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16: R2 Condensed Consolidated Balance Sheets HTML 119K
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18: R4 Condensed Consolidated Statements of Operations HTML 135K
19: R5 Condensed Consolidated Statements of Comprehensive HTML 47K
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Equity
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Discontinued Operations on Income Statement
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(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
iNYSE
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
(Do not check if a smaller reporting company)
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. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No ☒
Number of shares of Common Stock, $0.01 par value, outstanding as of April 30, 2021: i56,220,707.
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, 2020. Results of operations for interim periods are not necessarily indicative of annual results.
The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires us to use our judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of net sales and expenses during the reporting period. Actual results could
differ from these estimates.
A detailed description of the Company’s significant accounting policies can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
i
2.
RECENT ACCOUNTING PRONOUNCEMENTS
iNot yet 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. Entities may apply the ASU from March 12, 2020 through December 31, 2022. The
Company is currently evaluating the impact of this new ASU on its Condensed Consolidated Financial Statements and related disclosures.
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 (2) Structure to Win (completed in 2020) – an operating expense improvement program, (3) TreeHouse 2020 (completed in 2020) – a long-term growth and margin improvement strategy, and (4) 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 customer's preferred manufacturing and distribution partner. This reinvestment will occur through 2023, and 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 marketing competencies, furthering our e-commerce strategy and digital capabilities, and advancing automation and value engineering in our supply chain network. Employee-related costs primarily consist of dedicated employee costs.
/
9
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(2) Structure to Win
In
the first quarter of 2018, the Company announced an operating expenses improvement restructuring program ("Structure to Win") designed to align our organizational structure with strategic priorities. The program was intended to drive operational effectiveness, cost reduction, and position the Company for growth with a focus on a lean customer-centric go-to-market team, centralized supply chain, and streamlined administrative functions. This program was completed in 2020. Total costs within this program were $i92.7 million,
comprised primarily of consulting and professional fees, severance, dedicated employee costs, and Corporate office closing costs.
(3) TreeHouse 2020
In the third quarter of 2017, the Company announced TreeHouse 2020, a program intended to accelerate long-term growth through optimization of our manufacturing network, transformation of our mixing centers and warehouse footprint, and leveraging of systems and processes to drive performance. The Company’s workstreams related to these activities and selling, general, and administrative cost reductions were intended to increase our capacity utilization, expand operating margins, and streamline our plant structure to optimize
our supply chain. This program was completed in 2020. Total costs within this program were $i299.8 million, comprised primarily of consulting and professional fees, severance, dedicated employee costs, and accelerated depreciation for plant and other office closures.
(4) Other
Other costs include restructuring costs incurred for costs to exit facilities, information technology system implementation, and other administrative
costs.
i
The costs by activity for the Growth, Reinvestment, and Restructuring Programs are outlined below:
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.
Expenses associated with these programs are recorded in Cost of sales, General and administrative, and Other operating expense, net in the Condensed Consolidated Statements of Operations. The Company does not allocate costs associated with Growth, Reinvestment, and Restructuring Programs to reportable segments when evaluating the performance of its segments. As a result, costs associated with Growth, Reinvestment, and Restructuring Programs are not presented by reportable segment. Refer to Note 16 for additional information.
10
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
Below is a summary of costs by line item for the Growth, Reinvestment, and Restructuring Programs:
For
the three months ended March 31, 2021 and 2020, employee-related costs primarily consisted of dedicated project employee cost, severance, and retention; and other costs primarily consisted of consulting services. Employee-related and other costs are primarily recognized in Other operating expense, net of the Condensed Consolidated Statements of Operations.
i
The table below presents the exit cost liability activity for the Growth, Reinvestment,
and Restructuring Programs as of March 31, 2021:
Liabilities
as of March 31, 2021 associated with total exit cost reserves relate to severance. The severance liability is included in Accrued expenses in the Condensed Consolidated Balance Sheets.
i
4. RECEIVABLES SALES PROGRAM
In December 2017 and June 2019, the
Company entered into agreements to sell certain trade accounts receivable to itwo unrelated, third-party financial institutions (collectively, "the Receivables Sales Program"). The agreements can be terminated by either party with i60
days' notice. 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 receivables that
may be sold at any time is $i300.0 million.
i
The following table includes the outstanding amount of accounts receivable
sold under the Receivables Sales Program and the amount collected but not yet remitted to the financial institutions:
Collections
not remitted to financial institutions
i128.8
i202.8
//
11
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Receivables sold under the Receivables Sales Program are de-recognized 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 amount collected but not yet remitted to the financial institutions is included in Accounts payable in the Condensed Consolidated Balance Sheets.
The loss on sale of receivables was $i0.5
million and $i0.9 million for the three months ended March 31, 2021 and 2020, respectively, and is included in Other (income) expense, net in the Condensed Consolidated Statements of Operations. The Company has not recognized any servicing assets or liabilities as of March 31, 2021 or December
31, 2020, as the fair value of the servicing arrangement as well as the fees earned were not material to the financial statements.
On December 11, 2020, the Company completed the acquisition of the majority of the U.S. branded pasta portfolio as well as a manufacturing facility in St. Louis, Missouri of Riviana Foods, Inc. ("Riviana Foods"), a subsidiary of Ebro Foods, S.A. ("Ebro Foods") for a purchase price of approximately $i239.2
million in cash. Ebro Foods is a Spanish-based multinational food group operating primarily in the pasta and rice sectors. The acquisition includes the following brands: Skinner, No Yolks, American Beauty, Creamette, San Giorgio, Prince, Light ‘n Fluffy, Mrs. Weiss’, Wacky Mac, P&R Procino-Rossi, and New Mill. Additionally, the Company and Riviana Foods have a mutual put or call right to acquire or sell, respectively, the equipment utilized in the Riviana Foods Fresno, California facility for $i5.0
million by December 31, 2021. The acquisition is expected to strengthen the Company's portfolio and expand its scale to better serve its national and regional customers. The acquisition was funded from the Company’s existing cash resources.
