Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

x

  

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

For the Quarterly Period Ended June 30, 2013.

or

 

¨

  

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

For the Transition Period from                         to                

Commission File Number 001-32504

TreeHouse Foods, Inc.

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

 

 

LOGO

 

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

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

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

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

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

 

Large accelerated filer                                       

  x              Accelerated filer   ¨  

Non-accelerated filer

  ¨              Smaller reporting Company     ¨  

(Do not check if a smaller reporting company)

   

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

Yes    ¨     No    x

Number of shares of Common Stock, $0.01 par value, outstanding as of July 31, 2013: 36,373,615


Table of Contents

Table of Contents

 

     Page  

Part I — Financial Information

  

Item 1 — Financial Statements (Unaudited)

     3   

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

     32   

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

     46   

Item 4 — Controls and Procedures

     47   

Report of Independent Registered Public Accounting Firm

     48   

Part II — Other Information

  

Item 1 — Legal Proceedings

     49   

Item 1A — Risk Factors

     49   

Item 5 — Other Information

     49   

Item 6 — Exhibits

     49   

Signatures

     50   

 

2


Table of Contents

Part I — Financial Information

Item 1. Financial Statements

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

                                         
     June 30,
2013
    December 31,
2012
 
     (Unaudited)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 28,345      $ 94,407   

Investments

     7,551          

Receivables, net

     115,604        124,648   

Inventories, net

     389,447        347,353   

Deferred income taxes

     8,245        7,998   

Prepaid expenses and other current assets

     20,044        14,005   
  

 

 

   

 

 

 

Total current assets

     569,236        588,411   

Property, plant and equipment, net

     419,872        425,307   

Goodwill

     1,067,068        1,073,191   

Intangible assets, net

     400,550        417,561   

Other assets, net

     19,757        21,403   
  

 

 

   

 

 

 

Total assets

   $ 2,476,483      $ 2,525,873   
  

 

 

   

 

 

 
    

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 195,410      $ 185,086   

Current portion of long-term debt

     1,667        1,944   
  

 

 

   

 

 

 

Total current liabilities

     197,077        187,030   

Long-term debt

     813,224        898,100   

Deferred income taxes

     214,048        212,461   

Other long-term liabilities

     44,491        49,027   
  

 

 

   

 

 

 

Total liabilities

     1,268,840        1,346,618   

Commitments and contingencies (Note 18)

    

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, 36,350

and 36,197 shares issued and outstanding, respectively

     363        362   

Additional paid-in capital

     732,058        726,582   

Retained earnings

     510,489        468,951   

Accumulated other comprehensive loss

     (35,267     (16,640
  

 

 

   

 

 

 

Total stockholders’ equity

     1,207,643        1,179,255   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $         2,476,483      $ 2,525,873   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

 

                                                                                   
     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)  

Net sales

   $         526,346      $ 527,421      $ 1,066,456      $         1,051,232   

Cost of sales

     416,778        420,830        842,716        829,709   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     109,568        106,591        223,740        221,523   

Operating expenses:

        

Selling and distribution

     31,394        33,858        63,796        68,152   

General and administrative

     29,106        22,704        56,579        49,308   

Other operating (income) expense, net

     (136     (49     1,282        411   

Amortization expense

     8,227        8,624        16,726        16,887   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     68,591        65,137        138,383        134,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     40,977        41,454        85,357        86,765   

Other expense (income):

        

Interest expense

     12,230        12,452        25,008        25,664   

Interest income

     (322     (14     (1,000     (14

Loss (gain) on foreign currency exchange

     841        (450     480        406   

Other expense (income), net

     345        1,970        (368     1,509   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     13,094        13,958        24,120        27,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     27,883        27,496        61,237        59,200   

Income taxes

     9,318        7,985        19,698        17,615   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 18,565      $ 19,511      $ 41,539      $ 41,585   
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Net earnings per common share:

        

Basic

   $ .51      $ .54      $ 1.14      $ 1.15   

Diluted

   $ .50      $ .53      $ 1.11      $ 1.12   

Weighted average common shares:

        

Basic

     36,337        36,057        36,323        36,038   

Diluted

     37,373        37,132        37,312        37,113   

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

                                                                                   
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013
    2012  
     (Unaudited)     (Unaudited)  

Net income

   $ 18,565      $ 19,511      $ 41,539      $ 41,585   
        

Other comprehensive (loss) income:

        

Foreign currency translation adjustments

     (11,609     (9,271     (19,467     (1,784

Pension and post-retirement reclassification adjustment (1)

     349        282        759        561   

Derivative reclassification adjustment (2)

     41        41        81        81   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (11,219     (8,948     (18,627     (1,142
  

 

 

   

 

 

   

 

 

   

 

 

 
        

Comprehensive income

   $ 7,346      $ 10,563      $ 22,912      $ 40,443   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Net of tax of $217 and $177 for the three months ended June 30, 2013 and 2012, respectively, and $435 and $353 for the six months ended June 30, 2013 and 2012, respectively.
  (2) Net of tax of $25 for the three months ended June 30, 2013 and 2012, respectively, and $51 for the six months ended June 30, 2013 and 2012, respectively.

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

                                         
     Six Months Ended  
     June 30,  
     2013     2012  
     (Unaudited)  

Cash flows from operating activities:

    

Net income

   $ 41,539      $ 41,585   

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

    

Depreciation

     38,412        26,064   

Amortization

     16,726        16,887   

Mark to market (gain) loss on derivative contracts

     (499     1,581   

Mark to market gain on investments

     (389       

Excess tax benefits from stock-based compensation

     (1,097     (2,440

Stock-based compensation

     7,108        5,748   

(Gain) loss on disposition of assets

     (231     1,263   

Deferred income taxes

     2,138        3,387   

Other

     557        1,408   

Changes in operating assets and liabilities, net of acquisitions:

    

Receivables

     7,730        2,655   

Inventories

     (43,488     (12,285

Prepaid expenses and other assets

     (4,728     2,399   

Accounts payable, accrued expenses and other liabilities

     6,264        6,366   
  

 

 

   

 

 

 

Net cash provided by operating activities

     70,042        94,618   

Cash flows from investing activities:

    

Purchase of investments

     (7,585       

Additions to property, plant and equipment

     (35,641     (30,019

Additions to other intangible assets

     (3,255     (4,302

Acquisition of business, net of cash acquired

            (25,000

Proceeds from sale of fixed assets

     1,072        46   
  

 

 

   

 

 

 

Net cash used in investing activities

     (45,409     (59,275

Cash flows from financing activities:

    

Borrowings under revolving credit facility

     111,800        198,900   

Payments under revolving credit facility

     (195,800     (160,400

Payments on capitalized lease obligations

     (1,149     (1,033

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

     (1,192     (3,878

Excess tax benefits from stock-based compensation

     1,097        2,440   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (85,244     36,029   

Effect of exchange rate changes on cash and cash equivalents

     (5,451     (407
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (66,062     70,965   

Cash and cash equivalents, beginning of period

     94,407        3,279   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 28,345      $ 74,244   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the six months ended June 30, 2013

(Unaudited)

1. Basis of Presentation

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. (the “Company,” “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, 2012. Results of operations for interim periods are not necessarily indicative of annual results. In the Condensed Consolidated Statements of Cash Flows, the Company reclassified the “loss (gain) on foreign currency exchange” into the “other” line in cash flows from operating activities, as the amounts are not material and this change will result in a presentation format that is consistent with others in our industry. This reclassification had no effect on operating cash flows, or total cash flows for the periods presented. In the Condensed Consolidated Balance Sheets, the Company reclassified the “Assets held for sale” line into the “Prepaid expenses and other current assets” line, as the amounts are not material. As a result of investing our excess cash in interest bearing accounts in 2013, we are earning interest income, and as a result, we have presented interest income as a separate line item in our Condensed Consolidated Statements of Income in 2013. To be consistent with the current year presentation, we have reclassified interest income, which had previously been presented net of interest expense. These reclassifications had no effect on reported net income, total assets, or cash flows.

