TREEHOUSE FOODS, INC.
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
| (Mark One) | ||
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 | |
| For the Fiscal Year Ended December 31, 2010 | ||
| Or | ||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Transition Period from to |
Commission File Number
001-32504
TreeHouse Foods, Inc.
(Exact name of the registrant as specified in its charter)
(Exact name of the registrant as specified in its charter)
|
Delaware
(State or other jurisdiction of incorporation or organization) |
20-2311383
(I.R.S. employer identification no.) |
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2021 Spring Road, Suite 600
Oak Brook, IL (Address of principal executive offices) |
60523
(Zip Code) |
Registrant’s telephone number, including area code
(708) 483-1300
Two Westbrook Corporate Center, Suite 1070
Westchester, IL 60154
(Former address if changed since last report)
Westchester, IL 60154
(Former address if changed since last report)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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|
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Common Stock, $.01 par value
|
New York Stock Exchange |
Securities registered pursuant to section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
þ
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
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(section 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definitions of
“large accelerated filer”, “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
|
Large
accelerated filer
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Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
The aggregate market value of the Registrant’s common stock
held by non-affiliates as of June 30, 2010, based on the
$45.66 per share closing price on the New York Stock Exchange on
such date, was approximately $1,570,232,971. Shares of common
stock held by executive officers and directors of the registrant
have been excluded from this calculation because such persons
may be deemed to be affiliates.
The number of shares of the registrant’s common stock
outstanding as of January 31, 2011 was 35,441,562.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on April 28,
2011 are incorporated by reference into Part III of this
Form 10-K.
TABLE OF
CONTENTS
2
Table of Contents
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements and information in this
Form 10-K
may constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The
words “believe,” “estimate”,
“project”, “except,” “anticipate,”
“plan,” “intend,” “foresee,”
“should,” “would,” “could” or
other similar expressions are intended to identify
forward-looking statements, which are generally not historical
in nature. These forward-looking statements are based on our
current expectations and beliefs concerning future developments
and their potential effect on us. These forward-looking
statements and other information are based on our beliefs as
well as assumptions made by us using information currently
available. 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 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. 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 and 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 described Part I, Item 1A —
“Risk Factors” and our other reports filed from time
to time with the Securities and Exchange Commission (the
“SEC”).
Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to publicly update or revise
any forward-looking statements after the date they are made,
whether as a result of new information, future events or
otherwise.
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Table of Contents
PART I
| Item 1. | Business |
References herein to “we,” “us,”
“our,” “Company” and “TreeHouse”
refers to TreeHouse Foods, Inc. and its consolidated
subsidiaries unless the context specifically states or implies
otherwise.
TreeHouse is a Delaware corporation incorporated on
January 25, 2005 by Dean Foods Company to accomplish a
spin-off of certain specialty businesses to its shareholders
which was completed on June 27, 2005. Since the Company
began operating as an independent entity, it has expanded its
product offerings through a number of acquisitions:
| • | On April 24, 2006, the Company acquired the private label soup and infant feeding business from Del Monte Corporation (“Soup and Infant Feeding”). | |
| • | On May 31, 2007, the Company acquired VDW Acquisition, Ltd (“San Antonio Farms”) a manufacturer of Mexican sauces. | |
| • | On October 15, 2007, the Company acquired the assets of E.D. Smith Income Fund (“E.D. Smith”), a manufacturer of salad dressings, jams and various sauces. | |
| • | On March 2, 2010, the Company acquired Sturm Foods, Inc. (“Sturm”) a manufacturer of hot cereals and powdered drink mixes. | |
| • | On October 28, 2010, the company acquired S.T. Specialty Foods, Inc. (“S.T. Foods”), a manufacturer of macaroni and cheese and skillet dinners. |
We are a food manufacturer servicing primarily the retail
grocery and foodservice distribution channels. Our products
include non-dairy powdered coffee creamers; private label canned
soups; salad dressings and sauces; sugar free drink mixes; hot
cereals; macaroni and cheese; skillet dinners; Mexican sauces;
jams and pie fillings; pickles and related products; infant
feeding products; aseptic sauces; refrigerated salad dressings
and liquid non-dairy creamer. We manufacture and sell the
following:
| • | private label products to retailers, such as supermarkets and mass merchandisers, for resale under the retailers’ own or controlled labels, | |
| • | private label and branded products to the foodservice industry, including foodservice distributors and national restaurant operators, | |
| • | branded products under our own proprietary brands, primarily on a regional basis to retailers, and | |
| • | products to our industrial customer base, for repackaging in portion control packages and for use as ingredients by other food manufacturers. |
We discuss the following segments in “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.
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; infant
feeding products; salad dressings and sauces; pickles and
related products; Mexican sauces; jams and pie fillings; aseptic
products; liquid non-dairy creamer; powdered drinks; hot
cereals; macaroni and cheese and skillet dinners. During 2010,
we exited the retail infant feeding business which included the
Natures Goodness
®
brand.
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Our Food Away From Home segment sells non-dairy powdered
creamers, pickle products, Mexican sauces, refrigerated
dressings, aseptic products and hot cereals 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; pickles;
Mexican sauces; infant feeding products and refrigerated
dressings. Export sales are primarily to industrial customers
outside of North America.
See Note 22 to the Consolidated Financial Statements and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for information
related to the Company’s business segments.
We operate our business as Bay Valley Foods, LLC (“Bay
Valley”), Sturm and S.T. Foods in the United States and
E.D. Smith Foods, Ltd (“E.D. Smith”) in Canada. Bay
Valley is a Delaware limited liability company, a wholly owned
subsidiary of TreeHouse Foods, Inc. and holds all of the real
estate and operating assets related to our business. E.D. Smith,
Sturm and S.T. Foods are wholly owned subsidiaries of Bay Valley.
Recent
Developments
On October 28, 2010, the Company acquired all of the
outstanding securities of STSF Holdings, Inc. (Holdings) for
approximately $180 million in cash (subject to adjustment)
plus up to an additional $15 million in cash if S.T. Foods
achieved certain earnings targets for the twelve month period
ending December 31, 2010. The earnings targets were not
met; therefore, no additional payment is required. S.T. Foods, a
wholly owned subsidiary of Holdings, has annual net sales of
approximately $100 million and is a manufacturer of private
label macaroni and cheese, skillet dinners and other value-added
side dishes. The acquisition added additional categories to our
product portfolio for the retail grocery channel. The
acquisition was financed through the Company’s revolving
credit facility.
On October 27, 2010, the Company entered into an Amended
and Restated Credit Agreement with a group of participating
lenders which amended and restated the Credit Agreement dated
June 27, 2005 (as amended) that was to expire
August 31, 2011. The Amended and Restated Credit Agreement
provides for an increase in the aggregate commitment under the
revolving credit facility from $600 million to
$750 million and extends the maturity to October 27,
2015. The interest rate under the Amended and Restated Credit
Agreement is based on the Company’s consolidated leverage
ratio, and will be determined by either LIBOR plus a margin
ranging from 1.25% to 2.05% or a base rate (as defined in the
Amended and Restated Credit Agreement) plus a margin ranging
from 0.25% to 1.05%. In addition, a facility fee based on our
consolidated leverage ratio ranging from 0.25% to 0.45% is due
quarterly on the aggregate commitment under the credit facility.
Proceeds from the credit facility may be used for working
capital and general corporate purposes, including acquisition
financing. The credit facility contains various financial and
other restrictive covenants and requires that we maintain
certain financial ratios, including a leverage and an interest
coverage ratio.
For the year ended December 31, 2010, the Company recorded
charges of $4.2 million related to the exit from the retail
branded infant feeding business. Costs related to excess
inventory are included in the Gross profit line of the Condensed
Consolidated Statements of Income. Fixed asset write-downs and
severance costs are included in the Other operating expense
(income), net line of the Condensed Consolidated Statements of
Income.
In connection with the formation of the Company, the Board of
Directors of the Company adopted a stockholder rights plan that
became effective June 27, 2005. The plan had a term of five
years. The stockholder rights plan expired on June 27, 2010
and was not renewed.
On March 2, 2010, the Company acquired Sturm, a private
label manufacturer of hot cereal and powdered soft drink mixes
that serves retail and foodservice customers in the United
States with annual sales of approximately $340 million. The
acquisition of Sturm has strengthened the Company’s
presence in private label dry grocery categories. The Company
paid a cash purchase price of $664.7 million, before
adjusting for a $3.3 million working capital adjustment to
reduce the purchase price, for 100% of the issued and
outstanding
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Table of Contents
stock of Sturm. The $3.3 million working capital adjustment
is recorded in the Receivables, net line of our Condensed
Consolidated Balance Sheets as of December 31, 2010. The
transaction was financed through the issuance of
$400 million in high yield notes, the issuance of
2.7 million shares of Company common stock at $43.00 per
share and borrowings under the Company’s credit facility.
Our
Products
Financial information about our North American Retail Grocery,
Food Away From Home, and Industrial and Export segments can be
found under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
The following table sets forth percentages of consolidated net
sales by major products, for the years ended December 31,
2010, 2009, and 2008:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
Products
|
Net Sales | % | Net Sales | % | Net Sales | % | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Pickles
|
$ | 328,058 | 18.1 | % | $ | 316,976 | 21.0 | % | $ | 325,579 | 21.7 | % | ||||||||||||
|
Soup and infant feeding
|
322,490 | 17.8 | 344,181 | 22.8 | 336,519 | 22.4 | ||||||||||||||||||
|
Non-dairy powdered creamer
|
305,659 | 16.8 | 323,926 | 21.4 | 351,838 | 23.4 | ||||||||||||||||||
|
Salad dressings
|
208,209 | 11.5 | 186,778 | 12.3 | 156,884 | 10.5 | ||||||||||||||||||
|
Jams and other sauces
|
165,622 | 9.1 | 155,771 | 10.3 | 153,927 | 10.3 | ||||||||||||||||||
|
Powdered drinks
|
154,751 | 8.5 | — | — | — | — | ||||||||||||||||||
|
Hot cereals
|
120,486 | 6.6 | — | — | — | — | ||||||||||||||||||
|
Aseptic products
|
88,119 | 4.9 | 84,493 | 5.6 | 83,198 | 5.5 | ||||||||||||||||||
|
Mexican sauces
|
74,725 | 4.1 | 64,520 | 4.3 | 52,718 | 3.5 | ||||||||||||||||||
|
Refrigerated products
|
31,777 | 1.7 | 35,008 | 2.3 | 39,987 | 2.7 | ||||||||||||||||||
|
Dry dinners
|
17,128 | 0.9 | — | — | — | — | ||||||||||||||||||
|
Total
|
$ | 1,817,024 | 100.0 | % | $ | 1,511,653 | 100.0 | % | $ | 1,500,650 | 100.0 | % | ||||||||||||
Pickles
— We produce pickles and a variety of
related products, including peppers, pickled vegetables, sauces
and syrups. We produce private label and regional branded
offerings in the pickles category. These products are sold to
supermarkets, mass merchandisers, foodservice and industrial
customers. We believe we are the largest producer of pickles in
the United States. Pickles and related products represented
18.1% of our consolidated net sales in 2010.
Soup and Infant Feeding
— Soup, broth and gravy
are produced and packaged in cans of various sizes, from single
serve to larger sized cans. We primarily produce private label
products sold to supermarkets and mass merchandisers. During
2010 we exited the retail infant feeding business which included
the
Nature’s
Goodness
®
brand. We co-pack organic infant feeding products for a branded
baby food company which is included in the Industrial and Export
segment. In 2010, soup and infant feeding sales represented
17.8% of our consolidated net sales, with the majority of the
sales coming from soup sold through the retail channel.
Non-Dairy Powdered Creamer
— Non-dairy powdered
creamer is used as coffee creamer or whitener and as an
ingredient in baking, hot and cold beverages, gravy mixes and
similar products. Product offerings in this category include
private label and branded products packaged for grocery
retailers, such as supermarkets and mass merchandisers,
foodservice products for use in coffee service and other
industrial applications, such as portion control, repackaging
and ingredient use by other food manufacturers. We believe we
are the largest supplier of non-dairy powdered creamer in the
United States. Non-dairy powdered creamer represented 16.8% of
our consolidated net sales in 2010.
Salad Dressings
— We produce both pourable and
spoonable salad dressings. Our salad dressings are sold
primarily to supermarkets and mass merchandisers throughout the
United States and Canada, and encompass many flavor varieties.
We believe we are the largest supplier of private label salad
dressings in both the United States and Canada. Salad dressings
represented 11.5% of our consolidated net sales in 2010.
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Jams and Other Sauces
— We produce jams, pie
fillings and other sauces that we sell to supermarkets, mass
merchandisers and foodservice customers in the United States and
Canada. Jams and other sauces represented 9.1% of our
consolidated net sales in 2010.
Powdered drinks
— We produce a variety of
powdered drink mixes, principally sugar free products, including
lemonade, iced tea, energy, vitamin enhanced and isotonic sports
drinks through our recently acquired subsidiary, Sturm. These
products are sold primarily to supermarkets and mass
merchandisers. Powdered drinks, since the March 2, 2010
acquisition of Sturm, represented 8.5% of our consolidated net
sales in 2010.
Hot cereals
— We also produce a variety of
instant and
cook-on-stove
hot cereals, including oatmeal, farina and grits in single-serve
instant packets and microwaveable bowls through our recently
acquired subsidiary, Sturm. These products are sold primarily to
supermarkets and mass merchandisers. Hot cereals, since the
March 2, 2010 acquisition of Sturm, represented 6.6% of our
consolidated net sales in 2010.
Aseptic Products
— We produce aseptic products
which includes cheese sauces and puddings. Aseptic products are
processed under heat and pressure in a sterile production and
packaging environment, creating a product that does not require
refrigeration prior to use. These products are sold primarily to
foodservice customers in cans and flexible packages. Aseptic
products represented 4.9% of our consolidated net sales in 2010.
Mexican Sauces
— We produce a wide variety of
Mexican sauces, including salsa, picante sauce, cheese dip,
enchilada sauce and taco sauce that we sell to supermarkets,
mass merchandisers and foodservice customers in the United
States and Canada, as well as to industrial markets. Mexican
sauces represented 4.1% of our consolidated net sales in 2010.
Refrigerated Products
— We produce refrigerated
salad dressings and liquid non-dairy creamer, which are sold to
retail and foodservice customers. Refrigerated products
represented 1.7% of our consolidated net sales in 2010.
Dry dinners —
We produce private label macaroni
and cheese, skillet dinners and other value added side dishes
through our recently acquired subsidiary S.T. Foods. These
products are sold to retail channels. Dry dinners represented
0.9% of our consolidated net sales in 2010 and includes sales
from October 28, 2010, the acquisition date of
S.T. Foods.
See Note 22 to the Consolidated Financial Statements for
financial information by segment and sales by major products.
Customers
and Distribution
We sell our products through various distribution channels,
including retail grocery, foodservice distributors and
industrial and export, which includes food manufacturers and
repackagers of foodservice products. We have an internal sales
force that manages customer relationships and our broker
network, which is used for sales to retail and foodservice
accounts. Industrial food products are generally sold directly
to customers without the use of a broker. Most of our customers,
including long-standing customers, purchase products from us
either by purchase order or pursuant to contracts that generally
are terminable at will.
Products are shipped from our production facilities directly to
customers, or from warehouse distribution centers, where
products are consolidated for shipment to customers, if an order
includes products manufactured in more than one production
facility. We believe this consolidation of products enables us
to improve customer service by offering our customers a single
order, invoice and shipment.
We sell our products to a diverse customer base, including many
of the leading grocery retailers and foodservice operators in
the United States and Canada, and a variety of customers that
purchase bulk products for industrial food applications. We
currently supply more than 250 food retail customers in
North America, including 49 of the 50 largest food retailers,
and more than 450 foodservice customers, including 53 of
the 100 largest restaurant chains and the 200 largest
food distributors. A relatively limited number of customers
account for a large percentage of our consolidated net sales.
For the year ended December 31, 2010, our ten
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largest customers accounted for approximately 52.1% of the
Company’s consolidated net sales. For the years ended
December 31, 2010, 2009 and 2008, our largest customer,
Wal-Mart Stores, Inc. and its affiliates, accounted for
approximately 18.5%, 14.4% and 15.1%, respectively, of our
consolidated net sales. No other customer accounted for 10% or
more of the Company’s consolidated net sales. Total trade
receivables with Wal-Mart Stores, Inc. and affiliates
represented 22.6% and 13.3% of our total trade receivables as of
December 31, 2010 and 2009, respectively.
Backlog
Our products are generally shipped from inventory upon receipt
of a customer order. In certain cases, we produce to order.
Sales order backlog is not material to our business.
Competition
We have several competitors in each of our segments. For sales
of private label products to retailers, the principal
competitive factors are price, product quality and quality of
service. For sales of products to foodservice, industrial and
export customers, the principal competitive factors are product
quality and specifications, reliability of service and price. We
believe we are the largest manufacturer of non-dairy powdered
creamer and pickles in the United States and largest
manufacturer of private label salad dressings, drink mixes and
instant hot cereals in the United States and Canada based on
sales volume.
Competition to obtain shelf space for our branded products with
retailers generally is based on the expected or historical
performance of our product sales relative to our competitors.
The principal competitive factors for sales of our branded
products to consumers are brand recognition and loyalty, product
quality, promotion and price. Most of our branded competitors
have significantly greater resources and brand recognition than
we do.
The consolidation trend is continuing in the retail grocery and
foodservice industries, and mass merchandisers are gaining
market share. As our customer base continues to consolidate, we
expect competition to intensify as we compete for the business
of fewer large customers.
We believe our strategies for competing in each of our business
segments, which include superior product quality, effective cost
control programs, an efficient supply chain, successful new
products and price, allow us to compete effectively.
Patents
and Trademarks
We own a number of registered trademarks. While we consider our
trademarks to be valuable assets, we do not consider any
trademark to be of such material importance that its absence
would cause a material disruption of our business. No trademark
is material to any one segment.
Brand names sold within the North American Retail Grocery
segment include the following pickle brands,
Farman’s
®
,
Nalley’s
®
,
Peter
Piper
®
and
Steinfeld
®
.
Also sold are brands related to sauces and syrups that include,
Bennett’s
®
,
Hoffman
House
®
,
Roddenbery’s
Northwoods
®
and
San Antonio
Farms
®
.
Non-dairy powdered creamer is sold under our proprietary
Cremora
®
brand. Our refrigerated products are sold under the
Mocha
Mix
®
and
Second
Nature
®
brand names, and our jams and other sauces are sold under the
E.D. Smith
®
and
Habitant
®
brand names. Our oatmeal is sold under the
McCann’s
®
brand name.
Trade names used in our Food Away From Home segment include
Schwartz
®
and
Saucemaker
®
.
Seasonality
In the aggregate, total demand for our products does not vary
significantly by quarter. However, sales of soup products have a
higher percentage of sales in the fourth quarter and lower sales
in the second quarter while dressings have higher sales in the
second quarter. Pickles tend to have higher sales in the second
quarter and non-dairy powdered creamer tends to have higher
sales in the first and fourth quarters.
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Table of Contents
Foreign
Operations and Geographic Information
Foreign sales information is set forth in Note 22 to the
“Consolidated Financial Statements.”
Raw
Materials and Supplies
Our raw materials consist of ingredients and packaging
materials. Principle ingredients used in our operations include
processed vegetables and meats, soybean oil, coconut oil,
casein, oats, wheat, cheese, corn syrup, cucumbers, peppers and
fruit. These ingredients generally are purchased under supply
contracts, and we occasionally engage in forward buying, when we
determine such buying to be to our advantage. We believe these
ingredients to be generally available from a number of
suppliers. The cost of raw materials used in our products may
fluctuate due to weather conditions, regulations, industry and
general U.S. and global economic conditions, fuel prices,
energy costs, labor disputes, transportation delays or other
unforeseen circumstances. The most important packaging materials
and supplies used in our operations are glass containers,
plastic containers, corrugated containers, metal closures and
metal cans, operating supplies and energy. Most packaging
materials are purchased under long-term supply contracts. We
believe these packaging materials to be generally available from
a number of suppliers. Volatility in the cost of our raw
materials and packaging materials can adversely affect our
performance, as price changes often lag behind changes in costs
and we are not always able to adjust our pricing to reflect
changes in raw material and supply costs.
For additional discussion of the risks associated with the raw
materials used in our operations, see “Known Trends and
Uncertainties — Prices of Raw Materials.”
Working
Capital
Our short-term financing needs are primarily for financing
working capital during the year. Due to the seasonality of
pickle and fruit production, driven by harvest cycles, which
occur primarily during late spring and summer, inventories
generally are at a low point in late spring and at a high point
during the fall, increasing our working capital requirements. In
addition, we build inventories of salad dressings in the spring
and soup in the summer months in anticipation of large seasonal
shipments that begin late in the second and third quarters,
respectively. Our long-term financing needs will depend largely
on potential acquisition activity. Our revolving credit
facility, plus cash flow from operations, is expected to be
adequate to provide liquidity for our current operations. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources.”
Research
and Development
Our research facilities include a Research and Development
Center in Pecatonica, Illinois, which focuses on the development
of aseptic and powdered creamer products. Product development
work for aseptic products is also carried out at our production
facility in Dixon, Illinois. Research and development for our
pickle products is carried out at our production facility in
Green Bay, Wisconsin and hot cereals and powdered drinks in
Manawa, Wisconsin. We conduct research and development
activities for our soup and infant feeding products at our
production facility in Pittsburgh, Pennsylvania. New
formulations for salad dressings are created at our Seaforth,
Canada location and new sauces and fruit based products are
developed at our Winona, Canada facility. In addition, sample
preparation, plant trials, ingredient approval and other quality
control procedures are conducted at all our manufacturing
facilities. Research and development expense totaled
$10.5 million, $8.3 million, and $6.9 million in
2010, 2009, and 2008, respectively, and is included in the
General and administrative line of the Consolidated Statements
of Income.
Employees
As of December 31, 2010, our work force consisted of
approximately 4,000 full-time employees in the United
States and Canada.
9
Table of Contents
Available
Information
Our fiscal year ends on December 31.
We
furnish our stockholders with annual reports on
Form 10-K
containing audited financial reports. As a public company, we
regularly file reports and proxy statements with the Securities
and Exchange Commission (“SEC”). These reports are
required by the Securities Exchange Act of 1934 and include
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and proxy statements on Schedule 14A. Copies of any
materials the Company files with the SEC can be obtained free of
charge through the SEC’s website at
http://www.sec.gov,
at the SEC’s Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549, or by
calling the SEC’s Office of Investor Education and
Assistance at
1-800-732-0330.
We make our SEC filings available on our own internet site as
soon as reasonably practicable after they have been filed with
the SEC. Our internet address is
http://www.treehousefoods.com
.
The information on our website is not incorporated by reference
into this annual report on
Form 10-K.
Regulatory
Environment and Environmental Compliance
The conduct of our businesses, and the production, distribution,
sale, labeling, safety, transportation and use of our products,
are subject to various laws and regulations administered by
federal, state, and local governmental agencies in the United
States, as well as to foreign laws and regulations administered
by government entities and agencies in markets where we operate.
It is our policy to abide by the laws and regulations that apply
to our businesses.
We are subject to national and local environmental laws in the
United States and in foreign countries in which we do business
including laws relating to water consumption and treatment, air
quality, waste handling and disposal and other regulations
intended to protect public health and the environment. We are
committed to meeting all applicable environmental compliance
requirements.
The cost of compliance with U.S. and foreign laws does not
have and is not expected to have, a material financial impact on
our capital expenditures, earnings or competitive position.
Executive
Officers
|
Sam K. Reed
|
64 | Chairman of the Board of Directors. Mr. Reed has served as the Chief Executive Officer since January 2005. | ||||
|
David F. Vermylen
|
60 | President and Chief Operating Officer and has served in this position since January 2005. | ||||
|
Dennis F. Riordan
|
53 | Senior Vice President and Chief Financial Officer since January 2006. | ||||
|
Thomas E. O’Neill
|
55 | Senior Vice President, General Counsel, Chief Administrative Officer and Corporate Secretary. He has served in this position since January 2005. | ||||
|
Harry J. Walsh
|
55 | Senior Vice President and President of Bay Valley Foods LLC. Previously Senior Vice President of Operations from January 2005 through July 2008. | ||||
|
Sharon M. Flanagan
|
45 | Senior Vice President, Strategy. | ||||
|
Erik T. Kahler
|
44 | Senior Vice President, Corporate Development. | ||||
|
Alan T. Gambrel
|
56 | Senior Vice President, Human Resources and Chief Administrative Officer of Bay Valley Foods, LLC. |
10
Table of Contents
| Item 1A. | Risk Factors |
In addition to the factors discussed elsewhere in this Report,
the following risks and uncertainties could materially and
adversely affect the Company’s business, financial
condition, results of operations and cash flows. Additional
risks and uncertainties not presently known to the Company also
may impair the Company’s business operations and financial
condition.
Disruptions
in the financial markets could affect our ability to fund
acquisitions or to renew our outstanding credit agreements upon
expiration at our current favorable terms.
As of December 31, 2010, we had $977.4 million of
outstanding indebtedness which included $472.6 million
under our $750 million amended and restated revolving
credit facility, which matures October 27, 2015,
$100 million in senior notes from a private placement,
which matures on September 30, 2013, and $400 million
of high yield notes that mature March 1, 2018. The
inability to generate sufficient cash flow to satisfy our debt
obligations, or to refinance our debt obligations on
commercially reasonable terms, would have a material adverse
effect on our business, financial condition, and results of
operations. In addition, the inability to access additional
borrowing at commercially reasonable terms could affect our
ability to pursue additional acquisitions. U.S. credit
markets have experienced significant dislocations and liquidity
disruptions which have caused credit spreads on prospective debt
financings to widen considerably. These circumstances have
materially impacted liquidity in debt markets, making financial
terms for borrowers less attractive, and in certain cases have
resulted in the unavailability of certain types of debt
refinancing. Continued uncertainty in the credit markets may
negatively impact our ability to access additional debt
financing or to refinance existing indebtedness on favorable
terms, or at all. Events affecting the credit markets have also
had an adverse effect on other financial markets in the U.S.,
which may make it more difficult or costly for us to raise
capital through the issuance of common stock or other equity
securities. Our business could also be negatively impacted if
our suppliers or customers experience disruptions resulting from
tighter capital and credit markets, or a slowdown in the general
economy. Any of these risks could impair our ability to fund our
operations or limit our ability to expand our business and could
possibly increase our interest expense, which could have a
material adverse effect on our financial results.
Increases
in interest rates may negatively affect earnings.
As of December 31, 2010, the aggregate principal amount of
our debt instruments with exposure to interest rate risk was
approximately $422.6 million. As a result, increases in
interest rates will increase the cost of servicing our financial
instruments with exposure to interest rate risk and could
materially reduce our profitability and cash flows. As of
December 31, 2010, each one percentage point change in
interest rates would result in an approximate $4.2 million
change in the annual cash interest expense before any principal
payment on our financial instruments with exposure to interest
rate risk.
Fluctuations
in foreign currencies may adversely affect
earnings.
The Company is exposed to fluctuations in foreign currency
exchange rates primarily related to raw material purchases. We
manage the impact of foreign currency fluctuations related to
raw material purchases through the use of foreign currency
contracts. We are also exposed to fluctuations in the value of
our foreign currency investment in our Canadian subsidiary,
E.D. Smith.
The Canadian assets, liabilities, revenues and expenses are
translated into U.S. dollars at 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.
As we
are dependent upon a limited number of customers, the loss of a
significant customer, or consolidation of our customer base,
could adversely affect our operating results.
A limited number of customers represent a large percentage of
our consolidated net sales. Our operating results are contingent
on our ability to maintain our sales to these customers. The
competition to supply
11
Table of Contents
products to these high volume customers is very strong. We
expect that a significant portion of our net sales will continue
to be derived from a small number of customers. For the year
ended December 31, 2010, our ten largest customers
accounted for approximately 52.1% of the Company’s
consolidated net sales. These customers typically do not enter
into written contracts, and the contracts that they do enter
into generally are terminable at will. Our customers make
purchase decisions based on a combination of price, product
quality and customer service performance. If our product sales
to one or more of these customers are reduced, this reduction
may have a material adverse effect on our business, results of
operations and financial condition.
Increases
in input costs, such as ingredients, packaging materials and
fuel costs, could adversely affect earnings.
The costs of ingredients, as well as packaging materials and
fuel, 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. Many of the raw materials
that we use in our products rose to unusually high levels during
2008, including processed vegetables and meats, soybean oil,
casein, cheese and packaging materials. During 2010 and 2009,
certain input costs decreased from the high levels experienced
in 2008, while other input costs such as metal caps, glass and
plastic containers have risen. In addition, fuel costs, which
represent the most important factor affecting utility costs at
our production facilities and our transportation costs, rose to
unusually high levels in the middle of 2008. Although these
costs have recently moderated, we expect the volatile nature of
these costs to continue.
We manage the impact of increases in the costs of raw materials,
wherever possible, by locking in prices on quantities required
to meet our production requirements. In addition, we attempt to
offset the effect of such increases by raising prices to our
customers. However, changes in the prices of our products may
lag behind changes in the costs of our materials. Competitive
pressures also may limit our ability to quickly raise prices in
response to increased raw materials, packaging and fuel costs.
Accordingly, if we are unable to increase our prices to offset
increasing raw material, packaging and fuel costs, our operating
profits and margins could be materially adversely affected. In
addition, in instances of declining input costs, customers may
be looking for price reductions in situations where we have
locked into purchases at higher costs.
Our
private label and regionally branded products may not be able to
compete successfully with nationally branded
products.
For sales of private label products to retailers, the principal
competitive factors are price, product quality and quality of
service. For sales of private label products to consumers, the
principal competitive factors are price and product quality. In
many cases, competitors with nationally branded products have a
competitive advantage over private label products primarily due
to name recognition. In addition, when branded competitors focus
on price and promotion, the environment for private label
producers becomes more challenging because the price difference
between private label products and branded products can become
less significant.
Competition to obtain shelf space for our branded products with
retailers is primarily based on the expected or historical
performance of our product sales relative to our competitors.
The principal competitive factors for sales of our branded
products to consumers are brand recognition and loyalty, product
quality, promotion and price. Most of our branded competitors
have significantly greater resources and brand recognition than
we do.
Competitive pressures or other factors could cause us to lose
market share, which may require us to lower prices,
increase the use of discounting or promotional programs or
increase marketing expenditures, each of which would adversely
affect our margins and could result in a decrease in our
operating results and profitability.
We
operate in the highly competitive food industry.
We face competition across our product lines from other
companies which have varying abilities to withstand changes in
market conditions. Some of our competitors have substantial
financial, marketing and
12
Table of Contents
other resources, and competition with them in our various
business segments and product lines could cause us to reduce
prices, increase capital, marketing or other expenditures, or
lose category share, which could have a material adverse effect
on our business and financial results. Category share and growth
could also be adversely impacted if we are not successful in
introducing new products.
Some customer buying decisions are based on a periodic bidding
process in which the successful bidder is assured the selling of
its selected product to the food retailer, super center or mass
merchandiser until the next bidding process. Our sales volume
may decrease significantly if our offer is too high and we lose
the ability to sell products through these channels, even
temporarily. Alternatively, we risk reducing our margins if our
offer is successful but below our desired price points. Either
of these outcomes may adversely affect our results of operations.
We may
be unsuccessful in our future acquisition endeavors, if any,
which may have an adverse effect on our business.
Consistent with our stated strategy, our future growth depends,
in large part, on our acquisition of additional food
manufacturing businesses, products or processes. As a result,
our acquisition activity led to our acquisition of Sturm and
S.T. Foods in 2010. We may be unable to identify suitable
targets, opportunistic or otherwise, for acquisition or make
acquisitions at favorable prices. If we identify a suitable
acquisition candidate, our ability to successfully implement the
acquisition would depend on a variety of factors, including our
ability to obtain financing on acceptable terms.