The pasta acquisition was accounted for under the acquisition method of accounting and the results of operations were included in our Consolidated Financial Statements from the date of acquisition in the Meal Preparation segment.
i
The
following table summarizes the preliminary purchase price allocation of the fair value of net tangible and intangible assets acquired and liabilities assumed:
(In millions)
Inventories
$
i20.0
Property,
plant, and equipment, net
i48.2
Customer relationships
i68.0
Trade
names
i43.0
Formulas/recipes
i2.3
Goodwill
i57.8
Operating
lease right-of-use assets
i0.1
Assets acquired
i239.4
Assumed
liabilities
(i0.2)
Total purchase price
$
i239.2
//
12
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company allocated the intangible assets acquired to the Meal Preparation segment which included $i68.0 million of customer relationships with an estimated
life of i20 years, $i43.0 million of trade
names with an estimated life of i20 years, and $i2.3
million of formulas/recipes with estimated life of i5 years. The aforementioned intangible assets will be amortized over their estimated useful lives. The Company increased the cost of acquired inventories by approximately $i3.1
million as of December 31, 2020 and expensed $i1.0 million as a component of Cost of sales during the three months ended March 31, 2021. The Company has allocated $i57.8
million of goodwill to the Meal Preparation segment. Goodwill arises principally as a result of expansion opportunities of its scale to better serve its regional and national customers and plant operation synergies across its legacy Pasta category. The goodwill resulting from this acquisition is tax deductible. The purchase price allocation in the table above is preliminary and subject to the finalization of the Company’s valuation analysis and the option to exercise its right to acquire the $i5.0
million equipment utilized in the Fresno, California facility.
The fair values for customer relationships at the acquisition date were determined using the excess earnings method under the income approach. Trade name fair values were determined using the relief from royalty method, while the fair value of formulas/recipes was determined using the cost approach. Real property and personal property fair values were determined using the cost approach. The fair value measurements of intangible assets are based on significant unobservable inputs, and thus represent Level 3 inputs. Significant assumptions used in assessing the fair values of intangible assets include discounted future cash flows, customer attrition rates, and royalty rates.
The following unaudited pro forma information shows the results of operations for the
Company as if its pasta acquisition had been completed as of January 1, 2019. Adjustments have been made for the pro forma effects of depreciation and amortization of tangible and intangible assets recognized as part of the business combination and related income taxes. iThe pro forma results may not necessarily reflect actual results of operations that would have been achieved, nor are they necessarily indicative of future results of operations.
On May 1, 2019, the Company entered into a definitive agreement to sell its Ready-to-eat ("RTE") Cereal business to Post Holdings, Inc. ("Post"), which until that time had been a component of the Meal Preparation reporting segment. The sale of this business is part of the Company's portfolio optimization strategy. On December 19, 2019, the Federal Trade Commission objected to the sale to Post. On January 13, 2020, the sale to Post was terminated and the Company announced its intention
to pursue a sale of the RTE Cereal business to an alternative buyer. The Company continues to market the business and is committed to a plan of sale to dispose of the business.
The RTE Cereal business continues to be classified as a discontinued operation as of March 31, 2021. Expected disposal losses of $ii0.3/
million were recognized as an asset impairment charge during both the three months ended March 31, 2021 and 2020 within Net income from discontinued operations. The expected disposal loss for the RTE Cereal business is remeasured each period at the lower of carrying value or estimated fair value less costs to sell and is included in the valuation allowance in the balance sheet. Completion of the sale may be for amounts that could be significantly different from the current fair value estimate. The Company's estimate of fair value will be evaluated and recognized each reporting period until the divestiture is complete.
The Company has reflected
the RTE Cereal business as a discontinued operation for all periods presented. Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company's continuing operations.
13
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
Results
of discontinued operations are as follows:
Selling,
general, administrative and other operating expenses
i4.2
i4.9
Other
operating expense, net
i—
i0.5
Operating
income from discontinued operations
i1.9
i3.5
Interest
and other expense
i0.4
i1.3
Income
tax expense
i0.4
i0.6
Net
income from discontinued operations
$
i1.1
$
i1.6
Assets
and liabilities of discontinued operations presented in the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 include the following:
On January 10, 2020, the Company entered into a definitive agreement to sell itwo of its In-Store Bakery facilities located in Fridley, Minnesota and Lodi, California, which manufacture breads,
rolls, and cakes for in-store retail bakeries and food-away-from-home customers. These itwo facilities were included within the Snacking & Beverages reporting segment. On April 17, 2020, the sale of these facilities was completed for $i26.9
million.
14
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
i
Changes
in the carrying amount of goodwill for the three months ended March 31, 2021 are as follows:
Income taxes were recognized at effective rates of (i100.0)% and i55.1%
for the three months ended March 31, 2021 and 2020, respectively. The change in the Company's effective tax rate for the three months ended March 31, 2021 compared to 2020 is primarily the result of benefits recognized in 2020 due to the enactment of the “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act), a change in the amount of valuation allowance recorded against certain deferred tax assets, and an increase in the amount of tax deductible stock based compensation in 2021. 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.
Management estimates that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by as much as $i5.3 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.
As much as $i2.0 million of the $i5.3
million could affect net income when settled.
/
15
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The
scheduled maturities of outstanding debt, excluding deferred financing costs, at March 31, 2021 are as follows (in millions):
Remainder of 2021
$
i12.0
2022
i15.5
2023
i15.0
2024
i14.9
2025
i14.5
Thereafter
i1,892.1
Total
outstanding debt
$
i1,964.0
/
Credit Agreement
On March 26, 2021, the
Company entered into Amendment No. 3 (the “Amendment”) to the Second Amended and Restated Credit Agreement, dated as of December 1, 2017 (the "Credit Agreement") among the Company, the other loan parties thereto, the lenders from time to time party thereto and Bank of America N.A., as administrative agent, swing line lender and L/C issuer. Under the Amendment, among other things, the parties have agreed to: (i) amend and extend the maturity date of the Revolving Credit Facility and Tranche A-1 Term Loans until March 26, 2026 and the maturity date of the Term A Loans until March 26, 2028 (each as defined in the Credit Agreement), (ii) refinance and increase the existing Term Loan amounts by $i304.0
million, and (iii) include customary provisions under the Amendment providing for the replacement of LIBOR with any successor rate. The material terms and conditions under the Credit Agreement are otherwise substantially consistent with those contained in the Credit Agreement prior to the Amendment.
The Company’s average interest rate on debt outstanding under its Credit Agreement for the three months ended March 31, 2021 was i1.74%.
Including the impact of interest rate swap agreements in effect as of March 31, 2021, the average rate increased to i2.20%.
Revolving Credit Facility — During the three months ended March 31, 2021, the Company drew $i30.0 million
from its $i750.0 million Revolving Credit Facility. As of March 31, 2021, the Company had remaining availability of $i697.3
million under the Revolving Credit Facility, and there were $i22.7 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.