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, 2012.

2. Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date, clarifying how entities are required to measure obligations resulting from joint and several liability arrangements and outlining the required disclosures around these liabilities. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company’s joint and several guarantees of indebtedness as discussed in Note 11, Long-Term Debt, are guaranteed by our 100 percent owned subsidiaries. The Company does not believe this ASU will have a significant impact on the Company’s financial statements.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income (“AOCI”). This ASU expands the disclosure requirements by requiring an entity to disaggregate the total change of each component of other comprehensive income (“OCI”) and present separately any reclassification adjustments and current period OCI. This ASU also requires disclosure of the individual income statement line items affected by the amounts reclassified out of AOCI. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. This ASU does not change the accounting for AOCI, and only requires new disclosures. See Note 14 for the required disclosures.

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

3. Restructuring

Soup restructuring - On August 7, 2012, following a strategic review of the soup category, the Company announced a restructuring plan that includes the closure of its Mendota, Illinois soup plant. Subsequently, the Company amended the plan to include reductions to the cost structure of the Pittsburgh, Pennsylvania facility by reorganizing and simplifying the soup business at the Pittsburgh facility. The restructuring is expected to reduce manufacturing costs by streamlining operations and transferring production to the Company’s Pittsburgh, Pennsylvania soup plant. Production at the Mendota facility was primarily related to the North American Retail Grocery segment. Production ended as of December 31, 2012, with full plant closure in the second quarter of 2013. Total costs are expected to be approximately $26.7 million as detailed below, of which $5.6 million is expected to be in cash. The total expected costs increased from $20.5 million as of March 31, 2013, as estimates were refined and the scope of the restructuring was expanded to include the Company’s conversion from the use of wells to city water. Expenses associated with the restructuring are primarily aggregated in the Other operating expense, net line of the Condensed Consolidated Statements of Income, with the exception of accelerated depreciation, which is recorded in Cost of sales.

Seaforth, Ontario, Canada - On August 7, 2012, the Company announced the closure of its salad dressing plant in Seaforth, Ontario, Canada and the transfer of production to facilities where the Company has lower production costs. Production at the Seaforth, Ontario facility is primarily related to the North American Retail Grocery segment and is expected to end in the fourth quarter of 2013, with full plant closure also expected in the fourth quarter of 2013. Total costs to close the Seaforth facility are expected to be approximately $12.3 million as detailed below, of which $5.6 million is expected to be in cash. The total expected costs decreased from $13.4 million, as of March 31, 2013, as estimates were refined. Expenses incurred associated with the facility closure are primarily aggregated in the Other operating expense, net line of the Condensed Consolidated Statements of Income. Certain costs, primarily accelerated depreciation, are recorded in Cost of sales.

During the third quarter of 2012, and concurrent with the restructurings as noted above, the Company reviewed the fixed assets for impairment at the product category level and no impairment was indicated. During the review, the useful lives of the related assets were reassessed and shortened to be consistent with the dates that production at the facilities were expected to end. The change in estimated useful lives related to the restructurings resulted in accelerated depreciation of $7.2 million and $12.7 million for the three and six months ended June 30, 2013, respectively.

Below is a summary of the restructuring costs:

 

                                                                                                                   
    Soup Restructuring  
    Three Months     Six Months     Cumulative     Total  
    Ended     Ended     Costs     Expected  
    June 30, 2013     June 30, 2013     To Date     Costs  
    (In thousands)  

Accelerated depreciation

  $ 5,833      $ 9,981      $ 16,684      $ 21,088   

Severance and outplacement

    (44     (12     745        816   

Other closure costs

    (536     218        798        4,814   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,253      $ 10,187      $ 18,227      $ 26,718   
 

 

 

   

 

 

   

 

 

   

 

 

 
    Seaforth Closure  
    Three Months     Six Months     Cumulative     Total  
    Ended     Ended     Costs     Expected  
    June 30, 2013     June 30, 2013     To Date     Costs  
    (In thousands)  

Accelerated depreciation

  $ 1,356      $ 2,716      $ 6,724      $ 6,736   

Severance and outplacement

    200        496        2,745        2,772   

Other closure costs

    874        1,347        1,825        2,789   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,430      $ 4,559      $ 11,294      $ 12,297   
 

 

 

   

 

 

   

 

 

   

 

 

 

Naturally Fresh restructuring - As disclosed in Note 4, the Company acquired substantially all of the assets of Naturally Fresh, Inc. (“Naturally Fresh”) in the second quarter of 2012. Subsequent to the acquisition, during the third quarter of 2012, the Company closed the trucking operations of Naturally Fresh that were acquired in the purchase.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Liabilities recorded as of June 30, 2013 associated with the restructurings of the Soup category, Seaforth facility, and Naturally Fresh relate to severance and are included in the Accounts payable and accrued expenses line of the Condensed Consolidated Balance Sheets. The table below presents a reconciliation of the severance liability as of June 30, 2013.

 

                                
     Severance Liability  
     (In thousands)  

Balance as of January 1, 2013

       $ 2,686   

Expense

     485   

Payments

     (2,088

Foreign exchange

     (62

Adjustments

     (43
  

 

 

 

Balance as of June 30, 2013

       $ 978   
  

 

 

 

4. Acquisitions

On August 8, 2013, the Company announced it had entered into a definitive agreement to acquire all of the outstanding equity interests of Associated Brands Management Holdings Inc., Associated Brands Holdings Limited Partnership, Associated Brands GP Corporation and 6726607 Canada Ltd., (collectively, “Associated Brands”), a privately owned Canadian company and a leading private label manufacturer of powdered drinks, specialty teas and sweeteners, from TorQuest Partners LLC and other shareholders. The Company has agreed to pay CAD $187 million in cash for the business, subject to an adjustment for working capital. The acquisition of Associated Brands is expected to strengthen the Company’s retail presence in private label dry grocery and will introduce a line of specialty tea products to complement its fast growing single serve coffee business. The transaction is expected to close in the third quarter of 2013, subject to the satisfaction of customary closing conditions, and will be financed through borrowings under the Company’s existing $750 million credit facility.

On June 24, 2013, the Company announced it had entered into a definitive agreement to acquire all of the outstanding shares of Cains Foods, L.P. (“Cains”), a privately owned Ayer, Massachusetts based manufacturer of shelf stable mayonnaise, dressings and sauces. The Cains product portfolio offers retail and foodservice customers a wide array of packaging sizes, sold under both private label and branded products. The Company agreed to pay $35 million in cash for the business, subject to an adjustment for working capital and taxes. The acquisition is expected to expand the Company’s footprint in the Northeast United States, enhance its foodservice presence, and enrich its packaging capabilities. The transaction closed on July 1, 2013 and was financed through borrowings under the Company’s existing $750 million credit facility. The acquisition will be accounted for under the acquisition method of accounting. The required disclosures have not been provided as the initial accounting for the business combination was not complete prior to the issuance of these financial statements.

