Document


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 Exchange Act of 1934
For the Quarterly Period Ended September 30, 2018.
or
 
o
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)
 http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12525387&doc=16
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  o
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  o
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
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o
Smaller reporting Company
o
(Do not check if a smaller reporting company)
 
 
 
 
 
 
Emerging growth company
o
 
 
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.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o    No  x

Number of shares of Common Stock, $0.01 par value, outstanding as of October 26, 2018: 55,997,265.

1



Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



Part I — Financial Information
Item 1. Financial Statements
TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
 
 
 
September 30, 2018
 
December 31, 2017
 
 
(Unaudited)
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
52.8

 
$
132.8

Investments
 
15.4

 
14.1

Receivables, net
 
285.6

 
329.8

Inventories
 
999.3

 
918.3

Prepaid expenses and other current assets
 
92.5

 
89.7

Total current assets
 
1,445.6


1,484.7

Property, plant and equipment, net
 
1,272.1

 
1,294.4

Goodwill
 
2,168.0

 
2,182.0

Intangible assets, net
 
722.3

 
773.0

Other assets, net
 
36.2

 
45.2

Total assets
 
$
5,644.2


$
5,779.3

Liabilities and Stockholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
562.6

 
$
451.3

Accrued expenses
 
188.3

 
138.4

Current portion of long-term debt
 
10.4

 
10.1

Total current liabilities
 
761.3


599.8

Long-term debt
 
2,333.1

 
2,535.7

Deferred income taxes
 
173.3

 
178.4

Other long-term liabilities
 
186.8

 
202.1

Total liabilities
 
3,454.5


3,516.0

Commitments and contingencies (Note 15)
 


 


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, 56.1 and 56.6 shares issued and outstanding, respectively
 
0.6

 
0.6

Treasury stock
 
(70.9
)
 
(28.7
)
Additional paid-in capital
 
2,136.7

 
2,107.0

Retained earnings
 
198.5

 
245.9

Accumulated other comprehensive loss
 
(75.2
)
 
(61.5
)
Total stockholders’ equity
 
2,189.7


2,263.3

Total liabilities and stockholders’ equity
 
$
5,644.2


$
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
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
 
(Unaudited)
Net sales
 
$
1,394.0

 
$
1,548.8

 
$
4,331.0

 
$
4,607.2

Cost of sales
 
1,166.5

 
1,289.1

 
3,635.8

 
3,784.5

Gross profit
 
227.5


259.7


695.2


822.7

Operating expenses:
 
 
 
 
 
 
 
 
Selling and distribution
 
85.4

 
95.6

 
285.5

 
295.0

General and administrative
 
66.5

 
66.9

 
220.5

 
228.9

Amortization expense
 
21.4

 
28.5

 
64.9

 
85.8

Other operating expense, net
 
23.3

 
11.1

 
98.9

 
111.9

Total operating expenses
 
196.6


202.1


669.8


721.6

Operating income
 
30.9


57.6


25.4


101.1

Other expense:
 
 
 
 
 
 
 
 
Interest expense
 
27.8

 
31.4

 
87.6

 
92.9

Interest income
 
(1.3
)
 
(0.4
)
 
(3.8
)
 
(3.5
)
Loss (income) on foreign currency exchange
 
0.6

 
(2.5
)
 
5.0

 
(2.8
)
Other expense (income), net
 
3.6

 
(1.0
)
 
6.5

 
0.7

Total other expense
 
30.7


27.5


95.3


87.3

Income (loss) before income taxes
 
0.2

 
30.1

 
(69.9
)
 
13.8

Income tax (benefit) expense
 
(5.2
)
 
1.3

 
(21.1
)
 
(9.0
)
Net income (loss)
 
$
5.4


$
28.8


$
(48.8
)

$
22.8

 
 
 
 
 
 
 
 
 
Net earnings (loss) per common share:
 
 
 
 
 
 
 
 
Basic
 
$
0.10

 
$
0.50

 
$
(0.87
)
 
$
0.40

Diluted
 
$
0.10

 
$
0.50

 
$
(0.87
)
 
$
0.40

Weighted average common shares:
 
 
 
 
 
 
 
 
Basic
 
56.3

 
57.3

 
56.4

 
57.1

Diluted
 
56.7

 
57.7

 
56.4

 
57.7









See Notes to Condensed Consolidated Financial Statements.

4



TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)  
(In millions)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
 
(Unaudited)
Net income (loss)
 
$
5.4

 
$
28.8

 
$
(48.8
)
 
$
22.8

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments (1)
 
6.5

 
18.0

 
(13.0
)
 
34.5

Pension and postretirement reclassification adjustment (2)
 
0.1

 
0.1

 
0.4

 
7.2

Adoption of ASU 2018-02 reclassification to retained earnings
 

 

 
(1.1
)
 

Other comprehensive income (loss)
 
6.6

 
18.1

 
(13.7
)
 
41.7

 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
$
12.0


$
46.9


$
(62.5
)

$
64.5

 
(1)
Net of tax of $(0.1) million and $0.1 million for the three and nine months ended September 30, 2018, respectively.  There was no tax impact for the three or nine months ended September 30, 2017.   
(2)
Net of tax of $0.1 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and $0.2 million and $4.4 million for the nine months ended September 30, 2018 and 2017, respectively.   































See Notes to Condensed Consolidated Financial Statements.

