UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
(Mark
One)
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x
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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 September 30, 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 x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
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x
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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 x
There
were 31,928,672 shares of Common Stock, par value $0.01 per share, outstanding
as of October 30, 2009.
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Page
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3
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17
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28
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29
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30
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31
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31
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31
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31
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31
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31
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32
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Part I — Financial Information
Item 1. Financial Statements
TREEHOUSE
FOODS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and per share data)
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September
30,
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December
31,
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|||||||
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2009
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2008
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|||||||
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(Unaudited)
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||||||||
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Assets
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||||||||
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Current
assets:
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||||||||
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Cash
and cash equivalents
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$
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3,654
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$
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2,687
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||||
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Receivables,
net
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105,765
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86,837
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||||||
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Inventories,
net
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303,955
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245,790
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||||||
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Deferred
income taxes
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7,418
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6,769
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||||||
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Prepaid
expenses and other current assets
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8,991
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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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433,864
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356,479
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||||||
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Property,
plant and equipment, net
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278,702
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270,664
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||||||
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Goodwill
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576,094
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560,874
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||||||
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Identifiable
intangible and other assets, net
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166,848
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167,665
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||||||
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Total
assets
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$
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1,455,508
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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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176,499
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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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597
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475
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||||||
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Total
current liabilities
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177,096
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188,270
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||||||
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Long-term
debt
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475,477
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475,233
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||||||
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Deferred
income taxes
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44,092
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27,485
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||||||
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Other
long-term liabilities
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38,319
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44,563
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Total
liabilities
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734,984
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735,551
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||||||
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Commitments
and contingencies (Note 16)
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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 $0.01 per share, 90,000,000 and 40,000,000 shares
authorized, respectively, 31,928,544 and 31,544,515 shares issued and
outstanding, respectively
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319
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315
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||||||
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Additional
paid-in capital
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582,348
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569,262
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Retained
earnings
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173,173
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113,948
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||||||
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Accumulated
other comprehensive loss
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(35,316
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)
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(63,394
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)
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Total
stockholders’ equity
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720,524
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620,131
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Total
liabilities and stockholders’ equity
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$
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1,455,508
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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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Nine
Months Ended
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|||||||||||||||
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September
30,
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September
30,
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|||||||||||||||
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2009
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2008
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2009
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2008
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|||||||||||||
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(Unaudited)
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(Unaudited)
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|||||||||||||||
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Net
sales
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$ | 378,865 | $ | 374,576 | $ | 1,106,866 | $ | 1,102,568 | ||||||||
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Cost
of sales
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298,347 | 301,416 | 874,793 | 890,390 | ||||||||||||
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Gross
profit
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80,518 | 73,160 | 232,073 | 212,178 | ||||||||||||
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Operating
expenses:
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||||||||||||||||
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Selling
and distribution
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25,671 | 29,060 | 79,969 | 86,672 | ||||||||||||
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General
and administrative
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20,752 | 15,959 | 56,388 | 46,961 | ||||||||||||
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Other
operating (income) expense, net
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(14,354 | ) | 722 | (13,929 | ) | 12,572 | ||||||||||
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Amortization
expense
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3,375 | 3,331 | 9,954 | 10,346 | ||||||||||||
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Total
operating expenses
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35,444 | 49,072 | 132,382 | 156,551 | ||||||||||||
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Operating
income
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45,074 | 24,088 | 99,691 | 55,627 | ||||||||||||
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Other
(income) expense:
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||||||||||||||||
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Interest
expense
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4,807 | 6,493 | 14,144 | 21,785 | ||||||||||||
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Interest
income
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(21 | ) | — | (39 | ) | (107 | ) | |||||||||
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Loss
(gain) on foreign currency exchange
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(2,968 | ) | 1,869 | (4,772 | ) | 3,724 | ||||||||||
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Other
income, net
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(151 | ) | (87 | ) | (1,416 | ) | (268 | ) | ||||||||
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Total
other expense
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1,667 | 8,275 | 7,917 | 25,134 | ||||||||||||
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Income
before income taxes
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43,407 | 15,813 | 91,774 | 30,493 | ||||||||||||
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Income
taxes
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15,343 | 4,733 | 32,553 | 9,060 | ||||||||||||
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Net
income
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$ | 28,064 | $ | 11,080 | $ | 59,221 | $ | 21,433 | ||||||||
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Weighted
average common shares:
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||||||||||||||||
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Basic
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32,280 | 31,397 | 31,797 | 31,281 | ||||||||||||
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Diluted
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33,129 | 31,514 | 32,387 | 31,399 | ||||||||||||
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Net
earnings per common share:
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||||||||||||||||
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Basic
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$ | .87 | $ | .35 | $ | 1.86 | $ | .69 | ||||||||
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Diluted
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$ | .85 | $ | .35 | $ | 1.83 | $ | .68 | ||||||||
See Notes
to Condensed Consolidated Financial Statements.
TREEHOUSE
FOODS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
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Nine
Months Ended
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||||||||
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September
30,
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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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Net
income
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$
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59,221
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$
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21,433
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Adjustments
to reconcile net income to net cash provided by operating
activities:
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Depreciation
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24,978
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25,160
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Amortization
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9,954
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10,346
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Loss
(gain) on foreign currency exchange, intercompany note
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(4,465
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)
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3,107
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Mark
to market adjustment on interest rate swap
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(1,229
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)
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—
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Excess
tax benefits from stock-based payment arrangements
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(60
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)
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(325
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)
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Stock-based
compensation
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9,951
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8,795
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||||||
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Write
down of impaired assets
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—
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5,173
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Gain
on disposition of assets, net
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(12,612
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)
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(652
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)
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Deferred
income taxes
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11,743
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7,165
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||||||
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Other
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120
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393
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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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(5,614
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)
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(16,630
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)
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Inventories
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(54,083
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)
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6,535
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|||||
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Prepaid
expenses and other current assets
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1,584
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(6,358
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)
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|||||
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Accounts
payable, accrued expenses and other liabilities
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(10,561
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)
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28,550
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|||||
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Net
cash provided by operating activities
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28,927
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92,692
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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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(30,877
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)
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(40,799
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)
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||||
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Insurance
proceeds
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—
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4,800
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||||||
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Acquisitions
of businesses
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—
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(251
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)
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|||||
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Proceeds
from sale of fixed assets
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35
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1,659
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||||||
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Net
cash used in investing activities
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(30,842
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)
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(34,591
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)
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||||
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Cash
flows from financing activities:
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||||||||
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Net
repayment of debt
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(949
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)
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(69,460
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)
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||||
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Proceeds
from stock option exercises
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3,405
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3,965
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||||||
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Excess
tax benefits from stock-based payment arrangements
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60
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325
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||||||
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Cash
used to net share settle equity awards
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(324
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)
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—
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|||||
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Net
cash provided by (used in) financing activities
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2,192
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(65,170
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)
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|||||
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Effect
of exchange rate changes on cash and cash equivalents
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690
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(287
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)
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|||||
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Net
increase (decrease) in cash and cash equivalents
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967
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(7,356
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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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$
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3,654
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$
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1,874
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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 nine months ended September 30, 2009
(Unaudited)
1.
Basis of Presentation
The
Condensed Consolidated Financial Statements included herein have been prepared
by TreeHouse Foods, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission 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.
The
Company evaluated subsequent events through the time of filing this Quarterly
Report on Form 10-Q on November 4, 2009. We are not aware of any
significant events that occurred subsequent to the balance sheet date but prior
to the filing of this report that would have a material impact on our Condensed
Consolidated Financial Statements.
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.
Unless
otherwise indicated, references in this report to “we,” “us,” “our,” or the
“Company” refer to TreeHouse Foods, Inc. and subsidiaries, taken as a
whole.
2.
Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued an
accounting pronouncement which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value
measurements. The provisions of the pronouncement are effective for
fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued another accounting pronouncement, which delayed the initial
effective date 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 these pronouncements did
not significantly impact our financial statements.
In
December 2007, the FASB issued an accounting pronouncement on business
combinations. The provisions of this pronouncement 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. The
pronouncement 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 the provisions of this pronouncement for all future
acquisitions.
In
December 2007, the FASB issued an accounting pronouncement on non-controlling
interests in consolidated financial statements. The provisions of
this pronouncement outline the accounting and reporting for ownership interests
in a subsidiary held by parties other than the parent and is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. This pronouncement 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
this pronouncement did not have an impact on our financial
statements.
In March
2008, the FASB issued an accounting pronouncement regarding disclosures about
derivative instruments and hedging activities, which requires
increased qualitative, and credit-risk disclosures. This
pronouncement 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 the provisions of this pronouncement beginning
January 1, 2009 and have provided the required disclosures beginning with our
first quarterly report on Form 10-Q in 2009.
The
Emerging Issues Task Force (“EITF”) issued, in November 2008, an accounting
pronouncement regarding equity method investment accounting considerations which is effective for
transactions occurring in fiscal years beginning on or after December 15, 2008.
The adoption of this pronouncement did not have a significant impact on our
financial statements.
On
December 30, 2008, the FASB issued an accounting pronouncement regarding
employers’ disclosures about postretirement benefits. This
pronouncement is effective for fiscal years ending after December 15,
2009. This pronouncement 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 pronouncement only pertains to disclosures, the Company
does not expect its impact upon adoption to be significant.
In April
2009, the FASB issued an accounting pronouncement regarding interim disclosures
about the fair value of financial instruments. This pronouncement
requires disclosures about the fair value of financial instruments in financial
statements for interim reporting periods and in annual financial statements of
publicly-traded companies. This pronouncement also requires 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 pronouncement is interim and annual periods ending after June 15,
2009. We have complied with the disclosure provisions of this
pronouncement.
In May
2009, the FASB issued an accounting pronouncement regarding subsequent events,
which establishes general standards of accounting for, and requires disclosure
of, events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This
pronouncement is effective for fiscal years and interim periods ended after June
15, 2009. We adopted the provisions of this pronouncement for the
quarter ended June 30, 2009. The adoption of these provisions did not
have a material effect on our consolidated financial statements.
In June
2009, the FASB issued an accounting pronouncement regarding the FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles. This pronouncement establishes the FASB Accounting
Standards Codification (the “Codification”) as the single source of
authoritative, nongovernmental U.S. GAAP. The Codification is
effective for financial statements for interim or annual reporting periods
ending after September 15, 2009. All U.S. GAAP accounting literature
is now known as the “Accounting Standard Codification” (“ASC”) and updates to
the Codification are now issued as “Accounting Standards Updates” (“ASU”). As
the Codification was not intended to change or alter existing U.S. GAAP, it did
not have any impact on our consolidated financial statements.
In August
2009, the FASB issued ASU 2009-5 which provides additional guidance on measuring
the fair value of liabilities under ASC 820. ASU 2009-5 clarifies that the
quoted price for the identical liability, when traded as an asset in an active
market, is also a Level 1 measurement for that liability when no adjustment to
the quoted price is required. This pronouncement also requires that
the fair value of a liability is measured using one or more of the following
techniques when a quoted price in an active market for the identical liability
is not available, (1) a valuation technique that uses the quoted price for the
identical liability when traded as an asset, (2) quoted prices for similar
liabilities or similar liabilities when traded as assets, or (3) another
valuation technique consistent with the guidance in ASC 820, for example, an
income approach such as a present value technique. The adoption of
ASU 2009-5 is not expected to significantly impact the Company.
3.
Income Taxes
Income
tax expense was recorded at an effective rate of 35.3% and 35.5% for the three
and nine months ended September 30, 2009, respectively, compared to 29.9% and
29.7% for the three and nine months ended September 30, 2008,
respectively. The Company’s effective tax rate is favorably impacted
by an intercompany financing structure entered into in conjunction with the E.D.
Smith, Canadian acquisition. For the three and nine months ended
September 30, 2009 and 2008, the Company recognized a tax benefit related to
this item of approximately $1.3 million and $3.5 million and $1.4 million and
$4.2 million, respectively. As consolidated earnings for the three
and nine months ended September 30, 2009 were significantly higher than
consolidated earnings for the three and nine months ended September 30, 2008,
this tax benefit was proportionally much smaller, therefore, increasing the net
effective tax rate in the three and nine months ended September 30, 2009
compared to 2008. In addition, in 2009 the Company recorded an
additional $0.8 million in Canadian withholding tax related to the closure of
our Cambridge, Ontario plant.
As of
September 30, 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 Internal
Revenue Service (“IRS”) began 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 2010. 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 completed an examination of
E.D. Smith’s U.S. affiliates tax return for 2005 during the first quarter of
2009. An insignificant tax adjustment was paid to settle the
examination. The Canada Revenue Agency (CRA) initiated an income tax
audit for the E.D. Smith 2006 and 2007 tax years. The Company expects
this audit to conclude during the fourth quarter of 2009. The outcome
of this audit is unknown at this time.
4.
Other Operating (Income) Expense
The
Company had Other operating income of $14.4 million and $13.9 million for the
three and nine months ended September 30, 2009, respectively, and expense of
$0.7 million and $12.6 million for the three and nine months ended September 30,
2008, respectively. For the three and nine months ended September 30,
2009, income consisted of a gain from insurance proceeds of $14.5 million
related to a fire at our non-dairy powdered creamer facility located in New
Hampton, Iowa, offset by $0.1 million and $0.6 million, respectively, of
executory costs at our closed Portland, Oregon pickle plant. For the
three and nine months ended September 30, 2008, expenses consisted of $0.7
million and $12.1 million, respectively, relating to the closing of our
Portland, Oregon plant plus $0.5 million in the nine months ended September 30,
2008, relating to the fire at our New Hampton, Iowa plant.
5.
Facility Closings
On
February 13, 2008, the Company announced plans to close its pickle plant in
Portland, Oregon. The Portland plant was the Company’s highest cost
and least utilized pickle facility. Operations in the plant ceased
during the second quarter of 2008. Net 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 $13.8 million in Portland closure
costs since 2008. There are no accrued expenses related to this
closure as of September 30, 2009, and insignificant accrued expenses as of
December 31, 2008. In connection with the Portland closure, the
Company has $4.1 million of assets held for sale, which are primarily land and
buildings.
On
November 3, 2008, the Company announced plans to close its salad dressings
manufacturing plant in Cambridge, Ontario. Manufacturing operations
in Cambridge ceased at the end of June 2009. Production has been
transitioned to the Company’s other manufacturing facilities in Canada and the
United States. The change will result in the Company’s production
capabilities being more aligned with the needs of our customers. The
majority of the closure costs were included as costs of the acquisition of E.D.
Smith and are not expected to significantly impact earnings. Total
costs are expected to be approximately $2.5 million, including severance costs
of $1.3 million, and other costs of $1.2 million. As of September 30,
2009, the Company had remaining accruals of approximately $1.0 million for the
closure, the components of which include $0.6 million for severance and $0.4
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 nine months ended
September 30, 2009 were approximately $0.7 million.
6.
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. The Company 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. The claim was finalized in September 2009, and the Company
received a final payment of approximately $10.6 million to close our claim in
October. As of September 30, 2009, the Company recorded this amount
as a receivable and recognized income of approximately $15.4 million, of which
$14.5 million is classified in Other operating (income) expense and $0.9 million
is classified in Cost of sales. Of the $14.5 million, $13.6 was
related to a gain on the fixed assets destroyed in the
incident.
7.
Inventories
|
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Finished
goods
|
$
|
229,228
|
$
|
181,311
|
||||
|
Raw
materials and supplies
|
95,070
|
82,869
|
||||||
|
LIFO
reserve
|
(20,343
|
)
|
(18,390
|
)
|
||||
|
Total
|
$
|
303,955
|
$
|
245,790
|
||||
Approximately
$115.9 million and $83.0 million of our inventory was accounted for under the
LIFO method of accounting at September 30, 2009 and December 31, 2008,
respectively.
8.
Goodwill and Intangible Assets
Changes
in the carrying amount of goodwill for the nine months ended September 30, 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
|
13,754 | 1,466 | — | 15,220 | ||||||||||||
|
Balance
at September 30, 2009
|
$ | 357,405 | $ | 85,107 | $ | 133,582 | $ | 576,094 | ||||||||
The gross
carrying amount and accumulated amortization of our intangible assets other than
goodwill as of September 30, 2009 and December 31, 2008 are as
follows:
|
September
30, 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
|
$
|
30,566
|
$
|
—
|
$
|
30,566
|
$
|
27,824
|
$
|
—
|
$
|
27,824
|
||||||||||||||
|
Intangible
assets with finite lives:
|
||||||||||||||||||||||||||
|
Customer-related
|
145,177
|
(32,296
|
)
|
112,881
|
137,693
|
(23,430
|
)
|
114,263
|
||||||||||||||||||
|
Non-compete
agreement
|
2,620
|
(1,977
|
)
|
643
|
2,620
|
(1,422
|
)
|
1,198
|
||||||||||||||||||
|
Trademarks
|
17,610
|
(2,079
|
)
|
15,531
|
17,610
|
(1,385
|
)
|
16,225
|
||||||||||||||||||
|
Formulas/recipes
|
1,719
|
(659
|
)
|
1,060
|
1,583
|
(378
|
)
|
1,205
|
||||||||||||||||||
|
Total
|
$
|
197,692
|
$
|
(37,011
|
)
|
$
|
160,681
|
$
|
187,330
|
$
|
(26,615
|
)
|
$
|
160,715
|
||||||||||||
Amortization
expense on intangible assets for the three months ended September 30, 2009 and
2008 was $3.4 million and $3.3 million, respectively and $10.0 million and $10.3
million for the nine months ended September 30, 2009 and 2008,
respectively. Estimated aggregate intangible asset amortization
expense for the next five years is as follows:
|
(In
thousands)
|
|
|
2010
|
$12,857
|
|
2011
|
$10,965
|
|
2012
|
$10,664
|
|
2013
|
$10,422
|
|
2014
|
$10,402
|
9.
Long-Term Debt
|
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Revolving
credit facility
|
$
|
371,600
|
$
|
372,000
|
||||
|
Senior
notes
|
100,000
|
100,000
|
||||||
|
Tax
increment financing and other
|
4,474
|
3,708
|
||||||
|
476,074
|
475,708
|
|||||||
|
Less
current portion
|
(597
|
)
|
(475
|
)
|
||||
|
Total
long-term debt
|
$
|
475,477
|
$
|
475,233
|
||||
Revolving Credit Facility —
The Company maintains an unsecured revolving credit agreement with an aggregate
commitment of $600 million, of which $219.6 million was available as of
September 30, 2009, that expires August 31, 2011. In addition, as of
September 30, 2009, there were $8.8 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 the Company
maintain certain financial ratios, including a leverage and interest coverage
ratio. The Company is in compliance with all applicable covenants as
of September 30, 2009. The Company believes 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 September 30, 2009 was 0.82%.
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 September 30, 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 base rate. Under the terms of the agreement, $200 million in
floating rate debt was swapped for a fixed 2.9% interest base rate for a period
of 24 months, amortizing to $50 million for an additional nine months at the
same 2.9% interest rate. Under the terms of the Company’s revolving
credit agreement and in conjunction with our credit spread, this will result in
an all-in borrowing cost on the swapped principal being no more than 3.8% during
the life of the swap agreement. The Company did not apply hedge
accounting to this swap.
In July
2006, the Company entered into a forward interest rate swap transaction for a
notional amount of $100 million as a hedge of the forecasted private placement
of $100 million senior notes. The interest rate swap transaction was
terminated on August 31, 2006, which resulted in a pre-tax loss of $1.8
million. The unamortized loss is reflected, net of tax, in
Accumulated other comprehensive loss in our Condensed Consolidated Balance
Sheets. The total loss will be reclassified ratably to our Condensed
Consolidated Statements of Income as an increase to Interest expense over the
term of the senior notes, providing an effective interest rate of 6.29% over the
term of our senior notes. In the nine months ended September 30,
2009, $0.2 million of the loss was taken into interest expense. We
anticipate that $0.3 million of the loss will be reclassified to interest
expense in 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 September 30, 2009, $2.7 million remains
outstanding.
10.
Earnings Per Share
Basic
earnings per share is computed by dividing net income by the number of weighted
average common shares outstanding during the reporting period. The
weighted average number of common shares used in the diluted earnings per share
calculation is determined using the treasury stock method and includes the
incremental effect related to outstanding options, restricted stock, restricted
stock units and performance units.
Certain
restricted stock unit and restricted stock awards are subject to market
conditions for vesting. For the three months ended September 30, 2009
and 2008, none of the conditions for vesting were met for the restricted stock
awards. During the three months ended September 30, 2009, the
conditions for vesting were met for the restricted stock unit awards, and the
awards vested. The Company has included their dilutive impact for the
period of time during which they were not vested. For the three
months ended September 30, 2008, the restricted stock unit conditions were not
met and were excluded from the diluted shares calculation.
For the
nine months ended September 30, 2009, the conditions pertaining to the
restricted stock and restricted stock unit awards were met and these awards were
included in the diluted earnings per share calculation. For the nine
months ended September 30, 2008, none of the conditions for vesting were met for
either the restricted stock awards or restricted stock unit awards, and they
were excluded from the diluted earning per share calculation.
The
Company’s performance unit awards contain both service and performance
criteria. For the three and nine months ended September 30, 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. For the three months and nine months ended September 30,
2008, none of the performance criteria were met and these awards were excluded
from the diluted earnings per share calculation.
The
following table summarizes the effect of the share-based compensation awards on
the weighted average number of shares outstanding used in calculating diluted
earnings per share:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||
|
September
30,
|
September
30,
|
|||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||
|
Weighted
average common shares outstanding
|
32,280,059
|
31,396,886
|
31,797,354
|
31,281,338
|
||||||||
|
Assumed
exercise of stock options (1)
|
494,237
|
116,854
|
127,794
|
117,446
|
||||||||
|
Assumed
vesting of restricted stock, restricted stock units
and
performance units (1)
|
354,444
|
—
|
462,319
|
—
|
||||||||
|
Weighted
average diluted common shares outstanding
|
33,128,740
|
31,513,740
|
32,387,467
|
31,398,784
|
||||||||
|
(1)
|
Incremental
shares from stock options, restricted stock, restricted stock units, and
performance units are computed by the treasury stock
method. Stock options, restricted stock, restricted stock
units, and performance units excluded from our computation of diluted
earnings per share because they were anti-dilutive, 8,175 and 1,585,412
for the three and nine months ended September 30, 2009, respectively and
2,225,111 for the three and nine months ended September 30,
2008.
|
11.
Stock-Based Compensation
Income
before income taxes for the three and nine month periods ended September 30,
2009 and 2008 includes share-based compensation expense of $3.9 million, $10.0
million, $3.4 million and $8.8 million, respectively. The tax benefit
recognized related to the compensation cost of these share-based awards was
approximately $1.5 million and $3.8 million for the three and nine month periods
ended September 30, 2009, respectively, and $1.3 million and $3.5 million for
the three and nine month periods ended September 30, 2008,
respectively.
The
following table summarizes stock option activity during the nine months ended
September 30, 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
|
(18,787
|
)
|
—
|
$
|
25.53
|
—
|
||||||||||||||
|
Exercised
|
(125,514
|
)
|
—
|
$
|
26.82
|
—
|
||||||||||||||
|
Outstanding,
September 30, 2009
|
2,344,036
|
126,117
|
$
|
27.24
|
6.7
|
$
|
20,816,981
|
|||||||||||||
|
Vested/expected
to vest, at September 30, 2009
|
2,300,746
|
126,117
|
$
|
27.28
|
6.6
|
$
|
20,373,503
|
|||||||||||||
|
Exercisable,
September 30, 2009
|
1,896,310
|
111,981
|
$
|
27.77
|
6.3
|
$
|
15,873,304
|
|||||||||||||
Compensation
cost related to unvested options totaled $2.8 million at September 30, 2009 and
will be recognized over the remaining vesting period of the grants, which
averages 1.5 years. The average grant date fair value of the options
granted in the nine months ended September 30, 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 and nine months ended September 30, 2009 was approximately $1.1
million.
In
addition to stock options, the Company also grants restricted stock, restricted
stock units and performance unit awards. These awards are granted
under our long-term incentive plan. Employee restricted stock and
restricted stock unit awards granted during the nine months ended September 30,
2009 vest based on the passage of time. These awards generally vest
one-third on each anniversary of the grant date. Director restricted
stock units granted during the nine months ended September 30, 2009 vest over
thirteen months. 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 for the year ended December 31, 2008. The following
table summarizes the restricted stock and restricted stock unit activity during
the nine months ended September 30, 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
|
|||||||||||||||||||
|
Outstanding,
at December 31, 2008
|
1,412,322
|
$
|
24.15
|
598,939
|
$
|
25.28
|
22,200
|
$
|
24.06
|
|||||||||||||||
|
Granted
|
59,340
|
$
|
26.36
|
187,550
|
$
|
28.65
|
26,900
|
$
|
28.95
|
|||||||||||||||
|
Vested
|
(260,009
|
)
|
$
|
24.06
|
(4,688
|
)
|
$
|
24.10
|
(3,700
|
)
|
$
|
24.06
|
||||||||||||
|
Forfeited
|
(8,117
|
)
|
$
|
24.74
|
(2,020
|
)
|
$
|
27.02
|
—
|
—
|
||||||||||||||
|
Outstanding,
at September 30, 2009
|
1,203,536
|
$
|
24.28
|
779,781
|
$
|
26.09
|
45,400
|
$
|
26.96
|
|||||||||||||||
Future
compensation cost related to restricted stock and restricted stock units is
approximately $16.6 million as of September 30, 2009, and will be recognized on
a weighted average basis, over the next 2.0 years. The grant date
fair value of the awards granted in 2009 was equal to the Company’s closing
stock price on the grant date.
Performance
unit awards were granted to certain members of management. These
awards contain service and performance conditions. For each of the
three performance periods, one third of the units will accrue, multiplied by a
predefined percentage between 0% and 200%, depending on the achievement of
certain operating performance measures. Additionally, for the
cumulative performance period, a number of units will accrue, equal to the
number of units granted multiplied by a predefined percentage between 0% and
200%, depending on the achievement of certain operating performance measures,
less any units previously accrued. Accrued units will be converted to
stock or cash, at the discretion of the compensation committee on the third
anniversary of the grant date. The Company intends to settle these
awards in stock and has the shares available to do so. The following
table summarizes the performance unit activity during the nine months ended
September 30, 2009:
|
Weighted
|
||||||||
|
Average
|
||||||||
|
Performance
|
Grant
Date
|
|||||||
|
Units
|
Fair
Value
|
|||||||
|
Unvested,
at December 31, 2008
|
72,900
|
$
|
24.06
|
|||||
|
Granted
|
54,900
|
$
|
28.92
|
|||||
|
Vested
|
—
|
—
|
||||||
|
Forfeited
|
—
|
—
|
||||||
|
Unvested,
at September 30, 2009
|
127,800
|
$
|
26.15
|
|||||
Future
compensation cost related to the performance units is estimated to be
approximately $7.8 million as of September 30, 2009, and is expected to be
recognized over the next 2.2 years.
12.
Employee Retirement and Postretirement Benefits
Pension, Profit Sharing and
Postretirement Benefits — Certain of our employees and retirees
participate in pension and other postretirement benefit
plans. Employee benefit plan obligations and expenses included in the
Condensed Consolidated Financial Statements are determined based on plan
assumptions, employee demographic data, including years of service and
compensation, benefits and claims paid, and employer contributions.
Defined Benefit Plans — The
benefits under our defined benefit plans are based on years of service and
employee compensation.
Components
of net periodic pension expense are as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$
|
490
|
$
|
430
|
$
|
1,470
|
$
|
1,290
|
||||||||
|
Interest
cost
|
524
|
430
|
1,572
|
1,290
|
||||||||||||
|
Expected
return on plan assets
|
(440
|
)
|
(358
|
)
|
(1,320
|
)
|
(1,074
|
)
|
||||||||
|
Amortization
of unrecognized net loss
|
149
|
—
|
447
|
—
|
||||||||||||
|
Amortization
of prior service costs
|
145
|
120
|
435
|
360
|
||||||||||||
|
Effect
of settlements
|
—
|
75
|
—
|
225
|
||||||||||||
|
Net
periodic pension cost
|
$
|
868
|
$
|
697
|
$
|
2,604
|
$
|
2,091
|
||||||||
We
contributed $8.9 million to the pension plans in the first nine months of
2009. No additional contributions are required 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
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Service
cost
|
$
|
63
|
$
|
59
|
$
|
189
|
$
|
177
|
||||||||
|
Interest
cost
|
64
|
58
|
192
|
174
|
||||||||||||
|
Amortization
of prior service credit
|
(18
|
)
|
(18
|
)
|
(54
|
)
|
(54
|
)
|
||||||||
|
Amortization
of unrecognized net loss
|
5
|
6
|
15
|
18
|
||||||||||||
|
Net
periodic postretirement cost
|
$
|
114
|
$
|
105
|
$
|
342
|
$
|
315
|
||||||||
We expect
to contribute approximately $0.1 million to the postretirement health plans
during 2009.
13.
Comprehensive Income
The
following table sets forth the components of comprehensive income:
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||||
|
September
30,
|
September
30,
|
||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||
|
(In
thousands)
|
|||||||||||||||||
|
Net
income
|
$
|
28,064
|
$
|
11,080
|
$
|
59,221
|
$
|
21,433
|
|||||||||
|
Foreign
currency translation adjustment
|
15,396
|
(6,647
|
)
|
27,439
|
(13,230
|
)
|
|||||||||||
|
Amortization
of pension and postretirement
|
|||||||||||||||||
|
prior
service costs and net loss, net of tax
|
171
|
67
|
512
|
201
|
|||||||||||||
|
Amortization
of swap loss, net of tax
|
41
|
40
|
122
|
120
|
|||||||||||||
|
Other
|
—
|
10
|
5
|
10
|
|||||||||||||
|
Comprehensive
income
|
$
|
43,672
|
$
|
4,550
|
$
|
87,299
|
$
|
8,534
|
|||||||||
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.
14.
Fair Value of Financial Instruments
Cash and
cash equivalents and accounts receivable are financial assets with carrying
values that approximate fair value. Accounts payable are financial
liabilities with carrying values that approximate fair value. As of
September 30, 2009, the carrying value of the Company’s fixed rate senior notes
was $100.0 million and fair value was estimated to be $102.6 million based on
Level 2 inputs. The fair value of the Company’s variable rate debt
(revolving credit facility), with an outstanding balance of $371.6 million as of
September 30, 2009, was $350.0 million, using Level 2 inputs. Level 2
inputs are inputs other than quoted prices that are observable for an asset or
liability, either directly or indirectly.
The fair
value of the Company’s interest rate swap agreement as described in Notes 9 and
15 as of September 30, 2009 was a liability of approximately $5.8
million. The fair value of the swap was determined using Level 2
inputs.
15.
Derivative instruments
The
Company is exposed to certain risks relating to its ongoing business
operations. The primary risks managed by derivative instruments are
the interest rate risk and foreign currency 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 a portion of the facility. The Company’s objective in using
an interest rate swap is to establish a fixed interest rate, thereby enabling
the Company to predict and manage interest expense and cash flows in a more
efficient and effective manner. The Company did not apply hedge
accounting to the interest rate swap, and it is recorded at fair value on the
Company’s Condensed Consolidated Balance Sheets. See Note 9 for more details of
the interest rate swap, including the notional amount, interest rate and
term. Note 14 discusses the fair value of the interest rate
swap.
The
Company enters into foreign currency contracts to manage the risk associated
with foreign currency cash flows. The Company’s objective in using
foreign currency contracts is to establish a fixed foreign currency exchange
rate for certain Canadian raw material purchases that are denominated in U.S.
dollars, thereby enabling the Company to manage its foreign currency exchange
rate risk. In May 2009, the Company entered into three foreign
currency contracts for the purchase of $5.0 million U.S. dollars, in exchange
for $5.6 million Canadian dollars. These contracts expired during the
third quarter and are no longer outstanding. We did not apply hedge
accounting to these foreign currency contracts.
As of
September 30, 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
|
|||||||||
|
September
30, 2009
|
December
31, 2008
|
||||||||
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
||||||
|
(In
thousands)
|
|||||||||
|
Derivatives
not designated as hedging instruments
|
|||||||||
|
Interest
rate swap
|
Other
long-term liabilities
|
$5,752
|
Other
long-term liabilities
|
$6,981
|
|||||
The
Company recognized a gain of $1.2 million relating to the change in the fair
value of its interest rate swap derivative for the nine months ended September
30, 2009. This gain is recorded in the Other income, net line of our
Condensed Consolidated Statements of Income.
The
Company recognized a loss of $0.2 million relating to the settlement of its
foreign currency contracts for the nine months ended September 30,
2009. This loss is recorded in the Loss (gain) on foreign currency
exchange line of our Condensed Consolidated Statements of Income.
The
Company does not use derivatives for speculative or trading
purposes.
16.
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.
17.
Supplemental Cash Flow Information
Cash
payments for interest were $15.0 million and $23.4 million for the nine months
ended September 30, 2009 and 2008, respectively. Cash payments for
income taxes were $9.6 million and $10.0 million for the nine months ended
September 30, 2009 and 2008, respectively. As of September 30, 2009,
the Company had accrued property, plant and equipment of approximately $1.8
million. For the nine months ended September 30, 2009, the Company
entered into capital leases totaling approximately $1.3
million. Noncash financing activities for the three and nine months
ended September 30, 2009 include the gross issuance of 284 and 268,397 shares,
respectively, and the repurchase of 94 and 11,219 shares, respectively, to
satisfy the minimum statutory withholding requirements associated with the lapse
of restrictions on restricted stock and restricted stock unit
awards. The weighted average price of the issuance and repurchase of
these shares for the three and nine months ended September 30, 2009 was $33.05
and $29.12, respectively.
18.
Foreign Currency
The
Company enters into foreign currency contracts due to the exposure to
Canadian/U.S. dollar currency fluctuations on cross border
transactions. The Company does not apply hedge accounting to these
contracts and records them at fair value on the Condensed Consolidated Balance
Sheets, with changes in fair value being recorded through the Condensed
Consolidated Statements of Income, within Loss (gain) on foreign currency
exchange. In May 2009, the Company entered into three foreign
currency contracts for the purchase of $5.0 million U.S. dollars. The
contracts were entered into for the purchase of U.S. dollar denominated raw
materials by our Canadian subsidiary. These contracts expired during
the third quarter of 2009. Prior to these contracts, the Company had
similar contracts that had expired by December 31, 2008. For the
three and nine months ended September 30, 2009, the Company recorded a loss on
these contracts totaling approximately $0.4 million and $0.2 million,
respectively. For the three and nine months ended September 30, 2008,
the Company recorded a loss on these contracts totaling approximately $12
thousand and a gain of $32 thousand, respectively.
The
Company has an intercompany note denominated in Canadian dollars, which is
eliminated during consolidation. A portion of the note is considered
to be permanent, with the remaining portion considered to be
temporary. Foreign currency fluctuations on the permanent portion are
recorded through Accumulated other comprehensive loss, while foreign currency
fluctuations on the temporary portion are recorded in the Company’s Condensed
Consolidated Statements of Income, within Loss (gain) on foreign currency
exchange.
The
Company accrues interest on the intercompany note, which is also considered
temporary. Changes in the balance due to foreign currency
fluctuations are also recorded in the Company’s Condensed Consolidated
Statements of Income within Loss (gain) on foreign currency
exchange.
For the
three and nine months ended September 30, 2009 and 2008, the Company recorded a
gain of $3.0 million, $4.8 million, and a loss of $1.9 million and $3.7 million,
respectively, recorded in Loss (gain) on foreign currency exchange related to
foreign currency fluctuations. For the three and nine months ended
September 30, 2009 and 2008, the Company recorded a gain of $15.4 million and
$27.4 million and a loss of $6.6 million and $13.2 million, respectively, in
Accumulated other comprehensive loss related to foreign currency fluctuations on
the permanent portion of the note and translation of E.D. Smith financial
statements from Canadian dollars to U.S. dollars.
19.
Business and Geographic Information and Major Customers
The
Company manages operations on a company-wide basis, thereby making
determinations as to the allocation of resources in total rather than on a
segment-level basis. We have designated our reportable segments based
on how management views our business. We do not segregate assets
between segments for internal reporting. Therefore, asset-related
information has not been presented.
The
Company evaluates the performance of our segments based on net sales dollars,
gross profit and direct operating income (gross profit less freight out, sales
commissions and direct selling and marketing expenses). The amounts
in the following tables are obtained from reports used by our senior management
team and do not include allocated income taxes. 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 $0.2 million and $3.2
million incurred during the three and nine months ended September 30, 2009,
respectively, 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
|
Nine
Months Ended
|
|||||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||
|
(In
thousands)
|
||||||||||||||||||
|
Net
sales to external customers:
|
||||||||||||||||||
|
North
American Retail Grocery
|
$
|
238,891
|
$
|
221,814
|
$
|
705,426
|
$
|
664,334
|
||||||||||
|
Food
Away From Home
|
78,982
|
77,189
|
220,764
|
224,756
|
||||||||||||||
|
Industrial
and Export
|
60,992
|
75,573
|
180,676
|
213,478
|
||||||||||||||
|
Total
|
$
|
378,865
|
$
|
374,576
|
$
|
1,106,866
|
$
|
1,102,568
|
||||||||||
|
Direct
operating income:
|
||||||||||||||||||
|
North
American Retail Grocery
|
$
|
36,894
|
$
|
28,713
|
$
|
107,127
|
$
|
79,258
|
||||||||||
|
Food
Away From Home
|
9,025
|
8,200
|
24,128
|
24,335
|
||||||||||||||
|
Industrial
and Export
|
9,856
|
8,189
|
26,466
|
24,602
|
||||||||||||||
|
Direct
operating income
|
55,775
|
45,102
|
157,721
|
128,195
|
||||||||||||||
|
Unallocated
warehouse start-up costs (1)
|
(173
|
)
|
—
|
(3,223
|
)
|
—
|
||||||||||||
|
Unallocated
selling and distribution expenses
|
(755
|
)
|
(1,002
|
)
|
(2,394
|
)
|
(2,689
|
)
|
||||||||||
|
Unallocated
corporate expense
|
(9,773
|
)
|
(20,012
|
)
|
(52,413
|
)
|
(69,879
|
)
|
||||||||||
|
Operating
income
|
45,074
|
24,088
|
99,691
|
55,627
|
||||||||||||||
|
Other
(expense) income
|
(1,667
|
)
|
(8,275
|
)
|
(7,917
|
)
|
(25,134
|
)
|
||||||||||
|
Income
before income taxes
|
$
|
43,407
|
$
|
15,813
|
$
|
91,774
|
$
|
30,493
|
||||||||||
(1) Included
in Cost of sales in the Condensed Consolidated Statements of
Income.
Geographic Information — We
had revenues to customers outside of the United States of approximately 13.7%
and 14.6% of total consolidated net sales in the nine months ended September 30,
2009 and 2008, respectively, with 13.1% and 13.8% going to Canada,
respectively.
Major Customers — Wal-Mart
Stores, Inc. and affiliates accounted for approximately 14.4% and 14.7% of our
consolidated net sales in the nine months ended September 30, 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
and nine months ended September 30, 2009 and 2008:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Products:
|
||||||||||||||||
|
Pickles
|
$
|
82,164
|
$
|
79,305
|
$
|
240,268
|
$
|
251,329
|
||||||||
|
Non-dairy
powdered creamer
|
75,620
|
84,249
|
236,229
|
251,536
|
||||||||||||
|
Soup
and infant feeding
|
85,606
|
87,740
|
232,607
|
232,616
|
||||||||||||
|
Salad
dressing
|
46,249
|
33,103
|
146,012
|
121,087
|
||||||||||||
|
Jams
and other
|
42,319
|
45,109
|
113,616
|
114,254
|
||||||||||||
|
Aseptic
|
22,052
|
21,393
|
62,722
|
63,144
|
||||||||||||
|
Mexican
sauces
|
16,118
|
13,830
|
48,942
|
38,154
|
||||||||||||
|
Refrigerated
|
8,737
|
9,847
|
26,470
|
30,448
|
||||||||||||
|
Total
net sales
|
$
|
378,865
|
$
|
374,576
|
$
|
1,106,866
|
$
|
1,102,568
|
||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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 and nine months ended
September 30, 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 contain 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 sales and marketing
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
infant feeding products.
|
|
|
•
|
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.
|
Current
economic conditions continue to remain constrained. During these
times, the Company has focused its efforts not only on protecting its volume,
but also on cost containment, pricing and margin improvement. This
strategy has resulted in direct operating income growth of 23.7% for the three
months ended September 30, 2009 when compared to the three months ended
September 30, 2008. Likewise, direct operating income increased 23.0%
for the nine months ended September 30, 2009 when compared to the nine months
ended September 30, 2008.
Recent
Developments
During
the fourth quarter of 2009, the Company will begin implementation of an
Enterprise Resource Planning (“ERP”) system. The Company will utilize
a combination of internal and external resources and plans for certain modules
to be completed during 2011 with final completion in 2012. The
Company expects cash flows from operations will be sufficient to fund the
estimated project costs.
Results
of Operations
The
following table presents certain information concerning our financial results,
including information presented as a percentage of net sales:
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
Dollars
|
Percent
|
Dollars
|
Percent
|
||||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||||||
|
Net
sales
|
$
|
378,865
|
100.0
|
%
|
$
|
374,576
|
100.0
|
%
|
$
|
1,106,866
|
100.0
|
%
|
$
|
1,102,568
|
100.0
|
%
|
|||||||
|
Cost
of sales
|
298,347
|
78.7
|
301,416
|
80.5
|
874,793
|
79.0
|
890,390
|
80.8
|
|||||||||||||||
|
Gross
profit
|
80,518
|
21.3
|
73,160
|
19.5
|
232,073
|
21.0
|
212,178
|
19.2
|
|||||||||||||||
|
Operating
expenses:
|
|||||||||||||||||||||||
|
Selling
and distribution
|
25,671
|
6.8
|
29,060
|
7.7
|
79,969
|
7.2
|
86,672
|
7.9
|
|||||||||||||||
|
General
and administrative
|
20,752
|
5.5
|
15,959
|
4.3
|
56,388
|
5.1
|
46,961
|
4.3
|
|||||||||||||||
|
Other
operating (income) expense, net
|
(14,354
|
)
|
(3.8
|
)
|
722
|
0.2
|
(13,929
|
)
|
(1.2
|
)
|
12,572
|
1.1
|
|||||||||||
|
Amortization
expense
|
3,375
|
0.9
|
3,331
|
0.9
|
9,954
|
0.9
|
10,346
|
0.9
|
|||||||||||||||
|
Total
operating expenses
|
35,444
|
9.4
|
49,072
|
13.1
|
132,382
|
12.0
|
156,551
|
14.2
|
|||||||||||||||
|
Operating
income
|
45,074
|
11.9
|
24,088
|
6.4
|
99,691
|
9.0
|
55,627
|
5.0
|
|||||||||||||||
|
Other
(income) expense:
|
|||||||||||||||||||||||
|
Interest
expense
|
4,807
|
1.2
|
6,493
|
1.7
|
14,144
|
1.2
|
21,785
|
2.0
|
|||||||||||||||
|
Interest
income
|
(21
|
)
|
—
|
—
|
—
|
(39
|
)
|
—
|
(107
|
)
|
—
|
||||||||||||
|
Loss
(gain) on foreign currency exchange
|
(2,968
|
)
|
(0.8
|
)
|
1,869
|
0.5
|
(4,772
|
)
|
(0.4
|
)
|
3,724
|
0.3
|
|||||||||||
|
Other
income, net
|
(151
|
)
|
—
|
(87
|
)
|
—
|
(1,416
|
)
|
(0.1
|
)
|
(268
|
)
|
—
|
||||||||||
|
Total
other expense
|
1,667
|
0.4
|
8,275
|
2.2
|
7,917
|
0.7
|
25,134
|
2.3
|
|||||||||||||||
|
Income
before income taxes
|
43,407
|
11.5
|
15,813
|
4.2
|
91,774
|
8.3
|
30,493
|
2.7
|
|||||||||||||||
|
Income
taxes
|
15,343
|
4.1
|
4,733
|
1.2
|
32,553
|
2.9
|
9,060
|
0.8
|
|||||||||||||||
|
Net
income
|
$
|
28,064
|
7.4
|
%
|
$
|
11,080
|
3.0
|
%
|
$
|
59,221
|
5.4
|
%
|
$
|
21,433
|
1.9
|
%
|
|||||||
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008
Net Sales — Third quarter net
sales increased 1.1% to $378.9 million in 2009 compared to $374.6 million in the
third quarter of 2008. The increase is primarily due to price
increases taken in the second half of 2008, which more than offset the volume
declines in the quarter and reduced revenues from the impact of foreign currency
fluctuations. Net sales by segment are shown in the following
table:
|
Three
Months Ended September 30,
|
|||||||||||||||
|
$
Increase/
|
%
Increase/
|
||||||||||||||
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||
|
North
American Retail Grocery
|
$
|
238,891
|
$
|
221,814
|
$
|
17,077
|
7.7
|
%
|
|||||||
|
Food
Away From Home
|
78,982
|
77,189
|
1,793
|
2.3
|
%
|
||||||||||
|
Industrial
and Export
|
60,992
|
75,573
|
(14,581
|
)
|
(19.3
|
)%
|
|||||||||
|
Total
|
$
|
378,865
|
$
|
374,576
|
$
|
4,289
|
1.1
|
%
|
|||||||
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 78.7% in the
third quarter of 2009 compared to 80.5% in 2008. Although we have
experienced increases in certain costs such as metal caps, cans and lids, glass
and meat products in the third quarter of 2009 compared to 2008, these increases
have been more than offset by decreases in the cost of casein, oils and plastic
containers. Raw material, ingredient and packaging costs continue to
be volatile, and we anticipate this trend to continue. The
combination of price increases and the changes in commodity costs in the third
quarter of 2009 versus 2008, have resulted in improvement in our consolidated
gross margins.
Operating Expenses — Total
operating expenses were $35.4 million during the third quarter of 2009 compared
to $49.1 million in 2008. Selling and distribution expenses decreased
$3.4 million or 11.7% in the third quarter of 2009 compared to the third 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 $4.8 million in the third quarter of 2009 compared to
2008. The increase was primarily related to incentive based
compensation expense and stock based compensation related to the Company’s
performance. Other operating expense decreased $15.1 million during
the third quarter of 2009 compared to 2008 due to the gain related to our
insurance settlement related to the fire at our New Hampton, Iowa
plant.
Operating Income — Operating
income for the third quarter of 2009 was $45.1 million, an increase of $21.0
million, or 87.1%, from operating income of $24.1 million in the third quarter
of 2008. Our operating margin was 11.9% in the third quarter of 2009
compared to 6.4% in 2008 due to favorable pricing, cost reductions and the gain
related to our insurance settlement related to the fire at our New Hampton, Iowa
plant.
Interest Expense — Interest
expense decreased to $4.8 million in the third quarter of 2009, compared to $6.5
million in 2008 due to lower average interest rates and lower debt
levels.
Foreign Currency — The
Company’s foreign currency gain was $3.0 million for the three months ended
September 30, 2009 compared to a loss of $1.9 million in 2008, due to
fluctuations in currency exchange rates between the U.S. and Canadian
dollar.
Income Taxes — Income tax
expense was recorded at an effective rate of 35.3% in the third quarter of 2009
compared to 29.9% 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. As consolidated earnings for the three months ended
September 30, 2009 were significantly higher than consolidated earnings for the
three months ended September 30, 2008, this tax benefit was proportionally much
smaller, therefore, increasing the net effective rate in the third quarter of
2009 compared to 2008. In addition, in 2009 the Company recorded an
additional $0.8 million in Canadian withholding tax related to the closure of
our Cambridge, Ontario plant.
Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008 — Results by Segment
North
American Retail Grocery —
|
Three
Months Ended September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
238,891
|
100.0
|
%
|
$
|
221,814
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
183,240
|
76.8
|
172,309
|
77.7
|
||||||||||||
|
Gross
profit
|
55,651
|
23.2
|
49,505
|
22.3
|
||||||||||||
|
Freight
out and commissions
|
12,019
|
5.0
|
14,677
|
6.6
|
||||||||||||
|
Direct
selling and marketing
|
6,738
|
2.8
|
6,115
|
2.8
|
||||||||||||
|
Direct
operating income
|
$
|
36,894
|
15.4
|
%
|
$
|
28,713
|
12.9
|
%
|
||||||||
Net sales
in the North American Retail Grocery segment increased by $17.1 million, or 7.7%
in the third quarter of 2009 compared to the third quarter of
2008. This change in net sales from 2008 to 2009 was due to the
following:
|
Dollars
|
Percent
|
|||||||
|
(Dollars
in thousands)
|
||||||||
|
2008
Net sales
|
$
|
221,814
|
||||||
|
Volume
|
5,493
|
2.5
|
%
|
|||||
|
Pricing
|
17,765
|
8.0
|
||||||
|
Foreign
currency
|
(4,022
|
)
|
(1.8
|
)
|
||||
|
Mix/other
|
(2,159
|
)
|
(1.0
|
)
|
||||
|
2009
Net sales
|
$
|
238,891
|
7.7
|
%
|
||||
The
increase in net sales from 2008 to 2009 resulted primarily from higher unit
sales and the carryover effect of price increases taken in the second half of
2008. Overall volume is higher in the third quarter of 2009 compared
to that of 2008, primarily due to new customers and line extensions in the
pickle, Mexican sauces and salad dressings product lines. These
increases were partially offset by declines in our infant feeding
products. Also negatively impacting net sales are foreign currency
fluctuations.
Cost of
sales as a percentage of net sales decreased from 77.7% in the third quarter of
2008 to 76.8% in 2009 primarily as a result of price increases taken in the
second half 2008 to offset the commodity, material and certain packaging cost
increases previously incurred by the Company. Also contributing to
the decrease were several cost reduction initiatives, a shift in sales mix and
moving away from certain low margin customers over the past year and net
declines in raw material and packaging costs.
Freight
out and commissions paid to independent sales brokers were $12.0 million in the
third quarter of 2009 compared to $14.7 million in 2008, a decrease of 18.1%,
primarily due to lower freight costs, as fuel prices have decreased since last
year.
Direct
selling and marketing increased $0.6 million, or 10.2% from 2008 primarily due
to increased levels of incentive based compensation associated with the
Company’s overall performance.
Food
Away From Home —
|
Three
Months Ended September 30,
|
|||||||||||||||||
|
2009
|
2008
|
||||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
||||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||
|
Net
sales
|
$
|
78,982
|
100.0
|
%
|
$
|
77,189
|
100.0
|
%
|
|||||||||
|
Cost
of sales
|
65,702
|
83.2
|
64,050
|
83.0
|
|||||||||||||
|
Gross
profit
|
13,280
|
16.8
|
13,139
|
17.0
|
|||||||||||||
|
Freight
out and commissions
|
2,627
|
3.3
|
3,469
|
4.5
|
|||||||||||||
|
Direct
selling and marketing
|
1,628
|
2.1
|
1,470
|
1.9
|
|||||||||||||
|
Direct
operating income
|
$
|
9,025
|
11.4
|
%
|
$
|
8,200
|
10.6
|
%
|
|||||||||
Net sales
in the Food Away From Home segment increased by $1.8 million, or 2.3%, in the
third 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
|
$
|
77,189
|
|||||||
|
Volume
|
(104
|
)
|
(0.1
|
)%
|
|||||
|
Pricing
|
1,986
|
2.5
|
|||||||
|
Foreign
currency
|
(69
|
)
|
(0.1
|
)
|
|||||
|
Mix/other
|
(20
|
)
|
—
|
||||||
|
2009
Net sales
|
$
|
78,982
|
2.3
|
%
|
|||||
Net sales
increased during the third quarter of 2009 compared to 2008 primarily due to
increased pricing in response to commodity cost increases over the past
year. Price increases and new customers partially offset lower
volumes resulting from the recent economic downturn, which led consumers to
reduce their spending on dining and eating out. While overall volume
contracted slightly in the third quarter of 2009 across most of the products
sold within the segment, the Company experienced modest sales and volume
increases in the aseptic and Mexican sauces products.
Cost of
sales as a percentage of net sales increased from 83.0% in the third quarter of
2008 to 83.2% in 2009, due to costs associated with re-work of certain products,
offset by net declines in raw material and packaging costs.
Freight
out and commissions paid to independent sales brokers were $2.6 million in the
third quarter of 2009 compared to $3.5 million in 2008, a decrease of 24.3%,
primarily due to lower freight costs, as fuel costs have decreased since last
year.
Direct
selling and marketing increased $0.2 million in the third quarter of 2009
compared to 2008, an increase of 10.7% primarily due to higher levels of
incentive based compensation associated with the Company’s overall
performance.
Industrial
and Export —
|
Three
Months Ended September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
60,992
|
100.0
|
%
|
$
|
75,573
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
49,232
|
80.7
|
65,057
|
86.1
|
||||||||||||
|
Gross
profit
|
11,760
|
19.3
|
10,516
|
13.9
|
||||||||||||
|
Freight
out and commissions
|
1,396
|
2.3
|
2,087
|
2.8
|
||||||||||||
|
Direct
selling and marketing
|
508
|
0.8
|
240
|
0.3
|
||||||||||||
|
Direct
operating income
|
$
|
9,856
|
16.2
|
%
|
$
|
8,189
|
10.8
|
%
|
||||||||
Net sales
in the Industrial and Export segment decreased $14.6 million or 19.3% in the
third 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
|
$
|
75,573
|
||||||
|
Volume
|
(18,874
|
)
|
(25.0
|
)%
|
||||
|
Pricing
|
(2,502
|
)
|
(3.3
|
)
|
||||
|
Foreign
currency
|
443
|
0.6
|
||||||
|
Mix/other
|
6,352
|
8.4
|
||||||
|
2009
Net sales
|
$
|
60,992
|
(19.3
|
)%
|
||||
The
decrease in net sales is primarily due to reduced volumes resulting from a
decline in co-pack sales of branded products for other food
companies. While the decline in net sales included the majority of
the products sold within this segment, the most significant declines were in the
non-dairy powdered creamer, soup and infant feeding
categories. Partially offsetting the volume declines was a shift in
product sales mix.
Cost of
sales as a percentage of net sales decreased from 86.1% in the third quarter of
2008 to 80.7% in 2009 reflecting productivity improvements realized in the
quarter and net declines in raw material and packaging costs.
Freight
out and commissions paid to independent sales brokers were $1.4 million in the
third quarter of 2009 compared to $2.1 million in 2008, a decrease of 33.1%,
primarily due to reduced volumes and lower freight costs, as fuel costs have
decreased since last year.
Direct
selling and marketing was $0.5 million in the third quarter of 2009 compared to
$0.2 million in the third quarter of 2008, an increase of $0.3 million,
primarily due to higher levels of incentive based compensation associated with
the Company’s overall performance.
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008
Net Sales — Net sales
increased $4.3 million to $1,106.9 million in the first nine months of 2009
compared to $1,102.6 million in the first nine months of
2008. Reduced volume, the impact of foreign currency and a shift in
sales mix were offset by increased pricing. Net sales by segment are
shown in the following table:
|
Nine
Months Ended September 30,
|
|||||||||||||||
|
$
Increase/
|
%
Increase/
|
||||||||||||||
|
2009
|
2008
|
(Decrease)
|
(Decrease)
|
||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||
|
North
American Retail Grocery
|
$
|
705,426
|
$
|
664,334
|
$
|
41,092
|
6.2
|
%
|
|||||||
|
Food
Away From Home
|
220,764
|
224,756
|
(3,992
|
)
|
(1.8
|
)%
|
|||||||||
|
Industrial
and Export
|
180,676
|
213,478
|
(32,802
|
)
|
(15.4
|
)%
|
|||||||||
|
Total
|
$
|
1,106,866
|
$
|
1,102,568
|
$
|
4,298
|
0.4
|
%
|
|||||||
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 79.0% in the
first nine months of 2009 compared to 80.8% in 2008. We have
experienced increases in certain costs, such as metal cans, metal caps, glass,
meat products, sweeteners and cucumbers in the first nine months 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, which have now caught up with the commodity cost
increases experienced last year, and the net decrease in ingredient and
packaging costs in the first nine months of 2009 versus 2008, have resulted in
improvement in our consolidated gross margins.
Operating Expenses — Total
operating expenses were $132.4 million during the first nine months of 2009
compared to $156.6 million in 2008. Selling and distribution expenses
decreased $6.7 million or 7.7% in the third quarter of 2009 compared to the
first nine months of 2008 primarily due to a reduction in freight costs related
to lower unit volume and a reduction in freight rates. General and
administrative expenses increased $9.4 million in the third quarter of 2009
compared to 2008. This increase was primarily related to incentive
based compensation expense and stock based compensation related to the Company’s
performance. Other operating income was $13.9 million during the
first nine months of 2009, compared to operating expense of $12.6 million in
2008. Income in 2009 was related to the gain on our insurance
settlement relating to a fire at our New Hampton, Iowa plant, while the expense
in 2008 reflected the initial Portland plant closing costs of $12.1 million and
$0.5 million related to the New Hampton fire.
Operating Income — Operating
income for the first nine months of 2009 was $99.7 million, an increase of $44.1
million, or 79.2%, from operating income of $55.6 million in the first nine
months of 2008. Our operating margin was 9.0% in the first nine
months of 2009 compared to 5.0% in 2008 due to higher profit margins resulting
from favorable pricing and cost reductions, significantly lower costs in 2009
related to the Portland plant closure and the gain relating to the insurance
settlement of the New Hampton fire.
Interest Expense — Interest
expense decreased to $14.1 million in the first nine months of 2009, compared to
$21.8 million in 2008 due to lower average interest rates and lower debt
levels.
Foreign Currency — Foreign
currency gains were $4.8 million for the nine months ended September 30, 2009
compared to a loss of $3.7 million for the nine months ended September 30, 2008,
due to fluctuations in currency exchange rates between the U.S. and Canadian
dollar.
Other (Income) Expense, Net
— Other income
increased for the nine months ended September 30, 2009 by $1.1 million,
primarily reflecting the gain associated with the Company’s fair value
adjustment of its interest rate swap.
Income Taxes — Income tax
expense was recorded at an effective rate of 35.5% in the first nine months of
2009 compared to 29.7% in 2008. 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. As
consolidated earnings for the nine months ended September 30, 2009 were
significantly higher than consolidated earnings for the nine months ended
September 30, 2008, this tax benefit was proportionally much smaller, therefore,
increasing the net effective rate in the first nine months of 2009 compared to
2008. In addition, in 2009 the Company recorded an additional $0.8
million in Canadian withholding tax related to the closure of our Cambridge,
Ontario plant.
Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
— Results by Segment
North
American Retail Grocery —
|
Nine
Months Ended September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
705,426
|
100.0
|
%
|
$
|
664,334
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
539,451
|
76.5
|
523,921
|
78.9
|
||||||||||||
|
Gross
profit
|
165,975
|
23.5
|
140,413
|
21.1
|
||||||||||||
|
Freight
out and commissions
|
37,558
|
5.3
|
43,446
|
6.5
|
||||||||||||
|
Direct
selling and marketing
|
21,290
|
3.0
|
17,709
|
2.7
|
||||||||||||
|
Direct
operating income
|
$
|
107,127
|
15.2
|
%
|
$
|
79,258
|
11.9
|
%
|
||||||||
Net sales
in the North American Retail Grocery segment increased by $41.1 million, or 6.2%
in the first nine months of 2009 compared to the first nine months of
2008. This change in net sales from 2008 to 2009 was due to the
following:
|
Dollars
|
Percent
|
|||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
2008
Net sales
|
$
|
664,334
|
||||||||||
|
Volume
|
(16,055
|
)
|
(2.4
|
)%
|
||||||||
|
Pricing
|
76,029
|
11.4
|
||||||||||
|
Foreign
currency
|
(23,821
|
)
|
(3.5
|
)
|
||||||||
|
Mix/other
|
4,939
|
0.7
|
||||||||||
|
2009
Net sales
|
$
|
705,426
|
6.2
|
%
|
||||||||
The
increase in net sales from 2008 to 2009 resulted from the carryover effect of
price increases taken in the second half of 2008 to cover the rising raw
material and packaging costs, partially offset by lower case sales of infant
feeding products 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 salad
dressings.
Cost of
sales as a percentage of net sales decreased from 78.9% in for the first nine
months of 2008 to 76.5% in 2009 primarily as price increases have now caught up
to the raw material and packaging cost increases experienced by the Company in
earlier periods. Also contributing to the decrease were several cost
reduction initiatives and moving away from certain low margin customers over the
past year and net declines in raw material and packaging costs.
Freight
out and commissions paid to independent sales brokers were $37.6 million in the
first nine months of 2009 compared to $43.4 million in 2008, a decrease of
13.6%, primarily due to reduced volumes and lower freight costs, as fuel prices
have decreased since last year.
Direct
selling and marketing was $21.3 million in the first nine months of 2009
compared to $17.7 million in 2008, an increase of $3.6 million or 20.2%,
primarily due to increased levels of incentive based compensation associated
with the Company’s overall performance. Also contributing to the
increase are costs related to new label designs.
Food
Away From Home —
|
Nine
Months Ended September 30,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Net
sales
|
$
|
220,764
|
100.0
|
%
|
$
|
224,756
|
100.0
|
%
|
||||||||
|
Cost
of sales
|
183,615
|
83.2
|
184,914
|
82.3
|
||||||||||||
|
Gross
profit
|
37,149
|
16.8
|
39,842
|
17.7
|
||||||||||||
|
Freight
out and commissions
|
7,755
|
3.5
|
10,639
|
4.7
|
||||||||||||
|
Direct
selling and marketing
|
5,266
|
2.4
|
4,868
|
2.2
|
||||||||||||
|
Direct
operating income
|
$
|
24,128
|
10.9
|
%
|
$
|
24,335
|
10.8
|
%
|
||||||||
Net sales
in the Food Away From Home segment decreased by $4.0 million, or 1.8%, in the
first nine months 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
|
$
|
224,756
|
||||||
|
Volume
|
(9,990
|
)
|
(4.4
|
)%
|
||||
|
Pricing
|
10,787
|
4.7
|
||||||
|
Foreign
currency
|
(2,925
|
)
|
(1.3
|
)
|
||||
|
Mix/other
|
(1,864
|
)
|
(0.8
|
)
|
||||
|
2009
Net sales
|
$
|
220,764
|
(1.8
|
)%
|
||||
Net sales
decreased during the first nine months of 2009 compared to 2008 primarily due to
reduced volumes resulting from the recent economic down turn, as consumers
reduced their spending on dining and eating out. This segment also
experienced a decrease in net sales due to both a shift in the sales mix and the
impact of foreign currency changes. Increased pricing in response to
commodity cost increases over the past year and modest increases in sales units
of aseptic products and Mexican sauces, offset the volume declines in pickles
and other products.
Cost of
sales as a percentage of net sales increased from 82.3% in the first nine months
of 2008 to 83.2% in 2009, due to a shift in mix from higher margin food
distributors to lower margin national account quick serve customers, partially
offset by sales price increases. Also increasing cost of sales were
costs associated with the re-work of certain products, offset by net declines in
raw material and packaging costs.
Freight
out and commissions paid to independent sales brokers were $7.8 million in the
first nine months of 2009 compared to $10.6 million in 2008, a decrease of
27.1%, primarily due to reduced volumes and lower freight costs, as fuel costs
have decreased since last year.
Direct
selling and marketing was $5.3 million in the first nine months of 2009 compared
to $4.9 million in 2008, primarily due to higher levels of incentive
compensation associated with the Company’s overall performance.
Industrial
and Export —
|
Nine
Months Ended September 30,
|
|||||||||||||||
|
2009
|
2008
|
||||||||||||||
|
Dollars
|
Percent
|
Dollars
|
Percent
|
||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||
|
Net
sales
|
$
|
180,676
|
100.0
|
%
|
$
|
213,478
|
100.0
|
%
|
|||||||
|
Cost
of sales
|
148,504
|
82.2
|
181,555
|
85.0
|
|||||||||||
|
Gross
profit
|
32,172
|
17.8
|
31,923
|
15.0
|
|||||||||||
|
Freight
out and commissions
|
4,279
|
2.4
|
6,666
|
3.1
|
|||||||||||
|
Direct
selling and marketing
|
1,427
|
0.8
|
655
|
0.3
|
|||||||||||
|
Direct
operating income
|
$
|
26,466
|
14.6
|
%
|
$
|
24,602
|
11.6
|
%
|
|||||||
Net sales
in the Industrial and Export segment decreased $32.8 million or 15.4% in the
first nine months 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
|
$
|
213,478
|
|||||||
|
Volume
|
(49,156
|
)
|
(23.0
|
)%
|
|||||
|
Pricing
|
1,912
|
0.9
|
|||||||
|
Foreign
currency
|
(411
|
)
|
(0.2
|
)
|
|||||
|
Mix/other
|
14,853
|
6.9
|
|||||||
|
2009
Net sales
|
$
|
180,676
|
(15.4
|
)%
|
|||||
The
decrease in net sales is primarily due to reduced volumes resulting from lower
co-pack sales of branded products for other food companies. While the
decline in net sales included the majority of the products sold within this
segment, the most significant were in the non-dairy powdered creamer, soup and
infant feeding products. Partially offsetting the volume declines
were price increases taken since last year in an effort to offset the increases
in input costs and a positive mix variance.
Cost of
sales as a percentage of net sales decreased from 85.0% in the first nine months
of 2008 to 82.2% in 2009 as price increases have caught up to input cost
increases experienced in prior periods. Also contributing to the
reduction were productivity improvements realized in the first half of 2009 and
net decreases in raw material and packaging costs.
Freight
out and commissions paid to independent sales brokers were $4.3 million in the
first nine months of 2009 compared to $6.7 million in 2008, a decrease of 35.8%,
primarily due to reduced volumes and lower freight costs, as fuel costs have
decreased since last year.
Direct
selling and marketing was $1.4 million in the first nine months of 2009 compared
to $0.7 million in 2008, an increase of $0.7 million, primarily due to higher
levels of incentive compensation associated with the Company’s overall
performance.
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 $219.6 million was available under the
revolving credit facility as of September 30, 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:
|
Nine
Months Ended September
30,
|
|||||||
|
2009
|
2008
|
||||||
|
(In
thousands)
|
|||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
59,221
|
$
|
21,433
|
|||
|
Depreciation
and amortization
|
34,932
|
35,506
|
|||||
|
Stock-based
compensation
|
9,951
|
8,795
|
|||||
|
Loss
(gain) on foreign currency exchange
|
(4,465
|
)
|
3,107
|
||||
|
Mark
to market adjustment on interest rate swap
|
(1,229
|
)
|
—
|
||||
|
Write-down
of impaired assets
|
—
|
5,173
|
|||||
|
Gain
on disposition of assets, net
|
(12,612
|
)
|
(652
|
)
|
|||
|
Deferred
income taxes
|
11,743
|
7,165
|
|||||
|
Changes
in operating assets and liabilities, net of acquisitions
|
|||||||
|
Receivables
|
(5,614
|
)
|
(16,630
|
)
|
|||
|
Inventories
|
(54,083
|
)
|
6,535
|
||||
|
Prepaid
expenses and other current assets
|
1,584
|
(6,358
|
)
|
||||
|
Accounts
payable, accrued expenses and other liabilities
|
(10,561
|
)
|
28,550
|
||||
|
Other
|
60
|
(584
|
)
|
||||
|
Net
cash provided by operating activities
|
$
|
28,927
|
$
|
92,692
|
|||
Our cash
from operations decreased from $92.7 million in the first nine months of 2008 to
$28.9 million in 2009. Higher net income achieved in the first nine
months of 2009 was more than offset by a decrease in accounts payable from the
high level in 2008, and a build in inventories due to higher pickle production
resulting from the strong 2009 cucumber crop, the closing of the Cambridge
facility and the forward purchase of certain commodities.
|
Nine
Months Ended September
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Cash
flows from investing activities:
|
||||||||
|
Additions
to property, plant and equipment
|
$
|
(30,877
|
)
|
$
|
(40,799
|
)
|
||
|
Insurance
proceeds
|
—
|
4,800
|
||||||
|
Other
|
35
|
1,408
|
||||||
|
Net
cash used in investing activities
|
$
|
(30,842
|
)
|
$
|
(34,591
|
)
|
||
In the
first nine months of 2009, cash used in investing activities decreased by $3.7
million compared to 2008. Capital additions were $30.9 million for
the first nine months of 2009, compared to $40.8 million in 2008 ($36.0 million
net of insurance proceeds) as the Company had several large projects that were
initiated in 2008 and completed in 2009, including the repair of our New
Hampton, Iowa facility which was damaged by fire in February
2008. Capital spending in 2009 included upgrades to our Pittsburgh
plant water and power systems, capacity expansion at our North East,
Pennsylvania facility, completion of the repair of our New Hampton, Iowa
facility, and routine upgrades and improvements to our other
plants.
We expect
capital spending programs to be approximately $37.2 million in
2009. Capital spending in the balance of 2009 will focus on
productivity improvements and routine equipment upgrades or replacements at all
of our facilities, which number 16 across the United States and
Canada.
|
Nine
Months Ended September 30,
|
|||||||
|
2009
|
2008
|
||||||
|
(In
thousands)
|
|||||||
|
Cash
flows from financing activities:
|
|||||||
|
Net
repayment of debt
|
$
|
(949
|
)
|
$
|
(69,460
|
)
|
|
|
Proceeds
from stock option exercises
|
3,405
|
3,965
|
|||||
|
Other
|
(264
|
)
|
325
|
||||
|
Net
cash provided by (used in) financing activities
|
$
|
2,192
|
$
|
(65,170
|
)
|
||
Net cash
used in financing activities changed from a $65.2 million use of funds in the
first nine months of 2008 to a $2.2 million source of funds in 2009, as cash
provided from operating activities (used to pay down debt) for the nine months
ended September 30, 2009 was $63.8 million less than in 2008. Cash
provided from operating activities was higher for the first nine months of 2008
as compared to 2009 in part due to management’s focus on working capital
management (specifically inventory and accounts payable) to drive incremental
cash flows to pay down debt. See cash flows from operating
activities.
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. We expect our revolving credit agreement, plus cash flow
from operations, to be adequate to provide liquidity for current
operations.
Debt
Obligations
At
September 30, 2009, we had $371.6 million in borrowings under our revolving
credit facility, senior notes of $100.0 million and $4.5 million of tax
increment financing and other obligations. In addition, at September
30, 2009, there were $8.8 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 $219.6 million was available at September 30, 2009. Interest
rates are tied to variable market rates which averaged 0.82% on debt outstanding
as of September 30, 2009. We are in compliance with the applicable
covenants as of September 30, 2009.
See Note
9 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
16 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 $18.5 million based on anticipated
debt levels and cash income taxes are expected to be approximately $19.6
million.
Recent
Accounting Pronouncements
Information
regarding recent accounting pronouncements is provided in Note 2 to the
Company’s Condensed Consolidated Financial Statements.
Critical
Accounting Policies
A
description of the Company’s critical accounting policies is contained in our
Annual Report on Form 10-K for the year ended December 31,
2008. There were no material changes to our critical accounting
policies in the nine months ended September 30, 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, our Annual Report on Form 10-K
for the year ended December 31, 2008 as well as in our Current Reports on Form
8-K.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rate Fluctuations
The
Company entered into a $200 million long term interest rate swap agreement with
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 interest rate market
risk, other than our interest rate swap agreement, as of September 30,
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 $371.6 million
under our revolving credit facility at September 30, 2009, and adjusting for the
$200 million fixed rate swap agreement, as of September 30, 2009, each 1% rise
in our interest rate would increase our interest expense by approximately $1.7
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. Other input costs such as metal
cans, lids and caps continue to rise even though 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. We expect the volatile nature of these
costs to continue, with an overall slightly upward trend.
The most
important raw material used in our pickle operations is cucumbers. We
purchase cucumbers under seasonal grower contracts with a variety of growers
strategically located to supply our production facilities. Bad
weather or disease in a particular growing area can damage or destroy the crop
in that area, which would impair crop yields. If we are not able to
buy cucumbers from local suppliers, we would likely either purchase cucumbers
from foreign sources, such as Mexico or India, or ship cucumbers from other
growing areas in the United States, thereby increasing our production
costs.
Changes
in the prices of our products may lag behind changes in the costs of our
materials. Competitive pressures also may limit our ability to
quickly raise prices in response to increased raw materials, packaging and fuel
costs. Accordingly, if we are unable to increase our prices to offset
increasing raw material, packaging and fuel costs, our operating profits and
margins could be materially adversely affected. In addition, in
instances of declining input costs, customers may be looking for price
reductions in situations where we have locked into pricing at higher
costs.
Fluctuations
in Foreign Currencies
The
Company is exposed to fluctuations in the value of our foreign currency
investment in E.D. Smith, located in Canada. Input costs for certain
Canadian sales are denominated in U.S. dollars, further impacting the effect
foreign currency fluctuations may have on the Company.
The
Company’s financial statements are presented in U.S. dollars, which require the
Canadian assets, liabilities, revenues, and expenses to be translated into U.S.
dollars at the applicable exchange rates. Accordingly, we are exposed
to volatility in the translation of foreign currency earnings due to
fluctuations in the value of the Canadian dollar, which may negatively impact
the Company’s results of operations and financial position. For the
nine months ended September 30, 2009, the Company recognized a foreign currency
exchange gain of approximately $32.2 million, of which $27.4 million was
recorded as a component of Accumulated other comprehensive loss and $4.8 million
was recorded on the Company’s Condensed Consolidated Statements of Income within
the Other (income) expense line. For the nine months ended September
30, 2008 the Company recognized a loss of approximately $16.9 million, of which
$13.2 million was recorded as a component of Accumulated other comprehensive
loss and $3.7 million was recorded on the Company’s Condensed Consolidated
Statements of Income within the Other (income) expense line.
The
Company enters into foreign currency contracts due to the exposure to
Canadian/U.S. dollar currency fluctuations on cross border
transactions. The Company does not apply hedge accounting to these
contracts and records them at fair value on the Condensed Consolidated Balance
Sheets, with changes in fair value being recorded through the Condensed
Consolidated Statements of Income, within Other (income) expense. In
May 2009, the Company entered into three foreign currency contracts for the
purchase of $5.0 million U.S. dollars. The contracts were entered
into for the purchase of U.S. dollar denominated raw materials by our Canadian
subsidiary. These contracts expired by the end of September
2009. Prior to these contracts, the Company had similar contracts
that had expired by December 31, 2008. For the three and nine months
ended September 30, 2009, the Company recorded a loss on these contracts
totaling approximately $0.4 million and $0.2 million,
respectively. For the three and nine months ended September 30, 2008,
the Company recorded a loss on these contracts totaling approximately $12.0
thousand and a gain of $32.0 thousand, respectively.
Item 4. Controls and Procedures
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 September 30, 2009, these
disclosure controls and procedures were effective.
There
have been no changes in our internal control over financial reporting during the
quarter ended September 30, 2009 that have materially affected, or are likely to
materially affect, the Company’s internal control over financial
reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
TreeHouse
Foods, Inc.
Westchester,
IL
We have
reviewed the accompanying condensed consolidated balance sheet of TreeHouse
Foods, Inc. and subsidiaries (the “Company”) as of September 30, 2009, and the
related condensed consolidated statements of income for the three and nine month
periods ended September 30, 2009 and 2008 and of cash flows for the nine month
periods ended September 30, 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
November
4, 2009
Part II — Other Information
Item 1. Legal Proceedings
We are
party to a variety of legal proceedings arising out of the conduct of our
business. While the results of proceedings cannot be predicted with
certainty, management believes that the final outcome of these proceedings will
not have a material adverse effect on our consolidated financial statements,
annual results of operations or cash flows.
Item 1A. Risk Factors
Information
regarding risk factors appears in Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Information Related to
Forward-Looking Statements, in Part I — Item 2 of this Form 10-Q and in
Part I — Item 1A of the TreeHouse Foods, Inc. Annual Report on Form 10-K for the
year ended December 31, 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.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security
Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
3.2
|
Form
of Amended and Restated By-laws of TreeHouse Foods,
Inc.
|
||
|
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
|
November
4, 2009
-33-