UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the Quarterly Period Ended September 30, 2013.
or
For the Transition Period from to
Commission File Number 001-32504
TreeHouse Foods, Inc.
(Exact name of the registrant as specified in its charter)
(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.
(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 October 31, 2013: 36,414,439
Table of Contents
Part I — Financial Information
Item 1 — Financial Statements (Unaudited)
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 — Quantitative and Qualitative Disclosures About Market Risk
Item 4 — Controls and Procedures
Report of Independent Registered Public Accounting Firm
Part II — Other Information
Item 1 — Legal Proceedings
Item 1A — Risk Factors
Item 5 — Other Information
Item 6 — Exhibits
Signatures
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Item 1. Financial Statements
TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents
Investments
Receivables, net
Inventories, net
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets, net
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses
Current portion of long-term debt
Total current liabilities
Long-term debt
Other long-term liabilities
Total liabilities
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, 36,394 and 36,197 shares issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Condensed Consolidated Financial Statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling and distribution
General and administrative
Other operating expense, net
Amortization expense
Total operating expenses
Operating income
Other expense (income):
Interest expense
Interest income
Loss on foreign currency exchange
Other (income) expense, net
Total other expense
Income before income taxes
Income taxes
Net income
Net earnings per common share:
Basic
Diluted
Weighted average common shares:
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss):
Foreign currency translation adjustments
Pension and post-retirement reclassification adjustment (1)
Derivative reclassification adjustment (2)
Other comprehensive income (loss)
Comprehensive income
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization
Mark to market (gain) loss on derivative contracts
Mark to market gain on investments
Excess tax benefits from stock-based compensation
Stock-based compensation
Loss on disposition of assets
Other
Changes in operating assets and liabilities, net of acquisitions:
Receivables
Inventories
Prepaid expenses and other assets
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investments
Additions to property, plant and equipment
Additions to other intangible assets
Acquisition of business, net of cash acquired
Proceeds from sale of fixed assets
Net cash used in investing activities
Cash flows from financing activities:
Borrowings under revolving credit facility
Payments under revolving credit facility
Payment on senior notes
Payments on capitalized lease obligations
Net payments related to stock-based award activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the nine months ended September 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” line as presented in the Company’s Annual Report on Form 10-K, 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 as presented in the Company’s Annual Report on Form 10-K, 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.
On July 1, 2013, the Company completed its acquisition of 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 results of operations are included in our financial statements from the date of acquisition and are included in each of our segments.
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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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 included the closure of its Mendota, Illinois soup plant. Subsequently, the Company amended the plan to include reductions to the cost structure of its 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 from the Mendota plant 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 $26.5 million as detailed below, of which $4.6 million is expected to be in cash. The total expected costs decreased from $26.7 million as of June 30, 2013, as estimates were refined. 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 expected in the first quarter of 2014. Total costs to close the Seaforth facility are expected to be approximately $13.1 million as detailed below, of which $6.3 million is expected to be in cash. The total expected costs increased from $12.3 million, as of June 30, 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 noted above, the Company reviewed 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 $3.6 million and $16.3 million for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2012, the Company recognized $2.6 million of accelerated depreciation.
Below is a summary of the restructuring costs:
Accelerated depreciation
Severance and outplacement
Other closure costs
Total
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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.
Liabilities recorded as of September 30, 2013 associated with the restructurings 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 September 30, 2013.
Balance as of January 1, 2013
Expense
Payments
Foreign exchange
Adjustments
Balance as of September 30, 2013
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”) from TorQuest Partners LLC and other shareholders. Associated Brands is a privately owned Canadian company and a leading private label manufacturer of powdered drinks, specialty teas and sweeteners. The Company 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 closed on October 8, 2013 and was financed through cash on hand and 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 July 1, 2013, the Company completed its acquisition of 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 as private label and branded products. The purchase price was approximately $35 million, net of acquired cash, subject to an adjustment for working capital and taxes. The acquisition was financed through borrowings under the Company’s existing $750 million credit facility. The acquisition expanded the Company’s footprint in the Northeast United States, enhanced its foodservice presence, and enriched its packaging capabilities.
The Cains 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. Included in the Company’s Condensed Consolidated Statements of Income are Cains’ net sales of approximately $22 million and operating loss of approximately $0.1 million from the date of acquisition through September 30, 2013. At the date of acquisition, the purchase price was allocated to the assets and liabilities acquired based upon fair market values, and is subject to adjustments, primarily for taxes. We have made a preliminary allocation to net tangible and intangible assets acquired and liabilities assumed as follows:
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Cash
Inventory
Property plant and equipment
Customer relationships
Trade names
Non-compete agreement
Formulas
Other assets
Fair value of assets acquired
Assumed liabilities
Total purchase price
The Company allocated $13.5 million to customer relationships that have an estimated life of fifteen years, $3.4 million to trade names that have an estimated life of fifteen years, $0.2 million to a non-compete agreement with an estimated life of five years, and $0.4 million to formulas with an estimated life of five years. The Company has allocated $1.3 million of goodwill to the North American Retail Grocery segment, $0.3 million of goodwill to the Food Away From Home segment, and $0.2 million of goodwill to the Industrial and Export segment. Goodwill arises principally as a result of expansion opportunities. The Company incurred approximately $0.5 million in acquisition related costs. These costs are included in the General and administrative expense line of the Condensed Consolidated Statements of Income. Pro forma disclosures related to the transaction are not included since they are not considered material.
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 was 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 was 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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5. Investments
U.S. equity
Non-U.S. equity
Fixed income
Total investments
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 September 30, 2013 and December 31, 2012, $101.9 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 are expected to be used for general corporate purposes in Canada, including capital projects and acquisitions. On October 8, 2013, the Company completed its acquisition of Associated Brands and used cash on hand in Canada and borrowings under its $750 million credit facility to fund the acquisition.
For the three and nine months ended September 30, 2013, we recognized net unrealized gains on investments totaling $0.3 million and $0.6 million, respectively, that were included in the Interest income line of the Condensed Consolidated Statements of Income. Additionally, for the three and nine months ended September 30, 2013, we recognized realized gains on investments totaling $0.1 million that were included in the Interest income line of the Condensed Consolidated Statements of Income. When securities are sold, their cost is determined based on the first-in, first-out method.
