Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

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

For the Quarterly Period Ended September 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      ☒    No      ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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            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    ☒

Number of shares of Common Stock, $0.01 par value, outstanding as of October 31, 2016: 56,730,620

 

 

 


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      39   
Item 3 — Quantitative and Qualitative Disclosures About Market Risk      60   
Item 4 — Controls and Procedures      61   
Report of Independent Registered Public Accounting Firm      62   

Part II — Other Information

  
Item 1 — Legal Proceedings      63   
Item 1A — Risk Factors      63   
Item 5 — Other Information      63   
Item 6 — Exhibits      63   

Signatures

     64   

 

2

 

 

 


Part I — Financial Information

Item 1. Financial Statements

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

         September 30,             December 31,      
     2016     2015  
     (Unaudited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 47,227      $ 34,919   

Investments

     10,117        8,388   

Receivables, net

     384,901        203,198   

Inventories, net

     1,040,978        584,115   

Assets held for sale

     2,674          

Prepaid expenses and other current assets

     75,966        16,583   
  

 

 

   

 

 

 

Total current assets

     1,561,863        847,203   

Property, plant, and equipment, net

     1,364,672        541,528   

Goodwill

     2,774,764        1,649,794   

Intangible assets, net

     1,171,554        646,655   

Other assets, net

     50,379        17,616   
  

 

 

   

 

 

 

Total assets

   $         6,923,232      $         3,702,796   
  

 

 

   

 

 

 
    

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 606,793      $ 260,580   

Current portion of long-term debt

     58,099        14,893   
  

 

 

   

 

 

 

Total current liabilities

     664,892        275,473   

Long-term debt

     2,849,759        1,221,741   

Deferred income taxes

     416,079        279,108   

Other long-term liabilities

     205,257        71,615   
  

 

 

   

 

 

 

Total liabilities

     4,135,987        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, 56,729 and 43,126 shares issued and outstanding, respectively

     567        431   

Additional paid-in capital

     2,067,569        1,207,167   

Retained earnings

     810,205        760,729   

Accumulated other comprehensive loss

     (91,096     (113,468
  

 

 

   

 

 

 

Total stockholders’ equity

     2,787,245        1,854,859   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,923,232      $ 3,702,796   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

 

 


TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)  

Net sales

   $       1,586,850      $       798,638      $       4,398,412      $       2,340,991   

Cost of sales

     1,301,317        639,941        3,622,510        1,878,486   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     285,533        158,697        775,902        462,505   

Operating expenses:

    

Selling and distribution

     102,141        44,887        291,976        133,482   

General and administrative

     71,879        36,535        244,580        119,302   

Amortization expense

     28,638        14,893        80,952        45,772   

Other operating expense, net

     5,285        154        10,284        504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     207,943        96,469        627,792        299,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     77,590        62,228        148,110        163,445   

Other expense (income):

    

Interest expense

     30,749        10,914        87,955        33,978   

Interest income

     (108     (265     (3,569     (2,228

(Gain) loss on foreign currency exchange

     (1,075     9,226        (5,948     18,226   

Other (income) expense, net

     (4,584     2,078        (331     (394
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     24,982        21,953        78,107        49,582   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     52,608        40,275        70,003        113,863   

Income taxes

     15,434        11,834        20,527        36,208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 37,174      $ 28,441      $ 49,476      $ 77,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per common share:

    

Basic

   $ 0.65      $ 0.66      $ 0.89      $ 1.81   

Diluted

   $ 0.65      $ 0.65      $ 0.88      $ 1.78   

Weighted average common shares:

    

Basic

     56,804        43,168        55,350        43,004   

Diluted

     57,451        43,721        56,037        43,672   

See Notes to Condensed Consolidated Financial Statements.

 

4

 

 

 


TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  
     2016     2015     2016      2015  
     (Unaudited)     (Unaudited)  

Net income

   $       37,174      $       28,441      $       49,476       $           77,655   
         

Other comprehensive (loss) income:

         

Foreign currency translation adjustments

     (7,285     (20,216     21,598         (40,533

Pension and postretirement reclassification adjustment (1)

     258        256        774         767   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive (loss) income

     (7,027     (19,960     22,372         (39,766
  

 

 

   

 

 

   

 

 

    

 

 

 
         

Comprehensive income

   $ 30,147      $ 8,481      $ 71,848       $ 37,889   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

  (1) Net of tax of $159 and $158 for the three months ended September 30, 2016 and 2015, respectively, and $475 and $474 for the nine months ended September 30, 2016 and 2015, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

5

 

 

 


TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Nine Months Ended  
     September 30,  
     2016     2015  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $         49,476      $         77,655   

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

    

Depreciation

     127,181        46,160   

Amortization

     80,952        45,772   

Stock-based compensation

     22,784        15,503   

Excess tax benefits from stock-based compensation

     (3,676     (5,004

Mark-to-market gain on derivative contracts

     (3,860     (378

Mark-to-market (gain) loss on investments

     (480     421   

Loss on disposition of assets

     2,054        365   

Deferred income taxes

     (1,630     239   

(Gain) loss on foreign currency exchange

     (5,948     18,226   

Other

     (2,786     (1,127

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

    

Receivables

     (16,827     14,493   

Inventories

     (8,140     (61,715

Prepaid expenses and other assets

     (31,203     (5,150

Accounts payable, accrued expenses and other liabilities

     86,818        23,730   
  

 

 

   

 

 

 

Net cash provided by operating activities

     294,715        169,190   

Cash flows from investing activities:

    

Additions to property, plant, and equipment

     (131,942     (57,188

Additions to intangible assets

     (10,904     (9,663

Acquisitions, less cash acquired

     (2,644,364       

Proceeds from sale of fixed assets

     1,474        278   

Purchase of investments

     (795     (572

Increase in restricted cash

     (605       

Other

     4          
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,787,132     (67,145

Cash flows from financing activities:

    

Borrowings under Revolving Credit Facility

     239,300        131,100   

Payments under Revolving Credit Facility

     (313,300     (257,100

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

     (2,627     (2,672

Payment of deferred financing costs

     (34,328       

Payments on Term Loans

     (25,937     (7,250

Net proceeds from issuance of common stock

     835,131          

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

     (1,053     1,221   

Excess tax benefits from stock-based compensation

     3,676        5,004   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     2,500,862        (129,697

Effect of exchange rate changes on cash and cash equivalents

     3,863        (1,446
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     12,308        (29,098

Cash and cash equivalents, beginning of period

     34,919        51,981   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 47,227      $ 22,883   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

6

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the nine months ended September 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 September 25, 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.

 

7

 

 

 


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, which is not expected to be significant.

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.

 

8

 

 

 


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 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    $       6.9       $       3.8   

Ayer, Massachusetts

   April 5, 2016    First quarter

of 2017

  

Third quarter

of 2017

   Spoonable dressings    North American Retail Grocery, Food Away From Home    $ 8.5       $ 5.5   

Azusa, California

   May 24, 2016    Second quarter

of 2017

  

Second quarter

of 2017

   Bars and snack products    North American Retail Grocery    $ 15.2       $ 13.5   

Ripon, Wisconsin

   May 24, 2016    Fourth quarter

of 2016

  

Fourth quarter

of 2016

   Sugar wafer cookies    North American Retail Grocery    $ 2.0       $ 1.2   

Total expected costs to close the City of Industry, California and Ripon Wisconsin facilities have been reduced by approximately $5.0 million and $0.1 million, respectively, since the initial announcements while total expected costs to close the Ayer, Massachusetts and Azusa, California facilities have been increased by approximately $2.0 million and $0.3 million, respectively.

