Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

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

For the Quarterly Period Ended June 30, 2016.

or

 

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

For the Transition Period from                             to                             

Commission File Number 001-32504

TreeHouse Foods, Inc.

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

 

 

LOGO

 

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

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

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

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

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

 

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

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

Yes     ¨     No     x

Number of shares of Common Stock, $0.01 par value, outstanding as of July 31, 2016: 56,717,235

 

 

 


Table of Contents

Table of Contents

     Page  

Part I — Financial Information

  

Item 1 — Financial Statements (Unaudited)

     3   

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

     38   

Item  3 — Quantitative and Qualitative Disclosures About Market Risk

     58   

Item 4 — Controls and Procedures

     59   

Report of Independent Registered Public Accounting Firm

     60   

Part II — Other Information

  

Item 1 — Legal Proceedings

     61   

Item 1A — Risk Factors

     61   

Item 5 — Other Information

     61   

Item 6 — Exhibits

     61   

Signatures

     62   

 

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Table of Contents

Part I — Financial Information

Item 1. Financial Statements

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     June 30,     December 31,  
     2016     2015  
     (Unaudited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 51,591      $ 34,919   

Investments

     9,641        8,388   

Receivables, net

     362,461        203,198   

Inventories, net

     989,406        584,115   

Assets held for sale

     2,674          

Prepaid expenses and other current assets

     85,998        16,583   
  

 

 

   

 

 

 

Total current assets

     1,501,771        847,203   

Property, plant, and equipment, net

     1,361,270        541,528   

Goodwill

     2,788,023        1,649,794   

Intangible assets, net

     1,195,498        646,655   

Other assets, net

     52,041        17,616   
  

 

 

   

 

 

 

Total assets

   $ 6,898,603      $ 3,702,796   
  

 

 

   

 

 

 
    

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 606,423      $ 260,580   

Current portion of long-term debt

     49,929        14,893   
  

 

 

   

 

 

 

Total current liabilities

     656,352        275,473   

Long-term debt

     2,859,502        1,221,741   

Deferred income taxes

     413,358        279,108   

Other long-term liabilities

     220,615        71,615   
  

 

 

   

 

 

 

Total liabilities

     4,149,827        1,847,937   

Commitments and contingencies (Note 19)

    

Stockholders’ equity:

    

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

              

Common stock, par value $0.01 per share, 90,000 shares authorized, 56,702 and
43,126 shares issued and outstanding, respectively

     567        431   

Additional paid-in capital

     2,059,247        1,207,167   

Retained earnings

     773,031        760,729   

Accumulated other comprehensive loss

     (84,069     (113,468
  

 

 

   

 

 

 

Total stockholders’ equity

     2,748,776        1,854,859   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $         6,898,603      $         3,702,796   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)  

Net sales

   $         1,541,389      $         759,208      $         2,811,562      $         1,542,353   

Cost of sales

     1,275,583        607,837        2,321,193        1,238,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     265,806        151,371        490,369        303,808   

Operating expenses:

    

Selling and distribution

     104,363        42,797        189,835        88,595   

General and administrative

     78,067        38,367        172,701        82,767   

Amortization expense

     28,478        15,551        52,314        30,879   

Other operating expense, net

     3,305        135        4,999        350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     214,213        96,850        419,849        202,591   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     51,593        54,521        70,520        101,217   

Other expense (income):

    

Interest expense

     31,538        11,372        57,206        23,064   

Interest income

     (642     (194     (3,461     (1,963

(Gain) loss on foreign currency exchange

     (749     (2,386     (4,873     9,000   

Other (income) expense, net

     (729     (2,058     4,253        (2,472
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     29,418        6,734        53,125        27,629   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     22,175        47,787        17,395        73,588   

Income taxes

     6,527        16,425        5,093        24,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 15,648      $ 31,362      $ 12,302      $ 49,214   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Net earnings per common share:

    

Basic

   $ 0.28      $ 0.73      $ 0.23      $ 1.15   

Diluted

   $ 0.27      $ 0.72      $ 0.22      $ 1.13   

Weighted average common shares:

    

Basic

     56,555        42,974        54,625        42,922   

Diluted

     57,330        43,679        55,336        43,654   

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  
     (Unaudited)      (Unaudited)  

Net income

   $ 15,648       $ 31,362       $ 12,302       $ 49,214   
           

Other comprehensive income (loss):

           

 Foreign currency translation adjustments

     4,617         6,219         28,883         (20,318

 Pension and postretirement reclassification adjustment (1)

     258         256         516         512   
  

 

 

    

 

 

    

 

 

    

 

 

 

 Other comprehensive income (loss)

     4,875         6,475         29,399         (19,806
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Comprehensive income

   $         20,523       $         37,837       $           41,701       $             29,408   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Net of tax of $157 and $158 for the three months ended June 30, 2016 and 2015, respectively, and $316 for the six months ended June 30, 2016 and 2015.

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Six Months Ended  
     June 30,  
     2016     2015  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

     $ 12,302      $ 49,214   

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

    

Depreciation

     80,512        30,888   

Amortization

     52,314        30,879   

Stock-based compensation

     14,324        10,463   

Excess tax benefits from stock-based compensation

     (3,523     (4,583

Mark-to-market loss (gain) on derivative contracts

     2,970        (2,404

Mark-to-market gain on investments

     (128     (154

Loss on disposition of assets

     1,347        179   

Deferred income taxes

     (3,097     (2,155

(Gain) loss on foreign currency exchange

     (4,873     9,000   

Other

     (770     (761

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

    

Receivables

     13,616        58,199   

Inventories

     46,984        (24,127

Prepaid expenses and other assets

     (43,802     1,827   

Accounts payable, accrued expenses and other liabilities

     68,833        (7,666
  

 

 

   

 

 

 

Net cash provided by operating activities

     237,009        148,799   

Cash flows from investing activities:

    

Additions to property, plant, and equipment

     (83,956     (39,125

Additions to intangible assets

     (5,914     (6,683

Acquisitions, less cash acquired

     (2,640,201       

Proceeds from sale of fixed assets

     91        180   

Purchase of investments

     (530     (311

Increase in restricted cash

     (605       

Other

     (11       
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,731,126     (45,939

Cash flows from financing activities:

    

Borrowings under Revolving Credit Facility

     114,200        40,000   

Payments under Revolving Credit Facility

     (196,200     (148,000

Proceeds from issuance of Term Loan A-2

     1,025,000          

Proceeds from issuance of 2024 Notes

     775,000          

Payments on capitalized lease obligations and other debt

     (2,140     (2,017

Payment of deferred financing costs

     (34,328       

Payments on Term Loans

     (15,156     (4,000

Net proceeds from issuance of common stock

     835,131          

Net (payments) receipts related to stock-based award activities

     (762     1,112   

Excess tax benefits from stock-based compensation

     3,523        4,583   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

             2,504,268        (108,322

Effect of exchange rate changes on cash and cash equivalents

     6,521        (1,955
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     16,672        (7,417

Cash and cash equivalents, beginning of period

     34,919                    51,981   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $ 51,591      $ 44,564   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, 2016

(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 generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations. The Condensed Consolidated Financial Statements and related notes should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Results of operations for interim periods are not necessarily indicative of annual results.

On February 1, 2016, the Company acquired all of the outstanding common stock of Ralcorp Holdings, Inc., the Missouri corporation through which the private brands business of ConAgra Foods, Inc. (“Private Brands Business”) was operated. Ralcorp Holdings, Inc. was renamed TreeHouse Private Brands, Inc. during the first quarter of 2016. The results of operations of the Private Brands Business are included in our financial statements from the date of acquisition and are included in the North American Retail Grocery, Food Away From Home, and Industrial and Export segments, as applicable. The Private Brands Business is on a 4-4-5 fiscal calendar, and June 26, 2016 was the fiscal period end closest to the Company’s fiscal quarter end. This difference did not have a significant impact on the results of operations of the Private Brands Business.

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

A detailed description of the Company’s significant accounting policies can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently assessing the impact that this standard will have upon adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases, to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between existing GAAP and this ASU is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under existing GAAP. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The standard requires that entities apply the effects of these changes using a modified retrospective approach, which includes a number of optional practical expedients. The Company is currently assessing the impact that this standard will have upon adoption.

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, to simplify the accounting for adjustments made to provisional amounts. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The ASU also requires acquirers to present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This ASU is effective for fiscal periods beginning after December 15, 2015. The Company adopted the ASU during the first quarter of 2016. Adjustments to provisional amounts are disclosed in Note 4 on Acquisitions.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which requires entities to measure inventory at the lower of cost and net realizable value (“NRV”). This ASU will not apply to inventory valued under the last-in-first-out method. Under current guidance, an entity is required to measure inventory at the lower of cost or market, with market defined as replacement cost, NRV, or NRV less a normal profit margin. The three market measurements added complexity and reduced comparability in the valuation of inventory. FASB issued this ASU as part of its simplification initiative to address these issues. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is currently assessing the impact that this standard will have upon adoption.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, providing additional guidance surrounding the disclosure of going concern uncertainties in the financial statements and implementing requirements for management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. The ASU is effective for fiscal years ending after December 15, 2016 and for interim periods thereafter. The Company does not anticipate the adoption of the ASU will result in additional disclosures, however, management will begin performing the periodic assessments required by the ASU on its effective date.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which introduced a new framework to be used when recognizing revenue in an attempt to reduce complexity and increase comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standard requires that entities apply the effects of these changes to all prior years presented, upon adoption, using either the full retrospective method, which presents the impact of the change separately in each prior year presented, or the modified retrospective method, which includes the cumulative changes to all prior years presented in beginning retained earnings in the year of initial adoption. The Company has not yet determined which of the two adoption methods to elect. The FASB also issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, in April 2016 and May 2016, respectively, which amend the guidance in ASU 2014-09 and have the same effective date as the original standard. The Company is currently assessing the impact that these standards will have upon adoption.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

3. RESTRUCTURING

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 the facility closures are primarily aggregated in the Other operating expense, net line of the Condensed Consolidated Statements of Income, 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.

 

Facility Location

  Date of Closure
  Announcement  
  End of
      Production      
      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
  First quarter

of 2016

  Third quarter

of 2016

  Liquid non-
dairy creamer
and refrigerated
salad dressings
  Food Away From
Home
  $ 7.7      $ 3.9   
Ayer,
Massachusetts
  April 5, 2016   First quarter

of 2017

  Third quarter

of 2017

  Spoonable
dressings
  North American
Retail Grocery,
Food Away From
Home
  $ 6.5      $ 5.3   
Azusa, California   May 24, 2016   Second quarter

of 2017

  Second quarter

of 2017

  Bars and snack
products
  North American
Retail Grocery
  $ 14.9      $ 13.2   
Ripon, Wisconsin   May 24, 2016   Fourth quarter

of 2016

  Fourth quarter

of 2016

  Sugar wafer
cookies
  North American
Retail Grocery
  $ 2.1      $ 1.3   

Total expected costs to close the City of Industry, California facility have been reduced by approximately $4.2 million since the initial announcement. Total expected costs to close all other facilities remain unchanged since the initial announcements.

Below is a summary of the plant closing costs:

 

                                                                                                               
     Three Months      Six Months      Cumulative      Total  
     Ended      Ended      Costs      Expected  
     June 30, 2016      June 30, 2016      To Date      Costs  
     (In thousands)  

Asset-related

   $ 674       $ 1,506       $ 4,526       $ 7,540   

Employee-related

     1,292         1,963         3,125         8,547   

Other closure costs

     981         1,065         1,094         15,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,947       $ 4,534       $ 8,745       $ 31,217   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities recorded as of June 30, 2016 associated with these plant closings relate to severance and the partial withdrawal from a multiemployer pension plan. The severance liability is included in the Accounts payable and accrued expenses line of the Condensed Consolidated Balance Sheets while the multiemployer pension plan withdrawal liability is 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 June 30, 2016:

 

                                                                                                                 
     Severance     Multiemployer Pension
Plan Withdrawal
     Total Liabilities  
     (In thousands)  

Balance as of December 31, 2015

   $ 395      $ 767       $ 1,162   

Expense

     1,709                1,709   

Payments

     (477             (477
  

 

 

   

 

 

    

 

 

 

Balance as of June 30, 2016

   $ 1,627      $ 767       $ 2,394   
  

 

 

   

 

 

    

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

4. ACQUISITIONS

Private Brands Business

On February 1, 2016, the Company acquired the Private Brands Business, which is primarily engaged in manufacturing, distributing, and marketing private label products to retail grocery, food away from home, and industrial and export customers. The business’s primary product categories include snacks, retail bakery, pasta, cereal, bars, and condiments. The purchase price, after considering working capital adjustments, was approximately $2,644.4 million, net of acquired cash. The acquisition was funded by $835.1 million in net proceeds from a public sale of the Company’s common stock, $760.7 million in net proceeds from a private issuance of senior unsecured notes (“2024 Notes”), and a new $1,025.0 million term loan (“Term Loan A-2”), with the remaining balance funded by borrowings from the Company’s $900 million revolving credit facility (“Revolving Credit Facility”). The acquisition resulted in a broader portfolio of products and further diversified the Company’s product categories.