Acquisitions, involve risks, including those associated with
integrating the operations, financial reporting, disparate
technologies and personnel of acquired companies; managing
geographically dispersed operations; the diversion of
management’s attention from other business concerns; the
inherent risks in entering markets or lines of business in which
we have either limited or no direct experience; unknown risks;
and the potential loss of key employees, customers and strategic
partners of acquired companies. We may not successfully
integrate businesses or technologies we acquire in the future
and may not achieve anticipated revenue and cost benefits.
Acquisitions may not be accretive to our earnings and may
negatively impact our results of operations due to, among other
things, the incurrence of debt, one time write-offs of goodwill
and amortization expenses of other intangible assets. In
addition, future acquisitions could result in dilutive issuances
of equity securities.
We may
be unable to anticipate changes in consumer preferences, which
may result in decreased demand for our products.
Our success depends in part on our ability to anticipate the
tastes and eating habits of consumers and to offer products that
appeal to their preferences. Consumer preferences change from
time to time and our failure to anticipate, identify or react to
these changes could result in reduced demand for our products,
which would adversely affect our operating results and
profitability.
We may
be subject to product liability claims for misbranded,
adulterated, contaminated or spoiled food
products.
We sell food products for human consumption, which involve risks
such as product contamination or spoilage, misbranding, product
tampering, and other adulteration of food products. Consumption
of a misbranded, adulterated, contaminated or spoiled product
may result in personal illness or injury. We could be subject to
claims or lawsuits relating to an actual or alleged illness or
injury, and we could incur liabilities that are not insured or
that exceed our insurance coverage. Even if product liability
claims against us are not successful or fully pursued, these
claims could be costly and time consuming and may require
management to spend time defending the claims rather than
operating our business. A product that has been actually or
allegedly misbranded or becomes adulterated could result in:
product withdrawals, product recalls, destruction of product
inventory, negative publicity, temporary plant closings, and
substantial costs of compliance or remediation. Any of these
events, including a significant product liability judgment
against us, could result in a loss of confidence in our food
products, which could have an adverse effect on our financial
condition, results of operations or cash flows.
13
Table of Contents
New
laws or regulations or changes in existing laws or regulations
could adversely affect our business.
The food industry is subject to a variety of federal, state,
local and foreign laws and regulations, including those related
to food safety, food labeling and environmental matters.
Governmental regulations also affect taxes and levies,
healthcare costs, energy usage, international trade, immigration
and other labor issues, all of which may have a direct or
indirect effect on our business or those of our customers or
suppliers. Changes in these laws or regulations or the
introduction of new laws or regulations could increase the costs
of doing business for us or our customers or suppliers or
restrict our actions, causing our results of operations to be
adversely affected.
Increased government regulations to limit carbon dioxide and
other greenhouse gas emissions as a result of concern over
climate change may result in increased compliance costs, capital
expenditures and other financial obligations for us. We use
natural gas, diesel fuel, and electricity in the manufacturing
and distribution of our products. Legislation or regulation
affecting these inputs could materially affect our
profitability. In addition, climate change could affect our
ability to procure needed commodities at costs and in quantities
we currently experience and may require us to make additional
unplanned capital expenditures.
Our
business operations could be disrupted if our information
technology systems fail to perform adequately.
The efficient operation of our business depends on our
information technology systems. We rely on our information
technology systems to effectively manage our business data,
communications, supply chain, order entry and fulfillment, and
other business processes. The failure of our information
technology systems to perform as we anticipate could disrupt our
business and could result in transaction errors, processing
inefficiencies, and the loss of sales and customers, causing our
business and results of operations to suffer. In addition, our
information technology systems may be vulnerable to damage or
interruption from circumstances beyond our control, including
fire, natural disasters, system failures, security breaches, and
viruses. Any such damage or interruption could have a material
adverse effect on our business. We are currently implementing an
enterprise resource planning system throughout the Company.
Our
business could be harmed by strikes or work stoppages by our
employees.
Currently, approximately 51% of our full time hourly
distribution, production and maintenance employees are covered
by collective bargaining agreements with the International
Brotherhood of Teamsters, United Food and Commercial Workers
Union, or Retail, Wholesale and Department Store Union Central
States Council. Two contract agreements expire in 2011. If a
dispute with one of these unions or the employees they represent
were to arise, production interruptions caused by work stoppages
could occur. If a strike or work stoppage were to occur, our
business, financial condition and results of operations could be
adversely affected.
| Item 1B. | Unresolved Staff Comments |
None.
14
Table of Contents
| Item 2. | Properties |
We operate the following production facilities, the majority of
which are owned except for the facilities located in City of
Industry, California; Mendota, Illinois and Springfield,
Missouri. We also lease our principal executive offices in Oak
Brook, Illinois. We believe our owned and leased facilities are
suitable for our operations and provide sufficient capacity to
meet our requirements for the foreseeable future. The following
chart lists the location and principal products by segment
produced at our production facilities at December 31, 2010:
|
Facility Location
|
Principal Products
|
Segment | ||
|
Brooklyn Park, Minnesota
|
Macaroni and cheese and skillet dinners | 1 | ||
|
City of Industry, California
|
Liquid non-dairy creamer and refrigerated salad dressings | 1,2,3 | ||
|
Chicago, Illinois
|
Refrigerated foodservice pickles | 2 | ||
|
Dixon, Illinois
|
Aseptic cheese sauces, puddings and gravies | 2,3 | ||
|
Faison, North Carolina
|
Pickles, peppers and relish; syrup | 1,2,3 | ||
|
Green Bay, Wisconsin
|
Pickles, peppers, relish and sauces | 1,2,3 | ||
|
Kenosha, Wisconsin
|
Macaroni and cheese | 1 | ||
|
Manawa, Wisconsin
|
Hot cereal and drink mixes | 1,2,3 | ||
|
Mendota, Illinois
|
Soups, broths, and gravies | 1,3 | ||
|
New Hampton, Iowa
|
Non-dairy powdered creamer | 3 | ||
|
North East, Pennsylvania
|
Salad dressings | 1,3 | ||
|
Pecatonica, Illinois
|
Non-dairy powdered creamer | 3 | ||
|
Pittsburgh, Pennsylvania
|
Soups, broths, and gravies; baby food | 1,3 | ||
|
Plymouth, Indiana
|
Pickles, peppers and relish | 1,2,3 | ||
|
San Antonio, Texas
|
Mexican sauces | 1,2,3 | ||
|
Seaforth, Ontario, Canada
|
Salad dressings, mayonnaise | 1,3 | ||
|
Springfield, Missouri
|
Foodservice pickles | 2 | ||
|
Wayland, Michigan
|
Non-dairy powdered creamer | 1,3 | ||
|
Winona, Ontario, Canada
|
Jams, pie fillings and specialty sauces | 1,2,3 |
|
Segments:
|
1. | North American Retail Grocery | ||
| 2. | Food Away From Home | |||
| 3. | Industrial and Export |
| Item 3. | 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 the Consolidated Financial Statements, annual
results of operations or cash flows.
15
Table of Contents
| Item 4. | Removed and Reserved |
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s common stock is traded on the New York Stock
Exchange under the symbol “THS.” The high and low
sales prices of our common stock as quoted on the New York Stock
Exchange for 2010 and 2009 are provided in the table below
| 2010 | 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
First Quarter
|
$ | 45.99 | $ | 36.84 | $ | 29.41 | $ | 24.28 | ||||||||
|
Second Quarter
|
51.05 | 41.72 | 29.48 | 25.25 | ||||||||||||
|
Third Quarter
|
50.06 | 39.63 | 38.19 | 28.00 | ||||||||||||
|
Fourth Quarter
|
53.30 | 45.35 | 40.38 | 33.00 | ||||||||||||
The closing sales price of our common stock on February 4,
2011 as reported on the NYSE, was $48.43 per share. On
February 4, 2011, there were 4,128 shareholders of
record of our common stock.
We have not paid any cash dividends on the common stock and
currently anticipate that, for the foreseeable future, any
earnings will be retained for the development of our business.
Accordingly, no dividends are expected to be declared or paid on
the common stock. Moreover, our revolving credit facility
contains certain restrictions on our ability to pay cash
dividends. The declaration of dividends is at the discretion of
our Board of Directors.
The Company did not purchase any shares of its common stock in
either 2010 or 2009.
16
Table of Contents
Performance
Graph
The price information reflected for our common stock in the
following performance graph and accompanying table represents
the closing sales prices of the common stock for the period from
December 31, 2005 through December 31, 2010. The graph
and accompanying table compare the cumulative total
stockholders’ return on our common stock with the
cumulative total return of the S&P Small Cap 600 Index,
Russell 2000 Index and a Peer Group Index consisting of the
following group of companies selected based on the similar
nature of their business: Kraft Foods Inc., Sara Lee Corp.,
General Mills, Inc., Kellogg Co., ConAgra Foods Inc., Archer
Daniels Midland Co., H.J. Heinz Company, Campbell Soup Co.,
McCormick & Co. Inc., The JM Smucker Co., Del Monte
Foods Co., Corn Products Int’l., Lancaster Colony Corp.,
Flowers Foods, Inc., Ralcorp Holdings Inc., The Hain Celestial
Group, Inc.,
Snyders-Lance,
Inc., J&J Snack Foods Corp., B&G Foods, Inc., American
Italian Pasta Co., Farmer Bros. Inc. and Peet’s Coffee and
Tea. The graph assumes an investment of $100 on
December 31, 2005, in each of TreeHouse Foods’ common
stock, the stocks comprising the S&P Small Cap 600 Index,
Russell 2000 Index and the Peer Group Index.
COMPARISON
OF CUMULATIVE TOTAL RETURN OF $100 AMONG TREEHOUSE FOODS,
INC., S&P SMALL CAP 600 INDEX, RUSSELL 2000 INDEX AND THE
PEER GROUP INDEX
Comparison
of Cumulative Five Year Total Return
|
Indexed Returns
|
||||||||||||||||||||||||||||||
| Years Ending | ||||||||||||||||||||||||||||||
|
Base
|
||||||||||||||||||||||||||||||
|
Period
|
||||||||||||||||||||||||||||||
| Company Name / Index | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | ||||||||||||||||||||||||
|
TreeHouse Foods, Inc.
|
$ | 100 | $ | 166.67 | $ | 122.81 | $ | 145.51 | $ | 207.59 | $ | 272.92 | ||||||||||||||||||
|
S&P SmallCap 600 Index
|
100 | 115.12 | 114.78 | 79.11 | 99.34 | 125.48 | ||||||||||||||||||||||||
|
Russell 2000 Index
|
100 | 118.37 | 116.51 | 77.15 | 98.11 | 124.46 | ||||||||||||||||||||||||
|
Peer Group
|
100 | 125.32 | 133.36 | 110.26 | 129.74 | 147.11 | ||||||||||||||||||||||||
17
Table of Contents
Equity
Compensation Plan Information
The following table provides information about our common stock
that may be issued upon the exercise of options under all of our
equity compensation plans as of December 31, 2010:
|
(c)
|
||||||||||||
|
Number of Securities
|
||||||||||||
|
(a)
|
Remaining Available for
|
|||||||||||
|
Number of Securities to
|
(b)
|
Future Issuance Under
|
||||||||||
|
be Issued Upon
|
Weighted-Average
|
Equity Compensation
|
||||||||||
|
Exercise of Outstanding
|
Exercise Price of
|
Plans (Excluding
|
||||||||||
|
Options, Warrants
|
Outstanding Options,
|
Securities Reflected in
|
||||||||||
|
Plan Category
|
and Rights | Warrants and Rights | Column (a)) | |||||||||
|
Equity compensation plans approved by security holders:
|
||||||||||||
|
TreeHouse Foods, Inc. Equity and Incentive Plan
|
2,351,531 | $ | 28.38 | 614,151 | ||||||||
|
Equity compensation plans not approved by security holders:
|
||||||||||||
|
None
|
— | — | — | |||||||||
|
Total
|
2,351,531 | $ | 28.38 | 614,151 | ||||||||
| Item 6. | Selected Financial Data |
The following selected financial data as of and for each of the
five years in the period ended December 31, 2010 has been
derived from our Consolidated Financial Statements. The selected
financial data should be read in conjunction with our
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Consolidated
Financial Statements and related Notes.
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
|
Operating data:
|
||||||||||||||||||||
|
Net sales
|
$ | 1,817,024 | $ | 1,511,653 | $ | 1,500,650 | $ | 1,157,902 | $ | 939,396 | ||||||||||
|
Cost of sales
|
1,385,690 | 1,185,283 | 1,208,626 | 917,611 | 738,818 | |||||||||||||||
|
Gross profit
|
431,334 | 326,370 | 292,024 | 240,291 | 200,578 | |||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||
|
Selling and distribution
|
120,120 | 107,938 | 115,731 | 94,636 | 74,884 | |||||||||||||||
|
General and administrative
|
107,126 | 80,466 | 61,741 | 53,931 | 57,914 | |||||||||||||||
|
Amortization of intangibles
|
26,352 | 13,381 | 13,528 | 7,195 | 3,268 | |||||||||||||||
|
Other operating (income) expense, net
|
1,183 | (6,224 | ) | 13,899 | (415 | ) | (19,842 | ) | ||||||||||||
|
Total operating expenses
|
254,781 | 195,561 | 204,899 | 155,347 | 116,224 | |||||||||||||||
|
Operating income
|
176,553 | 130,809 | 87,125 | 84,944 | 84,354 | |||||||||||||||
|
Other (income) expense:
|
||||||||||||||||||||
|
Interest expense
|
45,691 | 18,430 | 27,614 | 22,036 | 12,985 | |||||||||||||||
|
Interest income
|
— | (45 | ) | (107 | ) | (112 | ) | (665 | ) | |||||||||||
|
(Gain) loss on foreign currency exchange
|
(1,574 | ) | (7,387 | ) | 13,040 | (3,469 | ) | — | ||||||||||||
|
Other (income) expense, net
|
(3,964 | ) | (2,263 | ) | 7,123 | (36 | ) | — | ||||||||||||
|
Total other expense
|
40,153 | 8,735 | 47,670 | 18,419 | 12,320 | |||||||||||||||
18
Table of Contents
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
|
Income from continuing operations, before income taxes
|
$ | 136,400 | $ | 122,074 | $ | 39,455 | $ | 66,525 | $ | 72,034 | ||||||||||
|
Income taxes
|
45,481 | 40,760 | 10,895 | 24,873 | 27,333 | |||||||||||||||
|
Income from continuing operations
|
90,919 | 81,314 | 28,560 | 41,652 | 44,701 | |||||||||||||||
|
Income (loss) from discontinued operations, net of tax
|
— | — | (336 | ) | (30 | ) | 155 | |||||||||||||
|
Net income
|
$ | 90,919 | $ | 81,314 | $ | 28,224 | $ | 41,622 | $ | 44,856 | ||||||||||
|
Basic earnings per common share:
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 2.59 | $ | 2.54 | $ | .91 | $ | 1.33 | $ | 1.43 | ||||||||||
|
Income (loss) from discontinued operations
|
— | — | (.01 | ) | — | .01 | ||||||||||||||
|
Net income
|
$ | 2.59 | $ | 2.54 | $ | .90 | $ | 1.33 | $ | 1.44 | ||||||||||
|
Diluted earnings per common share:
|
||||||||||||||||||||
|
Income from continuing operations
|
$ | 2.51 | $ | 2.48 | $ | .91 | $ | 1.33 | $ | 1.42 | ||||||||||
|
Income (loss) from discontinued operations
|
— | — | (.01 | ) | — | .01 | ||||||||||||||
|
Net income
|
$ | 2.51 | $ | 2.48 | $ | .90 | $ | 1.33 | $ | 1.43 | ||||||||||
|
Weighted average common shares:
|
||||||||||||||||||||
|
Basic
|
35,079 | 31,982 | 31,341 | 31,203 | 31,158 | |||||||||||||||
|
Diluted
|
36,172 | 32,798 | 31,469 | 31,351 | 31,396 | |||||||||||||||
|
Other data:
|
||||||||||||||||||||
|
Balance sheet data (at end of period):
|
||||||||||||||||||||
|
Total assets
|
$ | 2,391,248 | $ | 1,384,428 | $ | 1,355,682 | $ | 1,455,958 | $ | 935,623 | ||||||||||
|
Long-term debt
|
976,452 | 401,640 | 475,233 | 620,452 | 239,115 | |||||||||||||||
|
Other long-term liabilities
|
38,553 | 31,453 | 44,563 | 33,913 | 26,520 | |||||||||||||||
|
Deferred income taxes
|
194,917 | 45,381 | 27,485 | 27,517 | 4,293 | |||||||||||||||
|
Total stockholders’ equity
|
977,966 | 756,229 | 620,131 | 629,309 | 576,249 | |||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Executive
Overview
We believe we are the largest manufacturer of private label
salad dressings, drink mixes, and instant hot cereals in the
United States and Canada, and the largest manufacturer of
non-dairy powdered creamer and pickles in the United States,
based upon total sales volumes. In 2010, based on available
industry data, private label products sold in the retail grocery
channel in the United States, which compete with branded
products on the basis of equivalent quality at a lower price,
represented approximately 36% of all shelf stable pickle
products, approximately 54% of all non-dairy powdered creamer,
approximately 24% of all salad dressings and approximately 18%
of all canned soup.
We sell our products primarily to the retail grocery and
foodservice channels. For the year ended December 31, 2010,
sales to the retail grocery and foodservice channels represented
68.6% and 17.3%, respectively, of our consolidated net sales.
The remaining 14.1% represented industrial and export sales. A
majority of our sales are private label products.
19
Table of Contents
We intend to grow our business profitably through the following
strategic initiatives:
| • | Expand Partnerships with Retailers: As grocery retailers become more demanding of their private label food product suppliers, they have come to expect strategic insight, product innovation, customer service and logistical economies of scale similar to those of our branded competitors. To this end, we are continually developing, investing in and expanding our private label food product offerings and capabilities in these areas. In addition to our low cost manufacturing, we have invested in research and development, product and packaging innovation, category management, information technology systems and other capabilities. We believe that these investments enable us to provide a broad and growing array of private label food products that generally meet or exceed the value and quality of branded competitors that have comparable sales, marketing, innovation and category management support. We believe that we are well positioned to expand our market share with grocery retailers given our differentiated capabilities, breadth of product offering and geographic reach. | |
| • | Continue to Drive Growth and Profitability from our Existing Product Portfolio: We believe we can continue to drive organic growth from our existing product portfolio. Through insights gained from our Economic Value Added (“EVA”) analyses, we develop operating strategies that enable us to focus our resources and investments on products and categories that we believe offer the highest potential. Additionally, EVA analyses identify products and categories that lag the broader portfolio and require corrective action. We believe EVA analysis is a helpful tool which maximizes the full potential of our product offerings. | |
| • | Leverage Cross-Selling Opportunities Across Customers, Sales Channels and Geographies: While we have high private label food product market shares in the United States for our non-dairy powdered creamer, soup, salad dressing and pickles, as well as high branded and private label food product market share in jams in Canada, we believe we still have significant potential for growth with grocery retailers and foodservice distributors that we either currently serve in a limited manner, or do not currently serve. We believe that our size and scale give us an advantage over smaller private label food product producers, many of whom provide only a single category or service to a single customer or geography. Our ability to service customers across North America and across a wider spectrum of products and capabilities provides many opportunities for cross-selling to customers who seek to reduce the number of private label food product suppliers they utilize. | |
| • | Growth Through Acquisitions: We believe we have the expertise and demonstrated ability to identify and integrate value-enhancing acquisitions. We selectively pursue acquisitions of complementary businesses that we believe are a compelling strategic fit with our existing operations. Each potential acquisition is vigorously evaluated for merit utilizing a rigorous analysis that assesses targets for their market attractiveness, intrinsic value and strategic fit. We believe our past acquisitions, which include the Del Monte Soup and Infant Feeding business, San Antonio Farms and E.D. Smith, were each a success and consistent with our strategy. The 2010 acquisitions of Sturm and S.T. Foods were also consistent with this strategy and are expected to be successful in 2011 and beyond. Since we began operating as an independent company in 2005, our acquisitions have significantly added to our revenue base, enhanced margins and allowed us to expand from an initial base of two center-of-store, shelf stable food categories to twelve, including Sturm and S.T. Foods. We attempt to maintain conservative financial policies when pursuing acquisitions and our proven integration strategies have resulted in rapid deleveraging. By identifying targets that fit within our defined strategies, we believe we can continue to expand our product selection and continue our efforts to be the low-cost, high quality and innovative supplier of private label food products for our customers. |
The following discussion and analysis presents the factors that
had a material effect on our financial condition, changes in
financial condition and results of operations for the years
ended December 31, 2010, 2009 and 2008. This should be read
in conjunction with the Consolidated Financial Statements and
the Notes to those Consolidated Financial Statements included
elsewhere in this report.
20
Table of Contents
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements. See “Cautionary Statement Regarding
Forward-Looking Statements” for a discussion of the
uncertainties, risks and assumptions associated with these
statements.
The Company completed its annual assessment of goodwill and
intangible assets as of December 31, 2010 and did not have
any impairments.
For most of 2010, the economy continued to show signs of
weakness with continued high unemployment. The Company continued
to focus its efforts on cost containment, margin improvement and
volume retention. Our efforts resulted in direct operating
income growth of 39.7%, 24.9% and 23.1% for the years ended
December 31, 2010, 2009 and 2008, respectively.
The acquisition landscape in 2010, when compared to 2009,
yielded better opportunities and more attractive acquisition
targets. This improved landscape resulted in the acquisition of
Sturm, for approximately $660 million and S.T. Foods
for approximately $180 million. As we integrate these
acquisitions into our operations, the Company expects to
continue its pursuit of other attractive acquisition targets.
The Company’s exposure to foreign exchange rates is
primarily limited to the Canadian dollar. For the year 2010, the
U.S. dollar was relatively weak versus the Canadian dollar
which resulted in a foreign currency gain of $1.6 million.
Recent
Developments
On October 28, 2010, the Company acquired all of the
outstanding securities of STSF Holdings, Inc.
(“Holdings”) for approximately $180 million in
cash (subject to adjustment) plus up to an additional
$15 million in cash if S.T. Foods achieved certain
earnings targets for the twelve month period ending
December 31, 2010. The earnings targets were not met;
therefore, no additional payment will be required.
S.T. Foods, a wholly owned subsidiary of Holdings, has
annual net sales of approximately $100 million and is a
manufacturer of private label macaroni and cheese, skillet
dinners and other value-added side dishes. The acquisition added
additional categories to our product portfolio for the retail
grocery channel. The acquisition was financed through the
Company’s revolving credit facility.
On October 27, 2010, the Company entered into an Amended
and Restated Credit Agreement with a group of participating
lenders which amended and restated the Credit Agreement dated
June 27, 2005 (as amended) that was to expire
August 31, 2011. The Amended and Restated Credit Agreement
provides for an increase in the aggregate commitment under the
revolving credit facility from $600 million to
$750 million and extends the maturity to October 27,
2015. The interest rate under the Amended and Restated Credit
Agreement is based on the Company’s consolidated leverage
ratio, and will be determined by either LIBOR plus a margin
ranging from 1.25% to 2.05% or a base rate (as defined in the
Amended and Restated Credit Agreement) plus a margin ranging
from 0.25% to 1.05%. In addition, a facility fee based on our
consolidated leverage ratio ranging from 0.25% to 0.45% is due
quarterly on the aggregate commitment under the credit facility.
Proceeds from the credit facility may be used for working
capital and general corporate purposes, including acquisition
financing. The credit facility contains various financial and
other restrictive covenants and requires that we maintain
certain financial ratios, including a leverage and interest
coverage ratio.
For the year ended December 31, 2010, the Company recorded
charges of $4.2 million related to the exit of the retail
branded infant feeding business. Costs related to excess
inventory are included in the Gross profit line of the Condensed
Consolidated Statements of Income. Fixed asset write-downs and
severance costs are included in the Other operating expense
(income), net line of the Condensed Consolidated Statements of
Income.
In connection with the formation of the Company, the Board of
Directors of the Company adopted a stockholder rights plan that
became effective June 27, 2005. The plan had a term of five
years. The stockholder rights plan expired on June 27, 2010
and was not renewed.
On March 2, 2010, the Company acquired Sturm Foods, Inc.
(“Sturm”), a private label manufacturer of hot cereal
and powdered soft drink mixes that serves retail and foodservice
customers in the United States
21
Table of Contents
with annual sales of approximately $340 million. The
acquisition of Sturm has strengthened the Company’s
presence in private label dry grocery categories. The Company
paid a cash purchase price of $664.7 million, before
adjusting for a $3.3 million working capital adjustment to
reduce the purchase price, for 100% of the issued and
outstanding stock of Sturm. The $3.3 million working
capital adjustment is recorded in the Receivables, net line of
our Condensed Consolidated Balance Sheets as of
December 31, 2010. The transaction was financed through the
issuance of $400 million in high yield notes, the issuance
of 2.7 million shares of Company common stock at $43.00 per
share and borrowings under the Company’s credit facility.
Results
of Operations
The following table presents certain information concerning our
financial results, including information presented as a
percentage of consolidated net sales:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
|
Net sales
|
$ | 1,817,024 | 100.0 | % | $ | 1,511,653 | 100.0 | % | $ | 1,500,650 | 100.0 | % | ||||||||||||
|
Cost of sales
|
1,385,690 | 76.3 | 1,185,283 | 78.4 | 1,208,626 | 80.5 | ||||||||||||||||||
|
Gross profit
|
431,334 | 23.7 | 326,370 | 21.6 | 292,024 | 19.5 | ||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||
|
Selling and distribution
|
120,120 | 6.6 | 107,938 | 7.1 | 115,731 | 7.7 | ||||||||||||||||||
|
General and administrative
|
107,126 | 5.9 | 80,466 | 5.3 | 61,741 | 4.2 | ||||||||||||||||||
|
Amortization expense
|
26,352 | 1.5 | 13,381 | 0.9 | 13,528 | 0.9 | ||||||||||||||||||
|
Other operating (income) expense, net
|
1,183 | — | (6,224 | ) | (0.4 | ) | 13,899 | 0.9 | ||||||||||||||||
|
Total operating expenses
|
254,781 | 14.0 | 195,561 | 12.9 | 204,899 | 13.7 | ||||||||||||||||||
|
Total operating income
|
176,553 | 9.7 | 130,809 | 8.7 | 87,125 | 5.8 | ||||||||||||||||||
|
Other (income) expense:
|
||||||||||||||||||||||||
|
Interest expense
|
45,691 | 2.5 | 18,430 | 1.2 | 27,614 | 1.8 | ||||||||||||||||||
|
Interest income
|
— | — | (45 | ) | — | (107 | ) | — | ||||||||||||||||
|
(Gain) loss on foreign currency exchange
|
(1,574 | ) | (0.1 | ) | (7,387 | ) | (0.5 | ) | 13,040 | 0.9 | ||||||||||||||
|
Other (income) expense, net
|
(3,964 | ) | (0.2 | ) | (2,263 | ) | (0.1 | ) | 7,123 | 0.5 | ||||||||||||||
|
Total other expense
|
40,153 | 2.2 | 8,735 | 0.6 | 47,670 | 3.2 | ||||||||||||||||||
|
Income from continuing operations, before income taxes
|
136,400 | 7.5 | 122,074 | 8.1 | 39,455 | 2.6 | ||||||||||||||||||
|
Income taxes
|
45,481 | 2.5 | 40,760 | 2.7 | 10,895 | 0.7 | ||||||||||||||||||
|
Income from continuing operations
|
90,919 | 5.0 | 81,314 | 5.4 | 28,560 | 1.9 | ||||||||||||||||||
|
Loss from discontinued operations, net of tax
|
— | — | — | — | (336 | ) | — | |||||||||||||||||
|
Net income
|
$ | 90,919 | 5.0 | % | $ | 81,314 | 5.4 | % | $ | 28,224 | 1.9 | % | ||||||||||||
22
Table of Contents
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
Net Sales
— Net sales increased 20.2% to
$1,817.0 million for the year ended December 31, 2010,
compared to $1,511.7 million, for the year ended
December 31, 2009. Net sales by segment are shown in the
following table:
| Consolidated Net Sales | ||||||||||||||||
| Year Ended December 31, | ||||||||||||||||
| 2010 | 2009 | (Decrease) | (Decrease) | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
North American Retail Grocery
|
$ | 1,247,126 | $ | 971,083 | $ | 276,043 | 28.4 | % | ||||||||
|
Food Away From Home
|
314,998 | 292,927 | 22,071 | 7.5 | ||||||||||||
|
Industrial and Export
|
254,900 | 247,643 | 7,257 | 2.9 | ||||||||||||
|
Total
|
$ | 1,817,024 | $ | 1,511,653 | $ | 305,371 | 20.2 | % | ||||||||
Total net sales increased 20.2% as increases in volume and the
impact of acquisitions and foreign currency were partially
offset by decreases in pricing and a shift in sales mix.
Cost of Sales
— All expenses incurred to bring
a product to completion are included in cost of sales, such as
raw material, ingredient and packaging costs, labor costs,
facility and equipment costs, including 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
consolidated net sales decreased to 76.3% in 2010 from 78.4% in
the prior year. We experienced increases in certain costs such
as glass and plastic containers in 2010 compared to 2009;
however, these increases were more than offset by decreases in
the cost of casein, oils, sweeteners and other ingredients. The
combination of foreign currency fluctuations and a net decrease
in costs partially offset by a decrease in pricing and a shift
in sales mix in 2010 versus 2009 has resulted in improvement in
our consolidated gross margins.
Operating Costs and Expenses
— Operating
expenses increased to $254.8 million in 2010 compared to
$195.6 million in 2009. The increase in 2010 resulted from
the following:
Selling and distribution expenses increased $12.2 million
in 2010 compared to 2009. The increase is primarily due to the
acquisition of Sturm and S.T. Foods. Selling and distribution
expenses as a percentage of net sales decreased to 6.6% from
7.1% in 2009 due to improved efficiencies on our outbound
freight and reduction in incentive based compensation.
General and administrative expenses increased $26.7 million
in 2010 compared to 2009, which was primarily due to the
acquisition of Sturm and S.T. Foods, acquisition costs, stock
based compensation costs and consulting fees offset by a
decrease in incentive based compensation.
Amortization expense increased from $13.4 million in 2009
to $26.4 million in 2010 due primarily to the addition of
intangible assets acquired in the Sturm and S.T. Foods
acquisitions.
Other operating expense was $1.2 million in 2010 compared
to operating income of $6.2 million in 2009. Operating
expense in 2010 primarily relates to costs associated with the
exit from the branded baby food business partially offset by the
gain on a postretirement plan curtailment at our Dixon facility.
Income in 2009 was related to the $14.5 million gain on
insurance settlement relating to a fire at our New Hampton, Iowa
facility, partially offset by a $7.6 million impairment of
our
Nature’s
Goodness
®
trademark.
Operating Income
— Operating income in 2010 was
$176.6 million, an increase of $45.7 million, or 35.0%
from operating income of $130.8 million in 2009. Our
operating margin was 9.7% in 2010 compared to 8.7% in 2009.
Other (income) expense —
Other (income) expense
includes interest expense, interest income, foreign exchange
gains and losses, and other (income) and expenses.
Interest expense in 2010 was $45.7 million, an increase of
$27.3 million from 2009 primarily due to higher debt levels
in connection with the Sturm and S.T. Foods acquisitions.
23
Table of Contents
The impact of changes in foreign currency resulted in a gain of
$1.6 million in 2010 versus a gain in 2009 of
$7.4 million. The 2010 gain is due to fluctuations in
currency exchange rates between the U.S. and Canadian
dollar. In 2009, approximately $4.9 million of the foreign
currency gain was due to the revaluation of an intercompany
note. The remaining $2.5 million of foreign currency gain
in 2009 is primarily due to currency exchange on cross-border
purchases by our Canadian subsidiary, E.D. Smith.
