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(Address
of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (i708) i483-1300
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value
iTHS
iNew
York Stock Exchange
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. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Preferred
stock, par value $ii0.01/ per share,
ii10.0/ shares authorized, iinone/
issued
i—
i—
Common
stock, par value $ii0.01/ per share, ii90.0/
shares authorized, i56.1 and i55.8 shares outstanding as of September 30, 2022 and December 31, 2021, respectively
i0.6
i0.6
Treasury
stock
(i133.3)
(i133.3)
Additional
paid-in capital
i2,200.5
i2,187.4
Accumulated
deficit
(i278.6)
(i155.7)
Accumulated
other comprehensive loss
(i74.2)
(i53.6)
Total
stockholders' equity
i1,715.0
i1,845.4
Total
liabilities and stockholders' equity
$
i5,188.1
$
i5,207.8
See
Notes to Condensed Consolidated Financial Statements.
The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. and its consolidated subsidiaries (the "Company,""TreeHouse,""we,""us," or "our"), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") 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 accounting principles generally accepted in the United States of America ("GAAP") 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, 2021. Results of operations for interim periods are not necessarily indicative of annual results.
i
Use of Estimates
The preparation of our Condensed Consolidated Financial Statements
in conformity with GAAP requires management to use judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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.
Summary of Significant Accounting Policies
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, 2021.
iDiscontinued
Operations
On October 3, 2022, the Company completed the sale of a significant portion of the Company’s Meal Preparation business, including pasta, pourable and spoonable dressing, preserves, red sauces, syrup, dry blends and baking, dry dinners, pie filling, pita chips and other sauces, for a base purchase price of $i950 million
(the "Transaction" or the "Business"), subject to certain adjustments pursuant to the terms of the Stock Purchase Agreement, dated as of August 10, 2022. This Transaction is in line with the Company’s strategy to build leadership and depth around a focused group of categories in its higher-growth businesses. Beginning in the third quarter of 2022, the Business met the criteria for discontinued operations presentation, and, as such, has been excluded from continuing operations for all periods presented. Refer to Note 7 for additional information.
iSegment
Information
As a result of entering into the Transaction, the Company changed the structure of its internal organization and reporting in the third quarter of 2022 and began operating as ione segment. The Company manages operations on a company-wide basis, thereby making determinations as to the allocation of resources as ione
segment. We manufacture and distribute private label food and beverages in North America. Our products are primarily shelf stable and share similar customers and distribution. The Chief Executive Officer, who has been identified as our Chief Operating Decision Maker ("CODM") allocates resources and assesses performance based upon discrete financial information at the consolidated level. We have ione segment manager who reports directly to the CODM with incentive compensation based on aggregated consolidated results of the
Company. The annual operating plan is prepared and approved by the CODM based on consolidated results of the Company. We operate our business with a centralized financial systems infrastructure, and we share centralized resources for sales, procurement, and general and administrative activities. The majority of our manufacturing plants each produce one food or beverage category. Refer to Note 20 for disaggregation of revenue for additional information of our principal products sold.
/
9
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
2. RECENT ACCOUNTING PRONOUNCEMENTS
i
Adopted
In
March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. ASU 2020-04 was further amended in January 2021 by ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This guidance provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships, and the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective as
of March 12, 2020 through December 31, 2022 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company has identified agreements that reference LIBOR, including interest rate swap agreements, accounts receivable sale agreements, and debt agreements. The new guidance has been or will be applied as these contracts are modified to reference other rates. The Company adopted
this guidance during the second quarter of 2022 as a result of a modification to a receivable sale agreement. The adoption did not have a material impact on the Company's financial statements.
/
i
3.
GROWTH, REINVESTMENT, AND RESTRUCTURING PROGRAMS
The Company’s growth, reinvestment, and restructuring activities are part of an enterprise-wide transformation to build long-term sustainable growth and improve profitability for the Company. These activities are aggregated into the following categories: (1) Strategic Growth Initiatives (expected completion in 2023) – a growth and reinvestment strategy and (2) other (collectively the "Growth, Reinvestment, and Restructuring Programs").
Below is a description of each of the Growth, Reinvestment, and Restructuring Programs:
(1) Strategic Growth Initiatives
In
the first quarter of 2021, the Company began executing on its growth and reinvestment initiatives designed to invest in our commercial organization, adapt the supply chain to better support long-term growth opportunities, and further enable the Company to build greater depth in growth categories. These initiatives are intended to better position the Company to accelerate future revenue and earnings growth, and improve the execution of our strategy to be our customers' preferred manufacturing and distribution partner. This reinvestment will occur through 2023, and the cumulative costs incurred to date are $i91.1
million. The Company currently expects the total costs will be up to $i130.0 million, comprised of consulting and professional fees, employee-related costs, and investment in information technology. Consulting and professional fees are expected to include building digital capabilities and advancing automation and value engineering in our supply chain network. Employee-related costs primarily consist of severance, retention, and dedicated employee costs.
(2)
Other
Other costs include restructuring costs incurred for retention, severance, organization redesign, information technology system implementation, costs to exit facilities or production, and other administrative costs. Retention includes one-time cash recognition payments that were expensed ratably from the fourth quarter of 2021 to the first quarter of 2022 as well as additional cash bonuses and stock-based compensation to drive retention through 2023.
i
The costs by activity
for the Growth, Reinvestment, and Restructuring Programs are outlined below:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As part of our growth, reinvestment, and restructuring programs, we generally incur expenses that qualify as exit and disposal costs under U.S. GAAP. These include severance and employee separation costs and other exit costs. Severance and employee separation costs primarily relate to cash severance, non-cash severance, including accelerated equity award compensation expense, pension, and other termination benefits. Other exit costs typically relate to lease and contract terminations. We also incur expenses that are an integral component of, and directly attributable to, our growth, reinvestment, and restructuring activities, which do not qualify as exit and disposal costs under U.S. GAAP. These include asset-related
costs and other costs. Asset-related costs primarily relate to accelerated depreciation and certain long-lived asset impairments. Other costs primarily relate to start-up costs of new facilities, consulting and professional fees, information technology implementation, asset relocation costs, and costs to exit facilities.
i
Below is a summary of costs by type associated with the Growth, Reinvestment, and Restructuring Programs:
For
the three and nine months ended September 30, 2022 and 2021, employee-related costs primarily consisted of retention, severance, and dedicated project employee cost; and other costs primarily consisted of consulting services. Employee-related and other costs are recognized in Other operating expense, net of the Condensed Consolidated Statements of Operations.
i
The table below presents the exit cost liabilities related to severance and
retention activity for the Growth, Reinvestment, and Restructuring Programs as of September 30, 2022. All amounts in the table below include continuing and discontinued operations:
The
severance and retention liabilities are included in Accrued expenses in the Condensed Consolidated Balance Sheets.
11
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ii
4.
LEASES
The Company has operating and finance leases for manufacturing facilities, warehouses and distribution centers, office space, and certain equipment. Remaining lease terms for these leases range from i1 year to i11
years. Some of the Company's leases include options to extend the leases for up to i26 years, and some include options to terminate the leases within i1
year.
i
Supplemental balance sheet information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i27.8
$
i27.6
Financing
cash flows from finance leases
i1.0
i1.3
/
13
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
5. RECEIVABLES SALES PROGRAM
The Company has entered into agreements to sell certain trade accounts receivable to unrelated, third-party financial institutions at a discount (collectively, "the Receivables Sales Program"). The agreements can be terminated by either party with i60
days' notice. The Receivables Sales Program is used by the Company to manage liquidity in a cost-effective manner. The Company has ino retained interest in the receivables sold under the Receivables Sales Program; however, under the agreements, the
Company does have collection and administrative responsibilities for the sold receivables. Under the Receivables Sales Program, the maximum amount of outstanding accounts receivables sold at any time is $i500.0 million.
i
The
following table includes the outstanding amount of accounts receivable sold under the Receivables Sales Program and the receivables collected from customers and not remitted to the financial institutions. All amounts in the table below include continuing and discontinued operations:
Receivables
collected and not remitted to financial institutions
i216.4
i205.0
/
Receivables
sold under the Receivables Sales Program are derecognized from the Company's Condensed Consolidated Balance Sheet at the time of the sale and the proceeds from such sales are reflected as a component of the change in receivables in the operating activities section of the Condensed Consolidated Statements of Cash Flows. The receivables collected and not remitted to financial institutions are included in Accounts payable in the Condensed Consolidated Balance Sheets.
The following table summarizes the cash flows of the Company's accounts receivables associated with the Receivables Sales Program. All amounts in the table below include continuing and discontinued operations:
Receivables
collected and remitted to financial institutions
(i1,761.6)
(i1,316.3)
The
loss on sale of receivables from continuing operations represents the discount taken by third-party financial institutions and was $i2.0 million and $i0.5
million for the three months ended September 30, 2022 and 2021, respectively, and $i3.3 million and $i1.2
million for the nine months ended September 30, 2022 and 2021, respectively, and is included in Other income, net in the Condensed Consolidated Statements of Operations. The Company has not recognized any servicing assets or liabilities as of September 30, 2022 or December 31, 2021, as the fair value of the servicing arrangement as well as the fees earned were not material to the financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
7. DISCONTINUED OPERATIONS
Sale of a Significant Portion of the Meal Preparation Business
On August 10, 2022, the
Company, entered into a Stock Purchase Agreement (the "Purchase Agreement") with two entities affiliated with Investindustrial: Rushmore Investment III LLC, a Delaware limited liability company ("US Buyer") and 1373978 B.C., ULC, a British Columbia unlimited liability company ("CA Buyer" and together with US Buyer, the "Buyer"). On October 3, 2022, the Company completed the sale of a significant portion of the Company’s Meal Preparation business (the "Business") for a base purchase price of $i950.0 million,
subject to certain adjustments pursuant to the terms of the Purchase Agreement. The purchase price consists of approximately $i527.5 million in cash and approximately $i422.5 million
in a ifive-year secured seller promissory note issued by Rushmore Investment III LLC in favor of the Company and certain of its subsidiaries. The sale of the Business is in line with the Company’s strategy to build leadership and depth around a focused group of categories in its higher-growth businesses.