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6. Inventories
Raw materials and supplies
Finished goods
LIFO reserve
Approximately $80.8 million and $77.7 million of our inventory was accounted for under the Last-in, First-out (“LIFO”) method of accounting at September 30, 2013 and December 31, 2012, respectively.
7. Property, Plant and Equipment
Land
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation
Depreciation expense was $16.5 million and $16.0 million for the three months ended September 30, 2013 and 2012, respectively, and $54.9 million and $42.1 million for the nine months ended September 30, 2013 and 2012, respectively. Included in depreciation expense for the three and nine months ended September 30, 2013 is $3.6 million and $16.3 million of accelerated depreciation, respectively. For the three and nine months ended September 30, 2012, $2.6 million of accelerated depreciation was included in depreciation expense.
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8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2013 are as follows:
Balance at December 31, 2012
Acquisition
Currency exchange adjustment
Balance at September 30, 2013
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 September 30, 2013 and December 31, 2012 are as follows:
Intangible assets with indefinite lives:
Trademarks
Intangible assets with finite lives:
Customer-related
Non-compete agreements
Formulas/recipes
Computer software
Amortization expense on intangible assets for the three months ended September 30, 2013 and 2012 was $8.6 million and $7.8 million, respectively, and $25.3 million and $24.7 million for the nine months ended September 30, 2013 and 2012, respectively. Estimated amortization expense on intangible assets for 2013 and the next four years is as follows:
2013
2014
2015
2016
2017
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9. Accounts Payable and Accrued Expenses
Accounts payable
Payroll and benefits
Interest and taxes
Health insurance, workers’ compensation and other insurance costs
Marketing expenses
Other accrued liabilities
10. Income Taxes
Income tax expense was recorded at an effective rate of 22.8% and 29.1% for the three and nine months ended September 30, 2013, respectively, compared to 25.6% and 28.4% for the three and nine months ended September 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 decrease in the effective tax rate for the three months ended September 30, 2013 as compared to 2012 is attributable to the settlement of unrecognized tax benefits due to expiration of the statute of limitations and the resolution of the Company’s 2010 examination by the United States Internal Revenue Service (“IRS”). The increase in the effective tax rate for the nine months ended September 30, 2013 as compared to 2012 is attributable to an increase in state tax expense and the tax impact of a shift in revenues between jurisdictions.
During the second quarter of 2012, the IRS initiated an examination of TreeHouse Foods’ 2010 tax year which was closed during the third quarter of 2013, resulting in a small refund to the Company. In the second quarter of 2012, 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 also 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 $3.8 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
Revolving credit facility
High Yield Notes
Senior notes
Tax increment financing and other debt
Total debt outstanding
Less current portion
Total long-term debt
Revolving Credit Facility — The Company is party to an unsecured revolving credit facility with an aggregate commitment of $750 million, of which $234.6 million was available as of September 30, 2013. The revolving credit facility matures September 23, 2016. In addition, as of September 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 September 30, 2013. The Company’s average interest rate on debt outstanding under its revolving credit facility for the three and nine months ended September 30, 2013 was 1.43% and 1.54%, respectively.
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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 Bay Valley’s 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 with which the Company is in compliance as of September 30, 2013.
Senior Notes — During the third quarter of 2013, the Company repaid $100 million in aggregate principal amount of 6.03% senior notes using the Company’s existing $750 million revolving credit facility. These senior notes were paid in full on their maturity date, September 30, 2013.
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:
Weighted average common shares outstanding
Assumed exercise/vesting of equity awards (1)
Weighted average diluted common shares outstanding
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13. Stock-Based Compensation
Income before income taxes for the three and nine month periods ended September 30, 2013 includes share-based compensation expense of $4.6 million and $11.7 million, respectively. Share-based compensation expense for the three and nine month periods ended September 30, 2012 was $3.4 million and $9.1 million, respectively. The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.7 million and $4.3 million for the three and nine month periods ended September 30, 2013, respectively, and $1.3 million and $3.1 million for the three and nine month periods ended September 30, 2012, respectively.
The following table summarizes stock option activity during the nine months ended September 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.
Outstanding, December 31, 2012
Granted
Forfeited
Exercised
Outstanding, September 30, 2013
Vested/expected to vest, at September 30, 2013
Exercisable, September 30, 2013
Compensation costs related to unvested options totaled $7.3 million at September 30, 2013 and will be recognized over the remaining vesting period of the grants, which averages 2.2 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 nine months ended September 30, 2013 was $20.46. Stock options issued during the nine months ended September 30, 2013 totaled 280 thousand. The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2013 and 2012 was approximately $2.9 million and $1.8 million, respectively. The tax benefit recognized from stock option exercises was $1.1 million and $0.7 million for the nine months ended September 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 nine months ended September 30, 2013.
Outstanding, at December 31, 2012
Vested
Outstanding, at September 30, 2013
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Future compensation costs related to restricted stock units is approximately $12.9 million as of September 30, 2013, 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 2013 is equal to the Company’s closing stock price on the grant date. Vested awards during the nine months ended September 30, 2013 and 2012 had a fair value on the vest date of $9.8 million and $11.1 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. On August 31, 2013, based on achievement of operating performance measures, 870 performance units were converted into 755 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 nine months ended September 30, 2013:
Unvested, at December 31, 2012
Unvested, at September 30, 2013
Future compensation costs related to the performance units is estimated to be approximately $14.1 million as of September 30, 2013, and is expected to be recognized over the next 2.5 years. The grant date fair value of the awards is equal to the Company’s closing stock price on the date of grant.
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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:
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The Condensed Consolidated Statements of Income lines impacted by reclassifications out of Accumulated Other Comprehensive Loss are outlined below:
Net of tax
Prior service costs
Unrecognized net loss
Total before tax
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:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service costs
Amortization of unrecognized net loss
Net periodic pension cost
The Company contributed $4.9 million to the pension plans in the first nine months of 2013. The Company expects to make additional contributions to the plans of $0.4 million in 2013.