On November 30, 2012, the Company completed the acquisition of selected assets of the aseptic cheese and pudding business from Associated Milk Producers Inc. (“AMPI”), a dairy marketing cooperative based in New Ulm, Minnesota. The business was integrated into the Company’s existing aseptic operations within its Food Away From Home segment, and increased the Company’s presence in the aseptic category. The purchase price was $4 million. The acquisition was financed through borrowings under the Company’s existing $750 million credit facility. Components of the acquisition include fixed assets and intangible assets such as customer lists, formulas and goodwill. The acquisition is being accounted for under the acquisition method of accounting and the results of operations are included in our financial statements from the date of acquisition. There were no acquisition costs. Due to the size and timing of this acquisition, it did not have a material impact on the Company’s financial statements. As such, the Company has not presented pro forma disclosures. There have been no changes to the purchase price allocation in 2013.

On April 13, 2012, the Company completed its acquisition of substantially all the assets of Naturally Fresh, a privately owned Atlanta, Georgia based manufacturer of refrigerated dressings, sauces, marinades, dips and specialty items sold within each of our segments. The purchase price was approximately $26 million, net of cash. The acquisition was financed through borrowings under the Company’s existing $750 million credit facility. The acquisition expanded the Company’s refrigerated manufacturing and packaging capabilities, broadened its distribution footprint and further developed its presence within the growing category of fresh foods. Naturally Fresh’s Atlanta facility, coupled with the Company’s existing West Coast and Chicago based refrigerated food plants, is expected to allow the Company to more efficiently service customers from coast to coast. The acquisition is being accounted for under the acquisition method of accounting and the results of operations are included in our financial statements from the date of acquisition and are in each of our segments. Pro forma disclosures related to the transaction are not included since they are not considered material. There have been no changes to the purchase price allocation in 2013.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

5. Investments

 

                            
    June 30, 2013  
            (In thousands)          

U.S. equity

  $ 4,284   

Non-U.S. equity

    1,392   

Fixed income

    1,875   
 

 

 

 

Total investments

  $ 7,551   
 

 

 

 

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

We consider temporary cash investments with an original maturity of three months or less to be cash equivalents. As of June 30, 2013 and December 31, 2012, $9.0 million and $94.1 million, respectively, represents cash and equivalents held in Canada in local currency, and is convertible into other currencies. The cash and equivalents held in Canada is expected to be used for general corporate purposes in Canada, including capital projects and acquisitions. During June 2013, the Company temporarily transferred $85.0 million from Canada to the U.S., a portion of which was used to pay down the revolving credit facility. In July 2013, the Company transferred the $85.0 million, plus interest, back to Canada.

For the six months ended June 30, 2013, we recognized net unrealized gains totaling $0.4 million that are included in the Interest income line of the Condensed Consolidated Statements of Income. For the three months ended June 30, 2013, we recognized an insignificant amount of net unrealized gains. Additionally, for the three and six months ended June 30, 2013, we recognized realized gains totaling $0.1 million that are included in the Interest income line of the Condensed Consolidated Statements of Income. When securities are sold, their cost is determined based on the first-in, first-out method.

6. Inventories

 

                                         
    June 30,     December 31,  
    2013     2012  
    (In thousands)  

Raw materials and supplies

  $ 134,299      $ 128,186   

Finished goods

    275,704        238,575   

LIFO reserve

    (20,556     (19,408
 

 

 

   

 

 

 

Total

  $ 389,447      $           347,353   
 

 

 

   

 

 

 

Approximately $82.7 million and $77.7 million of our inventory was accounted for under the Last-in, First-out (“LIFO”) method of accounting at June 30, 2013 and December 31, 2012, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

7. Property, Plant and Equipment

 

                                                 
     June 30,     December 31,  
     2013     2012  
     (In thousands)  

Land

   $ 25,739      $ 25,517   

Buildings and improvements

     179,623        177,824   

Machinery and equipment

     488,706        478,394   

Construction in progress

     37,238        31,335   
  

 

 

   

 

 

 

Total

     731,306        713,070   

Less accumulated depreciation

     (311,434     (287,763
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 419,872      $ 425,307   
  

 

 

   

 

 

 

Depreciation expense was $20.0 million and $13.6 million for the three months ended June 30, 2013 and 2012, respectively, and $38.4 million and $26.1 million for the six months ended June 30, 2013 and 2012, respectively. Included in depreciation expense for the three and six months ended June 30, 2013 is $7.2 million and $12.7 million of accelerated depreciation, respectively.

8. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the six months ended June 30, 2013 are as follows:

 

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

Balance at December 31, 2012

  $ 845,216      $ 94,393      $ 133,582      $ 1,073,191   

Currency exchange adjustment

    (5,355     (768            (6,123
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ 839,861      $ 93,625      $ 133,582      $                 1,067,068   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

The gross carrying amount and accumulated amortization of intangible assets other than goodwill as of June 30, 2013 and December 31, 2012 are as follows:

 

                                                                                                                             
    June 30, 2013     December 31, 2012  
    Gross           Net     Gross           Net  
    Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying  
          Amount               Amortization               Amount                 Amount            Amortization        Amount    
    (In thousands)     (In thousands)  

Intangible assets with indefinite lives:

           

Trademarks

  $ 31,363      $      $ 31,363      $ 32,805      $      $ 32,805   

Intangible assets with finite lives:

           

Customer-related

    445,608        (119,359)        326,249        448,825        (107,761     341,064   

Non-compete agreements

    120        (30     90        120        (18     102   

Trademarks

    20,810        (6,358     14,452        20,810        (5,722     15,088   

Formulas/recipes

    6,945        (5,094     1,851        7,017        (4,631     2,386   

Computer software

    46,240        (19,695     26,545        43,339        (17,223     26,116   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 551,086      $ (150,536   $ 400,550      $ 552,916      $ (135,355   $ 417,561   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization expense on intangible assets for the three months ended June 30, 2013 and 2012 was $8.2 million and $8.6 million, respectively, and $16.7 million and $16.9 million for the six months ended June 30, 2013 and 2012, respectively. Estimated amortization expense on intangible assets for 2013 and the next four years is as follows:

 

       (In thousands)    

2013

     $ 33,539   

2014

     $ 32,827   

2015

     $ 31,645   

2016

     $ 31,450   

2017

     $ 30,873   

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

9. Accounts Payable and Accrued Expenses

 

                                             
    June 30,     December 31,  
    2013     2012  
    (In thousands)  

Accounts payable

  $ 127,900      $ 121,404   

Payroll and benefits

    32,710        26,661   

Interest and taxes

    15,215        16,205   

Health insurance, workers’ compensation and other insurance costs

    7,374        6,879   

Marketing expenses

    5,607        7,180   

Other accrued liabilities

    6,604        6,757   
 

 

 

   

 

 

 

Total

  $ 195,410      $ 185,086   
 

 

 

   

 

 

 

10. Income Taxes

Income tax expense was recorded at an effective rate of 33.4% and 32.2% for the three and six months ended June 30, 2013, respectively, compared to 29.0% and 29.8% for the three and six months ended June 30, 2012, respectively. The Company’s effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith Foods, Ltd. (“E.D. Smith”) acquisition in 2007. The increase in the effective tax rate for the three and six months ended June 30, 2013 as compared to 2012, is attributable to an increase in state tax expense and to the tax impact of a shift in revenues between tax jurisdictions.