Other (income) expense was a gain of $4.0 million in 2010
versus a gain of $2.3 million in 2009. The increase is
primarily related to the gain associated with the mark to market
adjustment of our interest rate swap agreement, totaling
approximately $4.0 million, compared to a gain of
$2.1 million in 2009.
Income Taxes
— Income tax expense was recorded
at an effective rate of 33.3% for 2010 compared to 33.4% for
2009.
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009 — Results by
Segment
North
American Retail Grocery
| Year Ended December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Dollars | Percent | Dollars | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 1,247,126 | 100.0 | % | $ | 971,083 | 100.0 | % | ||||||||
|
Cost of sales
|
933,734 | 74.9 | 738,002 | 76.0 | ||||||||||||
|
Gross profit
|
313,392 | 25.1 | 233,081 | 24.0 | ||||||||||||
|
Freight out and commissions
|
59,496 | 4.7 | 51,821 | 5.4 | ||||||||||||
|
Direct selling and marketing
|
32,423 | 2.6 | 28,411 | 2.9 | ||||||||||||
|
Direct operating income
|
$ | 221,473 | 17.8 | % | $ | 152,849 | 15.7 | % | ||||||||
Net sales in the North American Retail Grocery segment increased
by $276.0 million, or 28.4%, for the year ended
December 31, 2010 compared to the prior year. The change in
net sales from 2009 to 2010 was due to the following:
| Dollars | Percent | |||||||
| (Dollars in thousands) | ||||||||
|
2009 Net sales
|
$ | 971,083 | ||||||
|
Volume
|
3,511 | 0.4 | % | |||||
|
Pricing
|
(5,419 | ) | (0.6 | ) | ||||
|
Foreign currency
|
17,508 | 1.8 | ||||||
|
Acquisitions
|
266,512 | 27.4 | ||||||
|
Mix/other
|
(6,069 | ) | (0.6 | ) | ||||
|
2010 Net sales
|
$ | 1,247,126 | 28.4 | % | ||||
The increase in net sales from 2009 to 2010 is due to the
acquisition of Sturm and S.T. Foods, foreign currency
fluctuations and higher unit sales. Overall volume is higher in
2010 compared to that of 2009, primarily due to new customers
and line extensions in the pickle, Mexican sauces and salad
dressings product lines. These increases were partially offset
by declines in our soup and infant feeding products. During
2010, we exited the retail infant feeding business.
Cost of sales as a percentage of net sales decreased from 76.0%
in 2009 to 74.9% in 2010 primarily due to net declines in raw
material, ingredient and packaging costs. The segment continues
to see improvements from last year’s salad dressing plant
expansion. Negatively impacting costs in 2010 are the
revaluation of acquired inventories from the Sturm and S.T.
Foods acquisitions and the write-off of excess infant feeding
inventory.
24
Table of Contents
Freight out and commissions paid to independent brokers
increased $7.7 million or 14.8%, to $59.5 million in
2010 compared to $51.8 million in 2009, primarily due to
the Sturm and S.T. Foods acquisitions.
Direct selling and marketing was $32.4 million in 2010
compared to $28.4 million in 2009, an increase of
$4.0 million or 14.1% primarily due to the Sturm and S.T.
Foods acquisitions and an increase in stock based compensation
expense offset by a decline in incentive compensation.
Food Away
From Home
| Year Ended December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Dollars | Percent | Dollars | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 314,998 | 100.0 | % | $ | 292,927 | 100.0 | % | ||||||||
|
Cost of sales
|
249,508 | 79.2 | 239,971 | 81.9 | ||||||||||||
|
Gross profit
|
65,490 | 20.8 | 52,956 | 18.1 | ||||||||||||
|
Freight out and commissions
|
10,518 | 3.3 | 10,071 | 3.5 | ||||||||||||
|
Direct selling and marketing
|
7,221 | 2.3 | 6,816 | 2.3 | ||||||||||||
|
Direct operating income
|
$ | 47,751 | 15.2 | % | $ | 36,069 | 12.3 | % | ||||||||
Net sales in the Food Away From Home segment increased by
$22.1 million, or 7.5%, for the year ended
December 31, 2010 compared to the prior year. The change in
net sales from 2009 to 2010 was due to the following:
| Dollars | Percent | |||||||
| (Dollars in thousands) | ||||||||
|
2009 Net sales
|
$ | 292,927 | ||||||
|
Volume
|
(739 | ) | (0.3 | )% | ||||
|
Pricing
|
2,893 | 1.0 | ||||||
|
Foreign currency
|
2,940 | 1.0 | ||||||
|
Acquisitions
|
14,771 | 5.0 | ||||||
|
Mix/other
|
2,206 | 0.8 | ||||||
|
2010 Net sales
|
$ | 314,998 | 7.5 | % | ||||
Net sales increased in 2010 compared to 2009 due to the
acquisition of Sturm, foreign currency fluctuations and price
increases.
Cost of sales as a percentage of net sales decreased from 81.9%
in 2009 to 79.2% in 2010, due to net declines in raw material,
ingredient and packaging costs and improved productivity at the
segment’s aseptic plant.
Freight out and commissions paid to independent brokers
increased $447 thousand to $10.5 million in 2010 compared
to $10.1 million in 2009, primarily due to the acquisition
of Sturm.
Direct selling and marketing was $7.2 million in 2010
compared to $6.8 million in 2009, primarily due to the
acquisition of Sturm.
25
Table of Contents
Industrial
and Export
| Year Ended December 31, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Dollars | Percent | Dollars | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 254,900 | 100.0 | % | $ | 247,643 | 100.0 | % | ||||||||
|
Cost of sales
|
202,448 | 79.4 | 203,970 | 82.4 | ||||||||||||
|
Gross profit
|
52,452 | 20.6 | 43,673 | 17.6 | ||||||||||||
|
Freight out and commissions
|
5,583 | 2.2 | 5,848 | 2.4 | ||||||||||||
|
Direct selling and marketing
|
1,813 | 0.7 | 1,800 | 0.7 | ||||||||||||
|
Direct operating income
|
$ | 45,056 | 17.7 | % | $ | 36,025 | 14.5 | % | ||||||||
Net sales in the Industrial and Export segment increased by
$7.3 million, or 2.9%, for the year ended December 31,
2010 compared to the prior year. The change in net sales from
2009 to 2010 was due to the following:
| Dollars | Percent | |||||||
| (Dollars in thousands) | ||||||||
|
2009 Net sales
|
$ | 247,643 | ||||||
|
Volume
|
4,487 | 1.8 | % | |||||
|
Pricing
|
(5,381 | ) | (2.2 | ) | ||||
|
Foreign currency
|
887 | 0.4 | ||||||
|
Acquisitions
|
11,083 | 4.4 | ||||||
|
Mix/other
|
(3,819 | ) | (1.5 | ) | ||||
|
2010 Net sales
|
$ | 254,900 | 2.9 | % | ||||
The increase in net sales is primarily due to higher volumes in
the co-pack business and the acquisition of the Sturm co-pack
business. The volume and acquisition increases were partially
offset by price decreases, as the underlying commodity cost
decreases were passed through to customers, and an unfavorable
mix due to higher co-pack sales.
Cost of sales, as a percentage of net sales, decreased from
82.4% in 2009 to 79.4% in 2010 reflecting productivity
improvements and net declines in raw material, ingredient and
packaging costs.
Freight out and commissions paid to independent sales brokers
were $5.6 million in 2010 compared to $5.8 million in
2009, due to improved efficiencies on our outbound freight and
higher levels of customer pickups.
Direct selling and marketing was $1.8 million in 2010 and
2009.
26
Table of Contents
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Net Sales
— Net sales increased 0.7% to
$1,511.7 million for the year ended December 31, 2009,
compared to $1,500.7 million, for the year ended
December 31, 2008. Net sales by segment are shown in the
following table:
| Consolidated Net Sales | ||||||||||||||||
| Year Ended December 31, |
$ Increase/
|
% Increase/
|
||||||||||||||
| 2009 | 2008 | (Decrease) | (Decrease) | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
North American Retail Grocery
|
$ | 971,083 | $ | 917,102 | $ | 53,981 | 5.9 | % | ||||||||
|
Food Away From Home
|
292,927 | 294,020 | (1,093 | ) | (0.4 | ) | ||||||||||
|
Industrial and Export
|
247,643 | 289,528 | (41,885 | ) | (14.5 | ) | ||||||||||
|
Total
|
$ | 1,511,653 | $ | 1,500,650 | $ | 11,003 | 0.7 | % | ||||||||
Total net sales increased 0.7% as decreases in volume in all
segments and the impact of foreign currency were offset by
increased pricing and a shift in sales mix.
Cost of Sales
— All expenses incurred to bring
a product to completion are included in cost of sales, such as
raw material, ingredient and packaging costs, labor costs,
facility and equipment costs, including 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
consolidated net sales decreased to 78.4% in 2009 from 80.5% in
the prior year. We experienced increases in certain costs such
as metal caps, cans and lids and meat products in 2009 compared
to 2008; however, these increases were more than offset by
decreases in the cost of casein, oils and plastic containers.
The combination of price increases and a net decrease in costs
in 2009 versus 2008 has resulted in improvement in our
consolidated gross margins.
Operating Costs and Expenses
— Operating
expenses decreased to $195.6 million in 2009 compared to
$204.9 million in 2008. The decrease in 2009 resulted from
the following:
Selling and distribution expenses decreased $7.8 million in
2009 compared to 2008. The decrease is primarily due to a
reduction in freight costs related to lower unit volume and a
reduction in freight rates.
General and administrative expenses increased $18.7 million
in 2009 compared to 2008, which was primarily due to increases
in incentive based compensation and stock based compensation
related to the Company’s performance and acquisition costs.
Amortization expense decreased slightly from $13.5 million
in 2008 to $13.4 million in 2009.
Other operating income was $6.2 million in 2009 compared to
operating expense of $13.9 million in 2008. Income in 2009
was related to the $14.5 million gain on insurance
settlement relating to a fire at our New Hampton, Iowa facility,
partially offset by an $7.6 million impairment of our
Nature’s
Goodness
®
trademark. Operating expense in 2008 reflected costs associated
with the closure of our Portland, Oregon facility.
Operating Income
— Operating income in 2009 was
$130.8 million, an increase of $43.7 million, or 50.1%
from operating income of $87.1 million in 2008. Our
operating margin was 8.7% in 2009 compared to 5.8% in 2008.
Other (income) expense —
Other (income) expense
includes interest expense, interest income, foreign exchange
gains and losses, and other (income) and expenses.
Interest expense in 2009 was $18.4 million, a decrease of
$9.2 million from 2008. The decrease is due to lower debt
levels and lower average interest rates.
The impact of changes in foreign currency resulted in a gain of
$7.4 million in 2009 versus an expense in 2008 of
$13.0 million. In 2009, approximately $4.9 million of
the foreign currency gain was due to the revaluation of an
intercompany note, as compared to a currency loss of
$9.1 million in 2008. The remaining
27
Table of Contents
$2.5 million of foreign currency gain is primarily due to
currency exchange on cross-border purchases by our Canadian
subsidiary, E.D. Smith, as compared to currency loss of
$3.9 million in 2008.
Other (income) expense was a gain of $2.3 million in 2009
versus a loss of $7.1 million in 2008. The increase is
primarily related to the gain associated with the mark to market
adjustment of our interest rate swap agreement, totaling
approximately $2.1 million, compared to a loss of
$7.0 million in 2008.
Income Taxes
— Income tax expense was recorded
at an effective rate of 33.4% for 2009 compared to 27.6% for
2008. The higher effective tax rate in 2009 is due primarily to
increased income which reduced the percentage benefit of the
cross-border financing structure entered into in conjunction
with the E.D. Smith acquisition.
Discontinued operations —
Loss from
discontinued operations was $0.3 million in 2008 due to the
write off of assets held for sale. There were no discontinued
operations in 2009.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008 — Results by
Segment
North
American Retail Grocery
| Year Ended December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Dollars | Percent | Dollars | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 971,083 | 100.0 | % | $ | 917,102 | 100.0 | % | ||||||||
|
Cost of sales
|
738,002 | 76.0 | 720,388 | 78.6 | ||||||||||||
|
Gross profit
|
233,081 | 24.0 | 196,714 | 21.4 | ||||||||||||
|
Freight out and commissions
|
51,821 | 5.4 | 58,756 | 6.4 | ||||||||||||
|
Direct selling and marketing
|
28,411 | 2.9 | 23,447 | 2.6 | ||||||||||||
|
Direct operating income
|
$ | 152,849 | 15.7 | % | $ | 114,511 | 12.4 | % | ||||||||
Net sales in the North American Retail Grocery segment increased
by $54.0 million, or 5.9%, for the year ended
December 31, 2009 compared to the prior year. The change in
net sales from 2008 to 2009 was due to the following:
| Dollars | Percent | |||||||
| (Dollars in thousands) | ||||||||
|
2008 Net sales
|
$ | 917,102 | ||||||
|
Volume
|
(8,721 | ) | (1.0 | )% | ||||
|
Pricing
|
66,944 | 7.3 | ||||||
|
Foreign currency
|
(16,731 | ) | (1.8 | ) | ||||
|
Mix/other
|
12,489 | 1.4 | ||||||
|
2009 Net sales
|
$ | 971,083 | 5.9 | % | ||||
The increase in net sales from 2008 to 2009 resulted from the
carryover effect of price increases taken in the second half of
2008 to cover the cost of rising raw material and packaging
costs, partially offset by lower case sales of infant feeding
and retail branded pickles, and the impact of foreign currency.
While overall case sales decreased in the segment, the Company
experienced modest volume increases in soups, Mexican sauces,
and salad dressings.
Cost of sales as a percentage of net sales decreased from 78.6%
in 2008 to 76.0% in 2009 as price increases have now caught up
to the raw material and packaging cost increases experienced by
the Company in earlier periods. Also contributing to the
decrease were several cost reduction initiatives, moving away
from certain low margin customers over the past year and net
declines in raw material and packaging costs.
28
Table of Contents
Freight out and commissions paid to independent brokers
decreased $6.9 million or 11.8%, to $51.8 million in
2009 compared to $58.8 million in 2008, as a result of
reduced volumes and lower freight costs, as fuel costs have
decreased since last year.
Direct selling and marketing was $28.4 million in 2009
compared to $23.4 million in 2008, an increase of
$5.0 million or 21.2% primarily due to increased levels of
incentive based compensation associated with the Company’s
overall performance.
Food Away
From Home
| Year Ended December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Dollars | Percent | Dollars | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 292,927 | 100.0 | % | $ | 294,020 | 100.0 | % | ||||||||
|
Cost of sales
|
239,971 | 81.9 | 242,035 | 82.3 | ||||||||||||
|
Gross profit
|
52,956 | 18.1 | 51,985 | 17.7 | ||||||||||||
|
Freight out and commissions
|
10,071 | 3.5 | 13,567 | 4.6 | ||||||||||||
|
Direct selling and marketing
|
6,816 | 2.3 | 6,285 | 2.2 | ||||||||||||
|
Direct operating income
|
$ | 36,069 | 12.3 | % | $ | 32,133 | 10.9 | % | ||||||||
Net sales in the Food Away From Home segment decreased by
$1.1 million, or 0.4%, for the year ended December 31,
2009 compared to the prior year. The change in net sales from
2008 to 2009 was due to the following:
| Dollars | Percent | |||||||
| (Dollars in thousands) | ||||||||
|
2008 Net sales
|
$ | 294,020 | ||||||
|
Volume
|
(8,646 | ) | (2.9 | )% | ||||
|
Pricing
|
11,530 | 3.9 | ||||||
|
Foreign currency
|
(1,378 | ) | (0.5 | ) | ||||
|
Mix/other
|
(2,599 | ) | (0.9 | ) | ||||
|
2009 Net sales
|
$ | 292,927 | (0.4 | )% | ||||
Net sales decreased during 2009 compared to 2008 primarily due
to reduced volumes resulting from the recent economic down turn
as consumers reduced their spending on dining and eating out.
This segment also experienced a decrease in net sales due to
both a shift in the sales mix and the impact of foreign currency
changes. Increased pricing in response to commodity cost
increases over the past year and modest increases in sales units
of aseptic products and Mexican sauces, offset the volume
declines in pickles and other products.
Cost of sales as a percentage of net sales decreased from 82.3%
in 2008 to 81.9% in 2009, as price increases to our customers
have now caught up to the increases in raw material, packaging,
and energy costs experienced by the Company in earlier periods,
combined with improvements in operating efficiencies.
Freight out and commissions paid to independent brokers
decreased $3.5 million or 25.8% to $10.1 million in
2009 compared to $13.6 million in 2008, primarily as a
result of reduced volumes and lower freight costs, as fuel costs
have decreased since last year.
Direct selling and marketing was $6.8 million in 2009
compared to $6.3 million in 2008, primarily due to
increased levels of incentive based compensation associated with
the Company’s overall performance.
29
Table of Contents
Industrial
and Export
| Year Ended December 31, | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Dollars | Percent | Dollars | Percent | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
|
Net sales
|
$ | 247,643 | 100.0 | % | $ | 289,528 | 100.0 | % | ||||||||
|
Cost of sales
|
203,970 | 82.4 | 246,203 | 85.0 | ||||||||||||
|
Gross profit
|
43,673 | 17.6 | 43,325 | 15.0 | ||||||||||||
|
Freight out and commissions
|
5,848 | 2.4 | 8,821 | 3.0 | ||||||||||||
|
Direct selling and marketing
|
1,800 | 0.7 | 1,031 | 0.4 | ||||||||||||
|
Direct operating income
|
$ | 36,025 | 14.5 | % | $ | 33,473 | 11.6 | % | ||||||||
Net sales in the Industrial and Export segment decreased by
$41.9 million, or 14.5%, for the year ended
December 31, 2009 compared to the prior year. The change in
net sales from 2008 to 2009 was due to the following:
| Dollars | Percent | |||||||
| (Dollars in thousands) | ||||||||
|
2008 Net sales
|
$ | 289,528 | ||||||
|
Volume
|
(51,889 | ) | (17.9 | )% | ||||
|
Pricing
|
(1,941 | ) | (0.7 | ) | ||||
|
Foreign currency
|
(69 | ) | — | |||||
|
Mix/other
|
12,014 | 4.1 | ||||||
|
2009 Net sales
|
$ | 247,643 | (14.5 | )% | ||||
The decrease in net sales was primarily due to reduced volumes
resulting from lower co-pack sales of branded products for other
food companies. While the decline in net sales included the
majority of the products sold within this segment, the most
significant were in the non-dairy powdered creamer, soup and
infant feeding products. Partially offsetting the volume
declines was a favorable shift in the mix of products sold.
Cost of sales as a percentage of net sales decreased from 85.0%
in 2008 to 82.4% in 2009 as price increases have caught up to
input cost increases experienced in prior periods. Also
contributing to the reduction were productivity improvements
realized in 2009, and net decreases in raw material and
packaging costs.
Freight out and commissions paid to independent brokers
decreased by $3.0 million to $5.8 million primarily
due to reduced volumes and lower freight costs, as fuel costs
have decreased since last year.
Direct selling and marketing was $1.8 million in 2009
compared to $1.0 million in 2008, primarily due to
increased levels of incentive based compensation associated with
the Company’s overall performance.
Known
Trends and Uncertainties
Prices
of Raw Materials
We were adversely affected by rising input costs during 2008,
however, during 2010 and 2009 certain input costs decreased from
these high levels. Costs of many of the raw materials used in
our products rose to unusually high levels during 2008,
including processed vegetables and meats, soybean oil, casein,
cheese and packaging materials. Fluctuating fuel costs also
impacted our results. While prices for many of our raw materials
decreased during 2010, the Company expects moderate price
volatility for the next year with an upward trend. We manage the
impact, wherever possible, on commercially reasonable terms, by
locking in prices on quantities required to meet our production
requirements. In addition, we offset the effect of increased
costs by raising prices to our customers. However, for
competitive reasons, we may not be able to pass along
30
Table of Contents
the full effect of increases in raw materials and other input
costs as we incur them. In addition, in instances of declining
input costs, customers may be looking for price reductions in
situations where we have locked into purchases at higher costs.
Competitive
Environment
There has been significant consolidation in the retail grocery
and foodservice industries in recent years, and mass
merchandisers are gaining market share. As our customer base
continues to consolidate, we expect competition to intensify as
we compete for the business of fewer, large customers. There can
be no assurance that we will be able to keep our existing
customers, or gain new customers. As the consolidation of the
retail grocery and foodservice industry continues, we could lose
sales if any one or more of our existing customers were to be
sold.
Both the difficult economic environment and the increased
competitive environment in the retail and foodservice channels
have caused competition to become increasingly intense in our
business. We expect this trend to continue for the foreseeable
future.
Liquidity
and Capital Resources
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 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. Over the
last three years, the Company has generated $525.1 million
in cash flow from operating activities due to strong earnings
and by focusing on working capital management. If additional
borrowings are needed, approximately $268.2 million was
available on the revolving credit facility as of
December 31, 2010. This facility was amended and restated
as of October 27, 2010. The aggregate commitment was
increased from $600 million to $750 million and
maturity date was extended to October 27, 2015. We believe
that, given our cash flow from operating activities and our
available credit capacity, we can comply with the current terms
of the credit facility and meet foreseeable financial
requirements.
Cash
flows from operating activities:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Net income
|
$ | 90,919 | $ | 81,314 | $ | 28,224 | ||||||
|
Depreciation & amortization
|
69,778 | 47,343 | 45,854 | |||||||||
|
Stock-based compensation
|
15,838 | 13,303 | 12,193 | |||||||||
|
(Gain) loss on foreign currency exchange
|
1,469 | (4,932 | ) | 9,034 | ||||||||
|
Curtailment of postretirement benefit obligations
|
(2,357 | ) | — | — | ||||||||
|
Mark to market (gain) loss on derivative contracts
|
(4,363 | ) | (2,104 | ) | 6,981 | |||||||
|
Loss (gain) on disposition of assets
|
3,159 | (11,885 | ) | (469 | ) | |||||||
|
Write-down of impaired assets
|
— | 7,600 | 5,991 | |||||||||
|
Deferred income taxes
|
9,199 | 18,596 | 5,314 | |||||||||
|
Excess tax benefits from stock based compensation
|
(5,732 | ) | (169 | ) | (377 | ) | ||||||
|
Changes in operating assets and liabilities, net of acquisitions
|
66,580 | (44,383 | ) | 62,428 | ||||||||
|
Other
|
161 | 161 | 473 | |||||||||
|
Net cash provided by continuing operations
|
244,651 | 104,844 | 175,646 | |||||||||
|
Net cash provided by discontinued operations
|
— | — | (10 | ) | ||||||||
|
Net cash provided by operating activities
|
$ | 244,651 | $ | 104,844 | $ | 175,636 | ||||||
31
Table of Contents
Our cash from operations was $244.7 million in 2010
compared to $104.8 million in 2009, resulting in an
increase of $139.9 million. The increase in cash from
operating activities is due in part to a higher level of net
income excluding non-cash charges such as depreciation and
amortization resulting from the growth of the business and the
acquisitions of Sturm and S.T. Foods. Also contributing to the
increase in operating cash flows is a decrease in working
capital, net of acquisitions, resulting from management’s
continuing efforts to manage accounts receivable, accounts
payable and inventory levels.
Cash
flows from investing activities:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Additions to property, plant and equipment
|
$ | (39,543 | ) | $ | (36,987 | ) | $ | (55,471 | ) | |||
|
Additions to intangible assets
|
(22,110 | ) | — | — | ||||||||
|
Insurance proceeds
|
— | 2,863 | 12,047 | |||||||||
|
Cash outflows for acquisitions, less cash acquired
|
(844,496 | ) | — | (251 | ) | |||||||
|
Proceeds from sale of fixed assets
|
43 | 6 | 1,679 | |||||||||
|
Net cash used in continuing operations
|
(906,106 | ) | (34,118 | ) | (41,996 | ) | ||||||
|
Net cash provided by discontinued operations
|
— | — | 157 | |||||||||
|
Net cash used in investing activities
|
$ | (906,106 | ) | $ | (34,118 | ) | $ | (41,839 | ) | |||
In 2010, cash used in investing activities increased by
$872.0 million compared to 2009 primarily due to the
acquisitions of Sturm and S.T. Foods for an aggregate of
$844.5 million. Additions to intangible assets in 2010
consists primarily of computer software.
We expect capital spending programs to be approximately
$85 million in 2011. Capital spending in 2011 will focus on
food safety, quality, productivity improvements, improvements to
our San Antonio facility, installation of an Enterprise
Resource Planning system and routine equipment upgrades or
replacements at our plants.
Cash
flows from financing activities:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Proceeds from issuance of debt
|
$ | 400,000 | $ | — | $ | — | ||||||
|
Net borrowing (repayment) of debt
|
173,390 | (74,484 | ) | (145,537 | ) | |||||||
|
Payments of deferred financing costs
|
(16,418 | ) | — | — | ||||||||
|
Excess tax benefits from stock-based compensation
|
5,732 | 169 | 377 | |||||||||
|
Cash used to net share settle equity awards
|
(15,370 | ) | (336 | ) | — | |||||||
|
Issuance of common stock, net of expenses
|
110,688 | — | — | |||||||||
|
Proceeds from stock option exercises
|
4,599 | 4,926 | 5,434 | |||||||||
|
Net cash provided by (used in) financing activities
|
$ | 662,621 | $ | (69,725 | ) | $ | (139,726 | ) | ||||
Net cash flow from financing activities increased from a use of
funds of $69.7 million in 2009 to funds provided of
$662.6 million in 2010. To finance the Sturm acquisition in
2010, we issued $400.0 million of new debt, common stock in
the net amount of $110.7 million and borrowings under our
revolving credit facility. The S.T. Foods acquisition was
financed through borrowings under our revolving credit facility.
Cash provided by operating activities is used to pay down debt
and pay for additions to property, plant and equipment and
intangible assets.
32
Table of Contents
The Company believes it has sufficient liquidity, with the
availability under the revolving credit facility and does not
anticipate a significant risk to cash flows in the foreseeable
future despite the current disruption of the credit markets, as
the Company operates in a relatively stable industry and has
sizable market share across its product lines. The
Company’s long-term financing needs will depend largely on
potential acquisition activity.
The impact of the reduction in stock market equity values in
late 2008 and early 2009 resulted in a reduced funded balance of
our Pension Plan, and required additional cash contributions in
2009, which was funded by cash flows from operations. The
Company contributed $1.3 million and $8.9 million in
2010 and 2009, respectively, and expects to make contributions
of approximately $4.9 million in 2011.
Seasonality
The Company’s short-term financing needs are primarily for
financing working capital during the year. As the Company
continues to add new product categories to our portfolio, spikes
in financing needs are lessened. Cucumber and fruit production
are driven by harvest cycles, which occur primarily during the
spring and summer, 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.
Sources
of Capital
Revolving Credit Facility —
On October 27,
2010, the Company entered into an Amended and Restated Credit
Agreement with a group of participating lenders which amended
and restated the Credit Agreement dated June 27, 2005 (as
amended) that was to expire August 31, 2011. The Amended
and Restated Credit Agreement provides for an increase in the
aggregate commitment under the revolving credit facility from
$600 million to $750 million and extends the maturity
to October 27, 2015. The interest rate under the Amended
and Restated Credit Agreement is based on the Company’s
consolidated leverage ratio, and will be determined by either
LIBOR plus a margin ranging from 1.25% to 2.05% or a base rate
(as defined in the Amended and Restated Credit Agreement) plus a
margin ranging from 0.25% to 1.05%. In addition, a facility fee
based on our consolidated leverage ratio ranging from 0.25% to
0.45% is due quarterly on the aggregate commitment under the
credit facility. Proceeds from the credit facility may be used
for working capital and general corporate purposes, including
acquisition financing. The Company’s obligations under the
revolving credit facility are guaranteed by certain of its
United States subsidiaries. The credit facility contains various
financial and other restrictive covenants and requires that we
maintain certain financial ratios, including a leverage and an
interest coverage ratio. The Company is in compliance with all
applicable covenants as of December 31, 2010.
For a further discussion of the revolving credit facility and
the Amended and Restated Credit Agreement, see Note 10
“Long Term Debt” to the Consolidated Financial
Statements accompanying this report.
High Yield Notes
— On March 2, 2010,
TreeHouse Foods, Inc. completed its offering of
$400 million in aggregate principal amount of 7.75% high
yield notes due 2018 (the “Notes”). The net amount of
the proceeds of $391.0 million (providing an effective
interest rate of 8.03%) was used as partial payment in the
acquisition of all of the issued and outstanding stock of Sturm.
The Company issued the Notes pursuant to an Indenture, dated
March 2, 2010 (the “Base Indenture”), among the
Company, the subsidiary guarantors party thereto
(Bay Valley Foods, LLC and EDS Holdings, LLC, the
“Initial Guarantors”) and Wells Fargo Bank, National
Association, (Trustee), as supplemented by a First Supplemental
Indenture, dated March 2, 2010 (the “First
Supplemental Indenture”), among the Company, the Initial
Guarantors and the Trustee. In addition, on March 2, 2010,
the Company entered into a Second Supplemental Indenture, dated
March 2, 2010 (the “Second Supplemental
Indenture”) pursuant to which Sturm became an additional
guarantor of the Notes, with the same force and effect as if
Sturm was initially named as a guarantor under the Indenture. On
October 28, 2010, the Company entered into a Third
Supplemental Indenture, dated October 28, 2010 (the
“Third Supplemental Indenture” and together with the
Base Indenture the First Supplemental Indenture and the Second
33
Table of Contents
Supplemental Indenture, the “Indenture”), pursuant to
which S.T. Foods (together with the Initial Guarantors and
Sturm, the “Guarantors”) became an additional
guarantor of the Notes, with the same force and effect as if
S.T. Foods was initially named a guarantor under the Indenture.
The Company is in compliance with all applicable covenants as of
December 31, 2010.
For a further discussion of the Notes and the Indenture, see
Note 10, “Long Term Debt” to the Consolidated
Financial Statements accompanying this report.
Interest Rate Swap —
During 2008, the Company
entered into a $200 million long-term interest rate swap
agreement with an effective date of November 19, 2008 to
lock into a fixed LIBOR interest rate base. Under the terms of
the agreement, $200 million in floating rate debt was
swapped for a fixed rate of 2.9% interest rate base for a period
of 24 months, amortizing to $50 million for an
additional nine months at the same 2.9% interest rate. As of
December 31, 2010 the swap amount was $50 million. The
Company did not apply hedge accounting and recorded the fair
value of this instrument on its balance sheet within other long
term liabilities. The fair value of the swap, using Level 2
inputs, was a liability of approximately $0.9 million and
$4.9 million as of December 31, 2010 and 2009,
respectively. In 2010 and 2009, the Company recorded income of
$4.0 million and of $2.1 million, respectively,
related to the mark to market adjustment within the Other
(income) expense line of the Consolidated Statements of Income.
Senior Notes —
On September 22, 2006, the
Company completed a private placement of $100 million in
aggregate principal of 6.03% senior notes due
September 30, 2013 pursuant to a Note Purchase Agreement
among TreeHouse and a group of purchasers. All of the
Company’s obligations under the senior notes are fully and
unconditionally guaranteed by EDS Holdings, LLC, Bay Valley
Foods, LLC, a wholly-owned subsidiary of the Company, and its
wholly-owned subsidiaries Sturm and S.T. Foods. The senior notes
have not been registered under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States
absent registration or an applicable exemption. Net proceeds
were used to repay outstanding indebtedness under the revolving
credit facility. The Company is in compliance with all
applicable covenants as of December 31, 2010.
For a further discussion of the Senior Notes, see Note 10,
“Long Term Debt” to the Consolidated Financial
Statements accompanying this report.
