q22010_form10q.htm


 
 
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, 2010.
or

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

Commission File Number 001-32504

TreeHouse Foods, Inc.
(Exact name of the registrant as specified in its charter)


Delaware
 
20-2311383
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
     
Two Westbrook Corporate Center, Suite 1070
   
Westchester, IL
 
60154
(Address of principal executive offices)
 
(Zip Code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
o
         
Non-accelerated filer
o
 
Smaller reporting Company
o
(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 o     No x

Number of shares of Common Stock, $0.01 par value, outstanding as of July 30, 2010:  35,390,286.
 


 
 

Table of Contents

 
Page
 
   
3
   
24
   
34
   
35
   
36
   
 
   
37
   
37
   
37
   
38
   
   
   
   
   
   
   
   
   
   
   
   

 
-2-


Part I — Financial Information


Item 1. Financial Statements

TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

                 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
 
Assets
               
Current assets:
               
Cash and cash equivalents
 
$
3,447
   
$
4,415
 
Receivables, net
   
107,354
     
86,557
 
Inventories, net
   
295,635
     
264,933
 
Deferred income taxes
   
3,645
     
3,397
 
Prepaid expenses and other current assets
   
23,496
     
7,269
 
Assets held for sale
   
4,081
     
4,081
 
Total current assets
   
437,658
     
370,652
 
Property, plant and equipment, net
   
357,292
     
276,033
 
Goodwill
   
953,384
     
575,007
 
Other intangible assets, net
   
400,464
     
153,569
 
Other assets, net
   
19,433
     
9,167
 
Total assets
 
$
2,168,231
   
$
1,384,428
 
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable and accrued expenses
 
$
181,357
   
$
148,819
 
Current portion of long-term debt
   
1,046
     
906
 
Deferred income tax
   
642
     
 
Total current liabilities
   
183,045
     
149,725
 
Long-term debt
   
886,205
     
401,640
 
Deferred income taxes
   
160,776
     
45,381
 
Other long-term liabilities
   
35,753
     
31,453
 
Total liabilities
   
1,265,779
     
628,199
 
Commitments and contingencies (Note 17)
               
Stockholders’ equity:
               
Preferred stock, par value $0.01 per share, 10,000,000 shares authorized, none issued
   
     
 
Common stock, par value $0.01 per share, 90,000,000 shares authorized, 35,389,917 and 31,998,921 shares issued and outstanding, respectively
   
354
     
320
 
Additional paid-in capital
   
693,810
     
587,598
 
Retained earnings
   
233,233
     
195,262
 
Accumulated other comprehensive loss
   
 (24,945
)
   
(26,951
)
Total stockholders’ equity
   
902,452
     
756,229
 
Total liabilities and stockholders’ equity
 
$
2,168,231
   
$
1,384,428
 
                 
See Notes to Condensed Consolidated Financial Statements.

 
-3-


TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

                                 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
Net sales
 
$
446,195
   
$
372,605
   
$
843,319
   
$
728,001
 
Cost of sales
   
340,045
     
292,761
     
648,391
     
576,446
 
Gross profit
   
106,150
     
79,844
     
194,928
     
151,555
 
Operating expenses:
                               
Selling and distribution
   
30,887
     
28,517
     
57,683
     
54,298
 
General and administrative
   
25,084
     
19,863
     
53,562
     
35,636
 
Other operating expense (income) net
   
2,019
     
183
     
(242
)
   
425
 
Amortization expense
   
7,287
     
3,321
     
11,734
     
6,579
 
Total operating expenses
   
65,277
     
51,884
     
122,737
     
96,938
 
Operating income
   
40,873
     
27,960
     
72,191
     
54,617
 
Other expense (income):
                               
Interest expense, net
   
11,779
     
4,821
     
18,606
     
9,319
 
Gain on foreign currency exchange
   
(2,170
)
   
(3,864
)
   
(2,070
)
   
(1,804
)
Other income, net
   
(993
)
   
(1,153
)
   
(1,206
)
   
(1,265
)
Total other expense (income)
   
8,616
     
(196
)
   
15,330
     
6,250
 
Income before income taxes
   
32,257
     
28,156
     
56,861
     
48,367
 
Income taxes
   
10,605
     
9,731
     
18,890
     
17,210
 
Net income
 
$
21,652
   
$
18,425
   
$
37,971
   
$
31,157
 
                                 
Weighted average common shares:
                               
Basic
   
34,814
     
31,616
     
34,465
     
31,586
 
Diluted
   
35,994
     
31,752
     
35,588
     
32,052
 
Net earnings per common share:
                               
Basic
 
$
.62
   
$
.58
   
$
1.10
   
$
.99
 
Diluted
 
$
.60
   
$
.58
   
$
1.07
   
$
.97
 
                                 
See Notes to Condensed Consolidated Financial Statements.

 
-4-


TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

                 
   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
   
(Unaudited)
 
Cash flows from operating activities:
               
Net income
 
$
37,971
   
$
31,157
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
20,763
     
16,398
 
Amortization
   
11,734
     
6,579
 
Loss (gain) on foreign currency exchange
   
668
     
(2,146
)
Mark to market adjustment on derivative contracts
   
(1,710
)
   
(984
)
Excess tax deficiency (benefits) from stock-based payment arrangements
   
440
     
(100
)
Stock-based compensation
   
7,798
     
6,059
 
Loss on disposition of assets, net
   
1,720
     
380
 
Deferred income taxes
   
7,199
     
7,293
 
Curtailment of postretirement benefit obligation
   
(2,357
)
   
 
Other
   
81
     
80
 
Changes in operating assets and liabilities, net of acquisitions:
               
Receivables
   
20,556
     
4,086
 
Inventories
   
16,875
     
(27,880
)
Prepaid expenses and other assets
   
(11,898
)
   
3,224
 
Accounts payable, accrued expenses and other liabilities
   
6,922
     
(29,117
)
Net cash provided by operating activities
   
116,762
     
15,029
 
Cash flows from investing activities:
               
Additions to property, plant and equipment
   
(16,625
)
   
(22,553
)
Additions to other intangible assets
   
(6,614
)
   
 
Acquisition of business, net of cash acquired
   
(664,655
)
   
 
Proceeds from sale of fixed assets
   
     
24
 
Net cash used in investing activities
   
(687,894
)
   
(22,529
)
Cash flows from financing activities:
               
