibles balance is due to foreign currency translation.

Finite Lived Intangible Assets

The gross carrying amounts and accumulated amortization of intangible assets with finite lives as of March 31, 2018 and December 31, 2017 are as follows:

 

 

 

March 31, 2018

 

 

December 31, 2017

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Impairment

 

 

Carrying