Below is a summary of the plant closing costs:

 

    

Three Months
Ended
    September 30, 2016    

  

    Nine Months

    Ended
    September 30, 2016

  

Cumulative

Costs
To Date

  

Total

Expected

Costs

     (In thousands)

Asset-related

   $                      1,652    $                      3,158    $                      6,178    $                      8,585

Employee-related

   2,183    4,146    5,308    8,948

Other closure costs

   2,055    3,120    3,149    14,974
  

 

  

 

  

 

  

 

Total

   $                      5,890    $                    10,424    $                    14,635    $                    32,507
  

 

  

 

  

 

  

 

Liabilities recorded as of September 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 September 30, 2016:

 

     Severance       Multiemployer Pension  
Plan Withdrawal
     Total Liabilities  
     (In thousands)  

Balance as of December 31, 2015

   $                            395      $                         767       $                         1,162   

Expense

     3,809                3,809   

Payments

     (1,035             (1,035
  

 

 

   

 

 

    

 

 

 

Balance as of September 30, 2016

   $                         3,169      $                         767       $                        3,936   
  

 

 

   

 

 

    

 

 

 

 

9

 

 

 


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 nine months ended September 30, 2016 are the Private Brands Business’s net sales of approximately $2,074.6 million and income before income taxes of $55.6 million. Integration costs of $7.5 million were included in determining income before income taxes.

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

 

     (In thousands)  

Cash

     $              43,358   

Receivables

     161,190   

Inventory

     444,860   

Property, plant, and equipment

     808,856   

Customer relationships

     510,900   

Trade names

     33,000   

Software

     19,576   

Formulas

     23,200   

Other assets

     53,545   

Goodwill

     1,118,102   
  

 

 

 

Assets acquired

     3,216,587   

Deferred taxes

     (135,697

Assumed current liabilities

     (243,287

Assumed long-term liabilities

     (149,881
  

 

 

 

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. Indemnification assets related to taxes of approximately $23.4 million were also recorded. 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 $1,044.9 million and $73.2 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 first nine months of 2016, resulting in a decrease to goodwill of approximately $5.8 million. 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 these adjustments, approximately $0.2 million was expensed to Cost of sales in the first nine months of 2016. The remaining adjustments did not impact the Condensed Consolidated Statements of Income.

 

10

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 
September 30,
     Nine Months Ended
                         September 30,                        
 
                     2015                                      2016                                      2015          
  

 

 

 
     (In thousands, except per share data)  

Pro forma net sales

     $             1,657,997       $           4,722,375       $             5,007,031   
  

 

 

    

 

 

    

 

 

 

Pro forma net income (loss)

     $ 25,898       $ 71,191       $ (718,415
  

 

 

    

 

 

    

 

 

 

Pro forma basic earnings (loss) per common share

     $ 0.46       $ 1.26       $ (12.77
  

 

 

    

 

 

    

 

 

 

Pro forma diluted earnings (loss) per common share

     $ 0.45       $ 1.24       $ (12.77
  

 

 

    

 

 

    

 

 

 

5. INVESTMENTS

 

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

U.S. equity

   $ 7,353       $ 5,283   

Non-U.S. equity

     1,721         1,574   

Fixed income

     1,043         1,531   
  

 

 

    

 

 

 

Total investments

   $                 10,117       $                 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 September 30, 2016 and December 31, 2015, $47.2 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 September 30, 2016, which relates to cash held to meet certain insurance requirements.

For the nine months ended September 30, 2016, we recognized unrealized losses totaling $0.4 million that are included in the Interest expense line of the Condensed Consolidated Statements of Income, while unrealized losses for the three months ended September 30, 2016 were insignificant. For the three and nine months ended September 30, 2016, we recognized unrealized gains totaling $0.4 million and $0.9 million, respectively, that are included in the Interest income line of the Condensed Consolidated Statements of Income. Additionally, realized gains for the three and nine months ended September 30, 2016 were $0.1 million and $0.2 million, respectively, which 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.

 

11

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

6. INVENTORIES

 

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

Raw materials and supplies

   $ 438,535      $ 274,007   

Finished goods

     622,790        331,535   

LIFO reserve

     (20,347     (21,427
  

 

 

   

 

 

 

Total inventories

   $         1,040,978      $            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 $105.3 million and $88.1 million of our inventory was accounted for under the LIFO method of accounting at September 30, 2016 and December 31, 2015, respectively. Approximately $114.5 million and $128.9 million of our inventory was accounted for using the weighted average costing approach at September 30, 2016 and December 31, 2015, respectively.

7. PROPERTY, PLANT, AND EQUIPMENT

 

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

Land

   $ 70,878      $ 25,954   

Buildings and improvements

     459,564        226,134   

Machinery and equipment

     1,275,754        681,711   

Construction in progress

     96,655        24,493   
  

 

 

   

 

 

 

Total

     1,902,851        958,292   

Less accumulated depreciation

     (538,179     (416,764
  

 

 

   

 

 

 

Property, plant, and equipment, net

   $         1,364,672      $            541,528   
  

 

 

   

 

 

 

Depreciation expense was $46.7 million and $15.3 million for the three months ended September 30, 2016 and 2015, respectively, and $127.2 million and $46.2 million for the nine months ended September 30, 2016 and 2015, respectively.

 

12

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

8. GOODWILL AND INTANGIBLE ASSETS

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

 

       North American  
Retail Grocery
        Food Away    
From Home
    Industrial
      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

     (5,441     (381             (5,822

Foreign currency exchange adjustments

     6,257        611                6,868   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2016

   $         2,474,640      $         166,038      $         134,086       $         2,774,764   
  

 

 

   

 

 

   

 

 

    

 

 

 

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 September 30, 2016 and December 31, 2015 are as follows:

 

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

Trademarks

   $ 26,296       $ 25,229   
  

 

 

    

 

 

 

Total indefinite lived intangibles

   $             26,296       $             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 September 30, 2016 and December 31, 2015 are as follows:

 

     September 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

   $ 1,287,320       $ (272,759   $ 1,014,561       $ 769,419       $ (208,962   $ 560,457   

Contractual agreements

     2,972         (2,887     85         2,964         (2,831     133   

Trademarks

     65,336         (14,889     50,447         32,240         (11,091     21,149   

Formulas/recipes

     33,754         (11,525     22,229         10,471         (7,824     2,647   

Computer software

     111,094         (53,158     57,936         78,039         (40,999     37,040   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total finite lived intangibles

   $     1,500,476       $     (355,218   $     1,145,258       $       893,133       $     (271,707   $     621,426   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets, excluding goodwill, as of September 30, 2016 and December 31, 2015 were $1,171.6 million and $646.7 million, respectively. Amortization expense on intangible assets for the three months ended September 30, 2016 and 2015 was $28.6 million and $14.9 million, respectively, and $81.0 million and $45.8 million for the nine months ended September 30, 2016 and 2015, respectively. Estimated amortization expense on intangible assets for 2016 and the next four years is as follows:

 

       (In thousands)    

2016

    $         109,918   

2017

    $ 112,818   

2018

    $ 106,314   

2019

    $ 104,562   

2020

    $ 102,660   

 

13

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

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

Accounts payable

   $ 473,009       $ 202,065   

Payroll and benefits

     68,853         27,467   

Interest

     7,448         6,241   

Taxes

     22,694         1,499   

Health insurance, workers’ compensation, and other insurance costs

     16,993         9,331   

Marketing expenses

     11,965         7,435   

Other accrued liabilities

     5,831         6,542   
  

 

 

    

 

 

 

Total

   $           606,793       $           260,580   
  

 

 

    

 

 

 

10. INCOME TAXES

Income taxes were recorded at an effective rate of 29.3% for the three and nine months ended September 30, 2016 compared to 29.4% and 31.8% for the three and nine months ended September 30, 2015, respectively. During the quarter, the Company’s effective tax rate was favorably impacted by the reversal of $2.2 million in tax reserves assumed in prior acquisitions. The Company also recognized $2.2 million of non-operating expense for the write-off of the related indemnification assets, 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 second quarter of 2016, 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 2017.

Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $6.0 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 $3.6 million of the $6.0 million would affect net income when settled.

 

14

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

11. LONG-TERM DEBT

 

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

Revolving Credit Facility

   $ 279,000      $ 353,000   

Term Loan A

     289,875        295,500   

Term Loan A-1

     182,500        190,000   

Term Loan A-2

     1,012,188          

2022 Notes

     400,000        400,000   

2024 Notes

     775,000          

Tax increment financing and other debt

     4,312        6,002   
  

 

 

   

 

 

 

Total outstanding debt

     2,942,875        1,244,502   

Deferred financing costs

     (35,017     (7,868

Less current portion

     (58,099     (14,893
  

 

 

   

 

 

 

Total long-term debt

   $         2,849,759      $         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 coterminous 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 September 30, 2016 was 2.47%.

Revolving Credit Facility — As of September 30, 2016, $571.3 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 September 30, 2016, there were $49.7 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.

 

15

 

 

 


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 September 30, 2016, $289.9 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 September 30, 2016, $182.5 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 September 30, 2016, $1,012.2 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.

 

16

 

 

 


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 September 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.

 

17

 

 

 


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 September 30, 2016, there were 56,729,138 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      Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (In thousands)      (In thousands)  

Net income

   $     37,174       $     28,441       $     49,476       $     77,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     56,804         43,168         55,350         43,004   

Assumed exercise/vesting of equity awards (1)

     647         553         687         668   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     57,451         43,721         56,037         43,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per basic share

   $ 0.65       $ 0.66       $ 0.89       $ 1.81   

Net earnings per diluted share

   $ 0.65       $ 0.65       $ 0.88       $ 1.78   

 

(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 0.4 million and 0.7 million for the three and nine months ended September 30, 2016, respectively, and 0.7 million for the three and nine months ended September 30, 2015.

 

18

 

 

 


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 2.1 million remain available as of September 30, 2016.

Income before income taxes for the three and nine month periods ended September 30, 2016 includes share-based compensation expense of $8.5 million and $22.8 million, respectively. Share-based compensation expense for the three and nine months ended September 30, 2015 was $5.0 million and $15.5 million, respectively. The tax benefit recognized related to the compensation cost of these share-based awards was approximately $3.1 million and $8.3 million for the three and nine months ended September 30, 2016, respectively, and $1.7 million and $5.4 million for the three and nine months ended September 30, 2015, respectively.

 

19

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Stock Options —The following table summarizes stock option activity during the nine months ended September 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

     456              $ 96.85         

Forfeited

     (86           $ 79.09         

Exercised

     (148           $ 51.28         
  

 

 

   

 

 

          

Outstanding, at September 30, 2016

             2,140                    20       $         65.17         6.3       $ 52,098   
  

 

 

   

 

 

          

Vested/expected to vest, at September 30, 2016

     2,077        20       $ 64.36         6.2       $ 51,906   
  

 

 

   

 

 

          

Exercisable, at September 30, 2016

     1,374        20       $ 52.22         4.7       $         48,749   
  

 

 

   

 

 

          

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (In millions)      (In millions)  

Compensation expense

   $ 2.0       $ 1.7       $ 5.5       $ 4.9   

Intrinsic value of stock options exercised

   $ 0.1       $ 1.0       $ 6.1       $ 14.4   

Tax benefit recognized from stock option exercises

   $             0.1       $             0.4       $             2.2       $             5.5   

Compensation costs related to unvested options totaled $15.0 million at September 30, 2016 and will be recognized over the remaining vesting period of the grants, which averages 2.3 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 25.11%, 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 $26.01.

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 September 30, 2016, 89 thousand director restricted stock units have been earned and deferred.

The following table summarizes the restricted stock unit activity during the nine months ended September 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

     393      $ 91.44         15      $ 98.78   

Vested

     (142   $ 74.79         (22   $ 58.56   

Forfeited

     (32   $ 82.51              $ 76.30   
  

 

 

      

 

 

   

Outstanding, at September 30, 2016

                 531      $             87.59                     104      $             57.78   
  

 

 

      

 

 

   

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (In millions)      (In millions)  

Compensation expense

   $ 4.9       $ 2.8       $ 12.9       $ 8.9   

Fair value of vested restricted stock units

   $ 2.8       $ 0.9       $ 15.9       $ 13.9   

Tax benefit recognized from vested restricted stock units

   $         1.0       $         0.3       $         5.7       $         4.8   

 

20

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Future compensation costs related to restricted stock units are approximately $35.7 million as of September 30, 2016 and will be recognized on a weighted average basis over the next 2.2 years. The grant date fair value of the awards is equal to the Company’s closing stock price on the 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, 85,249 performance units were converted into 110,926 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 nine months ended September 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

     (16   $ 79.90   
  

 

 

   

Unvested, at September 30, 2016

                 270      $             85.15   
  

 

 

   

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2016     2015      2016      2015  
     (In millions)      (In millions)  

Compensation expense

   $ 1.6      $ 0.5       $ 4.4       $ 1.7   

Fair value of vested performance units

   $ (1.8   $ 0.6       $ 9.6       $ 5.1   

Tax benefit recognized from performance units vested

   $         —      $         0.2       $         4.1       $         1.9   

Future compensation costs related to the performance units are estimated to be approximately $14.3 million as of September 30, 2016, and are expected to be recognized 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 date of grant.

 

21

 

 

 


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

     21,598               21,598   

Reclassifications from accumulated other comprehensive loss

            774        774   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income

     21,598        774        22,372   
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $         (78,914)      $         (12,182)     

$

        (91,096)

  

  

 

 

   

 

 

   

 

 

 

 

           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

     (40,533            (40,533

Reclassifications from accumulated other comprehensive loss

            767        767   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (40,533     767        (39,766
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $         (91,859)      $         (12,238)      $         (104,097)   
  

 

 

   

 

 

   

 

 

 

 

  (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 $475 thousand and $474 thousand for the nine months ended September 30, 2016 and 2015, respectively. 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
September 30,
     Nine months ended
September 30,
      
     2016      2015      2016      2015       
     (In thousands)      (In thousands)       

Amortization of defined benefit pension items:

              

Prior service costs

   $ 35       $ 36       $ 105       $ 109       (a)

Unrecognized net loss

     382         378         1,144         1,132       (a)
  

 

 

    

 

 

    

 

 

    

 

 

    

Total before tax

     417         414         1,249         1,241      

Income taxes

     159         158         475         474       Income taxes            
  

 

 

    

 

 

    

 

 

    

 

 

    

Net of tax

   $         258       $         256       $         774       $         767      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

  (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.