Proceeds from issuance of debt
   
400,000
     
 
Borrowings under revolving credit facility
   
270,900
     
176,900
 
Payments under revolving credit facility
   
(187,100
)
   
(170,000
)
Payments on capitalized lease obligations
   
(587
)
   
(421
)
Proceeds from issuance of common stock, net of expenses
   
110,688
     
 
Payment of deferred financing costs
   
(10,783
)
   
 
Proceeds from stock option exercises
   
3,074
     
137
 
Excess tax (deficiency) benefits from stock-based payment arrangements
   
(440
)
   
100
 
Cash used to net share settle equity awards
   
(15,330
)
   
(279
)
Net cash provided by financing activities
   
570,422
     
6,437
 
Effect of exchange rate changes on cash and cash equivalents
   
(258
)
   
473
 
Net decrease in cash and cash equivalents
   
(968
)
   
(590
)
Cash and cash equivalents, beginning of period
   
4,415
     
2,687
 
Cash and cash equivalents, end of period
 
$
3,447
   
$
2,097
 
                 
See Notes to Condensed Consolidated Financial Statements.

 
-5-


TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the six months ended June 30, 2010
(Unaudited)

1. Basis of Presentation

The Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. without audit, 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.  Certain prior year amounts have been reclassified to conform to the current period presentation, primarily to present borrowings under our line of credit on a gross versus net basis.  These reclassifications had no effect on reported net earnings, total assets or net cash flows.  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, 2009.  Results of operations for interim periods are not necessarily indicative of annual results.

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, 2009.

Unless otherwise indicated, references in this report to “we,” “us,” “our,” or the “Company” refer to TreeHouse Foods, Inc. and subsidiaries, taken as a whole.

2. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”) to provide additional guidance on fair value disclosures.  ASU 2010-06 requires new disclosures about transfers in and out of Level 1 and 2, and requires that the activity in Level 3 disclosures be presented on a gross basis rather than as a net number.  The ASU also clarifies existing disclosures about the level of disaggregation and information on inputs and valuation techniques, and includes confirming amendments to the guidance on employers’ disclosures about postretirement benefit plan assets.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009.  The Company adopted the provisions of this ASU effective January 1, 2010, and the adoption did not significantly impact the Company’s Condensed Consolidated Financial Statements.

3. Acquisition

On March 2, 2010, the Company acquired Sturm Foods, Inc. (“Sturm”), a private label manufacturer of hot cereal and powdered soft drink mixes that serves retail and foodservice customers in the United States with annual sales of approximately $340 million.  The acquisition of Sturm has strengthened the Company’s presence in private label dry grocery categories.

The Company paid a cash purchase price of $664.7 million, before adjusting for a $5.2 million working capital adjustment to reduce the purchase price, for 100% of the issued and outstanding stock of Sturm.  The $5.2 million working capital adjustment is recorded in the Receivables, net line of our Condensed Consolidated Balance Sheets as of June 30, 2010.  The transaction was financed through the issuance of $400 million in high yield notes, the issuance of 2.7 million shares of Company common stock at $43.00 per share and borrowings under the Company’s credit facility.

The acquisition is being accounted for under the purchase method of accounting and the results of operations are included in our financial statements from the date of acquisition and are included in each of our segments.  Sturm contributed $101.3 million to net sales and $5.9 million in net income since the March 2, 2010 acquisition date through June 30, 2010.  At the date of acquisition, the purchase price was allocated to the assets and liabilities acquired based upon fair market values.  The Company’s purchase price allocation set forth below is preliminary and subject to tax and working capital adjustments that are expected to be completed in the second half of 2010.  Adjustments may impact the total purchase price, deferred taxes and goodwill.

 
-6-



       
   
(In thousands)
 
Receivables
  $ 35,648  
Inventory
    47,525  
Property plant and equipment
    86,106  
Customer relationships
    229,000  
Trade name
    10,000  
Formulas
    5,000  
Other intangible assets
    5,835  
Other assets
    3,813  
Goodwill
    378,602  
Total assets acquired
    801,529  
         
Accounts payable and accruals
    (35,171 )
Other long-term liabilities
    (4,365 )
Deferred taxes
    (102,553 )
Total liabilities acquired
    (142,089 )
Total purchase price
  $ 659,440  
         
The Company allocated $229 million to customer relationships that have an estimated life of twenty years.  The acquired trade name will be amortized over fifteen years.  Formulas have an estimated useful life of five years.  Other intangible assets consist of capitalized computer software that is being amortized over three years.  The Company increased the cost of acquired inventories by approximately $6.2 million, and expensed that amount as a component of cost of sales through the second quarter of 2010.  The Company has allocated $372.4 million of goodwill to the North American Retail Grocery segment and $6.2 million of goodwill to the Food Away From Home segment.  No goodwill is expected to be deductible for tax purposes.  Goodwill arises principally as a result of expansion opportunities, employed workforce, and the impact of Sturm’s first mover advantage.  The Company incurred approximately $5.4 million in acquisition related costs during the six months ended June 30, 2010.   These costs are included in the General and administrative expense line on the Condensed Consolidated Statements of Income.  In connection with the issuance of debt and equity to finance the acquisition, the Company incurred approximately $10.8 million in debt issue costs that were capitalized and are amortized over the term of the debt on a straight line basis, and are included as a component of interest expense.  The Company also incurred approximately $5.5 million of stock issuance costs, that reduced the proceeds and were recorded as a component of additional paid in capital.

