UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
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þ
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Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities and Exchange Act of
1934
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For
the Quarterly Period Ended March 31, 2009.
or
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o
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Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the Transition Period
from to
Commission
File Number 001-32504
TreeHouse
Foods, Inc.
(Exact
name of the registrant as specified in its charter)
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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 weather the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o
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)
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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 31,549,158 shares of Common Stock, par value $0.01 per share, outstanding
as of April 30, 2009.
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Page
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23
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24
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25
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26
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26
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27
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TREEHOUSE
FOODS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and per share data)
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March
31,
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December
31,
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|||||||
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2009
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2008
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|||||||
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(Unaudited)
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||||||||
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Assets
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$
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2,148
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$
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2,687
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||||
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Receivables,
net
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81,740
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86,837
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||||||
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Inventories,
net
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255,206
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245,790
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||||||
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Deferred
income taxes
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7,026
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6,769
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||||||
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Prepaid
expenses and other current assets
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7,379
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10,315
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||||||
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Assets
held for sale
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4,081
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4,081
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||||||
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Total
current assets
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357,580
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356,479
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||||||
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Property,
plant and equipment, net
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275,483
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270,664
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||||||
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Goodwill
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558,269
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560,874
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||||||
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Identifiable
intangible and other assets, net
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162,631
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167,665
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||||||
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Total
assets
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$
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1,353,963
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$
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1,355,682
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||||
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Liabilities
and Stockholders’ Equity
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||||||||
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Current
liabilities:
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||||||||
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Accounts
payable and accrued expenses
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$
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172,528
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$
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187,795
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||||
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Current
portion of long-term debt
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535
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475
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||||||
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Total
current liabilities
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173,063
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188,270
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||||||
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Long-term
debt
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480,346
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475,233
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||||||
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Deferred
income taxes
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31,045
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27,485
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||||||
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Other
long-term liabilities
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37,909
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44,563
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||||||
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Commitments
and contingencies (Note 17)
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||||||||
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Stockholders’
equity:
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||||||||
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Preferred
stock, par value $0.01 per share, 10,000,000 shares authorized, none
issued
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—
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—
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||||||
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Common
stock, par value $0.01 per share, 40,000,000 shares authorized, 31,549,158
and
31,544,515
shares issued and outstanding, respectively
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315
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315
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||||||
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Additional
paid-in capital
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572,264
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569,262
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||||||
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Retained
earnings
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126,684
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113,948
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||||||
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Accumulated
other comprehensive loss
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(67,663
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)
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(63,394
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)
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||||
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Total
stockholders’ equity
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631,600
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620,131
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||||||
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Total
liabilities and stockholders’ equity
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$
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1,353,963
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$
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1,355,682
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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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March
31,
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||||||||
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2009
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2008
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|||||||
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(Unaudited)
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||||||||
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Net
sales
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$
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355,396
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$
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360,623
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||||
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Cost
of sales
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283,685
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290,234
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||||||
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Gross
profit
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71,711
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70,389
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||||||
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Operating
expenses:
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||||||||
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Selling
and distribution
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25,781
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28,664
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||||||
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General
and administrative
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15,773
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15,242
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||||||
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Other
operating expense, net
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242
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10,922
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||||||
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Amortization
expense
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3,258
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3,487
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||||||
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Total
operating expenses
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45,054
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58,315
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||||||
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Operating
income
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26,657
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12,074
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||||||
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Other
(income) expense:
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||||||||
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Interest
expense
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4,498
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7,731
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||||||
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Interest
income
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—
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(20
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)
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|||||
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Loss
on foreign currency exchange
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2,060
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1,860
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||||||
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Other
income, net
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(112
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)
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(294
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)
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||||
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Total
other expense
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6,446
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9,277
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||||||
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Income
before income taxes
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20,211
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2,797
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||||||
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Income
taxes
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7,479
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736
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||||||
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Net
income
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$
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12,732
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$
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2,061
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||||
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Weighted
average common shares:
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||||||||
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Basic
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31,547
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31,204
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||||||
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Diluted
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32,343
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31,308
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||||||
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Net
earnings per common share:
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||||||||
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Basic
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$
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.40
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$
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.07
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||||
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Diluted
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$
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.39
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$
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.07
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||||
See Notes
to Condensed Consolidated Financial Statements.
TREEHOUSE
FOODS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
|
Three
Months Ended
|
||||||||
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March
31,
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||||||||
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2009
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2008
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|||||||
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(Unaudited)
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||||||||
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Cash
flows from operating activities:
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||||||||
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Net
income
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$
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12,732
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$
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2,061
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||||
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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||||||||
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Depreciation
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8,190
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8,486
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||||||
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Amortization
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3,258
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3,487
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||||||
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Gain
on derivative
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—
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(319
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)
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|||||
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Loss
on foreign currency exchange, intercompany note
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732
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1,860
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||||||
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Stock-based
compensation
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2,900
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2,781
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||||||
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Write
down of impaired assets
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—
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5,231
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||||||
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Deferred
income taxes
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3,612
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(710
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)
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|||||
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Other
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12
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81
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||||||
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Changes
in operating assets and liabilities, net of acquisitions:
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||||||||
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Receivables
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4,643
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(5,036
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)
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|||||
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Inventories
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(10,124
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)
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9,578
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|||||
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Prepaid
expenses and other current assets
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3,030
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139
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||||||
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Accounts
payable, accrued expenses and other current liabilities
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(20,159
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)
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4,979
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|||||
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Net
cash provided by operating activities
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8,826
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32,618
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||||||
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Cash
flows from investing activities:
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||||||||
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Additions
to property, plant and equipment
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(13,943
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)
|
(7,597
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)
|
||||
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Acquisitions
of businesses
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—
|
(31
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)
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|||||
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Proceeds
from sale of fixed assets
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12
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5
|
||||||
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Net
cash used in operating activities
|
(13,931
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)
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(7,623
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)
|
||||
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Cash
flows from financing activities:
|
||||||||
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Net
borrowings (repayment) of debt
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4,508
|
(31,347
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)
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|||||
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Proceeds
from stock option exercises
|
110
|
—
|
||||||
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Net
cash provided by (used in) financing activities
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4,618
|
(31,347
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)
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|||||
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Effect
of exchange rate changes on cash and cash equivalents
|
(52
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)
|
(123
|
)
|
||||
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Net
decrease in cash and cash equivalents
|
(539
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)
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(6,475
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)
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||||
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Cash
and cash equivalents, beginning of period
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2,687
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9,230
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||||||
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Cash
and cash equivalents, end of period
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$
|
2,148
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$
|
2,755
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||||
See Notes
to Condensed Consolidated Financial Statements.
TREEHOUSE
FOODS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As
of and for the three months ended March 31, 2009
(Unaudited)
1.
General
Business — TreeHouse Foods, Inc.
(“we,” “us,” “our,” or the “Company”) is a food manufacturer servicing primarily
the retail grocery and foodservice distribution channels. Our
products include non-dairy powdered creamer, soup and infant feeding products,
pickles and related products, salad dressings, sauces, jams and pie fillings,
aseptic products, Mexican sauces, refrigerated salad dressings and liquid
non-dairy products.
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, 2008. Results of
operations for interim periods are not necessarily indicative of annual
results.
The
preparation of our Condensed Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United States of America
(“GAAP”) requires us to use our judgment to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosures of
contingent assets and liabilities at the date of the Condensed Consolidated
Financial Statements, and the reported amounts of net sales and expenses during
the reporting period. Actual results could differ from these
estimates.
A
detailed description of the Company’s significant accounting policies can be
found in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008.