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Components of net periodic postretirement expense are as follows:
Net periodic postretirement cost
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 Expense, Net
The Company incurred other operating expense for the three and nine months ended September 30, 2013 and 2012, which consisted of the following:
Restructuring
Other income
Total other operating expense, net
17. Supplemental Cash Flow Information
Interest paid
Income taxes paid
Accrued purchase of property and equipment
Accrued other intangible assets
Accrued purchase price
Non-cash financing activities for the nine months ended September 30, 2013 and 2012 include the settlement of 182,063 shares and 153,436 shares, respectively, of restricted stock, restricted stock units and performance units, where shares were withheld to satisfy the minimum statutory 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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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 September 30, 2013, the Company did not have any foreign currency contracts outstanding. As of September 30, 2012, the Company had three foreign currency contracts for the purchase of U.S. dollars, all of which expired in the fourth quarter of 2012. The total contracted U.S. dollar amount as of September 30, 2012 was $18 million.
Certain commodities we use in the production and distribution of our products are exposed to market price risk. The Company utilizes derivative contracts to manage commodity price risk. The majority of commodity forward contracts are not derivatives, and those that are, generally qualify for the normal purchases and normal sales scope exception under the guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions. For derivative commodity contracts that do not qualify for the normal purchases and normal sales scope exception, the Company records their fair value on the Company’s Condensed Consolidated Balance Sheets, with changes in value being recorded in the Condensed Consolidated Statements of Income.
The Company’s derivative commodity contracts may include contracts for diesel, oil, plastics, natural gas, electricity, and other commodity contracts that do not meet the requirements for the normal purchases and normal sales scope exception.
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 purchases and normal sales scope exception are used to manage the price risk associated with raw material costs. As of September 30, 2013, the Company had outstanding contracts for the purchase of 9,727 megawatts of electricity, expiring in the fourth quarter of 2013, and outstanding contracts for the purchase of 39,886 megawatts of electricity, expiring throughout 2014. In addition, as of September 30, 2013, the Company had outstanding contracts for the purchase of 464,059 dekatherms of natural gas, expiring in the fourth quarter of 2013, and 1.5 million gallons of outstanding diesel fuel contracts that expire in the fourth quarter of 2013.
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The following table identifies the derivative, its fair value, and location on the Condensed Consolidated Balance Sheet:
Balance Sheet Location
Asset Derivative:
Commodity contracts
Liability Derivative:
We recorded the following gains and losses on our derivative contracts in the Condensed Consolidated Statements of Income:
Recognized in Income
Mark to market unrealized gain (loss):
Foreign currency contracts
Total unrealized gain (loss)
Realized (loss) gain:
Total realized loss
Total gain (loss)
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20. Fair Value
The following table presents the carrying value and fair value of our financial instruments as of September 30, 2013 and December 31, 2012:
Level
Not recorded at fair value (liability):
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 were 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 was 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 was determined using Level 1 inputs. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement dates. The investments are recorded at fair value on the Condensed Consolidated Balance Sheets.
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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.
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Net sales to external customers:
North American Retail Grocery
Food Away From Home
Industrial and Export
Direct operating income:
Unallocated selling and distribution expenses
Unallocated costs of sales (1)
Unallocated corporate expense
Other expense
Geographic Information — The Company had revenues to customers outside of the United States of approximately 13.0% and 13.3% of total consolidated net sales in the nine months ended September 30, 2013 and 2012, respectively, with 11.9% and 12.3% going to Canada, respectively.
Major Customers — Wal-Mart Stores, Inc. and affiliates accounted for approximately 19.4% and 20.5% of consolidated net sales in the nine months ended September 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 product for the three and nine months ended September 30, 2013 and 2012.
Products
Non-dairy creamer
Salad dressings
Pickles
Powdered drinks
Mexican and other sauces
Soup and infant feeding
Hot cereals
Dry dinners
Aseptic products
Jams
Other products
Total net sales
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22. Guarantor and Non-Guarantor Financial Information
The Company’s High Yield Notes are guaranteed by its 100 percent owned subsidiary Bay Valley and Bay Valley’s 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 September 30, 2013 and 2012, and for the three and nine months ended September 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.
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Condensed Supplemental Consolidating Balance Sheet
December 31, 2012
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Condensed Supplemental Consolidating Statement of Income
Three Months Ended September 30, 2013
Selling, general and administrative expense
Operating (loss) income
Other expense (income), net
(Loss) income before income taxes
Income taxes (benefit)
Equity in net income of subsidiaries
Three Months Ended September 30, 2012
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Nine Months Ended September 30, 2013
Nine Months Ended September 30, 2012
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Condensed Supplemental Consolidating Statement of Comprehensive Income
Other comprehensive income:
Pension and post-retirement reclassification adjustment, net of tax
Derivative reclassification adjustment, net of tax
Other comprehensive income
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31
Condensed Supplemental Consolidating Statement of Cash Flows
Non-
Guarantor
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
TreeHouse Foods 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 nine months ended September 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 “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 and shelf stable 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 non-dairy powdered creamers; 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 in which the Company operates 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 our operating results and those of our peers, where the overall industry is experiencing continued volatility in sales and volumes.
Despite the challenging operating environment, the Company achieved a 2.8% increase in net sales for the nine months ended September 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, and continued volatility in other product categories. The loss of the soup business negatively impacted our net sales attributed to volume/mix by approximately 2.4% for the nine months ended September 30, 2013. Offsetting the negative impact of the loss of the soup business were increased sales and volumes of the Company’s single serve hot beverage products, which had only a minor impact in 2012.
For the three months ended September 30, 2013, the Company experienced a 5.4% increase in net sales compared to the same period last year, resulting from acquisitions, increased volume/mix and minor improvements in pricing. Despite the negative impact from the loss of the soup business (2.9% in the quarter), volume/mix for the quarter was positive. Offsetting the negative impact of the loss of the soup business were increased sales and volumes of the Company’s single serve hot beverage products, which had only a minor impact in 2012.
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The Company continues to experience shifts in sales and volumes between retail channels such as traditional grocery, limited assortment, and discount stores. The Company expects customer patterns to continue to shift between store formats. In response to changing consumer behaviors, the Company has focused on lowering its “cost to serve” and aligned our offerings with shifting customer demands.