The following pro forma summary presents the effect of the Sturm acquisition as though the business had been acquired as of January 1 of each period presented and is based upon unaudited financial information of the acquired entity and may not be indicative of actual results:

 
                                 
                                 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands, except per share data)
 
Net sales as reported
 
$
446,195
   
$
372,605
   
$
843,319
   
$
728,001
 
Net sales of purchased businesses, for the period prior to acquisition
   
     
80,711
     
64,905
     
171,700
 
Pro forma net sales
 
$
446,195
   
$
453,316
   
$
908,224
   
$
899,701
 
Net income, as reported
 
$
21,652
   
$
18,425
   
$
37,971
   
$
31,157
 
Net income of purchased businesses, for the period prior to acquisition
   
     
5,521
     
3,927
     
10,923
 
Pro forma net income
 
$
21,652
   
$
23,946
   
$
41,898
   
$
42,080
 
Basic earnings per common share:
                               
As reported
 
$
.62
   
$
.58
   
$
1.10
   
$
.99
 
Effect of purchased businesses, for the period prior to acquisition
   
     
.12
     
.11
     
.24
 
Pro forma earnings per share - basic
 
$
.62
   
$
.70
   
$
1.21
   
$
1.23
 
Diluted earnings per common share
                               
     As reported
 
$
.60
   
$
.58
   
$
1.07
   
$
.97
 
     Effect of purchased businesses for the period prior to acquisition
   
     
.12
     
.11
     
.24
 
     Pro forma earnings per share - diluted
 
$
.60
   
$
.70
   
$
1.18
   
$
1.21
 

 
-7-


4. Income Taxes

Income tax expense was recorded at an effective rate of 32.9% and 33.2% for the three months and six months ended June 30, 2010, respectively, compared to 34.6% and 35.6% for the three and six months ended June 30, 2009, respectively.  The Company’s effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith Canadian acquisition.  The Company’s tax rate is lower in 2010 due to a lower state tax rate resulting from the acquisition of Sturm and an increased benefit for the deduction for domestic production activities.

As of June 30, 2010, the Company does not believe that the gross recorded unrecognized tax benefits will materially change within the next 12 months.

The Company or one of its subsidiaries files income tax returns in the U.S., Canada and various state jurisdictions.  E.D. Smith and its affiliates are subject to Canadian, U.S. and state tax examinations from 2005 forward.  During the quarter ended March 31, 2010, the Company settled with the Internal Revenue Service an audit related to its 2007 federal income tax return.  The audit resulted in a small refund to the Company.  During the second quarter of 2010, the Canada Revenue Agency (CRA) completed an income tax audit for E.D. Smith’s 2006 and 2007 income tax years.  The Company did not incur any material adjustments as a result of the tax audit.

5. Other Operating Expense (Income)

The Company had Other operating expenses of $2.0 million and income of $0.2 million for the three and six months ended June 30, 2010, respectively and expenses of $0.2 million and $0.4 million for the three and six months ended June 30, 2009, respectively.  For the three months ended June 30, 2010, expenses consisted primarily of costs associated with the realignment of the infant feeding business.    For the six months ended June 30, 2010, expenses consisted of the costs associated with the realignment of the infant feeding business offset by a gain on a postretirement plan curtailment.  See Note 13.  For the six months ended June 30, 2009, expenses consisted of $0.6 million, relating to the closing of our Portland, Oregon plant offset by $0.2 million in rental income.

6. Inventories

   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Raw materials and supplies
 
$
106,813
   
$
86,223
 
Finished goods
   
208,851
     
197,539
 
LIFO reserve
   
(20,029
)
   
(18,829
)
Total
 
$
295,635
   
$
264,933
 

Approximately $70.9 million and $98.7 million of our inventory was accounted for under the LIFO method of accounting at June 30, 2010 and December 31, 2009, respectively.

The increase in inventories from December 31, 2009 to June 30, 2010 is primarily due to the Sturm acquisition.  Excluding the effect of the Sturm acquisition, inventory levels decreased by $10.2 million.
 
7. Propert, Plant and Equipment
             
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Land
 
$
12,943
   
$
11,335
 
Buildings and improvements
   
133,131
     
99,856
 
Machinery and equipment
   
364,983
     
310,265
 
Construction in progress
   
18,936
     
6,778
 
Total
   
529,993
     
428,234
 
Less accumulated depreciation
   
(172,701
)
   
(152,201
)
Property, plant and equipment, net
 
$
357,292
   
$
276,033
 
 
The increase in property, plant and equipment from December 31, 2009 to June 30, 2010 is primarily due to the Sturm acquisition.  Excluding the effect of the Sturm acquisition, property, plant and equipment decreased by $2.5 million.

 
-8-


8. Accounts Payable and Accrued Expenses
   
June 30,
 
December 31,
   
2010
 
2009
   
(In thousands)
Accounts payable
 
$
106,001
 
$
81,967
Payroll and benefits
   
31,135
   
29,921
Interest and taxes
   
15,778
   
12,015
Health insurance, workers’ compensation and other insurance costs
   
5,551
   
4,837
Marketing expenses
   
8,130
   
10,558
Other accrued liabilities
   
14,762
   
9,521
Total
 
$
181,357
 
$
148,819
             
The increase in accounts payable from December 31, 2009 to June 30, 2010 is primarily due to the Sturm acquisition.  Excluding the effect of the Sturm acquisition, accounts payable and accrued expenses decreased from year end by $5.3 million.

9. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the six months ended June 30, 2010 are as follows:

   
North American
   
Food Away
   
Industrial
       
   
Retail Grocery
   
From Home
   
and Export
   
Total
 
   
(In thousands)
 
Balance at December 31, 2009
  $ 355,925     $ 85,500     $ 133,582     $ 575,007  
Acquisition
    376,296       6,232             382,528  
Currency exchange adjustment
    103       11             114  
Purchase price adjustment
    (4,201 )     (64 )           (4,265 )
Balance at June 30, 2010
  $ 728,123     $ 91,679     $ 133,582     $ 953,384  
                                 

Purchase price adjustments are primarily related to working capital and tax adjustments for the Sturm acquisition.  The Company has not incurred any goodwill impairments since its inception.  The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of June 30, 2010 and December 31, 2009 are as follows:

   
June 30, 2010
   
December 31, 2009
 
   
Gross
         
Net
   
Gross
         
Net
 
   
Carrying
   
Accumulated
   
Carrying
   
Carrying
   
Accumulated
   
Carrying
 
   
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
   
(In thousands)
 
Intangible assets with indefinite lives:
                                               
Trademarks
 
$
31,449
   
$
   
$
31,449
   
$
31,422
   
$
   
$
31,422
 
Intangible assets with finite lives:
                                               
Customer-related
   
377,845
     
(44,799
)
   
333,046
     
147,346
     
(35,400
)
   
111,946
 
Non-compete agreement
   
1,000
     
(867
)
   
133
     
2,620
     
(2,162
)
   
458
 
Trademarks
   
20,010
     
(2,796
)
   
17,214
     
10,010
     
(2,311
)
   
7,699
 
Formulas/recipes
   
6,764
     
(1,265
)
   
5,499
     
1,762
     
(761
)
   
1,001
 
Computer software
   
16,506
     
(3,383
)
   