Contractual
Obligations
The following table summarizes the Company’s obligations
and commitments to make future payments as of December 31,
2010:
Indebtedness,
Purchase and Lease Obligations
| Payments Due by Period | ||||||||||||||||||||
|
Year
|
Years
|
Years
|
More than
|
|||||||||||||||||
| Total | 1 | 2 - 3 | 4 - 5 | 5 Years | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Revolving credit facility(1)
|
$ | 523,538 | $ | 10,539 | $ | 21,078 | $ | 491,921 | $ | — | ||||||||||
|
High yield notes(2)
|
622,167 | 31,000 | 62,000 | 62,000 | 467,167 | |||||||||||||||
|
Senior notes(3)
|
116,583 | 6,030 | 110,553 | — | — | |||||||||||||||
|
Capital lease obligations(4)
|
2,430 | 831 | 1,477 | 122 | — | |||||||||||||||
|
Purchasing obligations(5)
|
170,179 | 156,035 | 12,878 | 1,266 | — | |||||||||||||||
|
Operating leases(6)
|
49,943 | 12,614 | 13,966 | 9,848 | 13,515 | |||||||||||||||
|
Benefit obligations(7)
|
29,449 | 2,204 | 5,257 | 5,604 | 16,384 | |||||||||||||||
|
Deferred compensation(8)
|
6,392 | 175 | 321 | 2,946 | 2,950 | |||||||||||||||
|
Unrecognized tax benefits(9)
|
6,969 | 374 | 3,568 | 2,973 | 54 | |||||||||||||||
|
Tax increment financing(10)
|
3,520 | 388 | 779 | 783 | 1,570 | |||||||||||||||
|
Total
|
$ | 1,531,170 | $ | 220,190 | $ | 231,877 | $ | 577,463 | $ | 501,640 | ||||||||||
34
Table of Contents
| (1) | Revolving credit facility obligation includes principal of $472.6 million and interest at an average rate of 2.23% at December 31, 2010. The principal is due October 27, 2015. (See Note 10) | |
| (2) | High yield notes include principal and interest payments based on a fixed interest rate of 7.75%. Principal payment is due March 1, 2018. | |
| (3) | Senior note obligation includes principal and interest payments based on a fixed interest rate of 6.03%. Principal payment is due September 30, 2013. (See Note 10) | |
| (4) | Payments required under long-term capitalized lease contracts. | |
| (5) | Primarily represents commitments to purchase minimum quantities of raw materials used in our production processes. We enter into these contracts from time to time in an effort to ensure a sufficient supply of raw ingredients. In addition, we have contractual obligations to purchase various services that are part of our production process. | |
| (6) | In accordance with GAAP, these obligations are not reflected in the accompanying balance sheets. Operating lease obligations consist of minimum rental payments under non-cancelable operating leases. | |
| (7) | Benefit obligations consist of future payments related to pension and postretirement benefits as estimated by an actuarial valuation. | |
| (8) | Deferred compensation obligations have been allocated to payment periods based on existing payment plans for terminated employees and the estimated timing of distributions of current employees based on age. | |
| (9) | The unrecognized tax benefit long term liability recorded by the Company is $6,969 million at December 31, 2010. The timing of cash settlement, if any, cannot be reasonably estimated. The Company’s gross unrealized tax benefit included in the tabular reconciliation (See Note 9 to our Consolidated Financial Statements) is approximately $6,854 million. The difference between the gross unrecognized tax benefit and the amount per the “Contractual Obligations — Indebtedness, Purchase and Lease Obligations” table is due to the inclusion above of corollary positions, interest, penalties, as well as the impact of state taxes on the federal tax liability. Deferred tax liabilities are excluded from the table due to uncertainty in their timing. | |
| (10) | Tax increment financing obligation includes principal and interest payments based on rates ranging from 6.61% to 7.16%. Final payment is due May 1, 2019. (See Note 10) |
In addition to the commitments set forth in the above table at
December 31, 2010, the Company had $9.2 million in
letters of credit primarily related to the Company’s
workers’ compensation program.
Off-Balance
Sheet Arrangements
The Company does 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 the Consolidated
Financial Statements.
Other
Commitments and Contingencies
The Company also has the following commitments and contingent
liabilities, in addition to contingent liabilities related to
ordinary course litigation, investigations and tax audits:
| • | certain lease obligations, and | |
| • | selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims and .other casualty losses. |
See Note 19 to our Consolidated Financial Statements for
more information about the Company’s commitments and
contingent obligations.
35
Table of Contents
Critical
Accounting Policies
Critical accounting policies are defined as those that are most
important to the portrayal of a company’s financial
condition and results and that require our most difficult,
subjective or complex judgments. In many cases the accounting
treatment of a particular transaction is specifically dictated
by generally accepted accounting principles with no need for the
application of our judgment. In certain circumstances, however,
the preparation of the Consolidated Financial Statements in
conformity with generally accepted accounting principles
requires us to use our judgment to make certain estimates and
assumptions. These estimates affect the reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the Consolidated Financial Statements
and the reported amounts of net sales and expenses during the
reporting period. We have identified the policies described
below as our critical accounting policies. See Note 1 to
the Consolidated Financial Statements for a detailed discussion
of these and other accounting policies.
Accounts Receivable Allowances
— We maintain an
allowance for customer promotional programs, marketing co-op
programs and other sales and marketing expenses. This allowance
is based on historical rolling twelve month average program
activity and can fluctuate due to the level of sales and
marketing programs, and timing of deductions. This allowance was
$8.4 million and $8.3 million, at December 31,
2010 and 2009, respectively.
Inventories —
Inventories are stated at the
lower of cost or market. Pickle inventories are valued using the
last-in,
first-out (“LIFO”) method, while all of our other
inventories are valued using the
first-in,
first-out (“FIFO”) method. These valuations have been
reduced by an allowance for obsolete and defective products and
packaging materials. The estimated allowance is based on a
review of inventories on hand compared to estimates of future
demand, changes in formulas and packaging materials and inferior
product. The Company’s allowances were $9.5 million
and $6.9 million at December 31, 2010 and 2009,
respectively.
Goodwill and Intangible Assets
— Goodwill and
intangible assets totaled $1,539.9 million as of
December 31, 2010, resulting primarily from acquisitions.
Upon acquisition, the purchase price is first allocated to
identifiable assets and liabilities, including but not limited
to trademarks and customer-related intangible assets, with any
remaining purchase price recorded as goodwill. Goodwill and
indefinite lived trademarks are not amortized. For purposes of
goodwill impairment testing, our reporting units are defined as
North American Retail Grocery — U.S., North American
Retail Grocery — Canada, Food Away From
Home — U.S., Food Away From Home — Canada,
Industrial Bulk and Co-Pack — U.S., and
Co-Pack — Canada.
We believe that a trademark has an indefinite life if it has
sufficient market share and a history of strong sales and cash
flow performance that we expect to continue for the foreseeable
future. If these perpetual trademark criteria are not met, the
trademarks are amortized over their expected useful lives.
Determining the expected life of a trademark requires
considerable management judgment and is based on an evaluation
of a number of factors including the competitive environment,
market share, trademark history and anticipated future trademark
support.
Indefinite lived trademarks and goodwill are evaluated for
impairment annually in the fourth quarter, or more frequently,
if other events occur, to ensure that fair value continues to
exceed the related book value. An indefinite lived trademark is
impaired if its book value exceeds fair value. Goodwill
impairment is indicated if the book value of its reporting unit
exceeds its fair value. If the fair value of an evaluated asset
is less than its book value, the asset is written down to fair
value, which is generally based on its discounted future cash
flows. Future business results could impact the evaluation of
our goodwill and intangible assets.
The Company completed its annual goodwill and intangible asset
impairment analysis as of December 31, 2010. Our assessment
did not result in an impairment. We have seven reporting units,
five of which contain goodwill totaling $1,076.3 million.
Our analysis employed the use of both a market and income
approach, with each method given equal weighting. Significant
assumptions used in the income approach include growth and
discount rates, margins and the Company’s weighted average
cost of capital. We used historical performance and management
estimates of future performance to determine margins and growth
rates. Discount rates selected for each reporting unit varied,
with the weighted average of all discount rates being equal to
the total Company discount rate. Our weighted average cost of
capital included a review and assessment of market and capital
structure assumptions. Further supporting our assessment of
goodwill is the fact that our Company’s stock price has
increased from December 31, 2009 to December 31, 2010
by
36
Table of Contents
approximately 31.5%. Of the five reporting units with goodwill,
all have fair values significantly in excess of their carrying
values (between 60% and 115%). Considerable management judgment
is necessary to evaluate the impact of operating changes and to
estimate future cash flows. Changes in our estimates or any of
our other assumptions used in our analysis could result in a
different conclusion.
We reviewed our indefinite lived intangible assets, which
include our trademarks totaling $32.7 million, using the
relief from royalty method. Significant assumptions include the
royalty, growth and discount rates. Our assumptions were based
on historical performance and management estimates of future
performance, as well as available data on licenses of similar
products. Our analysis resulted in no impairment. The
Company’s policy is that indefinite lived assets must have
a history of strong sales and cash flow performance that we
expect to continue for the foreseeable future. When these
criteria are no longer met, the Company changes the
classification. Considerable management judgment is necessary to
evaluate the impact of operating changes and to estimate future
cash flows. Changes in our estimates or any of our other
assumptions used in our analysis could result in a different
conclusion.
Amortizable intangible assets which include primarily customer
relationships and trademarks are evaluated for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If an evaluation of the
undiscounted cash flows indicates impairment, the asset is
written down to its fair value, which is generally based on
discounted future cash flows. No impairment was identified and
the Company concluded no changes are necessary to the remaining
useful lives or values of the remaining amortizable intangible
assets as of December 31, 2010.
Purchase Price Allocation
— We allocate the
purchase price of acquisitions to the assets acquired and
liabilities assumed. All identifiable assets acquired, including
identifiable intangibles, and liabilities assumed are assigned a
portion of the purchase price of the acquired company, normally
equal to their fair values at the date of acquisition. The
excess of the purchase price of the acquired company over the
sum of the amounts assigned to identifiable assets acquired,
less liabilities assumed is recorded as goodwill. We record the
initial purchase price allocation based on evaluation of
information and estimates available at the date of the financial
statements. As final information regarding fair value of assets
acquired and liabilities assumed is received and estimates are
refined, appropriate adjustments are made to the purchase price
allocation. To the extent that such adjustments indicate that
the fair values of assets and liabilities differ from their
preliminary purchase price allocations, such differences would
adjust the amounts allocated to those assets and liabilities and
would change the amounts allocated to goodwill. The final
purchase price allocation includes the consideration of a number
of factors to determine the fair value of individual assets
acquired and liabilities assumed, including quoted market
prices, forecast of expected cash flows, net realizable values,
estimates of the present value of required payments and
determination of remaining useful lives.
Income Taxes
— Deferred taxes are recognized
for future tax effects of temporary differences between
financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse. We
periodically estimate our probable tax obligations using
historical experience in tax jurisdictions and informed
judgments. There are inherent uncertainties related to the
interpretations of tax regulations in the jurisdictions in which
we operate. These judgments and estimates made at a point in
time may change based on the outcome of tax audits and changes
to or further interpretations of regulations. If such changes
take place, there is a risk that our tax rate may increase or
decrease in any period, which would have an impact on our
earnings. Future business results may affect deferred tax
liabilities or the valuation of deferred tax assets over time.
Stock-Based Compensation
— Income from
Continuing Operations Before Income Taxes, for the years ended
December 31, 2010 and December 31, 2009, included
share-based compensation expense for employee and director stock
options, restricted stock, restricted stock units, and
performance units of $15.8 million and $13.3 million,
respectively.
The fair value of stock options, restricted stock, restricted
stock unit awards and performance units (the “Awards”)
is determined on the date of grant. Stock options were valued
using a Black Scholes model. Performance units and all other
restricted stock and restricted stock unit awards were valued
using the closing price of the Company’s stock on the date
of grant. Stock-based compensation expense, as calculated and
recorded, could have been impacted, if other assumptions were
used. Furthermore, if we use different
37
Table of Contents
assumptions in future periods, stock-based compensation expense
could be impacted in future periods. Expected volatilities for
2010 are based on historical volatilities of the Company’s
stock price. Prior to 2010, expected volatilities were based on
the implied historical volatilities from peer companies and
other factors, as the Company’s stock was not publically
traded prior to June 27, 2005. The Company has estimated
that certain employees will complete the required service
conditions associated with certain Awards. For all other
employees, the Company estimates forfeitures as not all
employees are expected to complete the required service
conditions. The expected service period is the longer of the
derived service period, as determined from the output of the
valuation models, and the service period based on the term of
the Awards. The risk-free interest rate for periods within the
contractual life of the Awards is based on the
U.S. Treasury yield curve in effect at the time of the
grant. As the Company does not have significant history to
determine the expected term of its option awards, we based the
expected term on that of comparable companies. The assumptions
used to calculate the option and restricted stock awards granted
in 2010 are presented in Note 12 to the Consolidated
Financial Statements.
Insurance Accruals
— We retain selected levels
of property and casualty risks, primarily related to employee
health care, workers compensation claims and other casualty
losses. Many of these potential losses are covered under
conventional insurance programs with third-party carriers having
high deductible limits. In other areas, we are self-insured with
stop-loss coverage. Accrued liabilities for incurred but not
reported losses related to these retained risks are calculated
based upon loss development factors which contemplate a number
of variables, including claims history and expected trends.
These loss development factors are based on industry factors
and, along with the estimated liabilities, are developed by us
in consultation with external insurance brokers and actuaries.
At December 31, 2010 and 2009, we recorded accrued
liabilities related to these retained risks of $9.2 million
and $9.1 million, respectively, including both current and
long-term liabilities. Changes in loss development factors,
claims history and cost trends could result in substantially
different results in the future.
Employee Benefit Plan Costs
— We provide a
range of benefits to our employees, including pension and
postretirement benefits to our eligible employees and retirees.
We record annual amounts relating to these plans based on
calculations specified by generally accepted accounting
principles, which include various actuarial assumptions, such as
discount rates, assumed investment rates of return, compensation
increases, employee turnover rates and health care cost trend
rates. We review our actuarial assumptions on an annual basis
and make modifications to the assumptions based on current rates
and trends, when it is deemed appropriate. As required by
generally accepted accounting principles, the effect of the
modifications is generally recorded and amortized over future
periods. Different assumptions that we make could result in the
recognition of different amounts of expense over different
periods of time.
Our current asset mix guidelines, under our investment policy as
written by our Investment Committee, target equities at 55% to
65% of the portfolio and fixed income at 35% to 45%. At
December 31, 2010, our master trust was invested as
follows: equity securities of 62%; fixed income securities of
37%; and cash and cash equivalents of 1%.
We determine our expected long-term rate of return based on our
expectations of future returns for the pension plan’s
investments based on target allocations of the pension
plan’s investments. Additionally, we consider the
weighted-average return of a capital markets model and
historical returns on comparable equity, debt and other
investments. The resulting weighted average expected long-term
rate of return on plan assets is 7.60%.
While a number of the key assumptions related to our qualified
pension plans are long-term in nature, including assumed
investment rates of return, compensation increases, employee
turnover rates and mortality rates, generally accepted
accounting principles require that our discount rate assumption
be more heavily weighted to current market conditions. As such,
our discount rate will likely change more frequently. We used a
discount rate to determine our estimated future benefit
obligations of 5.25%, at December 31, 2010.
See Note 14 to our Consolidated Financial Statements for
more information regarding our employee pension and retirement
benefit plans.
38
Table of Contents
Recent
Accounting Pronouncements
Information regarding recent accounting pronouncements is
provided in Note 2 to the Consolidated Financial Statements.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest
Rate Fluctuations
The Company entered into a $200 million long term interest
rate swap agreement with an effective date of November 19,
2008 to lock into a fixed LIBOR interest rate base. Under the
terms of the agreement, $200 million in floating rate debt
was swapped for a fixed 2.9% interest base rate for a period of
24 months, amortizing to $50 million for an additional
nine months at the same 2.9% interest rate. As of
December 31, 2010 the swap amount is $50 million.
Under the terms of the Company’s revolving credit
agreement, and in conjunction with our credit spread, this will
result in an all in borrowing cost on the swapped principal of
$50 million being no more than 4.95% during the balance of
the swap agreement.
In July 2006, we entered into a forward interest rate swap
transaction for a notational amount of $100 million as a
hedge of the forecasted private placement of $100 million
in 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 the
Consolidated Balance Sheets. The total loss will be reclassified
ratably to the Consolidated Statements of Income as an increase
to interest expense over the term of the senior notes, providing
an effective interest rate of 6.29% over the terms of the senior
notes.
We do not utilize financial instruments for trading purposes or
hold any derivative financial instruments, other than our
interest rate swap agreements, foreign currency contracts and
commodity swap agreements as of December 31, 2010, which
could expose us to significant market risk. 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 which includes LIBOR and prime interest
rates. Based on our outstanding debt balance of
$472.6 million under our revolving credit facility, and
adjusting for the $50 million fixed rate swap agreement, as
of December 31, 2010, each 1% rise in our interest rate
would increase our interest expense by approximately
$4.2 million annually.
Input
Costs
The costs of raw materials, as well as packaging materials and
fuel, 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. We experienced increases in
certain costs such as metal caps, cans and lids and meat
products in 2010 compared to 2009, however, these increases were
more than offset by decreases in the cost of oils, casein and
plastic containers. In addition, fuel costs, which represent the
most important factor affecting utility costs at our production
facilities and our transportation costs, rose to unusually high
levels in the middle of 2008, but have decreased proportionately
to the general reduction in overall economic activity in 2009
and 2010. We expect the volatile nature of these cost to
continue with an overall upward trend.
The most important raw material used in our pickle operations is
cucumbers. We purchase cucumbers 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, which
would impair crop yields. If we are not able to buy cucumbers
from local suppliers, we would likely either purchase cucumbers
from foreign sources, such as Mexico or India, or ship cucumbers
from other growing areas in the United States, thereby
increasing our production costs.
Changes in the prices of our products may lag behind changes in
the costs of our materials. Competitive pressures also may limit
our ability to quickly raise prices in response to increased raw
materials, packaging and fuel costs. Accordingly, if we are
unable to increase our prices to offset increasing raw material,
packaging and fuel costs, our operating profits and margins
could be materially adversely 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.
39
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
The Consolidated Financial Statements for 2010 are included in
this report on the following pages:
| Page | ||||
| 41 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
40
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TreeHouse Foods, Inc.
Oak Brook, IL
We have audited the accompanying consolidated balance sheets of
TreeHouse Foods, Inc. and subsidiaries (the “Company”)
as of December 31, 2010 and 2009, and the related
consolidated statements of income, stockholders’ equity,
and cash flows for each of the three years in the period ended
December 31, 2010. Our audits also included the financial
statement schedule listed in the Index at Item 15. These
consolidated financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
TreeHouse Foods, Inc. and subsidiaries as of December 31,
2010 and 2009, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2010, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
December 31, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 14, 2011 expressed
an unqualified opinion on the Company’s internal control
over financial reporting.
DELOITTE &
TOUCHE LLP
Chicago, Illinois
February 14, 2011
41
Table of Contents
TREEHOUSE
FOODS, INC.
CONSOLIDATED
BALANCE SHEETS
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
(In thousands,
|
||||||||
| except per share data) | ||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 6,323 | $ | 4,415 | ||||
|
Receivables, net of allowance for doubtful accounts of $750 and
$424
|
126,644 | 86,557 | ||||||
|
Inventories, net
|
287,395 | 264,933 | ||||||
|
Deferred income taxes
|
3,499 | 3,397 | ||||||
|
Assets held for sale
|
4,081 | 4,081 | ||||||
|
Prepaid expenses and other current assets
|
12,861 | 7,269 | ||||||
|
Total current assets
|
440,803 | 370,652 | ||||||
|
Property, plant and equipment, net
|
386,191 | 276,033 | ||||||
|
Goodwill
|
1,076,321 | 575,007 | ||||||
|
Intangible assets, net
|
463,617 | 152,526 | ||||||
|
Other assets, net
|
24,316 | 10,210 | ||||||
|
Total assets
|
$ | 2,391,248 | $ | 1,384,428 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 202,384 | $ | 148,819 | ||||
|
Current portion of long-term debt
|
976 | 906 | ||||||
|
Total current liabilities
|
203,360 | 149,725 | ||||||
|
Long-term debt
|
976,452 | 401,640 | ||||||
|
Deferred income taxes
|
194,917 | 45,381 | ||||||
|
Other long-term liabilities
|
38,553 | 31,453 | ||||||
|
Total liabilities
|
1,413,282 | 628,199 | ||||||
|
Commitments and contingencies (Note 19)
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, par value $.01 per share, 10,000 shares
authorized, none issued
|
— | — | ||||||
|
Common stock, par value $.01 per share, 90,000 shares
authorized, 35,440 and 31,999 shares issued and
outstanding, respectively
|
354 | 320 | ||||||
|
Additional
paid-in-capital
|
703,465 | 587,598 | ||||||
|
Retained earnings
|
286,181 | 195,262 | ||||||
|
Accumulated other comprehensive loss
|
(12,034 | ) | (26,951 | ) | ||||
|
Total stockholders’ equity
|
977,966 | 756,229 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 2,391,248 | $ | 1,384,428 | ||||
See Notes to Consolidated Financial Statements.
42
Table of Contents
TREEHOUSE
FOODS, INC.
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except per share data) | ||||||||||||
|
Net sales
|
$ | 1,817,024 | $ | 1,511,653 | $ | 1,500,650 | ||||||
|
Cost of sales
|
1,385,690 | 1,185,283 | 1,208,626 | |||||||||
|
Gross profit
|
431,334 | 326,370 | 292,024 | |||||||||
|
Operating expenses:
|
||||||||||||
|
Selling and distribution
|
120,120 | 107,938 | 115,731 | |||||||||
|
General and administrative
|
107,126 | 80,466 | 61,741 | |||||||||
|
Amortization expense
|
26,352 | 13,381 | 13,528 | |||||||||
|
Other operating (income) expenses, net
|
1,183 | (6,224 | ) | 13,899 | ||||||||
|
Total operating expenses
|
254,781 | 195,561 | 204,899 | |||||||||
|
Operating income
|
176,553 | 130,809 | 87,125 | |||||||||
|
Other (income) expense:
|
||||||||||||
|
Interest expense
|
45,691 | 18,430 | 27,614 | |||||||||
|
Interest income
|
— | (45 | ) | (107 | ) | |||||||
|
(Gain) loss on foreign currency exchange
|
(1,574 | ) | (7,387 | ) | 13,040 | |||||||
|
Other (income) expense, net
|
(3,964 | ) | (2,263 | ) | 7,123 | |||||||
|
Total other expense
|
40,153 | 8,735 | 47,670 | |||||||||
|
Income from continuing operations, before income taxes
|
136,400 | 122,074 | 39,455 | |||||||||
|
Income taxes
|
45,481 | 40,760 | 10,895 | |||||||||
|
Income from continuing operations
|
90,919 | 81,314 | 28,560 | |||||||||
|
Loss from discontinued operations, net of tax
|
— | — | (336 | ) | ||||||||
|
Net income
|
$ | 90,919 | $ | 81,314 | $ | 28,224 | ||||||
|
Weighted average common shares:
|
||||||||||||
|
Basic
|
35,079 | 31,982 | 31,341 | |||||||||
|
Diluted
|
36,172 | 32,798 | 31,469 | |||||||||
|
Basic earnings per common share:
|
||||||||||||
|
Income from continuing operations
|
$ | 2.59 | $ | 2.54 | $ | .91 | ||||||
|
Loss from discontinued operations, net of tax
|
— | — | (.01 | ) | ||||||||
|
Net income
|
$ | 2.59 | $ | 2.54 | $ | .90 | ||||||
|
Diluted earnings per common share:
|
||||||||||||
|
Income from continuing operations
|
$ | 2.51 | $ | 2.48 | $ | .91 | ||||||
|
Loss from discontinued operations, net of tax
|
— | — | (.01 | ) | ||||||||
|
Net income
|
$ | 2.51 | $ | 2.48 | $ | .90 | ||||||
See Notes to Consolidated Financial Statements.
43
Table of Contents
TREEHOUSE
FOODS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||
| Common Stock |
Paid-In
|
Retained
|
Comprehensive
|
Stockholders’
|
||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Loss | Equity | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Balance, January 1, 2008
|
31,204 | $ | 312 | $ | 550,370 | $ | 85,724 | $ | (7,097 | ) | $ | 629,309 | ||||||||||||
|
Net income
|
— | — | — | 28,224 | — | 28,224 | ||||||||||||||||||
|
Pension & post-retirement liability adjustment, net of
tax of $4,070
|
— | — | — | — | (6,261 | ) | (6,261 | ) | ||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | (50,198 | ) | (50,198 | ) | ||||||||||||||||
|
Amortization of loss on derivatives, net of tax of $101
|
— | — | — | — | 162 | 162 | ||||||||||||||||||
|
Comprehensive loss
|
— | — | — | — | — | (28,073 | ) | |||||||||||||||||
|
Stock options exercised, including tax benefit of $1,356
|
341 | 3 | 6,787 | — | — | 6,790 | ||||||||||||||||||
|
Stock options forfeited
|
— | — | (88 | ) | — | — | (88 | ) | ||||||||||||||||
|
Stock-based compensation
|
— | — | 12,193 | — | — | 12,193 | ||||||||||||||||||
|
Balance, December 31, 2008
|
31,545 | 315 | 569,262 | 113,948 | (63,394 | ) | 620,131 | |||||||||||||||||
|
Net income
|
— | — | — | 81,314 | — | 81,314 | ||||||||||||||||||
|
Pension & post-retirement liability adjustment, net of
tax of $384
|
— | — | — | — | 604 | 604 | ||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | 35,678 | 35,678 | ||||||||||||||||||
|
Amortization of loss on derivatives, net of tax of $101
|
— | — | — | — | 161 | 161 | ||||||||||||||||||
|
Comprehensive income
|
— | — | — | — | — | 117,757 | ||||||||||||||||||
|
Stock options exercised, including tax benefit of $731
|
454 | 5 | 5,092 | — | — | 5,097 | ||||||||||||||||||
|
Stock options forfeited
|
— | — | (59 | ) | — | — | (59 | ) | ||||||||||||||||
|
Stock-based compensation
|
— | — | 13,303 | — | — | 13,303 | ||||||||||||||||||
|
Balance, December 31, 2009
|
31,999 | 320 | 587,598 | 195,262 | (26,951 | ) | 756,229 | |||||||||||||||||
|
Net income
|
— | — | — | 90,919 | — | 90,919 | ||||||||||||||||||
|
Pension & post-retirement liability adjustment, net of
tax benefit of $107
|
— | — | — | — | (172 | ) | (172 | ) | ||||||||||||||||
|
Post retirement curtailment, net of tax of $539
|
— | — | — | — | 862 | 862 | ||||||||||||||||||
|
Foreign currency translation adjustment
|
— | — | — | — | 14,066 | 14,066 | ||||||||||||||||||
|
Amortization of loss on derivatives, net of tax of $101
|
— | — | — | — | 161 | 161 | ||||||||||||||||||
|
Comprehensive income
|
— | — | — | — | — | 105,836 | ||||||||||||||||||
|
Shares issued
|
2,703 | 27 | 110,661 | — | — | 110,688 | ||||||||||||||||||
|
Equity awards exercised, including tax deficiency of $276
|
738 | 7 | (11,013 | ) | — | — | (11,006 | ) | ||||||||||||||||
|
Stock-based compensation
|
— | — | 16,219 | — | — | 16,219 | ||||||||||||||||||
|
Balance, December 31, 2010
|
35,440 | $ | 354 | $ | 703,465 | $ | 286,181 | $ | (12,034 | ) | $ | 977,966 | ||||||||||||
See Notes to Consolidated Financial Statements.
44
Table of Contents
TREEHOUSE
FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 90,919 | $ | 81,314 | $ | 28,224 | ||||||
|
Loss from discontinued operations
|
— | — | 336 | |||||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Depreciation
|
43,426 | 33,962 | 32,326 | |||||||||
|
Amortization
|
26,352 | 13,381 | 13,528 | |||||||||
|
Stock-based compensation
|
15,838 | 13,303 | 12,193 | |||||||||
|
(Gain) loss on foreign currency exchange, intercompany note
|
1,469 | (4,932 | ) | 9,034 | ||||||||
|
Mark to market (gain) loss on derivative contracts
|
(4,363 | ) | (2,104 | ) | 6,981 | |||||||
|
(Gain) loss on disposition of assets
|
3,159 | (11,885 | ) | (469 | ) | |||||||
|
Write-down of impaired intangible assets
|
— | 7,600 | 560 | |||||||||
|
Write-down of impaired tangible assets
|
— | — | 5,431 | |||||||||
|
Deferred income taxes
|
9,199 | 18,596 | 5,314 | |||||||||
|
Excess tax benefits from stock-based compensation
|
(5,732 | ) | (169 | ) | (377 | ) | ||||||
|
Curtailment of postretirement benefit obligations
|
(2,357 | ) | — | — | ||||||||
|
Other
|
161 | 161 | 137 | |||||||||
|
Changes in operating assets and liabilities, net of acquisitions:
|
||||||||||||
|
Receivables
|
6,161 | 3,739 | (14,395 | ) | ||||||||
|
Inventories
|
34,318 | (14,062 | ) | 43,396 | ||||||||
|
Prepaid expenses and other assets
|
225 | (647 | ) | (2,063 | ) | |||||||
|
Accounts payable, accrued expenses and other liabilities
|
25,876 | (33,413 | ) | 35,490 | ||||||||
|
Net cash provided by continuing operations
|
244,651 | 104,844 | 175,646 | |||||||||
|
Net cash used in discontinued operations
|
— | — | (10 | ) | ||||||||
|
Net cash provided by operating activities
|
244,651 | 104,844 | 175,636 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Additions to property, plant and equipment
|
(39,543 | ) | (36,987 | ) | (55,471 | ) | ||||||
|
Additions to intangible assets
|
(22,110 | ) | — | — | ||||||||
|
Insurance proceeds
|
— | 2,863 | 12,047 | |||||||||
|
Cash outflows for acquisitions, less cash acquired
|
(844,496 | ) | — | (251 | ) | |||||||
|
Proceeds from sale of fixed assets
|
43 | 6 | 1,679 | |||||||||
|
Net cash used in continuing operations
|
(906,106 | ) | (34,118 | ) | (41,996 | ) | ||||||
|
Net cash provided by discontinued operations
|
— | — | 157 | |||||||||
|
Net cash used in investing activities
|
(906,106 | ) | (34,118 | ) | (41,839 | ) | ||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from issuance of debt
|
400,000 | — | — | |||||||||
|
Borrowings under revolving credit agreement
|
512,000 | 284,200 | 263,000 | |||||||||
|
Payments under revolving credit agreement
|
(337,600 | ) | (358,000 | ) | (402,500 | ) | ||||||
|
Payments on capitalized lease obligations
|
(1,010 | ) | (684 | ) | (6,037 | ) | ||||||
|
Payments of deferred financing costs
|
(16,418 | ) | — | — | ||||||||
|
Excess tax benefits from stock-based compensation
|
5,732 | 169 | 377 | |||||||||
|
Cash used for taxes upon settlement of equity awards
|
(15,370 | ) | (336 | ) | — | |||||||
|
Issuance of common stock, net of expenses
|
110,688 | — | — | |||||||||
|
Proceeds from stock option exercises
|
4,599 | 4,926 | 5,434 | |||||||||
|
Net cash provided by (used in) financing activities
|
662,621 | (69,725 | ) | (139,726 | ) | |||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
742 | 727 | (614 | ) | ||||||||
|
Increase (decrease) in cash and cash equivalents
|
1,908 | 1,728 | (6,543 | ) | ||||||||
|
Cash and cash equivalents, beginning of year
|
4,415 | 2,687 | 9,230 | |||||||||
|
Cash and cash equivalents, end of year
|
$ | 6,323 | $ | 4,415 | $ | 2,687 | ||||||
See Notes to Consolidated Financial Statements.