Total direct operating income, the measure of our segment profitability, increased 4.0%, to $87.5 million, and 9.3%, to $262.6 million, for the three and nine months ended September 30, 2013, compared to the same periods in 2012. The increase in profitability was due to sales mix, pricing, cost containment, and reduced freight costs, resulting in total direct operating income as a percentage of net sales improving 1.0% to 16.1% for the nine months ended September 30, 2013, as compared to the same period last year. Total direct operating income as a percentage of net sales for the three months ended September 30, 2013 was 15.4%, representing a 0.2% decline as compared to the same period last year. The decrease in total direct operating income as a percentage of net sales for the quarter was due to the inclusion of higher cost of sales from the Cains acquisition (an impact of 0.4%). Cains’ profitability was negatively impacted by acquisition costs and we expect profitability to increase in the future.
Recent Developments
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 from TorQuest Partners LLC and other shareholders. Associated Brands is a privately owned Canadian company and a leading private label manufacturer of powdered drinks, specialty teas and sweeteners. The Company 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. Associated Brands has approximately $200 million in annual revenue. The transaction closed on October 8, 2013 and was financed through cash on hand and borrowings under the Company’s existing $750 million credit facility.
On July 1, 2013, the Company completed its acquisition of all of the outstanding shares of Cains, a privately owned Ayer, Massachusetts based manufacturer of shelf stable mayonnaise, dressings and sauces, with approximately $80 million in annual revenue. The Cains product portfolio offers retail and foodservice customers a wide array of packaging sizes, sold as private label and branded products. The purchase price was approximately $35 million, net of cash acquired, subject to an adjustment for working capital and taxes. The acquisition was financed through borrowings under the Company’s existing $750 million credit facility. The acquisition expanded the Company’s footprint in the Northeast United States, enhanced its foodservice presence, and enriched its packaging capabilities.
The Company continues to monitor the soup restructuring and also the closure of its salad dressing plant in Seaforth, Ontario. Total expected costs of the soup restructuring decreased from $26.7 million as of June 30, 2013 to $26.5 million as of September 30, 2013, as estimates were refined. Total expected costs of the Seaforth closure as of September 30, 2013 increased to $13.1 million from $12.3 million as of June 30, 2013, as estimates were refined. While there were no significant changes in the plan, the expected closure date of the Seaforth facility has been extended to the first quarter of 2014.
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Results of Operations
The following table presents certain information concerning our financial results, including information presented as a percentage of net sales:
Loss on foreign currency
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Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
Net Sales — Third quarter net sales increased 5.4%, to $567.2 million in 2013, compared to $538.1 million in the third quarter of 2012, primarily due to the Cains acquisition. Also contributing to the increase in net sales were increases in volume/mix and pricing activities. The increases in volume/mix were primarily in the powdered drinks and Mexican sauces categories, and were partially offset by reductions in the soup category related to the loss of certain soup business for a particular customer, and reductions in volume/mix in the pickles categories. Net sales by segment are shown in the following table:
Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw material and packaging costs, labor costs, facility and equipment costs, costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to distribution centers. Cost of sales increased in the third quarter of 2013 to 79.7% of net sales, from 79.0% of net sales in the third quarter of 2012. Contributing to the increase in cost of sales as a percentage of net sales were increased input costs such as sweeteners, dairy, and packaging, along with slightly higher cost of sales associated with Cains. Also contributing to the increase were costs associated with restructurings and facility consolidations that were recorded in cost of goods sold, primarily accelerated depreciation, that were $2.1 million higher for the three months ended September 30, 2013, as compared to the same period in 2012.
Operating Expenses — Total operating expenses were $74.1 million in the third quarter of 2013, compared to $71.9 million in 2012.
Operating expenses in 2013 resulted from the following:
Selling and distribution expenses increased $0.9 million in the third quarter of 2013, compared to 2012. This increase was primarily due to additional expenses resulting from the newly acquired Cains business. Before considering Cains, selling and distribution expenses decreased in the third quarter of 2013 compared to 2012. This decrease was attributable to lower freight costs, a shift in sales mix, and decreased distribution and delivery costs resulting from efficiencies such as increased utilization of existing shipping capacity, strategic product positioning to reduce distribution expense, and greater use of rail shipments.
General and administrative expenses increased by $3.3 million in the third quarter of 2013, compared to 2012. This was primarily related to higher incentive compensation as incentive costs returned to normalized levels. Incentive compensation costs in 2012 were lower due to the Company’s performance. Also contributing to the increase in general and administrative expenses were additional costs resulting from the newly acquired Cains business.
Other operating expense in the third quarter of 2013 was $0.9 million, compared to operating expense of $3.5 million in 2012. The decrease was primarily due to lower costs associated with the soup restructuring and Seaforth closure, as these projects are nearing completion. Restructuring costs related to accelerated depreciation were recorded in Cost of sales.
Amortization expense increased $0.7 million in the third quarter of 2013, compared to 2012, due primarily to the amortization of additional Enterprise Resource Planning (“ERP”) system costs and intangible assets acquired in the Cains acquisition.
Interest Expense — Interest expense decreased to $12.6 million in the third quarter of 2013, compared to $13.1 million in 2012, due to lower interest rates and average debt levels.
Interest Income – Interest income of $0.5 million related to interest earned on the cash held by our Canadian subsidiary and gains on investments as discussed in Note 5 to our Condensed Consolidated Financial Statements.
Foreign Currency — The Company’s foreign currency impact was a $0.1 million loss for the third quarter of 2013, compared to a loss of $0.2 million in 2012.
Other (Income) Expense, Net — Other income was $0.4 million for the third quarter of 2013, compared to income of $0.6 million in 2012, primarily consisting of mark to market gains on derivative contracts.
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Income Taxes — Income tax expense was recorded at an effective rate of 22.8% in the third quarter of 2013, compared to 25.6% in 2012. The decrease in the effective tax rate for the three months ended September 30, 2013 as compared to 2012 is attributable to the settlement of unrecognized tax benefits due to expiration of the statute of limitations and the resolution of the Company’s 2010 examination by the IRS.
Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012 — Results by Segment
North American Retail Grocery —
Freight out and commissions
Direct selling and marketing
Direct operating income
Net sales in the North American Retail Grocery segment increased by $17.2 million, or 4.5%, in the third quarter of 2013 compared to 2012. The change in net sales from 2012 to 2013 was due to the following:
2012 Net sales
Volume/mix
Pricing
Acquisitions
Foreign currency
2013 Net sales
The increase in net sales from 2012 to 2013 resulted primarily from acquisitions and volume/mix. During the third quarter, the Company experienced volume/mix increases in the powdered drinks and Mexican sauces categories, partially offset by reductions in the soup, dry dinners, and pickles categories. Increases in the powdered drinks category were primarily related to the continued expansion of the single serve hot beverage products. Losses in the soup category were the most significant and accounted for approximately a 4.0% loss in the North American Retail Grocery volume/mix, and related to the partial loss of business for a particular customer. The remaining categories accounted for a 6.3% increase in volume/mix.
Cost of sales as a percentage of net sales in the third quarter of 2013 increased when compared to the third quarter of 2012, due to increases in input costs such as sweeteners, dairy, and packaging components, partially offset by decreases in the cost of oils. Also contributing to the increase in cost of sales as a percentage of net sales was the inclusion of higher cost of sales associated with the Cains acquisition that also included acquisition costs.
Freight out and commissions paid to independent sales brokers were $16.1 million in the third quarter of 2013, compared to $16.6 million in 2012, a decrease of 3.3%, primarily due to increased efficiencies such as increased utilization of existing shipping capacity, strategic product positioning to reduce distribution expense, and greater use of rail shipments. Also contributing to the decrease were lower freight costs and a shift in sales mix. The decrease in freight out and commissions paid to independent sales brokers was partially offset by additional expenses associated with the Cains acquisition.
Direct selling and marketing expenses were $8.6 million in the third quarter of 2013, and $8.1 million in 2012.
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Food Away From Home —
Net sales in the Food Away From Home segment increased by $7.0 million, or 7.8%, in the third quarter of 2013 compared to the prior year. The change in net sales from 2012 to 2013 was due to the following:
Net sales increased during the third quarter of 2013, compared to 2012, primarily due to additional sales from the Cains acquisition and pricing. The increase in net sales was offset by reductions in volume/mix across most categories, with the largest decrease in the pickles and aseptic categories. Partially offsetting the decreases in volume/mix were increases in the powdered drinks category.
Cost of sales as a percentage of net sales increased to 80.4% in the third quarter of 2013, as compared to 80.0% in the third quarter of 2012, due to increases in input costs such as sweeteners, dairy, and packaging components, partially offset by decreases in the cost of oils. Also contributing to the increase in cost of sales as a percentage of net sales was the inclusion of higher cost of sales associated with the Cains acquisition that also included acquisition costs.
Freight out and commissions paid to independent sales brokers increased to $3.6 million in the third quarter of 2013, compared to $3.4 million in the third quarter of 2012. This increase was mostly attributable to the Cains acquisition. Before considering Cains, freight out and commissions paid to independent sales brokers decreased in the third quarter of 2013 compared to 2012. This decrease was due to lower volume, a shift in sales mix, and reduced freight costs. Freight costs did not decrease as much for Food Away From Home as they did for North American Retail Grocery because most customers in the Food Away From Home segment pick up their products.
Direct selling and marketing was $2.3 million in the third quarter of 2013, compared to $2.0 million in 2012.
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Industrial and Export —
Net sales in the Industrial and Export segment increased $4.8 million, or 7.5%, in the third quarter of 2013, compared to the prior year. The change in net sales from 2012 to 2013 was due to the following:
The increase in net sales is primarily due to the Cains acquisition and increased volume/mix. The increase in volume/mix was mainly attributable to the powdered drinks category, partially offset by volume/mix reductions in the non-dairy creamer category.
Cost of sales as a percentage of net sales increased from 79.8% in the third quarter of 2012, to 80.0% in 2013, due to the inclusion of higher cost of sales associated with the Cains acquisition that included acquisition costs and a shift in sales mix. Before considering Cains, cost of sales as a percentage of net sales was slightly lower in the third quarter of 2013 compared to 2012. This slight decrease was primarily due to a shift in sales mix to higher margin products.
Freight out and commissions paid to independent sales brokers were $1.1 million in the third quarter of 2013, and $1.3 million in 2012. This decrease was primarily due to lower freight costs.
Direct selling and marketing was $0.4 million in the third quarter of 2013, compared to $0.3 million in 2012.
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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
Net Sales — Net sales increased 2.8% to $1,633.6 million in the first nine months of 2013, compared to $1,589.3 million in the first nine months of 2012. The increase was primarily driven by increases from the Cains and Naturally Fresh acquisitions and pricing activities, partially offset by reductions in volume/mix, mainly in the soup, aseptic, pickles and dry dinners categories. The reductions in volume/mix were partially offset by increases in the powdered drinks and Mexican sauces categories. Net sales by segment are shown in the following table:
Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 79.2% in the first nine months of 2013, compared to 78.9% in 2012. Contributing to the increase in cost of sales, as a percent of net sales, was an incremental $15.8 million increase of costs associated with restructurings and facility consolidations compared to 2012, primarily accelerated depreciation, higher cost of sales associated with Cains and Naturally Fresh, and slightly higher input costs for sweeteners, vegetables, thickeners, and packaging costs, partially offset by reduced costs for dairy, oils, sugar, and diesel.
Operating Expenses — Total operating expenses were $212.5 million during the first nine months of 2013, compared to $206.6 million in 2012. The increase in 2013 resulted from the following:
Selling and distribution expenses decreased $3.5 million, or 3.4%, in the first nine months of 2013 compared to 2012, primarily due to decreased distribution and delivery costs resulting from efficiencies such as increased utilization of existing shipping capacity, strategic product positioning to reduce distribution expense, and greater use of rail shipments. Also contributing to the decrease were lower freight costs and volume, and a shift in sales mix, partially offset by the Cains and Naturally Fresh acquisitions.