13,123
     
3,363
     
(2,320
)
   
1,043
 
Total
 
$
453,574
   
$
(53,110
)
 
$
400,464
   
$
196,523
   
$
(42,954
)
 
$
153,569
 
                                                 
Amortization expense on intangible assets for the three months ended June 30, 2010 and 2009 was $7.3 million and $3.3 million, respectively, and $11.7 million and $6.6 million for the six months ended June 30, 2010 and 2009, respectively.  Estimated amortization expense on intangible assets for 2010 and the next four years is as follows:

   
(In thousands)
 
2010
  $ 26,300  
2011
  $ 27,000  
2012
  $ 26,700  
2013
  $ 24,600  
2014
  $ 24,400  

 
-9-


10. Long-Term Debt
                 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Revolving credit facility
 
$
382,000
   
$
298,200
 
High yield notes
   
400,000
     
 
Senior notes
   
100,000
     
100,000
 
Tax increment financing and other
   
5,251
     
4,346
 
     
887,251
     
402,546
 
Less current portion
   
(1,046
)
   
(906
)
Total long-term debt
 
$
886,205
   
$
401,640
 
 
Revolving Credit Facility — The Company is party to an unsecured revolving credit facility with an aggregate commitment of $600 million, of which $209.2 million was available as of June 30, 2010, that expires August 31, 2011.  In addition, as of June 30, 2010, there were $8.8 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, 2010.  The Company’s average interest rate on debt outstanding under our revolving credit facility at June 30, 2010 was 1.10%.

High Yield Notes — On March 2, 2010, TreeHouse Foods, Inc. completed its offering of $400 million in aggregate principal amount of 7.75% high yield notes due 2018 (the “Notes”).  The net amount of the proceeds of $391.0 million ($400.0 million notes less underwriting discount of $9.0 million providing an effective interest rate of 8.03%) were used as partial payment in the acquisition of all of the issued and outstanding stock of Sturm.  The Company issued the Notes pursuant to an Indenture, dated March 2, 2010 (the “Base Indenture”), among the Company, the subsidiary guarantors party thereto (Bay Valley Foods, LLC and EDS Holdings, LLC, the “Initial Guarantors”) and Wells Fargo Bank, National Association, (Trustee), as supplemented by a First Supplemental Indenture, dated March 2, 2010 (the “First Supplemental Indenture”), among the Company, the Initial Guarantors and the Trustee.  In addition, on March 2, 2010, the Company entered into a Second Supplemental Indenture, dated March 2, 2010 (the “Second Supplemental Indenture” and together with the Base Indenture and the First Supplemental Indenture, the “Indenture”), pursuant to which Sturm (together with the Initial Guarantors, the “Guarantors”) became an additional guarantor of the Notes, with the same force and effect as if Sturm was initially named as a guarantor under the Indenture.

The Indenture provides, among other things, that the Notes will be senior unsecured obligations of the Company.  Interest is payable on the Notes on March 1 and September 1 of each year, beginning September 1, 2010.  The Notes will mature on March 1, 2018.
 
The Company may redeem some or all of the Notes at any time prior to March 1, 2014 at a price equal to 100% of the principal amount of the Notes redeemed, plus an applicable “make-whole” premium.  On or after March 1, 2014, the Company may redeem some or all of the Notes at redemption prices set forth in the First Supplemental Indenture.  In addition, at any time prior to March 1, 2013, the Company may redeem up to 35% of the Notes at a redemption price of 107.75% of the principal amount of the Notes redeemed with the net cash proceeds of certain equity offerings.
 
Subject to certain limitations, in the event of a change of control of the Company, the Company will be required to make an offer to purchase the Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest.
 
The Company’s payment obligations under the Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Guarantors and future domestic subsidiaries of the Company, other than certain excluded subsidiaries and unrestricted subsidiaries.  The Notes are not guaranteed by any of the Company’s foreign subsidiaries.
 
The Indenture contains restrictive covenants that, among other things, limit the ability of the Company and the Guarantors to: (i) pay dividends or make other restricted payments, (ii) make certain investments, (iii) incur additional indebtedness or issue preferred stock, (iv) create liens, (v) allow restrictions on the ability of certain of its subsidiaries to pay dividends or make other payments to the Company or the Guarantors, (vi) merge or consolidate with other entities or sell substantially all of its assets, (vii) enter into transactions with affiliates and (viii) engage in certain sale and leaseback transactions.  The foregoing limitations are subject to exceptions as set forth in the First Supplemental Indenture.  In addition, if in the future the Notes have an investment grade credit rating by both Moody’s Investors Services, Inc. and Standard & Poor’s Ratings Services, certain of these covenants will, thereafter, no longer apply to the Notes for so long as the Notes are rated investment grade by the two rating agencies.  The Company is in compliance with the applicable covenants as of June 30, 2010.

 
-10-


 
The Indenture provides for customary events of default that include, among other things (subject in certain cases to customary grace and cure periods):  (i) non-payment of principal or interest; (ii) breach of certain covenants contained in the Indenture or the Notes, (iii) defaults in failure to pay certain other indebtedness or the acceleration of certain other indebtedness prior to maturity, (iv) the failure to pay certain final judgments, (v) the failure of certain guarantees to be enforceable and (vi) certain events of bankruptcy or insolvency.  Generally, if an event of default occurs (subject to certain exceptions), the Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately.

Senior Notes — The Company maintains a private placement of $100 million in aggregate principal of 6.03% senior notes due September 30, 2013, pursuant to a Note Purchase Agreement among the Company and a group of purchasers.  The Note Purchase Agreement contains covenants that will 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, 2010.

Swap Agreement — During 2008, the Company entered into a $200 million long term interest rate swap agreement with an effective date of November 19, 2008 to lock into a fixed LIBOR interest base rate.  Under the terms of the agreement, $200 million in floating rate debt was swapped for a fixed 2.9% interest base rate for a period of 24 months, amortizing to $50 million for an additional nine months at the same 2.9% interest rate.  Under the terms of the Company’s revolving credit agreement and in conjunction with our credit spread, this will result in an all-in borrowing cost on the swapped principal being no more than 3.8% during the life of the swap agreement.  The Company did not apply hedge accounting to this swap.  In the six months ended June 30, 2010, and 2009 a gain of $1.9 million and $1.2 million, respectively, was recognized in the Other income, net line of our Condensed Consolidated Statements of Income.

