q32008_form10q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form 10-Q
(Mark
One)
|
þ
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Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities and Exchange Act of
1934
|
For
the Quarterly Period Ended September 30, 2008.
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)
Delaware
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|
20-2311383
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
employer identification no.)
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Two
Westbrook Corporate Center, Suite 1070
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Westchester,
IL
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60154
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(Address of principal
executive offices)
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(Zip Code)
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(Registrant’s
telephone number, including area code)
(708) 483-1300
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or 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. (Check one)
Large
accelerated filer
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þ
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Accelerated
filer
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o
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Non-accelerated
filer
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o
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Smaller
reporting Company
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o
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(Do
not check if a smaller reporting company)
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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
There
were 31,533,853 shares of Common Stock, par value $0.01 per share, outstanding
as of October 31, 2008.
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Part I — Financial Information
TREEHOUSE
FOODS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and per share data)
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September
30,
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December
31,
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2008
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2007
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(Unaudited)
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Assets
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Current
assets:
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Cash
and cash equivalents
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$
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1,874
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$
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9,230
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Receivables,
net
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92,594
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76,951
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Inventories
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288,287
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|
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297,692
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Deferred
income taxes
|
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|
3,115
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2,790
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Prepaid
expenses and other current assets
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14,345
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7,068
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Assets
held for sale
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4,081
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—
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Net
assets of discontinued operations
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425
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|
544
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|
Total
current assets
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404,721
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394,275
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Property,
plant and equipment, net
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266,423
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265,007
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Goodwill
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583,264
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590,791
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Deferred
income taxes
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—
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|
3,504
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Identifiable
intangible and other assets, net
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185,347
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202,381
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Total
assets
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$
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1,439,755
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$
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1,455,958
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Liabilities
and Stockholders’ Equity
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Current
liabilities:
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Accounts
payable and accrued expenses
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$
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176,064
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$
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144,090
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Current
portion of long-term debt
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370
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677
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Total
current liabilities
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176,434
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144,767
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Long-term
debt
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551,474
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620,452
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Deferred
income taxes
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31,000
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27,517
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Other
long-term liabilities
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29,307
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33,913
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Commitments
and contingencies (Note 15)
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Stockholders’
equity:
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Preferred
stock, par value $0.01 per share, 10,000,000 shares authorized, none
issued
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Common
stock, par value $0.01 per share, 40,000,000 shares authorized, 31,463,853
and 31,204,305 shares issued and outstanding, respectively
|
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|
315
|
|
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|
312
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|
Additional
paid-in capital
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564,122
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550,370
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Retained
earnings
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107,099
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85,724
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Accumulated
other comprehensive loss
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(19,996
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)
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(7,097
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)
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Total
stockholders’ equity
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651,540
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629,309
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Total
liabilities and stockholders’ equity
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$
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1,439,755
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$
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1,455,958
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|
See Notes
to Condensed Consolidated Financial Statements.
TREEHOUSE
FOODS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
thousands, except per share data)
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Three
Months Ended
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Nine
Months Ended
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September
30,
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September
30,
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2008
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2007
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2008
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2007
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(Unaudited)
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(Unaudited)
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Net
sales
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$
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374,576
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|
$
|
271,951
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$
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1,102,568
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$
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786,966
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Cost
of sales
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301,416
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213,219
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890,390
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622,538
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Gross
profit
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73,160
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58,732
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212,178
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164,428
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Operating
expenses:
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Selling
and distribution
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29,060
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21,459
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86,672
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64,408
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General
and administrative
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15,959
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13,716
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46,961
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39,338
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Other
operating expense (income), net
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722
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2
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12,572
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(309
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)
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Amortization
expense
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3,331
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1,616
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10,346
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3,926
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Total
operating expenses
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49,072
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36,793
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156,551
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107,363
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Operating
income
|
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24,088
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21,939
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55,627
|
|
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57,065
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Other
(income) expense:
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Interest
expense
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6,493
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4,998
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21,785
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12,850
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Interest
income
|
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|
—
|
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|
(7
|
)
|
|
|
(107
|
)
|
|
|
(58
|
)
|
Loss
on foreign currency exchange
|
|
|
1,869
|
|
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|
—
|
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|
|
3,724
|
|
|
|
—
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Other
income, net
|
|
|
(87
|
)
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|
|
—
|
|
|
|
(268
|
)
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|
—
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Total
other expense
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|
8,275
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|
4,991
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25,134
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12,792
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Income
from continuing operations, before income taxes
|
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|
15,813
|
|
|
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16,948
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|
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30,493
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44,273
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|
Income
taxes
|
|
|
4,733
|
|
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|
6,380
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9,060
|
|
|
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16,899
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Income
from continuing operations
|
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|
11,080
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10,568
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21,433
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27,374
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Loss
from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
Net
income
|
|
$
|
11,080
|
|
|
$
|
10,568
|
|
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$
|
21,433
|
|
|
$
|
27,344
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Weighted
average common shares:
|
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|
|
|
|
|
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|
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|
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Basic
|
|
|
31,397
|
|
|
|
31,202
|
|
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|
31,281
|
|
|
|
31,202
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|
Diluted
|
|
|
31,514
|
|
|
|
31,290
|
|
|
|
31,399
|
|
|
|
31,305
|
|
Basic
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income
from continuing operations
|
|
$
|
.35
|
|
|
$
|
.34
|
|
|
$
|
.69
|
|
|
$
|
.88
|
|
Loss
from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income
|
|
$
|
.35
|
|
|
$
|
.34
|
|
|
$
|
.69
|
|
|
$
|
.88
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Income
from continuing operations
|
|
$
|
.35
|
|
|
$
|
.34
|
|
|
$
|
.68
|
|
|
$
|
.87
|
|
Loss
from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income
|
|
$
|
.35
|
|
|
$
|
.34
|
|
|
$
|
.68
|
|
|
$
|
.87
|
|
See Notes
to Condensed Consolidated Financial Statements.
TREEHOUSE
FOODS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
21,433
|
|
|
$
|
27,344
|
|
Loss
from discontinued operations
|
|
|
—
|
|
|
|
30
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
25,160
|
|
|
|
20,366
|
|
Amortization
|
|
|
10,346
|
|
|
|
3,926
|
|
Gain
on derivative
|
|
|
(62
|
)
|
|
|
—
|
|
Loss
on foreign currency exchange
|
|
|
3,107
|
|
|
|
—
|
|
Stock-based
compensation
|
|
|
8,795
|
|
|
|
10,221
|
|
Write
down of impaired assets
|
|
|
5,173
|
|
|
|
—
|
|
Gain
on disposition of assets
|
|
|
(652
|
)
|
|
|
(448
|
)
|
Deferred
income taxes
|
|
|
7,165
|
|
|
|
5,478
|
|
Interest
rate swap amortization
|
|
|
120
|
|
|
|
121
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
(325
|
)
|
|
|
—
|
|
Other
|
|
|
335
|
|
|
|
—
|
|
Changes
in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(16,630
|
)
|
|
|
(3,643
|
)
|
Inventories
|
|
|
6,535
|
|
|
|
(46,287
|
)
|
Prepaid
expenses and other current assets
|
|
|
(6,358
|
)
|
|
|
815
|
|
Accounts
payable, accrued expenses and other current liabilities
|
|
|
28,550
|
|
|
|
22,139
|
|
Net
cash provided by continuing operations
|
|
|
92,692
|
|
|
|
40,062
|
|
Net
cash used in discontinued operations
|
|
|
—
|
|
|
|
(30
|
)
|
Net
cash provided by operating activities
|
|
|
92,692
|
|
|
|
40,032
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
|
(40,799
|
)
|
|
|
(14,344
|
)
|
Insurance
proceeds
|
|
|
4,800
|
|
|
|
—
|
|
Acquisitions
of businesses
|
|
|
(251
|
)
|
|
|
(100,102
|
)
|
Acquisition
of equity investment
|
|
|
—
|
|
|
|
(4,471
|
)
|
Proceeds
from sale of fixed assets
|
|
|
1,659
|
|
|
|
1,376
|
|
Net
cash used in continuing operations
|
|
|
(34,591
|
)
|
|
|
(117,541
|
)
|
Net
cash provided by discontinued operations
|
|
|
—
|
|
|
|
467
|
|
Net
cash used in investing activities
|
|
|
(34,591
|
)
|
|
|
(117,074
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of debt
|
|
|
—
|
|
|
|
100,132
|
|
Net
repayment of debt
|
|
|
(69,460
|
)
|
|
|
(22,865
|
)
|
Payment
of deferred financing debt
|
|
—
|
|
|
|
(225
|
)
|
Proceeds
from stock option exercises
|
|
3,965
|
|
|
|
—
|
|
Excess
tax benefits from share-based payment arrangements
|
|
325
|
|
|
|
—
|
|
Net
cash provided (used in) financing activities
|
|
(65,170
|
)
|
|
|
77,042
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(287
|
)
|
|
|
—
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(7,356
|
)
|
|
|
—
|
|
Cash
and cash equivalents, beginning of period
|
|
|
9,230
|
|
|
|
6
|
|
Cash
and cash equivalents, end of period
|
|
$
|
1,874
|
|
|
$
|
6
|
|
See Notes
to Condensed Consolidated Financial Statements.
TREEHOUSE
FOODS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of and for the nine months ended September 30, 2008
(Unaudited)
1.
General
TreeHouse
is a food manufacturer servicing primarily the retail grocery and foodservice
channels. Its products include non-dairy powdered coffee creamer;
canned soup, salad dressings and sauces; salsa and Mexican sauces; jams and pie
fillings under the E.D. Smith brand name; pickles and related products; infant
feeding products; and other food products including aseptic sauces, refrigerated
salad dressings, and liquid non-dairy creamer. TreeHouse believes it
is the largest manufacturer of pickles and non-dairy powdered creamer in the
United States and the largest manufacturer of private label salad dressings in
the United States and Canada based on sales volume.
Effective
January 1, 2008, we realigned the manner in which the business is managed and
now focus on operating results based on channels of distribution, which has
resulted in a change to the operating and reportable
segments. Previously, we managed our business based on product
categories. Our change in operating and reportable segments from
product categories to channel based is consistent with management’s long-term
growth strategy and was necessary due to the acquisitions that occurred during
2007. Our new reportable segments are North American Retail Grocery,
Food Away From Home, and Industrial and Export. Accordingly, prior year
segment data has been restated to reflect the new segment
structure.
2.
