ths-10q_20170630.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

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

For the Quarterly Period Ended June 30, 2017.

or

 

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

For the Transition Period from                to

Commission File Number 001-32504

TreeHouse Foods, Inc.

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

 

Delaware

20-2311383

(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification no.)

 

 

2021 Spring Road, Suite 600

 

Oak Brook, IL

60523

(Address of principal executive offices)

(Zip Code)

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

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting Company

(Do not check if a smaller reporting company)

 

 

 

 

 

 

Emerging growth company

 

 

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

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

Yes      No  

Number of shares of Common Stock, $0.01 par value, outstanding as of July 31, 2017: 57,188,303

 

 


 

Table of Contents

 

 

Page

Part I — Financial Information

 

 

 

Item 1 — Financial Statements (Unaudited)

3

 

 

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

34

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

53

 

 

Item 4 — Controls and Procedures

54

 

 

Report of Independent Registered Public Accounting Firm

55

 

 

Part II — Other Information

 

 

 

Item 1 — Legal Proceedings

56

 

 

Item 1A — Risk Factors

56

 

 

Item 5 — Other Information

57

 

 

Item 6 — Exhibits

57

 

 

Signatures

58

 

2


 

Part I — Financial Information

Item 1. Financial Statements

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174.2

 

 

$

62.1

 

Investments

 

 

12.1

 

 

 

10.4

 

Receivables, net

 

 

352.7

 

 

 

429.0

 

Inventories, net

 

 

993.1

 

 

 

978.0

 

Assets held for sale

 

 

2.7

 

 

 

3.6

 

Prepaid expenses and other current assets

 

 

93.1

 

 

 

77.6

 

Total current assets

 

 

1,627.9

 

 

 

1,560.7

 

Property, plant, and equipment, net

 

 

1,296.3

 

 

 

1,359.3

 

Goodwill

 

 

2,454.2

 

 

 

2,447.2

 

Intangible assets, net

 

 

1,089.4

 

 

 

1,137.6

 

Other assets, net

 

 

42.1

 

 

 

41.0

 

Total assets

 

$

6,509.9

 

 

$

6,545.8

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

712.1

 

 

$

626.8

 

Current portion of long-term debt

 

 

70.9

 

 

 

66.4

 

Total current liabilities

 

 

783.0

 

 

 

693.2

 

Long-term debt

 

 

2,568.4

 

 

 

2,724.8

 

Deferred income taxes

 

 

410.0

 

 

 

422.2

 

Other long-term liabilities

 

 

205.6

 

 

 

202.3

 

Total liabilities

 

 

3,967.0

 

 

 

4,042.5

 

Commitments and contingencies (Note 19)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, par value $0.01 per share, 90.0 shares authorized, 57.2 and 56.8

   shares issued and outstanding, respectively

 

 

0.6

 

 

 

0.6

 

Additional paid-in capital

 

 

2,093.9

 

 

 

2,071.9

 

Retained earnings

 

 

526.1

 

 

 

532.1

 

Accumulated other comprehensive loss

 

 

(77.7

)

 

 

(101.3

)

Total stockholders’ equity

 

 

2,542.9

 

 

 

2,503.3

 

Total liabilities and stockholders’ equity

 

$

6,509.9

 

 

$

6,545.8

 

 

See Notes to Condensed Consolidated Financial Statements.

3


 

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net sales

 

$

1,522.2

 

 

$

1,541.4

 

 

$

3,058.4

 

 

$

2,811.6

 

Cost of sales

 

 

1,245.3

 

 

 

1,275.6

 

 

 

2,495.1

 

 

 

2,321.2

 

Gross profit

 

 

276.9

 

 

 

265.8

 

 

 

563.3

 

 

 

490.4

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and distribution

 

 

94.8

 

 

 

104.3

 

 

 

199.4

 

 

 

189.8

 

General and administrative

 

 

83.1

 

 

 

78.1

 

 

 

162.2

 

 

 

172.7

 

Amortization expense

 

 

28.7

 

 

 

28.5

 

 

 

57.3

 

 

 

52.3

 

Other operating expense, net

 

 

94.0

 

 

 

3.3

 

 

 

100.8

 

 

 

5.0

 

Total operating expenses

 

 

300.6

 

 

 

214.2

 