The Private Brands Business acquisition is accounted for under the acquisition method of accounting and the results of operations are included in our financial statements from the date of acquisition in the North American Retail Grocery, Food Away From Home, and Industrial and Export segments. Included in the Company’s Condensed Consolidated Statements of Income for the six months ended June 30, 2016 are the Private Brands Business’s net sales of approximately $1,286.6 million and net income of $32.1 million. Integration costs of $6.5 million were included in determining the net income.

We have made a preliminary allocation to net tangible and intangible assets acquired and liabilities assumed as follows:

 

          (In thousands)       

Cash

     $ 43,358   

Receivables

     171,008   

Inventory

     444,860   

Property, plant, and equipment

     804,234   

Customer relationships

     510,900   

Trade names

     33,000   

Software

     19,576   

Formulas

     23,200   

Other assets

     52,418   

Goodwill

     1,129,507   
  

 

 

 

Assets acquired

     3,232,061   

Deferred taxes

     (136,622

Assumed current liabilities

     (252,172

Assumed long-term liabilities

     (155,545
  

 

 

 

Total purchase price

     $         2,687,722   
  

 

 

 

The Company allocated $496.1 million to customer relationships in the North American Retail Grocery segment, which have a preliminary estimated life of 13 years, and $14.8 million to customer relationships in the Food Away From Home segment, which have a preliminary estimated life of 10 years. The Company allocated $33.0 million to trade names, which have a preliminary estimated life of 10 years. The Company allocated $23.2 million to formulas, which have a preliminary estimated life of 5 years. The Company allocated $19.6 million to capitalized software with estimated lives of 1 to 5 years, depending on expected use. The aforementioned intangibles will be amortized on a straight line basis. The Company increased the cost of acquired inventories by approximately $8.4 million, and expensed the amount as a component of cost of sales. The Company has preliminarily allocated $1,055.6 million and $73.9 million of goodwill to the North American Retail Grocery and Food Away From Home segments, respectively. Goodwill arises principally as a result of expansion opportunities and synergies across both new and legacy product categories. None of the goodwill resulting from this acquisition is tax deductible. The Company incurred approximately $35.2 million in acquisition costs. These costs are included in the General and administrative expense line of the Condensed Consolidated Statements of Income. The purchase price allocation in the table above is preliminary and subject to the finalization of the Company’s valuation analysis, including adjustments to taxes.

The Company recorded purchase price adjustments related to taxes and working capital in the second quarter of 2016, resulting in an increase to goodwill of approximately $5.6 million. Subsequent to quarter end, the working capital adjustment was finalized on July 25, 2016, resulting in a payment of $4.2 million to ConAgra Foods, Inc. that is reflected as a purchase price adjustment. As a result of

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

these adjustments, approximately $0.2 million was expensed to Cost of sales in the second quarter of 2016. The remaining adjustments did not impact the Condensed Consolidated Statements of Income.

The following unaudited pro forma information shows the results of operations for the Company as if its acquisition of the Private Brands Business had been completed as of January 1, 2015. Adjustments have been made for the pro forma effects of depreciation and amortization of tangible and intangible assets recognized as part of the business combination, the issuance of common stock, interest expense related to the financing of the business combination, and related income taxes. Excluded from the 2016 pro forma results are $35.2 million of costs incurred by the Company in connection with the acquisition. The 2015 pro forma results include $1.3 billion in asset impairment charges incurred by the seller. The pro forma results may not necessarily reflect actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations.

 

       Three Months Ended  
June 30,
     Six Months Ended
June 30,
 
     2015      2016      2015  
     (In thousands, except per share data)  

Pro forma net sales

     $                 1,678,636       $           3,135,525       $         3,349,034   
  

 

 

    

 

 

    

 

 

 

Pro forma net income (loss)

     $ 26,562       $ 34,017       $ (744,313
  

 

 

    

 

 

    

 

 

 

Pro forma basic earnings (loss) per common share

     $ 0.47       $ 0.60       $ (13.25
  

 

 

    

 

 

    

 

 

 

Pro forma diluted earnings (loss) per common share

     $ 0.47       $ 0.59       $ (13.25
  

 

 

    

 

 

    

 

 

 

5. INVESTMENTS

 

                                           
           June 30, 2016             December 31, 2015   
     (In thousands)  

U.S. equity

   $ 6,988       $ 5,283   

Non-U.S. equity

     1,622         1,574   

Fixed income

     1,031         1,531   
  

 

 

    

 

 

 

Total investments

   $ 9,641       $ 8,388   
  

 

 

    

 

 

 

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

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

We consider temporary cash investments with an original maturity of three months or less to be cash equivalents. As of June 30, 2016 and December 31, 2015, $50.9 million and $24.4 million, respectively, represents cash and equivalents held in foreign jurisdictions, in local currencies, that are convertible into other currencies. The cash and equivalents held in foreign jurisdictions are expected to be used for general corporate purposes in foreign jurisdictions, including capital projects and acquisitions. The Prepaid expenses and other current assets line on the Condensed Consolidated Balance Sheets also includes restricted cash of $2.9 million as of June 30, 2016, which relates to cash held to meet certain insurance requirements.

For the three and six months ended June 30, 2016, we recognized unrealized losses totaling $0.1 million and $0.4 million, respectively, that are included in the Interest expense line of the Condensed Consolidated Statements of Income and $0.2 million and $0.5 million, respectively, in unrealized gains that are included in the Interest income line of the Condensed Consolidated Statements of Income. Additionally, realized gains for the three months ended June 30, 2016 were insignificant, while for the six months ended June 30, 2016 we recognized realized gains totaling $0.1 million that are included in the Interest income line of the Condensed Consolidated Statements of Income. When securities are sold, their cost is determined based on the first-in, first-out method.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

6. INVENTORIES

 

                                           
     June 30,     December 31,  
     2016     2015  
     (In thousands)  

Raw materials and supplies

   $ 420,711      $ 274,007   

Finished goods

     588,972        331,535   

LIFO reserve

     (20,277     (21,427
  

 

 

   

 

 

 

Total inventories

   $ 989,406      $ 584,115   
  

 

 

   

 

 

 

Inventory is generally accounted for under the first-in, first-out (“FIFO”) method, but a portion is accounted for under the last-in, first-out (“LIFO”) method or the weighted average costing approach. Approximately $98.5 million and $88.1 million of our inventory was accounted for under the LIFO method of accounting at June 30, 2016 and December 31, 2015, respectively. Approximately $131.7 million and $128.9 million of our inventory was accounted for using the weighted average costing approach at June 30, 2016 and December 31, 2015, respectively.

7. PROPERTY, PLANT, AND EQUIPMENT

 

                                                 
     June 30,     December 31,  
     2016     2015  
     (In thousands)  

Land

   $ 70,326      $ 25,954   

Buildings and improvements

     455,062        226,134   

Machinery and equipment

     1,225,112        681,711   

Construction in progress

     108,486        24,493   
  

 

 

   

 

 

 

Total

     1,858,986        958,292   

Less accumulated depreciation

     (497,716     (416,764
  

 

 

   

 

 

 

Property, plant, and equipment, net

   $ 1,361,270      $ 541,528   
  

 

 

   

 

 

 

Depreciation expense was $44.9 million and $15.5 million for the three months ended June 30, 2016 and 2015, respectively, and $80.5 million and $30.9 million for the six months ended June 30, 2016 and 2015, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

8. GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the six months ended June 30, 2016 are as follows:

 

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

Balance at December 31, 2015

   $ 1,423,441       $ 92,267       $ 134,086       $ 1,649,794   

Acquisitions

     1,050,383         73,541                 1,123,924   

Purchase price adjustments

     5,218         365                 5,583   

Foreign currency exchange adjustments

     7,947         775                 8,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

   $ 2,486,989       $ 166,948       $ 134,086       $ 2,788,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The carrying amounts of our intangible assets with indefinite lives, other than goodwill, as of June 30, 2016 and December 31, 2015 are as follows:

 

                                                 
     June 30,
2016
     December 31,
2015
 
     (In thousands)  

Trademarks

   $ 26,584       $ 25,229   
  

 

 

    

 

 

 

Total indefinite lived intangibles

   $ 26,584       $ 25,229   
  

 

 

    

 

 

 

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

The gross carrying amounts and accumulated amortization of intangible assets, with finite lives, as of June 30, 2016 and December 31, 2015 are as follows:

 

                                                                                                                 
     June 30, 2016      December 31, 2015  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 
     (In thousands)      (In thousands)  

Intangible assets with finite lives:

          

Customer-related

   $ 1,289,210       $ (251,734   $ 1,037,476       $ 769,419       $ (208,962   $ 560,457   

Contractual agreements

     2,974         (2,874     100         2,964         (2,831     133   

Trademarks

     65,362         (13,544     51,818         32,240         (11,091     21,149   

Formulas/recipes

     33,777         (10,201     23,576         10,471         (7,824     2,647   

Computer software

     104,671         (48,727     55,944         78,039         (40,999     37,040   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total finite lived intangibles

   $ 1,495,994       $ (327,080   $ 1,168,914       $ 893,133       $ (271,707   $ 621,426   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets, excluding goodwill, as of June 30, 2016 and December 31, 2015 were $1,195.5 million and $646.7 million, respectively. Amortization expense on intangible assets for the three months ended June 30, 2016 and 2015 was $28.5 million and $15.6 million, respectively, and $52.3 million and $30.9 million for the six months ended June 30, 2016 and 2015, respectively. Estimated amortization expense on intangible assets for 2016 and the next four years is as follows:

 

        (In thousands)     

2016

    $ 109,818   

2017

    $ 111,535   

2018

    $ 104,388   

2019

    $ 102,961   

2020

    $ 101,285   

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

                                           
     June 30,      December 31,  
     2016      2015  
     (In thousands)  

Accounts payable

   $ 439,672       $ 202,065   

Payroll and benefits

     68,389         27,467   

Interest

     26,016         6,241   

Taxes

     21,450         1,499   

Health insurance, workers’ compensation, and other insurance costs

     18,248         9,331   

Marketing expenses

     18,794         7,435   

Other accrued liabilities

     13,854         6,542   
  

 

 

    

 

 

 

Total

   $ 606,423       $ 260,580   
  

 

 

    

 

 

 

10. INCOME TAXES

Income taxes were recorded at an effective rate of 29.4% and 29.3% for the three and six months ended June 30, 2016, respectively, compared to 34.4% and 33.1% for the three and six months ended June 30, 2015, respectively. During the quarter, the Company’s effective tax rate was favorably impacted by the reversal of a $0.9 million tax reserve assumed in a prior acquisition. The Company also recognized $0.9 million of non-operating expense for the write-off of the related indemnification asset, which is included in the Other (income) expense, net line of the Condensed Consolidated Statements of Income.

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 and the benefits associated with the federal domestic production activities deduction and an intercompany financing structure entered into in conjunction with the E.D. Smith Foods, Ltd. (“E.D. Smith”) acquisition in 2007.

The Internal Revenue Service (“IRS”) completed the examination of Flagstone Foods, Inc.’s 2013 tax year during the quarter, with no proposed adjustments to the Company’s tax liability. The Canadian Revenue Agency (“CRA”) is currently examining the 2008 through 2013 tax years of E.D. Smith. The CRA examination is expected to be completed in 2016 or 2017. The Company has examinations in process with various state taxing authorities, which are expected to be complete in 2016.

Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $17.6 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. Less than $0.1 million of the $17.6 million would affect net income when settled.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

11. LONG-TERM DEBT

 

                                           
     June 30,     December 31,  
     2016     2015  
     (In thousands)  

Revolving Credit Facility

   $ 271,000      $ 353,000   

Term Loan A

     291,750        295,500   

Term Loan A-1

     185,000        190,000   

Term Loan A-2

     1,018,594          

2022 Notes

     400,000        400,000   

2024 Notes

     775,000          

Tax increment financing and other debt

     4,786        6,002   
  

 

 

   

 

 

 

Total outstanding debt

     2,946,130        1,244,502   

Deferred financing costs

     (36,699     (7,868

Less current portion

     (49,929     (14,893
  

 

 

   

 

 

 

Total long-term debt

   $ 2,859,502      $ 1,221,741   
  

 

 

   

 

 

 

On February 1, 2016, coincident with the closing of the acquisition of the Private Brands Business, the Company entered into the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement amended the Company’s prior credit agreement, dated as of May 6, 2014 (as amended from time to time prior to February 1, 2016, the “Prior Credit Agreement”).

The Amended and Restated Credit Agreement (1) amended the maturity dates of the Revolving Credit Facility, Term Loan A, and Term Loan A-1 so that they are conterminous and mature on February 1, 2021, (2) provided for the issuance of Term Loan A-2, (3) is now a secured facility until, among other conditions, the Company reaches a leverage ratio of 3.5 and has no other pari-passu secured debt outstanding, and (4) increased credit spreads. The proceeds from Term Loan A-2 were used to fund a portion of the purchase price of the Private Brands Business. The Amended and Restated Credit Agreement contains substantially the same covenants as the Prior Credit Agreement with adjustments to reflect the incurrence of Term Loan A-2.