45
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Years
ended December 31, 2010, 2009 and 2008)
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Consolidation
— The Consolidated
Financial Statements include the accounts of TreeHouse Foods,
Inc. and its wholly owned subsidiaries (“Company,”
“we,” “us,” or “our”). All
intercompany balances and transactions are eliminated in
consolidation. Certain prior year amounts have been reclassified
to conform to the current period presentation, primarily to
present borrowings and payments under our line of credit on a
gross versus net basis. These reclassifications had no effect on
reported net income, total assets or net cash flows.
Use of Estimates
— The preparation of our
Consolidated Financial Statements in conformity with generally
accepted accounting principles (“GAAP”) requires
management to use 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 Consolidated Financial Statements and the reported amounts
of net sales and expenses during the reporting period. Actual
results could differ from these estimates.
Cash Equivalents
— We consider temporary cash
investments with an original maturity of three months or less to
be cash equivalents.
Inventories
— Inventories are stated at the
lower of cost or market. Pickle inventories are valued using the
last-in,
first-out (“LIFO”) method, while all of our other
inventories are valued using the
first-in,
first-out (“FIFO”) method. The costs of finished goods
inventories include raw materials, labor and overhead costs.
Property, Plant and Equipment
— Property, plant
and equipment are stated at acquisition cost, plus capitalized
interest on borrowings during the actual construction period of
major capital projects. Depreciation and amortization are
calculated using the straight-line method over the estimated
useful lives of the assets as follows:
|
Asset
|
Useful Life
|
|
|
Buildings and improvements:
|
||
|
Improvements and previously existing structures
|
10 to 20 years | |
|
New structures
|
40 years | |
|
Machinery and equipment:
|
||
|
Manufacturing plant equipment
|
5 to 20 years | |
|
Transportation equipment
|
3 to 8 years | |
|
Office equipment
|
3 to 10 years |
We perform impairment tests when circumstances indicate that the
carrying value may not be recoverable. Capitalized leases are
amortized over the shorter of their lease term or their
estimated useful lives, and amortization expense is included in
depreciation expense. Expenditures for repairs and maintenance,
which do not improve or extend the life of the assets, are
expensed as incurred.
Intangible and Other Assets
— Identifiable
intangible assets with finite lives are amortized over their
estimated useful lives as follows:
|
Asset
|
Useful Life
|
|
|
Customer relationships
|
Straight-line method over 5 to 20 years | |
|
Trademarks/trade names
|
Straight-line method over 10 to 20 years | |
|
Non-competition agreements
|
Straight-line method over the terms of the agreements | |
|
Deferred financing costs
|
Straight-line method over the terms of the related debt | |
|
Formulas/recipes
|
Straight-line method over 5 to 7 years | |
|
Computer software
|
Straight-line method over 2 to 7 years |
Indefinite lived trademarks are evaluated for impairment
annually in the fourth quarter or more frequently, if events or
changes in circumstances indicate that the asset might be
impaired. Indefinite lived trademarks
46
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
impairment is indicated when their book value exceeds fair
value. If the fair value of an evaluated asset is less than its
book value, the asset is written down to fair value, which is
generally based on its discounted future cash flows.
Goodwill is evaluated annually in the fourth quarter or more
frequently, if events or changes in circumstances require an
interim assessment. We assess goodwill for impairment at the
reporting unit level using a market and income approach,
employing significant assumptions regarding growth, discount
rates, and profitability at each reporting unit.
Stock-Based Compensation
— We measure
compensation expense for our equity awards at their grant date
fair value. The resulting expense is recognized over the
relevant service period.
Sales Recognition and Accounts Receivable
—
Sales are recognized when persuasive evidence of an arrangement
exists, the price is fixed or determinable, title and risk of
loss transfer to customers and there is a reasonable assurance
of collection of the sales proceeds. Product is shipped FOB
shipping point and FOB destination, depending on our agreement
with the customer. Sales are reduced by certain sales
incentives, some of which are recorded by estimating expense
based on our historical experience. We provide credit terms to
customers ranging up to 30 days, perform ongoing credit
evaluation of our customers and maintain allowances for
potential credit losses based on historical experience. Customer
balances are written off after all collection efforts are
exhausted. Estimated product returns, which have not been
material, are deducted from sales at the time of shipment.
Income Taxes
— The provision for income taxes
includes federal, foreign, state and local income taxes
currently payable and those deferred because of temporary
differences between the financial statement and tax bases of
assets and liabilities. Deferred tax assets or liabilities are
computed based on the difference between the financial statement
and income tax bases of assets and liabilities using enacted tax
rates. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will
not be realized. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to
period.
Foreign Currency Translation and Transactions
—
The functional currency of the Company’s foreign operations
is the applicable local currency. The functional currency is
translated into U.S. dollars for balance sheet accounts
using currency exchange rates in effect as of the balance sheet
date and for revenue and expense accounts using a
weighted-average exchange rate during the fiscal year. The
translation adjustments are deferred as a separate component of
stockholders’ equity, captioned accumulated other
comprehensive loss. Gains or losses resulting from transactions
denominated in foreign currencies are included in Other (income)
expense, in the Consolidated Statements of Income.
Shipping and Handling Fees
— Our shipping and
handling costs are included in both cost of sales and selling
and distribution expense, depending on the nature of such costs.
Shipping and handling costs included in cost of sales reflect
inventory warehouse costs, product loading and handling costs,
and costs associated with transporting finished products from
our manufacturing facilities to distribution warehouses.
Shipping and handling costs included in selling and distribution
expense consist primarily of the cost of shipping products to
customers through third party carriers. Shipping and handling
costs recorded as a component of selling and distribution
expense were approximately $53.6 million,
$46.5 million and $60.2 million, for years ended 2010,
2009 and 2008, respectively.
Derivative Financial Instruments
— From time to
time, we utilize derivative financial instruments including
interest rate and commodity swaps, foreign currency contracts
and forward purchase contracts to manage our exposure to
interest rate, foreign currency and commodity price risks. We do
not hold or issue financial instruments for speculative or
trading purposes. The Company accounts for its derivative
instruments as either assets or liabilities and carries them at
fair value. Derivatives that are not designated as hedges
according to GAAP must be adjusted to fair value through
earnings. For derivative instruments that are designated as cash
flow hedges, the effective portion of the gain or loss is
reported as accumulated other comprehensive income and
reclassified into earnings in the same period when the hedged
transaction affects
47
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
earnings. The ineffective gain or loss is recognized in current
earnings. For further information about our derivative
instruments see Note 20.
Capital Lease Obligations
— Capital lease
obligations represent machinery and equipment financing
obligations, which are payable in monthly installments of
principal and interest and are collateralized by the related
assets financed.
Insurance Accruals
— We retain selected levels
of property and casualty risks, primarily related to employee
health care, workers’ compensation claims and other
casualty losses. Many of these potential losses are covered
under conventional insurance programs with third party carriers
having high deductible limits. In other areas, we are
self-insured with stop-loss coverage. Accrued liabilities for
incurred but not reported losses related to these retained risks
are calculated based upon loss development factors which
contemplate a number of factors, including claims history and
expected trends. These accruals are developed by us in
consultation with external insurance brokers and actuaries.
Facility Closing and Reorganization Costs
— We
periodically record facility closing and reorganization charges,
when we have identified a facility for closure or other
reorganization opportunity, developed a plan and notified the
affected employees.
Research and Development Costs
— We record
research and development charges to expense as they are
incurred. The expenditures totaled $10.5 million,
$8.3 million and $6.9 million, for years ended 2010,
2009 and 2008, respectively.
Advertising Costs
— Advertising costs are
expensed as incurred and reported in the selling and
distribution line of our Consolidated Statements of Income.
| 2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
In January 2010, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”)
No. 2010-06,
Fair Value Measurements and Disclosures
(“ASU
2010-06”)
to provide additional guidance on fair value disclosures. ASU
2010-06
requires new disclosures about transfers in and out of
Level 1 and 2, and requires that the activity in
Level 3 disclosures be presented on a gross basis rather
than as a net number. The ASU also clarifies existing
disclosures about the level of disaggregation and information on
inputs and valuation techniques, and includes confirming
amendments to the guidance on employers’ disclosures about
postretirement benefit plan assets. ASU
2010-06
is
effective for interim and annual reporting periods beginning
after December 15, 2009. The Company adopted the provisions
of this ASU effective January 1, 2010, and the adoption did
not significantly impact the Company’s Condensed
Consolidated Financial Statements.
In December 2010, the FASB issued ASU
No. 2010-28,
When to Perform Step 2 of the Goodwill Impairment Test for
Reporting Units with Zero or Negative Carrying Amounts
to
modify Step 1 of the goodwill impairment test; requiring
companies with reporting units with zero or negative carrying
amounts to perform Step 2 of the goodwill impairment analysis if
it is more likely than not that a goodwill impairment exists.
This guidance is effective for fiscal years beginning after
December 15, 2010. Early adoption is not permitted. This
guidance is not expected to impact the Company.
In December 2010, the FASB issued ASU
No. 2010-29,
Disclosure of Supplementary Pro Forma Information for
Business Combinations
to specify that if a company presents
comparative financial statements, it should disclose revenue and
earnings of the combined entity as though the business
combination that occurred during the current period, occurred at
the beginning of the comparable prior annual reporting period
only. This guidance is effective prospectively for business
combinations for which the acquisition date in, on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2010. Early adoption is permitted. We
will adopt this guidance prospectively beginning January 1,
2011. It is not expected to have a significant impact on the
Company.
48
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 3. | FACILITY CLOSINGS |
On February 13, 2008, the Company announced plans to close
its pickle plant in Portland, Oregon. The Portland plant was the
Company’s highest cost and least utilized pickle facility.
Operations in the plant ceased during the second quarter of
2008. For the twelve months ended December 31, 2010 and
2009, the Company recorded costs of $0.6 million and
$0.9 million, respectively, that are included in Other
operating (income) expense in our Consolidated Statements of
Income. There are no accrued expenses related to this closure as
of December 31, 2010 and 2009, and insignificant accrued
expenses as of December 31, 2008. In connection with the
Portland closure, the Company has $4.1 million of assets
held for sale, which are primarily land and buildings. The
Company will continue to incur executory costs for this facility
until it is sold. Those costs total approximately
$0.8 million per year.
On November 3, 2008, the Company announced plans to close
its salad dressings manufacturing plant in Cambridge, Ontario.
Manufacturing operations in Cambridge ceased at the end of June
2009. Production has been transitioned to the Company’s
other manufacturing facilities in Canada and the United States.
The change results in the Company’s production capabilities
being more aligned with the needs of our customers. The majority
of the closure costs were included as costs of the acquisition
of E.D. Smith and did not significantly impact earnings. Total
costs are expected to be approximately $2.3 million,
including severance costs of $1.1 million, and other costs
of $1.2 million. As of December 31, 2010, the Company
had insignificant accruals remaining. Severance payments during
the twelve months ended December 31, 2010 and 2009 were
approximately $62 thousand, and $0.9 million, respectively.
| 4. | ACQUISITIONS |
On October 28, 2010, the Company acquired all of the
outstanding securities of STSF Holdings, Inc.
(“Holdings”) for approximately $180 million in
cash (subject to adjustment) plus up to an additional
$15 million in cash (“earn out”) if S.T.
Specialty Foods, Inc. (“S.T. Foods”) achieved certain
earnings targets for the twelve month period ending
December 31, 2010. The earnings targets were not met;
therefore, no additional payment will be required. The
acquisition was funded by the Company’s revolving credit
facility. S.T. Foods, a wholly owned subsidiary of Holdings, has
annual net sales of approximately $100 million and is a
manufacturer of private label macaroni and cheese, skillet
dinners and other value-added side dishes. The acquisition added
additional categories to our product portfolio for the retail
grocery channel.
The acquisition is being accounted for under the purchase method
of accounting and the results of operations are included in our
financial statements from the date of acquisition and are
included in the North American Retail Grocery segment. S.T.
Foods contributed $17.1 million to net sales and
$1.5 million in net income since the October 28, 2010
acquisition date through December 31, 2010. At the date of
acquisition, the purchase price was allocated to the assets
acquired and liabilities assumed based upon estimated fair
market value, no value was assigned to the earn out. The
Company’s purchase price allocation set forth below is
preliminary and subject to tax adjustments that are expected to
be completed during 2011. Adjustments may impact taxes, goodwill
and other assets and liabilities.
| (In thousands) | ||||
|
Receivables
|
$ | 6,183 | ||
|
Inventory
|
7,557 | |||
|
Property plant and equipment
|
26,400 | |||
|
Customer relationships
|
58,715 | |||
|
Other intangible assets
|
257 | |||
|
Deferred taxes
|
343 | |||
|
Other assets
|
177 | |||
|
Goodwill
|
117,193 | |||
|
Total assets acquired
|
216,825 | |||
49
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (In thousands) | ||||
|
Accounts payable and accruals
|
(6,921 | ) | ||
|
Deferred taxes
|
(30,063 | ) | ||
|
Total liabilities assumed
|
(36,984 | ) | ||
|
Total purchase price
|
$ | 179,841 | ||
The Company allocated $58.7 million to customer
relationships that have an estimated life of twenty years. Other
intangible assets consist of capitalized computer software that
is being amortized over two years. The Company increased the
cost of acquired inventories by approximately $0.8 million,
and expensed the amount as a component of cost of sales in the
fourth quarter of 2010. The Company has allocated all of the
goodwill ($117.2 million) to the North American Retail
Grocery segment. No goodwill is expected to be deductible for
tax purposes. Goodwill arises principally as a result of
expansion opportunities and employed workforce. The Company
incurred approximately $2.4 million in acquisition related
costs for the S.T. Foods acquisition that are included in the
General and administrative expense line on the Condensed
Consolidated Statements of Income.
On March 2, 2010, the Company acquired Sturm Foods, Inc.
(“Sturm”), a private label manufacturer of hot cereal
and powdered soft drink mixes that serves retail and foodservice
customers in the United States with annual sales of
approximately $340 million. The acquisition of Sturm has
strengthened the Company’s presence in private label dry
grocery categories.
The Company paid a cash purchase price of $664.7 million,
before adjusting for a $3.3 million working capital
adjustment to reduce the purchase price, for 100% of the issued
and outstanding stock of Sturm. The $3.3 million working
capital adjustment is recorded in the Receivables, net line of
our Condensed Consolidated Balance Sheets as of
December 31, 2010. The transaction was financed through the
issuance of $400 million in high yield notes, the issuance
of 2.7 million shares of Company common stock at $43.00 per
share and borrowings under the Company’s credit facility.
The acquisition is being accounted for under the purchase method
of accounting and the results of operations are included in our
financial statements from the date of acquisition and are
included in each of our segments. Sturm contributed
$275.2 million to net sales and $27.8 million in net
income since the March 2, 2010 acquisition date through
December 31, 2010. At the date of acquisition, the purchase
price was allocated to the assets acquired and liabilities
assumed based upon estimated fair market values. The
Company’s purchase price allocation set forth below is
preliminary and subject to tax adjustments that are expected to
be completed by March 2, 2011. Adjustments may impact the
total purchase price, deferred taxes and goodwill.
| (In thousands) | ||||
|
Receivables
|
$ | 35,774 | ||
|
Inventory
|
47,525 | |||
|
Property plant and equipment
|
86,106 | |||
|
Customer relationships
|
229,000 | |||
|
Trade name
|
10,000 | |||
|
Formulas
|
5,000 | |||
|
Other intangible assets
|
5,835 | |||
|
Other assets
|
3,813 | |||
|
Goodwill
|
379,804 | |||
|
Total assets acquired
|
802,857 | |||
50
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (In thousands) | ||||
|
Accounts payable and accruals
|
(34,207 | ) | ||
|
Other long-term liabilities
|
(4,518 | ) | ||
|
Deferred taxes
|
(102,805 | ) | ||
|
Total liabilities assumed
|
(141,530 | ) | ||
|
Total purchase price
|
$ | 661,327 | ||
The Company allocated $229.0 million to customer
relationships that have an estimated life of twenty years. The
acquired trade name will be amortized over fifteen years.
Formulas have an estimated useful life of five years. Other
intangible assets consist of capitalized computer software that
is being amortized over three years. The Company increased the
cost of acquired inventories by approximately $6.2 million,
and expensed that amount as a component of cost of sales through
the second quarter of 2010. The Company has allocated
$373.6 million of goodwill to the North American Retail
Grocery segment and $6.2 million of goodwill to the Food
Away From Home segment. No goodwill is expected to be deductible
for tax purposes. Goodwill arises principally as a result of
expansion opportunities, employed workforce, and the impact of
Sturm’s first mover advantage. The Company incurred
approximately $5.4 million in acquisition related costs
related to the Sturm acquisition during the twelve months ended
December 31, 2010. These costs are included in the General
and administrative expense line on the Condensed Consolidated
Statements of Income. In connection with the issuance of debt
and equity to finance the acquisition, the Company incurred
approximately $10.8 million in debt issue costs that were
capitalized and are amortized over the term of the debt on a
straight line basis, and are included as a component of interest
expense. The Company also incurred approximately
$5.5 million of stock issuance costs, that reduced the
proceeds and were recorded as a component of additional paid in
capital.
The following unaudited pro forma information shows the results
of operations for the Company as if the 2010 acquisitions of
Sturm and S.T. Foods had been completed as of the beginning of
each period presented. Adjustments have been made for the pro
forma effects of amortization of intangible assets recognized as
part of the business combination, interest expense related to
the financing of the business combinations, and related income
taxes. These pro forma results may not necessarily reflect the
actual results of operations that would have been achieved, nor
are they necessarily indicative of future results of operations.
|
Year Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
(In thousands,
|
||||||||
| except per share data) | ||||||||
|
Pro forma net sales
|
$ | 1,961,567 | $ | 1,954,568 | ||||
|
Pro forma net income
|
$ | 100,551 | $ | 104,679 | ||||
|
Pro forma basic earnings per common share
|
$ | 2.87 | $ | 3.02 | ||||
|
Pro forma diluted earnings per common share
|
$ | 2.78 | $ | 2.95 | ||||
51
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 5. | INVENTORIES |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Raw materials and supplies
|
$ | 111,376 | $ | 86,223 | ||||
|
Finished goods
|
194,558 | 197,539 | ||||||
|
LIFO reserve
|
(18,539 | ) | (18,829 | ) | ||||
|
Total inventories
|
$ | 287,395 | $ | 264,933 | ||||
The increase in inventories from December 31, 2009 to 2010
is primarily due to the Sturm and S.T. Foods acquisitions.
Excluding the effect of the Sturm and S.T. Foods acquisitions,
inventory levels decreased by $30.9 million.
Approximately $84.8 million and $98.7 million of our
inventory was accounted for under the LIFO method of accounting
at December 31, 2010 and 2009, respectively. The LIFO
reserve reflects the excess of the current cost of LIFO
inventories at December 31, 2010 and 2009, over the amount
at which these inventories were valued on the consolidated
balance sheets.
| 6. | PROPERTY, PLANT AND EQUIPMENT |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Land
|
$ | 15,851 | $ | 11,335 | ||||
|
Buildings and improvements
|
148,616 | 99,856 | ||||||
|
Machinery and equipment
|
390,907 | 310,265 | ||||||
|
Construction in progress
|
21,067 | 6,778 | ||||||
|
Total
|
576,441 | 428,234 | ||||||
|
Less accumulated depreciation
|
(190,250 | ) | (152,201 | ) | ||||
|
Property, plant and equipment, net
|
$ | 386,191 | $ | 276,033 | ||||
The increase in net property, plant and equipment from
December 31, 2009 to 2010 is primarily due to the Sturm and
S.T. Foods acquisitions. Excluding the effect of the Sturm and
S.T. Foods acquisitions, net property, plant and equipment
decreased by $1.9 million.
Accumulated depreciation includes the amortization of
capitalized leases.
Depreciation expense for years ended December 31, 2010,
2009 and 2008 was $43.4 million, $34.0 million and
$32.3 million, respectively.
52
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 7. | GOODWILL AND INTANGIBLE ASSETS |
The changes in the carrying amount of goodwill for the years
ended December 31, 2010 and 2009, are as follows:
|
North American
|
Food Away
|
Industrial
|
||||||||||||||
| Retail Grocery | From Home | and Export | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Balance at December 31, 2008
|
$ | 343,651 | $ | 83,641 | $ | 133,582 | $ | 560,874 | ||||||||
|
Reversal of certain reserves related to the consolidation of
operations expected at the time of the acquisition of E.D. Smith
|
(4,914 | ) | — | — | (4,914 | ) | ||||||||||
|
Foreign currency exchange adjustment
|
17,188 | 1,859 | — | 19,047 | ||||||||||||
|
Balance at December 31, 2009
|
355,925 | 85,500 | 133,582 | 575,007 | ||||||||||||
|
Acquisitions
|
493,489 | 6,232 | — | 499,721 | ||||||||||||
|
Purchase price adjustment
|
(3,640 | ) | (100 | ) | — | (3,740 | ) | |||||||||
|
Foreign currency exchange adjustment
|
4,819 | 514 | — | 5,333 | ||||||||||||
|
Balance at December 31, 2010
|
$ | 850,593 | $ | 92,146 | $ | 133,582 | $ | 1,076,321 | ||||||||
The Company has not incurred any goodwill impairments since its
inception.
Approximately $273.2 million of goodwill is deductible for
tax purposes.
The gross carrying amount and accumulated amortization of our
intangible assets other than goodwill as of December 31,
2010 and 2009 are as follows:
| December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
Intangible assets with indefinite lives:
|
||||||||||||||||||||||||
|
Trademarks
|
$ | 32,673 | $ | — | $ | 32,673 | $ | 31,422 | $ | — | $ | 31,422 | ||||||||||||
|
Intangible assets with finite lives:
|
||||||||||||||||||||||||
|
Customer-related
|
445,578 | (57,480 | ) | 388,098 | 147,346 | (35,400 | ) | 111,946 | ||||||||||||||||
|
Non-compete agreements
|
1,000 | (967 | ) | 33 | 2,620 | (2,162 | ) | 458 | ||||||||||||||||
|
Trademarks
|
20,010 | (3,393 | ) | 16,617 | 10,010 | (2,311 | ) | 7,699 | ||||||||||||||||
|
Formulas/recipes
|
6,825 | (1,972 | ) | 4,853 | 1,762 | (761 | ) | 1,001 | ||||||||||||||||
|
Computer software
|
26,007 | (4,664 | ) | 21,343 | — | — | — | |||||||||||||||||
|
Total other intangibles
|
$ | 532,093 | $ | (68,476 | ) | $ | 463,617 | $ | 193,160 | $ | (40,634 | ) | $ | 152,526 | ||||||||||
As of December 31, 2010, the weighted average remaining
useful life for the amortizable intangible assets are
(1) customer related at 16.8 years,
(2) non-compete agreements at 0.2 years,
(3) trademarks at 14.5 years,
(4) formulas/recipes at 3.9 years, and
(5) computer software at 6.1 years. The weighted
average remaining useful life in total for all amortizable
intangible assets is 16.1 years as of December 31,
2010.
53
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense on intangible assets was
$26.4 million, $13.4 million and $13.5 million,
for the years ended December 31, 2010, 2009 and 2008,
respectively. Estimated intangible asset amortization expense
for the next five years is as follows:
| (In thousands) | ||||
|
2011
|
$ | 32,401 | ||
|
2012
|
$ | 32,048 | ||
|
2013
|
$ | 29,877 | ||
|
2014
|
$ | 29,541 | ||
|
2015
|
$ | 28,593 | ||
Indefinite lived trademarks and goodwill are evaluated for
impairment annually in the fourth quarter or more frequently, if
events or changes in circumstances indicate that the asset might
be impaired. Indefinite lived trademarks are impaired and
goodwill impairment is indicated when their book value exceeds
fair value. If the fair value of an evaluated asset is less than
its book value, the asset is written down to fair value, which
is generally based on its discounted future cash flows.
Amortizable intangible assets are evaluated for impairment
whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If an evaluation of the
undiscounted cash flows indicates impairment, the asset is
written down to its estimated fair value, which is generally
based on discounted future cash flows.
Our 2010 impairment review, using a discounted cash flow
analysis, resulted in no impairment.
Our 2009 impairment review, using a discounted cash flow
analysis, resulted in the impairment of the
Nature’s
Goodness
®
amortizable infant feeding trademark as we focused on our
private label opportunities in retail baby food. The remaining
balance of approximately $7.6 million was written off as of
December 31, 2009 and is included in Other operating
(income) expense in our Consolidated Statements of Income.
Nature’s
Goodness
®
was a part of the North American Retail Grocery segment. The
circumstances resulting in the full impairment of the remaining
value occurred during the fourth quarter of 2009. During 2010,
we exited the retail infant business which included the
Natures
Goodness
®
brand. No other impairment was identified during our 2009
analysis.
During our 2008 impairment review, we determined that the
Steinfeld’s
®
pickle trademark,
Nature’s
Goodness
®
infant feeding trademark and
San Antonio
Farms
®
salsa trademarks can no longer be classified as indefinite
lived, and we began amortizing their remaining balance over
their expected remaining useful life of 10, 20 and
10 years, respectively, in 2009. Our review resulted in an
impairment expense of approximately $0.6 million related to
our
San Antonio
Farms
®
trademark and is recorded within the Other operating (income)
expense line of our Consolidated Statements of Income, and
pertains to the North American Retail Grocery segment.
Considerable management judgment is necessary to evaluate the
impact of operating changes and to estimate future cash flows.
Assumptions used in our impairment evaluations, such as
forecasted growth rates and our cost of capital, are consistent
with our internal projections and operating plans.
54
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 8. | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Accounts payable
|
$ | 112,638 | $ | 79,438 | ||||
|
Payroll and benefits
|
33,730 | 29,921 | ||||||
|
Interest and taxes
|
21,019 | 12,015 | ||||||
|
Health insurance, workers’ compensation and other insurance
costs
|
4,855 | 4,837 | ||||||
|
Marketing expenses
|
10,165 | 10,558 | ||||||
|
Other accrued liabilities
|
19,977 | 12,050 | ||||||
|
Total
|
$ | 202,384 | $ | 148,819 | ||||
The increase in accounts payable from December 31, 2009 to
2010 is primarily due to the Sturm and S.T. Foods acquisitions.
Excluding the effect of the Sturm and S.T. Foods acquisitions,
accounts payable and accrued expenses decreased by
$12.7 million.
| 9. | INCOME TAXES |
Components of Income from continuing operations, before income
taxes are as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Domestic source
|
$ | 120,461 | $ | 125,413 | $ | 35,966 | ||||||
|
Foreign source
|
15,939 | (3,339 | ) | 3,489 | ||||||||
|
Income from continuing operations, before income tax
|
$ | 136,400 | $ | 122,074 | $ | 39,455 | ||||||
The following table presents the components of the 2010, 2009
and 2008 provision for income taxes:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008(1) | ||||||||||
| (In thousands) | ||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 26,958 | $ | 20,654 | $ | 3,858 | ||||||
|
State
|
4,473 | 4,101 | 1,546 | |||||||||
|
Foreign
|
4,851 | (2,591 | ) | 177 | ||||||||
|
Total current
|
36,282 | 22,164 | 5,581 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
8,239 | 13,577 | 3,665 | |||||||||
|
State
|
1,250 | 1,956 | 350 | |||||||||
|
Foreign
|
(290 | ) | 3,063 | 1,299 | ||||||||
|
Total deferred
|
9,199 | 18,596 | 5,314 | |||||||||
|
Total income tax expense
|
$ | 45,481 | $ | 40,760 | $ | 10,895 | ||||||
| (1) | Excludes, $(0.2) million income tax benefit related to discontinued operations in 2008. |
55
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a reconciliation of income tax expense computed
at the U.S. federal statutory tax rate to the income tax
expense reported in the Consolidated Statements of Income:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Tax at statutory rate
|
$ | 47,740 | $ | 42,726 | $ | 13,809 | ||||||
|
State income taxes
|
3,720 | 3,937 | 1,233 | |||||||||
|
Tax benefit of cross-border intercompany financing structure
|
(5,053 | ) | (4,831 | ) | (4,762 | ) | ||||||
|
Reduction of enacted tax rates on deferred tax liabilities
(Canada)
|
— | (2,155 | ) | — | ||||||||
|
Transaction costs
|
1,149 | — | — | |||||||||
|
Other, net
|
(2,075 | ) | 1,083 | 615 | ||||||||
|
Total provision for income taxes
|
$ | 45,481 | $ | 40,760 | $ | 10,895 | ||||||
The tax effects of temporary differences giving rise to deferred
income tax assets and liabilities were:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Deferred tax assets:
|
||||||||
|
Pension and postretirement benefits
|
$ | 5,278 | $ | 5,116 | ||||
|
Accrued liabilities
|
11,900 | 11,235 | ||||||
|
Stock compensation
|
13,080 | 22,191 | ||||||
|
Unrealized foreign exchange loss
|
1,073 | 395 | ||||||
|
Unrealized loss on interest swap
|
337 | 1,894 | ||||||
|
Other
|
12 | 1,332 | ||||||
|
Total deferred tax assets
|
31,680 | 42,163 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Depreciation and amortization
|
(222,751 | ) | (82,214 | ) | ||||
|
Other
|
(347 | ) | (1,933 | ) | ||||
|
Total deferred tax liabilities
|
(223,098 | ) | (84,147 | ) | ||||
|
Net deferred income tax liability
|
$ | (191,418 | ) | $ | (41,984 | ) | ||
Classification of net deferred tax assets (liabilities) in the
Consolidated Balance Sheets is as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Current assets
|
$ | 3,499 | $ | 3,397 | ||||
|
Non-current liabilities
|
(194,917 | ) | (45,381 | ) | ||||
|
Total net deferred tax liabilities
|
$ | (191,418 | ) | $ | (41,984 | ) | ||
No valuation allowance has been provided on deferred tax assets
as management believes it is more likely than not that the
deferred income tax assets will be fully recoverable.
56
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We had the following tax loss carry forwards as of
December 31, 2010:
| Years of Expiration: | ||||||||||||
| Amount | Beginning | Ending | ||||||||||
| (In thousands) | ||||||||||||
|
U.S. state tax loss carry forwards
|
232 | 2014 | 2016 | |||||||||
These tax loss carry forwards are associated with the 2007
acquisition of E.D. Smith.
The Company or one of its subsidiaries files income tax returns
in the U.S. federal jurisdiction, Canada and various state
jurisdictions. The Company settled the Internal Revenue Service
(“IRS”) examination of its 2007 federal income tax
return in the first quarter of 2010. The exam resulted in a
small refund to the Company. The Company has various state tax
examinations in process, which are expected to be completed in
2011 or 2012. The outcome of the various state tax examinations
is unknown at this time.
E.D. Smith and its affiliates are subject to Canadian,
U.S. and state tax examinations from 2005 forward. The IRS
completed an examination of E.D. Smith’s
U.S. affiliates tax return for 2005 during the first
quarter of 2009. An insignificant tax adjustment was paid to
settle the examination. During the second quarter of 2010, the
Canada Revenue Agency (CRA) completed an income tax audit for
the E.D. Smith 2006 and 2007 tax years. The Company did not
incur any material adjustments as a result of the tax audit.
During the year, the Company recorded adjustments to its
unrecognized tax benefits. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
| Year Ended December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Unrecognized tax benefits beginning balance
|
$ | 3,187 | $ | 1,995 | ||||
|
Additions based on tax positions related to the current year
|
2,932 | 1,535 | ||||||
|
Additions based on tax positions of prior years
|
354 | 227 | ||||||
|
Additions resulting from acquisitions
|
1,887 | — | ||||||
|
Reductions for tax positions of prior years
|
(1,264 | ) | (529 | ) | ||||
|
Foreign currency translation
|
— | 146 | ||||||
|
Payments
|
(242 | ) | (187 | ) | ||||
|
Unrecognized tax benefits ending balance
|
$ | 6,854 | $ | 3,187 | ||||
At December 31, 2010, the Company does not anticipate any
significant adjustments to its unrecognized tax benefits caused
by the settlement of the ongoing tax examinations detailed above
or other factors within the next twelve months. Unrecognized tax
benefits are included in Other long-term liabilities in our
Consolidated Balance Sheets.