General and administrative expenses increased $10.6 million in the first nine months of 2013, compared to 2012. The increase was primarily related to increases in incentive based compensation expense as incentive costs returned to normalized levels, as well as the Cains and Naturally Fresh acquisitions.
Amortization expense increased $0.6 million in the first nine months of 2013, compared to the first nine months of 2012, due primarily to the amortization of additional ERP system costs and additional amortization from intangibles acquired in the Cains and Naturally Fresh acquisitions.
Other operating expense was $2.1 million in the first nine months of 2013, compared to $4.0 million in the first nine months of 2012. The decrease was primarily due to lower costs associated with the soup restructuring and Seaforth closure, as these projects are nearing completion. Restructuring costs related to accelerated depreciation were recorded in Cost of sales.
Interest Expense — Interest expense decreased to $37.6 million in the first nine months of 2013, compared to $38.8 million in 2012, due to a decrease in interest rates and lower average debt levels.
Interest Income – Interest income of $1.5 million related to interest earned on the cash held by our Canadian subsidiary and gains on investments as discussed in Note 5 to our Condensed Consolidated Financial Statements.
Foreign Currency — The Company’s foreign currency loss was $0.6 million for the nine months ended September 30, 2013 and 2012.
Other (Income) Expense, Net — Other income was $0.8 million in the first nine months of 2013, compared to expense of $0.9 million in 2012, primarily due to mark to market gains on commodity contracts.
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Income Taxes — Income tax expense was recorded at an effective rate of 29.1% in the first nine months of 2013, compared to 28.4% in 2012. The increase in the effective tax rate for the nine months ended September 30, 2013 as compared to 2012 was attributable to an increase in state tax expense and the tax impact of a shift in revenues between jurisdictions.
Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012 — Results by Segment
Net sales in the North American Retail Grocery segment increased by $28.5 million, or 2.5%, in the first nine months of 2013, compared to the first nine months of 2012. The change in net sales from 2012 to 2013 was due to the following:
The increase in net sales from 2012 to 2013 was due to acquisitions, increased volume/mix and pricing. Volume/mix increases in the powdered drinks, Mexican sauces, and hot cereals categories were partially offset by reductions in the soup, dry dinners, and non-dairy creamer categories. Losses in the soup category were the most significant and accounted for approximately a 3.4% loss in the North American Retail Grocery volume/mix and related to the partial loss of business for a customer. The remaining categories accounted for a 4.2% increase in volume/mix.
Cost of sales as a percentage of net sales decreased from 77.7% in the first nine months of 2012, to 77.6% in 2013, due to sales mix, cost savings from operating efficiencies, and lower ingredient and energy costs, partially offset by higher packaging costs and higher cost of sales from the Cains and Naturally Fresh acquisitions.
Freight out and commissions paid to independent sales brokers were $46.9 million in the first nine months of 2013, compared to $51.3 million in 2012, a decrease of 8.6%, due to efficiencies such as increased utilization of existing shipping capacity, strategic product positioning to reduce distribution expense, and greater use of rail shipments. Also contributing to the decrease were lower freight costs and a shift in sales mix, partially offset by the Cains acquisition and a full three quarters of expenses from Naturally Fresh.
Direct selling and marketing expenses were $25.4 million in the first nine months of 2013, compared to $24.7 million in 2012.
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Net sales in the Food Away From Home segment increased by $11.3 million, or 4.5%, in the first nine months of 2013 compared to the prior year. The change in net sales from 2012 to 2013 was due to the following:
Percent
Net sales increased during the first nine months of 2013, compared to 2012, as a result of acquisitions and price increases. Volume/mix reductions in our aseptic, pickles, and Mexican sauces categories, were partially offset by volume/mix increases in the powdered drinks category.
Cost of sales as a percentage of net sales decreased from 80.9% in the first nine months of 2012, to 80.5% in 2013, due to the rationalization of low margin aseptic business, lower ingredient and energy costs, and cost savings from operating efficiencies, partially offset by higher packaging costs and higher cost of sales for the Cains and Naturally Fresh acquisitions.
Freight out and commissions paid to independent sales brokers were $9.4 million in the first nine months of 2013, compared to $9.4 million in 2012. Decreased freight costs, primarily driven by lower freight costs, lower volume, and a shift in sales mix, were offset by additional costs associated with the Cains acquisition and a full three quarters of costs for Naturally Fresh. Freight and commissions were 3.6% of net sales, a slight decrease from 2012.
Direct selling and marketing was $6.3 million in the first nine months of 2013, compared to $6.2 million in 2012.
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Net sales in the Industrial and Export segment increased $4.4 million, or 2.2%, in the first nine months of 2013 compared to the prior year. The change in net sales from 2012 to 2013 was due to the following:
The increase in net sales was primarily due to acquisitions, partially offset by reductions in volume/mix. Volume/mix for the segment experienced a net decrease as reductions, primarily in the soup and infant feeding categories, were partially offset by increases in the powdered drinks category.
Cost of sales as a percentage of net sales decreased from 82.1% in the first nine months of 2012, to 78.9% in 2013, primarily due to sales mix, cost savings from operating efficiencies and lower ingredient and energy costs, partially offset by higher packaging costs and higher cost of sales for the Cains and Naturally Fresh acquisitions.
Freight out and commissions paid to independent sales brokers were $4.0 million in the first nine months of 2013, compared to $4.5 million in 2012. This decrease was due to the decrease in volume and freight costs and a shift in sales mix, partially offset by the Cains acquisition and a full three quarters of costs for Naturally Fresh.
Direct selling and marketing was $1.3 million in the first nine months of 2013, compared to $1.1 million in 2012.
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Liquidity and Capital Resources
Cash Flow
Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company continues to generate substantial cash flow from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, acquisitions and managing its capital structure on a short and long-term basis. If additional borrowings are needed, approximately $234.6 million was available under the revolving credit facility as of September 30, 2013. See Note 11 to our Condensed Consolidated Financial Statements for additional information regarding our revolving credit facility. We believe that, given our cash flow from operating activities and our available credit capacity, we can comply with the current terms of the revolving credit facility and meet our foreseeable financial requirements.