During the second quarter of 2012, the IRS initiated an examination of TreeHouse Foods’ 2010 tax year and the Canadian Revenue Agency (“CRA”) initiated an examination of the E.D. Smith 2008, 2009, and 2010 tax years. During the second quarter of 2013, the IRS initiated an examination of TreeHouse Foods’ 2011 tax year. The TreeHouse Foods and E.D. Smith examinations are expected to be completed in 2013 or 2014. The Company has examinations in process with various state taxing authorities, which are expected to be completed in 2013 or 2014.

Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $9.4 million within the next 12 months, primarily as a result of the resolution of audits currently in progress and the lapsing of statutes of limitations.

11. Long-Term Debt

 

                                                         
    June 30,     December 31,  
    2013     2012  
    (In thousands)  

Revolving credit facility

  $ 309,000      $ 393,000   

High Yield Notes

    400,000        400,000   

Senior notes

    100,000        100,000   

Tax increment financing and other debt

    5,891        7,044   
 

 

 

   

 

 

 

Total debt outstanding

    814,891        900,044   

Less current portion

    (1,667     (1,944
 

 

 

   

 

 

 

Total long-term debt

  $ 813,224      $ 898,100   
 

 

 

   

 

 

 

Revolving Credit Facility — The Company is party to an unsecured revolving credit facility with an aggregate commitment of $750 million, of which $430.2 million was available as of June 30, 2013. The revolving credit facility matures September 23, 2016. In addition, as of June 30, 2013, there were $10.8 million in letters of credit under the revolving credit facility that were issued but undrawn. Our revolving credit facility contains various financial and other restrictive covenants and requires that the Company maintains certain financial ratios, including a leverage and interest coverage ratio. The Company is in compliance with all applicable covenants as of June 30, 2013. The Company’s average interest rate on debt outstanding under its revolving credit facility for the three and six months ended June 30, 2013 was 1.53% and 1.60%, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

High Yield Notes — The Company’s 7.75% High Yield Notes in aggregate principal amount of $400 million are due March 1, 2018 (the “High Yield Notes”). The High Yield Notes are guaranteed, jointly and severally, by the Company’s 100 percent owned subsidiary Bay Valley Foods, LLC (“Bay Valley”) and its 100 percent owned subsidiaries EDS Holdings, LLC; Sturm Foods, Inc. (“Sturm Foods”); and S.T. Specialty Foods. In addition, certain other of the Company’s subsidiaries may become guarantors from time to time in accordance with the applicable Indenture and may fully, jointly, severally and unconditionally guarantee the Company’s payment obligations under any series of debt securities offered. The Indenture governing the High Yield Notes provides, among other things, that the High Yield Notes will be senior unsecured obligations of the Company. The Indenture contains various restrictive covenants of which the Company is in compliance as of June 30, 2013.

Senior Notes — The Company has outstanding $100 million in aggregate principal amount of 6.03% senior notes due September 30, 2013, issued in a private placement pursuant to a note purchase agreement (the “Note Purchase Agreement”) among the Company and a group of purchasers. The Note Purchase Agreement contains covenants that limit the ability of the Company and its subsidiaries to, among other things, merge with other entities, change the nature of the business, create liens, incur additional indebtedness or sell assets. The Note Purchase Agreement also requires the Company to maintain certain financial ratios. The Company is in compliance with the applicable covenants as of June 30, 2013. The Company will continue to classify these notes as long term, as the Company has the ability and intent to refinance them on a long-term basis using our revolving credit facility or other long-term financing arrangements.

Tax Increment Financing —The Company owes $1.8 million related to redevelopment bonds pursuant to a Tax Increment Financing Plan and has agreed to make certain payments with respect to the principal amount of the bonds through May 2019.

12. Earnings Per Share

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

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

 

                                                                                   
     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  
     (In thousands)      (In thousands)  

Weighted average common shares outstanding

     36,337         36,057         36,323         36,038   

Assumed exercise/vesting of equity awards (1)

     1,036         1,075         989         1,075   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     37,373         37,132         37,312         37,113   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Incremental shares from stock-based compensation awards (equity awards) are computed by the treasury stock method. Equity awards, excluded from our computation of diluted earnings per share because they were anti-dilutive, were 0.7 million for the three and six months ended June 30, 2013, and 0.6 million for the three and six months ended June 30, 2012, respectively.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

13. Stock-Based Compensation

Income before income taxes for the three and six month periods ended June 30, 2013 includes share-based compensation expense of $3.7 million and $7.1 million, respectively. Share-based compensation expense for the three and six month periods ended June 30, 2012 was $3.1 million and $5.7 million, respectively. The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.3 million and $2.6 million for the three and six months ended June 30, 2013, respectively, and $1.0 million and $1.8 million for the three and six month periods ended June 30, 2012, respectively.

The following table summarizes stock option activity during the six months ended June 30, 2013. Stock options are granted under our long-term incentive plan, and generally have a three year vesting schedule, which vest one-third on each of the first three anniversaries of the grant date. Stock options 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, December 31, 2012

    2,468        72      $ 33.19        4.4      $ 50,809   

Granted

    277             $ 65.96       

Forfeited

    (3          $ 61.41       

Exercised

    (36          $ 25.80       
 

 

 

   

 

 

       

Outstanding, June 30, 2013

    2,706        72      $ 36.52        4.5      $ 80,738   
 

 

 

   

 

 

       

Vested/expected to vest, at June 30, 2013

    2,623        72      $ 35.65        4.4      $ 80,657   
 

 

 

   

 

 

       

Exercisable, June 30, 2013

    2,203        72      $ 30.63        3.5      $ 79,437   
 

 

 

   

 

 

       

Compensation costs related to unvested options totaled $8.4 million at June 30, 2013 and will be recognized over the remaining vesting period of the grants, which averages 2.4 years. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used to calculate the fair value of stock options issued in 2013 include the following: expected volatility of 30.21%, expected term of six years, risk free rate of 0.995% and no dividends. The average grant date fair value of stock options granted in the six months ended June 30, 2013 was $20.46. Stock options issued during the six months ended June 30, 2013 totaled 277 thousand. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2013 and 2012 was approximately $1.3 million and $1.7 million, respectively. The tax benefit recognized from stock option exercises was $0.5 million and $0.6 million for the six months ended June 30, 2013 and 2012, respectively.

In addition to stock options, the Company also has outstanding restricted stock units and performance unit awards. These awards are granted under our long-term incentive plan. Employee restricted stock unit awards vest based on the passage of time, and 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 their departure from the Board of Directors, or a specified date. The following table summarizes the restricted stock unit activity during the six months ended June 30, 2013.

 

                                                                                                   
          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, 2012

    353      $ 53.62        78      $ 39.88   

Granted

    118      $ 65.91        19      $ 65.97   

Vested

    (142   $ 52.72        (2   $ 61.41   

Forfeited

    (14   $ 57.77        -      $ -   
 

 

 

     

 

 

   

Outstanding, at June 30, 2013

    315      $ 58.45        95      $ 44.27   
 

 

 

     

 

 

   

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Future compensation costs related to restricted stock units is approximately $14.7 million as of June 30, 2013, and will be recognized on a weighted average basis, over the next 2.2 years. The grant date fair value of the awards granted in 2013 is equal to the Company’s closing stock price on the grant date. Vested awards during the six months ended June 30, 2013 and 2012 had a fair value on the vest date of $9.3 million and $8.5 million, respectively.