 

22

 

 

 


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     Nine Months Ended  
     September 30,     September 30,  
     2016     2015     2016     2015  
     (In thousands)  

Service cost

   $ 1,279      $ 621      $ 3,607      $ 1,864   

Interest cost

     4,092        713        11,163        2,138   

Expected return on plan assets

     (4,468     (765     (12,162     (2,295

Amortization of unrecognized prior service cost

     53        53        158        157   

Amortization of unrecognized net loss

     383        365        1,148        1,095   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $             1,339      $             987      $             3,914      $             2,959   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $3.1 million to the pension plans in the first nine 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     Nine Months Ended  
     September 30,     September 30,  
     2016     2015     2016     2015  
     (In thousands)     (In thousands)  

Service cost

   $ 21      $ 5      $ 59      $ 15   

Interest cost

     348        38        938        113   

Amortization of unrecognized prior service cost

     (18     (17     (53     (49

Amortization of unrecognized net loss

     (1     13        (4     38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement cost

   $         350      $         39      $         940      $         117   
  

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

23

 

 

 


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 nine months ended September 30, 2016 and 2015, which consisted of the following:

 

                                                                                       
     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (In thousands)      (In thousands)  

Restructuring

   $ 4,890       $ 154       $ 8,973       $ 504   

Other

     395                 1,311           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating expense, net

   $ 5,285       $ 154       $ 10,284       $ 504   
  

 

 

    

 

 

    

 

 

    

 

 

 

18. SUPPLEMENTAL CASH FLOW INFORMATION

 

                                           
     Nine Months Ended  
     September 30,  
     2016      2015  
     (In thousands)  

Interest paid

   $ 80,769       $ 36,601   

Income taxes paid

   $ 49,528       $ 35,064   

Accrued purchase of property and equipment

   $ 15,467       $ 3,971   

Accrued other intangible assets

   $ 4,385       $ 1,569   

Non-cash financing activities for the nine months ended September 30, 2016 and 2015 include $26.8 million and $19.0 million, respectively, related to the vesting of restricted stock, restricted stock units, and performance stock units.

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.

 

24

 

 

 


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 September 30, 2016, the Company had $37.5 million of U.S. dollar foreign currency contracts outstanding, expiring throughout 2016 and early 2017.

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 September 30, 2016, the Company had outstanding contracts for the purchase of 14,612 megawatts of electricity, expiring throughout 2016; 4.0 million gallons of diesel, expiring throughout 2016; 0.6 million dekatherms of natural gas, expiring throughout 2016; 0.9 million bushels of corn, expiring throughout early 2017; 7.2 million pounds of plastics, expiring throughout 2016; and 0.3 million bushels of flour, expiring throughout 2016.

 

25

 

 

 


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

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

Asset Derivatives

        

Commodity contracts

   Prepaid expenses and other current assets    $ 563       $   

Foreign currency contracts

   Prepaid expenses and other current assets      1,120         1,356   

Interest rate swap agreements

   Prepaid expenses and other current assets      848           
     

 

 

    

 

 

 
      $ 2,531       $ 1,356   
     

 

 

    

 

 

 
        

Liability Derivatives

        

Commodity contracts

   Accounts payable and accrued expenses    $ 1,093       $ 3,778   
     

 

 

    

 

 

 
      $ 1,093       $ 3,778   
     

 

 

    

 

 

 

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

 

                                                                               
          Three Months Ended     Nine Months Ended  
     Location of (Loss) Gain    September 30,     September 30,  
    

Recognized in Income

   2016     2015     2016     2015  
          (In thousands)     (In thousands)  

Mark-to-market unrealized gain (loss):

           

Commodity contracts

   Other (income) expense, net    $ 2,305      $ (834   $ 3,248      $ 207   

Foreign currency contracts

   Other (income) expense, net      2,083        (1,183     (236     171   

Interest rate swap agreements

   Other (income) expense, net      2,442               848          
     

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gain (loss)

        6,830        (2,017     3,860        378   

Realized (loss) gain

           

Commodity contracts

   Manufacturing related to cost of sales and transportation related to selling and distribution      119        (1,508     (896     (3,268

Foreign currency contracts

   Cost of sales      (1,321     681        (3,256     1,142   
     

 

 

   

 

 

   

 

 

   

 

 

 

Total realized loss

        (1,202     (827     (4,152     (2,126
     

 

 

   

 

 

   

 

 

   

 

 

 

Total (loss) gain

      $ 5,628      $ (2,844   $ (292   $ (1,748
     

 

 

   

 

 

   

 

 

   

 

 

 

 

26

 

 

 


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 September 30, 2016 and December 31, 2015:

 

     September 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

   $ (279,000   $ (274,485   $ (353,000   $ (352,932     2   

Term Loan A

   $ (289,875   $ (290,329   $ (295,500   $ (294,327     2   

Term Loan A-1

   $ (182,500   $ (182,731   $ (190,000   $ (190,200     2   

Term Loan A-2

   $ (1,012,188   $ (1,013,471   $      $        2   

2022 Notes

   $ (400,000   $ (416,500   $ (400,000   $ (383,000     2   

2024 Notes

   $ (775,000   $ (832,156   $      $        2   

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

          

Commodity contracts

   $ (530   $ (530   $ (3,778   $ (3,778     2   

Foreign currency contracts

   $ 1,120      $ 1,120      $ 1,356      $ 1,356        2   

Interest rate swap agreements

   $ 848      $ 848      $      $        2   

Investments

   $             10,117      $             10,117      $               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.

 

27

 

 

 


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     Nine Months Ended  
     September 30,     September 30,  
     2016     2015     2016     2015  
     (In thousands)     (In thousands)  

Net sales to external customers:

        

North American Retail Grocery

   $ 1,305,872      $ 597,775      $ 3,599,506      $ 1,768,938   

Food Away From Home

     157,371        94,601        394,704        280,726   

Industrial and Export

     123,511        106,262        414,047        291,327   

Unallocated

     96               (9,845       
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $     1,586,850      $     798,638      $ 4,398,412      $   2,340,991   
  

 

 

   

 

 

   

 

 

   

 

 

 

Direct operating income:

        

North American Retail Grocery

   $ 159,124      $ 83,864      $ 442,757      $ 242,220   

Food Away From Home

     16,469        12,892        51,434        39,454   

Industrial and Export

     16,431        16,108        50,324        51,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     192,024        112,864        544,515        333,401   

Unallocated selling and distribution expenses

     (7,219     (1,431     (29,917     (6,552

Unallocated costs of sales (1)

     (1,509     2,377        (20,827     2,174   

Unallocated corporate expense and other

     (105,706     (51,582     (345,661     (165,578
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     77,590        62,228        148,110        163,445   

Other expense

     (24,982     (21,953     (78,107     (49,582
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 52,608      $ 40,275      $ 70,003      $ 113,863   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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 8.9% and 11.8% of total consolidated net sales in the nine months ended September 30, 2016 and 2015, respectively, with 7.1% and 10.7% of total consolidated net sales going to Canada, respectively. The Company held 10.8% and 8.3% of its property, plant, and equipment outside of the United States as of September 30, 2016 and 2015, respectively.