In October 2022, the Company used the majority of its cash proceeds of the sale to pay down debt.
The Business consists of consumer packaged food manufacturers operating i14 manufacturing facilities in the United States, Canada, and Italy servicing primarily retail grocery customers. The Business includes i11
categories and sells center of the store grocery and main course meal items, such as pasta, pourable dressings, sauces, red sauces (salsas and pasta sauces), spoonables (mayos and dips), syrups, preserves, dry dinners (macaroni and cheese), dry blends and baking goods, and pie filling as well as pita chips, which was previously reported in the Snacking & Beverages segment.
The Company entered into a Transition Services Agreement ("TSA") with the Buyer, which is designed to ensure and facilitate an orderly transfer of business operations. The services provided under the TSA include, but are not limited to, IT systems implementation, IT and financial shared services, procurement and order processing, customer service, distribution network separation, and a supply agreement. These services terminate at various times
up to itwenty-four months from the date of sale and certain services can be renewed with a maximum of an additional itwelve-month period. Additionally, a $i35.0 million
credit will be provided to the Buyer by TreeHouse to cover initial TSA set-up costs that otherwise would have been incurred by the Buyer ("TSA Credit"). The TSA Credit is included in the fair value of consideration transferred, and it represents deferred income for TreeHouse until the Company incurs the related TSA set-up costs, at which point deferred income will be reduced and TSA income recognized.
The Company has classified the assets and liabilities related to the Business as held for sale in its Condensed Consolidated Balance Sheets as of September 30, 2022. The disposal group of the Business was tested for recoverability as of the balance sheet date, and the
Company recognized an expected loss on disposal of $i73.8 million during the three and nine months ended September 30, 2022, as the fair value was determined to be less than the carrying value of the associated assets, including the related goodwill. The fair value for the secured seller promissory note was estimated at par value as of September
30, 2022, and the valuation will be completed in the fourth quarter of 2022. The expected loss on disposal is recognized within Net (loss) income from discontinued operations in the Condensed Consolidated Statements of Operations.
Ready-to-eat Cereal
On June 1, 2021, the Company simultaneously entered into a definitive agreement and completed the sale of its Ready-to-eat ("RTE") Cereal business to Post Holdings, Inc. ("Post") for a base purchase price of $i85.0
million, subject to customary purchase price adjustments, resulting in cash proceeds at closing of $i88.0 million. The Company classified the proceeds within Net cash (used in) provided by investing activities - discontinued operations, and a pre-tax gain was recognized on the transaction upon closing of $i18.4 million
as a component of Net (loss) income from discontinued operations in the Condensed Consolidated Statements of Operations. The sale of this business was part of the Company's portfolio optimization strategy. RTE Cereal operated as itwo manufacturing plants located in Lancaster, Ohio and Sparks, Nevada.
The
Company entered into a Transition Services Agreement ("RTE TSA") with Post, which is designed to ensure and facilitate an orderly transfer of business operations. The services provided under the RTE TSA terminate at various times up to itwelve months from the date of sale and certain services were renewed with a maximum of an additional isix-month
period expected to end in the fourth quarter of 2022. The income received under the RTE TSA was not material for the three and nine months ended September 30, 2022 or 2021 and is primarily classified within General and administrative expenses or Cost of sales in the Company's Condensed Consolidated Statements of Operations depending on the functions being supported by the Company.
/
15
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has reflected both of these transactions as a discontinued operation. Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company's continuing operations.
i
Results
of discontinued operations are as follows:
Selling,
general, administrative and other operating expenses
i41.9
i31.0
i117.0
i95.6
Amortization
expense
i2.0
i6.3
i14.5
i19.1
Loss
(gain) on sale of business
i73.8
i—
i73.8
(i18.4)
Operating
income from discontinued operations
(i63.4)
i16.8
(i43.8)
i95.4
Interest
and other expense
i11.4
i4.1
i18.3
i8.9
Income
tax (benefit) expense
i0.6
i1.9
i4.6
i19.8
Net
(loss) income from discontinued operations
$
(i75.4)
$
i10.8
$
(i66.7)
$
i66.7
Assets
and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 include the following:
Depreciation
expense was $i23.2 million and $i25.5 million for the three months ended September 30, 2022 and 2021 and $i71.2
million and $i76.9 million for the nine months ended September 30, 2022 and 2021, respectively.
/
i
9.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
As a result of the changes in organizational structure completed in the third quarter of 2022, the Company now has ione reportable segment. See Note 1 for more information regarding the change in segment structure during the third quarter of 2022. See Note 7 for more information regarding Goodwill of $i356.0
million reclassified within Assets of discontinued operations in the Condensed Consolidated Balance Sheets as of September 30, 2022 as a result of the sale of a significant portion of the Meal Preparation business.
i
Changes in the carrying amount of goodwill for the nine months ended September 30, 2022 are as follows:
Income taxes were recognized at effective rates of (i15.3)% and i7.9%
for the three and nine months ended September 30, 2022, respectively, compared to i8.9% and i23.0% for the three
and nine months ended September 30, 2021, respectively. The change in the Company's effective tax rate for the three months ended September 30, 2022 compared to 2021 is primarily driven by a change in the valuation allowance recorded against certain deferred tax assets, tax expense recognized in 2022 due to the restructuring of certain Canadian subsidiaries, and tax expense recognized in 2021 due to the enactment of the "Coronavirus Aid, Relief, and Economic Security Act" (the "CARES Act"). The change in the Company's effective tax rate for the nine months ended September
30, 2022 compared to 2021 is primarily driven by a change in the valuation allowance recorded against certain deferred tax assets, tax expense recognized in 2021 due to the enactment of the CARES Act, and a change in the amount of non-deductible executive compensation. Our effective tax rate may change from period to period based on recurring and non-recurring factors, including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.
/
18
TREEHOUSE FOODS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $i0.6 million within the next 12 months, primarily as a result of the resolution of audits currently in progress and the lapsing of statutes of limitations. Approximately $i0.3
million of the $i0.6 million could affect net income when settled. The timing of cash settlement, if any, cannot be reasonably estimated for uncertain tax benefits.
On February 14, 2022, the Company entered into Amendment No. 4 to the Credit Agreement. Amendment No. 4 temporarily increases the leverage covenant threshold from i4.50x to i5.50x
through June 30, 2022, then i5.25x through September 30, 2022 and thereafter reverts to i4.50x.
The material terms and conditions under the Credit Agreement are otherwise substantially consistent with those contained in the Credit Agreement prior to Amendment No. 4.
On August 10, 2022, the Company entered into Amendment No. 5 to the Credit Agreement. Under Amendment No. 5, among other things, the parties have agreed to: (i) amend the definition of "Consolidated EBITDA", (ii) allow the Borrower to make Investments pursuant to a credit facility in principal amount not to exceed $i50.0
million provided by the Borrower or any guarantors under the Credit Agreement to any Person that comprises or owns, directly or indirectly, any business unit disposed of by the Borrower or any such guarantors; and (iii) allow the Borrower to consummate the Transaction for consideration of at least i65% cash or cash equivalents. The material terms and conditions under the Credit Agreement are otherwise substantially consistent with those contained in the Credit Agreement prior to Amendment No. 5.
The
Company's average interest rate on debt outstanding under its Credit Agreement for the three months ended September 30, 2022 was i4.10%. Including the impact of interest rate swap agreements in effect as of September 30, 2022, the average rate is i4.54%.
Revolving
Credit Facility — As of September 30, 2022, $i714.2 million of the aggregate commitment of $i750.0
million of the Revolving Credit Facility was available. Under the Credit Agreement, the Revolving Credit Facility matures on March 26, 2026. In addition, as of September 30, 2022, there were $i35.8 million in letters of credit under the Revolving Credit Facility that were issued but undrawn, which have been included as a reduction to the calculation of available credit. In October 2022, the
Company reduced the revolving credit commitment from $i750.0 million to an aggregate amount of $i500.0 million.
Term
Loan A and Term Loan A-1 — In October 2022, the Company paid down debt of $i500.0 million which consisted of $i174.8 million
on Term Loan A and $i325.2 million on Term Loan A-1. The cash used to pay down the term loans was from the net proceeds of the divestiture of a significant portion of the Meal Preparation business.
Loss on Extinguishment of Debt — During the first quarter of 2021, the Company incurred a loss on extinguishment of debt totaling $i14.4 million,
which included a premium of $i9.0 million and a write off of deferred financing costs of $i5.4 million in connection with the redemption
of its 2024 Notes completed on March 31, 2021 and Credit Agreement refinancing executed on March 26, 2021.
/
19
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value —At September 30, 2022, the aggregate fair value of the
Company's total debt was $i1,782.3 million and its carrying value was $i1,905.0 million. At December 31, 2021, the aggregate fair value of the
Company's total debt was $i1,899.5 million and its carrying value was $i1,919.3 million. The fair values of Term Loan A and Term Loan A-1 were estimated using present value techniques and market-based interest rates
and credit spreads. The fair value of the Company's 2028 Notes was estimated based on quoted market prices for similar instruments due to their infrequent trading volume. Accordingly, the fair value of the Company's debt is classified as Level 2 within the valuation hierarchy.
i
13. EARNINGS PER SHARE
i
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 (loss) per share:
Weighted
average diluted common shares outstanding
i56.1
i55.8
i56.0
i55.9
(1)For
the three and nine months ended September 30, 2022 and 2021, the weighted average common shares outstanding is the same for the computations of both basic and diluted shares outstanding because the Company had a net loss from continuing operations for the period. Equity awards, excluded from our computation of diluted earnings per share because they were anti-dilutive, were i1.6
million and i1.4 million for the three and nine months ended September 30, 2022, respectively, and i1.7
million and i1.5 million for the three and nine months ended September 30, 2021, respectively.
//
i
14.