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 delayed 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. The
adoption of the provisions of SFAS 157 and FSP FAS 157-2 did not significantly
impact 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
the beginning of the first annual reporting period beginning on or after
December 15, 2008, and may not be early adopted. The Company will
apply 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. Adoption of SFAS 160 did not have an impact 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. Further, entities are encouraged, but not
required to provide comparative disclosures for earlier periods. We
adopted SFAS 161 beginning January 1, 2009 and have provided the required
disclosures beginning with our first quarterly report on Form 10-Q in
2009.
In April
2009, the FASB issued FSP SFAS No. 107-1, “Interim Disclosures about Fair Value
of Financial Instruments,” which amends SFAS No. 107, “Disclosures about Fair
Value of Financial Instruments,” and APB Opinion No. 28, “Interim Financial
Reporting.” FSP SFAS No. 107-1 will require disclosures about fair
value of financial instruments in financial statements for interim reporting
periods and in annual financial statements of publicly-traded
companies. This FSP also will require entities to disclose the
method(s) and significant assumptions used to estimate the fair value of
financial instruments in financial statements on an interim and annual basis and
to highlight any changes from prior periods. The effective date for
this FSP is interim and annual periods ending after June 15, 2009. We
will comply with the disclosure provisions of this FSP when it is
effective.
EITF
08-6, Equity Method Investment
Accounting Considerations, was issued in November 2008 and is effective
for transactions occurring in fiscal years beginning on or after December 15,
2008. This EITF was issued to provide guidance on how to apply
Account Principles Board Opinion 18 as a result of the issuance and adoption of
SFAS 141(R) and SFAS 160. EITF 08-6 resulted in four consensuses: (1)
the initial carrying amount of an equity method investment should be determined
by applying the cost accumulation model in appendix D of SFAS 141(R), (2) when
reviewing for impairment, Opinion 18 should be used, (3) share issuances by the
investee should be accounting for as if the equity method investor sold a
proportionate share of its investment, and (4) when the investment is no longer
accounted for under Opinion 18 and is instead within the scope of cost method
accounting or SFAS 115, the investor should prospectively apply the provisions
of Opinion 18 or SFAS 115 and use the current carrying amount of the investment
as its initial cost. The adoption of EITF 08-6 did not have a
significant impact on our financial statements.
On
December 30, 2008, the FASB issued FASB Staff Position (“FSP”) 132R-1, Employers Disclosures about
Postretirement Benefit Plan Assets. This FSP is effective for
fiscal years ending after December 15, 2009. This FSP does not change
current accounting methods, but requires disclosure about investment policies
and strategies, the fair value of each major category of plan assets, the
methods and inputs used to develop fair value measurements of plan assets, and
concentrations of credit risk. As this FSP only pertains to
disclosures, the Company does not expect its impact upon adoption to be
significant.
4.
Income Taxes
Income
tax expense was recorded at an effective rate of 37.0% in the first quarter of
2009 compared to 26.3% in the prior year’s quarter. The Company’s
effective tax rate is favorably impacted by an intercompany financing structure
entered into in conjunction with the E.D. Smith, Canadian
acquisition. For the three months ended March 31, 2009 and 2008, the
Company recognized a tax benefit of approximately $1.1 million and $1.4 million,
respectively, related to this item. Because consolidated earnings for
the three months ended March 31, 2009 were significantly higher than
consolidated earnings for the three months ended March 31, 2008, this tax
benefit was proportionally much smaller, therefore, increasing the net effective
rate in the first quarter of 2009 compared to 2008.
As of
March 31, 2009, the Company does not believe that the gross recorded
unrecognized tax benefits will materially change within the next 12
months.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, Canada and various state jurisdictions. The Company has
been informed that the Internal Revenue Service (“IRS”) will begin an
examination of the Company’s 2007 federal income tax return in the second
quarter of 2009. The IRS has previously examined tax returns filed
for years through 2006. The Company has various state tax
examinations in process, which are expected to be completed in due
course. The outcome of the IRS examination and the various state tax
examinations are unknown at this time.
E.D.
Smith and its affiliates are subject to Canadian, U.S. and state tax
examinations from 2005 forward. The IRS has completed an examination
of E.D. Smith’s U.S. affiliates tax return for 2005 during the period ended
March 31, 2009. An insignificant tax adjustment was paid to settle
the examination.
5.
Other Operating Expense
The
Company incurred Other operating expense of $0.2 million and $10.9 million for
the three months ended March 31, 2009 and 2008, respectively. For the
three months ended March 31, 2009, expenses consisted of $0.4 million relating
to the closing of our Portland, Oregon pickle plant offset by $0.2 million in
rental income. For the three months ended March 31, 2008, expenses
consisted of $10.4 million relating to the closing of our Portland, Oregon
pickle plant 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 $13.9 million, of which $8.6 million
is expected to be in cash, net of estimated proceeds from the sale of
assets. The Company has incurred $13.2 million in Portland closure
costs since 2008. Accrued expenses related to this closure were
insignificant as of March 31, 2009 and December 31, 2008. In
connection with the Portland closure, the Company has $4.1 million of assets
held for sale, which are primarily land and buildings.
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 majority of
the closure costs were included as costs of the acquisition of E.D. Smith and
are not expected to impact earnings. Total costs are expected to be
approximately $1.8 million. As of March 31, 2009 and December 31,
2008, the Company had accrued approximately $1.7 million for the closure, the
components of which include $1.2 million for severance and $0.5 million for
closing and other costs. The Company expects payments to be completed
by the end of 2009, with all payments expected to be funded with cash from
operations. Severance payments during the first quarter of 2009 were
insignificant. No other payments were made.
7.
Insurance Claim – New Hampton
In
February 2008, the Company’s non-dairy powdered creamer plant in New Hampton,
Iowa was damaged by a fire, which left the facility unusable. The
Company has repaired the facility and it became operational in the first quarter
of 2009. We filed a claim with our insurance provider and have
received approximately $37.5 million in reimbursements for property damage and
incremental expenses incurred to service our customers throughout this
period. We expect to incur a total of approximately $44 million in
expenses related to this claim, all of which are expected to be reimbursed by
our insurance provider, less a $0.5 million deductible. As of March
31, 2009, the Company has a liability of approximately $5.3 million recorded
primarily related to reimbursements for replacing the fixed assets in excess of
the net book value of the fixed assets destroyed in the fire. This
liability is expected to be resolved during 2009 upon finalization of the claim,
with any remaining amounts being reversed to income and recorded as a
gain. An additional component of our claim is for lost income, the
impact of which is not recorded until the claim is finalized and cash is
received.
8.
Inventories
|
March
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Finished
goods
|
$
|
187,350
|
$
|
181,311
|
||||
|
Raw
materials and supplies
|
87,046
|
82,869
|
||||||
|
LIFO
reserve
|
(19,190
|
)
|
(18,390
|
)
|
||||
|
Total
|
$
|
255,206
|
$
|
245,790
|
||||
Approximately
$86.1 million and $83.0 million of our inventory was accounted for under the
LIFO method of accounting at March 31, 2009 and December 31, 2008,
respectively.
9.