 

28

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Major Customers — Walmart Stores, Inc. and affiliates accounted for approximately 18.2% and 20.8% of consolidated net sales in the nine months ended September 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 nine months ended September 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      Nine Months Ended  
     September 30,      September 30,  
     2016      2015      2016      2015  
     (In thousands)      (In thousands)  

Products:

           

Snack nuts

   $ 355,901       $ 172,581       $ 967,296       $ 484,461   

Retail bakery

     167,036                 438,899           

Cookies and crackers

     157,196                 420,435           

Cereals

     144,154         37,253         395,331         114,540   

Pasta and dry dinners

     144,959         31,077         380,507         94,012   

Beverages

     118,487         101,622         343,892         305,292   

Salad dressings

     94,082         85,757         291,671         270,101   

Sauces

     84,977         52,908         248,660         170,134   

Pickles

     81,194         85,544         248,122         243,013   

Soup and infant feeding

     92,478         94,807         238,619         253,129   

Beverage enhancers

     73,627         80,028         226,673         244,557   

Jams

     29,765         13,365         79,631         37,587   

Aseptic products

     25,215         26,600         76,580         80,570   

Other products

     17,779         17,096         42,096         43,595   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $     1,586,850       $     798,638       $   4,398,412       $   2,340,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

29

 

 

 


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 September 30, 2016 and 2015, and for the three and nine months ended September 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

September 30, 2016

(In thousands)

 

     Parent      Guarantor     Non-Guarantor              
     Company      Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Assets

           

Current assets:

           

Cash and cash equivalents

   $       $ 10      $ 47,217      $      $ 47,227   

Investments

                    10,117               10,117   

Accounts receivable, net

             328,103        56,798               384,901   

Inventories, net

             923,607        117,371               1,040,978   

Assets held for sale

             2,674                      2,674   

Prepaid expenses and other current assets

     34,725         22,941        18,300               75,966   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     34,725         1,277,335        249,803               1,561,863   

Property, plant, and equipment, net

     28,010         1,189,389        147,273               1,364,672   

Goodwill

             2,644,106        130,658               2,774,764   

Investment in subsidiaries

     5,285,565         518,906               (5,804,471       

Intercompany accounts receivable (payable), net

     329,823         (313,490     (16,333              

Deferred income taxes

     20,187                       (20,187       

Intangible and other assets, net

     53,148         1,053,752        115,033               1,221,933   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,751,458       $ 6,369,998      $ 626,434      $ (5,824,658   $ 6,923,232   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

           

Current liabilities:

           

Accounts payable and accrued expenses

   $ 51,870       $ 488,394      $ 66,529      $      $ 606,793   

Current portion of long-term debt

     54,834         3,132        133               58,099   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     106,704         491,526        66,662               664,892   

Long-term debt

     2,848,712         779        268               2,849,759   

Deferred income taxes

             401,522        34,744        (20,187     416,079   

Other long-term liabilities

     8,797         190,606        5,854               205,257   

Stockholders’ equity

     2,787,245         5,285,565        518,906        (5,804,471     2,787,245   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $   5,751,458       $     6,369,998      $         626,434      $   (5,824,658   $     6,923,232   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

30

 

 

 


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   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

31

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended September 30, 2016

(In thousands)

 

     Parent     Guarantor       Non-Guarantor                
     Company       Subsidiaries       Subsidiaries       Eliminations         Consolidated    

Net sales

   $      $   1,501,774      $   167,014      $   (81,938   $   1,586,850   

Cost of sales

            1,240,261        142,994        (81,938     1,301,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

            261,513        24,020               285,533   

Selling, general, and administrative expense

     23,512        134,373        16,135               174,020   

Amortization expense

     2,319        23,962        2,357               28,638   

Other operating expense, net

            4,735        550               5,285   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (25,831     98,443        4,978               77,590   

Interest expense

     30,928        (103     1,143        (1,219     30,749   

Interest income

     (5     (1,005     (317     1,219        (108

Other expense (income), net

     (1     (435     (5,223            (5,659
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (56,753     99,986        9,375               52,608   

Income taxes (benefit)

     (22,143     35,669        1,908               15,434   

Equity in net income (loss) of subsidiaries

     71,784        7,467               (79,251       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $       37,174      $ 71,784      $ 7,467      $ (79,251   $ 37,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended September 30, 2015

(In thousands)

 

  

  

  

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

   $      $ 755,336      $ 96,991      $ (53,689   $ 798,638   

Cost of sales

            610,871        82,759        (53,689     639,941   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

            144,465        14,232               158,697   

Selling, general, and administrative expense

     15,418        58,435        7,569               81,422   

Amortization expense

     2,070        10,468        2,355               14,893   

Other operating expense, net

            154                      154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (17,488     75,408        4,308               62,228   

Interest expense

     10,376        (231     2,175        (1,406     10,914   

Interest income

     (16     (1,406     (249     1,406        (265

Other expense (income), net

     (5     9,054        2,255               11,304   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (27,843     67,991        127               40,275   

Income taxes (benefit)

     (10,576     23,110        (700            11,834   

Equity in net income (loss) of subsidiaries

     45,708        827               (46,535       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 28,441      $ 45,708      $ 827      $ (46,535   $ 28,441   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Income

Nine Months Ended September 30, 2016

(In thousands)

 

     Parent     Guarantor       Non-Guarantor                
     Company       Subsidiaries       Subsidiaries       Eliminations         Consolidated    

Net sales

   $      $ 4,160,967      $ 459,841      $ (222,396   $ 4,398,412   

Cost of sales

            3,448,050        396,856        (222,396     3,622,510   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

            712,917        62,985               775,902   

Selling, general, and administrative expense

     100,128        394,029        42,399               536,556   

Amortization expense

     6,778        67,192        6,982               80,952   

Other operating expense, net

            8,830        1,454               10,284   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (106,906     242,866        12,150               148,110   

Interest expense

     87,357        188        3,995        (3,585     87,955   

Interest income

     (2,233     (3,928     (993     3,585        (3,569

Other expense (income), net

     1        (2,501     (3,779            (6,279
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (192,031     249,107        12,927               70,003   

Income taxes (benefit)

     (73,404     93,814        117               20,527   

Equity in net income (loss) of subsidiaries

     168,103        12,810               (180,913       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 49,476      $ 168,103      $ 12,810      $ (180,913   $ 49,476   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Supplemental Consolidating Statement of Income

Nine Months Ended September 30, 2015

(In thousands)

 

  

  

  

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

   $      $ 2,203,154      $ 309,061      $ (171,224   $ 2,340,991   

Cost of sales

            1,779,531        270,179        (171,224     1,878,486   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

            423,623        38,882               462,505   

Selling, general, and administrative expense

     48,459        176,363        27,962               252,784   

Amortization expense

     5,941        32,260        7,571               45,772   

Other operating expense, net

            504                      504   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (54,400     214,496        3,349               163,445   

Interest expense

     32,806        151        5,343        (4,322     33,978   

Interest income

     (1,447     (4,322     (781     4,322        (2,228

Other expense (income), net

     (7     14,845        2,994               17,832   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (85,752     203,822        (4,207            113,863   

Income taxes (benefit)

     (32,689     72,423        (3,526            36,208   

Equity in net income (loss) of subsidiaries

     130,718        (681            (130,037       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 77,655      $ 130,718      $ (681   $ (130,037   $ 77,655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended September 30, 2016

(In thousands)

 

     Parent     Guarantor       Non-Guarantor                
     Company       Subsidiaries       Subsidiaries       Eliminations         Consolidated    

Net income (loss)

   $ 37,174      $ 71,784      $ 7,467      $ (79,251   $ 37,174   

Other comprehensive income:

          

Foreign currency translation adjustments

                   (7,285            (7,285

Pension and postretirement reclassification adjustment, net of tax

            258                      258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

            258        (7,285            (7,027

Equity in other comprehensive income (loss) of subsidiaries

     (7,027     (7,285            14,312          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $     30,147      $ 64,757      $ 182      $ (64,939   $ 30,147   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended September 30, 2015

(In thousands)

 

  

  

  

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income (loss)

   $ 28,441      $ 45,708      $ 827      $ (46,535   $ 28,441   

Other comprehensive income:

          

Foreign currency translation adjustments

                   (20,216            (20,216

Pension and postretirement reclassification adjustment, net of tax

            256                      256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

            256        (20,216            (19,960

Equity in other comprehensive income (loss) of subsidiaries

     (19,960     (20,215            40,175          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $       8,481      $ 25,749      $ (19,389   $ (6,360   $ 8,481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Nine Months Ended September 30, 2016

(In thousands)

 

     Parent     Guarantor       Non-Guarantor                
     Company       Subsidiaries       Subsidiaries       Eliminations         Consolidated    