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 March 2, 2013, based on achievement of operating performance measures, 1,225 performance units were converted into 2,450 shares of stock, a two to one conversion ratio. On June 28, 2013, based on achievement of operating performance measures, 32,371 performance units were converted into 28,308 shares of stock, an average conversion ratio of 0.87 shares for each performance unit. The following table summarizes the performance unit activity during the six months ended June 30, 2013:

 

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

Unvested, at December 31, 2012

    165      $ 56.57   

Granted

    89      $ 65.65   

Vested

    (29   $ 46.31   

Forfeited

    (4   $ 46.46   
 

 

 

   

Unvested, at June 30, 2013

    221      $ 61.91   
 

 

 

   

Future compensation cost related to the performance units is estimated to be approximately $12.3 million as of June 30, 2013, and is expected to be recognized over the next 2.7 years. The grant fair value of the awards is equal to the Company’s closing stock price on the date of grant.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

14. 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     Derivative     Other  
    Currency     Postretirement     Financial     Comprehensive  
    Translation (1)     Benefits (2)     Instrument (3)     Loss  
    (In thousands)  
Balance at December 31, 2012   $ (2,007   $ (14,525   $ (108   $ (16,640
Other comprehensive loss     (19,467                   (19,467
Reclassifications from accumulated other comprehensive loss            759        81        840   
 

 

 

   

 

 

   

 

 

   

 

 

 
Other comprehensive (loss) income     (19,467     759        81        (18,627
 

 

 

   

 

 

   

 

 

   

 

 

 
Balance at June 30, 2013   $ (21,474   $ (13,766   $ (27   $ (35,267
 

 

 

   

 

 

   

 

 

   

 

 

 
       
Balance at December 31, 2011   $ (10,268   $ (11,825   $ (269   $ (22,362
Other comprehensive loss     (1,784                   (1,784
Reclassifications from accumulated other comprehensive loss            561        81        642   
 

 

 

   

 

 

   

 

 

   

 

 

 
Other comprehensive (loss) income     (1,784     561        81        (1,142
 

 

 

   

 

 

   

 

 

   

 

 

 
Balance at June 30, 2012   $ (12,052   $ (11,264   $ (188   $ (23,504
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) The foreign currency translation adjustment is not net of tax, as it pertains to the Company’s permanent investment in its Canadian subsidiary, E.D. Smith.
  (2) The unrecognized pension and post-retirement benefits reclassification is presented net of tax of $435 and $353 for the six months ended June 30, 2013 and 2012, respectively.
  (3) The derivative financial instrument reclassification is presented net of tax of $51 for the six months ended June 30, 2013 and 2012.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Condensed Consolidated Statements of Income lines impacted by reclassifications out of Accumulated Other Comprehensive Loss are outlined below:

 

                                                                                    
                             Affected line in
     Reclassifications from Accumulated             The Condensed Consolidated        
     Other Comprehensive Loss     Statements of Income
     Three months ended June 30,     Six months ended June 30,      
     2013     2012     2013     2012      
     (In thousands)     (In thousands)      

Derivative financial instrument

   $ 66      $ 66      $ 132      $ 132      Interest expense

Income taxes

     25        25        51        51      Income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

   $ 41      $ 41      $ 81      $ 81     
  

 

 

   

 

 

   

 

 

   

 

 

   
          

Amortization of defined benefit pension items:

          

Prior service costs

   $ 96      $ 133      $ 193      $ 268      (a)

Unrecognized net loss

     470        326        940        646      (a)

Other

                   61            
  

 

 

   

 

 

   

 

 

   

 

 

   

Total before tax

     566        459        1,194        914     

Income taxes

     217        177        435        353      Income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

Net of tax

   $ 349      $ 282      $ 759      $ 561     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

  (a) These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 15 for additional details.

15. 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.

Components of net periodic pension expense are as follows:

 

                                                                                                   
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  
     (In thousands)  

Service cost

   $ 647      $ 633      $ 1,295      $ 1,266   

Interest cost

     628        591        1,255        1,182   

Expected return on plan assets

     (643     (581     (1,285     (1,162

Amortization of prior service costs

     114        151        228        302   

Amortization of unrecognized net loss

     459        309        917        618   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 1,205      $ 1,103      $ 2,410      $ 2,206   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $4.9 million to the pension plans in the first six months of 2013. The Company does not expect to make additional contributions to the plans in 2013.

 

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Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Components of net periodic postretirement expense are as follows:

 

                                                                                                   
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  
     (In thousands)  

Service cost

   $ 5      $ 8      $ 10      $ 16   

Interest cost

     37        39        72        78   

Amortization of prior service costs

     (18     (18     (35     (36

Amortization of unrecognized net loss

     11        14        23        28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement cost

   $ 35      $ 43      $ 70      $ 86   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company expects to contribute approximately $0.2 million to the postretirement health plans during 2013.

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

16. Other Operating (Income) Expense, Net

The Company incurred other operating (income) expense for the three and six months ended June 30, 2013 and 2012, which consisted of the following:

 

                                                                                   
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2013     2012     2013     2012  
     (In thousands)     (In thousands)  

Restructuring

   $ (136   $ (8   $ 1,282      $ 419   

Other expense

            (41            (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other operating (income) expense, net

   $ (136   $ (49   $ 1,282      $ 411   
  

 

 

   

 

 

   

 

 

   

 

 

 

17. Supplemental Cash Flow Information

 

                                         
     Six Months Ended  
     June 30,  
     2013      2012  
     (In thousands)  

Interest paid

   $ 23,136       $ 24,166   

Income taxes paid

   $ 26,206       $ 17,482   

Accrued purchase of property and equipment

   $ 4,795       $ 3,187   

Accrued other intangible assets

   $ 584       $ 1,333   

Accrued purchase price

   $       $ 956   

Non-cash financing activities for the six months ended June 30, 2013 and 2012 include the settlement of 150,777 shares and 224,259 shares, respectively, of restricted stock, restricted stock units and performance units, where shares were withheld to satisfy the minimum statuary tax withholding requirements.

18. 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 that it has established adequate reserves to satisfy any liability that may be incurred in connection with any such currently pending or threatened matters, none of which are significant. The settlement of any such currently pending or threatened matters is not expected to have a material impact on our financial position, annual results of operations or cash flows.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

19. Derivative Instruments

The Company is exposed to certain risks 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 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.

Due to the Company’s operations in Canada, we are exposed to foreign currency risks. The Company enters into foreign currency contracts to manage the risk associated with foreign currency cash flows. The Company’s objective in using foreign currency contracts is to establish a fixed foreign currency exchange rate for the net cash flow requirements for purchases that are denominated in U.S. dollars. These contracts do not qualify for hedge accounting and changes in their fair value are recorded in the Condensed Consolidated Statements of Income, with their fair value recorded on the Condensed Consolidated Balance Sheets. As of June 30, 2013 and 2012, the Company did not have any foreign currency contracts outstanding.

Certain commodities we use in the production and distribution of our products are exposed to market price risk. The Company utilizes a combination of derivative contracts, purchase orders and various short and long-term supply arrangements to manage commodity price risk. The majority of commodity forward contracts are not derivatives, and those that are, generally qualify for the normal purchase exception under the guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions.