Basis of Presentation
The
Condensed Consolidated Financial Statements included herein have been prepared
by TreeHouse Foods, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission applicable to quarterly reporting on Form
10-Q. In our opinion, these statements include all adjustments
necessary for a fair presentation of the results of all interim periods reported
herein. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as permitted by such rules
and regulations. The Condensed Consolidated Financial Statements and
related notes should be read in conjunction with the consolidated financial
statements and related notes included in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2007. Results of
operations for interim periods are not necessarily indicative of annual
results.
The
preparation of our condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
(“GAAP”) requires us to use our judgment to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities at the date of the Condensed Consolidated
Financial Statements, and the reported amounts of net sales and expenses during
the reporting period. Actual results could differ from these
estimates under different assumptions or conditions.
A
detailed description of the Company’s significant accounting policies can be
found in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2007.
3.
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 157 Fair Value Measurement, which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions of
SFAS 157 are effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position (FSP) FAS
157-2, which delays the effective date of Statement 157 for all nonrecurring
fair value measurements of nonfinancial assets and nonfinancial liabilities
until fiscal years beginning after November 15, 2008. We adopted the
provisions of SFAS 157 that were not deferred. We will continue to
assess the impact of the deferred provisions of SFAS 157, which will be
effective for the Company beginning January 1, 2009.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities — Including an Amendment of FASB Statement
115, that permits measurement of financial instruments and other certain
items at fair value. SFAS 159 does not require any new fair value
measurements. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Adoption of
SFAS 159 did not have an impact on our financial statements.
In
December 2007, the FASB issued SFAS 141(R), Business Combinations, a
replacement of SFAS 141, Business
Combinations. The provisions of SFAS 141(R) establish
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest acquired and the goodwill acquired. SFAS
141(R) also establishes disclosure requirements that will enable users to
evaluate the nature and financial effects of the business combination, and
applies to business combinations for which the acquisition date is on or after
December 15, 2008, and may not be early adopted. The Company will
adopt SFAS 141(R) for acquisitions after the effective date.
In
December 2007, FASB issued SFAS 160, Non-controlling Interests in
Consolidated Financial Statements – an Amendment of ARB
51. The provisions of SFAS 160 outline the accounting and
reporting for ownership interests in a subsidiary held by parties other than the
parent. SFAS 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15,
2008. Earlier application is prohibited. SFAS 160 is to be
applied prospectively as of the beginning of the fiscal year in which it is
initially adopted, except for the presentation and disclosure requirements,
which are to be applied retrospectively for all periods presented. We
are currently assessing the impact SFAS 160 will have on our financial
statements.
In March
2008, FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities, SFAS 161 requires increased
qualitative, and credit-risk disclosures. This Statement is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. Early adoption is
permitted. Further, entities are encouraged, but not required to
provide comparative disclosures for earlier periods. We are currently
assessing the impact SFAS 161 will have on our financial
statements.
In May
2008, FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements presented in conformity with generally
accepted accounting principles in the United States. It does not
change current practice. This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company does not believe
this Statement will have an impact on our financial statements.
EITF
08-3, Accounting by Lessees
for Nonrefundable Maintenance Deposits, was issued in June 2008 and
requires that all nonrefundable maintenance deposits that are contractually and
substantively related to maintenance of a particular asset be recorded as
deposit assets. These deposit assets are either capitalized or
expensed when the underlying maintenance is performed. This EITF is
effective for fiscal years beginning after December 15, 2008. The
Company is currently assessing the impact this EITF will have on our financial
statements.
4.
Income Taxes
The
Company was formed on January 25, 2005 and is subject to federal and state
income tax examinations beginning in 2005. The Internal Revenue
Service (IRS) completed an examination of the Company’s 2005 and 2006 federal
returns in the second quarter of 2008. The Company paid tax
adjustments of approximately $0.3 million which are primarily temporary items,
the impact of which will reverse in future years.
The
Company’s wholly owned consolidated subsidiary, E.D. Smith, and its affiliates
are subject to Canadian, U.S., and state tax examinations from 2003
forward. The IRS is currently conducting an examination of E.D. Smith
U.S. affiliates for 2005. The outcome of this examination is unknown
and is expected to be completed during 2008.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), on January
1, 2007. The adoption of FIN 48 did not have a material effect on the
financial position or results of operations of the Company.
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 three
and nine months ended September 30, 2008, the Company recognized a tax benefit
of approximately $1.4 million and $4.2 million, respectively, related to this
item.
5.
Other Operating Expense
The
Company incurred Other operating expense of $0.7 million and $12.6 million for
the three and nine months ended September 30, 2008, respectively. For
the nine months ended September 30, 2008, this expense consisted of $12.1
million relating to the closing of our pickle plant located in Portland, Oregon
(See Note 6) and $0.5 million relating to a fire at our non-dairy powdered
creamer facility located in New Hampton, Iowa.
6.
Facility Closing
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. Costs associated with the plant
closure are estimated to be approximately $14.0 million, of which $8.0 million
is expected to be in cash, net of estimated proceeds from the sale of
assets.
The
principal components of the plans include workforce reductions (approximately
$0.9 million) as a result of the facility closing and reorganization; shutdown
costs (approximately $2.7 million), including those costs that are necessary to
clean and prepare the facility for closure; contract termination costs
(approximately $4.8 million); and fixed asset impairment charges of $5.2
million.
During
the nine months ended September 30, 2008, the Company recorded $12.1 million of
costs, (included in Other operating expense in our Condensed Consolidated
Statements of Income), related to the closure of the Portland plant, which
included a fixed asset impairment charge of $5.2 million to reduce the carrying
value of the Portland facility to its net realizable value, $6.0 million for
contract terminations and other costs, as well as $0.9 million for
severance. The following is a summary of the liabilities recorded by
the Company as of and during the nine months ended September 30,
2008:
|
Accrued
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Charges
at
|
|
|
|
|
|
|
|
|
Charges
at
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
2007
|
|
|
Accruals
|
|
|
Payments
|
|
|
2008
|
|
|
(In
thousands)
|
|
Contract
terminations
|
$
|
—
|
|
|
$
|
3,092
|
|
|
$
|
(3,092
|
)
|
|
$
|
—
|
|
Work
force reductions
|
|
—
|
|
|
|
869
|
|
|
|
(800
|
)
|
|
|
69
|
|
Capital
lease and service contract buyout
|
|
5,681
|
|
|
|
1,694
|
|
|
|
(7,375
|
)
|
|
|
—
|
|
Total
|
$
|
5,681
|
|
|
$
|
5,655
|
|
|
$
|
(11,267
|
)
|
|
$
|
69
|
|
We expect
the closure plan for the facility to be completed by the end of
2008.
7.
Inventories
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Finished
goods
|
|
$
|
206,312
|
|
|
$
|
222,452
|
|
Raw
materials and supplies
|
|
|
99,663
|
|
|
|
89,328
|
|
LIFO
reserve
|
|
|
(17,688
|
)
|
|
|
(14,088
|
)
|
Total
|
|
$
|
288,287
|
|
|
$
|
297,692
|
|
Approximately
$103.0 million and $92.4 million of our inventory was accounted for under
the LIFO method of accounting at September 30, 2008 and December 31, 2007,
respectively.
8.
Intangible Assets
Changes
in the carrying amount of goodwill for the nine months ended September 30, 2008
are as follows:
|
North
American
|
|
Food
Away
|
|
Industrial
|
|
|
|
|
Retail
Grocery
|
|
From
Home
|
|
and
Export
|
|
Total
|
|
|
|
(In
thousands)
|
|
Balance
at December 31, 2007
|
$
|
370,688
|
|
$
|
86,521
|
|
$
|
133,582
|
|
$
|
590,791
|
|
Purchase
price adjustment
|
|
497
|
|
|
68
|
|
|
—
|
|
|
565
|
|
Currency
exchange adjustment
|
|
(7,347
|
)
|
|
(745
|
)
|
|
—
|
|
|
(8,092
|
)
|
Balance
at September 30, 2008
|
$
|
363,838
|
|
$
|
85,844
|
|
$
|
133,582
|
|
$
|
583,264
|
|
The
Company finalized its purchase price allocation related to the E.D. Smith
acquisition as of October 15, 2008 resulting in minor changes to goodwill for
the period October 1, 2008 through October 15, 2008.
The gross
carrying amount and accumulated amortization of our intangible assets other than
goodwill as of September 30, 2008 and December 31, 2007 are as
follows:
|
|
September
30, 2008
|
|
|
December
31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(In
thousands)
|
|
Intangible
assets with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
42,824
|
|
|
$
|
—
|
|
|
$
|
42,824
|
|
|
$
|
44,367
|
|
|
$
|
—
|
|
|
$
|
44,367
|
|
Intangible
assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
|
|
148,825
|
|
|
|
(22,148
|
)
|
|
|
126,677
|
|
|
|
152,812
|
|
|
|
(13,607
|
)
|
|
|
139,205
|
|
Non-compete
agreement
|
|
|
2,646
|
|
|
|
(1,263
|
)
|
|
|
1,383
|
|
|
|
2,646
|
|
|
|
(708
|
)
|
|
|
1,938
|
|
Trademarks
|
|
|
8,500
|
|
|
|
(1,281
|
)
|
|
|
7,219
|
|
|
|
8,500
|
|
|
|
(970
|
)
|
|
|
7,530
|
|
Formulas/recipes
|
|
|
1,776
|
|
|
|
(340
|
)
|
|
|
1,436
|
|
|
|
1,849
|
|
|
|
(87
|
)
|
|
|
1,762
|
|
Total
|
|
$
|
204,571
|
|
|
$
|
(25,032
|
)
|
|
$
|
179,539
|
|
|
$
|
210,174
|
|
|
$
|
(15,372
|
)
|
|
$
|
194,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense on intangible assets for the three months ended September 30, 2008 and
2007 was $3.3 million and $1.6 million, respectively, and $10.3
million and $3.9 million for the nine months ended September 30, 2008 and
2007, respectively. Estimated aggregate intangible asset amortization
expense for the next five years is as follows:
2009
|
$
13.3 million
|
2010
|
$
12.9 million
|
2011
|
$
11.0 million
|
2012
|
$
10.7 million
|
2013
|
$
10.4 million
|
9.