STOCK-BASED COMPENSATION
The Board of Directors adopted, and the Company's stockholders approved, the "TreeHouse Foods, Inc. Equity and Incentive Plan" (the "Plan"). Under the Plan, the Compensation Committee may grant awards of various types of compensation, including stock options, restricted stock, restricted stock units, performance shares, performance units, other types of stock-based awards, and other cash-based compensation. The maximum number of shares authorized to be awarded under the Plan is approximately i17.5
million.
i
Total compensation expense related to stock-based payments and the related income tax benefit recognized in Net loss from continuing operations are as follows:
Compensation expense related to stock-based payments
$
i6.1
$
i1.4
$
i15.2
$
i10.1
Related
income tax benefit
i1.5
i0.3
i3.6
i2.5
/
All
amounts below include continuing and discontinued operations.
/
20
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Options — The following table summarizes stock option activity during the nine months ended September 30, 2022. Stock options granted under the plan have a ithree
year vesting schedule, vest one-third on the second anniversary of the grant date and two-thirds on the third anniversary of the grant date, and expire iten years from the grant date. iStock
options are generally only granted to employees and non-employee directors.
Employee Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
(years)
Unrecognized
compensation costs related to nonvested options totaled $i4.7 million at September 30, 2022 and are expected to be recognized over a weighted average period of i2.6
years. The weighted average grant date fair value of options granted in 2022 was $i15.62.
Stock options are valued using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of the Company’s stock price. The risk-free
rate for periods within the contractual life of the stock options is based on the U.S. Treasury yield curve in effect at the time of the grant. We based our expected term on the simplified method as described under the SEC Staff Accounting Bulletin No. 107. iThe weighted average assumptions used to calculate the value of the stock option awards granted are presented as follows:
Restricted Stock Units — Employee restricted stock unit awards generally vest based on the passage of time in approximately ithree
equal installments on each of the first three anniversaries of the grant date with the following exceptions:
•On June 9, 2022, restricted stock unit awards were granted that vest on the passage of time on the ieighteen month anniversary of the grant date. The fair value of the awards was $i37.90
on approximately i62,000 units granted.
•On December 29, 2021, restricted stock unit awards granted to certain executive members of management that vest on the passage of time in approximately ithree
equal installments on each of the ithreeisix
month anniversaries of the grant date. The fair value of the awards was $i40.03 on approximately i51,200
units granted.
Director restricted stock units generally vest on the first anniversary of the grant date. Certain directors have elected to defer receipt of their awards until either their departure from the Board of Directors or a specified date beyond the first anniversary of the grant date.
21
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
The
following table summarizes the restricted stock unit activity during the nine months ended September 30, 2022:
Tax
benefit recognized from vested restricted stock units
i0.1
i0.5
i1.6
i3.7
/
Unrecognized
compensation costs related to nonvested restricted stock units are approximately $i24.4 million as of September 30, 2022 and will be recognized over a weighted average period of i1.9
years. The grant date fair value of the awards is equal to the Company's closing stock price on the grant date.
Performance Units — Performance unit awards are granted to certain members of management. These awards contain both service and performance conditions, and for certain executive members of management, a market condition, in each case as described below.
•For awards granted in years prior to 2020, for each year of the ithree-year
performance period, one-third of the units will accrue, multiplied by a predefined percentage generally between i0% and i200%, depending on the achievement of certain operating performance measures.
Accrued shares are not earned until the end of the full ithree-year performance period.
•For performance unit awards granted in 2020 through 2022, performance goals are set and measured annually with one-quarter of the units eligible to accrue for each year in the ithree-year
performance period. Accrued shares are earned at the end of each performance period but remain subject to forfeiture until the third anniversary of the grant date. Additionally, for the cumulative ithree-year performance period, one-quarter of the units will accrue. For both the annual and cumulative shares, the earned shares are equal to the number of units granted multiplied by a predefined percentage generally between i0%
and i200%, depending on the achievement of certain operating performance measures.
•In 2022 and 2021, certain executive members of management received awards that were measured using a relative total shareholder return ("TSR") market condition over a ithree-year
performance period instead of a cumulative ithree-year performance goal. The units will accrue, multiplied by a predefined percentage between i0%
and i150% for the relative TSR measure, depending on the achievement attainment over the ithree-year
performance period based on the Company’s absolute annualized TSR relative to the annualized TSR of a Peer Group. The fair value of the portion of the awards based on relative TSR was valued using a Monte Carlo simulation model with a grant-date fair value of $i26.84 on approximately i52,600
units granted in 2022 and a grant-date fair value of $i59.16 on approximately i23,200
units granted in 2021.
22
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
•During the second quarter of 2022, the Company made grants to certain of the Company’s named executive officers and certain other executive officers of performance-based restricted stock units (the "PBRSU Awards"). The PBRSU Awards include a relative TSR market condition over a itwo-year
performance period beginning on the date of grant. The units will accrue, multiplied by a predefined percentage between i0% to i450%
for the relative TSR measure, depending on the achievement attainment over the itwo-year performance period based on Company’s absolute annualized TSR relative to the annualized TSR of the S&P Food & Beverage Select Industry Index (the "Index"). The fair value of the awards was valued using a Monte Carlo simulation model with a weighted average grant-date fair value of $i58.36
on approximately i239,300 units granted in 2022.
These awards will be converted to stock or cash, at the discretion of the Compensation Committee, generally, on the third anniversary of the grant date with the exception of the PBRSU Awards on the second anniversary. The
Company intends to settle these awards in stock and has the shares available to do so.
Performance unit awards with market conditions are valued using a Monte Carlo simulation model. Expected volatility is based on the historical volatility of the Company’s stock price, average Peer Group stock price, or the total return value of the Index. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant with a term equivalent to the expected term of the award. The expected term is the time period from the grant date to the end of the performance period. iThe
weighted average assumptions used in the Monte Carlo simulations were as follows:
Tax
benefit recognized from performance units vested
i—
i0.1
i0.2
i0.3
/
Unrecognized
compensation costs related to nonvested performance units are estimated to be approximately $i17.2 million as of September 30, 2022 and are expected to be recognized over a weighted average period of i1.6
years. The fair value of the portion of the awards earned based on market conditions were valued using a Monte Carlo simulation model. For other awards, the grant date fair value is equal to the Company's closing stock price on the date of grant.
23
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
15.
ACCUMULATED OTHER COMPREHENSIVE LOSS
i
Accumulated other comprehensive loss consists of the following components, all of which are net of tax:
Foreign Currency Translation (1)
Unrecognized Pension
and Postretirement Benefits (1)
(1)The
tax impact of the foreign currency translation adjustment and the unrecognized pension and postretirement benefits reclassification was insignificant for the three and nine months ended September 30, 2022 and 2021.
//
(2)Refer to Note 16 for additional information regarding these reclassifications.
i
16.
EMPLOYEE RETIREMENT AND POSTRETIREMENT BENEFITS
Pension, Profit Sharing, and Postretirement Benefits — Certain 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. The information below includes the activities of the Company's continuing and discontinued operations.
i
Components
of net periodic pension benefit are as follows:
(1)
For the three and nine months ended September 30, 2021, the Company recognized a curtailment gain of $ii0.7/
million related to the sale of the RTE Cereal business within Cost of sales in the Condensed Consolidated Statements of Operations.
//
24
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Components of net periodic postretirement cost are as follows:
The
service cost components of net periodic pension and postretirement costs were recognized in Cost of sales and the other components were recognized in Other income, net of the Condensed Consolidated Statements of Operations.
i
17. OTHER OPERATING EXPENSE, NET
i
The
Company incurred other operating expense for the three and nine months ended September 30, 2022 and 2021, which consisted of the following:
Shareholder Class Action and Related Derivative Actions
The Company, as nominal defendant, and certain of its directors, officers and former directors and officers are parties to the following ifour shareholder derivative suits, each of which involves substantially similar claims and allegations:
(i)Wells
v. Reed, et al., Case No. 2016-CH-16359 (filed Dec. 22, 2016 in the Circuit Court of Cook County, Illinois), asserting state law claims for breach of fiduciary duty, unjust enrichment and corporate waste;
(ii)Lavin v. Reed, et al., Case No. 17-cv-01014 (filed Feb. 7, 2017 in the United States District Court for the Northern District of Illinois), asserting state law claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste;
(iii)Bartelt v. Reed, et al., Case No. 1:19-cv-00835 (filed Feb. 8, 2019 in the United States District Court for the Northern District
of Illinois), asserting state law claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste, as well as violations of Section 14 of the Securities Exchange Act of 1934; and
(iv)City of Ann Arbor Employees' Retirement System v. Reed, et al., Case No. 2019-CH-06753 (filed June 3, 2019 in the Circuit Court of Cook County, Illinois), asserting claims breach of fiduciary duty, aiding and abetting breaches of fiduciary duty and contribution and indemnification from the individual defendants for losses incurred by the Company.
/
25
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Essentially, all ifour complaints allege that TreeHouse, under the authority and control of the individual defendants: (i) made certain false and misleading statements regarding the Company's business, operations, and future prospects; and (ii) failed to disclose that (a) the
Company's private label business was underperforming; (b) the Company's Flagstone Foods business was underperforming; (c) the Company's acquisition strategy was underperforming; (d) the Company had overstated its full-year 2016 guidance; and (e) TreeHouse's statements lacked reasonable basis. The complaints allege, among other things, that these actions artificially inflated the market price of TreeHouse common stock and resulted in harm to the Company, including the filing of the MPERS class action (see below). The Bartelt action
also includes substantially similar allegations concerning events in 2017.
Each of these cases involves allegations similar to those in an earlier-filed, resolved federal securities class action, Public Employees' Retirement Systems of Mississippi v. TreeHouse Foods, Inc., et al., Case No. 1:16-cv-10632 ("MPERS") (filed Nov. 16, 2016), in the United States District Court for the Northern District of Illinois brought on behalf of a class of all purchasers of TreeHouse common stock from January 20, 2016 through and including November 2, 2016. The MPERS complaint asserted claims under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and was based on essentially the same facts described above. The parties filed a stipulation of settlement to resolve the MPERS class action for a cash payment of $i27.0 million (funded by D&O insurance) in exchange for dismissal with prejudice of the class claims and full releases. After briefing, preliminary approval, notice and a hearing, on November 17, 2021, the Court granted final approval of the
settlement and entered a final judgment dismissing the case with prejudice on a classwide basis.