Intangible Assets
Changes
in the carrying amount of goodwill for the three months ended March 31, 2009 are
as follows:
|
North
American
|
Food
Away
|
Industrial
|
||||||||||
|
Retail
Grocery
|
From
Home
|
and
Export
|
Total
|
|||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at December 31, 2008
|
$
|
343,651
|
$
|
83,641
|
$
|
133,582
|
$
|
560,874
|
||||
|
Currency
exchange adjustment
|
(2,354
|
)
|
(251
|
)
|
—
|
(2,605
|
)
|
|||||
|
Balance
at March 31, 2009
|
$
|
341,297
|
$
|
83,390
|
$
|
133,582
|
$
|
558,269
|
||||
The gross
carrying amount and accumulated amortization of our intangible assets other than
goodwill as of March 31, 2009 and December 31, 2008 are as follows:
|
March
31, 2009
|
December
31, 2008
|
|||||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||||
|
Intangible
assets with indefinite lives:
|
||||||||||||||||||||||||||
|
Trademarks
|
$
|
27,355
|
$
|
—
|
$
|
27,355
|
$
|
27,824
|
$
|
—
|
$
|
27,824
|
||||||||||||||
|
Intangible
assets with finite lives:
|
||||||||||||||||||||||||||
|
Customer-related
|
136,409
|
(25,888
|
)
|
110,521
|
137,693
|
(23,430
|
)
|
114,263
|
||||||||||||||||||
|
Non-compete
agreement
|
2,620
|
(1,607
|
)
|
1,013
|
2,620
|
(1,422
|
)
|
1,198
|
||||||||||||||||||
|
Trademarks
|
17,610
|
(1,616
|
)
|
15,994
|
17,610
|
(1,385
|
)
|
16,225
|
||||||||||||||||||
|
Formulas/recipes
|
1,559
|
(447
|
)
|
1,112
|
1,583
|
(378
|
)
|
1,205
|
||||||||||||||||||
|
Total
|
$
|
185,553
|
$
|
(29,558
|
)
|
$
|
155,995
|
$
|
187,330
|
$
|
(26,615
|
)
|
$
|
160,715
|
||||||||||||
Amortization
expense on intangible assets for the three months ended March 31, 2009 and 2008
was $3.3 million and $3.5 million, respectively. Estimated aggregate
intangible asset amortization expense for the next five years is as
follows:
|
(In
thousands)
|
|
|
2010
|
$12,499
|
|
2011
|
$10,607
|
|
2012
|
$10,308
|
|
2013
|
$10,082
|
|
2014
|
$10,062
|
10.
Long-Term Debt
|
March
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Revolving
credit facility
|
$
|
376,600
|
$
|
372,000
|
||||
|
Senior
notes
|
100,000
|
100,000
|
||||||
|
Tax
increment financing and other
|
4,281
|
3,708
|
||||||
|
480,881
|
475,708
|
|||||||
|
Less
current portion
|
(535
|
)
|
(475
|
)
|
||||
|
Total
Long-Term Debt
|
$
|
480,346
|
$
|
475,233
|
||||
Revolving Credit Facility —
The Company maintains an unsecured revolving credit agreement with an aggregate
commitment of $600 million, of which $214.8 million was available as of March
31, 2009, that expires August 31, 2011. In addition, as of March 31,
2009, there were $8.6 million in letters of credit under the revolver that were
issued but undrawn. 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 March 31, 2009. 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. Our average interest rate on
debt outstanding under our Credit Agreement at March 31, 2009 was
1.16%.
Senior Notes — The Company
also maintains a private placement of $100 million in aggregate principal of
6.03% senior notes due September 30, 2013, pursuant to a Note Purchase Agreement
among the Company and a group of purchasers. The Note Purchase
Agreement contains covenants that will limit the ability of the Company and its
subsidiaries to, among other things, merge with other entities, change the
nature of the business, create liens, incur additional indebtedness or sell
assets. The Note Purchase Agreement also requires the Company to
maintain certain financial ratios. We are in compliance with the
applicable covenants as of March 31, 2009.
Swap Agreements — During
2008, the Company entered into a $200 million long term interest rate swap
agreement with an effective date of November 19, 2008 to lock into a fixed LIBOR
interest rate base. Under the terms of agreement, $200 million in
floating rate debt was swapped for a fixed 2.9% interest base rate for a period
of 24 months, amortizing to $50 million for an additional nine months at the
same 2.9% interest rate. Under the terms of the Company’s revolving
credit agreement and in conjunction with our credit spread, this will result in
an all in borrowing cost on the swapped principal being no more than 3.8% during
the life of the swap agreement. The Company did not apply hedge
accounting to this swap.
In 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 three months ended March 31, 2009,
$0.1 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 2009.
Tax Increment Financing —As
part of the acquisition of the soup and infant feeding business in 2006, the
Company assumed the payments related to redevelopment bonds pursuant to a Tax
Increment Financing Plan. The Company has agreed to make certain
payments with respect to the principal amount of the redevelopment bonds
through May 2019. As of March 31, 2009, $2.9 million remains
outstanding.
11.
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, restricted stock, restricted
stock units and performance units. Certain outstanding restricted
stock unit and restricted stock awards are subject to market conditions for
vesting. As of March 31, 2009 and 2008, the conditions pertaining to
the restricted stock units were not met and these awards have been excluded from
the diluted earnings per share calculation. As of March 31, 2009, the
conditions pertaining to the restricted stock awards were met and these awards
were included in the diluted earnings per share calculation, but as of March 31,
2008, none of the conditions for vesting were met. The Company’s
performance unit awards contain both service and performance
criteria. As of March 31, 2009, the performance criteria for a
portion of the performance awards were met and, therefore, have been included in
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
|
||||||||||||||
|
March
31,
|
||||||||||||||
|
2009
|
2008
|
|||||||||||||
|
Weighted
average common shares outstanding
|
31,546,788
|
31,204,305
|
||||||||||||
|
Assumed
exercise of stock options (1)
|
74,804
|
103,372
|
||||||||||||
|
Assumed
vesting of restricted stock, restricted stock units and performance
units
|
720,978
|
—
|
||||||||||||
|
Weighted
average diluted common shares outstanding
|
32,342,570
|
31,307,677
|
||||||||||||
|
(1)
|
The
assumed exercise of stock options excludes 1,839,194 options outstanding,
which were anti-dilutive for the three months ended March 31, 2009, and
2,090,823 options outstanding, which were anti-dilutive for the three
months ended March 31, 2008.
|
12.
Stock-Based Compensation
Income
before income taxes for the three month periods ended March 31, 2009 and 2008
includes share-based compensation expense of $2.9 million and $2.8 million,
respectively. The tax benefit recognized related to the compensation
cost of these share-based awards was approximately $1.1 million for both the
three month periods ended March 31, 2009, and 2008.
The
following table summarizes stock option activity during the three months ended
March 31, 2009. 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, 2008
|
2,485,937
|
126,117
|
$
|
27.21
|
7.4
|
$
|
3,394,930
|
|||||||||||||
|
Granted
|
2,400
|
—
|
$
|
26.69
|
||||||||||||||||
|
Forfeited
|
(16,218
|
)
|
—
|
$
|
25.35
|
|||||||||||||||
|
Exercised
|
(3,178
|
)
|
—
|
$
|
22.84
|
|||||||||||||||
|
Outstanding,
March 31, 2009
|
2,468,941
|
126,117
|
$
|
27.23
|
7.2
|
$
|
5,264,092
|
|||||||||||||
|
Vested/expected
to vest, at March 31, 2009
|
2,429,326
|
126,117
|
$
|
27.26
|
7.2
|
$
|
5,119,229
|
|||||||||||||
|
Exercisable,
March 31, 2009
|
1,697,882
|
90,611
|
$
|
28.19
|
6.5
|
$
|
2,252,888
|
|||||||||||||
Compensation
cost related to unvested options totaled $4.8 million at March 31, 2009 and will
be recognized over the remaining vesting period of the grants, which averages
1.3 years. The average grant date fair value of the options granted
in the three months ended March 31, 2009 was $8.97. The Company uses
the Black-Scholes option pricing model to value its stock option
awards. The aggregate intrinsic value of stock options exercised
during the three months ended March 31, 2009 was approximately $14
thousand.