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Revolving
credit facility
|
|
$
|
448,000
|
|
|
$
|
511,500
|
|
Senior
notes
|
|
|
100,000
|
|
|
|
100,000
|
|
Tax
increment financing and other
|
|
|
3,844
|
|
|
|
9,629
|
|
|
|
|
551,844
|
|
|
|
621,129
|
|
Less
current portion
|
|
|
(370
|
)
|
|
|
(677
|
)
|
Total
|
|
$
|
551,474
|
|
|
$
|
620,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility —
On August 30, 2007, the Company entered into Amendment No. 2 to our
unsecured revolving Credit Agreement, as amended (the “Credit Agreement”), dated
June 27, 2005, with a group of participating financial
institutions. Among other things, Amendment No. 2 reduces the
available liquidity requirement with respect to permitted acquisitions and
reduces the required consolidated interest coverage ratio at the end of each
fiscal quarter. The Company also exercised its option under the
Credit Agreement to increase the aggregate commitments under the revolving
credit facility from $500 million to $600 million. The
Credit Agreement also provides for a $75 million letter of credit sublimit,
against which $8.6 million in letters of credit have been issued but
undrawn. 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. We are in
compliance with all applicable covenants as of September 30, 2008. 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.
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 underlying rate is defined
as the rate equal to the British Bankers Association LIBOR Rate for Eurodollar
Rate Loans, or the higher of the prime lending rate of the administrative agent
or federal funds rate plus 0.5% for Base Rate Committed Loans. The
applicable margin for Eurodollar loans is based on our consolidated leverage
ratio and ranges from 0.295% to 0.90%. In addition, a facility fee
based on our consolidated leverage ratio and ranging from 0.08% to 0.225% is due
quarterly on all commitments under the credit facility. Our average
interest rate on debt outstanding under our Credit Agreement at September 30,
2008 was 4.05%.
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. 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. Interest is paid semi-annually in arrears on March 31
and September 30 of each year.
The Note
Purchase Agreement contains covenants that will limit the ability of the Company
and its subsidiaries to, among other things, merge with other entities, change
the nature of the business, create liens, incur additional indebtedness or sell
assets. The Note Purchase Agreement also requires the Company to
maintain certain financial ratios. We are in compliance with the
applicable covenants as of September 30, 2008.
Swap Agreements — The Company
entered into a $200 million long term interest rate swap agreement with a
forward starting 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 will be swapped for a fixed 2.9% interest base rate for a
period of 24 months, amortizing to $50 million for an additional nine months at
the same 2.9% interest rate. Under the terms of the Company’s
revolving credit agreement, this will result in an all in borrowing cost on the
swapped principal being no more than 3.8% during the life of the swap
agreement.
In July
2006, we entered into a forward interest rate swap transaction for a notional
amount of $100 million as a hedge of the forecasted private placement of $100
million senior notes. The interest rate swap transaction was
terminated on August 31, 2006, which resulted in a pre-tax loss of $1.8
million. The unamortized loss is reflected, net of tax, in
Accumulated other comprehensive loss in our Condensed Consolidated Balance
Sheets. The total loss will be reclassified ratably to our Condensed
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 our senior notes. In the nine months ended September 30,
2008, $0.2 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 2008.
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 September 30,
2008, $2.9 million remains outstanding.
10.
Earnings Per Share
In
accordance with SFAS 128 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 and restricted
stock. Certain restricted stock units and restricted stock awards
outstanding are subject to market conditions for vesting, which were not met as
of September 30, 2008 or 2007, so these awards are excluded from the diluted
earnings per share calculation. During the second quarter of 2008,
the Company issued performance unit awards that contain both service and
performance criteria. As of September 30, 2008, none of the criteria
were met and these awards were excluded from the diluted earnings per share
calculation.
The
following table summarizes the effect of the share-based compensation awards on
the weighted average number of shares outstanding used in calculating diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Weighted
average common shares outstanding
|
|
31,396,886
|
|
|
31,202,473
|
|
|
31,281,338
|
|
|
31,202,473
|
Assumed
exercise of stock options (1)
|
|
116,854
|
|
|
87,639
|
|
|
117,446
|
|
|
102,504
|
Weighted
average diluted common shares outstanding
|
|
31,513,740
|
|
|
31,290,112
|
|
|
31,398,784
|
|
|
31,304,977
|
|
|
|
(1)
|
|
The
assumed exercise of stock options excludes 2,225,111 options outstanding,
which were anti-dilutive for the three and nine months ended September 30,
2008, and 2,117,973 options outstanding, which were anti-dilutive for
the three and nine months ended September 30,
2007.
|
11.
Stock-Based Compensation
For the
quarter beginning July 1, 2005, we adopted the requirements of SFAS 123(R),
Share Based
Payments. The Company elected to use the modified prospective
application of SFAS 123(R) for awards issued prior to July 1,
2005. Income from continuing operations before income taxes, for the
three and nine month periods ended September 30, 2008 and 2007 includes
share-based compensation expense of $3.4 million, $8.8 million, $3.4
million and $10.2 million, respectively. The tax benefit recognized
related to the compensation cost of these share-based awards was approximately
$1.3 million and $3.5 million for the three and nine month periods ended
September 30, 2008, and $1.3 million and $3.9 million for the three and nine
month periods ended September 30, 2007, respectively.
During
the second quarter of 2008, the Company issued its annual equity compensation
awards that consisted of stock options, restricted stock, restricted stock units
and performance units. In previous years, the Company issued stock
options to all eligible employees on an annual basis. The Company
changed its equity compensation methodology and now awards eligible employees
stock options, restricted stock or restricted stock units, or a combination of
the awards. Performance units were also issued to certain senior
management employees, the vesting of which is contingent upon service and
performance criteria. These awards are more fully described
below. Restricted stock and restricted stock unit awards previously
granted are fully described in the Company’s annual report on Form 10-K filed on
February 28, 2008.
The
following table summarizes stock option activity during the nine months ended
September 30, 2008. Options are granted under our long-term incentive
plan, and have a three year vesting schedule, which vest one-third on each of
the first three anniversaries of the grant date. Options expire 10
years from the grant date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Employee
|
|
|
|
Director
|
|
|
Exercise
|
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
|
Options
|
|
|
Price
|
|
|
|
Term
(yrs)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2007
|
|
|
2,100,878
|
|
|
|
457,300
|
|
|
$
|
26.26
|
|
|
|
7.6
|
|
|
$
|
2,971,492
|
|
Granted
|
|
|
440,900
|
|
|
|
4,800
|
|
|
$
|
24.03
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(37,650
|
)
|
|
|
(14,299
|
)
|
|
$
|
26.98
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(18,526
|
)
|
|
|
(241,022
|
)
|
|
$
|
15.28
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2008
|
|
|
2,485,602
|
|
|
|
206,779
|
|
|
$
|
26.94
|
|
|
|
7.6
|
|
|
$
|
7,473,640
|
|
Vested/expected
to vest, at September 30, 2008
|
|
|
2,420,854
|
|
|
|
203,372
|
|
|
$
|
26.99
|
|
|
|
7.6
|
|
|
$
|
7,160,256
|
|
Exercisable,
September 30, 2008
|
|
|
1,635,931
|
|
|
|
170,107
|
|
|
$
|
27.97
|
|
|
|
6.9
|
|
|
$
|
3,145,451
|
|
Compensation
cost related to unvested options totaled $7.3 million at September 30, 2008 and
will be recognized over the remaining vesting period of the grants, which
averages 2 years. The average grant date fair value of the options
granted in the nine months ended September 30, 2008 was $8.09. The
Company uses the Black-Scholes option pricing model to value its stock option
awards. The assumptions used to calculate the fair value of the stock
option awards for the Company’s annual grant in 2008 include the following:
expected volatility of 26.37%, expected term of 6 years, risk-free rate of 3.53%
and no dividends. The aggregate intrinsic value of stock options
exercised during the nine months ended September 30, 2008 was approximately $2.9
million.
In
addition to stock options, the Company also grants restricted stock, restricted
stock units and performance unit awards. These awards are granted
under our long-term incentive plan. Restricted stock and restricted
stock unit awards granted during the nine months ended September 30, 2008 vest
based on the passage of time. These awards generally vest one-third
on each anniversary of the grant date. A description of the
restricted stock and restricted stock unit awards previously granted is
presented in the Company’s annual report on Form 10-K filed on February 28,
2008. The following table summarizes the restricted stock and
restricted stock unit activity during the nine months ended September 30,
2008:
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Restricted
|
|
|
Average
|
|
|
|
Restricted
|
|
|
Grant
Date
|
|
|
Stock
|
|
|
Grant
Date
|
|
|
|
Stock
|
|
|
Fair
Value
|
|
|
Units
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested,
at December 31, 2007
|
|
626,622
|
|
|
$
|
24.26
|
|
|
584,339
|
|
|
$
|
25.31
|
|
Granted
|
|
806,500
|
|
|
$
|
24.06
|
|
|
14,300
|
|
|
$
|
24.06
|
|
Vested
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
(900
|
)
|
|
$
|
24.06
|
|
|
—
|
|
|
|
—
|
|
Unvested,
at September 30, 2008
|
|
1,432,222
|
|
|
$
|
24.14
|
|
|
598,639
|
|
|
$
|
25.28
|
|
Future
compensation cost related to restricted stock and restricted stock units is
approximately $18.1 million as of September 30, 2008, and will be recognized on
a weighted average basis, over the next 2.6 years. The grant date
fair value of the awards granted in 2008 was equal to the Company’s closing
stock price on the grant date.
Performance
unit awards were granted to certain members of senior
management. These awards contain service and performance
conditions. For each performance period (July 1, 2008 through
December 31, 2008, calendar 2009 and calendar 2010), 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 (July
1, 2008 through December 31, 2010), a number of units will accrue equal to the
number of units granted multiplied by a predefined percentage between 0% and
200%, depending on the achievement of certain operating performance measures,
less any units previously accrued. Accrued units will be converted to
stock or cash, at the discretion of the compensation committee on the third
anniversary of the grant date. The Company intends to settle these
awards in stock and has the shares available to do so. The following
table summarizes the performance unit activity during the nine months ended
September 30, 2008:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Performance
|
|
|
Grant
Date
|
|
|
|
|
Units
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
Unvested,
at December 31, 2007
|
|
—
|
|
|
|
—
|
|
|
Granted
|
|
72,900
|
|
|
$
|
24.06
|
|
|
Vested
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
—
|
|
|
|
—
|
|
|
Unvested,
at September 30, 2008
|
|
72,900
|
|
|
$
|
24.06
|
|
|
Future
compensation cost related to the performance units is estimated to be
approximately $1.6 million as of September 30, 2008, and is expected to be
recognized over the next 2.8 years. The grant date fair value of the
awards granted in 2008 was equal to the Company’s closing stock price on the
grant date.