In connection with the Amended and Restated Credit Agreement, $20.3 million in fees will be amortized ratably through February 1, 2021. Fees associated with Term Loan A, Term Loan A-1, and Term Loan A-2 (the “Term Loans”) are presented as a direct deduction from outstanding debt, while fees associated with the Revolving Credit Facility are presented as an asset. Beginning February 1, 2016, unamortized fees associated with the Prior Credit Agreement will be amortized ratably through February 1, 2021.

The Revolving Credit Facility and the Term Loans are known collectively as the “Amended and Restated Credit Agreement.” The Company’s average interest rate on debt outstanding under its Amended and Restated Credit Agreement for the three months ended June 30, 2016 was 2.50%.

Revolving Credit Facility — As of June 30, 2016, $575.4 million of the aggregate commitment of $900 million of the Revolving Credit Facility was available. Under the Amended and Restated Credit Agreement, the Revolving Credit Facility matures on February 1, 2021, as compared to a maturity date of May 6, 2019 under the Prior Credit Agreement. In addition, as of June 30, 2016, there were $53.6 million in letters of credit under the Revolving Credit Facility that were issued but undrawn, which have been included as a reduction to the calculation of available credit.

Interest is payable quarterly or at the end of the applicable interest period in arrears on any outstanding borrowings. The interest rates under the Amended and Restated Credit Agreement are based on the Company’s consolidated leverage ratio, and are determined by either (i) LIBOR, plus a margin ranging from 1.25% to 3.00% (inclusive of the facility fee), based on the Company’s consolidated leverage ratio, or (ii) a Base Rate (as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 0.25% to 2.00% (inclusive of the facility fee), based on the Company’s consolidated leverage ratio.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Amended and Restated Credit Agreement is fully and unconditionally, as well as jointly and severally, guaranteed by our 100% owned direct and indirect subsidiaries described as follows: During the first quarter of 2016, Protenergy Holdings, Inc. and Protenergy Natural Foods, Inc. were added as guarantors. Additionally, in connection with the acquisition of the Private Brands Business, TreeHouse Private Brands, Inc. (formerly Ralcorp Holdings, Inc.); American Italian Pasta Co.; Nutcracker Brands; Linette Quality Chocolates; Ralcorp Frozen Bakery Products, Inc.; Cottage Bakery, Inc.; and The Carriage House Companies, Inc. were added as guarantors during the first quarter of 2016. As a result, Bay Valley Foods, LLC; Sturm Foods, Inc.; S.T. Specialty Foods, Inc.; Associated Brands, Inc.; Cains Foods, Inc.; Cains Foods L.P.; Cains GP, LLC; and Flagstone Foods, Inc., together with the subsidiaries added in the first quarter as noted above, and certain other subsidiaries that may become guarantors in the future are collectively known as the “Guarantor Subsidiaries.” The Amended and Restated Credit Agreement contains various financial and restrictive covenants and requires that the Company maintain certain financial ratios, including a leverage and interest coverage ratio. The Amended and Restated Credit Agreement also contains cross-default provisions which could result in the acceleration of payments in the event TreeHouse or the Guarantor Subsidiaries (i) fails to make a payment when due in respect of any indebtedness or guarantee having an aggregate principal amount greater than $75 million or (ii) fails to observe or perform any other agreement or condition related to such indebtedness or guarantee as a result of which the holder(s) of such debt are permitted to accelerate the payment of such debt. The Amended and Restated Credit Agreement is secured by substantially all personal property of TreeHouse and its Guarantor Subsidiaries.

Term Loan A — On May 6, 2014, the Company entered into a $300 million term loan whose maturity date was amended in connection with the Amended and Restated Credit Agreement. The new maturity date is February 1, 2021, as compared to May 6, 2021 under the Prior Credit Agreement. The interest rates applicable to Term Loan A are based on the Company’s consolidated leverage ratio, and are determined by either (i) LIBOR, plus a margin ranging from 1.25% to 3.00%, or (ii) a Base Rate (as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 0.25% to 2.00%. Payments are due on a quarterly basis. Term Loan A is subject to substantially the same covenants as the Revolving Credit Facility, and also has the same Guarantor Subsidiaries. As of June 30, 2016, $291.8 million was outstanding under Term Loan A.

Term Loan A-1 — On July 29, 2014, the Company entered into a $200 million term loan whose maturity date was amended in connection with the Amended and Restated Credit Agreement. The new maturity date is February 1, 2021, as compared to May 6, 2019 under the Prior Credit Agreement. The interest rates applicable to Term Loan A-1 are based on the Company’s consolidated leverage ratio, and are determined by either (i) LIBOR, plus a margin ranging from 1.25% to 3.00%, or (ii) a Base Rate (as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 0.25% to 2.00%. Payments are due on a quarterly basis. Term Loan A-1 is subject to substantially the same covenants as the Revolving Credit Facility, and has the same Guarantor Subsidiaries. As of June 30, 2016, $185.0 million was outstanding under Term Loan A-1.

Term Loan A-2 — On February 1, 2016, the Company entered into a $1,025 million term loan pursuant to the Amended and Restated Credit Agreement. Term Loan A-2 matures on February 1, 2021. The interest rates applicable to Term Loan A-2 are based on the Company’s consolidated leverage ratio, and are determined by either (i) LIBOR, plus a margin ranging from 1.25% to 3.00%, or (ii) a Base Rate (as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 0.25% to 2.00%. Payments are due on a quarterly basis starting June 30, 2016. Term Loan A-2 is subject to substantially the same covenants as the Revolving Credit Facility, and has the same Guarantor Subsidiaries. As of June 30, 2016, $1,018.6 million was outstanding under Term Loan A-2.

2022 Notes — On March 11, 2014, the Company completed its underwritten public offering of $400 million in aggregate principal amount of 4.875% notes due March 15, 2022 (the “2022 Notes”). The net proceeds of $394 million ($400 million less underwriting discount of $6 million, providing an effective interest rate of 4.99%) were used to extinguish the Company’s previously issued 7.75% notes due on March 1, 2018 (the “2018 Notes”). Interest is payable on March 15 and September 15 of each year. The 2022 Notes will mature on March 15, 2022.

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

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

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

2024 Notes — On January 29, 2016, the Company completed an exempt offering under Rule 144A and Regulation S of the Securities Act of $775 million in aggregate principal amount of 6.0% notes due February 15, 2024. The net proceeds from the issuance of the 2024 Notes (approximately $760.7 million after deducting issuance costs, providing an effective interest rate of 6.23%) were used to fund a portion of the purchase price of the Private Brands Business. Interest is payable on February 15 and August 15 of each year, beginning August 15, 2016. The 2024 Notes will mature on February 15, 2024.

The Company may redeem some or all of the 2024 Notes at any time on or after February 15, 2019 at the applicable redemption prices described in the Indenture plus accrued and unpaid interest, if any, up to but not including the redemption date. In addition, prior to February 15, 2019, the Company may redeem all or a portion of the 2024 Notes at a price equal to 100% of the principal amount plus the “make-whole” premium set forth in the Indenture plus accrued and unpaid interest, if any, up to but not including the redemption date. The Company may also redeem up to 40% of the 2024 Notes prior to February 15, 2019 with the net cash proceeds received from certain equity offerings at the redemption price set forth in the Indenture. In the event of certain change of control events, as described in the Indenture, the Company may be required to purchase the 2024 Notes from the holders at a purchase price of 101% of the principal amount plus any accrued and unpaid interest.

The Company issued the 2022 Notes and 2024 Notes pursuant to a single base Indenture among the Company, the Guarantor Subsidiaries, and the Trustee. The Indenture provides, among other things, that the 2022 Notes and 2024 Notes will be senior unsecured obligations of the Company. The Company’s payment obligations under the 2022 Notes and 2024 Notes are fully and unconditionally, as well as jointly and severally, guaranteed on a senior unsecured basis by the Guarantor Subsidiaries, in addition to any future domestic subsidiaries that guarantee or become borrowers under its credit agreement, or guarantee certain other indebtedness incurred by the Company or its restricted subsidiaries. The Indenture was supplemented during the first quarter of 2016 to include the changes in Guarantor Subsidiaries noted above.

The Indenture governing the 2022 Notes and 2024 Notes contains customary event of default provisions (including, without limitation, defaults relating to the failure to pay at final maturity or the acceleration of certain other indebtedness). If an event of default occurs and is continuing, the trustee under the Indenture or holders of at least 25% in principal amount of such notes may declare the principal amount and accrued and unpaid interest, if any, on all such notes to be due and payable. The Indenture also contains restrictive covenants that, among other things, limit the ability of the Company and the Guarantor Subsidiaries to: (i) pay dividends or make other restricted payments, (ii) make certain investments, (iii) incur additional indebtedness or issue preferred stock, (iv) create liens, (v) pay dividends or make other payments (except for certain dividends and payments to the Company and certain subsidiaries of the Company), (vi) merge or consolidate with other entities or sell substantially all of its assets, (vii) enter into transactions with affiliates, and (viii) engage in certain sale and leaseback transactions. The foregoing limitations are subject to exceptions as set forth in the Indenture. In addition, if in the future, the 2022 Notes or 2024 Notes have an investment grade credit rating by both Moody’s Investors Services, Inc. and Standard & Poor’s Ratings Services, certain of these covenants will, thereafter, no longer apply to the 2022 Notes or 2024 Notes for so long as the 2022 Notes or 2024 Notes are rated investment grade by the two rating agencies.

Tax Increment Financing — On December 15, 2001, the Urban Redevelopment Authority of Pittsburgh (“URA”) issued $4.0 million of redevelopment bonds, pursuant to a “Tax Increment Financing Plan” to assist with certain aspects of the development and construction of the Company’s Pittsburgh, Pennsylvania facilities. The agreement was transferred to the Company as part of the acquisition of the soup and infant feeding business. The Company has agreed to make certain payments with respect to the principal amount of the URA’s redevelopment bonds through May 2019. As of June 30, 2016, $1.0 million remains outstanding that matures May 1, 2019. Interest accrues at an annual rate of 7.16%.

Interest Rate Swap Agreements — In June 2016, the Company entered into $500 million of long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base. Under the terms of the agreements, $500 million in variable-rate debt was swapped for a weighted average fixed interest rate base of approximately 0.86% for a period of 37 months, beginning on January 31, 2017 and ending on February 28, 2020. The borrowing cost on the swapped principal will range from 2.11% to 3.86% during the life of the swap agreement based on the credit spreads under the Amended and Restated Credit Agreement.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

12. STOCKHOLDERS’ EQUITY

Common stock — The Company has authorized 90 million shares of common stock with a par value of $0.01 per share. No dividends have been declared or paid.

On January 26, 2016, a total of 13,269,230 shares were issued pursuant to a public offering at $65.00 per share, resulting in gross proceeds to the Company of $862.5 million. Net cash from the offering, after considering issuance costs, was approximately $835.1 million, with approximately $0.1 million recorded to Common stock at par value and approximately $835.0 million recorded to Additional paid-in capital. The net proceeds from the offering were used to fund a portion of the purchase price of the Private Brands Business.

As of June 30, 2016, there were 56,702,327 shares of common stock issued and outstanding. There is no treasury stock issued or outstanding.

Preferred Stock — The Company has authorized 10 million shares of preferred stock with a par value of $0.01 per share. No preferred stock has been issued.

13. EARNINGS PER SHARE

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

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

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  
     (In thousands)      (In thousands)  

Net income

   $         15,648       $         31,362       $         12,302       $         49,214   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Weighted average common shares outstanding

     56,555         42,974         54,625         42,922   

Assumed exercise/vesting of equity awards (1)

     775         705         711         732   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     57,330         43,679         55,336         43,654   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

Net earnings per basic share

   $ 0.28       $ 0.73       $ 0.23       $ 1.15   

Net earnings per diluted share

   $ 0.27       $ 0.72       $ 0.22       $ 1.13   

 

(1) Incremental shares from equity awards are computed using the treasury stock method. Equity awards, excluded from our computation of diluted earnings per share because they were anti-dilutive, were 0.7 million and 1.0 million for the three and six months ended June 30, 2016, respectively, and 0.8 million and 0.7 million for the three and six months ended June 30, 2015, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

14. STOCK-BASED COMPENSATION

The Board of Directors adopted, and the Company’s stockholders approved, the “TreeHouse Foods, Inc. Equity and Incentive Plan” (the “Plan”). The Plan is administered by our Compensation Committee, which consists entirely of independent directors. The Compensation Committee determines specific awards for our executive officers. For all other employees, if the committee designates, our Chief Executive Officer or such other officers will, from time to time, determine specific persons to whom awards under the Plan will be granted, and the terms and conditions of each award. The Compensation Committee or its designee, pursuant to the terms of the Plan, also will make all other necessary decisions and interpretations under 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 12.3 million, of which approximately 2.0 million remain available as of June 30, 2016.