Net income (loss)

   $ 49,476      $ 168,103      $ 12,810      $ (180,913   $ 49,476   

Other comprehensive (loss) income:

          

Foreign currency translation adjustments

                   21,598               21,598   

Pension and postretirement reclassification adjustment, net of tax

            774                      774   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

            774        21,598               22,372   

Equity in other comprehensive (loss) income of subsidiaries

     22,372        21,598               (43,970       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $       71,848      $ 190,475      $ 34,408      $ (224,883   $ 71,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Nine Months Ended September 30, 2015

(In thousands)

 

  

  

  

     Parent     Guarantor     Non-Guarantor              
     Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income (loss)

   $ 77,655      $ 130,718      $ (681   $ (130,037   $ 77,655   

Other comprehensive (loss) income:

          

Foreign currency translation adjustments

                   (40,533            (40,533

Pension and postretirement reclassification adjustment, net of tax

            767                      767   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

            767        (40,533            (39,766

Equity in other comprehensive (loss) income of subsidiaries

     (39,766     (40,533            80,299          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $       37,889      $ 90,952      $ (41,214   $ (49,738   $ 37,889   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Cash Flows

Nine Months Ended September 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

   $ 90,485      $ 395,130      $ (10,761   $ (180,139   $ 294,715   

Cash flows from investing activities:

          

Additions to property, plant, and equipment

     (2,780     (119,983     (9,179            (131,942

Additions to intangible assets

     (8,221     (2,683                   (10,904

Intercompany transfer

     32,444        (78,421            45,977          

Acquisitions, less cash acquired

     (2,687,722     337        43,021               (2,644,364

Proceeds from sale of fixed assets

            1,474                      1,474   

Purchase of investments

                   (795            (795

Increase in restricted cash

            (605                   (605

Other

                   4               4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (2,666,279     (199,881     33,051        45,977        (2,787,132

Cash flows from financing activities:

          

Net borrowing (repayment) of debt

     1,700,063        (2,589     (38            1,697,436   

Payment of deferred financing costs

     (34,328                          (34,328

Intercompany transfer

     61,921        (192,741     (3,342     134,162          

Net proceeds from issuance of common stock

     835,131                             835,131   

Net payments related to stock-based award activities

     (1,053                          (1,053

Excess tax benefits from stock-based compensation

     3,676                             3,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     2,565,410        (195,330     (3,380     134,162        2,500,862   

Effect of exchange rate changes on cash and cash equivalents

                   3,863               3,863   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (10,384     (81     22,773               12,308   

Cash and cash equivalents, beginning of period

     10,384        91        24,444               34,919   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $      $ 10      $ 47,217      $      $ 47,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Cash Flows

Nine Months Ended September 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

   $       82,140      $ 218,218      $ (1,900   $ (129,268   $ 169,190   

Cash flows from investing activities:

          

Additions to property, plant, and equipment

     (286     (51,981     (4,921            (57,188

Additions to intangible assets

     (8,605     (932     (126            (9,663

Intercompany transfer

     (42,985     (78,928     2        121,911          

Proceeds from sale of fixed assets

            174        104               278   

Purchase of investments

                   (572            (572
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (51,876     (131,667     (5,513     121,911        (67,145

Cash flows from financing activities:

          

Net repayment of debt

     (133,250     (2,579     (93            (135,922

Intercompany transfer

     78,055        (84,213     (1,199     7,357          

Net receipts related to stock-based award activities

     1,221                             1,221   

Excess tax benefits from stock-based compensation

     5,004                             5,004   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (48,970     (86,792     (1,292     7,357        (129,697

Effect of exchange rate changes on cash and cash equivalents

                   (1,446            (1,446
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (18,706     (241     (10,151            (29,098

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $      $ 1,449      $       21,434      $      $ 22,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37

 

 

 


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

24. SUBSEQUENT EVENTS

On November 3, 2016, the Company announced its intention to close a facility in Delta, British Columbia and to reduce its manufacturing footprint in Battle Creek, Michigan. The decision follows an analysis of the Company’s plant network to align operations with the current and future needs of its customers and eliminate excess manufacturing capacity. Both the Battle Creek and Delta facilities were part of the Company’s acquisition of the Private Brands Business in February 2016.

The Delta facility produces frozen griddle products, primarily for the North American Retail Grocery segment. Production is expected to cease in early 2018. The Company operates two facilities in Delta, and this announcement only affects the frozen griddle facility.

The Battle Creek facility produces ready-to-eat cereal, primarily for the North American Retail Grocery segment. The facility downsizing will take place over a 15 month period beginning in January 2017.

Total costs to close the Delta facility and downsize Battle Creek are expected to be approximately $14.7 million, of which approximately $6.8 million is expected to be in cash. Components of the charges include non-cash asset write-offs of approximately $7.9 million, employee-related costs of approximately $4.6 million, and other closure costs of approximately $2.2 million. The Company expects approximately $4.0 million of the charges to be incurred in the fourth quarter of 2016.

 

38

 

 

 


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 and nine month periods ended September 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, as job growth experienced in the first half of the year gave way to three straight months of increased unemployment. Additionally, consumer spending in the quarter increased despite higher unemployment, and while personal income was up, the increase was lower than expectations. In September, the U.S. Federal Reserve announced that interest rates were likely to increase at least once this year, but based on the recent jobs and income reports and the upcoming election, we do not expect an increase in interest rates until the December 2016 meeting.

 

39

 

 

 


Consumer spending in the U.S. varied widely in the first nine months of 2016, with the first quarter showing flat to negative growth, and the third quarter rebounding with three consecutive months of expansion, resulting in retail sales growth of nearly 2.4% versus the prior year. Despite increased consumer spending in the third quarter, certain food expenditures continue to show contraction. For example, overall food volume in measured channels was approximately 1.2% lower in the third 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 0.7% 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 98.7% increase in net sales during the third quarter of 2016 when compared to the same period last year, as recent acquisitions and increased volume/mix offset the impact of lower pricing. Overall, the Company’s volume/mix increased 1.4% in the third quarter of 2016 versus last year. Volume/mix in North American Retail Grocery increased 4.6%, while volume/mix in Food Away from Home and Industrial and Export decreased 1.8% and 14.1%, respectively, in the quarter. Consistent with recent industry trends, the Company’s “better for you” and premium products continued to do well, posting a 35.1% increase in net sales during the quarter.

The Company believes it is on track with respect to the integration of the Private Brands Business. Most recently, the Company has had success in the implementation of SAP at a number of plants. The Company will continuously reassess its systems and processes and implement reorganization plans as necessary, as the integration of the Private Brands Business continues.

Total direct operating income, our measure of segment profitability, increased in the third quarter of 2016 by approximately 70.1% 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 200 basis points from last year to 12.1%, resulting from a higher mix of lower margin sales from the recent acquisition. Before considering the acquisition, direct operating income as a percentage of net sales increased 80 basis points from last year, as favorable input costs and sales mix offset the impact of lower pricing and competitive pressures.

The overarching themes impacting the third quarter of 2016 include (1) the February 2016 acquisition of the Private Brands Business, (2) a total Company volume/mix increase of 1.4% despite continued competitive pressures, (3) higher operating costs resulting from the growth of the Company, and (4) favorable input costs.

As compared to the third quarter of 2015, the average Canadian foreign exchange rate in 2016 was only 0.2% stronger. This marks the first quarter in recent periods where volatility in foreign exchange rates was not a major driver of fluctuations in operating results between periods. The Company continues to closely monitor 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. 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.

 

40

 

 

 


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.