Tax Increment Financing — As part of the acquisition of the soup and infant feeding business in 2006, the Company assumed the payments related to redevelopment bonds pursuant to a Tax Increment Financing Plan.  The Company has agreed to make certain payments with respect to the principal amount of the redevelopment bonds through May 2019.  As of June 30, 2010, $2.5 million remains outstanding.

11. 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 outstanding options, restricted stock, restricted stock units and performance units.

In March 2010, the Company issued 2,702,500 shares of common stock in connection with the acquisition of Sturm.  For the three and six months ended June 30, 2010, these shares have been included on a weighted average basis in basic shares outstanding.

With respect to awards issued to our founders in connection with the founding of the Company and pursuant to certain employment agreements, the Company issued restricted stock and restricted stock units that are subject to service and market conditions.  The restricted stock awards expired in June 2010 as the conditions for vesting were not met.  For the three and six months ended June 30, 2010, the market conditions were not met and these awards have been excluded from diluted earnings per share.  For the three months ended June 30, 2009, the market conditions were not met and the awards were excluded from diluted earnings per share.  For the six months ended June 30, 2009, the market conditions were met and these awards have been included in diluted earnings per share.  With respect to the restricted stock unit awards issued to our founders, the market conditions for these awards were satisfied in July 2009 and the awards vested.  These vested awards have been included in basic shares outstanding since that time.  For the three and six months ended June 30, 2009, the market conditions were not met and the awards were excluded from diluted earnings per share.

Beginning in June 2008, the Company issued performance unit awards that contain both service and performance criteria.  These awards accrue over the performance periods and will be converted to stock or cash at the discretion of the compensation committee on the third anniversary of the grant date.  The Company intends to settle these awards in stock using available shares.  For the three and six months ended June 30, 2010, and 2009, the performance criteria for a portion of the awards were met and have been included in diluted earnings per share.

 
-11-


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,
   
2010
 
2009
 
2010
 
2009
Weighted average common shares outstanding
 
34,814,309
   
31,615,772
   
34,464,990
   
31,585,869
Assumed exercise of stock options (1)
 
736,908
   
95,162
   
708,713
   
84,983
Assumed vesting of restricted stock, restricted stock units
and performance units (1)
 
442,374
   
41,082
   
414,768
   
381,030
Weighted average diluted common shares outstanding
 
35,993,591
   
31,752,016
   
35,588,471
   
32,051,882

     
(1)
 
Incremental shares from stock options, restricted stock, restricted stock units, and performance units are computed by the treasury stock method.  Stock options, restricted stock, restricted stock units, and performance units excluded from our computation of diluted earnings per share because they were anti-dilutive, were 276,620 for the three and six months ended June 30, 2010 and 1,839,194 for the three and six months ended June 30, 2009.

12. Stock-Based Compensation

Income before income taxes for the three and six month periods ended June 30, 2010 and 2009 includes share-based compensation expense of $4.4 million, $7.8 million, $3.2 million and $6.1 million, respectively.  The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.7 million and $3.0 million for the three and six month periods ended June 30, 2010, respectively, and $1.2 million and $2.3 million for the three and six month periods ended June 30, 2009, respectively.

The following table summarizes stock option activity during the six months ended June 30, 2010.  Options are granted under our long-term incentive plan, and have a three year vesting schedule, which vest one-third on each of the first three anniversaries of the grant date.  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
 
Outstanding, December 31, 2009
   
2,292,744
     
107,773
   
$
27.28
     
6.4
   
$
27,792,212
 
Granted
   
130,550
     
   
$
46.47
     
     
 
Forfeited
   
(3,801
)
   
   
$
26.84
     
     
 
Exercised
   
(113,051
)
   
(12,977
)
 
$
27.38
     
     
 
Outstanding, June 30, 2010
   
2,306,442
     
94,796
   
$
28.32
     
6.2
   
$
41,740,984
 
Vested/expected to vest, at June 30, 2010
   
2,287,538
     
94,796
   
$
28.29
     
6.1
   
$
41,474,031
 
Exercisable, June 30, 2010
   
2,012,116
     
93,196
   
$
27.51
     
5.8
   
$
38,207,535
 
                                         

Compensation costs related to unvested options totaled $3.5 million at June 30, 2010 and will be recognized over the remaining vesting period of the grants, which averages 2.3 years.  The Company uses the Black-Scholes option pricing model to value its stock option awards.  The assumptions used to calculate the fair value of stock options issued in 2010 include the following:  expected volatility of 35%, expected term of six years, risk free rate of 3.87% and no dividends.  The average grant date fair value of stock options granted in the six months ended June 30, 2010 was $19.11.  The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2010 was approximately $2.3 million.

In addition to stock options, the Company also grants restricted stock, restricted stock units and performance unit awards.  These awards are granted under our long-term incentive plan.  Employee restricted stock and restricted stock unit awards generally vest based on the passage of time.  These awards generally vest one-third on each anniversary of the grant date.  Director restricted stock units vest over thirteen months.  Certain directors have deferred receipt of their awards until their departure from the Board.  A complete description of restricted stock and restricted stock unit awards is presented in the Company’s annual report on Form 10-K for the year ended December 31, 2009.  The following table summarizes the restricted stock and restricted stock unit activity during the six months ended June 30, 2010:

 
-12-



                                 
         
Weighted
       
Weighted
       
Weighted
 
   
Employee
   
Average
 
Employee
   
Average
   
Director
 
Average
 
   
Restricted
   
Grant Date
 
Restricted
   
Grant Date
   
Restricted
 
Grant Date
 
   
Stock
   
Fair Value
 
Stock Units
   
Fair Value
   
Stock Units
 
Fair Value
 
Outstanding, at December 31, 2009
   
 1,202,319
   
$
24.28
     
 784,931
   
$
26.16
     
45,400
   
$
26.96
 
Granted
   
     
     
241,195
   
$
45.71
     
16,870
   
$
46.47
 
Vested
   
 (277,154
)
 
$
24.21
     
 (615,907
)
 
$
25.56
     
     
 
Forfeited
   
 (629,456
)
 
$
24.27
     
  (5,764
)
 
$
29.03
     
     
 
Outstanding, at June 30, 2010
   
 295,709
   
$
24.35
     
  404,455
   
$
38.68
     
62,270
   
$
32.24
 
                                                 
Future compensation cost related to restricted stock and restricted stock units is approximately $19.8 million as of June 30, 2010, and will be recognized on a weighted average basis, over the next 2.0 years.  The grant date fair value of the awards granted in 2010 is equal to the Company’s closing stock price on the grant date.