Income before income taxes for the three and six month periods ended June 30, 2016 includes share-based compensation expense of $8.1 million and $14.3 million, respectively. Share-based compensation expense for the three and six months ended June 30, 2015 was $4.5 million and $10.5 million, respectively. The tax benefit recognized related to the compensation cost of these share-based awards was approximately $3.0 million and $5.2 million for the three and six months ended June 30, 2016, respectively, and $1.6 million and $3.7 million for the three and six months ended June 30, 2015, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Stock Options — The following table summarizes stock option activity during the six months ended June 30, 2016. Stock options generally have a three year vesting schedule, which vest one-third on each of the first three anniversaries of the grant date, and expire ten years from the grant date.

 

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

Outstanding, at December 31, 2015

     1,918        20       $ 57.18         6.2       $ 41,793   

Granted

     448              $ 96.88         

Forfeited

     (41           $ 70.75         

Exercised

     (140           $ 49.94         
  

 

 

   

 

 

          

Outstanding, at June 30, 2016

     2,185        20       $ 65.45         6.6       $ 82,015   
  

 

 

   

 

 

          

Vested/expected to vest, at June 30, 2016

     2,110        20       $ 64.57         6.5       $ 81,125   
  

 

 

   

 

 

          

Exercisable, at June 30, 2016

     1,371        20       $ 52.16         5.0       $ 70,223   
  

 

 

   

 

 

          

 

                                                                           
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  
     (In millions)      (In millions)  

Compensation expense

    $ 1.9       $ 1.8       $ 3.5       $ 3.3   

Intrinsic value of stock options exercised

    $ 4.7       $ 2.4       $ 6.0       $ 13.4   

Tax benefit recognized from stock option exercises

    $ 1.7       $ 0.9       $ 2.1       $ 5.1   

Compensation costs related to unvested options totaled $17.5 million at June 30, 2016 and will be recognized over the remaining vesting period of the grants, which averages 2.4 years. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used to calculate the fair value of stock options issued in 2016 include the following: weighted average expected volatility of 25.12%, expected term of six years, weighted average risk free rate of 1.16%, and no dividends. The weighted average grant date fair value of awards granted in 2016 was $26.02.

Restricted Stock Units — Employee restricted stock unit awards generally vest based on the passage of time. These awards generally vest one-third on each anniversary of the grant date. Director restricted stock units generally vest on the first anniversary of the grant date. Certain directors have deferred receipt of their awards until either their departure from the Board of Directors or a specified date. As of June 30, 2016, 91 thousand director restricted stock units have been earned and deferred.

The following table summarizes the restricted stock unit activity during the six months ended June 30, 2016:

 

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

Outstanding, at December 31, 2015

     312      $ 76.36         111      $ 52.60   

Granted

     380      $ 91.28         13      $ 98.28   

Vested

     (117   $ 74.34         (20   $ 58.91   

Forfeited

     (12   $ 77.10              $   
  

 

 

      

 

 

   

Outstanding, at June 30, 2016

     563      $ 86.82         104      $ 56.95   
  

 

 

      

 

 

   

 

                                                                           
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  
     (In millions)      (In millions)  

Compensation expense

    $ 4.5       $ 3.4       $ 8.0       $ 6.0   

Fair value of vested restricted stock units

    $ 12.9       $ 12.3       $ 13.1       $ 12.9   

Tax benefit recognized from vested restricted stock units

    $ 4.6       $ 4.4       $ 4.7       $ 4.5   

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Future compensation costs related to restricted stock units are approximately $40.3 million as of June 30, 2016 and will be recognized on a weighted average basis over the next 2.4 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 27, 2016, based on achievement of operating performance measures, 84,897 performance units were converted into 110,468 shares of stock, an average conversion ratio of 1.30 shares for each performance unit. The following table summarizes the performance unit activity during the six months ended June 30, 2016:

 

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

Unvested, at December 31, 2015

     271      $ 74.13   

Granted

     100      $ 98.28   

Vested

     (85   $ 66.01   

Forfeited

     (6   $ 74.80   
  

 

 

   

Unvested, at June 30, 2016

     280      $ 85.11   
  

 

 

   

 

                                                                           
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2016      2015     2016      2015  
     (In millions)     (In millions)  

Compensation expense

     $ 1.7       $ (0.7     $ 2.8       $ 1.2   

Fair value of vested performance units

     $ 11.4       $ 4.5        $ 11.4       $ 4.5   

Tax benefit recognized from performance units vested

     $ 4.1       $ 1.7        $ 4.1       $ 1.7   

Future compensation costs related to the performance units are estimated to be approximately $15.5 million as of June 30, 2016, and are expected to be recognized over the next 2.5 years. The grant date fair value of the awards is equal to the Company’s closing stock price on the date of grant.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

15. ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss consists of the following components, all of which are net of tax, except for the foreign currency translation adjustment:

 

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

Balance at December 31, 2015

   $ (100,512   $ (12,956   $ (113,468

Other comprehensive income

     28,883               28,883   

Reclassifications from accumulated other comprehensive loss

            516        516   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income

     28,883        516        29,399   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

   $ (71,629   $ (12,440   $ (84,069
  

 

 

   

 

 

   

 

 

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

Balance at December 31, 2014

   $ (51,326   $ (13,005   $ (64,331

Other comprehensive loss

     (20,318            (20,318

Reclassifications from accumulated other comprehensive loss

            512        512   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (20,318     512        (19,806
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ (71,644   $ (12,493   $ (84,137
  

 

 

   

 

 

   

 

 

 

 

  (1) The foreign currency translation adjustment is not net of tax, as it pertains to the Company’s permanent investments in its Canadian and Italian subsidiaries.
  (2) The unrecognized pension and postretirement benefits reclassification is presented net of tax of $316 thousand for the six months ended June 30, 2016 and 2015. The reclassification is included in the computation of net periodic pension and postretirement cost, which is recorded in the Cost of sales and General and administrative lines of the Condensed Consolidated Statements of Income.

The Condensed Consolidated Statements of Income lines impacted by reclassifications out of Accumulated other comprehensive loss are outlined below:

 

                                Affected line in  
     Reclassifications from Accumulated          the Condensed Consolidated       
     Other Comprehensive Loss     Statements of Income  
       Three months ended June 30,          Six months ended June 30,          
     2016      2015      2016      2015        
     (In thousands)      (In thousands)        

Amortization of defined benefit pension items:

           

Prior service costs

   $ 35       $ 36       $ 70       $ 73        (a)   

Unrecognized net loss

     380         378         762         755        (a)   
  

 

 

    

 

 

    

 

 

    

 

 

   

Total before tax

     415         414         832         828     

Income taxes

     157         158         316         316        Income taxes   
  

 

 

    

 

 

    

 

 

    

 

 

   

Net of tax

   $ 258       $ 256       $ 516       $ 512     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

  (a) These accumulated other comprehensive loss components are included in the computation of net periodic pension and postretirement cost, and are recorded in the Cost of sales and General and administrative lines of the Condensed Consolidated Statements of Income.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

16. 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 acquisition of the Private Brands Business, the Company acquired three pension plans and one postretirement benefit plan. The net unfunded liability associated with these plans, which is included in the Accounts payable and accrued expenses and Other long-term liabilities lines of the Condensed Consolidated Balance Sheets, was $76.1 million as of the acquisition date.

Components of net periodic pension expense are as follows:

 

                                                                                       
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2016     2015     2016     2015  
     (In thousands)  

Service cost

   $ 1,279      $ 621      $ 2,328      $ 1,243   

Interest cost

     4,091        713        7,071        1,425   

Expected return on plan assets

     (4,468     (765     (7,694     (1,530

Amortization of unrecognized prior service cost

     52        52        105        105   

Amortization of unrecognized net loss

     382        365        765        730   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 1,336      $ 986      $ 2,575      $ 1,973   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $2.4 million to the pension plans in the first six months of 2016. The Company does not expect to make additional contributions to the plans in 2016.

Components of net periodic postretirement expense are as follows:

 

                                                                           
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2016     2015     2016     2015  
     (In thousands)     (In thousands)  

Service cost

   $ 22      $ 5      $ 38      $ 10   

Interest cost

     347        37        590        75   

Amortization of unrecognized prior service cost

     (17     (16     (35     (32

Amortization of unrecognized net loss

     (2     13        (3     25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement cost

   $ 350      $ 39      $ 590      $ 78   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company expects to contribute approximately $0.2 million to the postretirement health plans during 2016.

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

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

17. OTHER OPERATING EXPENSE, NET

The Company incurred other operating expense for the three and six months ended June 30, 2016 and 2015, which consisted of the following:

 

                                                                           
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  
     (In thousands)      (In thousands)  

Restructuring

   $ 2,447       $ 135       $ 4,083       $ 350   

Other

     858                 916           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expense, net

   $ 3,305       $ 135       $ 4,999       $ 350   
  

 

 

    

 

 

    

 

 

    

 

 

 

18. SUPPLEMENTAL CASH FLOW INFORMATION

 

                                     
     Six Months Ended  
     June 30,  
     2016      2015  
     (In thousands)  

Interest paid

   $ 33,343       $ 21,332   

Income taxes paid

   $ 46,426       $ 20,211   

Accrued purchase of property and equipment

   $ 11,492       $ 8,008   

Accrued other intangible assets

   $ 3,027       $ 2,550   

Non-cash financing activities for the six months ended June 30, 2016 and 2015 include $24.0 million and $17.4 million, respectively, related to the vesting of restricted stock, restricted stock units, and performance stock units. Income taxes paid in the first six months of 2016 were higher than the first six months of 2015 due to the timing of payments to the U.S. federal and state taxing authorities, the inclusion of the Private Brands Business, and payments made to the CRA relating to the 2008, 2009, and 2010 filing periods.

19. COMMITMENTS AND CONTINGENCIES

Litigation, Investigations and Audits — The Company is party in the ordinary course of business to certain claims, litigation, audits, and investigations. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable that may be incurred in connection with any such currently pending or threatened matter, none of which are significant. In the Company’s opinion, the settlement of any such currently pending or threatened matter is not expected to have a material impact on its financial position, annual results of operations, or cash flows.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

20. DERIVATIVE INSTRUMENTS

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

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

In June 2016, the Company entered into $500 million of long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base. Under the terms of the agreements, $500 million in variable-rate debt was swapped for a weighted average fixed interest rate base of approximately 0.86% for a period of 37 months, beginning on January 31, 2017 and ending on February 28, 2020. These agreements do not qualify for hedge accounting and changes in their fair value are recorded in the Condensed Consolidated Statements of Income, with their fair value recorded on the Condensed Consolidated Balance Sheets.

Due to the Company’s foreign operations, we are exposed to foreign currency risk. The Company enters into foreign currency contracts to manage the risk associated with foreign currency cash flows. The Company’s objective in using foreign currency contracts is to establish a fixed foreign currency exchange rate for the net cash flow requirements for purchases that are denominated in U.S. dollars. These contracts do not qualify for hedge accounting and changes in their fair value are recorded in the Condensed Consolidated Statements of Income, with their fair value recorded on the Condensed Consolidated Balance Sheets. As of June 30, 2016, the Company had $57.3 million of U.S. dollar foreign currency contracts outstanding, expiring throughout 2016.

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

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

Diesel contracts are used to manage the Company’s risk associated with the underlying cost of diesel fuel used to deliver products. Contracts for oil and plastics are used to manage the Company’s risk associated with the underlying commodity cost of a significant component used in packaging materials. Contracts for natural gas and electricity are used to manage the Company’s risk associated with the utility costs of its manufacturing facilities, and commodity contracts that are derivatives that do not meet the normal purchases and normal sales scope exception are used to manage the price risk associated with raw material costs. As of June 30, 2016, the Company had outstanding contracts for the purchase of 29,940 megawatts of electricity, expiring throughout 2016; 1.4 million gallons of diesel, expiring throughout 2016; 1.1 million dekatherms of natural gas, expiring throughout 2016; 0.9 million bushels of corn, expiring throughout 2016 and early 2017; 12.6 million pounds of plastics, expiring throughout 2016; 0.6 million bushels of cucumbers, expiring throughout 2016; and 1.7 million bushels of flour, expiring throughout 2016.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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

 

         Fair Value  
   

Balance Sheet Location

           June 30, 2016                December 31, 2015    
         (In thousands)  

Asset Derivatives                        

       

Foreign currency contracts

  Prepaid expenses and other current assets    $ 606       $ 1,356   
    

 

 

    

 

 

 
     $ 606       $ 1,356   
    

 

 

    

 

 

 
       

Liability Derivatives                  

       

Commodity contracts

  Accounts payable and accrued expenses    $ 2,835       $ 3,778   

Foreign currency contracts

  Accounts payable and accrued expenses      1,569           

Interest rate swap agreements

  Accounts payable and accrued expenses      1,594           
    

 

 

    

 

 

 
     $ 5,998       $ 3,778   
    

 

 

    

 

 

 

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

 

                                                                                                             
           Three Months Ended     Six Months Ended  
     Location of (Loss) Gain     June 30,     June 30,  
     Recognized in Income     2016     2015     2016     2015  
           (In thousands)     (In thousands)  

Mark-to-market unrealized gain (loss):

          