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 followed 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 $17.2 million, an increase of approximately $0.2 million since the initial announcement, as the Company revised its estimates. The Company expects approximately $14.7 million of the closure costs to be in cash. Components of the charges include non-cash asset write-offs of approximately $2.5 million, employee-related costs of approximately $4.5 million, and other closure costs of approximately $10.2 million.

On April 5, 2016, the Company announced its intention to close its Ayer, Massachusetts facility. The decision to close the facility was 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 $8.5 million, an increase of approximately $2.0 million since the initial announcement, as the Company revised its estimates. The Company expects approximately $5.5 million of the closure costs to be in cash. Components of the charges include non-cash asset write-offs of approximately $3.0 million, employee-related costs of approximately $2.6 million, and other closure costs of approximately $2.9 million.

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 $0.1 million and $15.3 million in charges for the recall for the three and nine months ended September 30, 2016, respectively, 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.

 

41

 

 

 


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 September 30,     Nine Months Ended September 30,  
     2016     2015     2016     2015  
     Dollars     Percent     Dollars     Percent     Dollars     Percent     Dollars     Percent  
     (Dollars in thousands)     (Dollars in thousands)  

Net sales

   $ 1,586,850        100.0   $   798,638        100.0   $ 4,398,412        100.0   $  2,340,991        100.0

Cost of sales

     1,301,317        82.0        639,941        80.1        3,622,510        82.4        1,878,486        80.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     285,533        18.0        158,697        19.9        775,902        17.6        462,505        19.8   

Operating expenses:

              

Selling and distribution

     102,141        6.5        44,887        5.6        291,976        6.6        133,482        5.7   

General and administrative

     71,879        4.5        36,535        4.6        244,580        5.6        119,302        5.1   

Amortization expense

     28,638        1.8        14,893        1.9        80,952        1.8        45,772        2.0   

Other operating expense, net

     5,285        0.3        154               10,284        0.2        504          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     207,943        13.1        96,469        12.1        627,792        14.2        299,060        12.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     77,590        4.9        62,228        7.8        148,110        3.4        163,445        7.0   

Other expense (income):

              

Interest expense

     30,749        2.0        10,914        1.4        87,955        2.0        33,978        1.5   

Interest income

     (108            (265            (3,569     (0.1     (2,228     (0.1

(Gain) loss on foreign currency exchange

     (1,075     (0.1     9,226        1.1        (5,948     (0.1     18,226        0.8   

Other (income) expense, net

     (4,584     (0.3     2,078        0.2        (331            (394       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     24,982        1.6        21,953        2.7        78,107        1.8        49,582        2.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     52,608        3.3        40,275        5.1        70,003        1.6        113,863        4.8   

Income taxes

     15,434        1.0        11,834        1.5        20,527        0.5        36,208        1.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 37,174        2.3   $ 28,441        3.6   $ 49,476        1.1   $ 77,655        3.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

42

 

 

 


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

Net Sales — Third quarter net sales increased 98.7% to $1,586.9 million in 2016 compared to $798.6 million in the third 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. During the second quarter of 2016, the Company announced a recall of certain products that impacted net sales. The impact on net sales of this recall in the third quarter was $0.1 million. The Company expects to be fully indemnified for the amount. Net sales by segment are shown in the following table:

 

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

North American Retail Grocery

   $ 1,305,872       $ 597,775       $ 708,097         118.5

Food Away From Home

     157,371         94,601         62,770         66.4   

Industrial and Export

     123,511         106,262         17,249         16.2   

Unallocated

     96                 96           
  

 

 

    

 

 

    

 

 

    

Total

   $   1,586,850       $           798,638       $     788,212         98.7
  

 

 

    

 

 

    

 

 

    

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 82.0% in the third quarter of 2016, compared to 80.1% in 2015. The increase in cost of sales as a percentage of net sales was due to the impact of lower margin products from the recent acquisition, which accounts for approximately 200 basis points of the increase. This increase in cost of sales as a percentage of net sales was partially offset by lower input costs and favorable sales mx. Included in cost of sales was approximately $1.2 million of costs related to restructuring activities and the product recall that began in the second quarter of 2016. These costs were insignificant in the prior year. The Company expects to be fully indemnified for all costs associated with the recall.

Operating Expenses — Total operating expenses were $207.9 million in the third quarter of 2016 compared to $96.5 million in 2015. The increase in 2016 resulted from the following:

Selling and distribution expenses increased $57.3 million, or 127.6% in the third quarter of 2016 compared to 2015, due to $59.7 million of incremental costs from the recent acquisition and additional investments in the sales force that were partially offset by favorable freight costs.

General and administrative expenses increased by $35.3 million in the third quarter of 2016 compared to 2015, of which $24.3 million pertains to continuing costs of the acquired business. Also contributing to the increase was $4.5 million of acquisition and integration costs in the third quarter of 2016 compared to $3.0 million in the prior year. The remaining increase of $9.5 million was due to approximately $6.0 million in higher incentive compensation compared to the prior year and general growth of the business. In the prior year, the Company reduced incentive compensation due to operating results.

Amortization expense increased $13.7 million in the third quarter of 2016 compared to 2015, primarily due to the amortization of intangible assets from the acquisition.

Other operating expense in the third quarter of 2016 was $5.3 million, compared to $0.2 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 $30.7 million in the third quarter of 2016, compared to $10.9 million in 2015, due to higher debt levels and higher interest rates from financing the acquisition.

Interest Income – Interest income of $0.1 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 $1.1 million gain for the third quarter of 2016, compared to a loss of $9.2 million in 2015, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar during the respective quarters.

 

43

 

 

 


Other (Income) Expense, net — Other income was $4.6 million for the third quarter of 2016, compared to expense 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, offset by 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 third quarter of 2016 compared to 29.4% in the prior year’s third quarter. During the third quarter of 2016, the Company’s effective tax rate was favorably impacted by the reversal of a $2.2 million tax reserve assumed in a prior acquisition. The Company also recognized $2.2 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.

 

44

 

 

 


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

North American Retail Grocery

 

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

Net sales

   $   1,305,872         100.0   $             597,775                   100.0

Cost of sales

     1,064,239         81.5        480,608         80.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     241,633         18.5        117,167         19.6   

Freight out and commissions

     56,153         4.3        23,250         3.9   

Direct selling and marketing

     26,356         2.0        10,053         1.7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 159,124         12.2   $ 83,864         14.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the North American Retail Grocery segment increased by $708.1 million, or 118.5%, in the third 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

   $ 597,775     

Volume/mix

     27,489        4.6  % 

Pricing

     (8,821     (1.5

Acquisitions

     690,215        115.5   

Foreign currency

     (786     (0.1
  

 

 

   

 

 

 

2016 Net sales

   $   1,305,872              118.5  % 
  

 

 

   

 

 

 

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. During the third quarter of 2016, volume/mix improved in single serve beverages (where the Company gained additional distribution), carton soup, and dressings, partially offset by lower volume/mix in non-dairy creamer and pickles.

Cost of sales as a percentage of net sales in the third quarter of 2016 increased 1.1% compared to last year, as the impact of lower margin products from the Private Brands Business offset favorability from lower commodity costs and improved sales mix. The Company estimates the acquisition increased cost of sales as a percentage of net sales by approximately 1.4%.

Freight out and commissions paid to independent sales brokers were $56.2 million in the third quarter of 2016, compared to $23.3 million in 2015. The Private Brands Business acquisition accounted for $34.4 million of the increase. Before considering the Private Brands Business acquisition, costs were lower primarily due to decreased freight costs.