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 purchase exception.

The Company’s diesel contracts are used to manage the Company’s risk associated with the underlying cost of diesel fuel used to deliver products. The 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 purchase exception are used to manage the price risk associated with raw material costs. As of June 30, 2013, the Company had outstanding contracts for the purchase of 20,079 megawatts of electricity, expiring throughout 2013 and outstanding contracts for the purchase of 903,356 dekatherms of natural gas, expiring throughout 2013. As of June 30, 2013, there were 3.0 million gallons of outstanding diesel fuel contracts that expire in the second half of 2013.

 

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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

               Fair Value  
      

Balance Sheet Location

              June 30, 2013                  December 31, 2012      
               (In thousands)  

Liability Derivative:

          

Commodity contracts

     Accounts payable and accrued expenses               $ 430          $ 929     
        

 

 

   

 

 

 
           $ 430          $ 929     
        

 

 

   

 

 

 

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

 

                                                                                    
          Three Months Ended     Six Months Ended  
     Location of (Loss) Gain    June 30,     June 30,  
    

Recognized in Income

   2013     2012     2013     2012  
          (In thousands)     (In thousands)  

Mark to market unrealized (loss) gain:

           

Commodity contracts

   Other expense (income), net    $ (274   $ (2,098   $ 499      $ (1,581
     

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized (loss) gain

        (274     (2,098     499        (1,581

Realized (loss) gain

           

Commodity contracts

   Cost of sales             (187            28   

Commodity contracts

   Selling and distribution      (163     15        (129     73   
     

 

 

   

 

 

   

 

 

   

 

 

 

Total realized (loss) gain

        (163     (172     (129     101   
     

 

 

   

 

 

   

 

 

   

 

 

 

Total (loss) gain

      $ (437   $ (2,270   $ 370      $ (1,480
     

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

20. Fair Value

The following table presents the carrying value and fair value of our financial instruments as of June 30, 2013 and December 31, 2012:

 

     June 30, 2013     December 31, 2012        
             Carrying                         Fair                         Carrying                         Fair                    
     Value     Value     Value     Value     Level  
     (In thousands)     (In thousands)        

Not recorded at fair value (liability):

          

Revolving credit facility

   $ (309,000   $ (307,151   $ (393,000   $ (393,353     2     

Senior notes

   $ (100,000   $ (101,099   $ (100,000   $ (102,341     2     

High Yield Notes

   $ (400,000   $ (435,520   $ (400,000   $ (433,500     2     
          

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

          

Commodity contracts

   $ (430   $ (430   $ (929   $ (929     2     

Investments

   $ 7,551      $ 7,551      $      $        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, senior notes, High Yield Notes and commodity contracts 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 value of the revolving credit facility and senior notes were estimated using present value techniques and market based interest rates and credit spreads. The fair value of the Company’s High Yield Notes was estimated based on quoted market prices for similar instruments, where the inputs are considered Level 2, due to their infrequent trading volume.

The fair value of the commodity contracts are based on an analysis comparing the contract rates to the forward curve rates throughout the term of the contracts. The commodity contracts are recorded at fair value on the Condensed Consolidated Balance Sheets.

The fair value of the investments is 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.

 

21


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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

21. 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, 2012.

 

22


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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

                                                                                   
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2013     2012     2013     2012  
    (In thousands)     (In thousands)  

Net sales to external customers:

       

North American Retail Grocery

  $ 375,744      $ 371,500      $ 761,825      $ 750,541   

Food Away From Home

    85,675        87,885        167,488        163,234   

Industrial and Export

    64,927        68,036        137,143        137,457   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 526,346      $ 527,421      $ 1,066,456      $ 1,051,232   
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct operating income:

       

North American Retail Grocery

  $ 61,140      $ 54,899      $ 126,449      $ 116,504   

Food Away From Home

    11,958        10,479        22,858        20,276   

Industrial and Export

    13,509        8,302        25,914        19,300   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    86,607        73,680        175,221        156,080   

Unallocated selling and distribution expenses

    (1,323     (947     (2,739     (2,709

Unallocated costs of sales (1)

    (7,110            (12,538       

Unallocated corporate expense

    (37,197     (31,279     (74,587     (66,606
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    40,977        41,454        85,357        86,765   

Other expense

    (13,094     (13,958     (24,120     (27,565
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

  $ 27,883      $ 27,496      $ 61,237      $ 59,200   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) Primarily related to accelerated depreciation and other charges related to restructurings.

Geographic Information — The Company had revenues to customers outside of the United States of approximately 13.4% and 13.3% of total consolidated net sales in the six months ended June 30, 2013 and 2012, respectively, with 12.1% and 12.1% going to Canada, respectively.

Major Customers — Wal-Mart Stores, Inc. and affiliates accounted for approximately 19.5% and 20.0% of consolidated net sales in the six months ended June 30, 2013 and 2012, respectively. No other customer accounted for more than 10% of our consolidated net sales.

Product Information — The following table presents the Company’s net sales by major products for the three and six months ended June 30, 2013 and 2012.

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2013     2012     2013     2012  
    (In thousands)     (In thousands)  

Products

       

Non-dairy creamer

  $ 79,963      $ 83,738      $ 171,137      $ 172,897   

Pickles

    85,466        88,624        156,376        159,500   

Salad Dressings

    81,503        77,529        154,282        140,646   

Powdered drinks

    71,419        52,340        140,114        105,673   

Mexican and other sauces

    63,234        63,428        121,405        115,069   

Soup and Infant Feeding

    36,926        52,684        92,004        124,623   

Hot cereals

    33,981        33,801        81,770        76,969   

Dry dinners

    28,586        28,189        57,780        61,364   

Aseptic products

    23,753        24,519        47,682        48,686   

Jams

    14,266        15,007        29,121        31,544   

Other Products

    7,249        7,562        14,785        14,261   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

  $           526,346      $           527,421      $   1,066,456      $   1,051,232   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

23


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TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

22. Guarantor and Non-Guarantor Financial Information

The Company’s High Yield Notes are guaranteed by its 100 percent owned subsidiary Bay Valley and its 100 percent owned subsidiaries EDS Holdings, LLC, Sturm Foods and S.T. Specialty Foods. There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan. The following condensed supplemental consolidating financial information presents the results of operations, financial position and cash flows of the parent company, its guarantor subsidiaries, its non-guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of June 30, 2013 and 2012, and for the three and six months ended June 30, 2013, and 2012. 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.