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 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.  The following table summarizes the performance unit activity during the six months ended June 30, 2010:

     
Weighted
 
     
Average
 
 
Performance
 
Grant Date
 
 
Units
 
Fair Value
 
Unvested, at December 31, 2009
127,800
 
$
26.15
 
Granted
37,185
 
$
46.41
 
Vested
   
 
Forfeited
   
 
Unvested, at June 30, 2010
164,985
 
$
30.71
 
           
Future compensation cost related to the performance units is estimated to be approximately $4.3 million as of June 30, 2010, and is expected to be recognized over the next 1.7 years.

13. Employee Retirement and Postretirement Benefits

Pension, Profit Sharing and Postretirement Benefits — Certain of our 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.

Effective March 31, 2010, the Company negotiated the transfer of the postretirement union retiree medical plan at the Dixon production facility to the Central States multiemployer plan.  The Company transferred its liability to the multiemployer plan and no longer carries a liability for the accumulated benefit obligation of the employees covered under that plan, resulting in a plan curtailment.  The curtailment resulted in a gain of $2.4 million, $1.4 million net of tax, which is included in Other operating (income) expense, net on the Condensed Consolidated Statements of Income.

Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation.

 
-13-


Components of net periodic pension expense are as follows:
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Service cost
 
$
515
   
$
490
   
$
1,030
   
$
980
 
Interest cost
   
551
     
524
     
1,102
     
1,048
 
Expected return on plan assets
   
(549
)
   
(440
)
   
(1,098
)
   
(880
)
Amortization of unrecognized net loss
   
124
     
149
     
248
     
298
 
Amortization of prior service costs
   
151
     
145
     
302
     
290
 
Net periodic pension cost
 
$
792
   
$
868
   
$
1,584
   
$
1,736
 

We contributed $0.4 million to the pension plans in the first six months of 2010.  We expect to contribute approximately $1.3 million in 2010.

Postretirement Benefits — We provide healthcare benefits to certain retirees who are covered under specific group contracts.

Components of net periodic postretirement expenses are as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Service cost
 
$
12
   
$
63
   
$
66
   
$
126
 
Interest cost
   
35
     
64
     
84
     
128
 
Amortization of prior service credit
   
(18
)
   
(18
)
   
(36
)
   
(36
)
Amortization of unrecognized net loss
   
(10
)
   
5
     
(11
)
   
10
 
Net periodic postretirement cost
 
$
19
   
$
114
   
$
103
   
$
228
 
                                 

We expect to contribute approximately $0.2 million to the postretirement health plans during 2010.

14. Comprehensive Income

The following table sets forth the components of comprehensive income:

   
Three Months Ended
   
Six Months Ended 
 
   
June 30,
   
June 30, 
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Net income
  $ 21,652     $ 18,425     $ 37,971     $ 31,157  
Foreign currency translation adjustment
    (7,773 )     16,522       749       12,043  
Amortization of pension and postretirement
                               
prior service costs and net loss, net of tax
    137       171       315       341  
Curtailment of postretirement plan
                862        
Amortization of swap loss, net of tax
    40       41       80       81  
Other
          5             5  
Comprehensive income
  $ 14,056     $ 35,164     $ 39,977     $ 43,627  

We expect to amortize $0.6 million of prior service costs and net loss, net of tax and $0.2 million of swap loss, net of tax from other comprehensive income into earnings during 2010.

 
-14-



15. Fair Value of Financial Instruments

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.  As of June 30, 2010, the outstanding balance of the Company’s variable rate debt (revolving credit facility) was $382.0 million, the fair value of which is estimated to be $373.2 million, using a present value technique and market based interest rates and credit spreads.  As of June 30, 2010, the carrying value of the Company’s fixed rate senior notes was $100.0 million and fair value was estimated to be $102.7 million based on a present value technique using market based interest rates and credit spreads.  The fair value of the Company’s 7.75% high yield notes due 2018, with an outstanding balance of $400.0 million as of June 30, 2010, was estimated at $413.0 million, based on quoted market prices.

The fair value of the Company’s interest rate swap agreement, as described in Notes 10 and 16, was a liability of approximately $3.0       million as of June 30, 2010.  The fair value of the swap was determined using Level 2 inputs, which are inputs other than quoted prices that are observable for an asset or liability, either directly or indirectly.  The fair value is based on a market approach, comparing the fixed rate of 2.9% to the current and forward one month Libor rates throughout the term of the swap agreement.

The fair value of the Company’s commodity contract as described in Note 16 was a liability of approximately $0.2 million as of June 30, 2010.  The fair value of the commodity contract was determined using Level 1 inputs.

16. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations.  Derivative instruments are used on occasion to manage interest rate, foreign currency and commodity input cost risks.

Interest rate swaps are entered into to manage interest rate risk associated with the Company’s $600 million revolving credit facility.  Interest on our credit facility is variable and use of the interest rate swap establishes a fixed rate over the term of a portion of the facility.  The Company’s objective in using an interest rate swap is to establish a fixed interest rate, thereby enabling the Company to predict and manage interest expense and cash flows in a more efficient and effective manner.  The Company did not apply hedge accounting to the interest rate swap, and it is recorded at fair value on the Company’s Condensed Consolidated Balance Sheets.  See Note 10 for more details of the interest rate swap, including the notional amount, interest rate and term.  Note 15 discusses the fair value of the interest rate swap.

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 certain Canadian raw material purchases that are denominated in U.S. dollars, thereby enabling the Company to manage its foreign currency exchange rate risk.  There were no foreign currency contracts issued or outstanding as of and for the six months ended June 30, 2010 and 2009.

During the second quarter of 2010, the Company entered into a commodity swap contract for 5.4 million pounds of High Density Polyethylene (“HDPE”) to manage the Company’s risk associated with the underlying commodity cost of a significant component used in packaging materials.  The objective in using this swap is to establish a fixed commodity cost over the term of the contract.  The trade date was June 3, 2010, with an effective date of July 1, 2010 and an expiration date of December 31, 2011.  The Company will settle 0.3 million pounds on a monthly basis over the term of the contract.  The Company did not apply hedge accounting to the commodity swap, and it is recorded at fair value on the Company’s Condensed Consolidated Balance Sheets.