Commodity contracts

     Other (income) expense, net      $ 521      $ 1,098      $ 943      $ 1,041   

Foreign currency contracts

     Other (income) expense, net        2,806        889        (2,319     1,363   

Interest rate swap agreements

     Other (income) expense, net        (1,594            (1,594       
    

 

 

   

 

 

   

 

 

   

 

 

 

  Total unrealized gain (loss)

       1,733        1,987        (2,970     2,404   

Realized (loss) gain

          

Commodity contracts

    
 
 
Manufacturing related to cost of
sales and transportation related
to selling and distribution
  
  
  
    (29     (929     (1,015     (1,759

Foreign currency contracts

     Cost of sales        (2,735     461        (1,935     461   
    

 

 

   

 

 

   

 

 

   

 

 

 

  Total realized loss

       (2,764     (468     (2,950     (1,298
    

 

 

   

 

 

   

 

 

   

 

 

 

Total (loss) gain

     $ (1,031   $ 1,519      $ (5,920   $ 1,106   
    

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

21. FAIR VALUE

The following table presents the carrying value and fair value of our financial instruments as of June 30, 2016 and December 31, 2015:

 

     June 30, 2016     December 31, 2015        
     Carrying
Value
    Fair
Value
    Carrying
Value
    Fair
Value
     Level   
     (In thousands)     (In thousands)  

Not recorded at fair value (liability):

          

Revolving Credit Facility

   $ (271,000   $ (266,349   $ (353,000   $ (352,932     2     

Term Loan A

   $ (291,750   $ (291,956   $ (295,500   $ (294,327     2     

Term Loan A-1

   $ (185,000   $ (185,257   $ (190,000   $ (190,200     2     

Term Loan A-2

   $ (1,018,594   $ (1,020,010   $      $        2     

2022 Notes

   $ (400,000   $ (409,500   $         (400,000   $         (383,000     2     

2024 Notes

   $         (775,000   $         (819,563   $      $        2     

    

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

Commodity contracts

   $ (2,835   $ (2,835   $ (3,778   $ (3,778     2     

Foreign currency contracts

   $ (963   $ (963   $ 1,356      $ 1,356        2     

Interest rate swap agreements

   $ (1,594   $ (1,594   $      $        2     

Investments

   $ 9,641      $ 9,641      $ 8,388      $ 8,388        1     

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

The fair value of the Revolving Credit Facility, Term Loan A, Term Loan A-1, Term Loan A-2, 2022 Notes, 2024 Notes, commodity contracts, foreign currency contracts, and interest rate swap agreements are determined using Level 2 inputs. Level 2 inputs are inputs other than quoted market prices that are observable for an asset or liability, either directly or indirectly. The fair values of the Revolving Credit Facility, Term Loan A, Term Loan A-1, and Term Loan A-2 were estimated using present value techniques and market based interest rates and credit spreads. The fair values of the Company’s 2022 Notes and 2024 Notes were estimated based on quoted market prices for similar instruments, where the inputs are considered Level 2, due to their infrequent trading volume. The fair values of the commodity contracts, foreign currency contracts, and interest rate swap agreements are based on an analysis comparing the contract rates to the market rates at the balance sheet date. The commodity contracts, foreign currency contracts, and interest rate swap agreements are recorded at fair value on the Condensed Consolidated Balance Sheets.

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

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

22. SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS

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

The Company evaluates the performance of its segments based on net sales dollars and direct operating income (gross profit less freight out, sales commissions, and direct selling and marketing expenses). The amounts in the following tables are obtained from reports used by senior management and do not include income taxes. Other expenses not allocated include unallocated selling and distribution expenses, unallocated costs of sales, and unallocated corporate expenses. The accounting policies of the Company’s segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2016     2015     2016     2015  
     (In thousands)     (In thousands)  

Net sales to external customers:

        

North American Retail Grocery

   $ 1,274,324      $ 578,750      $ 2,293,634      $ 1,171,163   

Food Away From Home

     124,736        97,848        237,333        186,125   

Industrial and Export

     152,270        82,610        290,536        185,065   

Unallocated

     (9,941            (9,941       
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $       1,541,389      $       759,208      $ 2,811,562      $     1,542,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

Direct operating income:

        

North American Retail Grocery

   $ 155,678      $ 81,256      $ 283,633      $ 158,356   

Food Away From Home

     19,050        14,539        34,965        26,562   

Industrial and Export

     12,803        14,097        33,893        35,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     187,531        109,892        352,491        220,537   

Unallocated selling and distribution expenses

     (9,469     (1,964     (22,698     (5,121

Unallocated costs of sales (1)

     (6,678     646        (19,318     (203

Unallocated corporate expense and other

     (119,791     (54,053     (239,955     (113,996
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     51,593        54,521        70,520        101,217   

Other expense

     (29,418     (6,734     (53,125     (27,629
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 22,175      $ 47,787      $ 17,395      $ 73,588   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Geographic Information — The Company had revenues from customers outside of the United States of approximately 9.0% and 11.2% of total consolidated net sales in the six months ended June 30, 2016 and 2015, respectively, with 7.1% and 10.2% of total consolidated net sales going to Canada, respectively. The Company held 11.2% and 8.8% of its property, plant, and equipment outside of the United States as of June 30, 2016 and 2015, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Major Customers — Walmart Stores, Inc. and affiliates accounted for approximately 18.7% and 20.9% of consolidated net sales in the six months ended June 30, 2016 and 2015, respectively. No other customer accounted for more than 10% of our consolidated net sales.

Product Information — The following table presents the Company’s net sales by major products for the three and six months ended June 30, 2016 and 2015. In 2016, as a result of the acquisition of the Private Brands Business, the Company made the following changes to its product categories: (1) Snacks was renamed Snack nuts and now includes the bars, fruit snacks, and cereal snack mixes from the Private Brands Business, (2) Dry dinners was renamed Pasta and dry dinners and now includes the dry pasta from the Private Brands Business, (3) Mexican and other sauces was renamed Sauces and now includes the sauces from the Private Brands Business, (4) Cookies and crackers was added to include the crackers, cookies, pretzels, pita chips, and candy from the Private Brands Business, and (5) Retail bakery was added to include the in-store bakery products, refrigerated dough, frozen griddle products (pancakes, waffles, and French toast), frozen bread products (breads, rolls, and biscuits), dessert products (frozen cookies and frozen cookie dough), and dry bakery mixes from the Private Brands Business. These changes did not require prior period adjustments.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2016      2015      2016      2015  
     (In thousands)      (In thousands)  

Products:

           

Snack nuts

   $ 351,398       $ 165,381       $ 611,395       $ 311,880   

Retail bakery

     159,060                 271,863           

Cookies and crackers

     159,340                 263,239           

Cereals

     139,205         34,247         251,177         77,287   

Pasta and dry dinners

     133,637         29,524         235,548         62,935   

Beverages

     117,812         92,670         225,405         203,670   

Salad dressings

     103,914         100,178         197,589         184,344   

Pickles

     92,598         86,407         166,928         157,469   

Sauces

     87,027         58,795         163,683         117,226   

Beverage enhancers

     71,007         78,416         153,046         164,529   

Soup and infant feeding

     61,291         59,514         146,141         158,322   

Aseptic products

     24,533         29,092         51,365         53,970   

Jams

     28,910         12,273         49,866         24,222   

Other products

     11,657         12,711         24,317         26,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $     1,541,389       $       759,208       $ 2,811,562       $     1,542,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

23. GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION

The Company’s 2022 Notes and 2024 Notes are guaranteed fully and unconditionally, as well as jointly and severally, by its Guarantor Subsidiaries. As described in Note 11, Protenergy Holdings, Inc. and Protenergy Natural Foods, Inc. were added as Guarantor Subsidiaries in the first quarter of 2016. Additionally, in connection with the acquisition of the Private Brands Business, TreeHouse Private Brands, Inc. (formerly Ralcorp Holdings, Inc.); American Italian Pasta Co.; Nutcracker Brands; Linette Quality Chocolates; Ralcorp Frozen Bakery Products, Inc.; Cottage Bakery, Inc.; and The Carriage House Companies, Inc. were added as guarantors during the first quarter of 2016. In the fourth quarter of 2015, Associated Brands, Inc.; Cains Foods, Inc.; Cains Foods L.P.; Cains GP, LLC; and Flagstone Foods, Inc. (formerly known as Snacks Holding Corporation) were added as Guarantor Subsidiaries. There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan. The following condensed supplemental consolidating financial information presents the results of operations, financial position and cash flows of the parent company, its Guarantor Subsidiaries, its non-guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of June 30, 2016 and 2015, and for the three and six months ended June 30, 2016 and 2015. The equity method has been used with respect to investments in subsidiaries. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. As a result of the addition of the guarantors noted above, the following condensed supplemental consolidating financial information has been recast for prior periods as if the new guarantor structure existed for all periods presented, as of the acquisition dates of the respective guarantors.

 

                                                                                                             
Condensed Supplemental Consolidating Balance Sheet  
June 30, 2016  
(In thousands)  
   
     Parent      Guarantor     Non-Guarantor              
     Company      Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Assets

           
Current assets:            
Cash and cash equivalents    $       $ 741      $ 50,850      $      $ 51,591   
Investments                     9,641               9,641   
Accounts receivable, net      1,342         314,970        46,149               362,461   
Inventories, net              877,991        111,415               989,406   
Assets held for sale              2,674                      2,674   
Prepaid expenses and other current assets      43,042         20,466        22,490               85,998   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Total current assets      44,384         1,216,842        240,545               1,501,771   
Property, plant, and equipment, net      26,679         1,181,805        152,786               1,361,270   
Goodwill              2,655,511        132,512               2,788,023   
Investment in subsidiaries      5,220,809         507,230               (5,728,039       
Intercompany accounts receivable (payable), net      368,086         (341,516     (26,570              
Deferred income taxes      18,649                       (18,649       
Intangible and other assets, net      50,956         1,063,531        133,052               1,247,539   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Total assets    $ 5,729,563       $ 6,283,403      $ 632,325      $ (5,746,688   $ 6,898,603   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
           
Liabilities and Stockholders’ Equity            
Current liabilities:            
Accounts payable and accrued expenses    $ 66,006       $ 485,611      $ 54,806      $      $ 606,423   
Current portion of long-term debt      46,552         3,222        155               49,929   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Total current liabilities      112,558         488,833        54,961               656,352   
Long-term debt      2,858,093         1,121        288               2,859,502   
Deferred income taxes              384,349        47,658        (18,649     413,358   
Other long-term liabilities      10,136         188,291        22,188               220,615   
Stockholders’ equity      2,748,776         5,220,809        507,230        (5,728,039     2,748,776   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
Total liabilities and stockholders’ equity    $ 5,729,563       $ 6,283,403      $ 632,325      $ (5,746,688   $ 6,898,603   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Balance Sheet  
December 31, 2015  
(In thousands)  
   
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

         

Current assets:

         

Cash and cash equivalents

  $ 10,384      $ 91      $ 24,444      $      $ 34,919   

Investments

                  8,388               8,388   

Accounts receivable, net

    17        182,524        20,657               203,198   

Inventories, net

           510,255        73,860               584,115   

Prepaid expenses and other current assets

    17,625        6,608        8,968        (16,618     16,583   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    28,026        699,478        136,317        (16,618     847,203   

Property, plant, and equipment, net

    26,294        470,639        44,595               541,528   

Goodwill

           1,526,004        123,790               1,649,794   

Investment in subsidiaries

    2,411,532        338,849               (2,750,381       

Intercompany accounts receivable (payable), net

    582,267        (553,408     (28,859              

Deferred income taxes

    18,092                      (18,092       

Intangible and other assets, net

    46,041        504,127        114,103               664,271   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $       3,112,252      $       2,985,689      $         389,946      $          (2,785,091   $       3,702,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities and Stockholders’ Equity

         

Current liabilities:

         

Accounts payable and accrued expenses

  $ 16,526      $ 239,316      $ 21,356      $ (16,618   $ 260,580   

Current portion of long-term debt

    11,621        3,116        156               14,893   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    28,147        242,432        21,512        (16,618     275,473   

Long-term debt

    1,219,011        2,398        332               1,221,741   

Deferred income taxes

           272,910        24,290        (18,092     279,108   

Other long-term liabilities

    10,235        56,417        4,963               71,615   

Stockholders’ equity

    1,854,859        2,411,532        338,849        (2,750,381     1,854,859   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 3,112,252      $ 2,985,689      $ 389,946      $ (2,785,091   $ 3,702,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

                                                                                              
Condensed Supplemental Consolidating Statement of Income  
Three Months Ended June 30, 2016  
(In thousands)  
   