Condensed Supplemental Consolidating Balance Sheet

June 30, 2013

(In thousands)

 

                                                                                                                  
    Parent     Guarantor    

Non-

Guarantor

             
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Assets

         

Current assets:

         

Cash and cash equivalents

  $ 18,809      $ 542      $ 8,994      $      $ 28,345   

Investments

                  7,551               7,551   

Receivables, net

    132        96,783        18,689               115,604   

Inventories, net

           340,259        49,188               389,447   

Deferred income taxes

           8,115        130               8,245   

Prepaid expenses and other current assets

    26,782        11,564        2,026        (20,328     20,044   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    45,723        457,263        86,578        (20,328     569,236   

Property, plant and equipment, net

    14,088        373,157        32,627               419,872   

Goodwill

           959,440        107,628               1,067,068   

Investment in subsidiaries

    1,785,869        201,249               (1,987,118       
Intercompany accounts receivable (payable) net     143,225        (78,377     (64,848              

Deferred income taxes

    14,061                      (14,061       
Identifiable intangible and other assets, net     47,459        304,136        68,712               420,307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,050,425      $ 2,216,868      $ 230,697      $ (2,021,507   $ 2,476,483   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities and Stockholders’ Equity

         

Current liabilities:

         

Accounts payable and accrued expenses

  $ 18,557      $ 181,858      $ 15,323      $ (20,328   $ 195,410   

Current portion of long-term debt

           1,664        3               1,667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    18,557        183,522        15,326        (20,328     197,077   

Long-term debt

    809,000        4,204        20               813,224   

Deferred income taxes

    2,181        211,826        14,102        (14,061     214,048   

Other long-term liabilities

    13,044        31,447                      44,491   

Stockholders’ equity

    1,207,643        1,785,869        201,249        (1,987,118     1,207,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,050,425      $ 2,216,868      $ 230,697      $ (2,021,507   $ 2,476,483   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Balance Sheet

December 31, 2012

(In thousands)

 

                                                                                                        
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Assets

         

Current assets:

         

Cash and cash equivalents

  $      $ 269      $ 94,138      $      $ 94,407   

Accounts receivable, net

    113        104,622        19,913               124,648   

Inventories, net

           301,286        46,067               347,353   

Deferred income taxes

           7,860        138               7,998   

Prepaid expenses and other current assets

    1,276        11,857        872               14,005   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,389        425,894        161,128               588,411   

Property, plant and equipment, net

    14,427        374,215        36,665               425,307   

Goodwill

           959,440        113,751               1,073,191   

Investment in subsidiaries

    1,740,451        209,833               (1,950,284       

Intercompany accounts receivable (payable), net

    267,016        (118,778     (148,238              

Deferred income taxes

    13,275                      (13,275       

Identifiable intangible and other assets, net

    48,797        315,258        74,909               438,964   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,085,355      $ 2,165,862      $ 238,215      $ (1,963,559   $ 2,525,873   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         

Liabilities and Shareholders’ Equity

         

Current liabilities:

         

Accounts payable and accrued expenses

  $ (3,579   $ 175,139      $ 13,526      $      $ 185,086   

Current portion of long-term debt

           1,938        6               1,944   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    (3,579     177,077        13,532               187,030   

Long-term debt

    893,000        5,079        21               898,100   

Deferred income taxes

    2,413        208,494        14,829        (13,275     212,461   

Other long-term liabilities

    14,266        34,761                      49,027   

Shareholders’ equity

    1,179,255        1,740,451        209,833        (1,950,284     1,179,255   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 2,085,355      $ 2,165,862      $ 238,215      $ (1,963,559   $ 2,525,873   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended June 30, 2013

(In thousands)

 

                                                                                                                            
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

  $      $ 471,138      $ 76,086      $ (20,878   $ 526,346   

Cost of sales

           374,912        62,744        (20,878     416,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

           96,226        13,342               109,568   

Selling, general and administrative expense

    10,216        43,963        6,321               60,500   

Amortization

    1,321        5,756        1,150               8,227   

Other operating income, net

           (517     381               (136
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (11,537     47,024        5,490               40,977   

Interest expense

    12,085        154        3,521        (3,530     12,230   

Interest income

           (3,530     (322     3,530        (322

Other income, net

    (2     543        645               1,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (23,620     49,857        1,646               27,883   

Income taxes (benefit)

    (15,812     24,611        519               9,318   

Equity in net income of subsidiaries

    26,373        1,127               (27,500       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 18,565      $ 26,373      $ 1,127      $ (27,500   $ 18,565   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Income

Three Months Ended June 30, 2012

(In thousands)

 

                                                                                                                            
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

  $      $ 463,960      $ 74,659      $ (11,198   $ 527,421   

Cost of sales

           373,332        58,696        (11,198     420,830   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

           90,628        15,963               106,591   

Selling, general and administrative expense

    10,664        39,862        6,036               56,562   

Amortization

    1,190        6,201        1,233               8,624   

Other operating expense, net

           (49                   (49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (11,854     44,614        8,694               41,454   

Interest expense

    12,391        60        3,556        (3,555     12,452   

Interest income

           (3,555     (14     3,555        (14

Other (income) expense, net

           2,346        (826            1,520   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (24,245     45,763        5,978               27,496   

Income taxes (benefit)

    (9,225     15,629        1,581               7,985   

Equity in net income of subsidiaries

    34,531        4,397               (38,928       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 19,511      $ 34,531      $ 4,397      $ (38,928   $ 19,511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Statement of Income

Six Months Ended June 30, 2013

(In thousands)

 

                                                                                                        
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

  $      $ 957,072      $ 147,433      $ (38,049   $ 1,066,456   

Cost of sales

           759,288        121,477        (38,049     842,716   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

           197,784        25,956               223,740   

Selling, general and administrative expense

    24,617        83,151        12,607               120,375   

Amortization

    2,599        11,808        2,319               16,726   

Other operating expense, net

           419        863               1,282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (27,216     102,406        10,167               85,357   

Interest expense

    24,579        438        7,045        (7,054     25,008   

Interest income

           (7,054     (1,000     7,054        (1,000

Other (income) expense, net

    (2     (146     260               112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (51,793     109,168        3,862               61,237   

Income taxes (benefit)

    (29,204     47,808        1,094               19,698   

Equity in net income of subsidiaries

    64,128        2,768               (66,896       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 41,539      $ 64,128      $ 2,768      $ (66,896   $ 41,539   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Income

Six Months Ended June 30, 2012

(In thousands)

 

                                                                                                        
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net sales

  $      $ 927,591      $ 146,587      $ (22,946   $ 1,051,232   

Cost of sales

           738,184        114,471        (22,946     829,709   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

           189,407        32,116               221,523   

Selling, general and administrative expense

    24,643        80,286        12,531               117,460   

Amortization

    2,226        12,187        2,474               16,887   

Other operating expense, net

           411                      411   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (26,869     96,523        17,111               86,765   

Interest expense

    25,326        332        7,132        (7,126     25,664   

Interest income

           (7,126     (14     7,126        (14

Other (income) expense, net

           1,535        380               1,915   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

    (52,195     101,782        9,613               59,200   

Income taxes (benefit)

    (19,861     34,955        2,521               17,615   

Equity in net income of subsidiaries

    73,919        7,092               (81,011       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 41,585      $ 73,919      $ 7,092      $ (81,011   $ 41,585   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended June 30, 2013

(In thousands)

 

                                                                                                                  
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income

  $ 18,565      $ 26,373      $ 1,127      $ (27,500   $ 18,565   
         

Other comprehensive income:

         

Foreign currency translation adjustments

           (4,828     (6,781            (11,609

Pension and post-retirement reclassification adjustment, net of tax

           349                      349   

Derivatives reclassification adjustment, net of tax

    41                             41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

    41        (4,479     (6,781            (11,219

Equity in other comprehensive income of

subsidiaries

    (11,260     (6,781            18,041          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 7,346      $ 15,113      $ (5,654   $ (9,459   $ 7,346   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Three Months Ended June 30, 2012

(In thousands)

 

                                                                                                                  
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income

  $ 19,511      $ 34,531      $ 4,397      $ (38,928   $ 19,511   
         

Other comprehensive income (loss):