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 three months ended March 31, 2009 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 26,
2009. The following table summarizes the restricted stock and
restricted stock unit activity during the three months ended March 31,
2009:
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Employee
|
Average
|
Employee
|
Average
|
Director
|
Average
|
|||||||||||||||||||
|
Restricted
|
Grant
Date
|
Restricted
|
Grant
Date
|
Restricted
|
Grant
Date
|
|||||||||||||||||||
|
Stock
|
Fair
Value
|
Stock
Units
|
Fair
Value
|
Stock
Units
|
Fair
Value
|
|||||||||||||||||||
|
Unvested,
at December 31, 2008
|
1,412,322
|
$
|
24.15
|
598,939
|
$
|
25.28
|
22,200
|
$
|
24.06
|
|||||||||||||||
|
Granted
|
58,640
|
$
|
26.36
|
200
|
$
|
26.44
|
—
|
—
|
||||||||||||||||
|
Vested
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
Forfeited
|
(4,455
|
)
|
$
|
24.35
|
(400
|
)
|
$
|
24.06
|
—
|
—
|
||||||||||||||
|
Unvested,
at March 31, 2009
|
1,466,507
|
$
|
24.24
|
598,739
|
$
|
25.28
|
22,200
|
$
|
24.06
|
|||||||||||||||
Future
compensation cost related to restricted stock and restricted stock units is
approximately $15.3 million as of March 31, 2009, and will be recognized on a
weighted average basis, over the next 2.3 years. The grant date fair
value of the awards granted in 2009 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. For the
performance period ended December 31, 2008, the Company achieved 94% of the
target, accordingly 94% of the first tranche of awards have been
accrued. The Company continues to expect that 100% of the awards will
accrue and vest over the cumulative performance period, subject to estimated
forfeitures. The following table summarizes the performance unit
activity during the three months ended March 31, 2009:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Performance
|
Grant
Date
|
|||||||
|
Units
|
Fair
Value
|
|||||||
|
Unvested,
at December 31, 2008
|
72,900
|
$
|
24.06
|
|||||
|
Granted
|
—
|
—
|
||||||
|
Vested
|
—
|
—
|
||||||
|
Forfeited
|
—
|
—
|
||||||
|
Unvested,
at March 31, 2009
|
72,900
|
$
|
24.06
|
|||||
Future
compensation cost related to the performance units is estimated to be
approximately $1.3 million as of March 31, 2009, and is expected to be
recognized over the next 2.3 years.
13.
Employee Retirement and Postretirement Benefits
Pension, Profit Sharing and
Postretirement Benefits — Certain of our employees and retirees
participate in pension and other postretirement benefit
plans. Employee benefit plan obligations and expenses included in the
Condensed Consolidated Financial Statements are determined based on plan
assumptions, employee demographic data, including years of service and
compensation, benefits and claims paid, and employer contributions.
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
|
||||||||||||||||
|
March
31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$
|
490
|
$
|
430
|
||||||||||||
|
Interest
cost
|
524
|
430
|
||||||||||||||
|
Expected
return on plan assets
|
(440
|
)
|
(358
|
)
|
||||||||||||
|
Amortization
of unrecongnized net loss
|
149
|
—
|
||||||||||||||
|
Amortization
of prior service costs
|
145
|
120
|
||||||||||||||
|
Effect
of settlements
|
—
|
75
|
||||||||||||||
|
Net
periodic pension cost
|
$
|
868
|
$
|
697
|
||||||||||||
We have
contributed $7.6 million to the pension plans in the first three months of
2009. We expect to contribute approximately $9.6 million in
2009.
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
|
||||||||||||||||
|
March
31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$
|
63
|
$
|
59
|
||||||||||||
|
Interest
cost
|
64
|
58
|
||||||||||||||
|
Amortization
of prior service credit
|
(18
|
)
|
(18
|
)
|
||||||||||||
|
Amortization
of unrecognized net loss
|
5
|
6
|
||||||||||||||
|
Net
periodic postretirement cost
|
$
|
114
|
$
|
105
|
||||||||||||
We expect
to contribute $0.1 million to the postretirement health plans during
2009.
14.
Comprehensive Income
The
following table sets forth the components of comprehensive income
(loss):
|
Three
Months Ended
|
|||||||||||||||||
|
March
31,
|
|||||||||||||||||
|
2009
|
2008
|
||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||
|
Net
income
|
$
|
12,732
|
$
|
2,061
|
|||||||||||||
|
Foreign
currency translation adjustment
|
(4,479
|
)
|
(10,416
|
)
|
|||||||||||||
|
Amortization
of pension and postretirement
|
|||||||||||||||||
|
prior
service costs and net loss, net of tax
|
170
|
67
|
|||||||||||||||
|
Amortization
of swap loss, net of tax
|
40
|
40
|
|||||||||||||||
|
Comprehensive
income
|
$
|
8,463
|
$
|
(8,248
|
)
|
||||||||||||
We expect
to amortize $0.7 million of prior service costs and net loss, net of tax and
$0.2 million of swap loss, net of tax from other comprehensive income into
earnings during 2009.
15.
Fair Value of Financial Instruments
Cash and
cash equivalents and accounts receivable are financial assets with carrying
values that approximate fair value. Accounts payable and the
Company’s variable rate debt (revolving credit facility) are financial
liabilities with carrying values that approximate fair value. As of
March 31, 2009, the carrying value of the Company’s fixed rate senior notes was
$100.0 million and fair value was estimated to be $97.6 million based on quoted
market rates.
The fair
value of the Company’s interest rate swap agreement as described in Note 10 as
of March 31, 2009 was a liability of approximately $7.0 million. The
fair value of the swap was determined under SFAS 157 using Level 2
inputs. Level 2 inputs are inputs other than quoted prices that are
observable for an asset of liability, either directly or
indirectly.
16.
Derivative instruments
The
Company is exposed to certain risks relating to its ongoing business operations.
The primary risk managed by using derivative instruments is interest rate risk.
Interest rate swaps are entered into to manage interest rate risk associated
with the Company’s $600 million revolving credit facility. Interest on our
credit facility is variable and use of the interest rate swap establishes a
fixed rate over the term of the facility. The Company’s objective in using an
interest rate swap is to establish a fixed interest rate, thereby enabling the
Company to predict and manage interest expense and cash flows in a more
efficient and effective manner. We did not apply hedge accounting to the
interest rate swap, and it is recorded at fair value on the Company’s Condensed
Consolidated Balance Sheet. See Note 10 for more details of the interest rate
swap, including the notional amount, interest rate and term. Note 15
discusses the fair value of the interest rate swap.
As of
March 31, 2009, the Company had no other derivative instruments.
The
following table identifies the derivative, its fair value, and location on the
Condensed Consolidated Balance Sheet:
|
Liability
Derivatives
|
|||||||||
|
March
31, 2009
|
December
31, 2008
|
||||||||
|
(In
thousands)
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
|||||
|
Derivatives
not designated as hedging instruments under Statement 133
|
|||||||||
|
Interest
rate swap
|
Other
Long-term liabilities
|
$6,953
|
Other
Long-term liabilities
|
$6,981
|
|||||
The
Company recognized a gain of $28 thousand relating to the change in the fair
value of its interest rate swap derivative for the three months ended March 31,
2009. This gain is recorded in the Other income, net line of our
Condensed Consolidated Statement of Income.
The
Company does not use derivatives for speculative or trading
purposes.
17.
Commitments and Contingencies
Litigation, Investigations and
Audits — We are party in the ordinary course of business to certain
claims, litigation, audits and investigations. We believe that we
have established adequate reserves to satisfy any liability we may incur in
connection with any such currently pending or threatened matters. In
our opinion, the settlement of any such currently pending or threatened matters
is not expected to have a material adverse impact on our financial position,
annual results of operations or cash flows.