12.
Employee Retirement and Postretirement Benefits
Pension, Profit Sharing and
Postretirement Benefits — Certain of our employees and retirees
participate in pension and other postretirement benefit
plans. Employee benefit plan obligations and expenses included in the
Condensed Consolidated Financial Statements are determined based on plan
assumptions, employee demographic data, including years of service and
compensation, benefits and claims paid, and employer
contributions.
Defined Benefit Plans — The
benefits under our defined benefit plans are based on years of service and
employee compensation.
Components
of net periodic pension expense are as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$
|
430
|
|
|
$
|
434
|
|
|
$
|
1,290
|
|
|
$
|
1,302
|
|
Interest
cost
|
|
|
430
|
|
|
|
403
|
|
|
|
1,290
|
|
|
|
1,206
|
|
Expected
return on plan assets
|
|
|
(358
|
)
|
|
|
(338
|
)
|
|
|
(1,074
|
)
|
|
|
(1,014
|
)
|
Amortization
of prior service costs
|
|
|
120
|
|
|
|
116
|
|
|
|
360
|
|
|
|
348
|
|
Effect
of settlements
|
|
|
75
|
|
|
|
—
|
|
|
|
225
|
|
|
|
—
|
|
Net
periodic pension cost
|
|
$
|
697
|
|
|
$
|
615
|
|
|
$
|
2,091
|
|
|
$
|
1,842
|
|
We have
contributed $7.3 million to the pension plans in the first nine months of
2008. No additional contributions are required for 2008.
Postretirement Benefits — We
provide healthcare benefits to certain retirees who are covered under specific
group contracts.
Components
of net periodic postretirement expenses are as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Service
cost
|
|
$
|
59
|
|
|
$
|
101
|
|
|
$
|
177
|
|
|
$
|
303
|
|
Interest
cost
|
|
|
58
|
|
|
|
68
|
|
|
|
174
|
|
|
|
204
|
|
Amortization
of prior service cost
|
|
|
(18
|
)
|
|
|
—
|
|
|
|
(54
|
)
|
|
|
—
|
|
Amortization
of unrecognized net loss
|
|
|
6
|
|
|
|
20
|
|
|
|
18
|
|
|
|
60
|
|
Net
periodic postretirement cost
|
|
$
|
105
|
|
|
$
|
189
|
|
|
$
|
315
|
|
|
$
|
567
|
|
We expect
to contribute $0.1 million to the postretirement health plans during
2008.
13.
Comprehensive Income
The
following table sets forth the components of comprehensive income:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In
thousands)
|
|
|
Net
income
|
|
$
|
11,080
|
|
|
$
|
10,568
|
|
|
$
|
21,433
|
|
|
$
|
27,344
|
|
Foreign
currency translation adjustment
|
|
|
(6,647
|
)
|
|
|
—
|
|
|
|
(13,230
|
)
|
|
|
—
|
|
Amortization
of pension and postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
service costs and net gain, net of tax
|
|
|
67
|
|
|
|
83
|
|
|
|
201
|
|
|
|
250
|
|
Amortization
of swap loss, net of tax
|
|
|
40
|
|
|
|
40
|
|
|
|
120
|
|
|
|
121
|
|
Other
|
|
|
10
|
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
Comprehensive
income
|
|
$
|
4,550
|
|
|
$
|
10,691
|
|
|
$
|
8,534
|
|
|
$
|
27,715
|
|
We expect
to amortize $0.3 million of prior service costs and net gain, net of tax and
$0.2 million of swap loss, net of tax from other comprehensive income into
earnings during 2008.
14.
Fair Value of Financial Instruments
Effective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS
No. 157). SFAS No. 157 clarifies the definition of fair value,
prescribes methods for measuring fair value, establishes a fair value hierarchy
based on the inputs used to measure fair value and expands disclosures about the
use of fair value measurements. In accordance with Financial
Accounting Standards Board Staff Position No. FAS 157-2, Effective Date of FASB Statement No.
157 (FSP 157-2), we will defer the adoption of SFAS No. 157 for our
nonfinancial assets and nonfinancial liabilities, except those items recognized
or disclosed at fair value on an annual or more frequently recurring basis,
until January 1, 2009. The adoption of the provisions that were not
deferred relating to SFAS No. 157 did not have a material impact on our fair
value measurements.
Financial
instruments held by the Company that are subject to SFAS No. 157 include foreign
currency contracts held by our Canadian subsidiary, E.D. Smith. These
contracts expire during 2008 and are in a liability position. The
fair value of the liability at September 30, 2008 is approximately $0.1 million,
which represents the amount the Company would be required to pay to exit these
contracts. The fair value is based on Level 2 inputs as of September
30, 2008. Level 2 inputs are inputs other than quoted prices that are
observable for an asset or liability, either directly or
indirectly.
Cash and
cash equivalents and accounts receivable are financial assets with carrying
values that approximate fair value. Accounts payable and the
Company’s variable rate debt (revolving credit facility) are financial
liabilities with carrying values that approximate fair value. As of
September 30, 2008, the carrying value of the Company’s fixed rate senior notes
was $100.0 million and fair value was estimated to be
$100.5 million.
15.
Commitments and Contingencies
Litigation, Investigations and
Audits — We are party in the ordinary course of business to certain
claims, litigation, audits and investigations. We believe that we
have established adequate reserves to satisfy any liability we may incur in
connection with any such currently pending or threatened matters. In
our opinion, the settlement of any such currently pending or threatened matters
is not expected to have a material adverse impact on our financial position,
annual results of operations or cash flows.
16.
Supplemental Cash Flow Information
Cash
payments for interest were $23.4 million and $11.6 million for the
nine months ended September 30, 2008 and 2007, respectively. Cash
payments for income taxes were $10.0 million and $8.2 million for the
nine months ended September 30, 2008 and 2007, respectively. As of
September 30, 2008, the Company had accrued property, plant and equipment of
approximately $2.3 million.
17.
Foreign Currency
The
Company, through its wholly owned consolidated subsidiary, E.D. Smith, enters
into foreign currency contracts due to the exposure to Canadian/U.S. dollar
currency fluctuations on cross border transactions. These contracts
do not qualify for hedge accounting. The Company records the fair
value of these contracts on the Condensed Consolidated Balance Sheets and has
recorded the change in fair value through the Condensed Consolidated Statements
of Income, within Other (income) expense. For the three and nine
months ended September 30, 2008, the Company recorded a loss on these contracts
totaling approximately $12 thousand and a gain of $32 thousand,
respectively.
The
Company has an intercompany note denominated in Canadian dollars, which is
eliminated during consolidation. A portion of the note is considered
to be permanent, with the remaining portion considered to be
temporary. Foreign currency fluctuations on the permanent portion are
recorded through Accumulated other comprehensive loss, while foreign currency
fluctuations on the temporary portion are recorded in the Company’s Condensed
Consolidated Statements of Income, within Other (income) expense.
The
Company accrues interest on the intercompany note, which is also considered
temporary. Changes in the balance due to foreign currency
fluctuations are also recorded in the Company’s Condensed Consolidated
Statements of Income within Other (income) expense.
For the
three and nine months ended September 30, 2008, the Company recorded a loss of
$1.9 million and $3.7 million, respectively, related to foreign currency
fluctuations within Other (income) expense. For the three and nine
months ended September 30, 2008, the Company recorded a loss of approximately
$4.0 million and $8.2 million, respectively, in Accumulated other
comprehensive loss related to foreign currency fluctuations on the permanent
portion of the note.
18.
Business 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.
During
the first quarter of 2008, the Company changed its internal reporting structure
from product categories to channel based. The Company’s new
reportable segments, as presented below, are consistent with the manner in which
the Company reports its results to the chief operating decision
maker.
We
evaluate the performance of our segments based on net sales dollars, gross
profit and direct operating income (gross profit less freight out, sales
commissions and direct segment expenses). The amounts in the
following tables are obtained from reports used by our senior management team
and do not include allocated income taxes. There are no significant
non-cash items reported in segment profit or loss other than depreciation and
amortization. Restructuring charges are not allocated to our
segments, as we do not include them in the measure of profitability as reviewed
by our chief operating decision maker. The accounting policies of our
segments are the same as those described in the summary of significant
accounting policies set forth in Note 2 to our 2007 Consolidated Financial
Statements contained in our Annual Report on Form 10-K.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Net
sales to external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Retail Grocery
|
|
$
|
221,814
|
|
|
$
|
145,936
|
|
|
$
|
664,334
|
|
|
$
|
430,735
|
|
Food
Away From Home
|
|
|
77,189
|
|
|
|
65,736
|
|
|
|
224,756
|
|
|
|
184,940
|
|
Industrial
and Export
|
|
|
75,573
|
|
|
|
60,279
|
|
|
|
213,478
|
|
|
|
171,291
|
|
Total
|
|
|
374,576
|
|
|
|
271,951
|
|
|
|
1,102,568
|
|
|
|
786,966
|
|
Direct
operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Retail Grocery
|
|
|
28,713
|
|
|
|
21,088
|
|
|
|
79,258
|
|
|
|
57,420
|
|
Food
Away From Home
|
|
|
8,200
|
|
|
|
7,647
|
|
|
|
24,335
|
|
|
|
20,924
|
|
Industrial
and Export
|
|
|
8,189
|
|
|
|
8,499
|
|
|
|
24,602
|
|
|
|
22,186
|
|
Direct
operating income
|
|
|
45,102
|
|
|
|
37,234
|
|
|
|
128,195
|
|
|
|
100,530
|
|
Other
operating expenses
|
|
|
21,014
|
|
|
|
15,295
|
|
|
|
72,568
|
|
|
|
43,465
|
|
Operating
income
|
|
$
|
24,088
|
|
|
$
|
21,939
|
|
|
$
|
55,627
|
|
|
$
|
57,065
|
|
Geographic Information —During the nine
months ended September 30, 2008, we had revenues to customers outside of the
United States representing approximately 14.6% of total consolidated net sales
with 13.8% going to Canada.
Major Customers — For the
nine months ended September 30, 2008, Wal-Mart Stores, Inc. accounted for
approximately 14.7% of our total consolidated net sales. No other
customer accounted for more than 10% of our consolidated net sales.