Due to the similarity of the derivative complaints, Bartelt was consolidated with Lavin, and Ann Arbor was consolidated with Wells. On August 24, 2022 the stay in the consolidated Lavin case was lifted, and plaintiffs were ordered to file a single operative complaint by October 24, 2022, which defendants are in the process of responding to. On August 26, 2022 plaintiffs in the consolidated Wells
case filed a second amended complaint, which defendants moved to strike. A briefing schedule has been set in the consolidated Wells case for defendants’ motion to strike and the plaintiffs’ second amended complaint.
Other Claims
In addition, the Company is party in the ordinary course of business to certain claims, litigation, audits, and investigations. The Company will record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company
believes it has established adequate accruals for liabilities that are probable and reasonably estimable that may be incurred in connection with any such currently pending or threatened matter. In the Company's opinion, the eventual resolution of such matters, either individually or in the aggregate, is not expected to have a material impact on the Company's financial position, results of operations, or cash flows. However, litigation is inherently unpredictable and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on our financial position, results of operations or cash flows for the reporting period in which any such resolution or disposition occurs.
In February 2014, TreeHouse,
along with its 100% owned subsidiaries, Bay Valley Foods, LLC and Sturm Foods, Inc., filed suit against Keurig Dr. Pepper Inc.'s wholly-owned subsidiary, Keurig Green Mountain ("KGM"), in the U.S. District Court for the Southern District of New York captioned TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et al. asserting claims under the federal antitrust laws, various state antitrust laws and unfair competition statutes, contending that KGM had monopolized alleged markets for single serve coffee brewers and single serve coffee pods. The Company is seeking monetary damages, declaratory relief, injunctive relief, and attorneys' fees. The matter remains pending, with summary judgment, motions to exclude certain expert
opinions, and discovery sanctions motions fully briefed. On March 28, 2022, the Magistrate Judge issued a non-public Opinion and Order granting in part and denying in part the TreeHouse sanctions motion against KGM and denying the KGM sanctions motion against TreeHouse. KGM has appealed a portion of the Opinion and Order awarding sanctions to the Company. KGM is denying the allegations made by the Company in the litigation. The Company has not recorded any amount in its Condensed Consolidated Financial Statements as of September 30, 2022.
i
19.
DERIVATIVE INSTRUMENTS
Interest Rate Swap Agreements - The Company manages its exposure to changes in interest rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps to hedge our exposure to changes in interest rates, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions.
26
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The
Company has entered into long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base that have a notional value of $ii875.0/
million as of both September 30, 2022 and December 31, 2021. Under the terms of the agreements, $ii875.0/
million in variable-rate debt is swapped for a weighted average fixed interest rate base of approximately ii2.91/%
from 2021 through 2025.
Commodity Contracts- Certain commodities the Company uses in the production and distribution of its products are exposed to market price risk. The Company utilizes derivative contracts to manage this risk. The majority of commodity forward contracts are not derivatives, and those that are generally qualify for the normal purchases and normal sales scope exception under the guidance for derivative instruments and hedging
activities and, therefore, are not subject to its provisions. For derivative commodity contracts that do not qualify for the normal purchases and normal sales scope exception, the Company accounts for the contracts as derivatives.
The Company's derivative commodity contracts may include contracts for diesel, oil, plastics, natural gas, electricity, resin, and other commodity
contracts that do not meet the requirements for the normal purchases and normal sales scope exception. Diesel contracts are used to manage the Company's risk associated with the underlying cost of diesel fuel used to deliver products. Contracts for oil, plastics, and resin are used to manage the Company's risk associated with the underlying commodity cost of a significant component used in packaging materials. Contracts for natural gas
and electricity are used to manage the Company's risk associated with the utility costs of its manufacturing facilities, and other commodity contracts that are derivatives that do not meet the normal purchases and normal sales scope exception are used to manage the price risk associated with raw material costs. As of September 30, 2022 and December 31, 2021, the notional value of the commodity contracts outstanding was $i12.3
million and $i58.8 million, respectively. These commodity contracts have maturities expiring through the remainder of 2022 and throughout 2023 as of September 30, 2022.
Total Return Swap Contract - The
Company has an economic hedge program that uses a total return swap contract to hedge the market risk associated with the unfunded portion of the Company's deferred compensation liability. The total return swap contract trades generally have a duration of one month and are rebalanced and re-hedged at the end of each monthly term. The total return swap contract is measured at fair value and recognized in the Condensed Consolidated Balance Sheets, with changes in value being recognized in the Condensed Consolidated Statements of Operations. As of September 30, 2022
and December 31, 2021, the notional value of the total return swap contract was $i4.1 million and $i7.0
million, respectively.
iiThe
following table identifies the fair value of each derivative instrument:/
Asset
derivatives are included within Prepaid expenses and other current assets and liability derivatives are included within Accrued expenses in the Condensed Consolidated Balance Sheets.
The fair values of the commodity contracts, foreign currency contracts, interest rate swap agreements, and the total return swap contract are determined using Level 2 inputs. Level 2 inputs are inputs other than quoted market prices that are observable for an asset or liability, either directly or indirectly. The fair values of the commodity contracts, interest rate
swap agreements, and total return swap contract are based on an analysis comparing the contract rates to the market rates at the balance sheet date.
i
27
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
iWe recognized the following gains and losses on our derivative contracts in the Condensed Consolidated Statements of Operations:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
20. DISAGGREGATION OF REVENUE
The principal products that comprise our different product category groups are as follows:
Product
Category Group
Principal Products
Snacking
Candy; cookies; crackers; in-store bakery items; pretzels; retail griddle waffles, pancakes, and French toast; and snack bars
Beverages & drink mixes
Broths/stocks; liquid and powdered non-dairy creamer; powdered beverages and other blends; ready-to-drink beverages; single serve hot beverages; and specialty teas
Grocery
Cheese & pudding; hot cereals; pickles; and refrigerated dough
i
Revenue
disaggregated by product category groups is as follows:
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
TreeHouse Foods, Inc. is a leading private label food and beverage manufacturer in North America. Our purpose is to engage and delight - one customer at a time. Through our customer focus and category experience, we strive to deliver excellent service and build capabilities and insights to drive mutual profitable growth for TreeHouse and for our customers. Our purpose is supported by investment in depth, capabilities and operational efficiencies which are aimed to capitalize on the long-term growth prospects in the categories in which we operate.
We believe we are well positioned across attractive snacking and beverage
growth categories fueled by strong consumer demand trends, and our portfolio includes crackers, non-dairy creamer, pickles, single serve beverages, refrigerated dough, broths/stocks, hot cereal, pretzels, in-store bakery items, griddle, cookies, snack bars, cheese & pudding, powdered beverages and other blends, tea, ready-to-drink beverages, and unique candy products. We sell our products to retail, co-manufacturing, and food-away-from-home customers in shelf stable, refrigerated, and frozen formats. We also offer our customer partners a range of value and nutritional solutions, including natural, organic and gluten free, so they can meet the unique needs of their consumers.
The following discussion and analysis presents the factors that had a material effect on our financial condition, changes in financial condition, and results of operations for the three and nine month periods ended September
30, 2022 and 2021. 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.
Recent Developments
Sale of a Significant Portion of the Meal Preparation Business
On
October 3, 2022, the Company completed the sale of a significant portion of the Company’s Meal Preparation business, including pasta, pourable and spoonable dressing, preserves, red sauces, syrup, dry blends and baking, dry dinners, pie filling, pita chips and other sauces, for a base purchase price of $950 million (the "Transaction" or the "Business"), subject to certain adjustments pursuant to the terms of the Stock Purchase Agreement, dated as of August 10, 2022. In October 2022, the Company used $500.0 million of the net proceeds to pay down debt on its term loans. This Transaction is in line with
the Company’s strategy to build leadership and depth around a focused group of categories in its higher-growth businesses. Beginning in the third quarter of 2022, the Business met the criteria for discontinued operations presentation, and, as such, has been excluded from continuing operations for all periods presented. Refer to Note 7 of our Condensed Consolidated Financial Statements for additional information.
Segment Change
As a result of entering into the sale agreement of a significant portion of the Company's Meal Preparation business, the Company changed the structure of its internal
organization and reporting in the third quarter of 2022 and began operating as one segment. Refer to Note 1 of our Condensed Consolidated Financial Statements for more information regarding the change in segment structure during the third quarter of 2022.
30
Executive Summary
The following table summarizes our consolidated financial results (in millions, except per share data and percentages):
(1)Adjusted EBITDA from continuing operations, Adjusted EBITDA, adjusted net income from continuing operations, and adjusted diluted EPS from continuing operations are Non-GAAP financial measures. Refer to the "Non-GAAP Measures" section for additional information.
Third
Quarter 2022 Financial Highlights
The following are highlights in our net sales and earnings for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Refer to the "Results of Operations" section below for further discussion and analysis.
•Net sales increased 16.4% primarily due to our pricing actions to recover commodity and freight cost inflation as we continue to manage through the current inflationary macro environment. However, labor and supply chain disruption continued to constrain our capacity to service increased demand for private label food and beverage products.
•Earnings saw sequential
margin improvement when compared to the second quarter of 2022, but global labor and supply chain disruption have adversely impacted profitability when compared to the third quarter of 2021. This was partially offset by the Company's pricing actions to recover commodity and freight inflation experienced in prior periods.
31
Known Trends or Uncertainties
Macroeconomic Conditions
The private label value proposition is becoming increasingly important for consumers as inflation is reflected in higher shelf price, and we have seen demand for
private label strengthen. Our ability to service this strengthening demand continues to be impacted by the macro environment, including industry-wide supply chain disruption and labor availability challenges. These items are not only impacting our sales volume, but they are also adversely impacting our profitability. These issues coupled with commodity inflation and increased freight costs, have increased our cost to service the customer. In response, we have implemented pricing actions to recover costs that we expect will continue to build throughout 2022. Additionally, rising interest rates during the nine months ended September 30, 2022 are challenges for both companies and consumers that are impacting the economy. The strengthening of the U.S. Dollar also adversely impacts the results of our Canadian operations.