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

   $      $     1,454,403      $     159,063      $ (72,077   $     1,541,389   
Cost of sales             1,210,669        136,991        (72,077     1,275,583   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Gross profit             243,734        22,072               265,806   
Selling, general, and administrative expense      22,900        143,242        16,288               182,430   
Amortization expense      2,256        23,842        2,380               28,478   
Other operating expense, net             2,763        542               3,305   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Operating (loss) income      (25,156     73,887        2,862               51,593   
Interest expense      31,076        344        1,336        (1,218     31,538   
Interest income      (1     (1,587     (272             1,218        (642
Other expense (income), net      1        2,599        (4,078            (1,478
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(Loss) income before income taxes      (56,232     72,531        5,876               22,175   
Income taxes (benefit)      (21,231     27,903        (145            6,527   
Equity in net income (loss) of subsidiaries      50,649        6,021               (56,670       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $     15,648      $ 50,649      $ 6,021      $ (56,670   $ 15,648   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Supplemental Consolidating Statement of Income  
Three Months Ended June 30, 2015  
(In thousands)  
   
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

   $      $     712,052      $     98,509      $ (51,353   $     759,208   
Cost of sales             569,470        89,720        (51,353     607,837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Gross profit             142,582        8,789               151,371   
Selling, general, and administrative expense      15,276        56,767        9,121               81,164   
Amortization expense      2,044        10,914        2,593               15,551   
Other operating expense, net             135                      135   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Operating (loss) income      (17,320     74,766        (2,925            54,521   
Interest expense      10,900        220        1,723        (1,471     11,372   
Interest income      (1     (1,471     (193     1,471        (194
Other expense (income), net      2        (3,287     (1,159            (4,444
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(Loss) income before income taxes      (28,221     79,304        (3,296                     —        47,787   
Income taxes (benefit)      (10,777     28,927        (1,725            16,425   
Equity in net income (loss) of subsidiaries      48,806        (1,571            (47,235       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $     31,362      $ 48,806      $ (1,571   $ (47,235   $ 31,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

                                                                                              
Condensed Supplemental Consolidating Statement of Income  
Six Months Ended June 30, 2016  
(In thousands)  
   
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales    $        2,659,193        292,827        (140,458     2,811,562   
Cost of sales             2,207,789        253,862        (140,458     2,321,193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Gross profit             451,404        38,965               490,369   
Selling, general, and administrative expense      76,616        259,656        26,264               362,536   
Amortization expense      4,459        43,230        4,625               52,314   
Other operating expense, net             4,095        904               4,999   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Operating (loss) income      (81,075     144,423        7,172               70,520   
Interest expense      56,429        291        2,852        (2,366     57,206   
Interest income      (2,228     (2,923     (676     2,366        (3,461
Other expense (income), net      2        (2,066     1,444               (620
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(Loss) income before income taxes      (135,278     149,121        3,552               17,395   
Income taxes (benefit)      (51,261     58,145        (1,791            5,093   
Equity in net income (loss) of subsidiaries      96,319        5,343               (101,662       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 12,302        96,319        5,343        (101,662     12,302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Supplemental Consolidating Statement of Income  
Six Months Ended June 30, 2015  
(In thousands)  
   
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net sales    $      $ 1,447,818      $ 212,070      $ (117,535   $ 1,542,353   
Cost of sales             1,168,660        187,420        (117,535     1,238,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Gross profit             279,158        24,650               303,808   
Selling, general, and administrative expense      33,041        117,928        20,393               171,362   
Amortization expense      3,871        21,792        5,216               30,879   
Other operating expense, net             350                      350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Operating (loss) income      (36,912     139,088        (959            101,217   
Interest expense      22,430        382        3,168        (2,916     23,064   
Interest income      (1,431     (2,916     (532     2,916        (1,963
Other expense (income), net      (2     5,791        739               6,528   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(Loss) income before income taxes      (57,909     135,831        (4,334            73,588   
Income taxes (benefit)      (22,113     49,313        (2,826            24,374   
Equity in net income (loss) of subsidiaries      85,010        (1,508            (83,502       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 49,214      $ 85,010      $ (1,508   $ (83,502   $ 49,214   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

                                                                                              
Condensed Supplemental Consolidating Statement of Comprehensive Income  
Three Months Ended June 30, 2016  
(In thousands)  
   
     Parent      Guarantor      Non-Guarantor              
     Company      Subsidiaries      Subsidiaries     Eliminations     Consolidated  

Net income (loss)

   $ 15,648       $ 50,649       $ 6,021      $ (56,670   $ 15,648   

    

            

Other comprehensive income:

            

Foreign currency translation adjustments

                     4,617               4,617   

Pension and postretirement reclassification adjustment, net of tax

             258                       258   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income

             258         4,617               4,875   
Equity in other comprehensive income (loss) of subsidiaries      4,875         4,617                (9,492       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 20,523       $ 55,524       $ 10,638      $ (66,162   $ 20,523   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
Condensed Supplemental Consolidating Statement of Comprehensive Income  
Three Months Ended June 30, 2015  
(In thousands)  
   
     Parent      Guarantor      Non-Guarantor              
     Company      Subsidiaries      Subsidiaries     Eliminations     Consolidated  

Net income (loss)

   $ 31,362       $ 48,806       $ (1,571   $ (47,235   $ 31,362   

    

            

Other comprehensive income:

            

Foreign currency translation adjustments

                     6,219               6,219   

Pension and postretirement reclassification adjustment, net of tax

             256                       256   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income

             256         6,219               6,475   
Equity in other comprehensive income (loss) of subsidiaries      6,475         6,219                (12,694       
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 37,837       $ 55,281       $ 4,648      $ (59,929   $ 37,837   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

                                                                                              
Condensed Supplemental Consolidating Statement of Comprehensive Income  
Six Months Ended June 30, 2016  
(In thousands)  
   
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income (loss)

   $ 12,302      $ 96,319      $ 5,343      $ (101,662   $ 12,302   
          

Other comprehensive (loss) income:

          

Foreign currency translation adjustments

                   28,883               28,883   

Pension and postretirement reclassification adjustment, net of tax

            516                      516   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

            516        28,883               29,399   
Equity in other comprehensive (loss) income of subsidiaries      29,399        28,883               (58,282       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 41,701      $ 125,718      $ 34,226      $ (159,944   $ 41,701   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Condensed Supplemental Consolidating Statement of Comprehensive Income  
Six Months Ended June 30, 2015  
(In thousands)  
   
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income (loss)

   $ 49,214      $ 85,010      $ (1,508   $ (83,502   $ 49,214   
          

Other comprehensive (loss) income:

          

Foreign currency translation adjustments

                   (20,318            (20,318

Pension and postretirement reclassification adjustment, net of tax

            512                      512   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

            512        (20,318            (19,806
Equity in other comprehensive (loss) income of subsidiaries      (19,806     (20,318            40,124          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 29,408      $ 65,204      $ (21,826   $ (43,378   $ 29,408   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

                                                                                              
Condensed Supplemental Consolidating Statement of Cash Flows  
Six Months Ended June 30, 2016  
(In thousands)  
   
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Cash flows from operating activities:

          

 Net cash provided by (used in) operating activities

   $ 45,799      $ 300,279      $ (7,922   $ (101,147   $ 237,009   

Cash flows from investing activities:

          

Additions to property, plant, and equipment

     (1,117     (73,837     (9,002            (83,956

Additions to intangible assets

     (5,901     (13                   (5,914

Intercompany transfer

     102,059        (30,755            (71,304       

Acquisitions, less cash acquired

     (2,683,559     337        43,021               (2,640,201

Proceeds from sale of fixed assets

            76        15               91   

Purchase of investments

                   (530            (530

Increase in restricted cash

            (605                   (605

Other

                   (11            (11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Net cash (used in) provided by investing activities

     (2,588,518     (104,797     33,493        (71,304     (2,731,126

Cash flows from financing activities:

          

Net borrowing (repayment) of debt

     1,702,844        (2,144     4               1,700,704   

Payment of deferred financing costs

     (34,328                          (34,328

Intercompany transfer

     25,927        (192,688     (5,690     172,451          

Net proceeds from issuance of common stock

     835,131                             835,131   

Net payments related to stock-based award activities

     (762                          (762

Excess tax benefits from stock-based compensation

     3,523                             3,523   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     2,532,335        (194,832     (5,686     172,451        2,504,268   

Effect of exchange rate changes on cash and cash equivalents

                   6,521               6,521   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (10,384     650        26,406               16,672   

Cash and cash equivalents, beginning of period

     10,384        91        24,444               34,919   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $      $ 741      $ 50,850      $      $ 51,591   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Cash Flows

Six Months Ended June 30, 2015

(In thousands)

 

                                                                                                             
     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Cash flows from operating activities:

          

Net cash provided by (used in) operating activities

   $ 31,490      $ 197,748      $ 2,554      $ (82,993   $ 148,799   

Cash flows from investing activities:

          

Additions to property, plant, and equipment

     (599     (35,422     (3,104            (39,125

Additions to intangible assets

     (5,819     (738     (126            (6,683

Intercompany transfer

     (11,587     (86,534            98,121          

Proceeds from sale of fixed assets

            159        21               180   

Purchase of investments

                   (311            (311
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (18,005     (122,535     (3,520     98,121        (45,939

Cash flows from financing activities:

          

Net repayment of debt

     (112,000     (1,958     (59            (114,017

Intercompany transfer

     86,230        (74,509     3,407        (15,128       
Net receipts related to stock-based award activities      1,112                             1,112   
Excess tax benefits from stock-based compensation      4,583                             4,583   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (20,075     (76,467     3,348        (15,128     (108,322
Effect of exchange rate changes on cash and cash equivalents                    (1,955            (1,955
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (6,590     (1,254     427               (7,417

Cash and cash equivalents, beginning of period

     18,706        1,690        31,585               51,981   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 12,116      $ 436      $ 32,012      $      $ 44,564   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Business Overview

TreeHouse is a consumer packaged food and beverage manufacturer servicing retail grocery, food away from home, and industrial and export customers. We manufacture a variety of shelf stable, refrigerated, and fresh products. Our product categories include: beverages; salad dressings; snack nuts; beverage enhancers; cookies and crackers; retail bakery; pickles; sauces; soup and infant feeding; cereals; pasta and dry dinners; aseptic products; jams; and other products. We have a comprehensive offering of packaging formats and flavor profiles, and we also offer natural, organic, and preservative-free ingredients in many categories. We believe we are the largest manufacturer of private label salad dressings, non-dairy powdered creamer, powdered drink mixes, instant hot cereals, snack nuts, crackers, pretzels, in-store bakery cookies, refrigerated dough, retail griddle items (waffles, pancakes, and French toast), dry pasta, ready-to-eat cereal, snack bars, and health and wellness bars in the United States and Canada, based on volume. We also believe we are the largest manufacturer of private label pickles, soup, and trail mixes in the United States, and the largest manufacturer of private label jams in Canada, based on volume.

The following discussion and analysis presents the factors that had a material effect on our results of operations for the three month and six month periods ended June 30, 2016 and 2015. Also discussed is our financial position as of the end of the current period. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes to those Condensed Consolidated Financial Statements included elsewhere in this report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See Cautionary Statement Regarding Forward-Looking Statements for a discussion of the uncertainties, risks and assumptions associated with these statements.

We discuss the following three segments in this Management’s Discussion and Analysis of Financial Condition and Results of Operations: North American Retail Grocery, Food Away From Home, and Industrial and Export. The key performance indicators of our segments are net sales dollars and direct operating income, which is gross profit less the cost of transporting products to customer locations (referred to in the tables below as “freight out”), commissions paid to independent sales brokers, and direct selling and marketing expenses. The segment results are presented on a consistent basis with the manner in which the Company reports its results to the chief operating decision maker, and does not include an allocation of taxes and other corporate expenses (which includes interest expense and expenses associated with restructurings). See Note 22 of the Condensed Consolidated Financial Statements for additional information on the presentation of our reportable segments.

Our current operations consist of the following:

North American Retail Grocery – Our North American Retail Grocery segment sells branded and private label products to customers within the United States and Canada. These products include non-dairy powdered creamers; sweeteners; condensed, ready to serve, and powdered soups, broths, and gravies; refrigerated and shelf stable salad dressings and sauces; mayonnaise; pickles and related products; Mexican, barbeque, and other sauces; table and flavored syrups; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; single serve hot beverages; specialty teas; ready-to-eat and hot cereals; baking and mix powders; macaroni and cheese; pasta; skillet dinners; in-store bakery products; refrigerated dough; retail griddle waffles, pancakes and French toast; cookies, crackers, pretzels, pita chips, and candy; snack nuts, bars, trail mixes, cereal snack mixes, fruit snacks, dried fruit, and other wholesome snacks.

Food Away From Home – Our Food Away From Home segment sells non-dairy powdered creamers; sweeteners; pickles and related products; Mexican, barbeque, and other sauces; table and flavored syrups; refrigerated and shelf stable dressings; mayonnaise; aseptic products; ready-to-eat and hot cereals; pasta; retail bakery products; cookies, crackers, pretzels, and candy; snack nuts; fruit snacks; powdered drinks; and single serve hot beverages to foodservice customers, including restaurant chains and food distribution companies, within the United States and Canada.