Product Information — The
following table presents the Company’s net sales by major products for the three
and nine months ended September 30, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pickles
|
|
$
|
79,305
|
|
|
$
|
81,375
|
|
|
$
|
251,329
|
|
|
$
|
248,111
|
|
Non-dairy
powdered creamer
|
|
|
84,249
|
|
|
|
70,019
|
|
|
|
251,536
|
|
|
|
207,475
|
|
Soup
and infant feeding
|
|
|
87,740
|
|
|
|
79,960
|
|
|
|
232,616
|
|
|
|
227,023
|
|
Jams and
other
|
|
|
45,109
|
|
|
|
—
|
|
|
|
114,254
|
|
|
|
—
|
|
Salad
dressing
|
|
|
33,103
|
|
|
|
—
|
|
|
|
121,087
|
|
|
|
—
|
|
Refrigerated
|
|
|
9,847
|
|
|
|
9,838
|
|
|
|
30,448
|
|
|
|
29,988
|
|
Aseptic
|
|
|
21,393
|
|
|
|
19,506
|
|
|
|
63,144
|
|
|
|
59,543
|
|
Salsa
|
|
|
13,830
|
|
|
|
11,253
|
|
|
|
38,154
|
|
|
|
14,826
|
|
Total
net sales
|
|
$
|
374,576
|
|
|
$
|
271,951
|
|
|
$
|
1,102,568
|
|
|
$
|
786,966
|
|
19.
Subsequent Event
On
November 3, 2008, the Company announced plans to close its salad dressings
manufacturing plant in Cambridge, Ontario. Production will be moved
to the Company’s existing manufacturing facilities in Canada and the United
States. The closure will result in the Company’s production
capabilities being more aligned with the needs of our customers. The
Company intends to cease all operations by July 2009. The closure
costs were included as costs of the acquisition of E.D. Smith and are not
expected to impact earnings. As of September 30, 2008, the Company
has accrued approximately $2.2 million for the closure, the components of which
include $1.4 million for severance and $0.8 million for closing and other
costs.
Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Business
Overview
We
believe we are the largest manufacturer of pickles and non-dairy powdered
creamer in the United States, and the largest manufacturer of private label
salad dressings in the United States and Canada, based upon total sales
volumes. We believe we are also the leading retail private label
supplier of pickles, non-dairy powdered creamer and soup in the United States,
and jams in Canada. Effective January 1, 2008, we realigned the
manner in which the business is managed and now focus on operating results based
on channels of distribution, which has resulted in a change to the operating and
reportable segments. Previously, we managed our business based on
product categories. Our change in operating and reportable segments
from product categories to channel based is consistent with management’s
long-term growth strategy and was necessary due to the acquisitions that
occurred during 2007. The change in operating and reportable segments
will permit the Company to integrate future acquisitions more efficiently and
provide our investors with greater comparability to our peer group, as many of
them also present results based on channels of distribution.
We
discuss the following segments in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations: North American Retail Grocery,
Food Away From Home, and Industrial and Export. The key performance
indicators of our segments are net sales dollars, gross profit and direct
operating margin, 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 segment
expenses.
Our
current operations consist of the following:
|
•
|
Our
North American Retail Grocery segment sells branded and private label
products to customers within the United States and
Canada. These products include pickles, peppers, relishes,
salsas, condensed and ready to serve soup, broths, gravies, jams, salad
dressings, sauces, non-dairy powdered creamer, aseptic products, and baby
food. 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, Bennet’s®, Hoffman House®, Roddenbery’s
Northwoods® and San Antonio
Farms®. Infant
feeding products are sold under the Nature’s Goodness ®
brand, while our non-dairy powdered creamer is sold under our
proprietary Cremora® brand. Our
refrigerated products are sold under the Mocha Mix®, Second Nature® brand names, and
our jams and other sauces are sold under the E.D. Smith®, Habitant® and Saucemaker® brand
names.
|
|
•
|
Our
Food Away From Home segment sells pickle products, non-dairy powdered
creamers, salsas, aseptic and refrigerated products, and sauces to food
service 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 for repackaging in portion control
packages and for use as an ingredient by other food
manufacturers. Export sales are primarily to industrial
customers.
|
Recent
Developments
On
November 3, 2008, the Company announced plans to close its salad dressings
manufacturing plant in Cambridge, Ontario. Production will be moved
to the Company’s existing manufacturing facilities in Canada and the United
States. The closure will result in the Company’s production
capabilities being more aligned with the needs of our customers. The
Company intends to cease all operations by July 2009. The closure
costs were included as costs of the acquisition of E.D. Smith and are not
expected to impact earnings. As of September 30, 2008, the Company
has accrued approximately $2.2 million for the closure, the components of which
include $1.4 million for severance and $0.8 million for closing and other
costs.
The
Company continues to experience increased commodity and input costs in excess of
expectations and prior year levels. While the commodities market has
declined from recent highs, the Company fixed the majority of its 2008
input costs earlier this year and will not participate in these savings during
the remainder 2008. While these times have been challenging, the
Company remains diligent in its efforts to manage controllable
costs. Customer pricing is contingent upon the timing of when and how
input costs fluctuate versus when prices are determined.
On
February 13, 2008, the Company announced plans to close its Portland pickle
processing plant. Operations in the plant have ceased effective June
6, 2008, with the closure plans expected to be completed by the end of
2008. For the nine months ended September 30, 2008, the Company
recorded approximately $12.1 million of costs, associated with the facility
closing. Included in these costs was a fixed asset impairment charge
of approximately $5.2 million to reduce the carrying value of the Portland
facilities to their net realizable value. Total costs are expected to
be approximately $14.0 million, $8.0 million of which is expected to be in cash,
net of estimated proceeds from the sale of assets.
On
February 19, 2008, the Company’s New Hampton facility, which produces a portion
of the Company’s non-dairy powdered creamer, was damaged by an early morning
fire. The Company has an insurance policy that will cover the costs
to repair the facility, replace damaged equipment, and reimburse the Company for
costs incurred in excess of those it would normally have incurred, subject to a
$0.5 million deductible. While the New Hampton fire has temporarily
reduced our manufacturing capacity, the Company has continued to meet our
customers’ needs, while providing the same high quality products they have come
to expect from the Company.
Results
of Operations
The
following table presents certain information concerning our financial results,
including information presented as a percentage of net sales:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
Net
sales
|
|
$
|
374,576
|
|
|
|
100.0
|
%
|
|
$
|
271,951
|
|
|
|
100.0
|
%
|
|
$
|
1,102,568
|
|
|
|
100.0
|
%
|
|
$
|
786,966
|
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
301,416
|
|
|
|
80.5
|
|
|
|
213,219
|
|
|
|
78.4
|
|
|
|
890,390
|
|
|
|
80.8
|
|
|
|
622,538
|
|
|
|
79.1
|
|
Gross
profit
|
|
|
73,160
|
|
|
|
19.5
|
|
|
|
58,732
|
|
|
|
21.6
|
|
|
|
212,178
|
|
|
|
19.2
|
|
|
|
164,428
|
|
|
|
20.9
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and distribution
|
|
|
29,060
|
|
|
|
7.7
|
|
|
|
21,459
|
|
|
|
7.9
|
|
|
|
86,672
|
|
|
|
7.9
|
|
|
|
64,408
|
|
|
|
8.1
|
|
General
and administrative
|
|
|
15,959
|
|
|
|
4.3
|
|
|
|
13,716
|
|
|
|
5.0
|
|
|
|
46,961
|
|
|
|
4.3
|
|
|
|
39,338
|
|
|
|
5.0
|
|
Other
operating expense (income), net
|
|
|
722
|
|
|
|
0.2
|
|
|
|
2
|
|
|
|
—
|
|
|
|
12,572
|
|
|
|
1.1
|
|
|
|
(309
|
)
|
|
|
—
|
|
Amortization
expense
|
|
|
3,331
|
|
|
|
0.9
|
|
|
|
1,616
|
|
|
|
0.6
|
|
|
|
10,346
|
|
|
|
0.9
|
|
|
|
3,926
|
|
|
|
0.5
|
|
Total
operating expenses
|
|
|
49,072
|
|
|
|
13.1
|
|
|
|
36,793
|
|
|
|
13.5
|
|
|
|
156,551
|
|
|
|
14.2
|
|
|
|
107,363
|
|
|
|
13.6
|
|
Operating
income
|
|
$
|
24,088
|
|
|
|
6.4
|
%
|
|
$
|
21,939
|
|
|
|
8.1
|
%
|
|
$
|
55,627
|
|
|
|
5.0
|
%
|
|
$
|
57,065
|
|
|
|
7.3
|
%
|
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007
Net Sales — Third quarter net
sales increased 37.7% to $374.6 million in 2008, compared to
$272.0 million in the third quarter of 2007. Net sales by
segment are shown in the following table:
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
$
Increase/
|
|
|
%
Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars
in thousands)
|
|
North
American Retail Grocery
|
|
$
|
221,814
|
|
|
$
|
145,936
|
|
|
$
|
75,878
|
|
|
52.0
|
%
|
Food
Away From Home
|
|
|
77,189
|
|
|
|
65,736
|
|
|
|
11,453
|
|
|
17.4
|
%
|
Industrial
and Export
|
|
|
75,573
|
|
|
|
60,279
|
|
|
|
15,294
|
|
|
25.4
|
%
|
Total
|
|
$
|
374,576
|
|
|
$
|
271,951
|
|
|
$
|
102,625
|
|
|
37.7
|
%
|
The
increase in sales is due to the 2007 acquisition of the E.D. Smith salad
dressing, jam and sauce business (“E.D. Smith”) as well as price increases taken
to offset rising input costs.
Cost of Sales — All expenses
incurred to bring a product to completion are included in cost of
sales. These costs include raw materials, ingredient and packaging
costs, labor costs, facility and equipment costs, including costs to operate and
maintain our warehouses, and costs associated with transporting our finished
products from our manufacturing facilities to our own distribution
centers. Cost of sales as a percentage of net sales was 80.5% in the
third quarter of 2008 compared to 78.4% in 2007. Price increases
taken in 2008, as well as cost reduction initiatives, only partially offset the
rising cost of raw materials and packaging. We continue to experience
increases in commodity costs in such items as casein, corn syrup, and soybean
oil compared to the third quarter of 2007. Increases in raw material
costs in the third quarter of 2008 compared to 2007 included a 42% increase in
casein, 10% increase in corn syrup and other sweeteners, 35% increase in
soybean oil and other oils and a 7% increase in cucumber crop
costs. Packaging cost increases include a 11% increase in glass
packaging and a 22% increase in plastic containers.