 

 

519.7

 

 

 

419.8

 

Operating (loss) income

 

 

(23.7

)

 

 

51.6

 

 

 

43.6

 

 

 

70.6

 

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

31.8

 

 

 

31.5

 

 

 

61.5

 

 

 

57.2

 

Interest income

 

 

(0.3

)

 

 

(0.6

)

 

 

(3.1

)

 

 

(3.4

)

Gain on foreign currency exchange

 

 

(0.4

)

 

 

(0.8

)

 

 

(0.3

)

 

 

(4.9

)

Other expense (income), net

 

 

1.2

 

 

 

(0.7

)

 

 

1.8

 

 

 

4.3

 

Total other expense

 

 

32.3

 

 

 

29.4

 

 

 

59.9

 

 

 

53.2

 

(Loss) income before income taxes

 

 

(56.0

)

 

 

22.2

 

 

 

(16.3

)

 

 

17.4

 

Income taxes

 

 

(21.8

)

 

 

3.2

 

 

 

(10.3

)

 

 

1.6

 

Net (loss) income

 

$

(34.2

)

 

$

19.0

 

 

$

(6.0

)

 

$

15.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.60

)

 

$

0.34

 

 

$

(0.11

)

 

$

0.29

 

Diluted

 

$

(0.60

)

 

$

0.33

 

 

$

(0.11

)

 

$

0.28

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

57.0

 

 

 

56.6

 

 

 

57.0

 

 

 

54.6

 

Diluted

 

 

57.0

 

 

 

57.5

 

 

 

57.0

 

 

 

55.5

 

 

See Notes to Condensed Consolidated Financial Statements.

4


 

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net (loss) income

 

$

(34.2

)

 

$

19.0

 

 

$

(6.0

)

 

$

15.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

12.9

 

 

 

4.6

 

 

 

16.5

 

 

 

28.9

 

Pension and postretirement reclassification adjustment (1)

 

 

6.8

 

 

 

0.2

 

 

 

7.1

 

 

 

0.5

 

Other comprehensive income

 

 

19.7

 

 

 

4.8

 

 

 

23.6

 

 

 

29.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(14.5

)

 

$

23.8

 

 

$

17.6

 

 

$

45.2

 

 

 

(1)

Net of tax of $4.2 million and $0.2 million for the three months ended June 30, 2017 and 2016, respectively, and $4.4 million and $0.3 million for the six months ended June 30, 2017 and 2016, respectively.

See Notes to Condensed Consolidated Financial Statements.

5


 

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(6.0

)

 

$

15.8

 

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

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

81.7

 

 

 

80.5

 

Amortization

 

 

57.3

 

 

 

52.3

 

Stock-based compensation

 

 

18.6

 

 

 

14.3

 

Amortization of deferred financing costs

 

 

4.0

 

 

 

3.6

 

Loss on divestiture

 

 

85.2

 

 

 

 

Mark-to-market loss on derivative contracts

 

 

2.5

 

 

 

3.0

 

Loss on disposition of assets

 

 

3.8

 

 

 

1.3

 

Deferred income taxes

 

 

(16.7

)

 

 

(6.6

)

Gain on foreign currency exchange

 

 

(0.3

)

 

 

(4.9

)

Write-down of tangible assets

 

 

1.5

 

 

 

 

Other

 

 

(1.3

)

 

 

(0.8

)

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

 

 

 

 

 

 

 

 

Receivables

 

 

77.2

 

 

 

13.6

 

Inventories

 

 

(65.7

)

 

 

47.0

 

Prepaid expenses and other assets

 

 

(22.8

)

 

 

(44.5

)

Accounts payable, accrued expenses, and other liabilities

 

 

108.4

 

 

 

65.9

 

Net cash provided by operating activities

 

 

327.4

 

 

 

240.5

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(71.4

)

 

 

(84.0

)

Additions to intangible assets

 

 

(14.0

)

 

 

(5.9

)

Acquisitions, less cash acquired

 

 

 

 

 

(2,640.2

)

Proceeds from sale of fixed assets

 

 

1.7

 

 

 

0.1

 

Proceeds from divestiture

 

 

19.3

 

 

 

 

Increase in restricted cash

 

 

 

 

 

(0.6

)

Other

 

 

(0.6

)