5



TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(48.8
)
 
$
22.8

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
193.7

 
213.2

Stock-based compensation
 
28.2

 
25.2

(Gain) loss on divestitures
 
(14.3
)
 
85.6

Other
 
5.2

 
0.7

Changes in operating assets and liabilities, net of effect of divestitures and acquisitions:
 
 
 
 
Receivables
 
40.1

 
0.2

Inventories
 
(85.2
)
 
(205.0
)
Prepaid expenses and other assets
 
13.5

 
(39.2
)
Accounts payable, accrued expenses, and other liabilities
 
138.1

 
159.9

Net cash provided by operating activities
 
270.5

 
263.4

Cash flows from investing activities:
 
 
 
 
Additions to property, plant, and equipment
 
(116.7
)
 
(102.5
)
Additions to intangible assets
 
(16.4
)
 
(18.6
)
Proceeds from sale of fixed assets
 
4.7

 
7.2

Proceeds from divestitures
 
30.8

 
19.3

Other
 
(1.1
)
 
(1.0
)
Net cash used in investing activities
 
(98.7
)
 
(95.6
)
Cash flows from financing activities:
 
 
 
 
Borrowings under Revolving Credit Facility
 
80.4

 
584.5

Payments under Revolving Credit Facility
 
(80.4
)
 
(634.5
)
Payments on capitalized lease obligations and other debt
 
(0.9
)
 
(2.3
)
Payment of deferred financing costs
 
(2.4
)
 

Payments on Term Loans
 
(10.5
)
 
(50.8
)
Repurchases of 2022 Notes
 
(24.1
)
 

Repurchases of 2024 Notes
 
(172.1
)
 

Repurchases of common stock
 
(42.2
)
 

Receipts related to stock-based award activities
 
4.7

 
11.1

Payments related to stock-based award activities
 
(3.3
)
 
(6.7
)
Net cash used in financing activities
 
(250.8
)
 
(98.7
)
Effect of exchange rate changes on cash and cash equivalents
 
(1.0
)
 
0.7

Net (decrease) increase in cash and cash equivalents
 
(80.0
)
 
69.8

Cash and cash equivalents, beginning of period
 
132.8

 
62.1

Cash and cash equivalents, end of period
 
$
52.8

 
$
131.9

 
 
 
 
 

6



 
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
 
(Unaudited)
Supplemental cash flow disclosures
 
 
 
 
Interest paid
 
$
102.7

 
$
102.8

Net income taxes (refunded) paid
 
(4.3
)
 
25.8

 
 
 
 
 
Non-cash investing activities:
 
 
 
 
Accrued purchase of property and equipment
 
$
22.8

 
$
20.9

Accrued other intangible assets
 
8.0

 
3.8















































See Notes to Condensed Consolidated Financial Statements.

7

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the nine months ended September 30, 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 PROGRAMS

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) TreeHouse 2020 – a long-term growth and margin improvement strategy; (2) Structure to Win – an operating expenses improvement program; and (3) other restructuring and plant closing costs (collectively the “Restructuring Programs”).
 
The costs by activity for the Restructuring Programs are outlined below:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
TreeHouse 2020
 
$
39.2

 
$
14.7

 
$
99.0

 
$
14.7

Structure to Win
 
5.3

 

 
31.5

 

Other restructuring and plant closing costs
 
1.0

 
6.0

 
4.2

 
24.8

Total Restructuring Programs
 
$
45.5

 
$
20.7

 
$
134.7

 
$
39.5

 
Expenses associated with these programs are recorded in Cost of sales, General and administrative, and Other operating expense, net in the Condensed Consolidated Statements of Operations.  The Company does not allocate costs associated with Restructuring Programs to reportable segments when evaluating the performance of its segments.  As a result, costs associated with Restructuring Programs are not presented by reportable segment. See Note 18 for more information. 
 
Below is a summary of costs by line item for the Restructuring Programs:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
Cost of sales
 
$
7.2

 
$
10.2

 
$
18.8

 
$
13.5

General and administrative
 
1.0

 

 
3.3

 

Other operating expense, net
 
37.3

 
10.5

 
112.6

 
26.0

Total
 
$
45.5

 
$
20.7

 
$
134.7

 
$
39.5

 

8

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below presents the activity of the liabilities associated with the Restructuring Programs as of September 30, 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

Expenses recognized
 
17.8

 

 
2.4

 
20.2

Cash payments
 
(11.2
)
 
(0.6
)
 
(2.7
)
 
(14.5
)
Adjustments
 

 

 
(0.8
)
 
(0.8
)
Balance as of September 30, 2018
 
$
12.7

 
$
0.2

 
$
1.6

 
$
14.5

 
Liabilities recorded as of September 30, 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 Accrued expenses in the Condensed Consolidated Balance Sheets, while the multiemployer pension plan withdrawal liability was included in Other long-term liabilities in the Condensed Consolidated Balance Sheets.
 
(1) 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 cost reductions will increase our capacity utilization, expand operating margins, and streamline our plant structure to optimize our supply chain.
 