Supply Chain Disruption and Labor Shortages
During
the nine months ended September 30, 2022, we have experienced significant disruptions in the global supply chain network when compared to nine months ended September 30, 2021. These disruptions include, but are not limited to, items such as freight transportation availability, labor challenges, and raw materials and packaging availability challenges, which have negatively impacted our margins and ability to service demand during the nine months ended September 30, 2022. In response, we have implemented labor and supply initiatives, which includes actions such as increasing hourly labor rates, awarding bonuses to our hourly employees in order to better attract and retain talent, implementing one-time retention programs, granting additional stock-based compensation awards to drive retention, securing additional suppliers,
and engaging additional transportation partners. We will continue to actively monitor and manage our response to these disruptions, but depending on duration and severity, these trends could continue to negatively impact our margins and service levels.
Commodity Inflation
During the nine months ended September 30, 2022, the Company continues to experience significant cost increases compared to 2021 across raw materials, packaging materials, fuel, energy, and agricultural commodities, including but not limited to edible oils (soybean, palm, coconut, and canola), durum, wheat, oats, coffee, eggs, corn, cucumbers, and tomatoes, cucumbers, and eggs. In particular, the price of eggs has risen in 2022 in part due to
a wave of avian flu which has impacted the supply of chickens and turkeys in the United States.
Additionally, in February 2022 as a result of the invasion of Ukraine by Russia, the United States and other countries imposed economic sanctions on Russian financial institutions, oil and gas imports, and other businesses. TreeHouse Foods is a North American focused company with no direct exposure to Russia or Ukraine. As such, the impact to TreeHouse has not been material to date. However, sanctions imposed by the United States on Russia oil and gas imports, as well as disruption caused to Ukraine's wheat and other agricultural supply due to the ongoing military conflict, is causing further inflation to our commodity costs. We will continue to monitor any broader economic impact from the current conflict.
We manage the impact of cost increases, wherever
possible, on commercially reasonable terms, by locking in prices on the quantities we expect are required to meet our production requirements. In addition, as input costs rise, we seek to recover inflation by implementing higher pricing. However, our pricing actions often lag commodity cost changes temporarily, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them.
32
Rising Interest Rates
The Federal Reserve has raised and is expected to continue to raise the federal funds interest rate throughout 2022 in its effort to take action against domestic inflation. The
Company has long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base in order to mitigate the Company's exposure to interest rate risk. As of September 30, 2022, we have an outstanding variable-rate debt balance of $1,405.0 million, and our interest rate swap agreements with a fixed LIBOR interest rate base are at $875.0 million. The rising interest rates have had a favorable impact to the fair value of the Company's interest rate swap agreements, and the Company recorded a $24.8 million and $77.0 million mark-to-market unrealized gain for the three and nine months ended September 30,
2022, respectively. Refer to Note 19 to our Condensed Consolidated Financial Statements for additional information. For additional information regarding the Company's exposure to interest rate risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, within the Company's 2021 Annual Report on Form 10-K.
Foreign Currency Exchange Rate Fluctuations
The U.S. Dollar has been strengthening compared to most foreign currencies. The most significant currency affecting our continuing operating results is the Canadian Dollar. The Canadian Dollar exposures to revenue are greater than the exposure to input costs
for foreign produced products. As such, a weaker Canadian Dollar leads to an unfavorable impact to the Company’s operating results. In addition to higher input costs, the Company is impacted by the re-measurement of the Canadian Dollar denominated intercompany loans and the translation of the Canadian Dollar financial statements. The Company recorded a $3.0 million loss on foreign currency exchange within the Condensed Consolidated Statements of Operations for both the three and nine months ended September 30, 2022, respectively, and the Company recorded a $14.5 million and $20.8
million loss on foreign currency translation within the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022, respectively. We will continue to monitor the impact of foreign currency to the Company's results of operations.
33
Results of Operations
The following table presents certain information concerning our financial results, including information presented as
a percentage of consolidated net sales:
Net Sales — Net sales for the third quarter of 2022 totaled $875.0 million compared to $751.7 million for the same period last year, an increase of $123.3 million, or 16.4%. The change in net sales from 2021 to 2022 was due to the following:
Dollars
Percent
(In
millions)
2021 Net sales
$
751.7
Pricing
155.8
20.7
%
Volume/mix
(31.3)
(4.2)
Foreign
currency
(1.2)
(0.1)
2022 Net sales
$
875.0
16.4
%
Foreign
currency
0.1
Percent change in organic net sales (1)
16.5
%
(1)Organic net sales is a Non-GAAP financial measure. Refer to the "Non-GAAP Measures" section for additional information.
The net sales increase of 16.4% was primarily driven by favorable pricing to recover commodity
inflation. This was partially offset by labor and supply chain disruption, which constrained our ability to service demand. Additionally, decreases in volume were due to exiting lower margin business particularly in Pickles.
Gross Profit — Gross profit as a percentage of net sales was 14.8% in the third quarter of 2022, compared to 16.7% in the third quarter of 2021, a decrease of 1.9 percentage points. The decrease is primarily due to incremental costs related to labor and supply chain disruption as a result of the macro environment as well as warehouse capacity challenges. This was partially offset by the Company's pricing actions to recover commodity and freight inflation experienced in prior periods and favorable category mix.
Total
Operating Expenses — Total operating expenses were $138.8 million in the third quarter of 2022 compared to $116.9 million in the third quarter of 2021, an increase of $21.9 million. The increase is primarily attributable to higher employee compensation costs to address retention and labor shortages. Professional fees increased in connection with set-up costs for a transition services agreement as part of the sale of a significant portion of the Meal Preparation business, and other divestiture related restructuring costs contributed to the increase. This was partially offset by lower spend in the strategic growth initiatives and other restructuring programs, which consisted primarily of professional fees.
Total Other Expense (Income) —Total other
expense (income) was $3.6 million in the third quarter of 2022 compared to $13.5 million in the third quarter of 2021, a decrease of $9.9 million. The decrease was primarily due to favorable non-cash mark-to-market impacts from hedging activities, largely driven by interest rate swaps due to rising interest rates. This was partially offset by unfavorable foreign currency exchange rate impacts between the U.S. and Canadian dollar.
Income Taxes — Income taxes were recognized at an effective rate of (15.3)% in the third quarter of 2022 compared to 8.9% recognized in the third quarter of 2021. The change in the Company's effective tax rate is primarily driven by a change in the valuation allowance recorded against certain deferred tax assets,
tax expense recognized in 2022 due to the restructuring of certain Canadian subsidiaries, and tax expense recognized in 2021 due to the enactment of the CARES Act.
Our effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.
35
Discontinued Operations
Discontinued
Operations — Net (loss) income from discontinued operations was a $75.4 million loss in the third quarter of 2022 compared to $10.8 million of income in the third quarter of 2021, a decrease of $86.2 million. The decrease is due to an expected loss on disposal of $73.8 million, an increase in professional fees associated with the divestiture of a significant portion of the Meal Preparation business, an increase in interest expense due to rising interest rates, and unfavorable foreign currency exchange rate impacts between the U.S. and Canadian dollar. Refer to Note 7 of our Condensed Consolidated Financial Statements for additional details.
Net Sales — Net sales for the first nine months of 2022 totaled $2,457.8 million compared to $2,129.6 million for the same period last year, an increase of $328.2 million, or 15.4%. The change in net sales from 2021 to 2022 was due to the following:
Dollars
Percent
(In
millions)
2021 Net sales
$
2,129.6
Pricing
331.6
15.6
%
Volume/mix
(0.9)
—
Foreign
currency
(2.5)
(0.2)
2022 Net sales
$
2,457.8
15.4
%
Foreign
currency
0.2
Percent change in organic net sales
15.6
%
The net sales increase of 15.4% was primarily driven by favorable pricing to recover commodity and freight cost inflation. This was partially offset by labor and supply chain disruption, which constrained our ability to service demand.
Gross Profit — Gross profit as a percentage of net sales was 13.8% in the first nine months of 2022, compared to
16.2% in the first nine months of 2021, a decrease of 2.4 percentage points. The decrease is primarily due to incremental costs related to labor and supply chain disruption as a result of the macro environment. Additionally, inbound freight cost inflation and warehouse capacity challenges contributed to the decrease. This was partially offset by the Company's pricing actions to recover commodity and freight inflation in prior periods, favorable category mix, and lower costs for purchases of personal protective equipment for employees and additional sanitation measures.
Total Operating Expenses — Total operating expenses were $430.5 million in the first nine months of 2022 compared to $379.0 million in the first nine months of 2021, an increase of $51.5 million. The increase is primarily attributable
to higher freight costs of $22.0 million due to freight cost inflation and lower utilization of full truck load shipments due to supply chain disruption. Professional fees increased in connection with set-up costs for a transition services agreement as part of the sale of a significant portion of the Meal Preparation business. Additionally, higher employee compensation costs to address retention and labor shortages as well as other divestiture related restructuring costs contributed to the increase. This was partially offset by lower spend in the strategic growth initiatives and other restructuring programs, which consisted primarily of professional fees.
36
Total Other Expense (Income) —Total other expense of $30.9 million in the first nine months of 2021 decreased by $61.4 million to be total other income of $30.5 million in the first nine months of 2022. The decrease was primarily due to higher favorable non-cash mark-to-market impacts from hedging activities of $79.3 in the first nine months of 2022 compared to $33.1 in the first nine months of 2021, largely driven by interest rate swaps due to rising interest rates and commodity contracts. Additionally, the non-recurrence of a loss on extinguishment of debt of $14.4 million in the first quarter of 2021 as a result of debt refinancing completed in the first quarter of 2021 contributed to the decrease. This was partially offset by unfavorable foreign currency exchange rate impacts between the U.S. and Canadian dollar.
Income
Taxes — Income taxes were recognized at an effective rate of 7.9% in the first nine months of 2022 compared to 23.0% recognized in the first nine months of 2021. The change in the Company's effective tax rate is primarily driven by a change in the valuation allowance recorded against certain deferred tax assets, tax expense recognized in 2021 due to the enactment of the CARES Act, and a change in the amount of non-deductible executive compensation.
Our effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.