18.
Supplemental Cash Flow Information
Cash
payments for interest were $6.2 million and $8.7 million for the three
months ended March 31, 2009 and 2008, respectively. Cash payments for
income taxes were $0.6 million and $4.3 million for the three months ended March
31, 2009 and 2008, respectively. As of March 31, 2009, the Company
had accrued property, plant and equipment of approximately $2.8
million. For the first quarter ended March 31, 2009, the Company
entered into capital leases totaling approximately $0.7 million.
19.
Foreign Currency
In
previous years, the Company entered into foreign currency contracts due to the
exposure to Canadian/U.S. dollar currency fluctuations on cross border
transactions. These contracts did not qualify for hedge
accounting. The Company recorded 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. All foreign currency contracts expired as of
December 31, 2008. For the three months ended March 31, 2008, the
Company recorded a gain on these contracts totaling approximately $0.3
million.
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 months ended March 31, 2009 and 2008, the Company recorded a loss of $2.1
million and $1.9 million, respectively, related to foreign currency fluctuations
within Other (income) expense. For the three months ended March 31,
2009 and 2008, the Company recorded a loss of approximately $2.6 million and
$6.2 million, respectively, in Accumulated other comprehensive loss related to
foreign currency fluctuations on the permanent portion of the note.
20.
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.
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. Also excluded from the
determination of direct operating income are warehouse distribution facility
start up costs of approximately $1.3 million incurred during the three months
ended March 31, 2009, as we did not include them in the measure of profitability
as reviewed by our chief operating decision maker. These costs are
included in the Company’s cost of sales as presented in the Condensed
Consolidated Statements of Income. The accounting policies of our
segments are the same as those described in the summary of significant
accounting policies set forth in Note 1 to our 2008 Consolidated Financial
Statements contained in our Annual Report on Form 10-K.
|
Three
Months Ended
|
|||||||||||||||||
|
March
31,
|
|||||||||||||||||
|
2009
|
2008
|
||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||
|
Net
sales to external customers:
|
|||||||||||||||||
|
North
American Retail Grocery
|
$
|
230,682
|
$
|
219,640
|
|||||||||||||
|
Food
Away From Home
|
66,753
|
70,926
|
|||||||||||||||
|
Industrial
and Export
|
57,961
|
70,057
|
|||||||||||||||
|
Total
|
$
|
355,396
|
$
|
360,623
|
|||||||||||||
|
Direct
operating income:
|
|||||||||||||||||
|
North
American Retail Grocery
|
$
|
34,305
|
$
|
25,492
|
|||||||||||||
|
Food
Away From Home
|
7,006
|
7,568
|
|||||||||||||||
|
Industrial
and Export
|
6,680
|
9,603
|
|||||||||||||||
|
Direct
operating income
|
47,991
|
42,663
|
|||||||||||||||
|
Unallocated
warehouse start-up costs (1)
|
(1,284
|
)
|
—
|
||||||||||||||
|
Unallocated
selling and distribution expenses
|
(776
|
)
|
(938
|
)
|
|||||||||||||
|
Unallocated
corporate expense
|
(19,274
|
)
|
(29,651
|
)
|
|||||||||||||
|
Operating
income
|
26,657
|
12,074
|
|||||||||||||||
|
Other
expense
|
(6,446
|
)
|
(9,277
|
)
|
|||||||||||||
|
Income
before income taxes
|
$
|
20,211
|
$
|
2,797
|
|||||||||||||
(1) Included
in Cost of sales in the Condensed Consolidated Statements of
Income.
Geographic Information — We had revenues
to customers outside of the United States of approximately 12.7% and 14.7% of
total consolidated net sales in the three months ended March 31, 2009 and 2008,
respectively, with 11.9% and 13.4% going to Canada, respectively.
Major Customers — Wal-Mart
Stores, Inc. and affiliates accounted for approximately 15.4% and 13.9% of our
consolidated net sales in the three months ended March 31, 2009 and 2008,
respectively. No other customer accounted for more than 10% of our
consolidated net sales.
Product Information — The
following table presents the Company’s net sales by major products for the three
months ended March 31, 2009 and 2008:
|
Three
Months Ended
|
|||||||||||||||||
|
March
31,
|
|||||||||||||||||
|
2009
|
2008
|
||||||||||||||||
|
(In
thousands)
|
|||||||||||||||||
|
Products:
|
|||||||||||||||||
|
Non-dairy
powdered creamer
|
$
|
86,055
|
$
|
87,441
|
|||||||||||||
|
Soup
and infant feeding
|
78,998
|
78,118
|
|||||||||||||||
|
Pickles
|
70,451
|
79,360
|
|||||||||||||||
|
Jams and
other
|
32,314
|
33,414
|
|||||||||||||||
|
Salad
dressing
|
44,135
|
39,074
|
|||||||||||||||
|
Aseptic
|
19,827
|
20,892
|
|||||||||||||||
|
Mexican
sauces
|
15,055
|
12,010
|
|||||||||||||||
|
Refrigerated
|
8,561
|
10,314
|
|||||||||||||||
|
Total
net sales
|
$
|
355,396
|
$
|
360,623
|
|||||||||||||
Business
Overview
We
believe we are the largest manufacturer of non-dairy powdered creamer and
pickles 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 non-dairy powdered creamer, soup and pickles in the United States,
and jams in Canada. We sell our products primarily to the retail
grocery and foodservice channels.
The
following discussion and analysis presents the factors that had a material
effect on our results of operations for the three months ended March 31, 2009
and 2008. Also discussed is our financial position, as of the end of
those periods. This should be read in conjunction with the Condensed
Consolidated Financial Statements and the Notes to those Condensed Consolidated
Financial Statements included elsewhere in this report. This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements. See “Cautionary
Statement Regarding Forward-Looking Statements” for a discussion of the
uncertainties, risks and assumptions associated with these
statements.
We
discuss the following segments in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations: North American Retail Grocery,
Food Away From Home, and Industrial and Export. The key performance
indicators of our segments are net sales dollars, gross profit and direct
operating income, which is gross profit less the cost of transporting products
to customer locations (referred to in the tables below as “freight out”),
commissions paid to independent sales brokers, and direct 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,
Mexican sauces, condensed and ready to serve soup, broths, gravies, jams,
salad dressings, sauces, non-dairy powdered creamer, aseptic products, and
baby food.
|
|
|
•
|
Our
Food Away From Home segment sells pickle products, non-dairy powdered
creamers, Mexican sauces, 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 outside of North America.
|
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.