 

 

(0.5

)

Net cash used in investing activities

 

 

(65.0

)

 

 

(2,731.1

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings under Revolving Credit Facility

 

 

130.0

 

 

 

114.2

 

Payments under Revolving Credit Facility

 

 

(251.0

)

 

 

(196.2

)

Proceeds from issuance of Term Loan A-2

 

 

 

 

 

1,025.0

 

Proceeds from issuance of 2024 Notes

 

 

 

 

 

775.0

 

Payments on capitalized lease obligations and other debt

 

 

(1.9

)

 

 

(2.1

)

Payment of deferred financing costs

 

 

 

 

 

(34.3

)

Payments on Term Loans

 

 

(31.7

)

 

 

(15.1

)

Net proceeds from issuance of common stock

 

 

 

 

 

835.1

 

Receipts related to stock-based award activities

 

 

9.9

 

 

 

7.0

 

Payments related to stock-based award activities

 

 

(6.6

)

 

 

(7.8

)

Net cash (used in) provided by financing activities

 

 

(151.3

)

 

 

2,500.8

 

Effect of exchange rate changes on cash and cash equivalents

 

 

1.0

 

 

 

6.5

 

Net increase in cash and cash equivalents

 

 

112.1

 

 

 

16.7

 

Cash and cash equivalents, beginning of period

 

 

62.1

 

 

 

34.9

 

Cash and cash equivalents, end of period

 

$

174.2

 

 

$

51.6

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

6


 

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, 2017

(Unaudited)

1. BASIS OF PRESENTATION

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. and its consolidated subsidiaries (the “Company,” “TreeHouse,” “we,” “us,” or “our”), pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to quarterly reporting on Form 10-Q. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted as permitted by such rules and regulations. Certain prior year amounts in the Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current period presentation. 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, 2016. Results of operations for interim periods are not necessarily indicative of annual results.

In the first quarter of 2017, the Company completed changes in its organizational structure that resulted in a change in how the Company manages its business and allocates resources. As a result, the Company revised its reportable segments to reflect how management currently reviews financial information and makes operating decisions. See Note 22 for additional details. All prior period amounts have been recast to reflect the change in reportable segments.

In the fourth quarter of 2016, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this ASU, excess tax benefits and deficiencies are no longer recognized as additional paid-in capital in the Condensed Consolidated Balance Sheets. The ASU requires recognition of excess tax benefits and deficiencies in the Condensed Consolidated Statements of Operations. As the Company adopted the ASU in the fourth quarter, any related adjustments were required to be reflected as of the beginning of the fiscal year of adoption. The results for the three and six months periods ended June 30, 2016 have been recast to reflect the adoption of the ASU as of January 1, 2016, resulting in income tax benefits of $3.3 million and $3.5 million, respectively, related to the recognition of excess tax benefits and deficiencies, which are included in the Income taxes line of the Condensed Consolidated Statements of Operations. The effect on basic and diluted net earnings per common share was $0.06 for the three and six months ended June 30, 2016. Additionally, the ASU requires excess tax benefits to be reported as a component of operating activities in the Condensed Consolidated Statements of Cash Flows. Excess tax benefits of $3.5 million were retrospectively reclassified from financing to operating activities in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016. The effects of the adoption of the other provisions of this ASU were immaterial.

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 (“Private Brands Business”) of ConAgra Foods, Inc. 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 Baked Goods, Condiments, Meals, and Snacks segments, as applicable.

The Private Brands Business was on a 4-4-5 fiscal calendar during the second quarter of 2016, and June 26, 2016 was the fiscal period end closest to the Company’s fiscal quarter end. This difference did not have a significant impact on the results of operations of the Private Brands Business. In the fourth quarter of 2016, the Company changed the fiscal year end of the Private Brands Business to December 31. The Company did not retrospectively apply the effects of this change to the three and six month periods ended June 30, 2016 due to impracticability, and believes the effects would be immaterial.