Operating Expenses — Our
operating expenses were $49.1 million during the third quarter of 2008
compared to $36.8 million in 2007. Selling and distribution
expenses increased $7.6 million or 35.4% in the third quarter of 2008
compared to the third quarter of 2007 due to the San Antonio Farms acquisition
in May, 2007 and E.D. Smith in October, 2007. General and
administrative expenses increased $2.2 million in the third quarter of 2008
compared to 2007, primarily due to the Canadian infrastructure added as a result
of the E.D. Smith acquisition in October, 2007. While operating costs
increased compared to 2007, total operating costs as a percentage of net sales
was consistent with 2007. During the third quarter of 2008 and 2007,
operating expenses as a percentage of net sales was 13.1% and 13.5%,
respectively, as the continued leveraging of selling and distribution and
general and administrative expenses were partially offset by higher amortization
expense.
Other
operating expense of $0.7 million is related to the closure of the Portland,
Oregon pickle plant.
Operating Income — Operating
income for the third quarter of 2008 was $24.1 million, an increase of
$2.1 million, or 9.8%, from operating income of $21.9 million in the
third quarter of 2007. Our operating margin was 6.4% in the third
quarter of 2008 compared to 8.1% in the prior year’s quarter, reflecting the
higher input costs.
Income Taxes — Income tax
expense was recorded at an effective rate of 29.9% in the third quarter of 2008
compared to 37.6% in the prior year’s quarter. The lower effective
tax rate in 2008 is due to the favorable intercompany financing structure
entered into in conjunction with the E.D. Smith acquisition. (See
Note 4)
Three
Months Ended September 30, 2008 Compared to Three Months Ended September 30,
2007 — Results by Segment
North
American Retail Grocery —
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
Net
sales
|
|
$
|
221,814
|
|
|
|
100.0
|
%
|
|
$
|
145,936
|
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
172,309
|
|
|
|
77.7
|
|
|
|
109,212
|
|
|
|
74.8
|
|
Gross
profit
|
|
|
49,505
|
|
|
|
22.3
|
|
|
|
36,724
|
|
|
|
25.2
|
|
Freight
out and commissions
|
|
|
14,677
|
|
|
|
6.6
|
|
|
|
9,986
|
|
|
|
6.8
|
|
Direct
selling and marketing
|
|
|
6,115
|
|
|
|
2.8
|
|
|
|
5,650
|
|
|
|
3.9
|
|
Direct
operating income
|
|
$
|
28,713
|
|
|
|
12.9
|
%
|
|
$
|
21,088
|
|
|
|
14.5
|
%
|
Net sales
in the North American Retail Grocery segment increased by $75.9 million, or
52.0% in the third quarter of 2008 compared to the third quarter of
2007. The change in net sales from 2007 to 2008 was due to the
following:
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
2007
Net sales
|
|
$
|
145,936
|
|
|
|
|
|
Volume
|
|
|
(4,981
|
)
|
|
|
(3.4
|
)%
|
Acquisitions
|
|
|
71,146
|
|
|
|
48.7
|
|
Pricing
|
|
|
10,898
|
|
|
|
7.5
|
|
Mix/other
|
|
|
(1,185
|
)
|
|
|
(0.8
|
)
|
2008
Net sales
|
|
$
|
221,814
|
|
|
|
52.0
|
%
|
The
increase in net sales from 2007 to 2008 resulted mainly from the acquisition of
E.D. Smith in the fourth quarter of 2007. Price increases taken due
to rising raw material and packaging costs partially offset lower case sales of
baby food, and retail branded pickles. Volume declined due to a
previously announced loss of a significant baby food customer and movement away
from certain low margin customers.
Cost of
sales as a percentage of net sales increased from 74.8% in 2007 to 77.7% in 2008
primarily as a result of increases in raw material and packaging costs which
were only partially offset by price increases. We have implemented
several cost reduction and pricing initiatives in an attempt to offset these
cost increases.
Freight
out and commissions paid to independent sales brokers was $14.7 million in
the third quarter of 2008 compared to $10.0 million in 2007, an increase of
47.0%, primarily due to the E.D. Smith acquisition and higher freight costs, due
to rising fuel costs.
Food
Away From Home —
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
Net
sales
|
|
$
|
77,189
|
|
|
|
100.0
|
%
|
|
$
|
65,736
|
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
64,050
|
|
|
|
83.0
|
|
|
|
54,103
|
|
|
|
82.3
|
|
Gross
profit
|
|
|
13,139
|
|
|
|
17.0
|
|
|
|
11,633
|
|
|
|
17.7
|
|
Freight
out and commissions
|
|
|
3,469
|
|
|
|
4.5
|
|
|
|
2,763
|
|
|
|
4.2
|
|
Direct
selling and marketing
|
|
|
1,470
|
|
|
|
1.9
|
|
|
|
1,223
|
|
|
|
1.9
|
|
Direct
operating income
|
|
$
|
8,200
|
|
|
|
10.6
|
%
|
|
$
|
7,647
|
|
|
|
11.6
|
%
|
Net sales
in the Food Away From Home segment increased by $11.5 million, or 17.4%, in
the third quarter of 2008 compared to the prior year. The change in
net sales from 2007 to 2008 was due to the following:
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
2007
Net sales
|
|
$
|
65,736
|
|
|
|
|
|
Volume
|
|
|
(3,068
|
)
|
|
|
(4.7
|
)%
|
Acquisitions
|
|
|
7,149
|
|
|
|
10.9
|
|
Pricing
|
|
|
4,589
|
|
|
|
7.0
|
|
Mix/other
|
|
|
2,783
|
|
|
|
4.2
|
|
2008
Net sales
|
|
$
|
77,189
|
|
|
|
17.4
|
%
|
Sales
increased during the third quarter of 2008 compared to 2007 primarily due to the
E.D. Smith acquisition in October, 2007 and price increases taken since last
year. Volume declined as the Company moved away from certain low
margin customers.
Cost of
sales as a percentage of net sales increased slightly from 82.3% in the third
quarter of 2007 to 83.0% in 2008, as sales price increases realized in the
quarter helped to partially offset increases in raw material and packaging costs
and a favorable mix of higher margin salsa.
Freight
out and commissions paid to independent sales brokers was $3.5 million in the
third quarter of 2008 compared to $2.8 million in 2007, an increase of 25.6%,
primarily due to growth in volume resulting from the E.D. Smith acquisition and
higher freight costs, due to rising fuel costs.
Industrial
and Export —
|
|
Three
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Net
sales
|
|
$
|
75,573
|
|
|
|
100.0
|
%
|
|
$
|
60,279
|
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
65,057
|
|
|
|
86.1
|
|
|
|
49,904
|
|
|
|
82.8
|
|
Gross
profit
|
|
|
10,516
|
|
|
|
13.9
|
|
|
|
10,375
|
|
|
|
17.2
|
|
Freight
out and commissions
|
|
|
2,087
|
|
|
|
2.8
|
|
|
|
1,709
|
|
|
|
2.8
|
|
Direct
selling and marketing
|
|
|
240
|
|
|
|
0.3
|
|
|
|
167
|
|
|
|
0.3
|
|
Direct
operating income
|
|
$
|
8,189
|
|
|
|
10.8
|
%
|
|
$
|
8,499
|
|
|
|
14.1
|
%
|
Net sales
in the Industrial and Export segment increased $15.3 million or 25.4% in
the third quarter of 2008 compared to the prior year. The change in
net sales from 2007 to 2008 was due to the following:
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
2007
Net sales
|
|
$
|
60,279
|
|
|
|
|
|
Volume
|
|
|
4,121
|
|
|
|
6.8
|
%
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
Pricing
|
|
|
11,640
|
|
|
|
19.3
|
|
Mix/other
|
|
|
(467
|
)
|
|
|
(0.7
|
)
|
2008
Net sales
|
|
$
|
75,573
|
|
|
|
25.4
|
%
|
Price
increases have been taken since last year in an effort to offset the significant
increases in input costs. Volume increases due to additional co-pack
sales also increased sales for the quarter.
Cost of
sales as a percentage of net sales increased from 82.8% in the third quarter of
2007 to 86.1% in 2008 reflecting increasing raw material and packaging costs,
which were partially offset by pricing increases during the quarter, and an
increase in lower margin co-pack sales.
Freight
out and commissions paid to independent sales brokers was $2.1 million in the
third quarter of 2008 compared to $1.7 million in 2007, an increase of
22.1%, primarily due increased freight costs, due to rising fuel
costs.
First
Nine Months of 2008 Compared to First Nine Months of 2007
Net Sales — The first nine
months net sales increased 40.1% to $1,102.6 million in the first nine
months of 2008, compared to $787.0 million in the first nine months of
2007. Net sales by segment are shown in the following
table:
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
$
Increase/
|
|
|
%
Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
(Dollars
in thousands)
|
|
North
American Retail Grocery
|
|
$
|
664,334
|
|
|
$
|
430,735
|
|
|
$
|
233,599
|
|
|
54.2
|
%
|
Food
Away From Home
|
|
|
224,756
|
|
|
|
184,940
|
|
|
|
39,816
|
|
|
21.5
|
%
|
Industrial
and Export
|
|
|
213,478
|
|
|
|
171,291
|
|
|
|
42,187
|
|
|
24.6
|
%
|
Total
|
|
$
|
1,102,568
|
|
|
$
|
786,966
|
|
|
$
|
315,602
|
|
|
40.1
|
%
|
The
increase in sales is primarily due to the 2007 acquisitions of E.D. Smith, San
Antonio Farms and DeGraffenreid, as well as price increases taken to offset
rising input costs.
Cost of Sales — All expenses
incurred to bring a product to completion are included in cost of
sales. These costs include raw materials, ingredient and packaging
costs, labor costs, facility and equipment costs, including costs to operate and
maintain our warehouses, and costs associated with transporting our finished
products from our manufacturing facilities to our own distribution
centers. Cost of sales as a percentage of net sales was 80.8% in the
first nine months of 2008 compared to 79.1% in 2007. Price increases
taken in 2008, as well as cost reduction initiatives, only partially offset the
rising cost of raw materials and packaging. We continued to
experience increases in commodity costs in such items as casein, corn syrup, and
soybean oil compared to the first nine months of 2007. Increases in
raw material costs in the first nine months of 2008 compared to 2007 included
a 59% increase in casein, 11% increase in corn syrup and other
sweeteners, 41% increase in soybean oil and other oils and a 7% increase in
cucumber crop costs. Packaging cost increases include a 13% increase
in glass packaging and a 20% increase in plastic containers.