Included in the balance at December 31, 2010 are amounts
that are offset by deferred taxes (i.e., temporary differences)
or amounts that would be offset by refunds in other taxing
jurisdictions (i.e., corollary adjustments). Thus,
$6.4 million and $1.9 million of the amount accrued at
December 31, 2010 and December 31, 2009, respectively,
would impact the effective tax rate, if reversed.
The Company recognizes interest (income) expense and penalties
related to unrecognized tax benefits in income tax expense.
During the years ended December 31, 2010, 2009 and 2008,
the Company recognized $(0.6) million, $0.1 million
and $0.2 million in interest and penalties in income tax
expense, respectively. The Company has accrued approximately
$0.1 million and $0.6 million for the payment of
interest and penalties at December 31, 2010 and 2009,
respectively.
57
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company considers its investment in E.D. Smith to be
permanent and therefore, the Company has not provided
U.S. income taxes on the earnings of E.D. Smith or the
translation of its financial statements into U.S. dollars.
A provision has not been established because it is our present
intention to reinvest the E.D. Smith undistributed earnings
indefinitely in Canada. The undistributed earnings as of
December 31, 2010 were approximately $27.0 million.
The determination of the amount of unrecognized
U.S. federal income tax liabilities for the E.D. Smith
unremitted earnings at December 31, 2010 is not practical
at this time.
During the first quarter of 2008, the Company entered into an
intercompany financing structure that results in the recognition
of foreign earnings subject to a low effective tax rate. As the
foreign earnings are permanently reinvested, U.S. income
taxes have not been provided. For the years ended
December 31, 2010 and 2009, the Company recognized a tax
benefit of approximately $5.6 million and
$6.0 million, respectively, related to this item.
| 10. | LONG-TERM DEBT |
| December 31, | ||||||||
|
2010
|
2009
|
|||||||
|
Amount
|
Amount
|
|||||||
| Outstanding | Outstanding | |||||||
| (In thousands) | ||||||||
|
Revolving credit facility
|
$ | 472,600 | $ | 298,200 | ||||
|
High yield notes
|
400,000 | — | ||||||
|
Senior notes
|
100,000 | 100,000 | ||||||
|
Tax increment financing and other debt
|
4,828 | 4,346 | ||||||
|
Total outstanding debt
|
977,428 | 402,546 | ||||||
|
Less current portion
|
(976 | ) | (906 | ) | ||||
|
Total long-term debt
|
$ | 976,452 | $ | 401,640 | ||||
The scheduled maturities of outstanding debt, at
December 31, 2010, are as follows (in thousands):
|
2011
|
$ | 976 | ||
|
2012
|
986 | |||
|
2013
|
100,890 | |||
|
2014
|
346 | |||
|
2015
|
472,905 | |||
|
Thereafter
|
401,325 | |||
|
Total outstanding debt
|
$ | 977,428 | ||
Revolving Credit Facility
— On October 27,
2010, the Company entered into an Amended and Restated Credit
Agreement (“Credit Agreement”) with a group of
participating lenders which amends and restates the Credit
Agreement dated June 27, 2005 (as amended) that was to
expire August 31, 2011. The Credit Agreement provides for
an increase in the aggregate commitment under the revolving
credit facility from $600 million to $750 million and
extends the maturity to October 27, 2015. The Credit
Agreement also provides for a $75 million letter of credit
sublimit, against which $9.2 million and $8.8 million
in letters of credit have been issued but undrawn as of
December 31, 2010 and 2009, respectively. Proceeds from the
credit facility may be used for working capital and general
corporate purposes, including acquisition financing. The
Company’s obligations under the credit facility are
guaranteed by certain of its United States subsidiaries. The
credit facility contains various financial and other restrictive
covenants and requires that we maintain certain financial
ratios, including a leverage and an interest coverage ratio. We
are in compliance with all applicable covenants as of
December 31, 2010. As of December 31, 2010, available
funds under this facility totaled $268.2 million.
58
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Interest is payable quarterly or at the end of the applicable
interest period in arrears on any outstanding borrowings at a
customary Eurodollar rate plus the applicable margin, or at a
customary base rate. The interest rate under the Credit
Agreement is based on the Company’s consolidated leverage
ratio, and will be determined by either LIBOR plus a margin
ranging from 1.25% to 2.05% or a base rate (as defined in the
Credit Agreement) plus a margin ranging from 0.25% to 1.05%. In
addition, a facility fee based on our consolidated leverage
ratio and ranging from 0.25% to 0.45% is due quarterly on the
aggregate commitment under the credit facility. Our average
interest rate on debt outstanding under our Credit Agreement at
December 31, 2010 was 2.23%. Including the swap agreement
(see below) with a fixed rate of 2.9% on $50 million, the
average rate increases to 2.52% at December 31, 2010.
The Credit Agreement contains limitations on liens, investments,
the incurrence of subsidiary indebtedness, mergers, dispositions
of assets, acquisitions, material lines of business and
transactions with affiliates. The Credit Agreement restricts
certain payments, including dividends, and prohibits certain
agreements restricting the ability of our subsidiaries to make
certain payments or to guarantee our obligations under the
Credit Agreement.
High Yield Notes
— On March 2, 2010,
TreeHouse Foods, Inc. completed its offering of
$400 million in aggregate principal amount of 7.75% high
yield notes due 2018 (the “Notes”). The net proceeds
of $391.0 million ($400.0 million notes less
underwriting discount of $9.0 million providing an
effective interest rate of 8.03%) were used as partial payment
in the acquisition of all of the issued and outstanding stock of
Sturm. The Company issued the Notes pursuant to an Indenture,
dated March 2, 2010 (the “Base Indenture”), among
the Company, the subsidiary guarantors party thereto (Bay Valley
Foods, LLC and EDS Holdings, LLC, the “Initial
Guarantors”) and Wells Fargo Bank, National Association,
(Trustee), as supplemented by a First Supplemental Indenture,
dated March 2, 2010 (the “First Supplemental
Indenture”), among the Company, the Initial Guarantors and
the Trustee. In addition, on March 2, 2010, the Company
entered into a Second Supplemental Indenture, dated
March 2, 2010 (the “Second Supplemental
Indenture”) pursuant to which Sturm became an additional
guarantor of the Notes, with the same force and effect as if
Sturm was initially named as a guarantor under the Indenture. On
October 28, 2010, the Company entered into a Third
Supplemental Indenture, dated October 28, 2010 (the
“Third Supplemental Indenture” and together with the
Base Indenture, the First Supplemental Indenture and the Second
Supplemental Indenture, the “Indenture”), pursuant to
which STSF Holdings, Inc. and S.T. Foods, Inc. (together
with the Initial Guarantors and Sturm, the
“Guarantors”) became an additional guarantor of the
Notes, with the same force and effect as if STSF Holdings, Inc.
and S.T. Foods, Inc. was initially named a guarantor under
the Indenture.
The Indenture provides, among other things, that the Notes will
be senior unsecured obligations of the Company. Interest is
payable on the Notes on March 1 and September 1 of each year,
beginning September 1, 2010. The Notes will mature on
March 1, 2018.
The Company may redeem some or all of the Notes at any time
prior to March 1, 2014 at a price equal to 100% of the
principal amount of the Notes redeemed, plus an applicable
“make-whole” premium. On or after March 1, 2014,
the Company may redeem some or all of the Notes at redemption
prices set forth in the First Supplemental Indenture. In
addition, at any time prior to March 1, 2013, the Company
may redeem up to 35% of the Notes at a redemption price of
107.75% of the principal amount of the Notes redeemed with the
net cash proceeds of certain equity offerings.
Subject to certain limitations, in the event of a change of
control of the Company, the Company will be required to make an
offer to purchase the Notes at a purchase price equal to 101% of
the principal amount of the Notes, plus accrued and unpaid
interest.
The Company’s payment obligations under the Notes are fully
and unconditionally guaranteed on a senior unsecured basis by
the Guarantors and future domestic subsidiaries of the Company,
other than certain
59
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
excluded subsidiaries and unrestricted subsidiaries. The Notes
are not guaranteed by any of the Company’s foreign
subsidiaries.
The Indenture contains restrictive covenants that, among other
things, limit the ability of the Company and the Guarantors to:
(i) pay dividends or make other restricted payments,
(ii) make certain investments, (iii) incur additional
indebtedness or issue preferred stock, (iv) create liens,
(v) allow restrictions on the ability of certain of its
subsidiaries to pay dividends or make other payments to the
Company or the Guarantors, (vi) merge or consolidate with
other entities or sell substantially all of its assets,
(vii) enter into transactions with affiliates and
(viii) engage in certain sale and leaseback transactions.
The foregoing limitations are subject to exceptions as set forth
in the First Supplemental Indenture. In addition, if in the
future the Notes have an investment grade credit rating by both
Moody’s Investors Services, Inc. and Standard &
Poor’s Ratings Services, certain of these covenants will,
thereafter, no longer apply to the Notes for so long as the
Notes are rated investment grade by the two rating agencies. The
Company is in compliance with the applicable covenants as of
December 31, 2010.
The Indenture provides for customary events of default that
include, among other things (subject in certain cases to
customary grace and cure periods): (i) non-payment of
principal or interest; (ii) breach of certain covenants
contained in the Indenture or the Notes, (iii) defaults in
failure to pay certain other indebtedness or the acceleration of
certain other indebtedness prior to maturity, (iv) the
failure to pay certain final judgments, (v) the failure of
certain guarantees to be enforceable and (vi) certain
events of bankruptcy or insolvency. Generally, if an event of
default occurs (subject to certain exceptions), the Trustee or
the holders of at least 25% in aggregate principal amount of the
then outstanding Notes may declare all the Notes to be due and
payable immediately.
Senior Notes
— On September 22, 2006, we
completed a private placement of $100 million in aggregate
principal of 6.03% senior notes due September 30,
2013, pursuant to a Note Purchase Agreement among the Company
and a group of purchasers. All of the Company’s obligations
under the senior notes are fully and unconditionally guaranteed
by Bay Valley Foods, LLC, a wholly-owned subsidiary of the
Company, and the wholly-owned subsidiaries of Bay Valley Foods,
LLC, EDS Holdings, LLC, Sturm and S.T. Foods. The senior notes
have not been registered under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States,
absent registration or an applicable exemption. Net proceeds
were used to repay outstanding indebtedness under the revolving
Credit Agreement. Interest is paid semi-annually in arrears on
March 31 and September 30 of each year. As of December 31,
2007, the Company exceeded the permitted leverage ratio of 3.5
to 1.0 requiring an additional interest payment of 1.0% per
annum in 2008. The maximum permitted leverage ratio is 4.0 to
1.0, therefore, the Company was in compliance with the covenants
of the Note Purchase Agreement. The Company’s leverage
ratio was under 3.5 to 1.0 at December 31, 2008 and 2009
and, therefore, the Company did not pay additional interest of
1.0% in 2009 or 2010.
The Note Purchase Agreement contains covenants that limit the
ability of the Company and its subsidiaries to, among other
things, merge with other entities, change the nature of the
business, create liens, incur additional indebtedness or sell
assets. The Note Purchase Agreement also requires the Company to
maintain certain financial ratios. We are in compliance with the
applicable covenants as of December 31, 2010.
Swap Agreements
— The Company entered into a
$200 million long term interest rate swap agreement with an
effective date of November 19, 2008 to lock into a fixed
LIBOR interest rate base. Under the terms of agreement,
$200 million in floating rate debt was swapped for a fixed
2.9% interest base rate for a period of 24 months,
amortizing to $50 million for an additional nine months at
the same 2.9% interest rate. As of December 31, 2010 the
swap amount was $50 million. Under the terms of the
Company’s revolving credit agreement and in conjunction
with our credit spread, this will result in an all-in borrowing
cost on the swapped principal being no more than 4.95% during
2011. The Company did not apply hedge accounting to this swap.
60
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In July 2006, the Company 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 the Balance
Sheet. The total loss will be reclassified ratably to the
Consolidated Statements of Income as an increase to interest
expense over the term of the senior notes, providing an
effective interest rate of 6.29% over the term of the senior
notes. In each of 2010, 2009 and 2008, $0.3 million of the
loss was taken into interest expense. We anticipate that
$0.3 million of the loss will be reclassified to interest
expense in 2011.
Tax Increment Financing
— On December 15,
2001, the Urban Redevelopment Authority of Pittsburgh
(“URA”) issued $4.0 million of redevelopment
bonds, pursuant to a Tax Increment Financing Plan to assist with
certain aspects of the development and construction of the
Company’s Pittsburgh, Pennsylvania facilities. The
agreement was transferred to the Company as part of the
acquisition of the Soup and Infant Feeding Business. The Company
has agreed to make certain payments with respect to the
principal amount of the URA’s redevelopment bonds through
May 2019. As of December 31, 2010, $2.5 million
remains outstanding. Interest accrues at an annual rate of 6.61%
for the $0.2 million tranche which is due on
November 1, 2011; 6.71% for the $0.4 million tranche
which is due on November 1, 2013; and 7.16% for the
$1.9 million tranche which is due on May 1, 2019.
Capital Lease Obligations and Other
— Capital
lease obligations represent machinery and equipment financing
obligations, which are payable in monthly installments of
principal and interest and are collateralized by the related
assets financed.
| 11. | STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE |
Common stock
— The Company has authorized
90 million shares of common stock with a par value of $0.01
per share and 10 million shares of preferred stock with a
par value of $0.01 per share. No preferred stock has been issued.
As of December 31, 2010, there were 35,439,835 common
shares issued and outstanding. There is no treasury stock.
Earnings per share
— Basic earnings per share
is computed by dividing net income by the number of weighted
average common shares outstanding during the reporting period.
The weighted average number of common shares used in the diluted
earnings per share calculation is determined using the treasury
stock method and includes the incremental effect related to
outstanding options, restricted stock, restricted stock units
and performance units.
Certain restricted stock and restricted stock units were subject
to service and market conditions for vesting. The market
conditions of the restricted stock awards were met only in the
first quarter of 2009, and thus are included in the year to date
calculation of diluted earnings per share in that year. These
awards are no longer outstanding as of December 31, 2010.
The market conditions for the restricted stock units were met
during the third quarter of 2009 and they became vested. Prior
to vesting, the restricted stock units did not meet the criteria
for inclusion in the calculation of diluted earnings per share
during 2009 and thus were excluded. During 2008, the market
conditions of these awards were not met and they were excluded
from the calculation of diluted earnings per share.
61
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Weighted average common shares outstanding
|
35,079 | 31,982 | 31,341 | |||||||||
|
Assumed exercise of stock options(1)
|
728 | 383 | 96 | |||||||||
|
Assumed vesting of restricted stock, restricted stock units and
performance units(1)
|
365 | 433 | 32 | |||||||||
|
Weighted average diluted common shares outstanding
|
36,172 | 32,798 | 31,469 | |||||||||
| (1) | Stock options, restricted stock, restricted stock units, and performance units excluded from our computation of diluted earnings per share, because they were anti-dilutive, were 131 thousand, 29 thousand and 2.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. |
| 12. | STOCK-BASED COMPENSATION |
The Board adopted and the stockholders approved the TreeHouse
Foods, Inc. 2005 Long-Term Incentive Plan. The Plan was amended
and restated as the “TreeHouse Foods, Inc. Equity and
Incentive Plan” on February 16, 2007. The Plan is
administered by our Compensation Committee, which consists
entirely of independent directors. The Compensation Committee
determines specific awards for our executive officers. For all
other employees below the position of senior vice president (or
any analogous title), and if the committee designates, our Chief
Executive Officer or such other officers will, from time to
time, determine specific persons to whom awards under the Plan
will be granted and the extent of, and the terms and conditions
of each award. The Compensation Committee or its designee,
pursuant to the terms of the Plan, also will make all other
necessary decisions and interpretations under the Plan.
Under the Plan, the Compensation Committee may grant awards of
various types of equity-based compensation, including stock
options, restricted stock, restricted stock units, performance
shares and performance units and other types of stock-based
awards, and other cash-based compensation. The maximum number of
shares that are available to be awarded under the Plan is
approximately 6.0 million, of which 0.6 million remain
available at December 31, 2010.
Income from continuing operations before tax, for the years
ended December 31, 2010, 2009 and 2008 included share-based
compensation expense for employee and director stock options,
restricted stock, restricted stock units and performance units
of $15.8 million, $13.3 million and
$12.2 million, respectively. The tax benefit recognized
related to the compensation cost of these share-based awards was
approximately $6.1 million, $5.1 million and
$4.6 million for 2010, 2009 and 2008, respectively.
The Company has estimated that certain employees and all our
directors will complete the required service conditions
associated with certain restricted stock, restricted stock
units, stock options and performance unit awards. For all other
employees, the Company estimates forfeitures, as not all
employees are expected to complete the required service
conditions. The expected service period is the longer of the
derived service period, as determined from the output of the
valuation models, and the service period based on the term of
the awards.
Options were granted under our long-term incentive plan and in
certain cases pursuant to employment agreements. Options were
also granted to our non-employee directors. All options have a
three year term and vest one-third on each of the first three
anniversaries of the grant date, and a maximum term of ten years.
62
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes stock option activity during 2010:
|
Weighted
|
||||||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||||||
|
Employee
|
Director
|
Exercise
|
Contractual
|
Intrinsic
|
||||||||||||||||
| Options | Options | Price | Term (Yrs) | Value | ||||||||||||||||
|
Outstanding, December 31, 2009
|
2,292,744 | 107,773 | $ | 27.28 | 6.4 | $ | 27,792,212 | |||||||||||||
|
Granted
|
130,550 | — | $ | 46.47 | — | — | ||||||||||||||
|
Forfeited
|
(6,601 | ) | — | $ | 27.00 | — | — | |||||||||||||
|
Exercised
|
(159,958 | ) | (12,977 | ) | $ | 26.84 | — | — | ||||||||||||
|
Outstanding, December 31, 2010
|
2,256,735 | 94,796 | $ | 28.38 | 5.6 | $ | 53,400,867 | |||||||||||||
|
Vested/expect to vest, at December 31, 2010
|
2,240,601 | 94,796 | $ | 28.35 | 5.6 | $ | 53,104,972 | |||||||||||||
|
Exercisable, December 31, 2010
|
1,980,891 | 93,196 | $ | 27.55 | 5.3 | $ | 48,824,201 | |||||||||||||
During the years ended December 31, 2010, 2009 and 2008,
the total intrinsic value of stock options exercised was
approximately $3.4 million, $1.9 million and
$3.8 million, respectively. The tax benefit recognized from
stock option exercises in 2010, 2009 and 2008 was approximately
$1.3 million, $0.7 million and $1.4 million,
respectively. Compensation expense related to unvested options
totaled $2.5 million at December 31, 2010 and will be
recognized over the remaining vesting period of the grants,
which averages 2.1 years. The average grant date fair value
of options granted, in 2010, 2009 and 2008 was $19.11, $8.97 and
$8.09, respectively.
In addition to stock options, certain management employees were
granted restricted stock and restricted stock units, pursuant to
the terms of their employment agreements that are subject to
service and market conditions for vesting. The restricted stock
awards expired and are no longer outstanding as of
December 31, 2010. During 2009, the vesting conditions of
the restricted stock units were satisfied. Issuance of the
shares related to the units was deferred pursuant to the
deferral elections of the participants.
During 2008, the Company began issuing restricted stock and
restricted stock units to non-employee directors and a larger
pool of employees. Generally these restricted stock and
restricted stock unit awards vest based on the passage of time.
Awards granted to employees generally vest one-third on each
anniversary of the grant date. Additionally, certain restricted
stock awards issued to our executives are subject to a
performance condition that requires operating income for the
previous twelve months to be greater than $0. This condition may
be satisfied on a yearly or cumulative basis over three years.
Restricted stock units granted to our non-employee directors in
2008 vest over one year and those granted subsequent to 2008
vest over thirteen months. The fair value of these awards is
equal to the closing price of our stock on the date of grant.
The following table summarizes the restricted stock and
restricted stock unit activity during 2010:
|
Weighted
|
Employee
|
Weighted
|
Director
|
Weighted
|
||||||||||||||||||||
|
Employee
|
Average
|
Restricted
|
Average
|
Restricted
|
Average
|
|||||||||||||||||||
|
Restricted
|
Grant Date
|
Stock
|
Grant Date
|
Stock
|
Grant Date
|
|||||||||||||||||||
| Stock | Fair Value | Units | Fair Value | Units | Fair Value | |||||||||||||||||||
|
Outstanding, at December 31, 2009
|
1,202,319 | $ | 24.28 | 784,931 | $ | 26.16 | 45,400 | $ | 26.96 | |||||||||||||||
|
Granted
|
— | $ | — | 266,485 | $ | 45.73 | 16,870 | $ | 46.47 | |||||||||||||||
|
Vested
|
(277,754 | ) | $ | 24.22 | (619,159 | ) | $ | 25.62 | — | $ | — | |||||||||||||
|
Forfeited
|
(632,937 | ) | $ | 24.28 | (12,381 | ) | $ | 31.31 | — | — | ||||||||||||||
|
Outstanding, at December 31, 2010
|
291,628 | $ | 24.32 | 419,876 | $ | 39.22 | 62,270 | $ | 32.24 | |||||||||||||||
Compensation expense for all restricted stock and restricted
stock units totaled $11.4 million in 2010,
$8.0 million in 2009, and $6.4 million in 2008.
63
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Future compensation cost for restricted stock and restricted
stock units is approximately $14.5 million as of
December 31, 2010, and will be recognized on a weighted
average basis over the next 1.8 years.
Performance unit awards have been granted to certain members of
management. These awards contain service and performance
conditions. For each performance period, one third of the units
will accrue multiplied by a predefined percentage between 0% and
200%, depending on the achievement of certain operating
performance measures. Additionally, for the cumulative
performance period, a number of units will accrue equal to the
number of units granted multiplied by a predefined percentage
between 0% and 200%, depending on the achievement of certain
operating performance measures, less any units previously
accrued. Accrued units will be converted to stock or cash, at
the discretion of the Compensation Committee on the third
anniversary of the grant date. The Company intends to settle
these awards in stock and has the shares available to do so. The
Company expects that 200% of the 2008 and 2009 awards will
accrue and vest over the cumulative performance and service
period, and approximately 100% of the 2010 awards will accrue
and vest over the cumulative performance and service period,
subject to estimated forfeitures. The following table summarizes
the performance unit activity during the twelve months ended
December 31, 2010:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Performance
|
Grant Date
|
|||||||
| Units | Fair Value | |||||||
|
Unvested, at December 31, 2009
|
127,800 | $ | 26.15 | |||||
|
Granted
|
38,885 | $ | 46.29 | |||||
|
Vested
|
— | — | ||||||
|
Forfeited
|
(1,625 | ) | $ | 28.47 | ||||
|
Unvested, at December 31, 2010
|
165,060 | $ | 30.87 | |||||
Future compensation cost related to the performance units is
estimated to be approximately $3.3 million as of
December 31, 2010, and is expected to be recognized over
the next 1.8 years. The future compensation accrual is
based on the assumption that 200% of the 2008 and 2009 awards,
and approximately 100% of the 2010 awards will vest. The grant
date fair value of the awards is equal to the Company’s
closing stock price on the date of grant.
The fair value of stock options, restricted stock, restricted
stock unit awards and performance units (the “Awards”)
is determined on the date of grant using the assumptions noted
in the following table or the market price of the Company’s
stock on the date of grant. Stock options were valued using a
Black Scholes model. Performance units and restricted stock and
restricted stock unit awards were valued using the closing price
of the Company’s stock on the date of grant. Expected
volatilities for 2010 are based on historical volatilities of
the Company’s stock price. Prior to 2010, expected
volatilities were based on the implied historical volatilities
from peer companies and other factors, as the Company’s
stock was not publically traded prior to June 27, 2005. The
risk-free interest rate for periods within the contractual life
of the Awards is based on the U.S. Treasury yield curve in
effect at the time of the grant. As the Company began operations
in 2005, we do not have significant history to determine the
expected term of our awards based on our experience alone. As
such, we based our expected term on that of comparable
companies. The assumptions used to calculate the value of the
option awards granted in 2010, 2009 and 2008 are presented as
follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Expected volatility
|
35.00 | % | 26.37 | % | 26.37 | % | ||||||
|
Expected dividends
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Risk-free interest rate
|
3.87 | % | 3.53 | % | 3.53 | % | ||||||
|
Expected term
|
6.0 years | 6.0 years | 6.0 years | |||||||||
64
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 13. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Accumulated Other Comprehensive Loss consists of the following
components all of which are net of tax, except for the foreign
currency translation adjustment:
|
Unrecognized
|
Accumulated
|
|||||||||||||||
|
Foreign
|
Pension and
|
Derivative
|
Other
|
|||||||||||||
|
Currency
|
Postretirement
|
Financial
|
Comprehensive
|
|||||||||||||
| Translation(1) | Benefits | Instrument | Loss | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Balance at December 31, 2007
|
$ | (3,325 | ) | $ | (2,858 | ) | $ | (914 | ) | $ | (7,097 | ) | ||||
|
Other comprehensive (loss) gain
|
(50,198 | ) | (6,261 | ) | 162 | (56,297 | ) | |||||||||
|
Balance at December 31, 2008
|
(53,523 | ) | (9,119 | ) | (752 | ) | (63,394 | ) | ||||||||
|
Other comprehensive gain
|
35,678 | 604 | 161 | 36,443 | ||||||||||||
|
Balance at December 31, 2009
|
(17,845 | ) | (8,515 | ) | (591 | ) | (26,951 | ) | ||||||||
|
Other comprehensive gain
|
14,066 | 690 | 161 | 14,917 | ||||||||||||
|
Balance at December 31, 2010
|
$ | (3,779 | ) | $ | (7,825 | ) | $ | (430 | ) | $ | (12,034 | ) | ||||
| (1) | The foreign currency translation adjustment is not net of tax, as it pertains to the Company’s permanent investment in the Canadian subsidiary, E.D. Smith. |
| 14. | EMPLOYEE PENSION AND RETIREMENT BENEFIT PLANS |
Pension and Postretirement Benefits
— Certain
of our employees and retirees participate in pension and other
postretirement benefit plans. Employee benefit plan obligations
and expenses included in the 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.
Defined Contribution Plans
— Certain of our
non-union employees participate in savings and profit sharing
plans. These plans generally provide for salary reduction
contributions to the plans on behalf of the participants of
between 1% and 20% of a participant’s annual compensation
and provide for employer matching and profit sharing
contributions. The Company established a tax-qualified defined
contribution plan to manage the assets. For 2010, 2009 and 2008,
the Company made matching contributions to the plan of
$3.3 million, $2.9 million and $2.8 million,
respectively.
Multiemployer Pension and Certain Union Plans
—
The Company contributes to several multiemployer pension plans
on behalf of employees covered by collective bargaining
agreements. These plans are administered jointly by management
and union representatives and cover substantially all full-time
and certain part-time union employees who are not covered by
other plans. The Multiemployer Pension Plan Amendments Act of
1980 amended ERISA to establish funding requirements and
obligations for employers participating in multiemployer plans,
principally related to employer withdrawal from or termination
of such plans. We could, under certain circumstances, be liable
for unfunded vested benefits or other expenses of jointly
administered union/management plans. At this time, we have not
established any liabilities because withdrawal from these plans
is not probable. In 2010, 2009 and 2008, the contributions to
these plans, which are expensed as incurred, were
$1.6 million, $1.5 million and $1.7 million,
respectively.
Defined Benefit Pension Plans
— The Company
established a tax-qualified pension plan and master trust to
manage the portion of the pension plan assets related to
TreeHouse eligible salaried and non-union and union employees
not covered by a multi-employer pension plan. We also retain
investment consultants to assist our Investment Committee with
formulating a long-term investment policy for the master trust.
The expected long term rate of return on assets is based on
projecting long-term market returns for the various asset
classes in which the plans assets are invested, weighted by the
target asset allocations. The estimated ranges are
65
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TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
primarily based on observations of historical asset returns and
their historical volatility. In determining the expected
returns, we also consider consensus forecasts of certain market
and economic factors that influence returns, such as inflation,
gross domestic product trends and dividend yields. Active
management of the plan assets may result in adjustments to the
historical returns. The rate of return assumption is reviewed
annually.
The Company’s overall investment strategy is to provide a
regular and reliable source of income to meet the liquidity
needs of the pension plans and minimize reliance on plan sponsor
contributions as a source of benefit security. The
Company’s investment policy includes various guidelines and
procedures designed to ensure assets are invested in a manner
necessary to meet expected future benefits earned by
participants. Central to the policy are target allocation ranges
by major asset classes. The objective of the target allocations
are to ensure the assets are invested with the intent to protect
pension plan assets so that such assets are preserved for the
provision of benefits to participants and their beneficiaries
and such long-term growth as may maximize the amounts available
to provide such benefits without undue risk. Additionally, we
consider the weighted average return of a capital markets model
and historical returns on comparable equity, debt and other
investments. Our current asset mix guidelines, under the
investment policy, target equities at 55% to 65% of the
portfolio and fixed income at 35% to 45%. At December 31,
2010, our master trust was invested as follows: equity
securities of 62%, fixed income securities of 37%, and cash and
cash equivalents of 1%. Equity securities primarily include
investments collective equity funds that primarily invest in
securities in the United States. Fixed income securities
primarily include investments in collective funds that invest in
corporate bonds of companies from diversified industries. Other
investments are short term in nature, including certificates of
deposit, investments in a collective bond fund that invest in
commercial paper, time deposits, fixed rate notes and bonds, and
others.
The fair value of the Company’s pension plan assets at
December 31, 2010 and 2009, by asset category are as
follows:
|
Pension Plan Assets
|
||||||||
|
Fair Value Measurements at
|
||||||||
| Level | December 31, 2010 | |||||||
|
Short Term Investment Fund(a)
|
2 | $ | 221 | |||||
|
Aggregate Bond Index Fund(b)
|
2 | 12,069 | ||||||
|
U.S. Market Cap Equity Index Fund(c)
|
2 | 16,868 | ||||||
|
International All Country World Index Fund(d)
|
2 | 3,242 | ||||||
| $ | 32,400 | |||||||
|
Pension Plan Assets
|
||||||||
|
Fair Value Measurements at
|
||||||||
| Level | December 31, 2009 | |||||||
|
Short Term Investment Fund(a)
|
1 | $ | 654 | |||||
|
Aggregate Bond Index Fund(b)
|
1 | 9,510 | ||||||
|
U.S. Market Cap Equity Index Fund(c)
|
1 | 16,211 | ||||||
|
International All Country World Index Fund(d)
|
1 | 3,329 | ||||||
| $ | 29,704 | |||||||
| (a) | This fund is an investment vehicle for cash reserves, that seeks to offer a competitive rate of return through a portfolio of high-grade, short term, money market instruments. Principal preservation is the primary objective of this fund. | |
| (b) | The primary objective of this fund is to hold a portfolio representative of the overall United States bond and debt market, as characterized by the Barclays Capital aggregate Bond Index. |
66
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TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (c) | The primary objective of this fund is to approximate the risk and return characteristics of the Dow Jones U.S. ex-LP’s Total Stock Market index. | |
| (d) | The primary objective of this fund is to approximate the risk and return characteristics of the Morgan Stanley All Country World ex-US (MSCI ACWI exUS) ND Index. This fund is commonly used to represent the Non-U.S. equity developed and emerging markets. |
The pension plan assets are held in collective funds and in
2009, were presented as Level 1 investments in a manner
that looked through the funds to the underlying investments. For
2010, the pension plan assets are presented at the fund level as
Level 2 investments. The presentation of the pension plan
assets for 2009 has been adjusted so that the investments are
presented consistent with the 2010 presentation.
Pension benefits for eligible salaried and non-union TreeHouse
employees were frozen in 2002 for years of creditable service.
For these employees incremental pension benefits are only earned
for changes in compensation effecting final average pay. Pension
benefits earned by union employees covered by collective
bargaining agreements, but not participating in multiemployer
pension plans, are earned based on creditable years of service
and the specified benefit amounts negotiated as part of the
collective bargaining agreements. The Company’s funding
policy provides that annual contributions to the pension plan
master trust will be at least equal to the minimum amounts
required by ERISA. The Company estimates that its 2011
contributions to its pension plans will be $4.9 million.