Industrial and Export – Our Industrial and Export segment includes the Company’s co-pack business and non-dairy powdered creamer sales to industrial customers for use in industrial applications, including products for repackaging in portion control packages and for use as ingredients by other food manufacturers. This segment primarily sells non-dairy powdered creamer; baking and mix powders; pickles and related products; refrigerated and shelf stable salad dressings; Mexican and barbeque sauces; aseptic products; soup and infant feeding products; ready-to-eat and hot cereals; powdered drinks; single serve hot beverages; specialty teas; pasta; retail griddle waffles, pancakes, and French toast; cookies, crackers, pretzels, and candy; snack nuts; bars; and other products. Export sales are primarily to industrial customers outside of North America.

From a macroeconomic perspective, the U.S economy showed continued variability, with continued job growth, increasing personal income, and uneven consumer spending; and while the U.S. Federal Reserve’s intention is to gradually raise interest rates over the next three years, those increases have been delayed due to uneven domestic data, soft global growth, and the decision of the United Kingdom to exit the European Union.

 

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Consumer spending in the U.S. varied widely in the first half of 2016, with the first quarter showing flat to negative growth, and the second quarter rebounding with three consecutive months of expansion, resulting in retail sales growth of nearly 2.6% versus the prior year. Despite increased consumer spending in the second quarter, certain food expenditures continue to show contraction. For example, overall food volume in measured channels was approximately 1.4% lower in the second quarter of 2016 versus the same quarter last year. However, after factoring in non-measured channels and the annual U.S. population growth rate of approximately 0.8%, total food volumes in both measured and non-measured channels are expected to be slightly positive, and in the same range as population growth. From a pricing perspective, private label food products in measured channels showed a 0.2% reduction in pricing, reflective of lower commodity costs being passed along to consumers.

While overall volume growth appears to be limited, certain retail sectors are experiencing growth as consumers continue to snack and seek out “healthy” and “better for you” foods. “Healthy” and “better for you” foods include items such as fresh or freshly prepared foods, natural, organic, or specialty foods, most of which are located in the perimeter of the store. Recent data shows that these product offerings are expected to be the primary growth area for both branded and private label products, and that growth in private label products is expected to drive the overall growth in these product categories. These trends are prompting companies to increase or adjust their product offerings, while retaining their commitment to providing these offerings at reasonable prices. In an effort to respond to shifting consumer demand, the Company offers an increasing variety of snacks, natural, and organic products.

The Company achieved a 103.0% increase in net sales during the second quarter of 2016 when compared to the same period last year, as recent acquisitions and increased volume/mix offset the impact of lower pricing and unfavorable foreign exchange. Overall, the Company’s volume/mix increased 2.3% in the second quarter of 2016 versus last year. Volume/mix in North American Retail Grocery and Industrial and Export increased 4.0% and 4.7%, respectively, while volume/mix in Food Away from Home decreased 9.3% in the quarter. Consistent with recent industry trends, the Company’s “better for you” and premium products continued to do well, posting a 14.9% increase in net sales during the quarter.

Total direct operating income, the measure of our segment profitability, increased in the second quarter of 2016 by approximately 70.7% over the same period last year, primarily from acquisitions. Despite the increase in total dollars, direct operating income as a percentage of net sales decreased 240 basis points from last year to 12.1%, resulting from a higher mix of lower margin sales from recent acquisitions. Direct operating income before considering the acquisition was flat year-over-year, as favorable input costs helped to offset the impact of lower pricing and unfavorable foreign exchange.

The overarching themes impacting the second quarter of 2016 include (1) the February 2016 acquisition of the Private Brands Business, (2) a total Company volume/mix increase of 2.3% despite continued competitive pressures, (3) higher operating costs resulting from the growth of the Company, and (4) continued unfavorable foreign exchange rates negatively impacting year-over-year sales and profitability.

As compared to the second quarter of 2015, the average Canadian foreign exchange rate in 2016 was 4.6% weaker, impacting both net sales and profitability. The Company estimates that net sales were negatively impacted by 0.6%. To help mitigate further profitability erosion, the Company closely monitors the Canadian / U.S. dollar exchange rate, and at times enters into foreign exchange contracts.

Recent Developments

Private Brands Business Acquisition

On February 1, 2016, the Company completed its acquisition of the private brands business of ConAgra Foods, Inc. (“Private Brands Business”) for approximately $2.7 billion, excluding transaction expenses and subject to working capital and other adjustments. The acquisition was funded by a public issuance of common stock, a private issuance of senior unsecured notes, and a new term loan, with the remaining balance funded by borrowings from the Company’s Revolving Credit Facility. Subsequent to quarter end, the working capital adjustment was finalized on July 25, 2016, resulting in a payment of $4.2 million to ConAgra Foods, Inc. that is reflected as a purchase price adjustment in the Condensed Consolidated Financial Statements. See Note 4 to the Condensed Consolidated Financial Statements for more information regarding the Private Brands Business.

On January 26, 2016, the Company issued 13,269,230 of its shares pursuant to a public offering, resulting in gross proceeds to the Company of $862.5 million. Net cash from the offering, after considering issuance costs, was approximately $835.1 million. The net proceeds from the offering were used to fund a portion of the acquisition price of the Private Brands Business.

On January 29, 2016, the Company completed an exempt offering under Rule 144A and Regulation S of the Securities Act of $775 million in aggregate principal amount of 6.0% senior unsecured notes (“2024 Notes”) due February 15, 2024. The net proceeds from the issuance of the 2024 Notes (approximately $760.7 million after deducting issuance costs) were used to fund a portion of the acquisition price of the Private Brands Business. Interest on the 2024 Notes will be paid on February 15th and August 15th of each year, beginning August 15, 2016.

 

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On February 1, 2016, the Term Loan A-2 financing was funded at $1,025.0 million coincident with the closing of the acquisition and has a term of 5 years. Interest on the Term Loan A-2 financing is based on the Company’s consolidated leverage ratio, and is determined by either (i) LIBOR, plus a margin ranging from 1.25% to 3.00%, or (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from 0.25% to 2.00%. Payments are due on a quarterly basis. The Company obtained Term Loan A-2 pursuant to an Amended and Restated Credit Agreement, dated as of February 1, 2016. The Amended and Restated Credit Agreement amends the Company’s Prior Credit Agreement, dated as of May 6, 2014. Significant components of the Amended and Restated Credit Agreement include (but are not limited to) (1) changes to the maturity dates of the Revolving Credit Facility, Term Loan A, and Term Loan A-1 so that they are coterminous and will mature on February 1, 2021, (2) issuance of Term Loan A-2, (3) the Credit Agreement is now a secured facility until, among other conditions, the Company reaches a leverage ratio of 3.5 and has no other pari-passu secured debt outstanding, and (4) increased credit spreads. The Amended and Restated Credit Agreement contains substantially the same covenants as the prior Credit Agreement.

Plant Closures

On May 24, 2016, the Company announced its intention to close its Azusa, California and Ripon, Wisconsin facilities. The decision to close the facilities follows an analysis of the Company’s plant network to align operations with current and future needs of its customers and eliminate excess manufacturing capacity. Full facility closure and the end of production at Azusa is expected to occur in the second quarter of 2017. Full facility closure and the end of production at Ripon is expected in to occur in the fourth quarter of 2016. Total costs to close the facilities are expected to be approximately $17.0 million, of which approximately $14.5 million is expected to be in cash. Components of the charges include non-cash asset write-offs of approximately $2.5 million, employee-related costs of approximately $4.3 million, and other closure costs of approximately $10.2 million. The Company expects to incur approximately $4.0 million of charges on a quarterly basis from the third quarter of 2016 through the second quarter of 2017.

On April 5, 2016, the Company announced its intention to close its Ayer, Massachusetts facility. The decision to close the facility is the result of an ongoing manufacturing network analysis by the Company to maintain competitive costs, service levels, and product quality. Production is expected to cease in the first quarter of 2017 with full closure of the facility expected to occur in the third quarter of 2017. Total costs to close the facility are expected to be approximately $6.5 million, of which approximately $5.3 million is expected to be in cash. Components of the charges include non-cash asset write-offs of approximately $1.2 million, employee-related costs of approximately $2.2 million, and other closure costs of approximately $3.1 million. The Company expects to incur approximately $3.9 million of charges in 2016.

Product Recall

On May 3, 2016, the Company announced the voluntary recall of products that may be impacted by sunflower seeds contaminated with Listeria monocytogenes (L.mono). The recall was expanded on May 19, 2016 and again on June 2, 2016. Product was distributed nationwide through retail stores, and no illnesses have been reported to date. Based on available information, the Company has incurred $15.2 million in charges for the recall, and is unable to determine the full cost at this time. The Company expects to be fully indemnified for all costs associated with the recall.

Interest Rate Swap Agreements

In June 2016, the Company entered into $500 million of long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base. Under the terms of the agreements, $500 million in variable-rate debt was swapped for a weighted average fixed interest rate base of approximately 0.86% for a period of 37 months, beginning on January 31, 2017 and ending on February 28, 2020. The borrowing cost on the swapped principal will range from 2.11% to 3.86% during the life of the swap agreement based on the credit spreads under the Amended and Restated Credit Agreement.

 

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Results of Operations

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

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2016     2015     2016     2015  
    Dollars     Percent     Dollars     Percent     Dollars     Percent     Dollars     Percent  
    (Dollars in thousands)     (Dollars in thousands)  

Net sales

  $ 1,541,389        100.0   $    759,208               100.0   $ 2,811,562               100.0   $   1,542,353            100.0

Cost of sales

    1,275,583        82.8        607,837        80.1        2,321,193        82.6        1,238,545        80.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    265,806        17.2        151,371        19.9        490,369        17.4        303,808        19.7   

Operating expenses:

             

Selling and distribution

    104,363        6.8        42,797        5.6        189,835        6.8        88,595        5.7   

General and administrative

    78,067        5.1        38,367        5.1        172,701        6.1        82,767        5.4   

Amortization expense

    28,478        1.8        15,551        2.0        52,314        1.9        30,879        2.0   

Other operating expense, net

    3,305        0.2        135               4,999        0.2        350          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    214,213             13.9        96,850        12.7        419,849        15.0        202,591        13.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    51,593        3.3        54,521        7.2        70,520        2.4        101,217        6.6   

Other expense (income):

             

Interest expense

    31,538        2.0        11,372        1.5        57,206        2.0        23,064        1.5   

Interest income

    (642            (194            (3,461     (0.2     (1,963     (0.1

(Gain) loss on foreign currency exchange

    (749     (0.1     (2,386     (0.3     (4,873     (0.2     9,000        0.6   

Other (income) expense, net

    (729            (2,058     (0.3     4,253        0.2        (2,472     (0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    29,418        1.9        6,734        0.9        53,125        1.8        27,629        1.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Income before income taxes     22,175        1.4        47,787        6.3        17,395        0.6        73,588        4.8   

Income taxes

    6,527        0.4        16,425        2.2        5,093        0.2        24,374        1.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 15,648        1.0   $ 31,362        4.1   $ 12,302        0.4   $ 49,214        3.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Net Sales — Second quarter net sales increased 103.0% to $1,541.4 million in 2016 compared to $759.2 million in the second quarter of 2015. The increase was due to sales from the 2016 acquisition of the Private Brands Business and favorable volume/mix, partially offset by unfavorable pricing and foreign exchange. During the second quarter of 2016, the Company announced a recall of certain products that impacted net sales by $9.9 million, which was not allocated to the segments. The Company expects to be fully indemnified for the amount. Net sales by segment are shown in the following table:

 

     Three Months Ended June 30,  
                  $ Increase/     % Increase/  
     2016     2015      (Decrease)     (Decrease)  
     (Dollars in thousands)  

North American Retail Grocery

   $ 1,274,324      $ 578,750       $ 695,574        120.2

Food Away From Home

     124,736        97,848         26,888        27.5   

Industrial and Export

     152,270        82,610         69,660        84.3   

Unallocated

     (9,941             (9,941       
  

 

 

   

 

 

    

 

 

   

Total

   $   1,541,389      $             759,208       $      782,181                  103.0
  

 

 

   

 

 

    

 

 

   

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These include the costs of raw materials, ingredients and packaging, labor, facilities and equipment, operation and maintenance of our warehouses, and transportation of our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 82.8% in the second quarter of 2016, compared to 80.1% in 2015. Contributing to the increase in cost of sales as a percentage of net sales was the impact of lower margin products from the recent acquisition, which accounts for approximately 160 basis points of the increase in cost of sales as a percentage of net sales. Also contributing to the increase in cost of sales relative to net sales was the year-over-year impact of unfavorable foreign exchange and increased operating costs, which more than offset the impact of favorable input costs. Included in cost of sales was approximately $5.3 million of costs related to the product recall in the second quarter of 2016 as compared to none in the prior year. The Company expects to be fully indemnified for all costs associated with the recall.

Operating Expenses — Total operating expenses were $214.2 million in the second quarter of 2016 compared to $96.9 million in 2015. The increase in 2016 resulted from the following:

Selling and distribution expenses increased $61.6 million, or 143.9% in the second quarter of 2016 compared to 2015 primarily due to $57.9 million of incremental costs from the recent acquisition. Also contributing to the increase were additional investments in the sales force.