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

A detailed description of the Company’s significant accounting policies can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

 

7


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which revises how employers that sponsor defined benefit pension and other postretirement plans present net periodic benefit cost. The ASU requires an employer to present the service cost component in the same income statement line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standard requires adoption on a retrospective basis for the presentation of net benefit cost components. The Company is currently assessing the impact that this standard will have upon adoption.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment, to eliminate the second step of the goodwill impairment test. This ASU requires an entity to measure a goodwill impairment loss as the amount by which the carrying value of a reporting unit exceeds its fair value. Additionally, an entity should include the income tax effects from any tax deductible goodwill on the carrying value of the reporting unit when measuring a goodwill impairment loss, if applicable. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard requires adoption on a prospective basis. The Company is currently assessing the impact that this standard will have upon adoption.

In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, to require that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts on the statement of cash flows. The Company currently classifies changes in restricted cash as an investing activity in the Consolidated Statements of Cash Flows. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standard requires adoption on a retrospective basis. The Company is currently assessing the impact that this standard will have upon adoption, which is not expected to be significant.

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 beginning to assess the impact that this standard will have upon adoption.

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 on a prospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company prospectively adopted the ASU during the first quarter of 2017, the impact of which was not significant.

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 expects to use the modified retrospective method. 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 on its accounting policies, processes, system requirements, internal controls, and disclosures using internal resources and the assistance of a third-party. The Company has established a project plan, completed an initial review of its customer contracts, and is considering impacted policies and processes. The Company has not yet determined the impact that these standards will have on our financial position and results of operations.

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 Operations, with the exception of asset-related costs, which are recorded in Cost of sales. The key information regarding the Company’s announced facility closures is outlined in the table below.

 

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 (Proceeds) 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

 

Beverages, Condiments

 

$

6.9

 

 

$

3.8

 

Ayer, Massachusetts

 

April 5, 2016

 

First quarter of 2017

 

Third quarter of 2017

 

Spoonable dressings

 

Condiments

 

 

6.1

 

 

 

3.3

 

Azusa, California

 

May 24, 2016

 

First quarter of 2017

 

Third quarter of 2017

 

Bars and snack products

 

Snacks

 

 

18.5

 

 

 

15.1

 

Ripon, Wisconsin

 

May 24, 2016

 

Fourth quarter of 2016

 

Fourth quarter of 2016

 

Sugar wafer cookies

 

Baked Goods

 

 

0.8

 

 

 

(0.2

)

Delta, British Columbia

 

November 3, 2016

 

Fourth quarter of 2017

 

First quarter of 2018

 

Frozen griddle products

 

Baked Goods

 

 

3.3

 

 

 

2.3

 

Battle Creek, Michigan

 

November 3, 2016

 

(1)

 

(1)

 

Ready-to-eat cereal

 

Meals

 

 

10.4

 

 

 

2.8

 

 

 

(1)

The downsizing of this facility began in January 2017 and is expected to last approximately 15 months.

Total expected costs to close the City of Industry, California, Ayer, Massachusetts, Ripon, Wisconsin, and Delta, British Columbia facilities have been reduced by approximately $4.9 million, $0.4 million, $1.3 million, and $1.9 million, respectively, since the initial announcements, while total expected costs to close the Azusa, California facility have been increased by approximately $3.7 million. Total costs to restructure the Battle Creek, Michigan facility have increased by approximately $0.9 million since the initial announcement.

Below is a summary of the plant closing costs:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

Cumulative Costs

 

 

Total Expected

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

To Date

 

 

Costs

 

 

 

(In millions)

 

Asset-related

 

$

(0.9

)

 

$

0.7

 

 

$

3.5

 

 

$

1.5

 

 

$

13.7

 

 

$

16.8

 

Employee-related

 

 

0.2

 

 

 

1.3

 

 

 

2.7

 

 

 

1.9

 

 

 

10.0

 

 

 

11.8

 

Other closure costs

 

 

7.8

 

 

 

1.0

 

 

 

10.3

 

 

 

1.1

 

 

 

14.8

 

 

 

17.4

 

Total

 

$

7.1

 

 

$

3.0

 

 

$

16.5

 

 

$

4.5

 

 

$

38.5

 

 

$

46.0

 

 

9


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Liabilities recorded as of June 30, 2017 associated with these plant closings relate to severance and the partial withdrawal from a multiemployer pension plan. The severance liability is included in the Accounts payable and accrued expenses line of the Condensed Consolidated Balance Sheets, while the multiemployer pension plan withdrawal liability is included in the Other long-term liabilities line of the Condensed Consolidated Balance Sheets. The table below presents a reconciliation of the liabilities as of June 30, 2017:

 

 

 

Severance

 

 

Multiemployer Pension

Plan Withdrawal

 

 

Other Costs

 

 

Total Liabilities

 

 

 

(In millions)

 

Balance as of December 31, 2016

 

$

3.5

 

 

$

0.8

 

 

$

 

 

$

4.3

 

Expense

 

 

2.4

 

 

 

 

 

 

2.4

 

 

 

4.8

 

Payments

 

 

(3.2

)

 

 

 

 

 

 

 

 

(3.2

)

Adjustments

 

 

(0.3

)

 

 

 

 

 

 

 

 

(0.3

)

Balance as of June 30, 2017

 

$

2.4

 

 

$

0.8

 

 

$

2.4

 

 

$

5.6

 

 

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 Condensed Consolidated Financial Statements from the date of acquisition in the Baked Goods, Condiments, Meals, and Snacks segments. Included in the Company’s Condensed Consolidated Statements of Operations are the Private Brands Business’s net sales of approximately $1,286.6 million and income before income taxes of $32.3 million from the date of acquisition through June 30, 2016. Integration costs of $6.5 million, which are included in the Cost of sales and General and administrative expense lines of the Condensed Consolidated Statements of Operations, were included in determining income before income taxes.

We have completed the purchase price allocation to net tangible and intangible assets acquired and liabilities assumed as follows:

 

 

(In millions)

 

Cash

$

43.3

 

Receivables

 

162.7

 

Inventory

 

443.7

 

Property, plant, and equipment

 

809.6

 

Customer relationships

 

510.9

 

Trade names

 

33.0

 

Software

 

19.6

 

Formulas

 

23.2

 

Other assets

 

50.2

 

Goodwill

 

1,141.2

 

Assets acquired

 

3,237.4

 

Deferred taxes

 

(152.8

)

Assumed current liabilities

 

(246.6

)

Assumed long-term liabilities

 

(150.3

)

Total purchase price

$

2,687.7

 

 

The Company allocated $496.1 million to customer relationships with retail grocery customers, which have an estimated life of 13 years, and $14.8 million to customer relationships with food away from home customers, which have an estimated life of 10 years. The Company allocated $33.0 million to trade names, which have an estimated life of 10 years. The Company allocated $23.2 million

10


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

to formulas, which have an 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 over their expected useful lives. Indemnification assets related to taxes of approximately $13.8 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 allocated $555.0 million, $73.3 million, $413.8 million, and $97.9 million of goodwill to the Baked Goods, Condiments, Meals, and Snacks 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 in 2016 and none in 2017. These costs are included in the General and administrative expense line of the Condensed Consolidated Statements of Operations.

The fair values for customer relationships at the acquisition date were determined using the excess earnings method under the income approach. Trade name fair values were determined using the relief from royalty method, while the fair value of formulas was determined using the cost approach. Real property fair values were determined using the cost and market approaches, while the fair value of personal property was determined using the indirect cost approach. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of intangible assets include discounted future cash flows, customer attrition rates, and royalty rates.

Since the preliminary purchase price allocation included in the Company’s Annual Report for the fiscal year ended December 31, 2016, the Company recorded purchase price adjustments related to taxes, resulting in an increase to goodwill of approximately $3.0 million in the first quarter of 2017. These adjustments did not impact the Condensed Consolidated Statements of Operations.

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, 2016. 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 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.

 

 

 

Six Months Ended

June 30, 2016

 

 

 

(In millions, except

per share data)

 

Pro forma net sales

 

$

3,135.5

 

Pro forma net income

 

$

37.5

 

Pro forma basic earnings per common share

 

$

0.66

 

Pro forma diluted earnings per common share

 

$

0.65

 

 

5. INVESTMENTS

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

U.S. equity

 

$

8.9

 

 

$

7.6

 

Non-U.S. equity

 

 

2.1

 

 

 

1.8

 

Fixed income

 

 

1.1

 

 

 

1.0

 

Total investments

 

$

12.1

 

 

$

10.4

 

 

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 Operations. 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.

11


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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. When securities are sold, their cost is determined based on the first-in, first-out (“FIFO”) method.