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 March 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||||||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Net
sales
|
$
|
355,396
|
100.0
|
%
|
$
|
360,623
|
100.0
|
%
|
||||||||||||||||||||||||||||||||
|
Cost
of sales
|
283,685
|
79.8
|
290,234
|
80.5
|
||||||||||||||||||||||||||||||||||||
|
Gross
profit
|
71,711
|
20.2
|
70,389
|
19.5
|
||||||||||||||||||||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||||||||||||||||||
|
Selling
and distribution
|
25,781
|
7.3
|
28,664
|
8.0
|
||||||||||||||||||||||||||||||||||||
|
General
and administrative
|
15,773
|
4.4
|
15,242
|
4.2
|
||||||||||||||||||||||||||||||||||||
|
Other
operating expense (income), net
|
242
|
0.1
|
10,922
|
3.0
|
||||||||||||||||||||||||||||||||||||
|
Amortization
expense
|
3,258
|
0.9
|
3,487
|
1.0
|
||||||||||||||||||||||||||||||||||||
|
Total
operating expenses
|
45,054
|
12.7
|
58,315
|
16.2
|
||||||||||||||||||||||||||||||||||||
|
Operating
income
|
26,657
|
7.5
|
12,074
|
3.3
|
||||||||||||||||||||||||||||||||||||
|
Other
(income) expense:
|
||||||||||||||||||||||||||||||||||||||||
|
Interest
expense
|
4,498
|
1.2
|
7,731
|
2.1
|
||||||||||||||||||||||||||||||||||||
|
Interest
income
|
—
|
—
|
(20
|
)
|
—
|
|||||||||||||||||||||||||||||||||||
|
Loss
on foreign currency exchange
|
2,060
|
0.6
|
1,860
|
0.5
|
||||||||||||||||||||||||||||||||||||
|
Other
income, net
|
(112
|
)
|
—
|
(294
|
)
|
(0.1
|
)
|
|||||||||||||||||||||||||||||||||
|
Total
other expense
|
6,446
|
1.8
|
9,277
|
2.5
|
||||||||||||||||||||||||||||||||||||
|
Income
before taxes
|
20,211
|
5.7
|
2,797
|
0.8
|
||||||||||||||||||||||||||||||||||||
|
Income
taxes
|
7,479
|
2.1
|
736
|
0.2
|
||||||||||||||||||||||||||||||||||||
|
Net
income
|
$
|
12,732
|
3.6
|
%
|
$
|
2,061
|
0.6
|
%
|
||||||||||||||||||||||||||||||||
Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008
Net Sales — First quarter net
sales decreased 1.4% to $355.4 million in 2009 compared to $360.6 million in the
first quarter of 2008. Reduced volume and the impact of foreign
currency were the primary reasons for the decline in net sales. The
Company was able to offset most of the impact by increasing pricing by
approximately 8.9%. Net sales by segment are shown in the following
table:
|
Net
Sales
|
|||||||||||||||
|
$
Increase/
|
%
Increase/
|
||||||||||||||
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||
|
North
American Retail Grocery
|
$
|
230,682
|
$
|
219,640
|
$
|
11,042
|
5.0
|
%
|
|||||||
|
Food
Away From Home
|
66,753
|
70,926
|
(4,173
|
)
|
(5.9
|
)%
|
|||||||||
|
Industrial
and Export
|
57,961
|
70,057
|
(12,096
|
)
|
(17.3
|
)%
|
|||||||||
|
Total
|
$
|
355,396
|
$
|
360,623
|
$
|
(5,227
|
)
|
(1.4
|
)%
|
||||||
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 79.8% in the
first quarter of 2009 compared to 80.5% in 2008. We have experienced
increases in ingredient and packaging costs such as metal cans, metal caps,
sweeteners, cucumbers and fiber in the first quarter of 2009 compared to
2008. These increases have been more than offset by decreases in the
cost of casein, oils and plastic containers. The combination of price
increases and the changes in commodity costs in the first quarter of 2009 versus
2008, has resulted in marginal improvement in our consolidated gross
profit.
Operating Expenses — Total
operating expenses were $45.1 million during the first quarter of 2009 compared
to $58.3 million in 2008. Selling and distribution expenses decreased
$2.9 million or 10.1% in the first quarter of 2009 compared to the first quarter
of 2008 primarily due to a reduction in freight costs related to reduced volume
and a reduction in freight rates. General and administrative expenses
increased $0.5 million in the first quarter of 2009 compared to
2008. The increase was primarily related to higher research and
development costs. Other operating expense was $0.2 million during
the first quarter of 2009, and reflected net costs incurred related to the
closed Portland, Oregon plant. This is down significantly from the
$10.9 million in 2008, reflecting the initial Portland plant closing costs of
approximately $10.4 million and $0.5 million related to the fire at our New
Hampton, Iowa facility in 2008.
Interest Expense — Interest expense
decreased to $4.5 million in the first quarter of 2009, compared to $7.7 million
in 2008 due to lower average interest rates and lower debt.
Foreign Currency — Foreign
currency losses increased to $2.1 million for the three months ended March 31,
2009 compared to $1.9 million for the three months ended March 31, 2008,
primarily due to increased foreign currency transaction losses from U.S. sourced
input costs used in our Canadian operations.
Operating Income — Operating
income for the first quarter of 2009 was $26.7 million, an increase of $14.6
million, or 120.8%, from operating income of $12.1 million in the first quarter
of 2008. Our operating margin was 7.5% in the first quarter of 2009
compared to 3.3% in 2008 due to the significantly higher impact of the
Portland plant closure and New Hampton fire in 2008.
Income Taxes — Income tax
expense was recorded at an effective rate of 37.0% in the first quarter of 2009
compared to 26.3% in the prior year’s quarter. The Company’s
effective tax rate is favorably impacted by an intercompany financing structure
entered into in conjunction with the E.D. Smith, Canadian
acquisition. Because consolidated earnings for the three months ended
March 31, 2009 were significantly higher than consolidated earnings for the
three months ended March 31, 2008, this tax benefit was proportionally much
smaller, therefore, increasing the net effective rate in the first quarter of
2009 compared to 2008.
Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008 —
Results by Segment
North
American Retail Grocery —
|
Three
Months Ended March 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
230,682
|
100.0
|
%
|
$
|
219,640
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
177,352
|
76.9
|
174,372
|
79.4
|
||||||||||||
|
Gross
profit
|
53,330
|
23.1
|
45,268
|
20.6
|
||||||||||||
|
Freight
out and commissions
|
12,325
|
5.3
|
13,948
|
6.3
|
||||||||||||
|
Direct
selling and marketing
|
6,700
|
2.9
|
5,828
|
2.7
|
||||||||||||
|
Direct
operating income
|
$
|
34,305
|
14.9
|
%
|
$
|
25,492
|
11.6
|
%
|
||||||||
Net sales
in the North American Retail Grocery segment increased by $11.0 million, or 5.0%
in the first quarter of 2009 compared to the first quarter of
2008. The change in net sales from 2008 to 2009 was due to the
following:
|
Dollars
|
Percent
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
2008
Net sales
|
$
|
219,640
|
||||||
|
Volume
|
(9,549
|
)
|
(4.3
|
)%
|
||||
|
Acquisitions
|
—
|
—
|
||||||
|
Pricing
|
24,295
|
11.0
|
||||||
|
Mix/other
|
(3,704
|
)
|
(1.7
|
)
|
||||
|
2009
Net sales
|
$
|
230,682
|
5.0
|
%
|
||||
The
increase in net sales from 2008 to 2009 resulted from the carryover effect of
price increases taken in the second half of 2008 due to rising raw material and
packaging costs, partially offset by lower case sales of baby food and retail
branded pickles, and the impact of foreign currency. While overall
case sales decreased in this segment, the Company experienced modest volume
increases in soups, Mexican sauces and dressings.
Cost of
sales as a percentage of net sales decreased from 79.4% in 2008 to 76.9% in 2009
primarily as a result of price increases to offset the material and packaging
cost increases incurred by the Company. Also contributing to the
decrease were several cost reduction initiatives and moving away from certain
low margin customers over the past year.
Freight
out and commissions paid to independent sales brokers was $12.3 million in the
first quarter of 2009 compared to $13.9 million in 2008, a decrease of 11.6%,
primarily due to reduced volumes and lower freight costs, as fuel prices have
decreased since last year.