The following table identifies the derivative, its fair value, and location on the Condensed Consolidated Balance Sheets.
       
         
Fair Value
 
   
Balance Sheet Location
   
June 30, 2010
 
December 31, 2009
 
Liability Derivatives:
       
(In thousands)
 
Interest rate swap
 
Accounts payable and accrued expenses
   
$              1,582
 
$                3,327
 
Commodity contract
 
Accounts payable and accrued expenses
   
                   144
 
 
         
$              1,726
 
$                3,327
 
                 
Interest rate swap
 
Other long-term liabilities
   
$              1,369
 
$                1,550
 
Commodity contract
 
Other long-term liabilities
   
                     72
 
 
         
$              1,441
 
$                1,550
 

 
-15-


The Company recognized a gain of $1.0 million and $1.7 million relating to the change in the fair value of its interest rate swap and commodity contract derivatives for the three and six months ended June 30, 2010, respectively, compared to a gain of $1.2 million and $1.2 million in the three and six months ended June 30, 2009.  This gain is recorded in the Other income, net line of our Condensed Consolidated Statements of Income.

The Company does not use derivatives for speculative or trading purposes.

17. Commitments and Contingencies

Litigation, Investigations and Audits — We are party in the ordinary course of business to certain claims, litigation, audits and investigations.  We believe that we have established adequate reserves to satisfy any liability we may incur in connection with any such currently pending or threatened matters.  In our opinion, the settlement of any such currently pending or threatened matters is not expected to have a material adverse impact on our financial position, annual results of operations or cash flows.

18. Supplemental Cash Flow Information

Cash payments for interest were $7.8 million and $9.4 million for the six months ended June 30, 2010 and 2009, respectively.  Cash payments for income taxes were $23.0 million and $9.0 million for the six months ended June 30, 2010 and 2009, respectively.  As of June 30, 2010 and 2009, the Company had accrued property, plant and equipment of approximately $3.6 million and $2.4 million, respectively.  The Company also accrued other intangible assets of $2.2 million at June 30, 2010.  For the six months ended June 30, 2009, the Company entered into capital leases of approximately $1.3 million.  There were no new capital leases in the first six months of 2010.  As of June 30, 2010, the Company recorded a receivable of $5.2 million for a working capital adjustment to the purchase price of Sturm.  As this adjustment is a noncash item, we have excluded it from the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010.  Noncash financing activities for the six months ended June 30, 2010 and 2009 include the vesting of 890,488 shares and 268,113 shares, respectively, of restricted stock and restricted stock units, where shares were withheld to satisfy the minimum statutory tax withholding requirements.

19. Foreign Currency

The Company enters into foreign currency contracts due to the exposure to Canadian/U.S. dollar currency fluctuations on cross border transactions.  The Company does not apply hedge accounting to these contracts and records them at fair value on the Condensed Consolidated Balance Sheets, with changes in fair value being recorded through the Condensed Consolidated Statements of Income, within Loss on foreign currency exchange.  In May 2009, the Company entered into three foreign currency contracts for the purchase of $5.0 million U.S. dollars.  The Contracts were entered into for the purchase of U.S. dollar denominated raw materials by our Canadian subsidiary.  These contracts expired by the end of September 2009.  The Company did not enter into any foreign currency contracts in the first six months of 2010.  The Company has an intercompany note denominated in Canadian dollars, which is eliminated during consolidation.  A portion of the note is considered to be permanent, with the remaining portion considered to be temporary.  Foreign currency fluctuations on the permanent portion are recorded through Accumulated other comprehensive loss, while foreign currency fluctuations on the temporary portion are recorded in the Company’s Condensed Consolidated Statements of Income, within Loss on foreign currency exchange.

The Company accrues interest on the intercompany note, which is also considered temporary.  Changes in the balance due to foreign currency fluctuations are also recorded in the Company’s Condensed Consolidated Statements of Income within Loss on foreign currency exchange.

For the three and six months ended June 30, 2010 and 2009, the Company recorded a gain of $2.2 million, $2.1 million, $3.9 million and $1.8 million, respectively, related to foreign currency fluctuations, recorded in the Gain on foreign currency exchange line of the Condensed Consolidated Statement of Income.  For the three and six months ended June 30, 2010 and 2009, the Company recorded a loss of $7.8 million, and gains of $0.7 million, $16.5 million and $12.0 million, respectively, in Accumulated other comprehensive loss related to foreign currency fluctuations on the permanent portion of the note and translation of E.D. Smith financial statements from Canadian dollars to U.S. dollars.

20. Business 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 our reportable segments based on how management views our business.  The Company does not segregate assets between segments for internal reporting.  Therefore, asset-related information has not been presented.
The Company evaluates the performance of our segments based on net sales dollars, gross profit 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 our senior management team and do not include allocated income taxes.  Other expenses not allocated include

 
-16-


warehouse start-up costs, unallocated selling and distribution expenses and corporate expenses which consist of general and administrative expenses, amortization expense, other operating (income) expense, interest expense, interest income, foreign currency exchange and other (income) expense.  The accounting policies of our segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to our 2009 Consolidated Financial Statements contained in our Annual Report on Form 10-K.

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Net sales to external customers:
                               
North American Retail Grocery
 
$
307,526
   
$
235,853
   
$
569,105
   
$
466,535
 
Food Away From Home
   
80,269
     
75,029
     
153,747
     
141,782
 
Industrial and Export
   
58,400
     
61,723
     
120,467
     
119,684
 
Total
 
$
446,195
   
$
372,605
   
$
843,319
   
$
728,001
 
Direct operating income:
                               
North American Retail Grocery
 
$
52,218
   
$
35,928
   
$
94,119
   
$
70,233
 
Food Away From Home
   
12,608
     
8,097
     
22,120
     
15,103
 
Industrial and Export
   
11,158
     
9,930
     
22,990
     
16,610
 
Total
   
75,984
     
53,955
     
139,229
     
101,946
 
                                 
Unallocated warehouse start-up costs (1)
   
     
(1,766
)
   
     
(3,050
)
Unallocated selling and distribution expenses
   
(721
)
   
(863
)
   
(1,984
)
   
(1,639
)
Unallocated corporate expense
   
(34,390
)
   
(23,366
)
   
(65,054
)
   
(42,640
)
Operating income
   
40,873
     
27,960
     
72,191
     
54,617
 
Other (expense) income
   
(8,616
)
   
196
     
(15,330
)
   
(6,250
)
Income before income taxes
 
$
32,257
   
$
28,156
   
$
56,861
   
$
48,367
 
                                 
(1) Included in Cost of sales in the Condensed Consolidated Statements of Income.