The Company’s cash flows from operating, investing and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows are summarized in the following tables:
Depreciation and amortization
Changes in operating assets and liabilities, net of acquisitions
Our cash provided by operations was $101.9 million in the first nine months of 2013, compared to $104.6 million in 2012, a decrease of $2.7 million. The Company continues to generate consistent net income. The decrease in cash provided by operations was mainly attributable to changes in operating assets and liabilities, specifically a higher inventory balance as of September 30, 2013 as compared to the same period in the prior year. The increased inventory levels primarily resulted from lower than expected sales volumes, as volatility in customer purchases continued.
In the first nine months of 2013, cash used in investing activities increased by $20.5 million, compared to 2012. The increase in cash used in investing activities was mainly attributable to cash used in the Cains acquisition in 2013 exceeding the cash used in the Naturally Fresh acquisition in 2012, together with the purchase of investments and increased investments in property, plant and equipment in 2013.
We expect capital spending programs to be approximately $90 million in 2013. Capital spending in 2013 is focused on food safety, quality, productivity improvements, product line expansions at our North East, Pennsylvania facility, continued implementation of an ERP system, and routine equipment upgrades or replacements at our plants.
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Net cash flow provided by financing activities was $11.6 million in the first nine months of 2013, compared to net cash provided by financing activities of $49.4 million in 2012. Borrowings under the revolving credit facility increased in 2013 compared to 2012, primarily due to the Company borrowing $100 million to pay the maturing senior notes. Also contributing to the increase was approximately $27 million in net year over year borrowings related to acquisitions and intercompany financing. Payments under the revolving credit facility increased in 2013 compared to 2012 as a result of a $40 million payment of intercompany financing and continued pay downs resulting from our consistent net income and operating cash flows.
The cash held by E.D. Smith as cash and cash equivalents and short term investments is expected to be used for general corporate purposes in Canada, including capital projects and acquisitions. The cash relates to foreign earnings that, if repatriated, would result in a tax liability. On October 8, 2013, the Company completed its acquisition of Associated Brands. The cash used to fund this acquisition included most of the Canadian cash on hand, as well as borrowings from the Company’s $750 million existing credit facility.
Cash provided by operating activities is used to pay down debt and fund investments in property, plant and equipment.
The Company’s short-term financing needs are primarily to finance working capital during the year. As the Company continues to add new product categories to our portfolio, spikes in financing needs are reduced. Vegetable and fruit production are driven by harvest cycles, which occur primarily during the spring and summer as inventories of pickles and jams generally are at a low point in late spring and at a high point during the fall, increasing our working capital requirements. In addition, the Company builds inventories of salad dressings in the spring and soup in the summer months in anticipation of large seasonal shipments that begin in the second and third quarters, respectively. Non-dairy creamer inventory builds in the fall for the expected winter sales. Our long-term financing needs will depend largely on potential acquisition activity. We expect our revolving credit facility, plus cash flow from operations, to be adequate to provide liquidity for current operations.
Debt Obligations
At September 30, 2013, we had $504.6 million in borrowings outstanding under our revolving credit facility, $400 million of 7.75% High Yield Notes outstanding, and $5.4 million of tax increment financing and other obligations. In addition, at September 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 provides for an aggregate commitment of $750 million, of which $234.6 million was available at September 30, 2013. Interest rates on debt outstanding under our revolving credit facility for the nine months ended September 30, 2013 averaged 1.54%.
During the third quarter of 2013, we repaid $100 million in aggregate principal amount of 6.03% senior notes using the Company’s existing $750 million revolving credit facility. These senior notes were paid in full on their maturity date of September 30, 2013.
We were in compliance with applicable debt covenants as of September 30, 2013. From an interest coverage ratio perspective, the Company’s actual ratio as of September 30, 2013 was nearly 57.2% higher than the minimum required level. As it relates to the leverage ratio, the Company was nearly 16.6% below the maximum level (where the maximum level is not increased in the event of an acquisition).
See Note 11 to our Condensed Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.
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Other Commitments and Contingencies
We also have the following commitments and contingent liabilities, in addition to contingent liabilities related to the ordinary course of litigation, investigations and tax audits:
See Note 18 to our Condensed Consolidated Financial Statements in Part I — Item 1 of this Form 10-Q and Note 17 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for more information about our commitments and contingent obligations.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2 to the Company’s Condensed Consolidated Financial Statements.
Critical Accounting Policies
A description of the Company’s critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2012. There were no material changes to our critical accounting policies in the nine months ended September 30, 2013.
Off-Balance Sheet Arrangements
We do not have any obligations that meet the definition of an off-balance sheet arrangement, other than operating leases and letters of credit, which have or are reasonably likely to have a material effect on our Condensed Consolidated Financial Statements.
Forward Looking Statements
From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Quarterly Report on Form 10-Q, which are deemed to be “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
The words “anticipate,” “believe,” “estimate,” “project,” “expect,” “intend,” “plan,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We do not intend to update these forward-looking statements following the date of this report.
In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q and other public statements we make. Such factors include, but are not limited to: the outcome of litigation and regulatory proceedings to which we may be a party; the impact of product recalls; actions of competitors; changes and developments affecting our industry; quarterly or cyclical variations in financial results; our ability to obtain suitable pricing for our products; development of new products and services; our level of indebtedness; the availability of financing on commercially reasonable terms; cost of borrowing; our ability to maintain and improve cost efficiency of operations; changes in foreign currency exchange rates; interest rates; raw material and commodity costs; changes in economic conditions; political conditions; reliance on third parties for manufacturing of products and provision of services; general U.S. and global economic conditions; the financial condition of our customers and suppliers; consolidations in the retail grocery and foodservice industries; our ability to continue to make acquisitions in accordance with our business strategy or effectively manage the growth from acquisitions; and other risks that are set forth in the Risk Factors section, the Legal Proceedings section, the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and other sections of this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2012 and from time to time in our filings with the Securities and Exchange Commission.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Fluctuations
The Company is party to an unsecured revolving credit facility with an aggregate commitment of $750 million. The interest rate under the revolving credit facility is based on the Company’s consolidated leverage ratio, and will be determined by either LIBOR plus a margin ranging from 1.00% to 1.60%, or a base rate (as defined in the revolving credit facility) plus a margin ranging from 0.00% to 0.60%.