2024 Notes — The Company previously issued i6.000%
notes in the aggregate principal amount of $i775 million due on February 15, 2024 (the "2024 Notes"). On February 16, 2021the Company, through Wells Fargo Bank, National Association, as trustee (the "Trustee"), completed a partial redemption of $i200.0 million
of its 2024 Notes, and on March 31, 2021, the Company completed the full redemption of the remaining $i402.9 million outstanding principal of its 2024 Notes at a price of i101.50%
of the principal amount, plus accrued and unpaid interest to, but not including, each redemption date (the "2024 Notes Redemption").
/
16
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2028 Notes — On September 9, 2020, the Company completed its public offering of $i500 million
aggregate principal amount of its i4.000% senior notes due September 1, 2028 (the "2028 Notes").
Loss on Extinguishment of Debt — For the three months ended March 31, 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.
Fair
Value - At March 31, 2021, the aggregate fair value of the Company's total debt was $i1,963.8 million and its carrying value was $i1,960.0
million. At December 31, 2020, the aggregate fair value of the Company's total debt was $i2,250.4 million and its carrying value was $i2,228.9
million. The fair values of the Revolving Credit Facility, 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
10.
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
i56.5
i56.3
(1)For
the three months ended March 31, 2020, 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 for the period. Equity awards, excluded from our computation of diluted earnings per share because they were anti-dilutive, were i1.4
million and i2.1 million for the three months ended March 31, 2021 and 2020, respectively.
//
i
11.
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 available to be awarded under the Plan is approximately i17.5
million, of which approximately i3.4 million remained available at March 31, 2021.
i
Total
compensation expense related to stock-based payments and the related income tax benefit recognized in Net income (loss) from continuing operations are as follows:
Compensation expense related to stock-based payments
$
i4.9
$
i7.9
Related
income tax benefit
i1.4
i2.1
/
All
amounts below include continuing and discontinued operations.
/
17
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. 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.
i
The following table summarizes the restricted stock unit activity during the three months ended March
31, 2021:
Tax
benefit recognized from vested restricted stock units
i2.3
i1.4
/
Future
compensation costs related to restricted stock units are approximately $i34.8 million as of March 31, 2021 and will be recognized on a weighted average basis over the next i2.3
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. 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 and 2021, 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 the ithree-year performance period. Additionally, for the cumulative ithree-year
performance period, one-quarter of the units will accrue. In 2021, certain executive members of management received awards that had a market condition as described below. 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. Accrued units will be converted to stock or cash, at the discretion of the Compensation Committee, generally, on the third anniversary of the grant date. The Company intends to settle these awards in stock and has the shares available to do so.
In 2021, the Compensation Committee of the Board approved performance unit awards granted to certain executive members of management that include a relative total shareholder return market condition that is measured over a ithree-year
performance period in addition to the existing operating performance measures. The units will accrue, multiplied by a predefined percentage generally between i0% and i200% for the operating performance
measures and i0% and i150%
for the relative total shareholder return measure, depending on the achievement attained for each performance measure. The fair value of the portion of the award earned based on relative total shareholder return was valued using a Monte Carlo simulation model with a grant-date fair value of $i59.16 on approximately i23,200
units granted. 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. The Company intends to settle these awards in stock and has the shares available to do so.
18
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
The
assumptions used in the Monte Carlo simulation were as follows:
Tax
benefit recognized from performance units vested
i0.3
i0.6
/
Future
compensation costs related to the performance units are estimated to be approximately $i18.0 million as of March 31, 2021 and are expected to be recognized over the next i1.9
years. The grant date fair value of the awards is equal to the Company’s closing stock price on the date of grant. The fair value of the portion of certain awards earned based on relative total shareholder return was valued using a Monte Carlo simulation model.
19
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
12.
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 months ended March 31, 2021 and 2020.
//
(2)Refer to Note 13 for additional information regarding these reclassifications.
i
13.
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:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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) expense, net of the Condensed Consolidated Statements of Operations.
i
14.
COMMITMENTS AND CONTINGENCIES
Litigation, Investigations, and Audits - On November 16, 2016, a purported TreeHouse shareholder filed a class action captioned Tarara v. TreeHouse Foods, Inc., et al., Case No. 1:16-cv-10632, in the United States District Court for the Northern District of Illinois against TreeHouse and certain of its officers. The complaint, amended on March 24, 2017, is purportedly brought on behalf of all purchasers of TreeHouse common stock from January 20, 2016 through and including November 2, 2016. It asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
and seeks, among other things, damages and costs and expenses. On December 22, 2016, another purported TreeHouse shareholder filed an action captioned Wells v. Reed, et al., Case No. 2016-CH-16359, in the Circuit Court of Cook County, Illinois, against TreeHouse and certain of its officers. This complaint, purportedly brought derivatively on behalf of TreeHouse, asserts state law claims against certain officers for breach of fiduciary duty, unjust enrichment, and corporate waste. On February 7, 2017, another purported TreeHouse shareholder filed an action captioned Lavin v. Reed, et al., Case No. 17-cv-01014, in the Northern District of Illinois, against TreeHouse and certain of its officers. This complaint is also purportedly brought derivatively on behalf of TreeHouse, and
it asserts state law claims against certain officers for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste. On February 8, 2019, another purported TreeHouse shareholder filed an action captioned Bartelt v. Reed, et al., Case No. 1:19-cv-00835, in the United States District Court for the Northern District of Illinois. This complaint is purportedly brought derivatively on behalf of TreeHouse and asserts state law claims against certain officers for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste, in addition to asserting violations of Section 14 of the Securities Exchange Act of 1934. Finally, on June 3, 2019, another purported TreeHouse shareholder filed an action captioned City of Ann Arbor
Employees’ Retirement System v. Reed, et al., Case No. 2019-CH-06753, in the Circuit Court of Cook County, Illinois, against TreeHouse and certain of its officers. Like Wells, Lavin, and Bartelt,this complaint is purportedly brought derivatively on behalf of TreeHouse and asserts claims for contribution and indemnification, breach of fiduciary duty, and aiding and abetting breaches of fiduciary duty.
All ifive
complaints make substantially similar allegations (though the amended complaint in Tarara now contains additional detail). Essentially, the 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 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 that these actions artificially inflated the market price of TreeHouse common stock during the class period, thus purportedly harming investors. The Bartelt action also includes substantially similar allegations concerning events in 2017, and the Ann Arbor complaint also seeks contribution from the individual defendants for losses incurred by the company in these litigations. We believe that these claims are without merit and intend to defend against them vigorously, but note that, as described below, an agreement in principle has been reached to resolve the federal securities class action.