Geographic Information — We had revenues to customers outside of the United States of approximately 13.9% and 13.4% of total consolidated net sales in the six months ended June 30, 2010 and 2009, respectively, with 13.1% and 12.7% going to Canada, respectively.

Major Customers — Wal-Mart Stores, Inc. and affiliates accounted for approximately 17.8% and 14.3% of our consolidated net sales in the six months ended June 30, 2010 and 2009, 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, 2010 and 2009:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Products:
                               
Pickles
 
$
93,671
   
$
87,653
   
$
169,688
   
$
158,104
 
Non-dairy powdered creamer
   
66,445
     
74,554
     
149,152
     
160,609
 
Soup and infant feeding
   
58,855
     
68,003
     
135,001
     
147,001
 
Salad dressing
   
59,517
     
55,628
     
110,822
     
99,763
 
Jams and other sauces
   
41,326
     
38,983
     
80,542
     
71,297
 
Powdered drinks
   
51,990
     
     
66,380
     
 
Aseptic products
   
21,527
     
20,843
     
43,196
     
40,670
 
Mexican sauces
   
19,229
     
17,769
     
37,368
     
32,824
 
Hot cereals
   
25,516
     
     
34,921
     
 
Refrigerated products
   
8,119
     
9,172
     
16,249
     
17,733
 
Total net sales
 
$
446,195
   
$
372,605
   
$
843,319
   
$
728,001
 


 
-17-



21.
Guarantor and Non-Guarantor Financial Information

On March 2, 2010, the Company issued 7.75% high yield notes due 2018, that are guaranteed by its wholly owned domestic subsidiaries (Guarantor Subsidiaries) in accordance with the applicable Indenture and fully, jointly, severally and unconditionally guarantee our payment obligations under the debt securities offered.  The notes are not guaranteed by the foreign subsidiaries of TreeHouse (Non-Guarantor Subsidiaries).  There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan.  The following condensed consolidating financial information presents the results of operations, financial position and cash flows of TreeHouse Foods, Inc., 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, 2010 and December 31, 2009 and for the three and six months ended June 30, 2010 and 2009.  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, 2010
(In thousands)
 
   
Parent
   
Guarantor
   
Non-Guarantor
             
   
Company
   
Subsidiaries
   
Subsidiaries
   
Eliminations
   
Consolidated
 
                               
Assets
                               
Current assets:
                             
Cash and cash equivalents
  $     $ 942     $ 2,505     $     $ 3,447  
Receivables, net
    4,169       90,511       12,674             107,354  
Inventories, net
          260,944       34,691             295,635  
Deferred income taxes
    1,127       2,148       370             3,645  
Assets held for sale
          4,081                   4,081  
Prepaid expenses and other current assets
    530       22,447       519             23,496  
Total current assets
    5,826       381,073       50,759             437,658  
Property, plant and equipment, net
    11,232       311,087       34,973             357,292  
Goodwill
          844,876       108,508             953,384  
Investment in subsidiaries
    1,121,891       127,425             (1,249,316 )      
Intercompany accounts receivable, net
    639,555       (528,058 )     (111,497 )            
Deferred income taxes
    12,257                   (12,257 )      
Identifiable intangible and other assets, net
    31,155       306,179       82,563             419,897  
Total assets
  $ 1,821,916     $ 1,442,582     $ 165,306     $ (1,261,573 )   $ 2,168,231  
                                         
Liabilities and Stockholders’ Equity
                                         
Current liabilities:
                                       
Accounts payable and accrued expenses
  $ 26,965     $ 132,668     $ 21,724     $     $ 181,357  
Current portion of long-term debt
          992       54             1,046  
Deferred income taxes
          642                   642  
Total current liabilities
    26,965       134,302       21,778             183,045  
Long-term debt
    873,230       12,975                   886,205  
Deferred income taxes
    8,947       147,993       16,093       (12,257 )     160,776  
Other long-term liabilities
    10,322       25,421       10             35,753  
Stockholders’ equity
    902,452       1,121,891       127,425       (1,249,316 )     902,452  
Total liabilities and stockholders’ equity
  $ 1,821,916     $ 1,442,582     $ 165,306     $ (1,261,573 )   $ 2,168,231  

 
-18-



   
Condensed Supplemental Consolidating Balance Sheet
 
December 31, 2009
 
(In thousands)
 
   
       
Parent
     
Guarantor
     
Non-Guarantor
               
       
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
                                         
 
Assets
                                         
 
Current assets:
                                     
 
Cash and cash equivalents
 
$
1
   
$
8
   
$
4,406
   
$
   
$
4,415
 
Receivables, net
   
325
     
66,573
     
19,659
     
     
86,557
 
Inventories, net
   
     
229,185
     
35,748
     
     
264,933
 
Deferred income taxes
   
1,875
     
990
     
532
     
     
3,397
 
Assets held for sale
   
     
4,081
     
     
     
4,081
 
Prepaid expenses and other current assets
   
384
     
6,253
     
632
     
     
7,269
 
Total current assets
   
2,585
     
307,090
     
60,977
     
     
370,652
 
Property, plant and equipment, net
   
11,549
     
230,595
     
33,889
     
     
276,033
 
Goodwill
   
     
466,274
     
108,733
     
     
575,007
 
Investment in subsidiaries
   
1,054,776
     
94,804
     
     
(1,149,580
)
   
 
Intercompany accounts receivable, net
   
87,643
     
65,683
     
(153,326
)
   
     
 
Deferred income taxes
   
21,186
     
     
     
(21,186
)
   
 
Identifiable intangible and other assets, net
   
14,328
     
65,156
     
83,252
     
     
162,736
 
Total assets
 
$
1,192,067
   
$
1,229,602
   
$
133,525
   
$
(1,170,766
)
 
$
1,384,428
                                         
 
Liabilities and Stockholders’ Equity
                                         
 
Current liabilities:
                                     
 
Accounts payable and accrued expenses
 
$
31,458
   
$
94,936
   
$
22,425
   
$
   
$
148,819
 
Current portion of long-term debt
   
200
     
554