This program began in 2017 and will be executed through 2020.  In 2017, the Company announced the closure of the Brooklyn Park, Minnesota and Plymouth, Indiana facilities, as well as the downsizing of the Dothan, Alabama facility.  In the first quarter of 2018, the Company announced the closure of the Company’s Visalia, California and Battle Creek, Michigan facilities. All facilities have either closed or are successfully tracking toward their closure dates noted in the table below.  The table below shows key information regarding the Company's announced plant closures, a component of the broader TreeHouse 2020 program:

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 completed in Q3 2018
 
Trail mix and snack nuts
 
Snacks
 
$
11.2

 
$
5.2

Brooklyn Park, Minnesota
 
August 3, 2017
 
Completed in Q4 2017
 
Dry dinners
 
Meals
 
19.5

 
12.2

Plymouth, Indiana
 
August 3, 2017
 
Completed in Q4 2017
 
Pickles
 
Condiments
 
13.3

 
8.5

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

 
 
 
 
 
 
 
 
 
 
$
85.8

 
$
48.7



9

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the third quarter of 2018, the Company announced the closure of its Omaha, Nebraska office by January 31, 2019. Estimated costs to close are approximately $5.8 million, of which $4.3 million is expected to be in cash.

Below is a summary of the overall TreeHouse 2020 program costs by type: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Cumulative Costs
 
Total Expected
 
 
2018
 
2017
 
2018
 
2017
 
To Date
 
Costs
 
 
(In millions)
Asset-related
 
$
5.5

 
$
8.0

 
$
11.4

 
$
8.0

 
$
49.7

 
$
80.0

Employee-related
 
10.4

 
4.3

 
27.5

 
4.3

 
36.6

 
75.0

Other costs
 
23.3

 
2.4

 
60.1

 
2.4

 
70.3

 
210.0

Total
 
$
39.2

 
$
14.7

 
$
99.0

 
$
14.7

 
$
156.6

 
$
365.0

 
For the three and nine months ended September 30, 2018, asset-related costs primarily consisted of accelerated depreciation; employee-related costs primarily consisted of dedicated project employee cost and severance; and other costs primarily consisted of consulting costs.  For the three and nine months ended September 30, 2017, asset-related costs primarily consisted of accelerated depreciation; employee-related costs primarily consisted of severance; and other costs primarily consisted of consulting costs. Asset-related costs are included in Cost of sales while employee-related and other costs are primarily included in Other operating expense, net of the Condensed Consolidated Statements of Operations.

(2) 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 drive 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.  

Below is a summary of costs by type associated with the Structure to Win program:
 
 
Three Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2018
 
Cumulative Costs
To Date
 
Total Full Year 2018 Expected
Costs
 
 
(In millions)
Asset-related
 
$

 
$
2.2

 
$
2.2

 
$
2.2

Employee-related
 
3.4

 
13.0

 
13.0

 
14.0

Other costs
 
1.9

 
16.3

 
16.3

 
20.8

Total
 
$
5.3

 
$
31.5

 
$
31.5

 
$
37.0

 
For the three months ended September 30, 2018, employee-related costs primarily consisted of severance and other costs primarily consisted of consulting services. For the nine months ended September 30, 2018, asset-related costs primarily consisted of accelerated depreciation, employee-related costs primarily consisted of severance, and other costs primarily consisted of consulting services. Asset-related costs are included in General and administrative expense and the employee-related and other costs are included in Other operating expense, net of the Condensed Consolidated Statements of Operations.  There were no costs related to this program during the three and nine months ended September 30, 2017.
 
(3) 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 Other operating expense, net 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. 
 

10

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

 
$
3.7

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
 
21.8

 
17.1

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

 
 
 
 
 
 
 
 
 
 
$
49.1

 
$
30.7

 
(1)
The downsizing of this facility began in January 2017. On January 31, 2018, the Company announced the full closure of this facility, with a targeted completion date of mid-2019. The costs associated with the full closure are included in the TreeHouse 2020 section of this footnote.
Below is a summary of costs by type associated with the other restructuring and plant closing costs:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Cumulative Costs
 
Total Expected
 
 
2018
 
2017
 
2018
 
2017
 
To Date
 
Costs
 
 
(In millions)
Asset-related
 
$
0.1

 
$
0.8

 
$
1.4

 
$
4.3

 
$
18.4

 
$
18.5

Employee-related
 

 
0.2

 

 
2.9

 
10.5

 
11.3

Other costs
 
0.3

 
1.9

 
0.3

 
12.2

 
18.9

 
19.3

Total
 
$
0.4

 
$
2.9

 
$
1.7

 
$
19.4

 
$
47.8

 
$
49.1

 
For the three and nine months ended September 30, 2018, asset-related costs primarily consisted of inventory dispositions. For the three and nine months ended September 30, 2017, asset-related costs consisted of accelerated depreciation; employee-related costs primarily consisted of severance; and other costs primarily consisted of third-party costs. Asset-related costs are included in Cost of sales and employee-related and other closure costs are recorded in Other operating expense, net in the Condensed Consolidated Statements of Operations.
 
Other cost reduction activities not related to our plant closings above totaled $0.6 million and $2.5 million, respectively, for the three and nine months ended September 30, 2018 and were primarily the result of a Private Brands plant closure initiated prior to TreeHouse’s acquisition and severance-related costs.  Other cost reduction activities were $3.1 million and $5.4 million for the three and nine months ended September 30, 2017, respectively.   