6. INVENTORIES

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Raw materials and supplies

 

$

448.3

 

 

$

429.4

 

Finished goods

 

 

569.5

 

 

 

571.9

 

LIFO reserve

 

 

(24.7

)

 

 

(23.3

)

Total inventories

 

$

993.1

 

 

$

978.0

 

 

Inventory is generally accounted for under the FIFO method, and a portion is accounted for under the last-in, first-out (“LIFO”) method and the weighted average costing approach. Approximately $93.0 million and $105.9 million of our inventory was accounted for under the LIFO method of accounting at June 30, 2017 and December 31, 2016, respectively. Approximately $113.3 million and $116.2 million of our inventory was accounted for using the weighted average costing approach at June 30, 2017 and December 31, 2016, respectively.

7. PROPERTY, PLANT, AND EQUIPMENT

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(In millions)

 

Land

 

$

70.0

 

 

$

71.2

 

Buildings and improvements

 

 

451.1

 

 

 

465.3

 

Machinery and equipment

 

 

1,250.5

 

 

 

1,324.5

 

Construction in progress

 

 

68.0

 

 

 

85.0

 

Total

 

 

1,839.6

 

 

 

1,946.0

 

Less accumulated depreciation

 

 

(543.3

)

 

 

(586.7

)

Property, plant, and equipment, net

 

$

1,296.3

 

 

$

1,359.3

 

 

Depreciation expense was $37.9 million and $44.9 million for the three months ended June 30, 2017 and 2016, respectively, and $81.7 million and $80.5 million for the six months ended June 30, 2017 and 2016, respectively.

8. GOODWILL AND INTANGIBLE ASSETS

As a result of the changes in organizational structure completed in the first quarter of 2017, the Company has the following five operating segments, which are also its reporting units: Baked Goods, Beverages, Condiments, Meals, and Snacks. See Note 22 for more information.

The Company allocated the goodwill balance as of January 1, 2017 between the new reporting units using a relative fair value allocation approach. The change was considered a triggering event indicating a test for goodwill impairment was required as of January 1, 2017. The Company performed the first step of the impairment test, which did not result in the identification of any impairment losses. Changes in the carrying amount of goodwill for the six months ended June 30, 2017 are as follows:

 

 

 

Baked

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goods

 

 

Beverages

 

 

Condiments

 

 

Meals

 

 

Snacks

 

 

Total

 

 

 

(In millions)

 

Balance at January 1, 2017

 

$

554.2

 

 

$

713.2

 

 

$

433.1

 

 

$

470.6

 

 

$

276.1

 

 

$

2,447.2

 

Purchase price adjustments

 

 

1.4

 

 

 

 

 

 

0.2

 

 

 

1.1

 

 

 

0.3

 

 

 

3.0

 

Foreign currency exchange adjustments

 

 

 

 

 

1.7

 

 

 

2.3

 

 

 

 

 

 

 

 

 

4.0

 

Balance at June 30, 2017

 

$

555.6

 

 

$

714.9

 

 

$

435.6

 

 

$

471.7

 

 

$

276.4

 

 

$

2,454.2

 

12


TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The carrying amounts of our intangible assets with indefinite lives, other than goodwill, as of June 30, 2017 and December 31, 2016 are as follows:

 

 

 

June 30,

2017

 

 

December 31,

2016

 

 

 

(In millions)

 

Trademarks

 

$

22.1

 

 

$

21.6

 

Total indefinite lived intangibles

 

$

22.1

 

 

$

21.6

 

 

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

The gross carrying amounts and accumulated amortization of intangible assets, with finite lives, as of June 30, 2017 and December 31, 2016 are as follows:

 

 

 

June 30, 2017

 

 

December 31, 2016

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

 

 

(In millions)

 

 

(In millions)

 

Intangible assets with finite lives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer-related

 

$

1,260.8

 

 

$

(317.4

)

 

$

943.4

 

 

$

1,284.3

 

 

$

(293.3

)

 

$

991.0

 

Contractual agreements

 

 

3.0

 

 

 

(2.9

)

 

 

0.1

 

 

 

3.0

 

 

 

(2.9

)

 

 

0.1

 

Trademarks

 

 

69.4

 

 

 

(26.0

)

 

 

43.4

 

 

 

69.6

 

 

 

(23.6

)

 

 

46.0