Direct selling and marketing expenses were $26.4 million in the third quarter of 2016 and $10.1 million in 2015. The acquisition of the Private Brands Business accounted for $13.6 million of the increase, with the remaining amount being due to investments in the sales force.

 

45

 

 

 


Food Away From Home

 

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

Net sales

   $       157,371         100.0   $ 94,601         100.0

Cost of sales

     133,013         84.5        75,791         80.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     24,358         15.5        18,810         19.9   

Freight out and commissions

     5,705         3.6        3,844         4.1   

Direct selling and marketing

     2,184         1.4        2,074         2.2   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 16,469                 10.5   $         12,892                   13.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Food Away From Home segment increased by $62.8 million, or 66.4%, in the third 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

   $ 94,601     

Volume/mix

     (1,692     (1.8 )% 

Pricing

     (1,731     (1.7

Acquisitions

     66,170        69.9   

Foreign currency

     23          
  

 

 

   

 

 

 

2016 Net sales

   $         157,371                  66.4  % 
  

 

 

   

 

 

 

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

Cost of sales as a percentage of net sales increased to 84.5% in the third quarter of 2016 from 80.1% in 2015 due to the impact of lower margin products from the Private Brands Business. The Company estimates the acquisition increased cost of sales as a percentage of net sales by approximately 6.0%. Before considering the impact of the Private Brands Business, cost of sales as a percentage of net sales decreased due to favorable commodity prices and higher than normal prior year cost associated with the avian flu outbreak.

Freight out and commissions paid to independent sales brokers increased in the third quarter of 2016 by $1.9 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 due to lower freight rates.

Direct selling and marketing increased to $2.2 million in the third quarter of 2016 from $2.1 million in 2015 due to the acquisition. Despite the increase in total expense, direct selling and marketing decreased as a percentage of net sales due to cost saving initiatives.

 

46

 

 

 


Industrial and Export

 

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

Net sales

   $     123,511         100.0   $              106,262         100.0

Cost of sales

     102,556         83.0        85,919         80.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     20,955         17.0        20,343         19.2   

Freight out and commissions

     3,230         2.6        3,620         3.4   

Direct selling and marketing

     1,294         1.1        615         0.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 16,431               13.3   $ 16,108                     15.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the Industrial and Export segment increased $17.2 million, or 16.2%, in the third 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

   $             106,262     

Volume/mix

     (14,937     (14.1 )% 

Pricing

     291        0.3   

Acquisitions

     32,375        30.5   

Foreign currency

     (480     (0.5
  

 

 

   

 

 

 

2016 Net sales

   $ 123,511                    16.2  % 
  

 

 

   

 

 

 

Net sales increased during the third quarter of 2016 compared to 2015 due to the acquisition of the Private Brands Business. This increase was partially offset by a decrease in volume/mix in most product categories, led by soup (where a large portion of the decrease was related to lower margin co-pack business), pickles, and non-dairy creamer. Increased competitive pressure is the primary cause of reduced volume/mix.

Cost of sales as a percentage of net sales increased from 80.8% in the third quarter of 2015 to 83.0% in 2016, primarily due to the impact of lower margin products from the Private Brands Business. The Company estimates the acquisition increased cost of sales as a percentage of net sales by approximately 2.7%. Before considering the impact of the Private Brands Business, cost of sales as a percentage of net sales decreased due to improved sales mix and favorable commodity prices.

Freight out and commissions paid to independent sales brokers were $3.2 million in the third quarter of 2016 and $3.6 million in 2015. The decrease is due to the impact lower freight rates and lower volume.

Direct selling and marketing increased to $1.3 million in the third quarter of 2016 from $0.6 million in 2015, primarily due to the acquisition.

 

47

 

 

 


Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Net Sales — Net sales increased 87.9% to $4,398.4 million in the first nine months of 2016 compared to $2,341.0 million in the first nine 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 $9.8 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:

 

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

North American Retail Grocery

   $  3,599,506      $ 1,768,938       $ 1,830,568        103.5   % 

Food Away From Home

     394,704        280,726         113,978        40.6   

Industrial and Export

     414,047        291,327         122,720        42.1   

Unallocated

     (9,845             (9,845       
  

 

 

   

 

 

    

 

 

   

Total

   $ 4,398,412      $  2,340,991       $  2,057,421        87.9   % 
  

 

 

   

 

 

    

 

 

   

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 82.4% in the first nine months of 2016, compared to 80.2% 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 170 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 and $3.9 million of restructuring costs in the first nine months of 2016 compared to only $0.7 million of acquisition and integration costs 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 $5.5 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 $627.8 million during the first nine months of 2016 compared to $299.1 million in 2015. The increase in 2016 resulted from the following:

Selling and distribution expenses increased $158.5 million, or 118.7%, in the first nine months of 2016 compared to 2015, primarily due to $158.5 million of incremental costs from the recent acquisition. Before considering the impact of the Private Brands Business, selling and distribution expenses were relatively flat, as additional investments in the sales force were offset by favorable freight costs.

General and administrative expenses increased by $125.3 million in the first nine months of 2016 compared to 2015, of which $67.1 million pertained to continuing costs of the acquired business. Also contributing to the increase was $42.0 million of acquisition and integration costs in the first nine months of 2016 compared to $4.2 million in the prior year. The remaining increase of $20.4 million was due to approximately $21.0 million in higher incentive compensation as compared to prior year, the general growth of the business, and duplicative costs as a result of the Private Brands Business. In the prior year, the Company reduced incentive compensation due to operating results.

Amortization expense increased by $35.2 million in the first nine months of 2016 compared to 2015, due to the amortization of intangible assets from the acquisition.

Other operating expense in the first nine months of 2016 was $10.3 million, compared to $0.5 million in 2015. The increase was primarily 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 $88.0 million in the first nine months of 2016, compared to $34.0 million in 2015, due to higher debt levels and higher interest rates from financing the acquisition.

Interest Income – Interest income of $3.6 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.

 

48

 

 

 


Foreign Currency – The Company’s foreign currency impact was a $5.9 million gain for the first nine months of 2016, compared to a loss of $18.2 million in 2015, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar during the respective nine month periods.

Other (Income) Expense, net — Other income was $0.3 million for the first nine months of 2016, compared to income of $0.4 million in 2015. This balance was due to the non-cash mark-to-market adjustments on derivative contracts, primarily foreign currency contracts and interest rate swap agreements, offset by 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 nine months of 2016 compared to 31.8% in 2015. During the first nine months of 2016, the Company’s effective tax rate was favorably impacted by the reversal of $3.1 million of tax reserve assumed in prior acquisitions. The Company also recognized $3.1 million of non-operating expense for the write-off of the related indemnification assets, 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.

 

49

 

 

 


Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 — Results by Segment

North American Retail Grocery

 

     Nine Months Ended September 30,  
     2016     2015  
     Dollars      Percent     Dollars      Percent  
     (Dollars in thousands)  

Net sales

   $         3,599,506             100.0   $         1,768,938             100.0

Cost of sales

     2,929,908         81.4        1,425,772         80.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

     669,598         18.6        343,166         19.4   

Freight out and commissions

     154,465         4.3        69,393         3.9   

Direct selling and marketing

     72,376         2.0        31,553         1.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Direct operating income

   $ 442,757         12.3   $ 242,220         13.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales in the North American Retail Grocery segment increased by $1,830.6 million, or 103.5%, in the first nine months of 2016 compared to the first nine months of 2015. The change in net sales from 2015 to 2016 was due to the following:

 

     Dollars     Percent  
     (Dollars in thousands)  

2015 Net sales

   $ 1,768,938     

Volume/mix

     50,243        2.8   % 

Pricing

     (13,077     (0.7

Acquisitions

     1,805,199        102.0