The measurement date for the defined benefit pension plans is
December 31.
Other Postretirement Benefits
— Certain
employees participate in benefit programs which provide certain
health care and life insurance benefits for retired employees
and their eligible dependents. The plans are unfunded. The
Company estimates that its 2011 contributions to its
postretirement benefit plans will be $0.2 million. The
measurement date for the other postretirement benefit plans is
December 31.
Effective March 31, 2010, the Company negotiated the
transfer of the postretirement union retiree medical plan at the
Dixon production facility to the Central States multiemployer
plan. The Company transferred its liability to the multiemployer
plan and no longer carries a liability for the accumulated
benefit obligation of the employees covered under that plan,
resulting in a plan curtailment. The curtailment resulted in a
gain of $2.4 million, $1.4 million net of tax, which
is included in Other operating (income) expense, net on the
Condensed Consolidated Statements of Income.
The following table summarizes information about our pension and
postretirement benefit plans for the years ended
December 31, 2010 and 2009:
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
Change in benefit obligation:
|
||||||||||||||||
|
Benefit obligation, at beginning of year
|
$ | 38,780 | $ | 33,540 | $ | 4,713 | $ | 3,959 | ||||||||
|
Service cost
|
2,023 | 1,933 | 85 | 255 | ||||||||||||
|
Interest cost
|
2,136 | 2,083 | 140 | 239 | ||||||||||||
|
Amendments
|
— | 182 | — | — | ||||||||||||
|
Acquisitions
|
— | — | 1,064 | — | ||||||||||||
|
Curtailments
|
— | — | (3,758 | ) | — | |||||||||||
|
Actuarial losses
|
2,141 | 2,854 | 279 | 358 | ||||||||||||
|
Benefits paid
|
(1,868 | ) | (1,812 | ) | (198 | ) | (98 | ) | ||||||||
|
Benefit obligation, at end of year
|
$ | 43,212 | $ | 38,780 | $ | 2,325 | $ | 4,713 | ||||||||
67
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TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||
|
Change in plan assets:
|
||||||||||||||||
|
Fair value of plan assets, at beginning of year
|
$ | 29,704 | $ | 17,600 | $ | — | $ | — | ||||||||
|
Actual return on plan assets
|
3,314 | 5,019 | — | — | ||||||||||||
|
Company contributions
|
1,250 | 8,897 | 198 | 98 | ||||||||||||
|
Benefits paid
|
(1,868 | ) | (1,812 | ) | (198 | ) | (98 | ) | ||||||||
|
Fair value of plan assets, at year end
|
$ | 32,400 | $ | 29,704 | $ | — | $ | — | ||||||||
|
Funded status of the plan
|
$ | (10,812 | ) | $ | (9,076 | ) | $ | (2,325 | ) | $ | (4,713 | ) | ||||
|
Amounts recognized in the Consolidated Balance Sheet consist
of:
|
||||||||||||||||
|
Current liability
|
$ | — | $ | — | $ | (175 | ) | $ | (107 | ) | ||||||
|
Non-current liability
|
(10,812 | ) | (9,076 | ) | (2,150 | ) | (4,606 | ) | ||||||||
|
Net amount recognized
|
$ | (10,812 | ) | $ | (9,076 | ) | $ | (2,325 | ) | $ | (4,713 | ) | ||||
|
Amounts recognized in Accumulated Other Comprehensive Loss
consist of:
|
||||||||||||||||
|
Net actuarial loss
|
$ | 10,095 | $ | 9,591 | $ | (167 | ) | $ | 925 | |||||||
|
Prior service cost
|
3,449 | 4,052 | (508 | ) | (576 | ) | ||||||||||
|
Total, before tax effect
|
$ | 13,544 | $ | 13,643 | $ | (675 | ) | $ | 349 | |||||||
| Pension Benefits | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Accumulated benefit obligation:
|
$ | 40,582 | $ | 35,749 | ||||
|
Weighted average assumptions used to determine the pension
benefit obligations:
|
||||||||
|
Discount rate
|
5.25 | % | 5.75 | % | ||||
|
Rate of compensation increases
|
4.00 | % | 4.00 | % | ||||
The key actuarial assumptions used to determine the
postretirement benefit obligations as of December 31, 2010
and 2009 are as follows:
| 2010 | 2009 | |||||||||||
| Pre-65 | Post 65 | Pre-65 | Post 65 | |||||||||
|
Healthcare inflation:
|
||||||||||||
|
Initial rate
|
7.5% - 9.0% | 9.0% | 8.0 | % | 10.0 | % | ||||||
|
Ultimate rate
|
5.0% | 5.0% | 5.0 | % | 5.0 | % | ||||||
|
Year ultimate rate achieved
|
2015-2018 | 2015-2018 | 2015 | 2015 | ||||||||
|
Discount rate
|
5.25% | 5.25% | 5.75 | % | 5.75 | % | ||||||
68
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TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the net periodic cost of our
pension plans and postretirement plans, for the years ended
December 31, 2010, 2009 and 2008:
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||
|
Components of net periodic costs:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 2,023 | $ | 1,933 | $ | 1,755 | $ | 85 | $ | 255 | $ | 218 | ||||||||||||
|
Interest cost
|
2,136 | 2,083 | 1,807 | 140 | 239 | 218 | ||||||||||||||||||
|
Expected return on plan asset
|
(2,199 | ) | (1,773 | ) | (1,505 | ) | — | — | — | |||||||||||||||
|
Amortization of unrecognized prior service cost
|
603 | 580 | 479 | (68 | ) | (68 | ) | (68 | ) | |||||||||||||||
|
Amortization of unrecognized net loss (gain)
|
522 | 626 | 73 | (30 | ) | (2 | ) | 8 | ||||||||||||||||
|
Curtailment
|
— | — | — | (2,357 | ) | — | — | |||||||||||||||||
|
Settlement charge
|
— | — | — | — | — | — | ||||||||||||||||||
|
Net periodic cost
|
$ | 3,085 | $ | 3,449 | $ | 2,609 | $ | (2,230 | ) | $ | 424 | $ | 376 | |||||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Weighted average assumptions used to determine the periodic
benefit costs:
|
||||||||||||||||||||||||
|
Discount rate
|
5.75 | % | 6.25 | % | 6.25 | % | 5.75 | % | 6.25 | % | 6.25 | % | ||||||||||||
|
Rate of compensation increases
|
4.00 | % | 4.00 | % | 4.00 | % | — | — | — | |||||||||||||||
|
Expected return on plan assets
|
7.60 | % | 7.60 | % | 7.60 | % | — | — | — | |||||||||||||||
The estimated amount that will be amortized from accumulated
other comprehensive income into net pension cost in 2011 is as
follows:
| Pension | Postretirement | |||||||
| (In thousands) | ||||||||
|
Net actuarial loss
|
$ | 575 | $ | 12 | ||||
|
Prior service cost
|
$ | 603 | $ | 68 | ||||
Estimated future pension and postretirement benefit payments
from the plans are as follows:
|
Pension
|
Postretirement
|
|||||||
| Benefit | Benefit | |||||||
| (In thousands) | ||||||||
|
2011
|
$ | 2,029 | $ | 175 | ||||
|
2012
|
$ | 2,391 | $ | 149 | ||||
|
2013
|
$ | 2,586 | $ | 131 | ||||
|
2014
|
$ | 2,594 | $ | 145 | ||||
|
2015
|
$ | 2,707 | $ | 158 | ||||
|
2016-2020
|
$ | 15,563 | $ | 821 | ||||
69
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The effect of a 1% change in health care trend rates would have
the following effects on the postretirement benefit plan:
| 2010 | ||||
| (In thousands) | ||||
|
1% Increase:
|
||||
|
Benefit obligation, end of year
|
$ | 186 | ||
|
Service cost plus interest cost for the year
|
$ | 11 | ||
|
1% Decrease:
|
||||
|
Benefit obligation, end of year
|
$ | (158 | ) | |
|
Service cost plus interest cost for the year
|
$ | (10 | ) | |
Most of our employees are not eligible for postretirement
medical benefits and of those that are, the majority are covered
by a multi-employer plan in which expenses are paid as incurred.
The effect on those covered by plans for which we maintain a
liability was not significant.
| 15. | OTHER OPERATING (INCOME) EXPENSE, NET |
We incurred Other operating (income) expense, net of
$1.2 million, $(6.2) million and $13.9 million,
for the years ended December 31, 2010, 2009 and 2008,
respectively. Other operating (income) expenses, net consisted
of the following:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Facility closing costs and impairment charges related to the
Portland, Oregon plant
|
$ | 642 | $ | 886 | $ | 12,839 | ||||||
|
Gain on postretirement plan curtailment
|
(2,357 | ) | — | — | ||||||||
|
Realignment of infant feeding business
|
2,195 | — | — | |||||||||
|
Exit from a third party warehouse
|
879 | — | — | |||||||||
|
(Gain) loss on fire at New Hampton, Iowa facility
|
— | (14,533 | ) | 500 | ||||||||
|
Impairment of trademarks and other intangibles
|
— | 7,600 | 560 | |||||||||
|
Other
|
(176 | ) | (177 | ) | — | |||||||
|
Total other operating (income) expense, net
|
$ | 1,183 | $ | (6,224 | ) | $ | 13,899 | |||||
| 16. | INSURANCE CLAIM — NEW HAMPTON |
In February 2008, the Company’s non-dairy powdered creamer
plant in New Hampton, Iowa was damaged by a fire, which left the
facility unusable. The Company repaired the facility and it
became operational in the first quarter of 2009. The Company
filed a claim with our insurance provider and received
approximately $47.2 million in reimbursements for property
damage and incremental expenses incurred to service our
customers throughout this period. The claim was finalized in
September 2009, and the Company received a final payment of
approximately $10.6 million to close the claim in October
2009. For the year ended December 31, 2009 the Company
recognized income of approximately $15.4 million, of which
$14.5 million is classified in Other operating (income)
expense and $0.9 million is classified in Cost of sales. Of
the $14.5 million, $13.6 was related to a gain on the fixed
assets destroyed in the incident.
| 17. | DISCONTINUED OPERATIONS |
In the fourth quarter of 2008, the Company wrote-off the value
of the remaining assets consisting of machinery and equipment of
the nutritional beverage business that was discontinued in 2004.
The loss of approximately $0.3 million in 2008, net of tax
of $0.2 million, is included in the Consolidated Statements
of
70
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income in the line Income (loss) from discontinued operations,
net of tax expense (benefit). The Company was not able to find a
buyer for these assets.
| 18. | SUPPLEMENTAL CASH FLOW INFORMATION |
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Interest paid
|
$ | 33,045 | $ | 17,224 | $ | 29,153 | ||||||
|
Income taxes paid
|
$ | 23,895 | $ | 18,103 | $ | 10,959 | ||||||
|
Accrued purchase of property and equipment
|
$ | 4,761 | $ | 1,419 | $ | 3,819 | ||||||
|
Accrued other intangible assets
|
$ | 1,609 | $ | — | $ | — | ||||||
|
Receivable related to Sturm acquisition
|
$ | 3,329 | $ | — | $ | — | ||||||
Non cash financing activities for the twelve months ended
December 31, 2010 and 2009 include the settlement of
893,198 and 33,625 shares, respectively, of restricted
stock and restricted stock units, where shares were withheld to
satisfy the minimum statuary tax withholding requirements.
| 19. | COMMITMENTS AND CONTINGENCIES |
Leases
— We lease certain property, plant and
equipment used in our operations under both capital and
operating lease agreements. Such leases, which are primarily for
machinery, equipment and vehicles, have lease terms ranging from
1 to 25 years. Certain of the operating lease agreements
require the payment of additional rentals for maintenance, along
with additional rentals based on miles driven or units produced.
Rent expense, including additional rent, was $33.1 million,
$34.3 million and $27.3 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
The composition of capital leases which are reflected as
Property, plant and equipment in the Consolidated Balance Sheets
are as follows:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
| (In thousands) | ||||||||
|
Machinery and equipment
|
$ | 3,381 | $ | 2,486 | ||||
|
Less accumulated amortization
|
(1,207 | ) | (869 | ) | ||||
|
Total
|
$ | 2,174 | $ | 1,617 | ||||
Purchase Obligations
— We have entered into
various contracts obligating us to purchase minimum quantities
of raw materials used in our production processes, including
cucumbers and tank yard space.
71
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Future minimum payments at December 31, 2010, under
non-cancelable capital leases, operating leases and purchase
obligations are summarized as follows:
|
Capital
|
Operating
|
Purchase
|
||||||||||
| Leases | Leases | Obligations | ||||||||||
| (In thousands) | ||||||||||||
|
2011
|
$ | 831 | $ | 12,614 | $ | 156,035 | ||||||
|
2012
|
805 | 8,707 | 10,963 | |||||||||
|
2013
|
672 | 5,259 | 1,915 | |||||||||
|
2014
|
90 | 5,073 | 1,230 | |||||||||
|
2015
|
32 | 4,775 | 36 | |||||||||
|
Thereafter
|
— | 13,515 | — | |||||||||
|
Total minimum payments
|
2,430 | $ | 49,943 | $ | 170,179 | |||||||
|
Less amount representing interest
|
137 | |||||||||||
|
Present value of capital lease obligations
|
$ | 2,293 | ||||||||||
Litigation, Investigations and Audits
— We are
party in the conduct of our business to certain claims,
litigation, audits and investigations. We believe we have
adequate reserves for any liability we may incur in connection
with any such currently pending or threatened matter. In our
opinion, the settlement of any such currently pending or
threatened matter is not expected to have a material adverse
impact on our financial position, annual results of operations
or cash flows.
| 20. | DERIVATIVE INSTRUMENTS |
The Company is exposed to certain risks relating to its ongoing
business operations. The primary risks managed by derivative
instruments are interest rate risk, foreign currency risk and
commodity price risk. Interest rate swaps are entered into to
manage interest rate risk associated with the Company’s
$750 million revolving credit facility. Interest on our
credit facility is variable and use of interest rate swaps
establishes a fixed rate over the term of a portion of the
facility. The Company’s objective in using an interest rate
swap is to establish a fixed interest rate, thereby enabling the
Company to predict and manage interest expense and cash flows in
a more efficient and effective manner.
During 2008, the Company entered into a $200 million
long-term interest rate swap agreement with an effective date of
November 19, 2008 to lock into a fixed LIBOR interest rate
base. Under the terms of the agreement, $200 million in
floating rate debt was swapped for a fixed rate of 2.9% interest
rate base for a period of 24 months, amortizing to
$50 million for an additional nine months at the same 2.9%
interest rate. The Company did not apply hedge accounting and
recorded the fair value of this instrument on its Consolidated
Balance Sheets. The fair value of the swap at December 31,
2010 and 2009 was a liability of approximately $0.9 million
and $4.9 million, respectively. The Company recorded income
of $4.0 million and $2.1 million and expense of
$7.0 million related to the mark to market adjustment in
2010, 2009 and 2008, respectively, within the Other (income)
expense line of the Consolidated Statements of Income.
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 certain Canadian raw material
purchases that are denominated in U.S. dollars, thereby
enabling the Company to manage its foreign currency exchange
rate risk. These contracts do not qualify for hedge accounting
and changes in their fair value are recorded through the
Consolidated Statements of Income, within the (Gain) loss on
foreign currency exchange line. As of December 31, 2010 we
had a liability of $0.2 million for foreign exchange
contracts. No foreign currency contracts were outstanding as of
December 31, 2009 or
72
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2008. During 2010 and 2009, the Company realized a loss of
approximately $0.2 million and a gain of approximately
$0.7 million in 2008 on these contracts.
During 2010, the Company entered into a commodity swap contract
for 5.4 million pounds of High Density Polyethylene
(“HDPE”) to manage the Company’s risk associated
with the underlying commodity cost of a significant component
used in packaging materials. The objective in using this swap is
to establish a fixed commodity cost over the term of the
contract. The trade date was June 3, 2010, with an
effective date of July 1, 2010 and an expiration date of
December 31, 2011. The Company will settle 0.3 million
pounds on a monthly basis over the term of the contract. The
Company did not apply hedge accounting to the commodity swap,
and it is recorded at fair value on the Company’s Condensed
Consolidated Balance Sheets. As of December 31, 2010, we
had an asset of $0.4 million associated with the commodity
swap contract. During 2010, the Company realized a gain of
$0.4 million on this contract which is recorded in the
Consolidated Statement of Income, within the Other (income)
expense line.
The following table identifies the derivative, its fair value,
and location on the Consolidated Balance Sheet:
| Fair Value | ||||||||||
|
Balance Sheet Location
|
December 31, 2010 | December 31, 2009 | ||||||||
| (In thousands) | ||||||||||
|
Liability Derivatives:
|
||||||||||
|
Interest rate swap
|
Accounts payable and accrued expenses | $ | 874 | $ | 3,327 | |||||
|
Foreign exchange contract
|
Accounts payable and accrued expenses | 184 | — | |||||||
| $ | 1,058 | $ | 3,327 | |||||||
|
Interest rate swap
|
Other Long-term liabilities | $ | — | $ | 1,550 | |||||
| $ | — | $ | 1,550 | |||||||
|
Asset Derivative:
|
||||||||||
|
Commodity contract
|
Prepaid expenses and other current assets | $ | 360 | $ | — | |||||
| $ | 360 | $ | — | |||||||
| 21. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
Cash and cash equivalents and accounts receivable are financial
assets with carrying values that approximate fair value.
Accounts payable are financial liabilities with carrying values
that approximate fair value. As of December 31, 2010, the
outstanding balance of the Company’s variable rate debt
(revolving credit facility) was $472.6 million, the fair
value of which is estimated to be $475.4 million, using a
present value technique and market based interest rates and
credit spreads. As of December 31, 2010, the carrying value
of the Company’s fixed rate senior notes was
$100.0 million and fair value was estimated to be
$100.2 million based on a present value technique using
market based interest rates and credit spreads. The fair value
of the Company’s 7.75% high yield notes due 2018, with an
outstanding balance of $400.0 million as of
December 31, 2010, was estimated at $434.0 million,
based on quoted market prices.
The fair value of the Company’s interest rate swap
agreement, as described in Notes 10 and 20, was a liability
of approximately $0.9 million as of December 31, 2010.
The fair value of the swap was determined using Level 2
inputs, which are inputs other than quoted prices that are
observable for an asset or liability, either directly or
indirectly. The fair value is based on a market approach,
comparing the fixed rate of 2.9% to the current and forward one
month LIBOR rates throughout the term of the swap agreement.
The fair value of the Company’s commodity contract as
described in Note 20 was an asset of approximately
$0.4 million as of December 31, 2010. The fair value
of the commodity contract was determined using Level 1
inputs. Level 1 inputs are those inputs where quoted prices
in active markets for identical assets or liabilities are
available.
73
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair value of the Company’s foreign exchange contract
as described in Note 20 was a liability of
$0.2 million as of December 31, 2010, using
level 2 inputs, comparing the foreign exchange rate of our
contract to the spot rate as of December 31, 2010.
| 22. | SEGMENT AND GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS |
We manage operations on a company-wide basis, thereby making
determinations as to the allocation of resources in total rather
than on a segment-level basis. We have designated our reportable
segments based on how management views our business. We do not
segregate assets between segments for internal reporting.
Therefore, asset-related information has not been presented. The
Company’s reportable segments, as presented below, are
consistent with the manner in which the Company reports its
results to the chief operating decision maker.
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; infant
feeding products; salad dressings and sauces; pickles and
related products; Mexican sauces; jams and pie fillings; aseptic
products; liquid non-dairy creamer; powdered drinks; hot
cereals; macaroni and cheese and skillet dinners. During 2010,
we exited the retail infant feeding business.
Our Food Away From Home segment sells non-dairy powdered
creamers, pickles and related products, Mexican sauces,
refrigerated dressings, aseptic products and hot cereals 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; pickles
and related products; Mexican sauces; infant feeding products
and refrigerated dressings. Export sales are primarily to
industrial customers outside of North America.
We evaluate the performance of our 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 our senior management team and do not include
allocated income taxes. Other expenses not allocated include
warehouse
start-up
costs, unallocated selling and distribution expenses and
corporate expenses which consist of general and administrative
expenses, amortization expense, other operating (income)
expense, interest expense, interest income, foreign currency
exchange and other (income) expense. The accounting policies of
our segments are the same as those described in the summary of
significant accounting policies set forth in Note 1
“Summary of Significant Accounting Policies”.
Financial information relating to the Company’s reportable
segments is as follows:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Net sales:
|
||||||||||||
|
North American Retail Grocery
|
$ | 1,247,126 | $ | 971,083 | $ | 917,102 | ||||||
|
Food Away From Home
|
314,998 | 292,927 | 294,020 | |||||||||
|
Industrial and Export
|
254,900 | 247,643 | 289,528 | |||||||||
|
Total
|
1,817,024 | 1,511,653 | 1,500,650 | |||||||||
|
Direct operating income:
|
||||||||||||
|
North American Retail Grocery
|
221,473 | 152,849 | 114,511 | |||||||||
|
Food Away From Home
|
47,751 | 36,069 | 32,133 | |||||||||
|
Industrial and Export
|
45,056 | 36,025 | 33,473 | |||||||||
|
Total
|
314,280 | 224,943 | 180,117 | |||||||||
74
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Unallocated warehouse
start-up
costs(1)
|
— | (3,339 | ) | — | ||||||||
|
Unallocated selling and distribution expenses
|
(3,066 | ) | (3,172 | ) | (3,824 | ) | ||||||
|
Unallocated corporate expense
|
(134,661 | ) | (87,623 | ) | (89,168 | ) | ||||||
|
Operating income
|
176,553 | 130,809 | 87,125 | |||||||||
|
Other expense
|
(40,153 | ) | (8,735 | ) | (47,670 | ) | ||||||
|
Income before income taxes
|
$ | 136,400 | $ | 122,074 | $ | 39,455 | ||||||
|
Depreciation:
|
||||||||||||
|
North American Retail Grocery
|
$ | 27,729 | $ | 21,395 | $ | 23,064 | ||||||
|
Food Away From Home
|
5,666 | 5,237 | 5,424 | |||||||||
|
Industrial and Export
|
7,332 | 5,485 | 2,344 | |||||||||
|
Corporate office
|
2,699 | 1,845 | 1,494 | |||||||||
|
Total
|
$ | 43,426 | $ | 33,962 | $ | 32,326 | ||||||
|
Trademark impairment:
|
||||||||||||
|
North American Retail Grocery
|
$ | — | $ | 7,600 | $ | 560 | ||||||
|
Food Away From Home
|
— | — | — | |||||||||
|
Industrial and Export
|
— | — | — | |||||||||
|
Total
|
$ | — | $ | 7,600 | $ | 560 | ||||||
| (1) | Included in Cost of sales in the Consolidated Statements of Income. |
Geographic Information
— We had revenues to
customers outside of the United States of approximately 13.5%,
13.7% and 14.3% of total consolidated net sales in 2010, 2009
and 2008, respectively, with 12.8%, 13.1% and 13.6% going to
Canada in 2010, 2009 and 2008, respectively. Sales are
determined based on customer destination.
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Long-lived assets
|
||||||||||||
|
United States
|
$ | 350,356 | $ | 242,144 | $ | 239,574 | ||||||
|
Canada
|
35,835 | 33,889 | 31,090 | |||||||||
|
Total
|
$ | 386,191 | $ | 276,033 | $ | 270,664 | ||||||
Long-lived assets consist of net property, plant and equipment.
Major Customers
— Wal-Mart Stores, Inc. and
affiliates accounted for approximately 18.5%, 14.4% and 15.1% of
our consolidated net sales in 2010, 2009 and 2008, respectively.
Sales to Wal-Mart Stores, Inc. and affiliates are included in
our North American Retail Grocery segment. No other customer
accounted for more than 10% of our consolidated net sales.
Total trade receivables with Wal-Mart Stores, Inc. and
affiliates represented approximately 22.6% and 13.3% of our
total trade receivables as of December 31, 2010 and 2009,
respectively.
75
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Product Information
— The following table
presents the Company’s net sales by major products.