Discontinued
Operations
Discontinued Operations — Net (loss) income from discontinued operations was a $66.7 million loss in the first nine months of 2022 compared to $66.7 million of income in the first nine months of 2021, a decrease of $133.4 million. The decrease is primarily due to an expected loss on disposal of $73.8 million, a decrease in gross margin of $30.2 million, and the completion of the sale of the Ready-to-eat Cereal business on June 1, 2021, which resulted in the non-recurrence of a pre-tax gain of $18.4 million. Gross margin was adversely impacted by commodity and freight cost inflation, which was offset by favorable pricing actions to recover inflation, and incremental costs related to labor and supply chain disruption. An increase in interest expense due to rising interest rates and unfavorable foreign currency exchange rate
impacts between the U.S. and Canadian dollar also contributed to the decrease. Refer to Note 7 of our Condensed Consolidated Financial Statements for additional details.
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 remains in a strong financial position, with resources available for reinvesting in existing businesses,
including our strategic growth initiatives, and managing its capital structure on a short and long-term basis.
Seller Note Credit Agreement
On October 3, 2022, the Company completed the sale of a significant portion of the Company’s Meal Preparation for a base purchase price of $950.0 million, subject to certain adjustmentsThe purchase price consists of approximately $527.5 million in cash and approximately $422.5 million in a five-year secured seller-secured promissory note (the “Seller Note Credit Agreement”) issued by certain entities affiliated with the buyer.
The
Seller Note Credit Agreement sets forth the terms of the seller promissory note and the loan evidenced thereby (the “Seller Loan”). The Seller Loan matures on October 1, 2027.The Seller Loan bears interest at a rate per annum equal to 10% for the first two years thereof, 11% for the third year thereof, 12% for the fourth year thereof, and 13% thereafter, payable quarterly in arrears. For the first year of the Seller Loan, a portion of the interest of up to 1% per annum may be paid in kind; all other interest for the first year, and all interest thereafter, will be paid in cash. Starting on March 31, 2025, the Loan Parties shall commence paying back the principal amount of the Seller Loan on a quarterly basis as set forth in the Seller Note Credit Agreement.
37
Receivables
Sales Program
The Company has the ability to strategically manage customer payment terms and counterparty risk by selling receivables in a cost-effective manner through its Receivables Sales Program. Approximately $122.0 million was available under the Receivables Sales Program limit as of September 30, 2022. See Note 5 to our Condensed Consolidated Financial Statements for additional information regarding our Receivables Sales Program. Our Receivables Sales Program provides us lower cost access to liquidity when compared to the Revolving Credit Facility.
As a result of the sale of a significant portion of the Company’s Meal
Preparation business, the Company was required to reduce the sale of receivables related to the divested business. Subsequent to the Transaction, the Company will continue to evaluate the extent of the use of the Receivables Sales Program for its cash resource needs.
Revolving Credit Facility
If additional borrowings are needed, approximately $714.2 million was available under the Revolving Credit Facility as of September 30, 2022. In October 2022, the Company reduced the revolving credit commitment from $750.0 million to an aggregate amount
of $500.0 million. See Note 12 to our Condensed Consolidated Financial Statements for additional information regarding our Revolving Credit Facility. We are in compliance with the terms of the Revolving Credit Facility and expect to meet foreseeable financial requirements.
CARES Act
Our cash earnings and liquidity have been impacted by global macroeconomic challenges with commodity inflation and supply chain disruption, but we anticipate our current cash balances, cash flows from operations, and our available sources of liquidity will be sufficient to meet our cash requirements. Under the CARES Act, we deferred the payment of $22.8 million in payroll taxes in 2020, with $12.3 million paid in 2021 and 2022, and the remaining $10.5 million to be paid in the first quarter of 2023. We filed refund claims from the Internal Revenue Service of $73.5
million and $8.3 million related to the net operating loss carryback provisions of the CARES Act for the 2019 and 2020 federal tax losses, respectively. We received $71.4 million in the fourth quarter of 2020 and the remaining $2.1 million in the third quarter of 2022 related to the 2019 refund claim, and we received $8.3 million in the fourth quarter of 2021 related to the 2020 refund claim. Given the macro environment, we will continue to assess our liquidity needs while additionally managing our discretionary spending and investment strategies.
The following table is derived from our Condensed Consolidated Statement of Cash Flows:
Net cash used in operating activities from continuing operations was $90.4 million in the first nine months of 2022 compared to $57.0 million in the first nine months of 2021, an increase in cash used of $33.4 million. The increase was primarily attributable to lower cash earnings, which reflect the impact of commodity and freight cost inflation. Working capital changes have been impacted by higher sales as a result of price increases in response to commodity and freight cost inflation, which have increased receivables and inventories. This was partially offset by an increase in cash flow from accounts payable due to improved working capital management, lower incentive compensation paid in the first quarter of 2022 compared to the first quarter of 2021
based on prior year performance, lower cash paid on interest due to debt refinancing in 2021, and an increase in cash flows from the Receivables Sales Program. Refer to Note 5 to our Condensed Consolidated Financial Statements for additional information. The Company's working capital management emphasis continues to be focused on driving faster collection of receivables and extending vendor terms.
Investing Activities From Continuing Operations
Net cash used in investing activities from continuing operations was $56.5 million in the first nine months of 2022 compared to $53.1 million in the first nine months of 2021, an
increase in cash used of $3.4 million. This was primarily driven by the non-recurrence of proceeds received from the sale of our investments during the first quarter of 2021 as the Company entered into a total return swap contract to hedge the market risk associated with the unfunded portion of the Company's deferred compensation liability (refer to Note 19 to our Condensed Consolidated Financial Statements for additional information). This was partially offset by lower capital expenditures and increased proceeds received from the sale of fixed assets.
Financing Activities From Continuing Operations
Net
cash used in financing activities from continuing operations was $21.8 million in the first nine months of 2022 compared to $357.9 million in the first nine months of 2021, a decrease in cash used of $336.1 million. The decrease in cash used is attributable to the debt refinancing in the prior year, which included the redemption of the 2024 Notes of $602.9 million. Additionally, there was $25.0 million of common stock repurchases during the first nine months of 2021, which contributed to the decrease in cash used. This was partially offset by the Amendment to the Credit Agreement in the prior year, which resulted in an increase in Term Loan balances of $304.0 million.
Cash Flows From Discontinued Operations
Net cash used in
discontinued operations was $59.9 million in the first nine months of 2022 compared to net cash provided by discontinued operations of $171.3 million, an increase in cash used of $231.2 million. The increase in cash used in the first nine months of 2021 is primarily due to the non-recurrence from the proceeds received of $88.0 million from the completion of the sale of the Ready-to-eat Cereal business on June 1, 2021. Additionally, the increase was attributable to lower cash earnings from a significant portion of the Meal Preparation business, which reflect the impact of commodity and freight cost inflation. Working capital changes have been impacted by higher sales as a result of price increases in response to commodity and freight cost inflation, which have increased receivables and inventories. This was partially offset by an increase in cash flow from accounts payable due to improved working capital management. Refer
to Note 7 to our Condensed Consolidated Financial Statements for additional information.
39
Debt Obligations
At September 30, 2022, we had $491.3 million outstanding under Term Loan A, $913.7 million outstanding under Term Loan A-1, $500.0 million of the 2028 Notes outstanding, and $1.3 million of finance lease obligations. In October 2022, the Company paid down debt of $500.0 million which consisted of $174.8 million on Term Loan A and $325.2 million on Term Loan A-1 The cash used to pay down
the term loans was from the net proceeds of the divestiture of a significant portion of the Meal Preparation business. Refer to Note 7 and Note 12 of our Condensed Consolidated Financial Statements for additional information.
As of September 30, 2022, $714.2 million of the aggregate commitment of $750.0 million of the Revolving Credit Facility was available. Under the Credit Agreement, the Revolving Credit Facility matures on March 26, 2026. In addition, as of September 30, 2022, there were $35.8 million in letters of credit under the Revolving Credit Facility that were issued but undrawn, which have been included as a reduction to the calculation of available credit. In October 2022, the
Company reduced the revolving credit commitment from $750.0 million to an aggregate amount of $500.0 million.
The Company’s average interest rate on debt outstanding under its Credit Agreement for the three months ended September 30, 2022 was 4.10%. Including the impact of interest rate swap agreements in effect as of September 30, 2022, the average rate is 4.54%.
The Credit Agreement contains various financial and restrictive covenants and requires that the Company maintain a consolidated net leverage ratio of no greater than 4.50 to 1.0, and our debt obligations contain
customary representations and events of default. On February 14, 2022, the Company entered into Amendment No. 4 to the Credit Agreement. Amendment No. 4 temporarily increases the leverage covenant threshold from 4.50x to 5.50x through June 30, 2022, then 5.25x through September 30, 2022 and thereafter reverts to 4.50x.
On August 10, 2022, the Company entered into Amendment No. 5 to the Credit Agreement. Under Amendment No. 5, among other things, the parties have agreed to: (i) amend the definition of "Consolidated EBITDA", (ii) allow
the Borrower to make Investments pursuant to a credit facility in principal amount not to exceed $50.0 million provided by the Borrower or any guarantors under the Credit Agreement to any Person that comprises or owns, directly or indirectly, any business unit disposed of by the Borrower or any such guarantors; and (iii) allow the Borrower to consummate the Transaction for consideration of at least 65% cash or cash equivalents.
The material terms and conditions under the Credit Agreement are otherwise substantially consistent with those contained in the Credit Agreement prior to Amendment No. 4 and Amendment No. 5. We are in compliance with all applicable debt covenants as of September 30, 2022.
See Note 12 to our Condensed Consolidated Financial Statements for information on our debt obligations.
Guarantor
Summarized Financial Information
The 2028 Notes issued by TreeHouse Foods, Inc. are fully and unconditionally, as well as jointly and severally, guaranteed by our directly and indirectly owned domestic subsidiaries, which are collectively known as the "Guarantor Subsidiaries." The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances, only upon the occurrence of certain customary conditions. There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries
by dividend or loan.
The following tables present summarized financial information of TreeHouse Foods, Inc. and the Guarantor Subsidiaries on a combined basis. The combined summarized financial information eliminates intercompany balances and transactions among TreeHouse Foods, Inc. and the Guarantor Subsidiaries and equity in earnings and investments in any Guarantor Subsidiaries or Non-Guarantor Subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for
the issuer and Guarantor Subsidiaries.