Due
to the similarity of the complaints, the parties in Wells and Lavin entered stipulations deferring the litigation until the earlier of (i) the court in Public Employees’ entering an order resolving defendants’ anticipated motion to dismiss therein or (ii) plaintiffs’ counsel receiving notification of a settlement of Public Employees’ or until otherwise agreed to by the parties. On September 27, 2018, the parties in Wells and Lavin filed joint motions for entry of agreed orders further deferring the matters in light of the Public Employees’ Court’s denial of the motion to dismiss in February
2018. The Wells and Lavin Courts entered the agreed orders further deferring the matters on September 27, 2018 and October 10, 2018, respectively. On June 25, 2019, the parties jointly moved to consolidate the Bartelt matter with Lavin, so that it would be subject to the Lavin deferral order. This motion was granted on June 27, 2019, and Bartelt is now consolidated with Lavin and deferred. The parties filed a status report on April
13, 2021. Similarly, Ann Arbor was consolidated with Wells on August 13, 2019, and is now deferred. On February 8, 2021, the plaintiffs in Wells moved to modify the deferral order to lift the stay, and defendants thereafter opposed the motion. On April 15, 2021, the court denied the motion and set a status hearing for July 15, 2021.
/
21
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Since its initial docketing, the Tarara matter has been re-captioned as Public Employees’ Retirement Systems of Mississippi v. TreeHouse Foods, Inc., et al., in accordance with the Court’s order appointing Public Employees’ Retirement Systems of Mississippi as the lead plaintiff. On May 26, 2017, the Public Employees’ defendants filed a motion to dismiss, which the court denied on February 12, 2018. On April 12, 2018, the Public Employees’ defendants filed their answer to
the amended complaint. On April 23, 2018, the parties filed a joint status report with the Court, which set forth a proposed discovery and briefing schedule for the Court’s consideration. On July 13, 2018, lead plaintiff filed a motion to certify the class, and defendants filed their response in opposition to the motion to certify the class on October 8, 2018. On November 12, 2018, the parties filed an agreed motion to stay proceedings to allow them to explore mediation. The motion was granted on November 19. The parties thereafter engaged in mediation but failed to resolve the dispute. On March 29, 2019, the parties resumed litigation by filing an agreed motion for extension of time, which was granted on April 9. Under that
schedule, lead plaintiff filed its reply class certification brief on May 17, 2019.
On February 26, 2020, the court granted lead plaintiff’s motion for class certification. Defendants then filed a petition for permissive appeal of the class certification order in the United States Court of Appeals for the Seventh Circuit on March 11, 2020. After ordering lead plaintiff to file a response, the court denied the petition on May 4, 2020.
On December 16, 2019, the parties agreed to extend the case schedule i90
days. This agreed motion was granted on December 25, 2019. At a status conference on March 10, 2020, the parties informed the court that they intended to engage in a second mediation and the court extended then-upcoming deadlines under the case schedule, pending a further status report from the parties regarding the extent of the stay needed to facilitate mediation. The court subsequently issued multiple general orders as a result of the COVID-19 outbreak, which together postponed all case deadlines for a total of i77 days. On June
9, 2020, the parties filed a joint status report informing the court that mediation had been scheduled for July 9, 2020. The next day, the court stayed the case pending the outcome of mediation. Any in-person mediation was thereafter postponed due to ongoing COVID-19 concerns, and the parties proceeded to mediate remotely. On April 19, 2021, the parties advised the Court that they have reached an agreement in principle to resolve the matter, subject to various conditions, definitive documentation, and Court approval. The agreement contemplates 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. As a result of these developments, the Company has recorded a $ii27.0/
million liability and a corresponding insurance receivable within Accrued expenses and Prepaid expenses and other current assets, respectively, in the Condensed Consolidated Balance Sheets as of March 31, 2021.
The Company is party to matters challenging its wage and hour practices. These matters include a number of class actions consolidated under the caption Negrete v. Ralcorp Holdings, Inc., et al, pending in the U.S. District Court for the Central District of California, in which plaintiffs allege a pattern of violations of California and/or federal law at three former Company manufacturing facilities in California. The Company
has notified the Court that it has reached a preliminary settlement understanding with the Negrete plaintiffs that would resolve all associated matters for a payment by the Company of $i9.0 million. The preliminary understanding reached with the Negrete plaintiffs involves procedural requirements and Court approval which may continue through 2021. As a result of these developments,
the Company has an accrual for a $i9.0 million liability within Accrued expenses in the Condensed Consolidated Balance Sheets as of March 31, 2021.
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, none of which are significant. In the Company’s opinion, the settlement of any such currently pending or threatened matter is not expected to have a material impact on the Company’s financial position, results of operations, or cash flows.
22
TREEHOUSE
FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
15. DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by derivative instruments include interest rate risk, foreign currency risk, commodity
price risk, and risk associated with the unfunded portion of the Company's deferred compensation liability. Derivative contracts are entered into for periods consistent with the related underlying exposure and do not constitute positions independent of those exposures. The Company does not enter into derivative instruments for trading or speculative purposes.
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.
As of March 31, 2021, the Company had entered into $i875.0 million of long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base.
Under the terms of the agreements, $i875.0 million in variable-rate debt was swapped for a weighted average fixed interest rate base of approximately i2.68% in 2020 and i2.91%
from 2021 through 2025. These instruments are not accounted for under hedge accounting and the changes in their fair value are recognized in the Condensed Consolidated Statements of Operations.
Foreign Currency Contracts- Due to the Company’s foreign operations, it is exposed to foreign currency risk. The Company enters into foreign currency contracts to manage the risk associated with foreign currency cash flows. This includes, but is not limited to, using foreign currency contracts
to establish a fixed foreign currency exchange rate for the net cash flow requirements for purchases of inventory, sales of finished goods, and future settlement of foreign-denominated assets and liabilities. These contracts do not qualify for hedge accounting and changes in their fair value are recognized in the Condensed Consolidated Statements of Operations. As of March 31, 2021, the Company had $i7.8
million of foreign currency contracts outstanding, expiring throughout 2021 and 2022.
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 records their fair value on the Condensed Consolidated Balance Sheets, with changes in value being recognized in the Condensed Consolidated Statements of Operations.
The Company’s derivative commodity contracts may include
contracts for diesel, oil, plastics, natural gas, electricity, resin, corn, coffee, flour, 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 March 31, 2021, the Company had outstanding contracts
for the purchase of i0.1 million megawatts of electricity, expiring throughout 2021 and 2022; i12.0 million gallons of diesel,
expiring throughout 2021; i5.5 million dekatherms of natural gas, expiring throughout 2021 and 2022; i1.5 million pounds of coffee,
expiring throughout 2021; i17.5 million pounds of resin, expiring throughout 2021, and i2.2 million bushels
of flour, expiring throughout 2021.
Total Return Swap Contract - In March 2021, the Company entered into 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. While the total return
swap contract is treated as an economic hedge, the Company has not designated it as a hedge for accounting purposes. 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 March 31, 2021, the notional value of the total return swap contract was $i10.3
million.
/
23
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
iThe
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, foreign currency
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.
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
16. SEGMENT INFORMATION
The Company manages operations on a company-wide basis, thereby making determinations as to the allocation of resources in total rather than on a segment-level basis. The
Company has designated reportable segments based on how management views its business. The Company does not segregate assets between segments for internal reporting. Therefore, asset-related information has not been presented. The reportable segments, as presented below, are consistent with the manner in which the Company reports its results to the Chief Operating Decision Maker.
The principal products that comprise each segment are as follows:
Meal Preparation – Our Meal Preparation segment sells aseptic cheese & pudding; baking and mix powders; hot cereals; jams, preserves, and jellies; liquid and powdered non-dairy creamer; macaroni and
cheese; mayonnaise; Mexican, barbeque, and other sauces; pasta; pickles and related products; powdered soups and gravies; refrigerated and shelf stable dressings and sauces; refrigerated dough; single serve hot beverages; skillet dinners; and table and flavored syrups.
The Company evaluates the performance of its segments based on net sales dollars and direct operating income. Direct operating income is defined as gross profit less freight out, sales commissions,
and direct selling, general, and administrative expenses. The amounts in the following tables are obtained from reports used by senior management and do not include income taxes. Other expenses not allocated include unallocated selling, general, and administrative expenses, unallocated costs of sales, and unallocated corporate expenses (amortization expense, other operating expense, and asset impairment). The accounting policies of the Company’s segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to the Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
i
Financial
information relating to the Company’s reportable segments on a continuing operations basis is as follows:
Unallocated
selling, general, and administrative expenses
(i69.0)
(i71.4)
Unallocated
cost of sales (1)
(i4.1)
i3.2
Unallocated
corporate expense and other (1)
(i38.1)
(i36.0)
Operating
income
$
i11.0
$
i30.2
/
(1)Includes
charges related to growth, reinvestment, and restructuring programs and other costs managed at corporate. Other costs include incremental expenses directly attributable to our response to the COVID-19 pandemic, which included supplemental pay to our front-line personnel, additional protective equipment for employees, and additional sanitation measures.
/
25
TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Disaggregation of Revenue
i
Segment
revenue disaggregated by product category groups are as follows:
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
TreeHouse Foods, Inc. is a leading manufacturer and distributor of private label foods and beverages in North America. We have approximately 40 production facilities across North America and Italy, and our vision is to be the undisputed solutions leader for custom brands for our customers. Our extensive product portfolio includes snacking, beverages, and meal preparation products, available in shelf stable, refrigerated, frozen, and fresh formats. We have a comprehensive offering of packaging formats and flavor profiles, and we also offer clean label, organic, and preservative-free ingredients across almost our entire portfolio. Our purpose is to make high quality
food and beverages affordable to all.
Our reportable segments, and the principal products that comprise each segment, are as follows:
•Meal Preparation - Our Meal Preparation segment is focused on productivity, efficiency and cash flow. Operational progress is driven by continuous improvement and value engineering. The organizational focus allows the Company to apply resources that better align with customers’ goals for driving value within the center of the retail grocery store. This segment includes center of the store grocery items (single-serve coffee, powdered creamer,
dressings, dips, sauces, salsas, syrups, pasta sauces, jams and jellies, pickles, and cheese sauces) and main course meal items (dough, dry dinners, hot cereals, and pasta) in shelf stable and refrigerated formats for retail, food-away-from-home, industrial, ingredient, export and co-pack customers. We play a private label leadership role in several categories and offer clean label, organic, or better-for-you formulas in nearly every category.
•Snacking & Beverages - Our Snacking and Beverages segment is focused on revenue growth, and research, development and commercialization is geared toward evolving consumer trends. The organizational focus enables the Company to apply the proper resources to meet its retail customers’ goals around experience, uniqueness
and differentiation in private label. This segment produces and sells a comprehensive portfolio of sweet and savory baked food items (cookies, crackers, frozen waffles, pita chips, pretzels, snack bars and unique candy products) and beverages and drink mixes (powdered drinks, broths/stocks, ready-to-drink beverages, coffee/tea concentrates and bagged specialty tea) for retail, food-away-from-home and co-pack customers in shelf stable, refrigerated and frozen formats. Across many of our categories, we have a private label leadership role and can offer our customer partners a range of value and nutritional solutions, including clean label, organic and gluten free, so that 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 month periods ended March 31, 2021 and 2020. 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.
27
Recent
Developments
Debt Refinancing
On March 26, 2021, the Company amended its Second Amended and Restated Credit Agreement, dated as of December 1, 2017 (the "Credit Agreement") which extended the maturity date of the Revolving Credit Facility and Tranche A-1 Term Loans until March 26, 2026 and the maturity date of the Term A Loans until March 26, 2028, and the amendment refinanced and increased the existing Term Loan amounts by $304.0 million. Additionally, the Company drew
$30.0 million from its $750.0 million Revolving Credit Facility. The net proceeds from Term Loan A-1, Term Loan A, and Revolving Credit Facility as well as available cash on hand were used to fund the redemption of all of the $602.9 million outstanding principal amount of the 2024 Notes. Refer to Note 9 to our Condensed Consolidated Financial Statements for additional information.
COVID-19
In December 2019, a novel coronavirus disease ("COVID-19") was first reported and subsequently characterized by the World Health Organization ("WHO") as a pandemic in March 2020. The spread of COVID-19 throughout the United States and the rest of the world continues to have an impact on the global economy, our business, and industry. Our cross-functional task force continues to monitor and coordinate the
Company's response to COVID-19 including the ongoing defense of the health and safety of our employees.
The COVID-19 pandemic impacted consumer behavior and resulted in at-home consumption compared to food-away-from-home consumption. This consumer consumption trend has continued through the first quarter of 2021 and benefits our retail grocery business which comprises approximately 80% of total net sales. The majority of food-away-from home channel sales are within our Meal Preparation segment, and the impact of the COVID-19 pandemic partially offsets the benefit from retail grocery within this segment. However, our Snacking & Beverages segment is mostly comprised of retail grocery, and therefore, this segment continues to benefit from the at-home consumption as a result of the COVID-19 pandemic. Changes in consumer behavior consumption patterns have impacted and could continue to impact our revenues
and earnings.
We continue to monitor the impact of the COVID-19 pandemic on our supply chain network and continue to incur incremental costs related to COVID-19 to address the safety and welfare of our employees. Further, there have been increased costs associated with a tighter labor market due to COVID-19 related absenteeism and labor-related restrictions. The COVID-19 environment has also caused freight rates to increase due to tighter capacity and stronger demand in the trucking market with the higher shipping volume of products and groceries at-home. These trends have impacted and could continue to impact our margins and pricing.
The impact of COVID-19 continues to remain uncertain and depends on the duration and severity of the pandemic; federal, state, and local government actions taken in response; the macroeconmonic environment; and the
rollout of the vaccination programs and potential risks of new strains of the virus. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, consumer consumption patterns, supply chain, results of operations, and financial condition.
28
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 — First quarter net sales decreased by $27.6 million, or 2.5%, in 2021 compared to 2020. The change in net sales from the first quarter of 2020 to the first quarter of 2021 was due to the following:
Dollars
Percent
(In
millions)
2020 Net sales
$
1,084.9
Volume/mix excluding acquisitions and divestitures
(50.8)
(4.7)
%
Pricing
(3.1)
(0.3)
Volume/mix
related to divestitures
(18.5)
(1.7)
Acquisition
40.9
3.8
Foreign currency
3.9
0.4
2021
Net sales
$
1,057.3
(2.5)
%
Volume/mix related to divestitures
1.7
Acquisition
(3.8)
Foreign
currency
(0.4)
Percent change in organic net sales (1)
(5.0)
%
(1) Organic net sales is a Non-GAAP financial measure. Refer to the definition within the "Non-GAAP Measures" section.
Organic net sales decreased 5.0% in the first quarter of 2021 compared to 2020 driven by:
•Volume/mix excluding acquisitions and divestitures was
unfavorable 4.7% year-over-year primarily due to decreased retail demand as a result of lapping consumer pantry stocking in March 2020 from the uncertainty of the COVID-19 pandemic. This was partially offset by distribution gains which outpaced distribution losses.
•Pricing was slightly unfavorable driven by the carryover impact of prior year pricing adjustments.
Additionally, lower volume/mix related to the divestiture of the two In-Store Bakery facilities was unfavorable 1.7%. This was more than offset by the favorable impact of the inclusion of the business from the pasta acquisition of 3.8% and favorable foreign exchange of 0.4% resulting in a year-over-year decrease in reported net sales of 2.5%.
Gross Profit — Gross profit as a percentage
of net sales was 17.1% in the first quarter of 2021, compared to 18.0% in the first quarter of 2020, a decrease of 0.9 percentage points. The decrease is primarily due to lower volume from reduced COVID-19 pandemic demand, commodity inflation, and incremental costs incurred in response to the COVID-19 pandemic, including increased production shifts, supplemental pay, protective equipment for employees, and additional sanitation measures. This was partially offset by increased volume from the inclusion of the business from the pasta acquisition and favorable channel mix.
Total Operating Expenses — Total operating expenses as a percentage of net sales were 16.0% in the first quarter of 2021 compared to 15.2% in the first quarter of 2020, an increase of 0.8 percentage points. The increase is primarily attributable to integration costs associated with the recent pasta acquisition, higher
freight costs due to reduced market capacity and an increase in spot market usage, and professional services fees related to shareholder activism. This was partially offset by lower employee incentive compensation expense.
30
Total Other Expense —Total other expense decreased by $92.4 million to $10.8 million in the first quarter of 2021 compared to $103.2 million in the first quarter of 2020. The decrease was primarily related to favorable non-cash mark-to-market impacts from hedging activities, driven by interest rate swaps and commodity contracts, and favorable
currency exchange rate impacts between the U.S. and Canada compared to unfavorable mark-to-market and currency exchange impacts in the prior year. This was partially offset by a loss on extinguishment of debt.
Income Taxes — Income taxes were recognized at an effective rate of (100.0)% in the first quarter of 2021 compared to 55.1% recognized in the first quarter of 2020. The change in the Company’s effective tax rate is primarily the result of benefits recognized in 2020 due to the enactment of the CARES Act and a change in the amount of valuation allowance recorded against certain deferred tax assets, and an increase in the amount of tax deductible stock based compensation in 2021.
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
Net income from discontinued operations decreased $0.5 million in the first quarter of 2021 compared to the first quarter of 2020. The decrease is primarily related to lower Ready-to-eat Cereal volume due to decreased retail demand as a result of lapping consumer pantry stocking in March 2020 from the uncertainty of the COVID-19 pandemic. Refer to Note 6 of our Condensed Consolidated Financial Statements for additional details.
The
change in net sales by segment from the first quarter of 2020 to the first quarter of 2021 was due to the following:
Three Months Ended March 31,
Meal Preparation
Snacking
& Beverages
Dollars
Percent
Dollars
Percent
(unaudited, dollars in millions)
2020 Net sales
$
673.6
$
411.3
Volume/mix
excluding acquisitions and divestitures
(37.1)
(5.5)
%
(13.7)
(3.4)
%
Pricing
(1.2)
(0.2)
(1.9)
(0.5)
Volume/mix
related to divestitures
—
—
(18.5)
(4.4)
Acquisition
40.9
6.1
—
—
Foreign
currency
2.3
0.3
1.6
0.4
2021 Net sales
$
678.5
0.7
%
$
378.8
(7.9)
%
Volume/mix
related to divestitures
—
4.4
Acquisition
(6.1)
—
Foreign
currency
(0.3)
(0.4)
Percent change in organic net sales
(5.7)
%
(3.9)
%
Meal
Preparation
Net sales in the Meal Preparation segment increased $4.9 million, or 0.7%, in the first quarter of 2021 compared to the first quarter of 2020. The change in net sales was primarily driven by the favorable impact of the inclusion of the business from the pasta acquisition and distribution gains that outpaced distribution losses. This was partially offset by decreased retail demand as a result of lapping consumer pantry stocking in March 2020 from the uncertainty of the COVID-19 pandemic. Organic net sales in the Meal Preparation segment decreased by 5.7% year-over-year.
Direct operating income as a percentage of net sales decreased 0.9 percentage points in the first quarter of 2021 compared to the first quarter of 2020. This decrease was due to lower volume from reduced COVID-19 pandemic demand, increased operational costs as
a result of severe winter weather in certain regions of the U.S., commodity inflation, and higher freight costs due to reduced market capacity and an increase in spot market usage. This was partially offset by increased volume from the inclusion of the business from the pasta acquisition and favorable channel mix.