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 19 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;

11

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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
 
Segment revenue disaggregated by product category groups are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
 
(In millions)
Retail bakery
 
$
161.6

 
$
169.4

 
$
488.5

 
$
514.0

Baked products
 
171.2

 
181.8

 
509.4

 
502.6

Total Baked Goods
 
332.8

 
351.2

 
997.9

 
1,016.6

Beverages
 
166.8

 
168.1

 
503.5

 
518.9

Beverage enhancers
 
69.5

 
76.8

 
218.3

 
240.2

Total Beverages
 
236.3

 
244.9

 
721.8

 
759.1

Dressings and sauces
 
240.0

 
250.4

 
735.0

 
738.6

Pickles
 
77.1

 
83.4

 
233.4

 
250.2

Total Condiments
 
317.1

 
333.8

 
968.4

 
988.8

Pasta and dry dinners
 
129.6

 
147.8

 
400.6

 
420.6

Cereals and other meals (1)
 
124.1

 
136.8

 
376.6

 
476.4

Total Meals
 
253.7

 
284.6

 
777.2

 
897.0

Snack nuts
 
171.0

 
224.9

 
568.2

 
608.1

Trail mix and bars
 
83.1

 
107.7

 
297.5

 
332.1

Total Snacks
 
254.1

 
332.6

 
865.7

 
940.2

Unallocated net sales (2)
 

 
1.7

 

 
5.5

Total net sales
 
$
1,394.0


$
1,548.8


$
4,331.0


$
4,607.2


(1)
On May 22, 2017, the Company sold the soup and infant feeding business (“SIF”). Included within this category was $59.5 million of SIF related sales for the nine months ended September 30, 2017. No amounts were included for the three months ended September 30, 2017.
(2)
Represents product recall reimbursements that were received during the three and nine months ended September 30, 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.  

12

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
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 September 30, 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.  
 
Shipping
 
Shipping and handling costs associated with outbound freight are included within Selling and distribution expenses and are accounted for as a fulfillment cost as incurred, including 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 September 30, 2018 are immaterial.  The Company does not have significant deferred revenue or unbilled receivable balances arising from transactions with customers.
 
Contract Costs
 
We have identified certain incremental costs to obtain a contract, primarily sales commissions, requiring capitalization under Topic 606.  The Company continues to expense these costs as incurred because the amortization period for the costs would be one year or less.  The Company does not incur significant fulfillment costs requiring capitalization.
 
Impact of Adoption
 
The Company adopted Topic 606 on a modified retrospective basis on January 1, 2018.  As a result of adoption, the Company reclassified $51.0 million of certain customer liabilities related to customer trade promotional activity from Receivables, net to

13

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accrued expenses during the first quarter of 2018.  There were no material impacts to the Condensed Consolidated Statements of Operations or the Condensed Consolidated Statements of Cash Flows upon adoption. 

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 sale of certain receivables on a revolving basis until terminated by either party. On September 28, 2018, the Company entered into an Amendment to the Receivables Sales Agreement, increasing the maximum receivables that may be sold at any time from $200.0 million to $300.0 million.

The outstanding amount of accounts receivable sold under the Receivables Sales Agreement were $200.0 million and $74.6 million as of September 30, 2018 and December 31, 2017, respectively. 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 loss on sale of receivables is $1.0 million and $2.3 million for the three and nine months ended September 30, 2018, respectively, and is included in Other expense (income), net 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 September 30, 2018, as the fair value of the servicing arrangement as well as the fees earned were not material to the financial statements.

5. INVENTORIES
 
 
 
September 30, 2018
 
December 31, 2017
 
 
(In millions)
Raw materials and supplies
 
$
495.3

 
$
416.5

Finished goods
 
529.9

 
530.0

LIFO reserve
 
(25.9
)
 
(28.2
)
Total inventories
 
$
999.3

 
$
918.3

 
Inventory is generally accounted for under the first-in, first-out (“FIFO”) method and a portion was accounted for under the last-in, first-out (“LIFO”) method. Approximately $75.1 million and $92.9 million of our inventory was accounted for under the LIFO method of accounting at September 30, 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.  

Due in part to the closure of the Plymouth, Indiana pickle facility and lower overall inventory levels, the Company has reduced the quantity of LIFO inventory on hand during 2018, resulting in a liquidation of inventory carried at lower costs from prior years. The LIFO liquidation resulted in a reduction to Cost of sales of $4.2 million during the third quarter of 2018. There were no LIFO liquidations during the three or nine months ended September 30, 2017.


14

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

6. 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
)
 
(2.0
)
 

 

 
(3.4
)
Divestiture
 

 

 

 
(10.6
)
 

 
(10.6
)
Balance at September 30, 2018
 
$
555.6

 
$
715.3

 
$
436.0

 
$
461.1

 
$


$
2,168.0

 
Indefinite Lived Intangible Assets
 
The carrying amounts of our intangible assets with indefinite lives, other than goodwill, as of September 30, 2018 and December 31, 2017 are as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
(In millions)
Trademarks
 
$
22.2

 
$
22.8

Total indefinite lived intangibles
 
$
22.2

 
$
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 September 30, 2018 and December 31, 2017 are as follows:
 
 
 
September 30, 2018
 
December 31, 2017
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Impairment
Losses
 
Net
Carrying
Amount
 
 
(In millions)
Intangible assets with finite lives:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Customer-related
 
$
961.7

 
$
(376.9
)
 
$
584.8

 
$
1,265.4

 
$
(361.4
)
 
$
(273.3
)
 
$
630.7

Contractual agreements
 
3.0

 
(3.0
)
 

 
3.0

 
(3.0
)
 

 

Trademarks
 
59.4

 
(26.8
)
 
32.6

 
69.6

 
(28.7
)
 

 
40.9

Formulas/recipes
 
33.8

 
(22.2
)
 
11.6

 
33.8

 
(18.3
)
 

 
15.5

Computer software
 
151.2

 
(80.1
)
 
71.1

 
137.8

 
(74.7
)
 

 
63.1

Total finite lived intangibles
 
$
1,209.1

 
$
(509.0
)
 
$
700.1

 
$
1,509.6


$
(486.1
)
 
$
(273.3
)
 
$
750.2

 
Total intangible assets, excluding goodwill, as of September 30, 2018 and December 31, 2017 were $722.3 million and $773.0 million, respectively.  