In July 2006, we entered into a forward interest rate swap transaction for a notional amount of $100 million as a hedge of the forecasted private placement of $100 million senior notes. The interest rate swap transaction was terminated on August 31, 2006, which resulted in a pre-tax loss of $1.8 million. The unamortized loss is reflected, net of tax, in Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets. The loss is reclassified ratably to our Condensed Consolidated Statements of Income as an increase to interest expense over the term of the senior notes (that matured on September 30, 2013), providing an effective interest rate of 6.29%. As of September 30, 2013, the loss has been fully amortized, consistent with the maturity and repayment of the senior notes.
We do not hold any derivative financial instruments which could expose us to significant interest rate market risk, as of September 30, 2013. Our exposure to market risk for changes in interest rates relates primarily to the increase in the amount of interest expense we expect to pay with respect to our revolving credit facility, which is tied to variable market rates. Based on our outstanding debt balance of $504.6 million under our revolving credit facility at September 30, 2013, each 1% rise in our interest rate would increase our interest expense by approximately $5.0 million annually.
Input Costs
The costs of raw materials, packaging materials, fuel, and energy have varied widely in recent years and future changes in such costs may cause our results of operations and our operating margins to fluctuate significantly. When comparing the third quarter of 2013 to the third quarter of 2012, price increases in packaging and commodity costs such as sweeteners and dairy, were offset by price decreases in transportation and energy costs such as diesel. We expect the volatile nature of these costs to continue with an overall upward trend.
We manage the cost of certain raw materials by entering into forward purchase contracts. Forward purchase contracts help us manage our business and reduce cost volatility. Some of these forward purchase contracts qualify as derivatives; however, the majority of commodity forward contracts are not derivatives. Those that are derivatives generally qualify for the normal purchases and normal sales scope exception under the guidance for derivative instruments and hedging activities, and therefore are not subject to its provisions. For derivative commodity contracts that do not qualify for the normal purchases and normal sales scope exception, the Company records their fair value on the Company’s Condensed Consolidated Balance Sheets, with changes in value being recorded in the Condensed Consolidated Statements of Income.
We use a significant volume of fruits and vegetables in our operations as raw materials. Certain of these fruits and vegetables are purchased under seasonal grower contracts with a variety of growers strategically located to supply our production facilities. Bad weather or disease in a particular growing area can damage or destroy the crop in that area. If we are unable to buy the fruits and vegetables from local suppliers, we would purchase them from more distant locations, including other locations within the United States, Mexico or India, thereby increasing our production costs.
Changes in the prices of our products may lag behind changes in the costs of our products. Competitive pressures also may limit our ability to quickly raise prices in response to increased raw materials, packaging, fuel, and energy costs. Accordingly, if we are unable to increase our prices to offset increasing costs, our operating profits and margins could be materially affected. In addition, in instances of declining input costs, customers may be looking for price reductions in situations where we have locked into pricing at higher costs.
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Fluctuations in Foreign Currencies
The Company is exposed to fluctuations in the value of our foreign currency investment in E.D. Smith, located in Canada. Input costs for certain Canadian sales are denominated in U.S. dollars, further impacting the effect foreign currency fluctuations may have on the Company.
The Company’s financial statements are presented in U.S. dollars, which require the Canadian assets, liabilities, revenues, and expenses to be translated into U.S. dollars at the applicable exchange rates. Accordingly, we are exposed to volatility in the translation of foreign currency earnings due to fluctuations in the value of the Canadian dollar, which may negatively impact the Company’s results of operations and financial position. For the nine months ended September 30, 2013 the Company recognized a net loss of $13.0 million, of which a loss of $12.4 million was recorded as a component of Accumulated other comprehensive loss and a loss of $0.6 million was recorded on the Company’s Condensed Consolidated Statements of Income within the Loss on foreign currency exchange line. For the nine months ended September 30, 2012 the Company recognized a net gain of $11.7 million, of which a gain of $12.3 million was recorded as a component of Accumulated other comprehensive loss and a loss of $0.6 million was recorded on the Company’s Condensed Consolidated Statements of Income within the Loss on foreign currency exchange line.
The Company, on occasion, 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. The contracts are entered into for the purchase of U.S. dollar denominated raw materials by our Canadian subsidiary. The Company had no foreign currency contracts outstanding as of September 30, 2013. As of September 30, 2012, the company had an insignificant liability and unrealized loss associated with outstanding foreign currency contracts.
Item 4. Controls and Procedures
The Company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.
As of September 30, 2013, the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), together with management, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective. We have excluded Cains from our evaluation of disclosure controls and procedures as of September 30, 2013 because Cains was acquired by the Company on July 1, 2013. The net sales and total assets of Cains represented approximately 3.8% and 1.6%, respectively, of the Condensed Consolidated Financial Statement amounts as of and for the quarter ended September 30, 2013.
There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2013 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Oak Brook, Illinois
We have reviewed the accompanying condensed consolidated balance sheet of TreeHouse Foods, Inc. and subsidiaries (the “Company”) as of September 30, 2013, and the related condensed consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2013 and 2012, and of cash flows for the nine-month periods ended September 30, 2013 and 2012. This interim financial information is the responsibility of the Company’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial information taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of TreeHouse Foods, Inc. and subsidiaries as of December 31, 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
November 7, 2013
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Item 1. Legal Proceedings
We are party to a variety of legal proceedings arising out of the conduct of our business. While the results of proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our consolidated financial statements, annual results of operations or cash flows.
Item 1A. Risk Factors
Information regarding risk factors appears in Management’s Discussion and Analysis of Financial Condition and Results of Operations — Information Related to Forward-Looking Statements, in Part I — Item 2 of this Form 10-Q and in Part I — Item 1A of the TreeHouse Foods, Inc. Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes from the risk factors previously disclosed in the TreeHouse Foods, Inc. Annual Report on Form 10-K for the year ended December 31, 2012.
Item 5. Other Information
None
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Dennis F. Riordan
Dennis F. Riordan
Executive Vice President and Chief Financial Officer
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