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands) | ||||||||||||
|
Products:
|
||||||||||||
|
Pickles
|
$ | 328,058 | $ | 316,976 | $ | 325,579 | ||||||
|
Soup and infant feeding
|
322,490 | 344,181 | 336,519 | |||||||||
|
Non-dairy powdered creamer
|
305,659 | 323,926 | 351,838 | |||||||||
|
Salad dressings
|
208,209 | 186,778 | 156,884 | |||||||||
|
Jams and other sauces
|
165,622 | 155,771 | 153,927 | |||||||||
|
Powdered drinks
|
154,751 | — | — | |||||||||
|
Hot cereals
|
120,486 | — | — | |||||||||
|
Aseptic products
|
88,119 | 84,493 | 83,198 | |||||||||
|
Mexican sauces
|
74,725 | 64,520 | 52,718 | |||||||||
|
Refrigerated products
|
31,777 | 35,008 | 39,987 | |||||||||
|
Dry dinners
|
17,128 | — | — | |||||||||
|
Total net sales
|
$ | 1,817,024 | $ | 1,511,653 | $ | 1,500,650 | ||||||
| 23. | QUARTERLY RESULTS OF OPERATIONS (unaudited) |
The following is a summary of our unaudited quarterly results of
operations for 2010 and 2009:
Fiscal
2010
| Quarter | ||||||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
Fiscal 2010
|
||||||||||||||||
|
Net sales
|
$ | 397,124 | $ | 446,195 | $ | 464,242 | $ | 509,463 | ||||||||
|
Gross profit
|
88,778 | 106,150 | 110,237 | 126,169 | ||||||||||||
|
Income before income taxes
|
24,604 | 32,257 | 36,810 | 42,729 | ||||||||||||
|
Net income
|
16,319 | 21,652 | 24,867 | 28,081 | ||||||||||||
|
Net income per common share:
|
||||||||||||||||
|
Basic
|
.49 | .62 | .70 | .79 | ||||||||||||
|
Diluted
|
.47 | .60 | .68 | .77 | ||||||||||||
|
Fiscal 2009
|
||||||||||||||||
|
Net sales
|
$ | 355,396 | $ | 372,605 | $ | 378,865 | $ | 404,787 | ||||||||
|
Gross profit
|
71,711 | 79,844 | 80,518 | 94,297 | ||||||||||||
|
Income before income taxes(1)
|
20,211 | 28,156 | 43,407 | 30,300 | ||||||||||||
|
Net income
|
12,732 | 18,425 | 28,064 | 22,093 | ||||||||||||
|
Net income per common share:
|
||||||||||||||||
|
Basic
|
.40 | .58 | .87 | .68 | ||||||||||||
|
Diluted
|
.39 | .58 | .85 | .66 | ||||||||||||
| (1) | Includes trademark impairment of $7.6 million before tax in the fourth quarter of 2009. |
76
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 24. | GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION |
With the acquisition of Sturm, the Company issued
$400 million in new debt which is guaranteed by its wholly
owned subsidiaries Bay Valley Foods, LLC; EDS Holdings, LLC;
Sturm Foods, Inc.; STSF Holdings, Inc. and S.T. Specialty Foods,
Inc. and certain other of our subsidiaries that may become
guarantors from time to time in accordance with the applicable
indenture and may fully, jointly, severally and unconditionally
guarantee our payment obligations under any series of debt
securities offered. There are no significant restrictions on the
ability of the parent company or any guarantor to obtain funds
from its subsidiaries by dividend or loan. The following
condensed consolidating financial information presents the
results of operations, financial position and cash flows of
TreeHouse Foods, Inc., its Guarantor subsidiaries, its
non-Guarantor subsidiaries and the eliminations necessary to
arrive at the information for the Company on a consolidated
basis as of December 31, 2010 and 2009 and for the years
ended December 31, 2010, 2009 and 2008. The equity method
has been used with respect to investments in subsidiaries. The
principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
Condensed
Supplemental Consolidating Balance Sheet
December 31, 2010
December 31, 2010
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | — | $ | 6 | $ | 6,317 | $ | — | $ | 6,323 | ||||||||||
|
Accounts receivable, net
|
3,381 | 104,227 | 19,036 | — | 126,644 | |||||||||||||||
|
Inventories, net
|
— | 251,993 | 35,402 | — | 287,395 | |||||||||||||||
|
Deferred income taxes
|
339 | 2,916 | 244 | — | 3,499 | |||||||||||||||
|
Assets held for sale
|
— | 4,081 | — | — | 4,081 | |||||||||||||||
|
Prepaid expenses and other current assets
|
1,299 | 10,997 | 565 | — | 12,861 | |||||||||||||||
|
Total current assets
|
5,019 | 374,220 | 61,564 | — | 440,803 | |||||||||||||||
|
Property, plant and equipment, net
|
12,722 | 337,634 | 35,835 | — | 386,191 | |||||||||||||||
|
Goodwill
|
— | 963,031 | 113,290 | — | 1,076,321 | |||||||||||||||
|
Investment in subsidiaries
|
1,216,618 | 140,727 | — | (1,357,345 | ) | — | ||||||||||||||
|
Intercompany accounts receivable, net
|
703,283 | (586,789 | ) | (116,494 | ) | — | — | |||||||||||||
|
Deferred income taxes
|
13,179 | — | — | (13,179 | ) | — | ||||||||||||||
|
Identifiable intangible and other assets, net
|
45,005 | 358,805 | 84,123 | — | 487,933 | |||||||||||||||
|
Total assets
|
$ | 1,995,826 | $ | 1,587,628 | $ | 178,318 | $ | (1,370,524 | ) | $ | 2,391,248 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 33,363 | $ | 147,889 | $ | 21,132 | $ | — | $ | 202,384 | ||||||||||
|
Current portion of long-term debt
|
— | 976 | — | — | 976 | |||||||||||||||
|
Total current liabilities
|
33,363 | 148,865 | 21,132 | — | 203,360 | |||||||||||||||
|
Long-term debt
|
963,014 | 13,438 | — | — | 976,452 | |||||||||||||||
|
Deferred income taxes
|
6,210 | 185,427 | 16,459 | (13,179 | ) | 194,917 | ||||||||||||||
|
Other long-term liabilities
|
15,273 | 23,280 | — | — | 38,553 | |||||||||||||||
|
Shareholders’ equity
|
977,966 | 1,216,618 | 140,727 | (1,357,345 | ) | 977,966 | ||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,995,826 | $ | 1,587,628 | $ | 178,318 | $ | (1,370,524 | ) | $ | 2,391,248 | |||||||||
77
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Supplemental Consolidating Balance Sheet
December 31, 2009
December 31, 2009
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 1 | $ | 8 | $ | 4,406 | $ | — | $ | 4,415 | ||||||||||
|
Accounts receivable, net
|
325 | 66,573 | 19,659 | — | 86,557 | |||||||||||||||
|
Inventories, net
|
— | 229,185 | 35,748 | — | 264,933 | |||||||||||||||
|
Deferred income taxes
|
1,875 | 990 | 532 | — | 3,397 | |||||||||||||||
|
Assets held for sale
|
— | 4,081 | — | — | 4,081 | |||||||||||||||
|
Prepaid expenses and other current assets
|
384 | 6,253 | 632 | — | 7,269 | |||||||||||||||
|
Total current assets
|
2,585 | 307,090 | 60,977 | — | 370,652 | |||||||||||||||
|
Property, plant and equipment, net
|
11,549 | 230,595 | 33,889 | — | 276,033 | |||||||||||||||
|
Goodwill
|
— | 466,274 | 108,733 | — | 575,007 | |||||||||||||||
|
Investment in subsidiaries
|
1,054,776 | 94,804 | — | (1,149,580 | ) | — | ||||||||||||||
|
Intercompany accounts receivable, net
|
87,643 | 65,683 | (153,326 | ) | — | — | ||||||||||||||
|
Deferred income taxes
|
21,186 | — | — | (21,186 | ) | — | ||||||||||||||
|
Identifiable intangible and other assets, net
|
14,328 | 65,156 | 83,252 | — | 162,736 | |||||||||||||||
|
Total assets
|
$ | 1,192,067 | $ | 1,229,602 | $ | 133,525 | $ | (1,170,766 | ) | $ | 1,384,428 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Accounts payable and accrued expenses
|
$ | 31,458 | $ | 94,936 | $ | 22,425 | $ | — | $ | 148,819 | ||||||||||
|
Current portion of long-term debt
|
200 | 554 | 152 | — | 906 | |||||||||||||||
|
Total current liabilities
|
31,658 | 95,490 | 22,577 | — | 149,725 | |||||||||||||||
|
Long-term debt
|
390,037 | 11,603 | — | — | 401,640 | |||||||||||||||
|
Deferred income taxes
|
5,609 | 44,914 | 16,044 | (21,186 | ) | 45,381 | ||||||||||||||
|
Other long-term liabilities
|
8,534 | 22,819 | 100 | — | 31,453 | |||||||||||||||
|
Shareholders’ equity
|
756,229 | 1,054,776 | 94,804 | (1,149,580 | ) | 756,229 | ||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,192,067 | $ | 1,229,602 | $ | 133,525 | $ | (1,170,766 | ) | $ | 1,384,428 | |||||||||
78
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Supplemental Consolidating Statement of Income
Year Ended December 31, 2010
Year Ended December 31, 2010
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 1,593,324 | $ | 250,001 | $ | (26,301 | ) | $ | 1,817,024 | |||||||||
|
Cost of sales
|
— | 1,215,837 | 196,154 | (26,301 | ) | 1,385,690 | ||||||||||||||
|
Gross profit
|
— | 377,487 | 53,847 | — | 431,334 | |||||||||||||||
|
Selling, general and administrative expense
|
50,605 | 153,619 | 23,022 | — | 227,246 | |||||||||||||||
|
Amortization
|
526 | 21,085 | 4,741 | — | 26,352 | |||||||||||||||
|
Other operating income, net
|
— | 1,183 | — | — | 1,183 | |||||||||||||||
|
Operating (loss) income
|
(51,131 | ) | 201,600 | 26,084 | — | 176,553 | ||||||||||||||
|
Interest expense (income), net
|
44,824 | (12,862 | ) | 13,729 | — | 45,691 | ||||||||||||||
|
Other (income) expense, net
|
(4,002 | ) | 1,537 | (3,073 | ) | — | (5,538 | ) | ||||||||||||
|
(Loss) income from continuing operations, before income taxes
|
(91,953 | ) | 212,925 | 15,428 | — | 136,400 | ||||||||||||||
|
Income taxes (benefit)
|
(35,782 | ) | 76,702 | 4,561 | — | 45,481 | ||||||||||||||
|
Equity in net income of subsidiaries
|
147,090 | 10,867 | — | (157,957 | ) | — | ||||||||||||||
|
Income from continuing operations
|
||||||||||||||||||||
|
Loss from discontinued operations
|
||||||||||||||||||||
|
Net income (loss)
|
$ | 90,919 | $ | 147,090 | $ | 10,867 | $ | (157,957 | ) | $ | 90,919 | |||||||||
Condensed
Supplemental Consolidating Statement of Income
Year Ended December 31, 2009
Year Ended December 31, 2009
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 1,300,694 | $ | 246,715 | $ | (35,756 | ) | $ | 1,511,653 | |||||||||
|
Cost of sales
|
— | 1,016,524 | 204,515 | (35,756 | ) | 1,185,283 | ||||||||||||||
|
Gross profit
|
— | 284,170 | 42,200 | — | 326,370 | |||||||||||||||
|
Selling, general and administrative expense
|
36,560 | 128,592 | 23,252 | — | 188,404 | |||||||||||||||
|
Amortization
|
926 | 7,809 | 4,646 | — | 13,381 | |||||||||||||||
|
Other operating expense (income), net
|
7,600 | (13,824 | ) | — | — | (6,224 | ) | |||||||||||||
|
Operating (loss) income
|
(45,086 | ) | 161,593 | 14,302 | — | 130,809 | ||||||||||||||
|
Interest expense (income), net
|
15,922 | (11,279 | ) | 13,787 | — | 18,430 | ||||||||||||||
|
Other (income) expense, net
|
(2,104 | ) | (11,855 | ) | 4,264 | — | (9,695 | ) | ||||||||||||
|
(Loss) income from continuing operations, before income taxes
|
(58,904 | ) | 184,727 | (3,749 | ) | — | 122,074 | |||||||||||||
|
Income taxes (benefit)
|
(23,375 | ) | 63,321 | 814 | — | 40,760 | ||||||||||||||
|
Equity in net income of subsidiaries
|
116,843 | (4,563 | ) | — | (112,280 | ) | — | |||||||||||||
|
Net income (loss)
|
$ | 81,314 | $ | 116,843 | $ | (4,563 | ) | $ | (112,280 | ) | $ | 81,314 | ||||||||
79
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Supplemental Consolidating Statement of Income
Year Ended December 31, 2008
Year Ended December 31, 2008
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net sales
|
$ | — | $ | 1,252,780 | $ | 252,756 | $ | (4,886 | ) | $ | 1,500,650 | |||||||||
|
Cost of sales
|
— | 1,017,798 | 195,714 | (4,886 | ) | 1,208,626 | ||||||||||||||
|
Gross profit
|
— | 234,982 | 57,042 | — | 292,024 | |||||||||||||||
|
Selling, general and administrative expense
|
27,938 | 121,729 | 27,805 | — | 177,472 | |||||||||||||||
|
Amortization
|
415 | 7,802 | 5,311 | — | 13,528 | |||||||||||||||
|
Other operating expense, net
|
560 | 13,339 | — | — | 13,899 | |||||||||||||||
|
Operating (loss) income
|
(28,913 | ) | 92,112 | 23,926 | — | 87,125 | ||||||||||||||
|
Interest expense (income), net
|
24,259 | (13,326 | ) | 16,681 | — | 27,614 | ||||||||||||||
|
Other expense, net
|
6,981 | 9,170 | 3,905 | — | 20,056 | |||||||||||||||
|
(Loss) income from continuing operations, before income taxes
|
(60,153 | ) | 96,268 | 3,340 | — | 39,455 | ||||||||||||||
|
Income taxes (benefit)
|
(22,659 | ) | 32,078 | 1,476 | — | 10,895 | ||||||||||||||
|
Equity in net income of subsidiaries
|
65,718 | 1,864 | — | (67,582 | ) | — | ||||||||||||||
|
Income from continuing operations
|
28,224 | 66,054 | 1,864 | (67,582 | ) | 28,560 | ||||||||||||||
|
Loss from discontinued operations
|
— | (336 | ) | — | — | (336 | ) | |||||||||||||
|
Net income
|
$ | 28,224 | $ | 65,718 | $ | 1,864 | $ | (67,582 | ) | $ | 28,224 | |||||||||
80
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Supplemental Consolidating Statement of Cash Flows
Fiscal Year Ended December 31, 2010
Fiscal Year Ended December 31, 2010
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net cash (used) provided by operations
|
$ | (39,737 | ) | $ | 276,416 | $ | 7,972 | $ | — | $ | 244,651 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||
|
Additions to property, plant and equipment
|
(463 | ) | (33,485 | ) | (5,595 | ) | — | (39,543 | ) | |||||||||||
|
Additions to intangible assets
|
(14,763 | ) | (5,883 | ) | (1,464 | ) | — | (22,110 | ) | |||||||||||
|
Cash outflows for acquisitions, net of cash acquired
|
1,641 | (846,137 | ) | — | — | (844,496 | ) | |||||||||||||
|
Proceeds from sale of fixed assets
|
— | (367 | ) | 410 | — | 43 | ||||||||||||||
|
Net cash used in continuing operations
|
(13,585 | ) | (885,872 | ) | (6,649 | ) | — | (906,106 | ) | |||||||||||
|
Net cash provided by discontinued operations
|
— | — | — | — | — | |||||||||||||||
|
Net cash provided by (used in) investing activities
|
(13,585 | ) | (885,872 | ) | (6,649 | ) | — | (906,106 | ) | |||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||
|
Proceeds from issuance of debt
|
400,000 | — | — | — | 400,000 | |||||||||||||||
|
Net borrowing (repayment) of debt
|
174,600 | (1,056 | ) | (154 | ) | — | 173,390 | |||||||||||||
|
Intercompany transfer
|
(610,510 | ) | 610,510 | — | — | — | ||||||||||||||
|
Payment of deferred financing costs
|
(16,418 | ) | — | — | — | (16,418 | ) | |||||||||||||
|
Excess tax benefit from stock based compensation
|
5,732 | — | — | — | 5,732 | |||||||||||||||
|
Cash used to net share settle equity awards
|
(15,370 | ) | — | — | — | (15,370 | ) | |||||||||||||
|
Issuance of common stock, net of expenses
|
110,688 | — | — | — | 110,688 | |||||||||||||||
|
Proceeds from stock option exercises
|
4,599 | — | — | — | 4,599 | |||||||||||||||
|
Net cash provided by (used in) financing activities
|
53,321 | 609,454 | (154 | ) | — | 662,621 | ||||||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
— | — | 742 | — | 742 | |||||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
(1 | ) | (2 | ) | 1,911 | — | 1,908 | |||||||||||||
|
Cash and cash equivalents, beginning of year
|
1 | 8 | 4,406 | — | 4,415 | |||||||||||||||
|
Cash and cash equivalents, end of year
|
$ | — | $ | 6 | $ | 6,317 | $ | — | $ | 6,323 | ||||||||||
81
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Supplemental Consolidating Statement of Cash Flows
Fiscal Year Ended December 31, 2009
Fiscal Year Ended December 31, 2009
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net cash (used) provided by operating activities
|
$ | (85,858 | ) | $ | 167,537 | $ | 23,165 | $ | — | $ | 104,844 | |||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||
|
Additions to property, plant and equipment
|
(166 | ) | (33,693 | ) | (3,128 | ) | — | (36,987 | ) | |||||||||||
|
Insurance proceeds
|
— | 2,863 | — | — | 2,863 | |||||||||||||||
|
Proceeds from sale of fixed assets
|
— | 6 | — | — | 6 | |||||||||||||||
|
Net cash used in investing activities
|
(166 | ) | (30,824 | ) | (3,128 | ) | — | (34,118 | ) | |||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||
|
Net repayment of debt
|
(73,800 | ) | 18,342 | (19,026 | ) | — | (74,484 | ) | ||||||||||||
|
Intercompany transfer
|
155,054 | (155,054 | ) | — | — | — | ||||||||||||||
|
Excess tax benefits from stock based compensation
|
169 | — | — | — | 169 | |||||||||||||||
|
Cash used to net settle equity awards
|
(336 | ) | — | — | — | (336 | ) | |||||||||||||
|
Proceeds from stock option exercises
|
4,926 | — | — | — | 4,926 | |||||||||||||||
|
Net cash used in financing activities
|
86,013 | (136,712 | ) | (19,026 | ) | — | (69,725 | ) | ||||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
— | — | 727 | — | 727 | |||||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
(11 | ) | 1 | 1,738 | — | 1,728 | ||||||||||||||
|
Cash and cash equivalents, beginning of year
|
12 | 7 | 2,668 | — | 2,687 | |||||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 1 | $ | 8 | $ | 4,406 | $ | — | $ | 4,415 | ||||||||||
82
Table of Contents
TREEHOUSE
FOODS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Supplemental Consolidating Statement of Cash Flows
Fiscal Year Ended December 31, 2008
Fiscal Year Ended December 31, 2008
|
Parent
|
Subsidiary
|
Non-Guarantor
|
||||||||||||||||||
| Company | Guarantors | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
Net cash provided by operating activities
|
$ | 26,616 | $ | 127,353 | $ | 21,667 | $ | — | $ | 175,636 | ||||||||||
|
Cash flows from investing activities:
|
||||||||||||||||||||
|
Additions to property, plant and equipment
|
(12,133 | ) | (40,232 | ) | (3,106 | ) | — | (55,471 | ) | |||||||||||
|
Insurance proceeds
|
— | 12,047 | — | 12,047 | ||||||||||||||||
|
Acquisitions, net of cash acquired
|
67 | — | (318 | ) | — | (251 | ) | |||||||||||||
|
Proceeds from sale of fixed assets
|
1,679 | — | — | 1,679 | ||||||||||||||||
|
Net cash used in continuing operations
|
(12,066 | ) | (26,506 | ) | (3,424 | ) | — | (41,996 | ) | |||||||||||
|
Net cash provided by discontinued operations
|
— | 157 | — | — | 157 | |||||||||||||||
|
Net cash used in investing activities
|
(12,066 | ) | (26,349 | ) | (3,424 | ) | — | (41,839 | ) | |||||||||||
|
Cash flows from financing activities:
|
||||||||||||||||||||
|
Net repayment of debt
|
(139,673 | ) | 14,757 | (20,621 | ) | — | (145,537 | ) | ||||||||||||
|
Intercompany transfer
|
115,986 | (115,986 | ) | — | — | — | ||||||||||||||
|
Excess tax benefits from stock based payment arrangements
|
377 | — | — | — | 377 | |||||||||||||||
|
Proceeds from stock option exercises
|
5,434 | — | — | — | 5,434 | |||||||||||||||
|
Net cash used in financing activities
|
(17,876 | ) | (101,229 | ) | (20,621 | ) | — | (139,726 | ) | |||||||||||
|
Effect of exchange rate changes on cash and cash equivalents
|
— | — | (614 | ) | — | (614 | ) | |||||||||||||
|
Increase (decrease) in cash and cash equivalents
|
(3,326 | ) | (225 | ) | (2,992 | ) | — | (6,543 | ) | |||||||||||
|
Cash and cash equivalents, beginning of year
|
3,338 | 232 | 5,660 | — | 9,230 | |||||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 12 | $ | 7 | $ | 2,668 | $ | — | $ | 2,687 | ||||||||||
83
Table of Contents
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Disclosure
Controls and Procedures
The Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in
Rules 13a-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) as of December 31, 2010. Based
on such evaluations, the Company’s Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end
of such period, the Company’s disclosure controls and
procedures were effective in recording, processing, summarizing,
and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits
under the Exchange Act, and that information is accumulated and
communicated to the Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely discussions regarding
required disclosure.
Management’s
Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in
Rule 13a-15(f)
under the Exchange Act. The Company’s management, with the
participation of Company’s Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the
Company’s internal control over financial reporting based
on the criteria set forth in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. The scope of management’s
assessment of the effectiveness of internal control over
financial reporting as of December 31, 2010 includes all of
the Company’s subsidiaries except for Sturm Foods, Inc. and
S.T. Specialty Foods, Inc., which were acquired in 2010. This
scope exception is permissible under applicable Securities and
Exchange Commission guidelines. The net sales and total assets
of Sturm and S.T. Foods represented approximately 16% and 42%,
respectively, of the related Consolidated Financial Statement
amounts for the year ended December 31, 2010. Based on this
evaluation, the Company’s management has concluded that, as
of December 31, 2010, the Company’s internal control
over financial reporting was effective.
The Company’s independent registered public accounting
firm, Deloitte & Touche LLP, has issued an attestation
report on the Company’s internal control over financial
reporting as of December 31, 2010. This report is included
with this
Form 10-K.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Changes
in Internal Controls over Financial Reporting
There was no change in the Company’s internal control over
financial reporting (as defined in
Rule 13a-15(f)
of the Exchange Act) identified in connection with the
evaluation required by
Rule 13a-15(d)
of the Exchange Act, that occurred during the fourth quarter of
the fiscal year covered by this report on
Form 10-K,
that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
84
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TreeHouse Foods, Inc.
Oak Brook, IL
We have audited the internal control over financial reporting of
TreeHouse Foods, Inc. and subsidiaries (the “Company”)
as of December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. As described in the Management Report on Internal
Control Over Financial Reporting, management excluded from its
assessment the internal control over financial reporting at
Sturm Foods, Inc. which was acquired on March 2, 2010, and
STSF Holdings, Inc., which was acquired on October 28,
2010, whose combined financial statements constitute 42% of
total assets and 16% of revenues of the consolidated financial
statement amounts as of and for the year ended December 31,
2010. Accordingly, our audit did not include the internal
control over financial reporting at Sturm Foods, Inc. and STSF
Holdings, Inc. The Company’s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
85
Table of Contents
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2010 of
the Company and our report dated February 14, 2011
expressed an unqualified opinion on those financial statements
and financial statement schedule.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 14, 2011
86
Table of Contents
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
Information required by this item about our directors and
executive officers is included in our Proxy Statement
(“2011 Proxy Statement”) to be filed with the
Securities and Exchange Commission in connection with our 2011
annual meeting of the stockholders under the headings,
Directors And Management — Directors and Executive
Officers
and
Election of Directors
and is
incorporated herein by reference.
Information about compliance with the reporting requirements of
Section 16(a) of the Securities Exchange Act of 1934, as
amended, by our executive officers and directors, persons who
own more than ten percent of our common stock, and their
affiliates who are required to comply with such reporting
requirements, is included in our 2011 Proxy Statement under the
headings,
Stock Ownership
—
Security
Ownership of Certain Beneficial Owners and Management
and
Section 16(a) Beneficial Ownership Reporting Compliance
and is incorporated herein by reference. Information about
the Audit Committee Financial Expert is included in our 2011
Proxy Statement under the heading,
Corporate Governance
—
Meetings of the Board of Directors and
Committee Meetings/Role of Committees,
and is incorporated
herein by reference.
The information required by this item concerning our executive
officers is incorporated herein by reference to our proxy
statement (to be filed) for our April 28, 2011 Annual
Meeting of Stockholders.
Our Code of Ethics, which is applicable to all of our employees
and directors, is available on our corporate website at
http://www.treehousefoods.com,
along with the Corporate Governance Guidelines of our Board of
Directors and the charters of the Committees of our Board of
Directors. Any waivers that we may grant to our executive
officers or directors under the Code of Ethics, and any
amendments to our Code of Ethics, will be posted on our
corporate website. Any of these items or any of our filings with
the Securities and Exchange Commission are available in print to
any shareowner who requests them. Requests should be sent to
Investor Relations, TreeHouse Foods, Inc., 2021 Spring Road,
Suite 600, Oak Brook, IL 60523.
We submitted the certification of our chief executive officer
required by Section 303A.12 of the NYSE Listed Company
Manual, relating to our compliance with the NYSE’s
corporate governance listing standards, on May 10, 2010
without qualification. In addition, we have included the
certifications required of our chief executive officer and our
chief financial officer by Section 302 of the
Sarbanes-Oxley Act of 2002 and related rules with respect to the
quality of our disclosures in our
Form 10-K
for the year ended December 31, 2010, as Exhibits 31.1
and 31.2, respectively, to this
Form 10-K.
| Item 11. | Executive Compensation |
The information required by this item is included in the 2011
Proxy Statement under the headings,
Stock Ownership,
Compensation Discussion and Analysis, Executive Compensation,
Compensation Committee Interlocks and Insider Participation
and
Committee Reports — Report of the
Compensation Committee
and is incorporated herein by
reference. Notwithstanding anything to the contrary set forth in
this report, the
Committee Reports — Report of the
Compensation Committee
section of the 2011 Proxy Statement
shall be deemed to be “furnished” and not
“filed” for purposes of the Securities Exchange Act of
1934, as amended.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is included in the 2011
Proxy Statement under the heading,
Stock
Ownership — Security Ownership of Certain Beneficial
Owners and Management
and is incorporated herein by
reference.
87
Table of Contents
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is included in the 2011
Proxy Statement under the heading,
Corporate Governance
and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
The information required by this item is included in the 2011
Proxy Statement under the heading,
Fees Billed by Independent
Registered Public Accounting Firm
and is incorporated herein
by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
The following documents are filed as part of this
Form 10-K.
| Page | ||||
|
1. Financial Statements filed as a part of this document under
Item 8
|
40 | |||
| 41 | ||||
| 42 | ||||
| 43 | ||||
| 44 | ||||
| 45 | ||||
| 46 | ||||
|
2. Financial Statement Schedule
|
||||
| 90 | ||||
|
3. Exhibits
|
91 | |||
88
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TREEHOUSE FOODS, INC.
/s/ Dennis
F. Riordan
Dennis F. Riordan
Senior Vice President and Chief Financial Officer
February 14, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
Name
|
Title
|
Date
|
||||
|
/s/ Sam
K. Reed
|
Chairman of the Board,
Chief Executive Officer and Director (Principal Executive Officer) |
February 14, 2011 | ||||
|
/s/ Dennis
F. Riordan
|
Senior Vice President and
Chief Financial Officer (Principal Financial and Accounting Officer) |
February 14, 2011 | ||||
|
/s/ George
V. Bayly
|
Director | February 14, 2011 | ||||
|
/s/ Diana
S. Ferguson
|
Director | February 14, 2011 | ||||
|
/s/ Dennis
F. O’Brien
|
Director | February 14, 2011 | ||||
|
/s/ Frank
J. O’Connell
|
Director | February 14, 2011 | ||||
|
/s/ Ann
M. Sardini
|
Director | February 14, 2011 | ||||
|
/s/ Gary
D. Smith
|
Director | February 14, 2011 | ||||
|
/s/ Terdema
L. Ussery, II
|
Director | February 14, 2011 | ||||
|
/s/ David
B. Vermylen
|
Director
President and Chief Operating Officer |
February 14, 2011 | ||||
89
Table of Contents
SCHEDULE II
TREEHOUSE
FOODS, INC.
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2010, 2009 and 2008
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2010, 2009 and 2008
Allowance for doubtful accounts deducted from accounts
receivable:
|
Balance
|
Change
|
Write-Off of
|
||||||||||||||||||||||
|
Beginning
|
to
|
Uncollectible
|
Balance
|
|||||||||||||||||||||
|
Year
|
of Year | Allowance | Acquisitions | Accounts | Recoveries | End of Year | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
2008
|
$ | 637 | $ | 150 | $ | — | $ | (314 | ) | $ | 5 | $ | 478 | |||||||||||
|
2009
|
$ | 478 | $ | 68 | $ | — | $ | (124 | ) | $ | 2 | $ | 424 | |||||||||||
|
2010
|
$ | 424 | $ | (50 | ) | $ | 243 | $ | (60 | ) | $ | 193 | $ | 750 | ||||||||||
90
Table of Contents
INDEX TO
EXHIBITS
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Exhibit No.
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Exhibit Description
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| 2 | .1 | Purchase Agreement, dated as of April 20, 2007, among Silver Brands Partners II, L.P., VDW Farms, Ltd., VDW Management, L.L.C., and Bay Valley Foods, LLC is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated April 23, 2007. | ||
| 2 | .2 | Purchase Agreement, dated as of June 24, 2007 between E.D. Smith Operating Trust, E.D. Smith Limited Partnership, E.D. Smith Income Fund and TreeHouse Foods, Inc. is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated June 27, 2007. | ||
| 2 | .3 | Stock Purchase Agreement, dated as of December 20, 2009, among TreeHouse Foods, Inc., Sturm Foods, Inc., HMSF, L.P. and other shareholders of Sturm Foods, Inc. is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K dated December 20, 2009. | ||
| 2 | .4 | Securities Purchase Agreement, dated as of September 13, 2010, among STSF Holdings LLC, STSF Holdings, Inc., S.T. Specialty Foods, Inc. and the Company is incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated September 13, 2010. | ||
| 2 | .5 | Earnout Agreement between STSF Holdings, LLC and the Company is incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K dated September 13, 2010. | ||
| 3 | .1 | Restated Certificate of Incorporation of TreeHouse Foods, Inc., as amended on April 30, 2009 is incorporated by reference to Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2009. | ||
| 3 | .2 | Amended and Restated By-Laws of TreeHouse Foods, Inc. is incorporated by reference to Exhibit 3.2 of our quarterly report on Form 10-Q filed with the Commission November 4, 2009. | ||
| 4 | .1 | Form of TreeHouse Foods, Inc. Common Stock Certificate is incorporated by reference to Exhibit 4.1 to Amendment No. 1 to our Registration Statement on Form 10 filed with the Commission on June 9, 2005. | ||
| 4 | .2 | Form of Certificate of Designation of Series A Junior Participating Preferred Stock incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated June 28, 2005. | ||
| 4 | .3* | Third Supplemental Indenture, dated October 28, 2010, among the Company, the subsidiary guarantors party thereto and the Trustee. | ||
| 10 | .1** | Employment Agreement, dated January 27, 2005, by and between TreeHouse Foods, Inc. and Sam K. Reed is incorporated by reference to Exhibit 10.1 to our Registration Statement on Form 10 filed with the Commission on May 13, 2005. | ||
| 10 | .2** | Employment Agreement, dated January 27, 2005, by and between TreeHouse Foods, Inc. and David B. Vermylen is incorporated by reference to Exhibit 10.2 to our Registration Statement on Form 10 filed with the Commission on May 13, 2005. | ||
| 10 | .3** | Employment Agreement, dated January 27, 2005, by and between TreeHouse Foods, Inc. and Thomas E. O’Neill is incorporated by reference to Exhibit 10.4 to our Registration Statement on Form 10 filed with the Commission on May 13, 2005. | ||
| 10 | .4** | Employment Agreement, dated January 27, 2005, by and between TreeHouse Foods, Inc. and Harry J. Walsh is incorporated by reference to Exhibit 10.5 to our Registration Statement on Form 10 filed with the Commission on May 13, 2005. | ||
| 10 | .5 | Form of Subscription Agreement is incorporated by reference to Exhibit 10.6 to our Registration Statement on Form 10 filed with the Commission on May 13, 2005. | ||
| 10 | .6** | Form of Memorandum of Amendment to Stockholders Agreement and Employment Agreements of Sam K. Reed, David B. Vermylen, E. Nichol McCully, Thomas E. O’Neill, and Harry J. Walsh is incorporated by reference to Exhibit 10.14 to Amendment No. 1 to our Registration Statement on Form 10 filed with the Commission on June 9, 2005. | ||
| 10 | .7** | TreeHouse Foods, Inc. Executive Deferred Compensation Plan is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated August 3, 2005. | ||
| 10 | .8 | Credit Agreement dated as of June 27, 2005, between TreeHouse Foods, Inc. and a group of Lenders with Bank of America as Administrative Agent, Swing Line Lender and L/C Issuer is incorporated by reference to Exhibit 10.16 of our Form 10-Q filed with the Commission on May 12, 2006. | ||
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Exhibit No.
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Exhibit Description
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| 10 | .9 | Amendment No. 1 dated as of August 31, 2006 to the Credit Agreement dated June 27, 2005 is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated August 31, 2006. | ||
| 10 | .10 | Note Purchase Agreement dated as of September 22, 2006 by and among TreeHouse Foods, Inc. and a group of Purchasers is incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K dated September 22, 2006. | ||
| 10 | .11** | Amendments to and a restatement of our 2005 Long-Term Incentive Plan which was renamed the “TreeHouse Foods, Inc. Equity and Incentive Plan” is incorporated by reference to Appendix A of the Schedule 14A (Proxy Statement) dated February 27, 2007. | ||
| 10 | .12** | Amendment to the TreeHouse Foods, Inc. Equity and Incentive Plan is incorporated by reference to Exhibit 10.1 of our Form 10-Q filed with the Commission August 8, 2007. | ||
| 10 | .13 | Amendment to No. 2 dated as of August 30, 2007 to the Credit Agreement dated June 27, 2005 is incorporated by reference to exhibit 10.1 to our Current Report on Form 8-K dated September 4, 2007. | ||
| 10 | .14** | First Amendment to the January 27, 2005 Employment Agreement by and between TreeHouse Foods, Inc. and Sam K. Reed is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .15** | First Amendment to the January 27, 2005 Employment Agreement by and between TreeHouse Foods, Inc. and Thomas E. O’Neill is incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .16** | First Amendment to the January 27, 2005 Employment Agreement by and between TreeHouse Foods, Inc. and David B. Vermylen is incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .17** | First Amendment to the January 27, 2005 Employment Agreement by and between TreeHouse Foods, Inc. and Harry J. Walsh is incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .18** | Employment Agreement by and between TreeHouse Foods, Inc. and Dennis F. Riordan is incorporated by reference to Exhibit 10.5 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .19** | First Amendment to the TreeHouse Foods, Inc. Executive Deferred Compensation Plan is incorporated by reference to Exhibit 10.6 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .20** | First Amendment to the TreeHouse Foods, Inc. Equity and Incentive Plan is incorporated by reference to Exhibit 10.10 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .21** | Amended and Restated TreeHouse Foods, Inc. Executive Severance Plan is incorporated by reference to Exhibit 10.11 to our Current Report on Form 8-K dated November 5, 2008. | ||
| 10 | .22** | First Amendment to Employment Agreement, date April 21, 2009, between TreeHouse Foods, Inc. and Dennis F. Riordan is Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K dated April 21, 2009. | ||
| 10 | .23** | Form of employee Cash Long-Term Incentive Award Agreement is incorporated by reference to Exhibit 10.1 of our Form 10-Q filled with the Commission August 6, 2009. | ||
| 10 | .24** | Form of employee Performance Unit Agreement is incorporated by reference to Exhibit 10.2 of our Form 10-Q filled with the Commission August 6, 2009. | ||
| 10 | .25** | Form of employee Restricted Stock Agreement is incorporated by reference to Exhibit 10.3 of our Form 10-Q filled with the Commission August 6, 2009. | ||
| 10 | .26** | Form of employee Restricted Stock Unit Agreement is incorporated by reference to Exhibit 10.4 of our Form 10-Q filled with the Commission August 6, 2009. | ||
| 10 | .27** | Form of employee Non-Statutory Stock Option Agreement is incorporated by reference to Exhibit 10.5 of our Form 10-Q filled with the Commission August 6, 2009. | ||
| 10 | .28** | Form of non-employee director Restricted Stock Unit Agreement is incorporated by reference to Exhibit 10.6 of our Form 10-Q filled with the Commission August 6, 2009. | ||
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Exhibit No.
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Exhibit Description
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| 10 | .29** | Form of non-employee director Non-Statutory Stock Option Agreement is incorporated by reference to Exhibit 10.7 of our Form 10-Q filled with the Commission August 6, 2009. | ||
| 10 | .30 | Amended and Restated Credit Agreement, dated as of October 27, 2010 is incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 27, 2010. | ||
| 12 | .1* | Computation of Ratio of Earnings to Fixed Changes. | ||
| 21 | .1* | List of Subsidiaries. | ||
| 23 | .1* | Consent of Independent Registered Accounting Firm, Deloitte & Touche LLP. | ||
| 31 | .1* | Certificate of Chief Executive Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 31 | .2* | Certificate of Chief Financial Officer Required Under Section 302 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .1* | Certificate of Chief Executive Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 32 | .2* | Certificate of Chief Financial Officer Required Under Section 906 of the Sarbanes-Oxley Act of 2002. | ||
| 101 | .INS*** | XBRL Instance Document. | ||
| 101 | .SCH*** | XBRL Taxonomy Extension Schema Document. | ||
| 101 | .CAL*** | XBRL Taxonomy Extension Calculation Linkbase Document. | ||
| 101 | .DEF*** | XBRL Taxonomy Extension Definition Linkbase Document. | ||
| 101 | .LAB*** | XBRL Taxonomy Extension Label Linkbase Document. | ||
| 101 | .PRE*** | XBRL Taxonomy Extension Presentation Linkbase Document. | ||
| * | Filed herewith | |
| ** | Management contract or compensatory plan or arrangement. | |
| *** | Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statement of Income for the years ended December 31, 2010 and 2009, (ii) the Condensed Consolidated Balance Sheet at December 31, 2010 and December 31, 2010 and 2009, (iii) the Condensed Consolidated Statement of Cash Flows for the years ended December 31, 2010, 2009 and 2008, and (iv) Notes to Condensed Consolidated Financial Statements for the years ended December 31, 2010, 2009 and 2008. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under these sections. |
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TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. Removed and ReservedprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint