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THS > SEC Filings for THS > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for TREEHOUSE FOODS, INC.

Form 10-Q for TREEHOUSE FOODS, INC.


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

TreeHouse is a food manufacturer servicing primarily the retail grocery and foodservice distribution channels. Our products include non-dairy powdered creamers, private label canned soups, refrigerated and shelf stable salad dressings and sauces, powdered drink mixes, hot cereals, macaroni and cheese, skillet dinners, Mexican sauces, jams and pie fillings, pickles and related products, aseptic sauces, and liquid non-dairy creamer. TreeHouse believes it is the largest manufacturer of pickles and non-dairy powdered creamer in the United States and the largest manufacturer of private label salad dressings, powdered drink mixes and instant hot cereals in the United States and Canada based on sales volume.

The following discussion and analysis presents the factors that had a material effect on our results of operations for the three and nine months ended September 30, 2012 and 2011. Also discussed is our financial position as of the end of those periods. This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes to those Condensed Consolidated Financial Statements included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See "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 and direct operating income, which is gross profit less the cost of transporting products to customer locations (referred to in the tables below as "freight out"), commissions paid to independent sales brokers, and direct selling and marketing expenses.

Our current operations consist of the following:

Our North American Retail Grocery segment sells branded and private label products to customers within the United States and Canada. These products include non-dairy powdered creamers; condensed and ready to serve soups, broths and gravies; refrigerated and shelf stable salad dressings and sauces; pickles and related products; Mexican sauces; jams and pie fillings; aseptic products; liquid non-dairy creamer; powdered drinks; hot cereals; macaroni and cheese; and skillet dinners.

Our Food Away From Home segment sells non-dairy powdered creamers, pickle products, Mexican sauces, refrigerated dressings, aseptic products and hot cereals to foodservice customers, including restaurant chains and food distribution companies, within the United States and Canada.

Our Industrial and Export segment includes the Company's co-pack business and non-dairy powdered creamer sales to industrial customers for use in industrial applications, including products for repackaging in portion control packages and for use as ingredients by other food manufacturers; pickles; Mexican sauces; infant feeding products and refrigerated dressings. Export sales are primarily to industrial customers outside of North America.

The environment the Company operates in continues to be one that is challenged by the overall state of the economy, increased competition, and soft volumes. Also impacting the industry is continued volatility in energy and commodity prices. While energy and commodity costs trended lower earlier this year, they increased early in the quarter due in part to hot and dry weather, resulting in reduced expected production volumes of agricultural commodities, and thus increasing future input costs. However, as a result of our purchasing programs, the Company does not expect that these higher costs will impact a large portion of our input costs this year.

Throughout the year, and consistent with our peers, sales volume growth has been challenging. However, the Company has been able to achieve an increase in net sales on a year to date basis over the same period last year, due to price increases and additional sales from the Naturally Fresh acquisition, that were partially offset by a decrease in volumes and a change in sales mix. Additionally, the Company has continued to see a shift in sales to alternate retail channels, including dollar store, discount and limited assortment formats.


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Recent Developments

On August 7, 2012, following a strategic review of the soup category and its related business, the Company announced a restructuring plan that includes the closure of its Mendota, Illinois soup plant. Subsequently, the Company amended the plan to include reductions to the cost structure of the Pittsburgh, Pennsylvania facility by reorganizing and simplifying the soup business at the Pittsburgh facility. The restructuring will reduce manufacturing costs by streamlining the operations and moving production to the Company's Pittsburgh, Pennsylvania soup plant. Production at the Mendota facility was primarily related to the North American Retail Grocery segment and is expected to cease operations in the first quarter of 2013, with full plant closure occurring in the same quarter. Total restructuring costs are expected to be approximately $21.4 million. The total expected costs increased from $17.7 million, as previously reported, as a result of refined estimates. Components of the expected costs include non-cash accelerated depreciation of approximately $15.1 million, severance and outplacement costs of approximately $2.6 million, and other closure costs of approximately $3.7 million.

The Company will also close its salad dressing plant in Seaforth, Ontario, Canada and transfer production to facilities where the Company has lower production costs resulting from the recently completed capacity expansion. Production at the Seaforth, Ontario facility is expected to end in the second quarter of 2013, with full plant closure expected in the third quarter of 2013. Total costs to close the Seaforth facility are expected to be approximately $13.6 million. The total expected costs decreased from $17.3 million, as previously reported, as a result of refined estimates. Components of the charges include non-cash accelerated depreciation of approximately $7.1 million, severance of approximately $4.0 million, and other closure costs of approximately $2.5 million.

On June 6, 2012, the Company recalled 74,000 boxes of pasta mix products based on information from a supplier that it provided the Company with a seasoning blend that may potentially contain small metal fragments. There have been no reports of any injury or illness associated with the recalled products. The recall is not expected to impact the Company's relationship with its customers and is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

On April 13, 2012, the Company completed its acquisition of substantially all of the assets of Naturally Fresh, Inc. ("Naturally Fresh"), a privately owned Atlanta, Georgia based manufacturer of refrigerated dressings, sauces, marinades, dips and specialty items sold within each of our segments. Naturally Fresh has annual revenues of approximately $80 million. The Company paid a purchase price of approximately $26 million for the business, net of cash. The acquisition was financed through borrowings under the Company's revolving credit facility. The acquisition expanded the Company's refrigerated manufacturing and packaging capabilities, broaden its distribution footprint and further develop its presence within the growing category of fresh foods. Naturally Fresh's Atlanta facility, coupled with the Company's existing West Coast and Chicago based refrigerated food plants, will allow the Company to more efficiently service customers from coast to coast.

On January 10, 2012, the Company repaid its cross-border intercompany loans with its Canadian subsidiary, E.D. Smith. The repayment totaled $67.7 million and included both principal and interest. Payment was financed with borrowings under our revolving credit facility. The loans were fully repaid and canceled at the time of payment. The cash will be held by E.D. Smith in short term investments as cash and cash equivalents. We expect to use the cash for general corporate purposes in Canada, including capital projects and acquisitions. The cash relates to foreign earnings that, if repatriated, would result in a tax liability.


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Results of Operations

The following table presents certain information concerning our financial
results, including information presented as a percentage of net sales:



                                                                   Three Months Ended September 30,                                  Nine Months Ended September 30,
                                                                 2012                            2011                            2012                              2011
                                                        Dollars         Percent         Dollars         Percent          Dollars         Percent          Dollars          Percent
                                                                        (Dollars in thousands)                                           (Dollars in thousands)
Net sales                                             $   538,112          100.0 %    $   528,050          100.0 %    $   1,589,344         100.0 %    $   1,514,183          100.0 %
Cost of sales                                             424,903           79.0          402,518           76.2          1,254,612          78.9          1,158,285           76.5

Gross profit                                              113,209           21.0          125,532           23.8            334,732          21.1            355,898           23.5
Operating expenses:
Selling and distribution                                   32,546            6.0           34,932            6.6            100,698           6.3            106,750            7.0
General and administrative                                 27,929            5.2           27,376            5.2             77,237           4.9             87,221            5.7
Other operating expense, net                                3,541            0.7            1,733            0.3              3,952           0.2              5,731            0.4
Amortization expense                                        7,848            1.4            8,839            1.7             24,735           1.6             25,207            1.7

Total operating expenses                                   71,864           13.3           72,880           13.8            206,622          13.0            224,909           14.8

Operating income                                           41,345            7.7           52,652           10.0            128,110           8.1            130,989            8.7
Other expenses (income):
Interest expense, net                                      12,760            2.4           12,610            2.4             38,410           2.4             39,931            2.6
Loss (gain) on foreign currency exchange                      237            0.0           (5,620 )         (1.0 )              643           0.1             (5,065 )         (0.3 )
Other (income) expense, net                                  (614 )         (0.1 )            547            0.1                895           0.1               (170 )            -

Total other expense                                        12,383            2.3            7,537            1.5             39,948           2.6             34,696            2.3

Income before income taxes                                 28,962            5.4           45,115            8.5             88,162           5.5             96,293            6.4
Income taxes                                                7,408            1.4           14,725            2.7             25,023           1.5             31,750            2.1

Net income                                            $    21,554            4.0 %    $    30,390            5.8 %    $      63,139           4.0 %    $      64,543            4.3 %


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Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Net Sales - Third quarter net sales increased 1.9% to $538.1 million in 2012 compared to $528.1 million in the third quarter of 2011. The increase is primarily driven by increases in pricing needed to offset higher input costs, and the acquisition of Naturally Fresh. Net sales by segment are shown in the following table:

                                                       Three Months Ended September 30,
                                                                          $ Increase/        % Increase/
                                         2012              2011            (Decrease)        (Decrease)
                                                            (Dollars in thousands)
North American Retail Grocery         $   384,663     $       369,547     $     15,116                4.1 %
Food Away From Home                        89,827              79,454           10,373               13.1
Industrial and Export                      63,622              79,049          (15,427 )            (19.5 )

Total                                 $   538,112     $       528,050     $     10,062                1.9 %

Cost of Sales - All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 79.0% in the third quarter of 2012 compared to 76.2% in 2011. Contributing to the increase in cost of sales as a percent of net sales, is an increase in input and operating costs, as the underlying commodity costs of raw materials and packaging supplies continues to trend higher in 2012. Also contributing to the increase in cost of sales is accelerated depreciation associated with the soup restructuring and Seaforth closure.

Operating Expenses - Total operating expenses were $71.9 million in the third quarter of 2012 compared to $72.9 million in 2011. The decrease in 2012 resulted from the following:

Selling and distribution expenses decreased $2.4 million or 6.8% in the third quarter of 2012 compared to 2011. This decrease was primarily due to decreased distribution and delivery costs resulting from lower freight rates and volumes, along with efficiencies resulting from last year's warehouse consolidation program. The decrease was partially offset by the acquisition of Naturally Fresh.

General and administrative expenses increased by $0.6 million in the third quarter of 2012 compared to 2011. This is primarily related to the acquisition of Naturally Fresh.

Other operating expense in the third quarter of 2012 was $3.5 million compared to expense of $1.7 million in 2011. The increase was primarily due to the soup restructuring and Seaforth closure.

Amortization expense decreased $1.0 million in the third quarter of 2012 compared to 2011, due primarily to the full amortization of several assets and projects.

Interest Expense - Interest expense increased slightly to $12.8 million in the third quarter of 2012, compared to $12.6 million in 2011.

Foreign Currency - The Company's foreign currency impact was a $0.2 million loss for the third quarter of 2012 compared to a gain of $5.6 million in 2011, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar.

Other Expense (Income) - Other income was $0.6 million for the third quarter of 2012 compared to expense of $0.5 million in 2011, primarily due to mark to market gains on commodity contracts.

Income Taxes - Income tax expense was recorded at an effective rate of 25.6% in the third quarter of 2012 compared to 32.6% in the prior year's quarter. The decrease in the effective tax rate for the three months ended September 30, 2012 as compared to 2011 is attributable to the tax impact of the repayment of certain intercompany debt, a decrease in the Canadian statutory tax rate, and a decrease in state tax expense.


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Three Months Ended September 30, 2012 Compared to Three Months Ended
September 30, 2011 - Results by Segment

North American Retail Grocery -



                                              Three Months Ended September 30,
                                           2012                             2011
                                   Dollars         Percent          Dollars         Percent
                                                   (Dollars in thousands)
 Net sales                      $     384,663         100.0 %    $     369,547         100.0 %
 Cost of sales                        299,636          77.9            278,668          75.4

 Gross profit                          85,027          22.1             90,879          24.6
 Freight out and commissions           16,617           4.3             18,359           5.0
 Direct selling and marketing           8,079           2.1              7,814           2.1

 Direct operating income        $      60,331          15.7 %    $      64,706          17.5 %

Net sales in the North American Retail Grocery segment increased by $15.1 million, or 4.1% in the third quarter of 2012 compared to 2011. The change in net sales from 2011 to 2012 was due to the following:

                                        Dollars          Percent
                                        (Dollars in thousands)
                   2011 Net sales     $    369,547
                   Volume/mix               (2,055 )         (0.6 )%
                   Pricing                   9,272            2.5
                   Acquisition               8,804            2.4
                   Foreign currency           (905 )         (0.2 )

                   2012 Net sales     $    384,663            4.1 %

The increase in net sales from 2011 to 2012 resulted primarily from price increases and the acquisition of Naturally Fresh. During the third quarter, the Company experienced volume losses primarily in the non-dairy creamer, dressings, jams and powdered drinks categories, partially offset by volume increases in pasta sauces and hot cereals.

Cost of sales as a percentage of net sales increased from 75.4% in the third quarter of 2011 to 77.9% in 2012 primarily due to a shift in sales mix and inflationary pressures. Also contributing to the increase were higher ingredient and packaging costs, partially offset by price increases.

Freight out and commissions paid to independent sales brokers were $16.6 million in the third quarter of 2012 compared to $18.4 million in 2011, a decrease of 9.5%, primarily due to lower freight rates and efficiencies resulting from last year's warehouse consolidation program.

Direct selling and marketing expenses were $8.1 million in the third quarter of 2012 and $7.8 million in 2011.


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Food Away From Home -



                                                         Three Months Ended September 30,
                                                    2012                               2011
                                           Dollars         Percent           Dollars           Percent
                                                              (Dollars in thousands)
Net sales                                $     89,827          100.0 %    $       79,454            100.0 %
Cost of sales                                  71,843           80.0              61,476             77.4

Gross profit                                   17,984           20.0              17,978             22.6
Freight out and commissions                     3,408            3.8               2,851              3.6
Direct selling and marketing                    2,008            2.2               1,572              1.9

Direct operating income                  $     12,568           14.0 %    $       13,555             17.1 %

Net sales in the Food Away From Home segment increased by $10.4 million, or 13.1%, in the third quarter of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

                                       Dollars          Percent
                                        (Dollars in thousands)
                  2011 Net sales     $     79,454
                  Volume/mix               (3,649 )          (4.6 )%
                  Pricing                   2,908             3.7
                  Acquisition              11,275            14.2
                  Foreign currency           (161 )          (0.2 )

                  2012 Net sales     $     89,827            13.1 %

Net sales increased during the third quarter of 2012 compared to 2011 primarily due to the acquisition of Naturally Fresh and increased pricing. Volume in this segment was down from prior year, primarily in the aseptic category.

Cost of sales as a percentage of net sales increased from 77.4% in the third quarter of 2011 to 80.0% in 2012 due to higher operating, ingredient and packaging costs, partially offset by pricing. The increase is also due to the effect of lower than average margin contribution from the Naturally Fresh acquisition.

Freight out and commissions paid to independent sales brokers were $3.4 million in the third quarter of 2012 compared to $2.9 million in 2011, an increase of $0.5 million, primarily due to the acquisition of Naturally Fresh. Freight costs did not decrease for Food Away From Home as they did for the North American Retail Grocery segment, as most customers pick up their products.

Direct selling and marketing was $2.0 million in the third quarter of 2012 and $1.6 million in 2011. The increase was primarily due to the acquisition of Naturally Fresh.


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Industrial and Export -



                                              Three Months Ended September 30,
                                           2012                             2011
                                  Dollars         Percent          Dollars         Percent
                                                   (Dollars in thousands)
 Net sales                      $     63,622          100.0 %    $     79,049          100.0 %
 Cost of sales                        50,802           79.8            62,374           78.9

 Gross profit                         12,820           20.2            16,675           21.1
 Freight out and commissions           1,320            2.1             2,659            3.4
 Direct selling and marketing            303            0.5               505            0.6

 Direct operating income        $     11,197           17.6 %    $     13,511           17.1 %

Net sales in the Industrial and Export segment decreased $15.4 million or 19.5% in the third quarter of 2012 compared to the prior year. The change in net sales from 2011 to 2012 was due to the following:

                                        Dollars          Percent
                                        (Dollars in thousands)
                  2011 Net sales     $       79,049
                  Volume/mix                (16,581 )       (21.0 )%
                  Pricing                       163           0.2
                  Acquisition                 1,010           1.3
                  Foreign currency              (19 )          -

                  2012 Net sales     $       63,622         (19.5 )%

The decrease in net sales is primarily due to volume decreases in the non-dairy creamer, soup, and infant feed categories, partially offset by increased volumes in Mexican sauces. Prior year sales included certain non-dairy creamer export volume that was opportunistic and did not repeat this year.

Cost of sales as a percentage of net sales increased from 78.9% in the third quarter of 2011 to 79.8% in 2012 primarily due to a shift in sales mix.

Freight out and commissions paid to independent sales brokers were $1.3 million in the third quarter of 2012 and $2.7 million 2011. This decrease was primarily due to sales mix and lower volumes that resulted in lower freight costs and commissions.

Direct selling and marketing was $0.3 million in the third quarter of 2012 and $0.5 million in 2011.

Nine months ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Net Sales - Net sales increased 5.0% to $1,589.3 million in the first nine months of 2012 compared to $1,514.2 million in the first nine months of 2011. The increase is primarily driven by increases in pricing needed to offset higher input costs and the acquisition of Naturally Fresh. Net sales by segment are shown in the following table:

                                                        Nine Months Ended September 30,
                                                                          $ Increase/        % Increase/
                                          2012              2011           (Decrease)        (Decrease)
                                                            (Dollars in thousands)
North American Retail Grocery         $   1,135,204     $   1,073,874     $     61,330                5.7 %
Food Away From Home                         253,061           232,857           20,204                8.7
Industrial and Export                       201,079           207,452           (6,373 )             (3.1 )

Total                                 $   1,589,344     $   1,514,183     $     75,161                5.0 %


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Cost of Sales - All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to distribution centers. Cost of sales as a percentage of net sales was 78.9% in the first nine months of 2012 compared to 76.5% in 2011. Contributing to the increase in cost of sales, as a percent of net sales, was an increase in input and operating costs. The underlying commodity cost of most raw materials and packaging supplies continues to trend higher in 2012.

Operating Expenses - Total operating expenses were $206.6 million during the first nine months of 2012 compared to $224.9 million in 2011. The decrease in 2012 resulted from the following:

Selling and distribution expenses decreased $6.1 million or 5.7% in the first . . .

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