         

Foreign currency translation adjustments

           (4,081     (5,190            (9,271

Pension and post-retirement reclassification adjustment, net of tax

           282                      282   

Derivative reclassification adjustment, net of tax

    41                             41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    41        (3,799     (5,190            (8,948

Equity in other comprehensive income of

subsidiaries

    (8,989     (5,190            14,179          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 10,563      $ 25,542      $ (793   $ (24,749   $ 10,563   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Six Months Ended June 30, 2013

(In thousands)

 

                                                                                                                  
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income

  $ 41,539      $ 64,128      $ 2,768      $ (66,896   $ 41,539   
         

Other comprehensive income (loss):

         

Foreign currency translation adjustments

           (8,115     (11,352            (19,467

Pension and post-retirement reclassification adjustment, net of tax

           759                      759   

Derivative reclassification adjustment, net of tax

    81                             81   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    81        (7,356     (11,352            (18,627
Equity in other comprehensive income of subsidiaries     (18,708     (11,352            30,060          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 22,912      $ 45,420      $ (8,584   $ (36,836   $ 22,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Supplemental Consolidating Statement of Comprehensive Income

Six Months Ended June 30, 2012

(In thousands)

 

                                                                                                                  
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net income

  $ 41,585      $ 73,919      $ 7,092      $ (81,011   $ 41,585   
         

Other comprehensive income (loss):

         

Foreign currency translation adjustments

           (735     (1,049            (1,784

Pension and post-retirement reclassification adjustment, net of tax

           561                      561   

Derivative reclassification adjustment, net of tax

    81                             81   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

    81        (174     (1,049            (1,142
Equity in other comprehensive income of subsidiaries     (1,223     (1,049            2,272          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 40,443      $ 72,696      $ 6,043      $ (78,739   $ 40,443   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Condensed Supplemental Consolidating Statement of Cash Flows

Six Months Ended June 30, 2013

(In thousands)

 

                                                                                              
    Parent     Guarantor    

Non-

Guarantor

             
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net cash provided by operating activities   $ (15,554   $ 153,551      $ (67,955   $      $ 70,042   
Cash flows from investing activities:          
Purchase of investments                   (7,585            (7,585
Additions to property, plant and equipment     (156     (31,175     (4,310            (35,641
Additions to other intangible assets     (2,407     (848                   (3,255
Proceeds from sale of fixed assets            915        157               1,072   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net cash used in investing activities     (2,563     (31,108     (11,738            (45,409
Cash flows from financing activities:          
Borrowings under revolving credit facility     111,800                             111,800   
Payments under revolving credit facility     (195,800                          (195,800
Payments on capitalized lease obligations            (1,149                   (1,149
Intercompany transfer     121,021        (121,021                     
Net payments related to stock-based award activities     (1,192                          (1,192
Excess tax benefits from stock-based compensation     1,097                             1,097   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net cash provided by financing activities     36,926        (122,170                   (85,244
Effect of exchange rate changes on cash and cash equivalents                   (5,451            (5,451
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net increase in cash and cash equivalents     18,809        273        (85,144            (66,062
Cash and cash equivalents, beginning of period            269        94,138               94,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 18,809      $ 542      $ 8,994      $      $ 28,345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

TREEHOUSE FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Condensed Supplemental Consolidating Statement of Cash Flows

Six Months Ended June 30, 2012

(In thousands)

 

                                                                                                        
    Parent     Guarantor     Non-Guarantor              
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
Net cash provided by operating activities   $ (22,807   $ 41,104      $ 76,321      $      $ 94,618   
Cash flows from investing activities:          
Additions to property, plant and equipment     607        (25,526     (5,100            (30,019
Additions to other intangible assets     (4,302                          (4,302
Acquisition of business, net of cash acquired            (25,000                   (25,000
Proceeds from sale of fixed assets            46                      46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net cash used in investing activities     (3,695     (50,480     (5,100            (59,275
Cash flows from financing activities:          
Borrowings under revolving credit facility     198,900                             198,900   
Payments under revolving credit facility     (160,400                          (160,400
Payments on capitalized lease obligations            (1,033                   (1,033
Intercompany transfer     (10,560     10,560                        
Excess tax benefits from stock-based compensation     2,440                             2,440   
Net payments related to stock-based award activities     (3,878                          (3,878
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net cash provided by financing activities     26,502        9,527                      36,029   
Effect of exchange rate changes on cash and cash equivalents                   (407            (407
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Net increase in cash and cash equivalents            151        70,814               70,965   
Cash and cash equivalents, beginning of period            6        3,273               3,279   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Cash and cash equivalents, end of period   $      $ 157      $ 74,087      $      $ 74,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

31


Table of Contents

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

Business Overview

TreeHouse is a food manufacturer servicing primarily the retail grocery and foodservice distribution channels. Our products include non-dairy powdered creamers, private label canned soups, refrigerated and shelf stable salad dressings and sauces, powdered drink mixes, single serve hot beverages, hot cereals, macaroni and cheese, skillet dinners, Mexican sauces, jams and pie fillings, pickles and related products, aseptic sauces, and liquid non-dairy creamer. We believe we are the largest manufacturer of pickles and non-dairy powdered creamer in the United States, and the largest manufacturer of private label salad dressings, powdered drink mixes, and instant hot cereals in the United States and Canada, based on sales volume.

The following discussion and analysis presents the factors that had a material effect on our results of operations for the three and six months ended June 30, 2013 and 2012. Also discussed is our financial position as of the end of those periods. 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 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, including those associated with restructurings. See Note 21 of the Condensed Consolidated Financial Statements for additional information on the presentation of our reportable segments.

Our current operations consist of the following:

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; condensed and ready to serve soups, broths and gravies; refrigerated and shelf stable salad dressings and sauces; pickles and related products; Mexican sauces; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks and single serve hot beverages; hot cereals; macaroni and cheese and skillet dinners.

Our Food Away From Home segment sells non-dairy powdered creamers; pickles and related products; Mexican sauces; refrigerated dressings; aseptic products; hot cereals; powdered drinks and single serve hot beverages to foodservice customers, including restaurant chains and food distribution companies, within the United States and Canada.

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. The most common products sold in this segment include pickles and related products; Mexican sauces; infant feeding products; refrigerated dressings and single serve hot beverages. Export sales are primarily to industrial customers outside of North America.

The industry environment the Company operates in continues to be one that is challenged by the overall state of the economy, increased competition, and inconsistent volumes. These dynamics have manifested themselves in the operating results of TreeHouse and our peers, where the overall industry is experiencing continued volatility in sales and volumes.

Despite the challenging operating environment, the Company achieved a 1.4% increase in net sales for the six months ended June 30, 2013 as compared to the same period last year, due to additional sales from acquisitions and price increases. This increase was partially offset by a decrease in volume/mix driven primarily by the loss of certain soup business for a particular customer that will be reflected in the Company’s results throughout the remainder of the year. For the three months ended June 30, 2013, the Company experienced a 0.2% decrease in net sales compared to the same period last year, due to decreased volume/mix, partially offset by additional sales from acquisitions and price increases. As previously stated, the decrease in volume/mix was primarily related to the loss of certain soup business for a particular customer. The loss of the soup business negatively impacted our net sales attributed to volume/mix by approximately 2.1% and 2.3% for the three and six months ended June 30, 2013, respectively. If not for the negative