7. INCOME TAXES
 
Income taxes were recorded at an effective rate of (2,600.0)% and 30.2% for the three and nine months ended September 30, 2018, respectively, compared to 4.3% and (65.2)% for the three and nine months ended September 30, 2017, respectively. The income tax benefit in the third quarter of 2018 was primarily driven by the release of certain tax reserves related to statute expirations of $6.7 million. In tandem with recognizing the $6.7 million tax benefit, during the third quarter of 2018 the Company wrote off $6.7 million of related tax indemnification asset, which was reflected in Other expense (income), net in the

15

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidated Statements of Operations. The change in the effective tax rates for the three and nine months ended September 30, 2018 compared to 2017 are primarily a result of the reduction in the U.S. Federal statutory tax rate, an increase in the amount of income tax benefit from the release of tax reserves, a decrease in the tax deduction related to share–based payments, a reduction in the benefit from foreign tax credits on a year–over–year basis, and the overall impact of discrete items on low third quarter income before income taxes. Our effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

The Company’s effective tax rate differs from the U.S. federal statutory tax rate primarily due to state tax expense, the impact of stock compensation expense that is not deductible for tax purposes, and an intercompany financing structure entered into in conjunction with the E.D. Smith Foods, Ltd. (“E.D. Smith”) acquisition in 2007. In addition, the Company’s effective tax rate for the nine months ended September 30, 2018 reflects a discrete expense with a rate impact of approximately (2.4)% attributable to the vesting and exercise of share-based awards.

The Internal Revenue Service (“IRS”) completed their examination of the TreeHouse Foods, Inc. & Subsidiaries’ 2015 tax year, resulting in an insignificant impact to income tax expense during the first quarter of 2018. Our Canadian operations are under exam by the Canadian Revenue Agency (“CRA”) for tax years 2008 through 2015.  These examinations are expected to be completed in the fourth quarter of 2018 or 2019. The Italian Agency of Revenue (“IAR”) is examining the 2007 through 2009 and 2013 tax years of our Italian operations.  The IAR examinations are not expected to be completed prior to 2020 due to a backlog of appeals before the agency. The Company has examinations in process with various state taxing authorities, which are expected to be completed in 2018.
       
Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $3.4 million within the next 12 months, primarily as a result of the resolution of audits currently in progress and the lapsing of statutes of limitations. As much as $0.8 million of the $3.4 million could affect net income when settled.
 
Tax Reform
 
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act made significant changes to the Internal Revenue Code, including, but not limited to, a corporate tax rate decrease from 35% to 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings, the transition of U.S. international taxation from a worldwide tax system to a territorial system, allowing for the full expensing of certain qualified property and a one-time transition tax on the mandatory repatriation of cumulative foreign earnings.
 
The SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of US GAAP in situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.  To the extent that a company’s accounting for the Tax Act is incomplete but it is able to provide a reasonable estimate, it must record a provisional amount in the financial statements.  SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740.
 
For the period ended December 31, 2017, the Company recorded a provisional net tax benefit of $104.2 million primarily consisting of (1) a $108.4 million benefit related to adjustments to our net deferred tax liability and (2) a $9.6 million expense related to the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings.  During the nine months ended September 30, 2018, the Company recorded a $1.4 million adjustment to its provisional tax benefit consisting of (1) a $1.0 million additional benefit related to adjustments to our net deferred tax liability and (2) a $0.4 million reduction to the expense related to the one-time transition tax.
 
The Tax Act also creates a new requirement that certain income (i.e., Global Intangible Low Taxed Income or “GILTI”) earned by controlled foreign corporations (“CFCs”) must be included currently in the gross income of the CFC’s U.S. shareholder.  The FASB allows an entity to make an accounting policy election of either (1) treating taxes due of future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into the company’s measurement of deferred taxes.  We continue to assess the impact of GILTI and have not yet made an accounting policy election.

As the Company has not completed its analysis of the impact of the Tax Act, the net tax benefit of $105.6 million remains provisional and is subject to change due to, among other things, additional analysis, changes in interpretations and assumptions

16

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the Company has made, and additional regulatory guidance that may be issued. We expect to complete our analysis within the one-year measurement period allowed by SAB 118.

8. LONG-TERM DEBT
 
 
 
September 30, 2018
 
December 31, 2017
 
 
(In millions)
Term Loan A
 
$
495.0

 
$
498.8

Term Loan A-1
 
891.0

 
897.8

2022 Notes
 
375.9

 
400.0

2024 Notes
 
602.9

 
775.0

Other debt
 
2.6

 
3.1

Total outstanding debt
 
2,367.4

 
2,574.6

Deferred financing costs
 
(23.9
)
 
(28.8
)
Less current portion
 
(10.4
)
 
(10.1
)
Total long-term debt
 
$
2,333.1

 
$
2,535.7

 
During the three months ended September 30, 2018, the Company repurchased $2.7 million and $53.3 million of its 2022 Notes and 2024 Notes, respectively. The Company wrote off $0.7 million of debt issuance costs and recorded a loss on debt extinguishment of $1.1 million related to the repurchases, recorded within Interest expense and Other expense (income), net of the Condensed Consolidated Statements of Operations, respectively. During the nine months ended September 30, 2018, the Company repurchased $24.1 million and $172.1 million of its 2022 Notes and 2024 Notes, respectively.  The Company wrote off $2.4 million of debt issuance costs and recorded a loss on debt extinguishment of $4.2 million related to the repurchases, recorded within Interest expense and Other expense (income), net of the Condensed Consolidated Statement of Operations, respectively. There were no amounts repurchased during the three or nine months ended September 30, 2017.
 