Food
Away From Home —
|
Three
Months Ended March 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
66,753
|
100.0
|
%
|
$
|
70,926
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
55,671
|
83.4
|
58,065
|
81.9
|
||||||||||||
|
Gross
profit
|
11,082
|
16.6
|
12,861
|
18.1
|
||||||||||||
|
Freight
out and commissions
|
2,528
|
3.8
|
3,461
|
4.8
|
||||||||||||
|
Direct
selling and marketing
|
1,548
|
2.3
|
1,832
|
2.6
|
||||||||||||
|
Direct
operating income
|
$
|
7,006
|
10.5
|
%
|
$
|
7,568
|
10.7
|
%
|
||||||||
Net sales
in the Food Away From Home segment decreased by $4.2 million, or 5.9%, in the
first quarter of 2009 compared to the prior year. The change in net
sales from 2008 to 2009 was due to the following:
|
Dollars
|
Percent
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
2008
Net sales
|
$
|
70,926
|
||||||
|
Volume
|
(5,362
|
)
|
(7.6
|
)%
|
||||
|
Acquisitions
|
—
|
—
|
||||||
|
Pricing
|
4,049
|
5.7
|
||||||
|
Mix/other
|
(2,860
|
)
|
(4.0
|
)
|
||||
|
2009
Net sales
|
$
|
66,753
|
(5.9
|
)%
|
||||
Net sales
decreased during the first quarter of 2009 compared to 2008 primarily due to
reduced volumes resulting from the recent economic down turn, as consumers
reduce their spending on dining and eating out. This segment also
experienced a decrease in net sales due to both a shift in the sales mix and the
impact of foreign currency changes. Net sales of pickle and powder
products led the decline by falling 7.5% and 18.2%,
respectively. Increased pricing in response to commodity cost
increases over the past year partially offset these volume
declines.
Cost of
sales as a percentage of net sales increased from 81.9% in the first quarter of
2008 to 83.4% in 2009, as sales price increases realized in the quarter helped
to partially offset increases in raw material and packaging costs and due to a
shift in mix from higher margin food distributors to lower margin national
account quick serve customers.
Freight
out and commissions paid to independent sales brokers was $2.5 million in the
first quarter of 2009 compared to $3.5 million in 2008, a decrease of 27.0%,
primarily due to reduced volumes and lower freight costs, as fuel costs have
decreased since last year.
Industrial
and Export —
|
Three
Months Ended March 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
57,961
|
100.0
|
%
|
$
|
70,057
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
49,378
|
85.2
|
57,797
|
82.5
|
||||||||||||
|
Gross
profit
|
8,583
|
14.8
|
12,260
|
17.5
|
||||||||||||
|
Freight
out and commissions
|
1,513
|
2.6
|
2,424
|
3.5
|
||||||||||||
|
Direct
selling and marketing
|
390
|
0.7
|
233
|
0.3
|
||||||||||||
|
Direct
operating income
|
$
|
6,680
|
11.5
|
%
|
$
|
9,603
|
13.7
|
%
|
||||||||
Net sales
in the Industrial and Export segment decreased $12.1 million or 17.3% in the
first quarter of 2009 compared to the prior year. The change in net
sales from 2008 to 2009 was due to the following:
|
Dollars
|
Percent
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
2008
Net sales
|
$
|
70,057
|
||||||
|
Volume
|
(15,500
|
)
|
(22.1
|
)%
|
||||
|
Acquisitions
|
—
|
—
|
||||||
|
Pricing
|
3,836
|
5.4
|
||||||
|
Mix/other
|
(432
|
)
|
(0.6
|
)
|
||||
|
2009
Net sales
|
$
|
57,961
|
(17.3
|
)%
|
||||
The
decrease in net sales is primarily due to reduced volumes resulting from a
general decline in consumer usage, and export sales decreasing significantly due
to the strength of the U.S. dollar. While the decline in net sales
spanned the products sold within this segment, the largest declines were in the
non-dairy powdered creamer and soup products. Partially offsetting
the volume declines were price increases taken since last year in an effort to
offset the increases in input costs.
Cost of
sales as a percentage of net sales increased from 82.5% in the first quarter of
2008 to 85.2% in 2009 reflecting increasing raw material and packaging costs,
which were partially offset by pricing increases during the
quarter.
Freight
out and commissions paid to independent sales brokers was $1.5 million in the
first quarter of 2009 compared to $2.4 million in 2008, a decrease of 37.6%,
primarily due to reduced volumes and lower freight costs, as fuel costs have
decreased since last year.
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 positive cash flow from operating activities and remains
in a strong financial position, with resources available for reinvestment in
existing businesses, acquisitions and managing its capital structure on a short
and long-term basis. If additional borrowing is needed to finance
future acquisitions, approximately $214.8 million was available on the revolving
credit facility as of March 31, 2009. This facility expires in
2011. 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.
The
Company’s cash flows from operating, investing and financing activities, as
reflected in the Condensed Consolidated Statements of Cash Flows is summarized
in the following tables:
|
Three
Months Ended March 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(In
thousands)
|
|||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
12,732
|
$
|
2,061
|
|||
|
Depreciation
& amortization
|
11,448
|
11,973
|
|||||
|
Stock-based
compensation
|
2,900
|
2,781
|
|||||
|
Loss
on foreign currency exchange
|
732
|
1,860
|
|||||
|
Write-down
of impaired assets
|
—
|
5,231
|
|||||
|
Deferred
income taxes
|
3,612
|
(710
|
)
|
||||
|
Changes
in operating assets and liabilities, net of acquisitions
|
(22,610
|
)
|
9,660
|
||||
|
Other
|
12
|
(238
|
)
|
||||
|
Net
cash provided by operating activities
|
$
|
8,826
|
$
|
32,618
|
|||
Our cash
from operations decreased from $32.6 million in the first three months of 2008
to $8.8 million in 2009, primarily due to an increase in working capital
partially offset by an increase in net income. The increase in
working capital resulted from an increase in inventories due to a decline in
sales volume and a reduction in payables.
|
Three
Months Ended March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Cash
flows from investing activities:
|
||||||||
|
Additions
to property, plant and equipment
|
$
|
(13,943
|
)
|
$
|
(7,597
|
)
|
||
|
Other
|
12
|
(26
|
)
|
|||||
|
Net
cash used in investing activities
|
$
|
(13,931
|
)
|
$
|
(7,623
|
)
|
||
In the
first three months 2009, cash used in investing activities increased by $6.3
million compared to 2008. Capital additions were $13.9 million in
2009, compared to $7.6 million in 2008. Capital spending in 2009
included upgrades to our Pittsburgh plant water and power systems, capacity
expansion at our North East, Pennsylvania facility and repair of our New
Hampton, Iowa facility, which was damaged by fire in February of 2008, along
with routine upgrades and improvements to our other plants.
We expect
capital spending programs to be $35.0 million in 2009. Capital
spending in 2009 will focus on productivity improvements and expansion at our
North East, Pennsylvania and Pittsburgh plants, and routine equipment upgrades
or replacements at all of our plants, which number 17 across the United States
and Canada.
|
Three
Months Ended March 31,
|
||||||
|
2009
|
2008
|
|||||
|
(In
thousands)
|
||||||
|
Cash
flows from financing activities:
|
||||||
|
Net
borrowing (repayment) of debt
|
$
|
4,508
|
$
|
(31,347
|
)
|
|
|
Proceeds
from stock option exercises
|
110
|
—
|
||||
|
Net
cash provided by (used in) financing activities
|
$
|
4,618
|
$
|
(31,347
|
)
|
|
Net cash
used in financing activities changed from a $31.3 million use of funds in 2008
to a $4.6 million source of funds in 2009, as less cash was available from
operations to pay down debt than in the prior year.
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
late 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.
Debt
Obligations
At March
31, 2009, we had $376.6 million in borrowings under our revolving credit
facility, senior notes of $100.0 million and $4.3 million of tax
increment financing and other obligations. In addition, at March 31,
2009, there were $8.6 million in letters of credit under the revolver that were
issued but undrawn.