Operating Expenses — Our
operating expenses were $156.6 million during the first nine months of 2008
compared to $107.4 million in 2007. Selling and distribution
expenses increased $22.3 million or 34.6% in the first nine months of
2008 compared to the first nine months of 2007 due to the San Antonio Farms
acquisition in May, 2007 and E.D. Smith in October, 2007. General and
administrative expenses increased $7.6 million in the first nine months of
2008 compared to 2007, primarily due to the Canadian infrastructure added as a
result of the E.D. Smith acquisition.
Other
operating expense of $12.6 million includes $12.1 million related to the closure
of the Portland, Oregon pickle plant and $0.5 million related to the
unreimbursed expense resulting from the fire at the New Hampton, Iowa
facility.
Operating Income — Operating
income for the first nine months of 2008 was $55.6 million, a decrease of
$1.4 million, or 2.5%, from operating income of $57.1 million in the
first nine months of 2007. Our operating margin was 5.0% in the first
nine months of 2008 compared to 7.3% in the prior year. Excluding the
impact of the Portland plant closure, operating margin for the first nine months
of 2008 would have been 6.1%.
Income Taxes — Income tax
expense was recorded at an effective rate of 29.7% in the first nine months of
2008 compared to 38.2% in the prior year. The lower effective tax rate in
2008 is due to the favorable intercompany financing structure entered into in
conjunction with the E.D. Smith acquisition. (See Note
4)
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
— Results by Segment
North
American Retail Grocery —
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
Net
sales
|
|
$
|
664,334
|
|
|
|
100.0
|
%
|
|
$
|
430,735
|
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
523,921
|
|
|
|
78.9
|
|
|
|
326,967
|
|
|
|
75.9
|
|
Gross
profit
|
|
|
140,413
|
|
|
|
21.1
|
|
|
|
103,768
|
|
|
|
24.1
|
|
Freight
out and commissions
|
|
|
43,446
|
|
|
|
6.5
|
|
|
|
29,430
|
|
|
|
6.8
|
|
Direct
selling and marketing
|
|
|
17,709
|
|
|
|
2.7
|
|
|
|
16,918
|
|
|
|
3.9
|
|
Direct
operating income
|
|
$
|
79,258
|
|
|
|
11.9
|
%
|
|
$
|
57,420
|
|
|
|
13.4
|
%
|
Net sales
in the retail grocery segment increased by $233.6 million, or 54.2% in the first
nine months of 2008 compared to the first nine months of 2007. The
change in net sales from 2007 to 2008 was due to the following:
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
2007
Net sales
|
|
$
|
430,735
|
|
|
|
|
|
Volume
|
|
|
(23,476
|
)
|
|
|
(5.5
|
)%
|
Acquisitions
|
|
|
227,360
|
|
|
|
52.8
|
|
Pricing
|
|
|
29,130
|
|
|
|
6.8
|
|
Mix/other
|
|
|
585
|
|
|
|
0.1
|
|
2008
Net sales
|
|
$
|
664,334
|
|
|
|
54.2
|
%
|
The
increase in net sales from 2007 to 2008 resulted mainly from the acquisition of
San Antonio Farms in the second quarter of 2007 and E.D. Smith in the fourth
quarter of 2007. Price increases taken due to rising raw material and
packaging costs partially offset lower case sales of baby food and retail
branded pickles. Volume declined due to a previously announced loss
of a significant baby food customer and movement away from certain low margin
customers.
Cost of
sales as a percentage of net sales increased from 75.9% in 2007 to 78.9% in 2008
primarily as a result of increases in raw material and packaging costs which
were only partially offset by price increases. We have implemented
several cost reduction and pricing initiatives in an attempt to offset these
cost increases.
Freight
out and commissions paid to independent sales brokers was $43.4 million in
the first nine months of 2008 compared to $29.4 million in 2007, an
increase of 47.6%, primarily due to the San Antonio Farms and E.D. Smith
acquisitions and higher freight costs, due to higher fuel
costs.
Food
Away From Home —
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
Net
sales
|
|
$
|
224,756
|
|
|
|
100.0
|
%
|
|
$
|
184,940
|
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
184,914
|
|
|
|
82.3
|
|
|
|
152,707
|
|
|
|
82.6
|
|
Gross
profit
|
|
|
39,842
|
|
|
|
17.7
|
|
|
|
32,233
|
|
|
|
17.4
|
|
Freight
out and commissions
|
|
|
10,639
|
|
|
|
4.7
|
|
|
|
7,603
|
|
|
|
4.1
|
|
Direct
selling and marketing
|
|
|
4,868
|
|
|
|
2.2
|
|
|
|
3,706
|
|
|
|
2.0
|
|
Direct
operating income
|
|
$
|
24,335
|
|
|
|
10.8
|
%
|
|
$
|
20,924
|
|
|
|
11.3
|
%
|
Net sales
in the Food Away From Home segment increased by $39.8 million, or 21.5%, in
the first nine months of 2008 compared to the prior year. The change
in net sales from 2007 to 2008 was due to the following:
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
2007
Net sales
|
|
$
|
184,940
|
|
|
|
|
|
Volume
|
|
|
(9,962
|
)
|
|
|
(5.4
|
)%
|
Acquisitions
|
|
|
31,467
|
|
|
|
17.0
|
|
Pricing
|
|
|
13,312
|
|
|
|
7.2
|
|
Mix/other
|
|
|
4,999
|
|
|
|
2.7
|
|
2008
Net sales
|
|
$
|
224,756
|
|
|
|
21.5
|
%
|
Sales
were up during the first nine months of 2008 compared to 2007 primarily due to
the DeGraffenreid and San Antonio Farms acquisitions in May, 2007, the E.D.
Smith acquisition in October, 2007 and price increases taken since last
year. Volume declined as the Company moved away from certain low
margin customers.
Cost of
sales as a percentage of net sales decreased from 82.6% in the first nine months
of 2007 to 82.3% in 2008, as sales price increases realized in the first nine
months helped to offset increases in raw material and packaging costs and a
favorable mix of higher margin salsa as a result of the San Antonio Farms
acquisition.
Freight
out and commissions paid to independent sales brokers was $10.6 million in the
first nine months of 2008 compared to $7.6 million in 2007, an increase of
39.9%, primarily due to growth in volume resulting from the DeGraffenreid, San
Antonio Farms and E.D. Smith acquisitions and higher freight costs, due to
higher fuel costs.
Industrial
and Export —
|
|
Nine
Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Net
sales
|
|
$
|
213,478
|
|
|
|
100.0
|
%
|
|
$
|
171,291
|
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
181,555
|
|
|
|
85.0
|
|
|
|
142,864
|
|
|
|
83.4
|
|
Gross
profit
|
|
|
31,923
|
|
|
|
15.0
|
|
|
|
28,427
|
|
|
|
16.6
|
|
Freight
out and commissions
|
|
|
6,666
|
|
|
|
3.1
|
|
|
|
5,683
|
|
|
|
3.3
|
|
Direct
selling and marketing
|
|
|
655
|
|
|
|
0.3
|
|
|
|
558
|
|
|
|
0.3
|
|
Direct
operating income
|
|
$
|
24,602
|
|
|
|
11.6
|
%
|
|
$
|
22,186
|
|
|
|
13.0
|
%
|
Net sales
in the Industrial and Export segment increased $42.2 million or 24.6% in
the first nine months of 2008 compared to the prior year. The change
in net sales from 2007 to 2008 was due to the following:
|
|
Dollars
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
2007
Net sales
|
|
$
|
171,291
|
|
|
|
|
|
Volume
|
|
|
12,403
|
|
|
|
7.2
|
%
|
Acquisitions
|
|
|
3,314
|
|
|
|
1.9
|
|
Pricing
|
|
|
34,022
|
|
|
|
19.9
|
|
Mix/other
|
|
|
(7,552
|
)
|
|
|
(4.4
|
)
|
2008
Net sales
|
|
$
|
213,478
|
|
|
|
24.6
|
%
|
Price
increases have been taken since last year in an effort to offset the significant
increases in input costs. The effect of acquisitions and volume
increases in the co-pack business make up the balance of the growth in net
sales.
Cost of
sales as a percentage of net sales increased from 83.4% in the first nine months
of 2007 to 85.0% in 2008 reflecting increased raw material and packaging costs
that were partially offset by price increases.
Freight
out and commissions paid to independent sales brokers was $6.7 million in the
first nine months of 2008 compared to $5.7 million in 2007, an increase of
17.3%, due to the 2007 acquisitions and increased freight costs, due to higher
fuel costs.
Liquidity
and Capital Resources
Cash
Flow
Management
assesses the Company’s liquidity in terms of its ability to generate cash to
fund its operating, investing and financing activities. The Company
continues to generate substantial cash 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. Management has increased its focus on working
capital management and has taken actions to specifically reduce inventories and
drive incremental cash flow.
The
Company’s cash flow from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows is summarized
in the following table:
|
|
Nine
Months Ended
|
|
|
September
30,
|
|
|
2008
|
|
2007
|
|
|
(In
thousands)
|
Net
cash provided by (used in) continuing operations:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
92,692
|
|
|
$
|
40,062
|
|
Investing
activities
|
|
$
|
(34,591
|
)
|
|
$
|
(117,541
|
)
|
Financing
activities
|
|
$
|
(65,170
|
)
|
|
$
|
77,042
|
|
Net cash
provided by operating activities increased by $52.6 million for the first nine
months of 2008 compared to 2007. Net income, excluding non-cash items
such as write down of impaired assets, depreciation, amortization and
stock-based compensation, increased by $13.6 million. In
addition, a decrease in working capital mainly due to a decrease in inventories,
as the result of working capital efficiency programs, and an increase in
payables accounted for the balance of the increase.
Net cash
used in investing activities was $34.6 million in the first nine months of 2008
compared to $117.5 million in the first nine months of 2007, a decrease of
$83.0 million primarily due to decreased cash outflows for acquisitions
offset by an increase in additions to property, plant and
equipment. These additions to property, plant and equipment in 2008,
were associated with a boiler project and plant equipment purchases at our
Pittsburgh facility, a capacity expansion project at our North East,
Pennsylvania facility, the repair of our New Hampton, Iowa facility which was
damaged by fire in February of this year, multiple projects at our other
manufacturing facilities and the purchase of a Company airplane.
Net cash
used in financing activities was $65.2 million in the first nine months of
2008 compared to cash provided of $77.0 million in 2007, a decrease of
$142.2 million mainly due to proceeds from the issuance of debt in 2007
needed for the acquisition of businesses, in contrast with the repayment of debt
in 2008. The Company repaid approximately $69.5 million of debt,
which includes $5.5 million for the termination of a capital lease, in the first
nine months of 2008, net of borrowings, compared to $22.9 million in
2007.