(1)For the nine months ended September 30, 2022, TreeHouse Foods, Inc. and Guarantor Subsidiaries recorded $63.2 million of net sales to the Non-Guarantor Subsidiaries
and $205.0 million of purchases from the Non-Guarantor Subsidiaries.
We have included in this report measures of financial performance that are not defined by GAAP ("Non-GAAP").
A Non-GAAP financial measure is a numerical measure of financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the Company's Condensed Consolidated Financial Statements. We believe these measures provide useful information to the users of the financial statements as we also have included these measures in other communications and publications.
For each of these Non-GAAP financial measures, we provide a reconciliation between the Non-GAAP measure and the most directly comparable GAAP measure, an explanation of why management believes the Non-GAAP measure provides useful information to financial statement users, and any additional purposes for which management uses the Non-GAAP measure. This Non-GAAP financial
information is provided as additional information for the financial statement users and is not in accordance with, or an alternative to, GAAP. These Non-GAAP measures may be different from similar measures used by other companies.
Organic Net Sales
Organic net sales is defined as net sales excluding the impacts of acquisitions, divestitures, and foreign currency. This information is provided in order to allow investors to make meaningful comparisons of the Company's sales between periods and to view the Company's business from the same perspective as Company management.
Adjusted Earnings Per Diluted Share, Adjusting
for Certain Items Affecting Comparability
Adjusted earnings (loss) per diluted share ("adjusted diluted EPS") reflects adjustments to GAAP loss per diluted share to identify items that, in management's judgment, significantly affect the assessment of earnings results between periods. Adjusted diluted EPS is presented as continuing operations, discontinued operations, and total. This information is provided in order to allow investors to make meaningful comparisons of the Company's earnings performance between periods and to view the
41
Company's business from the same perspective as Company management. As the
Company cannot predict the timing and amount of charges that include, but are not limited to, items such as divestiture, acquisition, integration, and related costs, mark-to-market adjustments on derivative contracts, foreign currency exchange impact on the re-measurement of intercompany notes, growth, reinvestment, and restructuring programs, impairment of assets, the impact of the COVID-19 pandemic, and other items that may arise from time to time that would impact comparability, management does not consider these costs when evaluating the Company's performance, when making decisions regarding the allocation of resources, in determining incentive compensation, or in determining earnings estimates.
The reconciliation of adjusted
diluted EPS, excluding certain items affecting comparability, to the relevant GAAP measure of diluted EPS as presented in the Condensed Consolidated Statements of Operations, is as follows:
Growth, reinvestment, restructuring programs & other
(2)
0.30
0.01
0.31
1.02
0.03
1.05
Central
services and conveyed employee costs
(3)
0.32
(0.32)
—
1.09
(1.09)
—
Divestiture, acquisition, integration, and related costs
(4)
0.04
0.09
0.14
0.05
0.30
0.35
Foreign
currency loss (gain) on re-measurement of intercompany notes
(5)
0.01
0.02
0.04
—
(0.01)
(0.01)
Shareholder activism
(6)
0.02
—
0.02
0.07
—
0.07
Litigation
matter
(7)
—
—
—
—
—
—
Tax indemnification
(8)
0.02
0.02
0.04
0.03
0.02
0.05
Mark-to-market
adjustments
(9)
(0.08)
(0.01)
(0.09)
(0.59)
—
(0.59)
COVID-19
(10)
0.05
0.01
0.06
0.24
0.05
0.29
Loss
on extinguishment of debt
(11)
—
—
—
0.26
—
0.26
Taxes on adjusting items
(0.19)
0.03
(0.18)
(0.56)
0.24
(0.33)
Adjusted
diluted EPS (Non-GAAP)
$
0.42
$
0.04
$
0.46
$
0.71
$
0.40
$
1.11
The
sum of the individual per share amounts may not add due to rounding.
42
During the three and nine months ended September 30, 2022 and 2021, the Company entered into transactions that affected the year-over-year comparison of its financial results from continuing operations as follows:
(1)
For
the three and nine months ended September 30, 2022, the Company recognized an expected loss on disposal of a significant portion of the Meal Preparation business of $73.8 million. For the nine months ended September 30, 2021, the Company recognized a gain on the sale of the RTE Cereal business of $18.4 million.
Refer to Note 7 to our Condensed Consolidated Financial Statements for additional information.
(2)
The
Company's growth, reinvestment, and restructuring activities are part of an enterprise-wide transformation to improve long-term growth and profitability for the Company. For the three months ended September 30, 2022 and 2021, the Company incurred growth, reinvestment, and restructuring program costs of approximately $23.6 million and $17.4 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company incurred growth, reinvestment, and restructuring program costs of approximately $71.3 million
and $59.3 million, respectively. Additionally, the Company recognized other items affecting comparability including regulatory compliance cost reimbursements related to changes in nutrition labeling requirements. There were no other items recognized during the three and nine months ended September 30, 2022. These other items were approximately $(0.1) million for the nine months ended September 30, 2021.
Refer to Note 3 to our Condensed Consolidated Financial Statements for additional information on a continuing operations basis.
(3)
As
a result of the sale of a significant portion of the Meal Preparation business, the Company identified two items affecting comparability – 1) central service costs and 2) conveyed employee costs.
1) The Company has historically provided central services to the Meal Preparation business including, but not limited to, IT and financial shared services, procurement and order processing, customer service, warehousing, logistics, and customs. These costs were historically incurred by TreeHouse and include employee and non-employee expenses to support the services. For the three months ended September 30, 2022 and 2021, central service costs
were approximately $13.4 million in both periods. For the nine months ended September 30, 2022 and 2021, central service costs were approximately $40.2 million in both periods.
2) Conveyed employee costs represent compensation costs for employees that were not historically dedicated to the sold business and transferred to the buyer after the sale. For the three months ended September 30, 2022 and 2021, conveyed employee costs were approximately $8.1 million and $4.7 million, respectively. For the nine months ended September 30, 2022 and 2021, conveyed employee costs were approximately $24.8 million and $20.9 million,
respectively.
(4)
Divestiture, acquisition, integration, and related costs represent costs associated with completed and potential divestitures, completed and potential acquisitions, and the related integration of the acquisitions.
Refer to Note 7 to our Condensed Consolidated Financial Statements for additional information.
(5)
The
Company has foreign currency denominated intercompany loans and incurred foreign currency losses of $5.0 million and $2.1 million for the three months ended September 30, 2022 and 2021, respectively, to re-measure the loans at quarter end. For the nine months ended September 30, 2022 and 2021, the Company incurred foreign currency losses of $4.1 million and foreign currency gains of $0.7 million, respectively. These charges are non-cash and the loans are eliminated in consolidation.
(6)
The
Company incurred fees related to shareholder activism which include directly applicable third-party advisory and professional service fees.
43
(7)
During the nine months ended September 30, 2022, the Company recognized $0.4 million incremental expense for the settlement payment of the $9.0 million accrual
related to a litigation matter challenging wage and hour practices at three former manufacturing facilities in California.
(8)
Tax indemnification represents the non-cash write off of indemnification assets that were recorded in connection with acquisitions from prior years. These write-offs arose as a result of the related uncertain tax position being released due to the statute of limitation lapse or settlement with taxing authorities.
(9)
The Company's derivative contracts
are marked-to-market each period. The non-cash unrealized changes in fair value recognized in Other income, net within the Condensed Consolidated Statements of Operations are treated as Non-GAAP adjustments. As the contracts are settled, realized gains and losses are recognized, and only the mark-to-market impacts are treated as Non-GAAP adjustments.
Refer to Note 19 to our Condensed Consolidated Financial Statements for additional information.
(10)
During 2021, the
Company incurred incremental expenses directly attributable to our response to the COVID-19 pandemic, which included additional protective equipment for employees and additional sanitation measures. These costs were approximately $1.1 million and $14.6 million for the three and nine months ended September 30, 2021, respectively. Additionally, the Company incurred income tax expense due to a change in the amount of the total benefit recognized from the enactment of the CARES Act of approximately $1.9 million for the three and nine months ended September 30, 2021.
(11)
For the nine
months ended September 30, 2021, the Company incurred a loss on extinguishment of debt totaling $14.4 million, which included a premium of $9.0 million and a write off of deferred financing costs of $5.4 million in connection with the redemption of its 2024 Notes and Credit Agreement refinancing.
Refer to Note 12 to our Condensed Consolidated Financial Statements for additional information.
The tax impact on adjusting items is calculated based upon the tax laws and statutory tax rates applicable in the tax jurisdiction of the underlying Non-GAAP adjustments.
Adjusted Net Income (Loss), Adjusted EBIT, Adjusted EBITDA, Adjusted EBITDAS, Adjusted Net Income (Loss) Margin, Adjusted EBIT Margin, Adjusted EBITDA Margin, and Adjusted EBITDAS Margin, Adjusting for Certain Items Affecting Comparability
Adjusted net income (loss) represents GAAP net (loss) income as reported in the Condensed Consolidated Statements of Operations adjusted for items that, in management's judgment, significantly affect the assessment of earnings results between periods as outlined in the adjusted diluted EPS section above. Adjusted net income (loss) is presented as continuing operations, discontinued operations, and total. This information is provided in order to allow investors to make meaningful comparisons of the Company's earnings performance
between periods and to view the Company's business from the same perspective as Company management. This measure is also used as a component of the Board of Directors' measurement of the Company's performance for incentive compensation purposes and is the basis of calculating the adjusted diluted EPS from continuing operations metric outlined above.
Adjusted EBIT represents adjusted net income (loss) before interest expense, interest income, and income tax expense. Adjusted EBITDA represents adjusted net income (loss) before interest expense, interest income, income tax expense, and depreciation and amortization expense. Adjusted EBITDAS represents adjusted EBITDA before non-cash stock-based compensation expense. Adjusted EBIT, adjusted
EBITDA, and adjusted EBITDAS are performance measures commonly used by management to assess operating performance, and the Company believes they are commonly reported and widely used by investors and other interested parties as a measure of a company's operating performance between periods and as a component of our debt covenant calculations. Adjusted EBIT, adjusted EBITDA, and adjusted EBITDAS are presented as continuing operations, discontinued operations, and total.