Our
revolving credit facility provides for an aggregate commitment of $600 million
of which $214.8 million was available at March 31, 2009. Interest
rates are tied to variable market rates which averaged 1.16% on debt outstanding
as of March 31, 2009. We are in compliance with the applicable
covenants as of March 31, 2009.
See Note
10 to our Condensed Consolidated Financial Statements.
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
17 to our Condensed Consolidated Financial Statements and Note 20 in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for more
information about our commitments and contingent obligations.
In 2009,
we expect cash interest to be approximately $17.4 million based on
anticipated debt levels and cash income taxes are expected to be approximately
$16.6 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,
2008. There were no material changes to our critical accounting
policies in the three months ended March 31, 2009.
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.
Interest
Rate Fluctuations
The
Company entered into a $200 million long term interest rate swap agreement with
an effective date of November 19, 2008 to lock into a fixed LIBOR interest rate
base. Under the terms of agreement, $200 million in floating rate
debt will be swapped for a fixed 2.9% interest rate base for a period of 24
months, amortizing to $50 million for an additional nine months at the same 2.9%
interest rate. Under the terms of the Company’s revolving credit
agreement and in conjunction with our credit spread, this will result in an all
in borrowing cost on the swapped principal being no more than 3.8% during the
life of the swap agreement.
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, which could expose us to significant market risk, other
than our interest rate swap agreement, as of March 31, 2009. Our exposure
to market risk for changes in interest rates relates primarily to the increase
in the amount of interest expense we expect to pay with respect to our revolving
credit facility, which is tied to variable market rates. Based on our
outstanding debt balance of $376.6 million under our revolving credit facility,
and adjusting for the $200 million fixed rate swap agreement, as of March 31,
2009, each 1% rise in our interest rate would increase our interest expense by
approximately $1.8 million annually.
Input
Costs
The costs
of raw materials, as well as packaging materials and fuel, have varied widely in
recent years and future changes in such costs may cause our results of
operations and our operating margins to fluctuate significantly. Many
of the raw materials that we use in our products rose to unusually high levels
during 2008, including processed vegetables and meats, soybean oil, casein,
cheese and packaging materials. During 2009, certain input costs have
decreased from the high levels experienced in 2008, but continue to remain at
levels in excess of historical costs. Additionally, certain input
costs such as metal cans, lids and caps continue to rise even through the
underlying commodity cost has decreased. The reason for the continued
rise in cost is due in part to the limited number of suppliers. In
addition, fuel costs, which represent the most important factor affecting
utility costs at our production facilities and our transportation costs, rose to
unusually high levels in the middle of 2008, but have decreased proportionately
to the general reduction in overall economic activity in
2009. Furthermore, certain input requirements, such as glass used in
packaging, are available only from a limited number of suppliers.
The most
important raw material used in our pickle operations is cucumbers. We
purchase cucumbers under seasonal grower contracts with a variety of growers
strategically located to supply our production facilities. Bad
weather or disease in a particular growing area can damage or destroy the crop
in that area, which would impair crop yields. If we are not able to
buy cucumbers from local suppliers, we would likely either purchase cucumbers
from foreign sources, such as Mexico or India, or ship cucumbers from other
growing areas in the United States, thereby increasing our production
costs.
Changes
in the prices of our products may lag behind changes in the costs of our
materials. Competitive pressures also may limit our ability to
quickly raise prices in response to increased raw materials, packaging and fuel
costs. Accordingly, if we are unable to increase our prices to offset
increasing raw material, packaging and fuel costs, our operating profits and
margins could be materially adversely affected. In addition, in
instances of declining input costs, customers may be looking for price
reductions in situations where we have locked into pricing at higher
costs.
Fluctuations
in Foreign Currencies
The
Company is exposed to fluctuations in the value of our foreign currency
investment in E.D. Smith, located in Canada. Input costs for certain
Canadian sales are denominated in U.S. dollars, further impacting the effect
foreign currency fluctuations may have on the Company.
The
Company’s financial statements are presented in U.S. dollars, which require the
Canadian assets, liabilities, revenues, and expenses to be translated into U.S.
dollars at the applicable exchange rates. Accordingly, we are exposed
to volatility in the translation of foreign currency earnings due to
fluctuations in the value of the Canadian dollar, which may negatively impact
the Company’s results of operations and financial position. For the
three months ended March 31, 2009 and 2008, the Company
recognized
a foreign currency exchange loss of approximately $6.5 million and $12.3
million, respectively of which $4.5 million and $10.4 million was recorded as a
component of Accumulated other comprehensive loss and $2.1 million and $1.9
million was recorded on the Company’s Condensed Consolidated Statements of
Income within the Other (income) expense line, respectively.
In
previous years, the Company entered into foreign currency contracts due to the
exposure to Canadian/U.S. dollar currency fluctuations on cross border
transactions. These contracts did not qualify for hedge
accounting. The Company recorded the fair value of these contracts on
the Condensed Consolidated Balance Sheets and has recorded the change in fair
value through the Condensed Consolidated Statement of Income, within the Other
(income) expense line. For the three months ended March 31, 2008, the
Company recorded a gain on these contracts totaling approximately $0.3
million. All foreign currency contracts expired as of December 31,
2008, therefore, there was no gain or loss in the first quarter of
2009.
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 amended) 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 March 31, 2009, these
disclosure controls and procedures were effective.
There
have been no changes in our internal control over financial reporting during the
quarter ended March 31, 2009 that have materially affected, or are likely to
materially affect, the Company’s internal control over financial
reporting.
To the
Board of Directors and Stockholders of
TreeHouse
Foods, Inc.
Westchester,
IL
We have
reviewed the accompanying condensed consolidated balance sheet of TreeHouse
Foods, Inc. and subsidiaries (the “Company”) as of March 31, 2009, and the
related condensed consolidated statements of income and cash flows for the
three-month periods ended March 31, 2009 and 2008. 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, 2008, and the related
consolidated statements of income, stockholders’ equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 25,
2009, 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, 2008 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
May 5,
2009
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, 2008. 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, 2008.
None.
None.
The
following matters were submitted to a vote of security holders at TreeHouse
Foods’ Annual Meeting of Shareholders held on April 30, 2009. Further
information regarding each item can by found in the Company’s Definitive Proxy
Statement which was filed with the Securities and Exchange Commission on March
17, 2009.
Election of
Directors
|
Nominee
|
For
|
Withheld
|
Abstain
|
||||
|
Frank
J. O’Connell
|
28,223,858
|
202,366
|
1,091
|
||||
|
Terdema
L. Ussery II
|
27,131,507
|
1,294,717
|
1,093,442
|
||||
The two
directors listed above were elected to a three-year term expiring in
2012.
Description of
Proposals
Ratification
of the selection of Deloitte & Touche LLP as independent registered public
accounting firm for the fiscal year 2009.
|
For
|
Against
|
Abstain
|
|||||
|
Votes
|
28,402,159
|
17,907
|
6,158
|
||||
Amendment
to Article Fourth of the Company’s Restated Certificate of Incorporation to
increase the number of authorized shares of common stock, $0.01 par value, from
40,000,000 to 90,000,000.
|
For
|
Against
|
Abstain
|
|||||
|
Votes
|
22,629,150
|
5,699,208
|
97,866
|
||||
None.
|
15.1
|
Awareness
Letter from Deloitte & Touche LLP regarding unaudited financial
information
|
||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
||
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
||
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
||
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
||
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.
|
TREEHOUSE
FOODS, INC.
|
||
|
/s/
Dennis F. Riordan
|
||
|
Dennis
F. Riordan
|
||
|
Senior
Vice President and Chief Financial Officer
|
May 8,
2009
-28-