General and administrative expenses increased by $39.7 million in the second quarter of 2016 compared to 2015, of which $28.3 million pertains to continuing costs of the acquired business. Also contributing to the increase was $4.6 million of acquisition and integration costs in the second quarter of 2016 as compared to $0.6 million in the prior year. The remaining increase of $7.4 million was due to the general growth of the business and higher incentive compensation as compared to the prior year. In the prior year, the Company reduced incentive compensation due to operating results.

Amortization expense increased $12.9 million in the second quarter of 2016 compared to 2015, due to the amortization of intangible assets from the acquisition.

Other operating expense in the second quarter of 2016 was $3.3 million, compared to $0.1 million in 2015. The increase was due to higher costs associated with restructurings that were announced in recent quarters with respect to the Company’s closure of the City of Industry, California; Ayer, Massachusetts; Azusa, California; and Ripon, Wisconsin facilities.

Interest Expense — Interest expense increased to $31.5 million in the second quarter of 2016, compared to $11.4 million in 2015, due to higher debt levels and interest rates from financing the acquisition.

Interest Income – Interest income of $0.6 million relates to interest earned on the cash held by our Canadian subsidiaries and gains on investments discussed in Note 5.

Foreign Currency — The Company’s foreign currency impact was a $0.7 million gain for the second quarter of 2016, compared to a gain of $2.4 million in 2015, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar from the beginning to ending dates of the respective quarters.

 

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Other (Income) Expense, net — Other income was $0.7 million for the second quarter of 2016, compared to income of $2.1 million in 2015. The change was due to the non-cash mark-to-market adjustments on derivative contracts, primarily foreign currency contracts and interest rate swap agreements, and the write-off of the indemnification asset discussed below.

Income Taxes — Income tax expense was recorded at an effective rate of 29.4% in the second quarter of 2016 compared to 34.4% in the prior year’s second quarter. During the second quarter of 2016, the Company’s effective tax rate was favorably impacted by the reversal of a $0.9 million tax reserve assumed in a prior acquisition. The Company also recognized $0.9 million of non-operating expense for the write-off of the related indemnification asset, which is included in Other (income) expense, net.

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 and the benefits associated with the federal domestic production activities deduction and an intercompany financing structure entered into in conjunction with the E.D. Smith Foods, Ltd. (“E.D. Smith”) acquisition in 2007.

 

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Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015 — Results by Segment

North American Retail Grocery

 

     Three Months Ended June 30,  
     2016     2015  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $     1,274,324                 100.0   $             578,750                 100.0

Cost of sales

     1,036,114         81.3        464,364         80.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     238,210         18.7        114,386         19.8   

Freight out and commissions

     55,337         4.3        22,295         3.9   

Direct selling and marketing

     27,195         2.2        10,835         1.9   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 155,678         12.2   $ 81,256         14.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the North American Retail Grocery segment increased by $695.6 million, or 120.2%, in the second quarter of 2016 compared to 2015. The change in net sales from 2015 to 2016 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2015 Net sales

   $ 578,750     

Volume/mix

     22,984        4.0   % 

Pricing

     (3,455     (0.6

Acquisitions

     679,526        117.4   

Foreign currency

     (3,481     (0.6
  

 

 

   

 

 

 

2016 Net sales

   $     1,274,324                120.2   % 
  

 

 

   

 

 

 

The increase in net sales from 2015 to 2016 resulted from the acquisition of the Private Brands Business and improved volume/mix, partially offset by unfavorable pricing and foreign exchange. During the second quarter of 2016, volume/mix increases in single serve beverages and carton soup were partially offset by lower volume/mix primarily in pickles, non-dairy creamer, and sauces.

Cost of sales as a percentage of net sales in the second quarter of 2016 increased 1.1% compared to last year, as the impact of lower margin products from the Private Brands Business and unfavorable foreign exchange offset improved sales mix and favorability from lower commodity costs. The Company estimates the acquisition increased cost of sales as a percentage of net sales by approximately 1.6%.

Freight out and commissions paid to independent sales brokers were $55.3 million in the second quarter of 2016, compared to $22.3 million in 2015. The Private Brands Business acquisition accounted for $34.7 million of the increase. Before considering the Private Brands Business acquisition, costs were slightly lower primarily due to decreased freight costs.

Direct selling and marketing expenses were $27.2 million in the second quarter of 2016 and $10.8 million in 2015. The acquisition of the Private Brands Business accounted for $13.4 million of the increase, with the remaining amount being due to investments in the sales force.

 

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Food Away From Home

 

     Three Months Ended June 30,  
     2016     2015  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $       124,736               100.0   $       97,848               100.0

Cost of sales

     98,028         78.6        77,569         79.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     26,708         21.4        20,279         20.7   

Freight out and commissions

     4,521         3.6        3,699         3.7   

Direct selling and marketing

     3,137         2.5        2,041         2.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 19,050         15.3   $ 14,539         14.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Food Away From Home segment increased by $26.9 million, or 27.5%, in the second quarter of 2016 compared to the prior year. The change in net sales from 2015 to 2016 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2015 Net sales

   $ 97,848     

Volume/mix

     (9,080     (9.3 )  % 

Pricing

     674        0.7   

Acquisitions

     35,715        36.5   

Foreign currency

     (421     (0.4
  

 

 

   

 

 

 

2016 Net sales

   $     124,736                  27.5   % 
  

 

 

   

 

 

 

Net sales increased during the second quarter of 2016 compared to 2015 as the increase from the acquisition of the Private Brands Business was partially offset by unfavorable volume/mix. Volume/mix increases in hot cereals were more than offset by volume/mix reductions in most other product categories, the most significant being pickles, aseptic products, and salad dressings, reflecting competitive pressures.

Cost of sales as a percentage of net sales decreased to 78.6% in the second quarter of 2016 from 79.3% in 2015 due to the impact of higher margin products from the Private Brands Business and favorable input costs that were partially offset by unfavorable foreign exchange for the Canadian operations. The Company estimates the acquisition decreased cost of sales as a percentage of net sales by approximately 0.8%.

Freight out and commissions paid to independent sales brokers increased in the second quarter of 2016 by $0.8 million compared to 2015, due to the acquisition. Despite the increase in total expense, freight out and commissions decreased as a percentage of net sales.

Direct selling and marketing increased to $3.1 million in the second quarter of 2016 from $2.0 million in 2015 due to the acquisition and investments in the sales force, resulting in a slightly higher percentage of net sales.

 

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Industrial and Export

 

     Three Months Ended June 30,  
     2016     2015  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $     152,270             100.0   $     82,610             100.0

Cost of sales

     134,763         88.5        66,550         80.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     17,507         11.5        16,060         19.4   

Freight out and commissions

     3,745         2.5        1,427         1.7   

Direct selling and marketing

     959         0.6        536         0.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 12,803         8.4   $ 14,097         17.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Industrial and Export segment increased $69.7 million, or 84.3%, in the second quarter of 2016, compared to the prior year. The change in net sales from 2015 to 2016 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2015 Net sales

   $ 82,610     

Volume/mix

     3,917        4.7   % 

Pricing

     (1,211     (1.4

Acquisitions

     67,259        81.4   

Foreign currency

     (305     (0.4
  

 

 

   

 

 

 

2016 Net sales

   $       152,270                84.3   % 
  

 

 

   

 

 

 

Net sales increased during the second quarter of 2016 compared to 2015 as the increase from the acquisition of the Private Brands Business and increased volume/mix were partially offset by unfavorable pricing and foreign exchange. Volume/mix increases in pickles were partially offset by lower volume/mix in soup and infant feeding.

Cost of sales as a percentage of net sales increased from 80.6% in the second quarter of 2015 to 88.5% in 2016, primarily due to the impact of lower margin products from the Private Brands Business and a shift in legacy mix to lower margin products resulting from competitive pressures, particularly in infant feeding and non-dairy creamer. The Company estimates the acquisition increased cost of sales as a percentage of net sales by approximately 7.3%.

Freight out and commissions paid to independent sales brokers were $3.7 million in the second quarter of 2016 and $1.4 million in 2015. The increase is due to the impact of the acquisition and increased volume.

Direct selling and marketing increased to $1.0 million in the second quarter of 2016 from $0.5 million in 2015, primarily due to the acquisition.

 

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Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Net Sales — Net sales increased 82.3% to $2,811.6 million in the first six months of 2016 compared to $1,542.4 million in the first six months of 2015. The increase was due to sales from the 2016 acquisition of the Private Brands Business and favorable volume/mix, partially offset by unfavorable pricing and foreign exchange. During the second quarter of 2016, the Company announced a recall of certain products that impacted net sales by $9.9 million, which was not allocated to the segments. The Company expects to be fully indemnified for the amount. Net sales by segment are shown in the following table:

 

     Six Months Ended June 30,  
                  $ Increase/     % Increase/  
     2016     2015      (Decrease)     (Decrease)  
     (Dollars in thousands)  

North American Retail Grocery

   $ 2,293,634      $ 1,171,163       $ 1,122,471        95.8   % 

Food Away From Home

     237,333        186,125         51,208        27.5   

Industrial and Export

     290,536        185,065         105,471        57.0   

Unallocated

     (9,941             (9,941       
  

 

 

   

 

 

    

 

 

   

Total

   $   2,811,562      $   1,542,353       $   1,269,209            82.3   % 
  

 

 

   

 

 

    

 

 

   

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These include the costs of raw materials, ingredients and packaging, labor, facilities and equipment, operation and maintenance of our warehouses, and transportation of our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 82.6% in the first six months of 2016, compared to 80.3% in 2015. Contributing to the increase in cost of sales as a percentage of net sales was the impact of lower margin products from the recent acquisition, which accounts for approximately 150 basis points of the increase in cost of sales as a percentage of net sales. Included in cost of sales was approximately $8.4 million of acquisition and integration costs in the first six months of 2016 as compared to $0.7 million in the prior year. Also contributing to the increase in cost of sales relative to net sales was the year-over-year impact of unfavorable foreign exchange, increased operating costs, and approximately $5.3 million of costs related to the product recall, which more than offset the impact of favorable input costs. The Company expects to be fully indemnified for all costs associated with the recall.

Operating Expenses — Total operating expenses were $419.8 million during the first six months of 2016 compared to $202.6 million in 2015. The increase in 2016 resulted from the following:

Selling and distribution expenses increased $101.2 million, or 114.3%, in the first six months of 2016 compared to 2015, primarily due to $98.8 million of incremental costs from the recent acquisition. Also contributing to the increase were additional investments in the sales force.

General and administrative expenses increased by $89.9 million in the first six months of 2016 compared to 2015, of which $42.8 million pertained to continuing costs of the acquired business. Also contributing to the increase was $37.6 million of acquisition and integration costs in the first six months of 2016 as compared to $1.3 million in the prior year. The remaining increase of $10.8 million was due to the general growth of the business and higher incentive compensation as compared to prior year. In the prior year, the Company reduced incentive compensation due to operating results.

Amortization expense increased by $21.4 million in the first six months of 2016 compared to 2015, due to the amortization of intangible assets from the acquisition.

Other operating expense in the first six months of 2016 was $5.0 million, compared to $0.4 million in 2015. The increase was due to higher costs associated with restructurings that were announced in recent quarters with respect to the Company’s closure of the City of Industry, California; Ayer, Massachusetts; Azusa, California; and Ripon, Wisconsin facilities.

Interest Expense — Interest expense increased to $57.2 million in the first six months of 2016, compared to $23.1 million in 2015, due to higher debt levels and interest rates from financing the acquisition.

Interest Income – Interest income of $3.5 million includes $2.2 million of interest income recorded in the first quarter related to annual patronage refunds pertaining to Term Loan A. The patronage refund represents our participation in a capital plan related to our Term Loan A and is an annual payment based on a percentage of our average daily loan balance. The remaining interest income pertains to cash held by our Canadian subsidiaries and gains on investments, as discussed in Note 5.

Foreign Currency – The Company’s foreign currency impact was a $4.9 million gain for the first six months of 2016, compared to a loss of $9.0 million in 2015, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar from the beginning to ending dates of the respective six month periods.

 

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Other (Income) Expense, net — Other expense was $4.3 million for the first six months of 2016, compared to income of $2.5 million in 2015. The change was due to the non-cash mark-to-market adjustments on derivative contracts, primarily foreign currency contracts and interest rate swap agreements, and the write-off of the indemnification asset discussed below.

Income Taxes — Income tax expense was recorded at an effective rate of 29.3% in the first six months of 2016 compared to 33.1% in 2015. During the first six months of 2016, the Company’s effective tax rate was favorably impacted by the reversal of a $0.9 million tax reserve assumed in a prior acquisition. The Company also recognized $0.9 million of non-operating expense for the write-off of the related indemnification asset, which is included in Other (income) expense, net.

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 and the benefits associated with the federal domestic production activities deduction and an intercompany financing structure entered into in conjunction with the E.D. Smith Foods, Ltd. (“E.D. Smith”) acquisition in 2007.

 

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Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015 — Results by Segment

North American Retail Grocery

 

     Six Months Ended June 30,  
     2016     2015  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $     2,293,634             100.0   $     1,171,163             100.0

Cost of sales

     1,865,669         81.3        945,164         80.7