On December 1, 2017, the Company entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) which amends, restates, and replaces the Company’s prior credit agreement, dated as of February 1, 2016 (as amended from time to time prior to February 1, 2016, the “Prior Credit Agreement”). As amended, the senior unsecured credit facility includes a revolving credit facility (the “Revolving Credit Facility” or the “Revolver”) and two term loans. The Credit Agreement (1) extended the maturity dates of the Revolving Credit Facility, Term Loan A, and Term Loan A-1, (2) resized the Revolver from $900 million to $750 million, (3) consolidated three term loans into two, (4) improved pricing, and (5) modified the fee structure on the Revolving Credit Facility to now calculate based on the unused portion of the commitments under the Revolving Credit Facility rather than the total commitments under the Revolving Credit Facility.  
 
On June 11, 2018, the Company entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement.  Under the Amendment, among other things, (i) the leverage covenant threshold has increased through fiscal year 2019, (ii) the Company and the other loan parties secured the obligations with liens on substantially all of their personal property, and (iii) such liens will be released upon the Company’s leverage ratio being less than or equal to 4.00 to 1.00 no earlier than the fiscal quarter ended on December 31, 2019.  The material terms and conditions under the Credit Agreement are otherwise substantially consistent with those contained in the Credit Agreement prior to the Amendment.  In connection with this Amendment, $0.6 million in lender fees will be amortized ratably through January 31, 2025 and $1.8 million of fees will be amortized ratably through February 1, 2023.  

The Company’s average interest rate on debt outstanding under its Credit Agreement for the three months ended September 30, 2018 was 3.71%. Including the impact of interest rate swap agreements in effect as of September 30, 2018, the average rate decreased to 3.28%.

Revolving Credit Facility — As of September 30, 2018, there were $30.4 million in letters of credit that were issued but undrawn, and $719.6 million of available credit under the $750.0 million Revolving Credit Facility. The Revolving Credit Facility matures on February 1, 2023.


17

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. STOCKHOLDERS' EQUITY

Share Repurchase Authorization

On November 2, 2017, the Company announced that the Board of Directors adopted a stock repurchase program. The stock repurchase program authorizes the Company to repurchase up to $400 million of the Company’s common stock at any time, or from time to time. Any repurchases under the program may be made by means of open market transactions, negotiated block transactions, or otherwise, including pursuant to a repurchase plan administered in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The size and timing of any repurchases will depend on price, market and business conditions, and other factors. The Company is authorized to enter into an administrative repurchase plan for $50 million of the $400 million in fiscal 2018 and is also authorized to repurchase an additional $100 million per year outside the administrative repurchase plan (total annual cap of $150 million). Any shares repurchased will be held as treasury stock.

For the nine months ended September 30, 2018, the Company repurchased approximately 0.9 million shares of common stock for a total of $42.2 million.

10. EARNINGS PER SHARE

The following table summarizes the effect of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings (loss) per share:
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions, except per share data)
Net income (loss)
 
$
5.4

 
$
28.8

 
$
(48.8
)
 
$
22.8

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
56.3

 
57.3

 
56.4

 
57.1

Assumed exercise/vesting of equity awards (1)
 
0.4

 
0.4

 

 
0.6

Weighted average diluted common shares outstanding
 
56.7

 
57.7

 
56.4

 
57.7

 
 
 
 
 
 
 
 
 
Net earnings (loss) per basic share
 
$
0.10

 
$
0.50

 
$
(0.87
)
 
$
0.40

Net earnings (loss) per diluted share
 
$
0.10

 
$
0.50

 
$
(0.87
)
 
$
0.40

 
(1)
Incremental shares from equity awards are computed using the treasury stock method. For the nine months ended September 30, 2018, the weighted average common shares outstanding is the same for both the computations of basic and diluted shares because the Company had a net loss for the period.  Equity awards excluded from the Company's computation of diluted earnings per share because they were anti-dilutive, were 1.8 million for both the three and nine months ended September 30, 2018, and 1.7 million and 1.4 million for the three and nine months ended September 30, 2017, respectively.

11. STOCK-BASED COMPENSATION

The Board of Directors adopted, and the Company’s stockholders approved, the “TreeHouse Foods, Inc. Equity and Incentive Plan” (the “Plan”).  Under the Plan, the Compensation Committee may grant awards of various types of compensation, including stock options, restricted stock, restricted stock units, performance shares, performance units, other types of stock-based awards, and other cash-based compensation. The maximum number of shares available to be awarded under the Plan is approximately 16.1 million, of which approximately 3.8 million remain available at September 30, 2018.

Income (loss) before income taxes for the three and nine months ended September 30, 2018 includes stock-based compensation expense of $5.0 million and $28.2 million, respectively.  Stock-based compensation expense for the three and nine months ended September 30, 2017 was $6.6 million and $25.2 million, respectively.  The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.3 million and $7.1 million for the three and nine months

18

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

ended September 30, 2018, respectively, and $2.4 million and $9.3 million for the three and nine months ended September 30, 2017, respectively.  

In the first quarter of 2018, the Company entered into an amended employment agreement with our former Chief Executive Officer. The amended plan resulted in the modification of his outstanding equity awards by accelerating the vesting dates, changing outstanding performance units to vest at target, and extending the exercisability of options outstanding. Modification of the existing awards resulted in a charge of $10.0 million in the three months ended March 31, 2018. The impact of this modification on expense recognized for stock options, restricted stock units, and performance units was $1.2 million, $3.8 million, and $5.0 million, respectively.

 Stock Options — The following table summarizes stock option activity during the nine months ended September 30, 2018. Stock options generally vest in approximately three equal installments on each of the first three anniversaries of the grant date and expire ten years from the grant date.
 
 
 
Employee
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (yrs)
 
Aggregate
Intrinsic
Value
 
 
(In thousands)
 
 
 
 
 
(In millions)
Outstanding, at December 31, 2017
 
2,099

 
$
71.46

 
6.1
 
$
5.9

Forfeited
 
(106
)
 
88.19

 
 
 
 
Exercised
 
(196
)
 
24.06

 
 
 
 
Expired
 
(39
)
 
84.72

 
 
 
 
Outstanding, at September 30, 2018
 
1,758

 
75.43

 
5.7
 
0.7

Vested/expected to vest, at September 30, 2018
 
1,727

 
75.27

 
5.6
 
0.7

Exercisable, at September 30, 2018
 
1,436

 
72.77

 
5.1
 
0.7

 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
 
(In millions)
Compensation expense
 
$
0.8

 
$
2.3

 
$
4.9

 
$
6.8

Intrinsic value of stock options exercised
 

 
0.9

 
3.8

 
11.0

Tax benefit recognized from stock option exercises
 
0.1

 
0.4

 
0.7

 
4.2

 
Future compensation costs related to unvested options totaled $3.9 million at September 30, 2018 and will be recognized over the remaining vesting period of the grants, which averages 1.3 years.
Restricted Stock Units — Employee restricted stock unit awards generally vest based on the passage of time. These awards generally vest in approximately three equal installments on each of the first three anniversaries of the grant date. Director restricted stock units generally vest on the first anniversary of the grant date. Certain directors have deferred receipt of their awards until either their departure from the Board of Directors or a specified date. As of September 30, 2018, director restricted stock units that have been earned and deferred totaled 91,400.
 

19

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the restricted stock unit activity during the nine months ended September 30, 2018:
 
 
 
Employee
Restricted
Stock Units
 
Weighted
Average
Grant Date
Fair Value
 
Director
Restricted
Stock Units
 
Weighted
Average
Grant Date
Fair Value
 
 
(In thousands)
 
 
 
(In thousands)
 
 
Outstanding, at December 31, 2017
 
547

 
$
85.41

 
117

 
$
60.21

Granted
 
657

 
38.70

 
38

 
39.01

Vested
 
(209
)
 
86.68

 
(25
)
 
61.20

Forfeited
 
(139
)
 
65.92

 
(1
)
 
84.66

Outstanding, at September 30, 2018
 
856

 
52.39

 
129

 
53.75

 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
 
(In millions)
Compensation expense
 
$
3.8

 
$
5.5

 
$
17.1

 
$
17.3

Fair value of vested restricted stock units
 
0.8

 
0.7

 
10.7

 
13.7

Tax benefit recognized from vested restricted stock units
 
0.2

 
0.3

 
2.3

 
5.0

 
Future compensation costs related to restricted stock units are approximately $24.7 million as of September 30, 2018 and will be recognized on a weighted average basis over the next 2.0 years. The grant date fair value of the awards is equal to the Company’s closing stock price on the grant date.

Performance Units — Performance unit awards are granted to certain members of management. These awards contain service and performance conditions. For each of the three performance periods, one-third of the units will accrue, multiplied by a predefined percentage between 0% and 200%, depending on the achievement of certain operating performance measures. Additionally, for the cumulative performance period, a number of units will accrue, equal to the number of units granted multiplied by a predefined percentage between 0% and 200%, depending on the achievement of certain operating performance measures, less any units previously accrued. Accrued units will be converted to stock or cash, at the discretion of the Compensation Committee, generally, on the third anniversary of the grant date. The Company intends to settle these awards in stock and has the shares available to do so. On June 26, 2018, based on the achievement of operating performance measures, 79,910 performance units were converted into 18,139 shares of common stock, or an average conversion of 0.23 shares for each performance unit.  

The following table summarizes the performance unit activity during the nine months ended September 30, 2018:  
 
 
Performance
Units
 
Weighted
Average
Grant Date
Fair Value
 
 
(In thousands)
 
 
Unvested, at December 31, 2017
 
264

 
$
86.13

Granted
 
141

 
38.27

Vested
 
(18
)
 
76.30

Forfeited
 
(74
)
 
78.89

Unvested, at September 30, 2018
 
313

 
66.92

 

20

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
 
(In millions)
Compensation expense
 
$
0.4

 
$
(1.2
)
 
$
6.2

 
$
1.1

Fair value of vested performance units
 

 

 
1.0

 
6.5

Tax benefit recognized from performance units vested
 

 

 
0.1

 
2.5


Future compensation costs related to the performance units are estimated to be approximately $2.6 million as of September 30, 2018 and are expected to be recognized over the next 2.2 years. The grant date fair value of the awards is equal to the Company’s closing stock price on the date of grant.

12. ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Accumulated other comprehensive loss consists of the following components, all of which are net of tax:
 
 
 
Foreign
Currency
Translation (1)
 
Unrecognized
Pension and
Postretirement
Benefits (2)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In millions)
Balance at December 31, 2017
 
$
(57.2
)
 
$
(4.3
)
 
$
(61.5
)
Other comprehensive loss
 
(13.0
)
 

 
(13.0
)
Reclassifications from accumulated other comprehensive loss
 

 
0.4

 
0.4

Reclassifications from accumulated other comprehensive loss - Adoption of ASU 2018-02
 

 
(1.1
)
 
(1.1
)
Other comprehensive loss
 
(13.0
)
 
(0.7
)
 
(13.7
)
Balance at September 30, 2018
 
$
(70.2
)
 
$
(5.0
)
 
$
(75.2
)
 
 
 
Foreign
Currency
Translation (1)
 
Unrecognized
Pension and
Postretirement
Benefits (2)
 
Accumulated
Other
Comprehensive
Loss
 
 
(In millions)
Balance at December 31, 2016
 
$
(89.4
)
 
$
(11.9
)
 
$
(101.3
)
Other comprehensive income
 
34.5

 

 
34.5

Reclassifications from accumulated other comprehensive loss
 

 
7.2

 
7.2

Other comprehensive income
 
34.5

 
7.2

 
41.7

Balance at September 30, 2017
 
$
(54.9
)
 
$
(4.7
)
 
$
(59.6
)
 
(1)
The foreign currency translation adjustment is presented net of tax of $0.1 million for the nine months ended September 30, 2018.  There was no tax impact for the nine months ended September 30, 2017.
(2)
The unrecognized pension and postretirement benefits reclassification is presented net of tax of $0.2 million and $4.4 million for the nine months ended September 30, 2018 and 2017, respectively. Also included is a $1.1 million adjustment related to the adoption of ASU 2018-02 (see Note 19 for more information).


21

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Condensed Consolidated Statements of Operations lines impacted by reclassifications out of Accumulated other comprehensive loss are outlined below:
 
 
 
 
 
 
 
Affected line in
 
 
Reclassifications from Accumulated
Other Comprehensive Loss
 
the Condensed Consolidated
Statements of Operations
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
(In millions)
 
(In millions)
 
 
Amortization of defined benefit pension and postretirement items:
 
 

 
 

 
 

 
 

 
 
Prior service costs
 
$
0.1

 
$

 
$
0.2

 
$
0.1

 
Other expense (income), net
Unrecognized net loss
 
0.1

 
0.1

 
0.4

 
0.7

 
Other expense (income), net
Actuarial adjustment
 

 

 

 
2.1

 
(a)
Divestiture
 

 

 

 
8.7

 
Other operating expense, net
Total before tax
 
0.2

 
0.1

 
0.6

 
11.6

 

Income taxes
 
0.1

 

 
0.2

 
4.4

 
Income tax (benefit) expense
Adoption of ASU 2018-02
 

 

 
1.1

 

 
Income tax (benefit) expense
Net of tax
 
$
0.1

 
$
0.1

 
$
(0.7
)
 
$
7.2

 

 
(a)
Represents the actuarial adjustment that was recorded in conjunction with the divestiture of a pension plan and a postretirement benefit plan in the second quarter of 2017 due to the SIF business divestiture. 

13. 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. In connection with the divestiture of the SIF business in the second quarter of 2017, the Company divested a pension plan and a postretirement benefit plan.  The net unfunded liability associated with these plans as of the closing date, which was included in Other operating expense, net of the Condensed Consolidated Statements of Operations, was $10.5 million for the nine months ended September 30, 2017.

Components of net periodic pension expense are as follows:
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
 
(In millions)
Service cost
 
$
0.6

 
$
0.8

 
$
1.8

 
$
2.9

Interest cost
 
3.0

 
3.6

 
8.9

 
11.4

Expected return on plan assets
 
(4.1
)
 
(4.2
)
 
(12.2
)
 
(13.3
)
Amortization of unrecognized prior service cost
 
0.1

 

 
0.2

 
0.1

Amortization of unrecognized net loss
 
0.1

 
0.1

 
0.4

 
0.7

Net periodic pension (benefit) cost
 
$
(0.3
)
 
$
0.3

 
$
(0.9
)
 
$
1.8

 
The Company contributed $1.7 million to the pension plans during the first nine months of 2018. The Company does not expect to make additional contributions to the plans in 2018.


22

TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Components of net periodic postretirement expense are as follows:
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
 
(In millions)
Interest cost
 
$
0.3

 
$
0.3

 
$
0.9

 
$
0.9

Net periodic postretirement cost
 
$
0.3

 
$
0.3

 
$
0.9

 
$
0.9

 
The Company expects to contribute approximately $1.8 million to the postretirement health plans during 2018.

The service cost components of net periodic pension and postretirement costs were recorded in Cost of sales and the other components were recorded in Other expense (income), net of the Condensed Consolidated Statements of Operations.

14. OTHER OPERATING EXPENSE, NET

The Company incurred other operating expense for the three and nine months ended September 30, 2018 and 2017, which consisted of the following:
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In millions)
 
(In millions)
Restructuring programs (1)
 
$
37.3

 
$
10.5