44
Adjusted net income (loss) margin, adjusted EBIT margin, adjusted EBITDA margin, and adjusted EBITDAS margin are calculated as the respective metric defined above as a percentage of net sales
as reported in the Condensed Consolidated Statements of Operations for Continuing Operations and net sales reported in the Discontinued Operations footnote within the Condensed Consolidated Financial Statements for Discontinued Operations adjusted for items that, in management's judgment, significantly affect the assessment of earnings results between periods as outlined in the adjusted diluted EPS section above. Adjusted net income (loss) margin, adjusted EBIT margin, adjusted EBITDA margin, and adjusted EBITDAS margin are presented as continuing operations, discontinued operations, and total.
The following table reconciles the Company's net loss as presented in the Condensed Consolidated Statements of Operations, the relevant GAAP measure, to Adjusted net income (loss), Adjusted EBIT, Adjusted EBITDA, and Adjusted EBITDAS
for the three and nine months ended September 30, 2022 and 2021:
Growth, reinvestment, restructuring programs & other
(2)
16.9
0.5
17.4
57.5
1.7
59.2
Central
services and conveyed employee costs
(3)
18.1
(18.1)
—
61.1
(61.1)
—
Divestiture, acquisition, integration, and related costs
(4)
2.4
5.2
7.6
3.0
16.8
19.8
Foreign
currency loss (gain) on re-measurement of intercompany notes
(5)
0.8
1.3
2.1
(0.2)
(0.5)
(0.7)
Shareholder activism
(6)
0.9
—
0.9
4.0
—
4.0
Litigation
matter
(7)
—
—
—
—
—
—
Tax indemnification
(8)
1.5
1.2
2.7
1.7
1.2
2.9
Mark-to-market
adjustments
(9)
(4.7)
(0.6)
(5.3)
(33.3)
0.2
(33.1)
COVID-19
(10)
2.5
0.5
3.0
13.6
2.9
16.5
Loss
on extinguishment of debt
(11)
—
—
—
14.4
—
14.4
Less: Taxes on adjusting items
(10.9)
1.5
(9.4)
(31.7)
12.9
(18.8)
Adjusted
net income (loss) (Non-GAAP)
23.4
2.3
25.7
40.0
22.4
62.4
Interest expense
16.5
2.3
18.8
55.5
7.5
63.0
Interest
income
—
—
—
(4.1)
—
(4.1)
Income taxes (excluding COVID-19 income tax adjustments)
(2.3)
1.9
(0.4)
(16.9)
19.8
2.9
Add:
Taxes on adjusting items
10.9
(1.5)
9.4
31.7
(12.9)
18.8
Adjusted EBIT (Non-GAAP)
48.5
5.0
53.5
106.2
36.8
143.0
Depreciation
and amortization
(12)
37.3
16.1
53.4
112.3
48.9
161.2
Adjusted EBITDA (Non-GAAP)
85.8
21.1
106.9
218.5
85.7
304.2
Stock-based
compensation expense
(13)
1.1
0.6
1.7
8.3
2.2
10.5
Adjusted EBITDAS (Non-GAAP)
$
86.9
$
21.7
$
108.6
$
226.8
$
87.9
$
314.7
Net
(loss) income margin
(0.5)
%
3.1
%
0.6
%
(2.4)
%
6.0
%
0.5
%
Adjusted
net income (loss) margin
3.1
%
0.7
%
2.3
%
1.9
%
2.0
%
1.9
%
Adjusted
EBIT margin
6.5
%
1.4
%
4.9
%
5.0
%
3.3
%
4.4
%
Adjusted EBITDA margin
11.4
%
6.0
%
9.7
%
10.3
%
7.7
%
9.4
%
Adjusted
EBITDAS margin
11.6
%
6.2
%
9.9
%
10.6
%
7.9
%
9.7
%
46
Location
in Condensed
Three Months Ended September 30,
Nine Months Ended September 30,
Consolidated Statements of Operations
2022
2021
2022
2021
(unaudited
in millions)
(1)
Loss (gain) on sale of business
Net (loss) income from discontinued operations
$
73.8
$
—
$
73.8
$
(18.4)
(2)
Growth,
reinvestment, restructuring programs & other
Other operating expense, net
22.4
16.9
66.4
57.6
Cost of sales
—
—
—
(0.1)
Net
(loss) income from discontinued operations
1.2
0.5
4.9
1.7
(3)
Central services and conveyed employee costs
General and administrative
16.5
14.3
50.1
47.6
Cost
of sales
5.0
3.8
14.9
13.5
Net (loss) income from discontinued operations
(21.5)
(18.1)
(65.0)
(61.1)
(4)
Divestiture,
acquisition, integration, and related costs
General and administrative
7.2
2.2
15.7
2.5
Cost of sales
—
0.2
1.6
0.4
Other
operating expense, net
1.0
—
1.1
0.1
Net (loss) income from discontinued operations
9.4
5.2
31.0
16.8
(5)
Foreign
currency loss (gain) on re-measurement of intercompany notes
Loss (gain) on foreign currency exchange
1.8
0.8
1.4
(0.2)
Net (loss) income from discontinued operations
3.2
1.3
2.7
(0.5)
(6)
Shareholder
activism
General and administrative
0.4
0.9
2.1
4.0
(7)
Litigation matter
General and administrative
—
—
0.4
—
(8)
Tax
indemnification
Other income, net
—
1.5
—
1.7
Net (loss) income from discontinued operations
—
1.2
0.1
1.2
(9)
Mark-to-market
adjustments
Other income, net
(17.1)
(4.7)
(79.4)
(33.3)
Net (loss) income from discontinued operations
(0.1)
(0.6)
(0.1)
0.2
(10)
COVID-19
Cost
of sales
—
0.6
—
11.7
Income tax expense (benefit)
—
1.9
—
1.9
Net
(loss) income from discontinued operations
—
0.5
—
2.9
(11)
Loss on extinguishment of debt
Loss on extinguishment of debt
—
—
—
14.4
(12)
Depreciation
and amortization included as an adjusting item
Net (loss) income from discontinued operations
(11.0)
—
(11.0)
—
(13)
Stock-based compensation expense included as an adjusting item
Other operating expense, net
2.3
0.3
4.5
1.8
Net
(loss) income from discontinued operations
—
(0.3)
(0.5)
(1.0)
Free Cash Flow From Continuing Operations
In addition to measuring our cash flow generation and usage based upon the operating, investing, and financing classifications included in the Condensed Consolidated Statements of Cash Flows, we also measure free cash flow from continuing operations (a Non-GAAP measure) which represents net cash used in operating activities
from continuing operations less capital expenditures. We believe free cash flow is an important measure of operating performance because it provides management and investors a measure of cash generated from operations that is available for mandatory payment obligations and investment opportunities such as funding acquisitions, repaying debt, repurchasing public debt, and repurchasing our common stock.
47
The following table reconciles cash flow used in operating activities from continuing operations (a GAAP measure) to our free cash flow from continuing operations (a Non-GAAP measure).
Cash flow used in operating activities from continuing operations (GAAP)
$
(90.4)
$
(57.0)
Less: Capital expenditures
(61.3)
(70.4)
Free
cash flow from continuing operations (Non-GAAP)
$
(151.7)
$
(127.4)
Other Commitments and Contingencies
The Company also has selected levels of property and casualty risks, primarily related to employee health care, workers' compensation claims, and other casualty losses, in addition to contingent liabilities
related to the ordinary course of litigation, investigations, and tax audits.
See Note 18 to our Condensed Consolidated Financial Statements included herein and Note 19 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for additional information about our commitments and contingent obligations.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2 to the Company's Condensed Consolidated Financial
Statements.
Critical Accounting Estimates
A description of the Company's critical accounting estimates is contained in our Annual Report on Form 10-K for the year ended December 31, 2021. There were no material changes to the Company's critical accounting estimates in the three and nine months ended September 30, 2022.
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.
48
The words "believe,""estimate,""project,""expect,""anticipate,""plan,""intend,""foresee,""should,""would,""could," 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 following the date of this report. 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 impact that the divestiture of a significant portion of our Meal Preparation Business or any such divestiture might have on the Company’s operations; risks related to the impact of the ongoing COVID-19 outbreak on our business, suppliers, consumers, customers, and employees; the success of our growth, reinvestment, and restructuring programs; our level of indebtedness and related obligations; disruptions in the financial markets; interest rates; changes in foreign currency exchange rates; customer concentration and consolidation; raw material and commodity costs; competition; loss of key suppliers; disruptions or inefficiencies in our supply chain and/or operations, including from the ongoing COVID-19 outbreak; our ability to continue to make acquisitions and
execute on divestitures in accordance with our business strategy or effectively manage the growth from acquisitions; impairment of goodwill or long lived assets; changes and developments affecting our industry, including customer preferences; the outcome of litigation and regulatory proceedings to which we may be a party; product recalls; changes in laws and regulations applicable to us; shareholder activism; disruptions in or failures of our information technology systems; changes in weather conditions, climate changes, and natural disasters; labor strikes or work stoppages; multiemployer pension plans; labor shortages and increased competition for labor; 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, 2021, and from time to time in our filings with the Securities and Exchange Commission ("SEC").
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risks, which exist as part of its ongoing business operations. The Company uses derivative instruments, where appropriate, to manage these risks. Refer to Note 19 to our Condensed Consolidated Financial Statements for additional information regarding these derivative instruments.
For
additional information regarding the Company's exposure to certain market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, within the Company's 2021 Annual Report on Form 10-K. There have been no significant changes in the Company's portfolio of financial instruments or market risk exposures from the 2021 year-end.
Item 4. Controls and Procedures
The
Company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Interim Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosures.
As of September 30, 2022, management, with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of
the Company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2022 that has materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
49
Part
II — Other Information
Item 1. Legal Proceedings
Information regarding legal proceedings is available in Note 18 to the Condensed Consolidated Financial Statements in this report.
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, 2021. 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, 2021.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
The cover page from TreeHouse Foods, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (included as Exhibit 101).
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.