Debt
Obligations
At
September 30, 2008, we had $448.0 million in borrowings under our revolving
credit facility, senior notes of $100 million and $3.8 million of tax
increment financing and other obligations. In addition, at September
30, 2008, there were $8.6 million in letters of credit under the revolver
that were issued but undrawn.
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 quarter, respectively. Our long-term financing needs
will depend largely on potential acquisition activity. Our revolving
credit agreement, plus cash flow from operations, is expected to be adequate to
provide liquidity for our planned growth strategy and current operations, and is
not expected to be impacted by the current credit crisis.
Our
revolving credit facility provides for an aggregate commitment of $600 million
of which $143.4 million was available at September 30, 2008. Interest
rates are tied to variable market rates which averaged 4.05% on debt outstanding
as of September 30, 2008. We are in compliance with the applicable
covenants as of September 30, 2008.
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. We are in compliance with the
applicable covenants as of September 30, 2008.
See Note
9 to our Condensed Consolidated Financial Statements.
Interest
Rate Fluctuations
The
Company entered into a $200 million long term interest rate swap agreement with
a forward starting 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 will be swapped for a fixed 2.9% interest base rate for a
period of 24 months, amortizing to $50 million for an additional nine months at
the same 2.9% interest rate. Under the terms of the Company’s
revolving credit agreement, this will result in an all in borrowing cost on the
swapped principal being no more than 3.8% during the life of the swap
agreement.
Other
Commitments and Contingencies
We also
have the following commitments and contingent liabilities, in addition to
contingent liabilities related to ordinary course of 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
15 to our Condensed Consolidated Financial Statements and our Annual Report on
Form 10-K for the fiscal year ended December 31, 2007 for more information about
our commitments and contingent obligations.
Future
Capital Requirements
We expect
capital spending programs to increase in 2008 as a result of including a full
twelve months of the acquisitions in 2007. Capital spending in 2008
is focused on plant efficiencies and upgrades to our Pittsburgh plant’s water
and power systems, additional building and production lines at our North East,
Pennsylvania facility, productivity improvements and routine equipment upgrades
or replacements at our plants, which currently number 17 across the United
States and Canada.
In 2008,
we expect cash interest to be approximately $28.9 million based on
anticipated debt levels and cash taxes are expected to be approximately
$11.0 million.
Recent
Accounting Pronouncements
Information
regarding recent accounting pronouncements is provided in Note 3 to the
Company’s Condensed Consolidated Financial Statements.
Critical
Accounting Policies
A
description of the Company’s critical accounting policies is contained in our
Annual Report on Form 10-K for the year ended December 31,
2007. There were no material changes to our critical accounting
policies in the nine months ended September 30, 2008.
Off-Balance
Sheet Arrangements
We do not
have any obligations that meet the definition of an off-balance sheet
arrangement, other than operating leases, which have or are reasonably likely to
have a material effect on our Condensed Consolidated Financial
Statements.
Forward
Looking Statements
From time
to time, we and our representatives may provide information, whether orally or
in writing, including certain statements in this Quarterly Report on Form 10-Q,
which are deemed to be “forward-looking” within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Litigation Reform
Act”). These forward-looking statements and other information are
based on our beliefs as well as assumptions made by us using information
currently available.
The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “should” and similar
expressions, as they relate to us, are intended to identify forward-looking
statements. Such statements reflect our current views with respect to
future events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected or intended. We do not intend to update these
forward-looking statements.
In
accordance with the provisions of the Litigation Reform Act, we are making
investors aware that such forward-looking statements, because they relate to
future events, are by their very nature subject to many important factors that
could cause actual results to differ materially from those contemplated by the
forward-looking statements contained in this Quarterly Report on Form 10-Q and
other public statements we make. Such factors include, but are not
limited to: the outcome of litigation and regulatory proceedings to which we may
be a party; 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; 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; and other risks that are set forth in the
Risk Factors section, the Legal Proceedings section, the Management’s Discussion
and Analysis of Financial Condition and Results of Operations section and other
sections of this Quarterly Report on Form 10-Q, as well as in our Current
Reports on Form 8-K.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Interest
Rate Fluctuations
The
Company entered into a $200 million long term interest rate swap agreement with
a forward starting 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 will be swapped for a fixed 2.9% interest base rate for a
period of 24 months, amortizing to $50 million for an additional nine months at
the same 2.9% interest rate. Under the terms of the Company’s
revolving credit agreement, this will result in an “all in” borrowing cost on
the swapped principal being no more than 3.8% during the life of the swap
agreement.
In
July 2006, we entered into a forward interest rate swap transaction for a
notional amount of $100 million as a hedge of the forecasted private
placement of $100 million senior notes. The interest rate swap
transaction was terminated on August 31, 2006, which resulted in a pre-tax
loss of $1.8 million. The unamortized loss is reflected, net of
tax, in Accumulated other comprehensive loss in our Condensed Consolidated
Balance Sheets. The total loss will be reclassified ratably to our
Condensed 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 our senior notes.
We do not
utilize financial instruments for trading purposes or hold any derivative
financial instruments as of September 30, 2008, 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. Based on our outstanding debt balance under our
revolving credit facility, as of September 30, 2008, each 1% rise in our
interest rate would increase our interest expense by approximately
$4.5 million annually. This does not include the impact of the
interest rate swap agreement entered into in October 2008.
Input
Costs
The costs
of raw materials, as well as packaging materials and fuel, have increased
substantially 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 2007, and continued at these high levels in
the first nine months of 2008, including processed vegetables and meat, soybean
oil, casein, sweeteners, cheese and packaging materials. In addition,
fuel costs, which represent the most important factor affecting utility costs at
our production facilities and our transportation costs, have been at very high
levels. Furthermore, certain input requirements, such as glass used
in packaging, are available only from a limited number of
suppliers.
New for
the Company in 2008 is the exposure to raw material price fluctuations for items
used in our jams and other products, which were obtained through the purchase of
E.D. Smith in October 2007. Incremental raw materials used in these
products include fresh and processed fruits and berries. The majority
of the remaining raw materials used by E.D. Smith are currently used by the
Company, but now at higher volumes. The price of fruits and berries
are subject to many variables, including global supply, which is impacted by
weather and disease and can significantly impact available supplies and
costs.
The
Company has seasonal grower contracts with a variety of growers strategically
located to supply our pickle 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 raw
materials and packaging. Competitive pressures also may limit our
ability to quickly raise prices in response to increased raw material, 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.
Fluctuations
in Foreign Currencies
The
Company is exposed to fluctuations in foreign currency cash flows primarily
related to raw material purchases. We are also exposed to
fluctuations in the value of our foreign currency investment in our Canadian
subsidiary, E.D. Smith, which was purchased October 15,
2007. Additionally, input costs for certain Canadian sales are
denominated in U.S. dollars, further impacting the affect foreign currency
fluctuations may have on the Company.
E.D.
Smith is a manufacturer of private label salad dressings, jams and pie fillings
and other private label products in Canada. The Company’s financial
statements are presented in U.S. dollars, which require the Canadian assets,
liabilities, revenues, and expenses to be translated into U.S. dollars at
applicable exchange rates. Accordingly, we are exposed to volatility
in the translation of foreign currency earnings due to fluctuations in the value
of the Canadian dollar, which may negatively impact the Company’s results of
operations and financial position. For the nine months ended
September 30, 2008, the Company recognized a foreign currency exchange loss of
approximately $16.9 million, of which $13.2 million was recorded as a component
of Accumulated other comprehensive loss and $3.7 million was recorded on the
Company’s Condensed Consolidated Statements of Income within the Other (income)
expense line.
The
Company, through its wholly owned consolidated subsidiary, E.D. Smith, enters
into foreign currency contracts due to the exposure to Canadian/U.S. dollar
currency fluctuations on cross border transactions. These contracts
do not qualify for hedge accounting. The Company records the fair
value of these contracts on the Condensed Consolidated Balance Sheets and has
recorded the change in fair value through the Condensed Consolidated Statements
of Income, within the Other (income) expense line. For the nine
months ended September 30, 2008, the Company recorded a gain on these contracts
totaling approximately $32 thousand. The remaining foreign currency
contracts expire during 2008.
Evaluations
were carried out under the supervision and with the participation of the
Company’s management, including our Chief Executive Officer and Chief Financial
Officer of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this
report. Based upon those evaluations, the Chief Executive Officer and
Chief Financial Officer have concluded that as of September 30, 2008, these
disclosure controls and procedures were effective.
There
have been no changes in our internal control over financial reporting during the
quarter ended September 30, 2008 that have materially affected, or are likely to
materially affect, the Company’s internal control over financial
reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
TreeHouse
Foods, Inc.
Westchester,
Illinois
We have
reviewed the accompanying condensed consolidated balance sheet of TreeHouse
Foods, Inc. and subsidiaries (the “Company”) as of September 30, 2008, and the
related condensed consolidated statements of income for the three and nine month
periods ended September 30, 2008 and 2007 and of cash flows for the nine month
periods ended September 30, 2008 and 2007. These interim financial
statements are the responsibility of the Company’s management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to such condensed consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
TreeHouse Foods, Inc. and subsidiaries as of December 31, 2007, and the
related consolidated statements of income, stockholders’ equity and parent’s net
investment, and cash flows for the year then ended (not presented herein); and
in our report dated February 27, 2008, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2007 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
/s/
Deloitte & Touche LLP
Chicago,
Illinois
November
5, 2008
We are
party to a variety of legal proceedings arising out of the conduct of our
business. While the results of proceedings cannot be predicted with
certainty, management believes that the final outcome of these proceedings will
not have a material adverse effect on our consolidated financial statements,
annual results of operations or cash flows.
Information
regarding risk factors appears in Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Information Related to
Forward-Looking Statements, in Part I — Item 2 of this Form
10-Q and in Part I — Item 1A of the TreeHouse Foods, Inc. Annual
Report on Form 10-K for the year ended December 31, 2007. There
have been no material changes from the risk factors previously disclosed in the
TreeHouse Foods, Inc. Annual Report on Form 10-K for the year ended December 31,
2007.
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
None.
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15.1
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Awareness
Letter from Deloitte & Touche LLP regarding unaudited financial
information
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31.1
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Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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31.2
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Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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32.1
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Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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32.2
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Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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TREEHOUSE
FOODS, INC.
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/s/
Dennis F. Riordan
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Dennis
F. Riordan
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Senior
Vice President and Chief Financial Officer
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November
5, 2008
-32-