Snacking & Beverages
Net sales in the Snacking & Beverages segment decreased $32.5 million, or 7.9%, in the first quarter of 2021 compared to the first quarter of 2020. The change in net sales was due to decreased retail demand as a result of lapping consumer pantry stocking in March 2020 from the uncertainty of the COVID-19 pandemic and lower volume/mix due to divestitures. This was partially offset by distribution gains which outpaced distribution losses and innovation with new items. Organic net sales in the Snacking &
Beverages segment decreased 3.9% year-over-year.
Direct operating income as a percentage of net sales decreased 0.7 percentage points in the first quarter of 2021 compared to the first quarter of 2020. The decrease was due to lower volume from reduced COVID-19 pandemic demand and higher freight costs due to reduced market capacity and an increase in spot market usage.
32
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, conducting acquisitions, and managing its capital structure on a short and long-term basis. If additional borrowings are needed, approximately $697.3 million was available under the Revolving Credit Facility as of March 31, 2021. See Note 9 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.
At this time,
COVID-19 has not had a material adverse impact on our operations, and 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, which will be paid equally in the fourth quarters of 2021 and 2022. In addition, we are actively monitoring the collectability of all of our outstanding trade receivables, including those within our food-away-from-home channel, which comprises less than 10% of our revenue. Given the dynamic nature of COVID-19, 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:
Cash used in operating activities of continuing operations was $5.5 million in the first three months of 2021 compared to cash provided by operating activities of $68.5 million in the first three months of 2020, a decrease of $74.0 million. The decrease was primarily attributable to lower cash earnings, slower inventory turnover as a result of lapping consumer pantry stocking in March 2020 from the uncertainty of the COVID-19 pandemic, and increased inventory levels to improve service. This was partially offset by higher usage of the Receivables Sales Program. Refer to Note 4 to our Condensed Consolidated Financial Statements for additional information.
Investing Activities From Continuing Operations
Cash used in investing
activities of continuing operations was $13.2 million in the first three months of 2021 compared to $26.0 million in the first three months of 2020, a decrease in cash used of $12.8 million. This was driven by proceeds received from the sale of our investments during the three months ended March 31, 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 15 to our Condensed Consolidated Financial Statements for additional information. This was partially offset by the non-recurrence of the receipt of proceeds from the sale of the
Minneapolis, Minnesota facility in the prior year.
33
Financing Activities From Continuing Operations
Net cash used in financing activities of continuing operations was $293.3 million in the first three months of 2021 compared to cash provided by financing activities of $92.3 million in the first three months of 2020, a decrease in cash provided by financing activities of $385.6 million. The decrease is primarily attributable to the redemption of the 2024 Notes and smaller draw on the Company's Revolving Credit Facility during the first three months of 2021 compared
to the first three months of 2020. This was partially offset by the amendment of the Credit Agreement which resulted in an increase in Term Loan balances used to fund the redemption of the 2024 Notes.
Cash Flows From Discontinued Operations
Our cash used in discontinued operations was $3.5 million in the first three months of 2021 compared to $6.3 million in the first three months of 2020, a decrease in cash used of $2.8 million. The decrease in cash used in discontinued operations is primarily attributable to a non-recurring payment of a working capital adjustment from the 2019 sale of the Snacks division that occurred during the three months ended March 31, 2020. This was partially offset by a decrease in cash flow provided by operating activities from the Ready-to-eat Cereal business.
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) provided by 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.
The following table reconciles cash flow (used in) provided by operating activities
from continuing operations (a GAAP measure) to our free cash flow from continuing operations (a Non-GAAP measure).
Cash flow (used in) provided by operating activities from continuing operations
$
(5.5)
$
68.5
Less: Capital expenditures
(31.3)
(31.1)
Free cash flow from continuing operations
$
(36.8)
$
37.4
Debt
Obligations
At March 31, 2021, we had $30.0 million outstanding under the Revolving Credit Facility, $500.0 million outstanding under Term Loan A, $930.0 million outstanding under Term Loan A-1, $500.0 million of the 2028 Notes outstanding, and $4.0 million of other obligations. In addition, at March 31, 2021, there were $22.7 million in letters of credit of which under the Revolving Credit Facility that were issued but undrawn.
Also, at March 31, 2021, our Revolving Credit Facility provided for an aggregate commitment of $750 million, of which $697.3 million was available. Interest rates on debt outstanding under the Revolving Credit Facility, Term Loan A, and Term Loan A-1 (collectively known as
the "Amended and Restated Credit Agreement") for the three months ended March 31, 2021 averaged 1.74%. Including the interest rate swap agreements in effect as of March 31, 2021, the average rate increased to 2.20%.
We are in compliance with all applicable financial debt covenants as of March 31, 2021. See Note 9 to our Condensed Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.
34
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.
The following is a description of the transactions between
the combined TreeHouse Foods, Inc. and Guarantor Subsidiaries with Non-Guarantor Subsidiaries:
The costs of raw materials, ingredients, packaging materials, fuel, and energy have been volatile in recent years and future changes in such costs may cause our results of operations and our operating margins to fluctuate significantly. We believe the overall food and beverage industry is facing significant inflation across several agricultural commodities, specifically edible oils (soybean, coconut, canola, and palm), wheat, durum, coffee, and oats. 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, we offset the effect of increased costs by raising prices to our customers. However, for competitive reasons, we may not be able to pass along the full
effect of increases in raw materials and other input costs as we incur them.
36
Non-GAAP Measures
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 SKU rationalization, the net sales associated with the pasta acquisition from Riviana Foods, foreign currency, and the net sales associated with the divestiture of the In-Store Bakery facilities, which closed on April 17, 2020. 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 From Continuing Operations, Adjusting for Certain Items Affecting Comparability
Adjusted earnings
per diluted share from continuing operations ("adjusted diluted EPS") reflects adjustments to GAAP earnings (loss) per diluted share from continuing operations to identify items that, in management’s judgment, significantly affect the assessment of earnings results between periods. 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. As the Company cannot predict the timing and amount of charges that include, but are not limited to, items such as acquisition, integration, divestiture, 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, 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 from continuing operations, excluding certain items affecting comparability, to the relevant GAAP measure of diluted EPS from continuing operations as presented in the Condensed Consolidated Statements of Operations,
is as follows:
Diluted
earnings (loss) per share from continuing operations (GAAP)
$
0.01
$
(0.58)
Growth, reinvestment, restructuring programs & other
(1)
0.35
0.36
Loss
on extinguishment of debt
(2)
0.25
—
COVID-19
(3)
0.16
(0.09)
Acquisition,
integration, divestiture, and related costs
(4)
0.09
—
Shareholder activism
(5)
0.04
—
Tax
indemnification
(6)
—
0.01
Foreign currency (gain) loss on re-measurement of intercompany notes
(7)
(0.03)
0.26
Mark-to-market
adjustments
(8)
(0.38)
1.13
Taxes on adjusting items
(0.13)
(0.72)
Adjusted
diluted EPS from continuing operations (Non-GAAP)
$
0.36
$
0.37
37
During the three months ended March 31, 2021 and 2020, the
Company entered into transactions that affected the year-over-year comparison of its financial results from continuing operations as follows:
(1) 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 March 31, 2021 and 2020, the Company incurred growth, reinvestment, and restructuring program costs of approximately $19.6 million and $19.9 million, respectively. Refer to Note 3 to our Condensed
Consolidated Financial Statements for additional details. Additionally, the Company recognized other items affecting comparability including recovery of insurance proceeds related to a prior period product recall, consulting fees associated with the CFO transition, and regulatory compliance costs related to changes in nutrition labeling requirements. These other items were approximately $(0.1) million and $0.6 million for the three months ended March 31, 2021 and 2020, respectively.
(2) For the three months ended March 31, 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. Refer to Note 9 to our Condensed Consolidated Financial Statements for additional details.
(3) During 2021 and 2020, the Company incurred incremental expenses directly attributable to our response to the COVID-19 pandemic, which included supplemental pay to our front-line personnel, additional protective equipment for employees, and additional sanitation measures. These costs were approximately $8.8 million and $0.9 million for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2020,
these costs were more than offset by an income tax benefit due to the enactment of the CARES Act of approximately $6.0 million.
(4) Acquisition, integration, divestiture, and related costs represents costs associated with completed and potential divestitures, completed and potential acquisitions, the related integration of the acquisitions, and gains or losses on the divestiture of a business. Refer to Note 6 to our Consolidated Financial Statements for additional details.
(5) The Company incurred fees related to shareholder activism which include directly applicable third-party advisory and professional service fees.
(6) The
tax indemnification line 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.
(7) The Company has Canadian dollar denominated intercompany loans and incurred foreign currency gains of $1.5 million and foreign currency losses of $14.9 million for the three months ended March 31, 2021 and 2020, respectively, to re-measure the loans at quarter end. These charges are non-cash and the loans are eliminated in consolidation.
(8)
The Company’s derivative contracts are marked-to-market each period. The non-cash unrealized changes in fair value recognized in Other (income) expense, 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 15 to our Condensed Consolidated Financial Statements for additional details.
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 from Continuing Operations, Adjusted EBIT from Continuing Operations, Adjusted EBITDA from Continuing Operations, Adjusted Net Income Margin from Continuing Operations, Adjusted EBIT Margin from Continuing Operations and Adjusted EBITDA Margin from Continuing Operations, Adjusting for Certain Items Affecting Comparability
Adjusted net income from continuing operations represents GAAP net income (loss) 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 from continuing operations section above. 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.
38
Adjusted EBIT from continuing operations represents adjusted net income from continuing operations before interest expense, interest income, and income tax expense. Adjusted EBITDA from continuing operations
represents adjusted EBIT from continuing operations before depreciation and amortization expense and non-cash stock-based compensation expense. Effective January 1, 2021, non-cash stock-based compensation expense was added as an adjustment to our calculation of Adjusted EBITDA in order to better reflect our core operating performance. Prior period amounts have been recast to conform to this presentation. Adjusted EBIT from continuing operations and adjusted EBITDA from continuing operations 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
net income margin from continuing operations, adjusted EBIT margin from continuing operations, and adjusted EBITDA margin from continuing operations are calculated as the respective metric defined above as a percentage of net sales 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 from continuing operations section above.
The following table reconciles the Company’s net income (loss) from continuing operations as presented in the Condensed Consolidated Statements of Operations, the relevant GAAP measure, to Adjusted net income from continuing operations, Adjusted EBIT from continuing operations, and Adjusted EBITDA from continuing operations for
the three months ended March 31, 2021 and 2020:
Net income (loss) from continuing operations
(GAAP)
$
0.4
$
(32.8)
Growth, reinvestment, restructuring programs & other
(1)
19.5
20.5
Loss
on extinguishment of debt
(2)
14.4
—
COVID-19
(3)
8.8
(5.1)
Acquisition,
integration, divestiture, and related costs
(4)
5.3
(0.1)
Shareholder activism
(5)
2.1
—
Tax
indemnification
(6)
—
0.8
Foreign currency (gain) loss on re-measurement of intercompany notes
(7)
(1.5)
14.9
Mark-to-market
adjustments
(8)
(21.6)
64.1
Less: Taxes on adjusting items
(6.9)
(41.6)
Adjusted
net income from continuing operations (Non-GAAP)
20.5
20.7
Interest expense
25.1
24.8
Interest
income
(4.1)
(4.0)
Income taxes (excluding COVID-19 tax benefit)
(0.2)
(34.2)
Add:
Taxes on adjusting items
6.9
41.6
Adjusted EBIT from continuing operations (Non-GAAP)
48.2
48.9
Depreciation
and amortization
53.5
49.8
Stock-based compensation expense
(9)
4.5
7.9
Adjusted
EBITDA from continuing operations (Non-GAAP)
$
106.2
$
106.6
Adjusted net income margin from continuing
operations
1.9
%
1.9
%
Adjusted EBIT margin from continuing operations
4.6
%
4.5
%
Adjusted
EBITDA margin from continuing operations
10.0
%
9.8
%
39
Location
in Condensed
Three Months Ended March 31,
Consolidated Statements of Operations
2021
2020
(unaudited
in millions)
(1)
Growth, reinvestment, restructuring programs & other
Other operating expense, net
$
19.6
$
18.5
General and administrative
—
0.7
Cost
of sales
(0.1)
0.6
Selling and distribution
—
0.7
(2)
Loss
on extinguishment of debt
Loss on extinguishment of debt
14.4
—
(3)
COVID-19
Cost of sales
8.8
0.9
Income
tax benefit
—
(6.0)
(4)
Acquisition, integration, divestiture, and related costs
General and administrative
3.9
(0.1)
Cost
of sales
1.3
—
Other operating expense, net
0.1
—
(5)
Shareholder
activism
General and administrative
2.1
—
(6)
Tax
indemnification
Other (income) expense, net
—
0.8
(7)
Foreign
currency (gain) loss on re-measurement of intercompany notes
(Gain) loss on foreign currency exchange
(1.5)
14.9
(8)
Mark-to-market adjustments
Other (income) expense, net
(21.6)
64.1
(9)
Stock-based
compensation expense included as an adjusting item
Other operating expense, net
0.4
—
40
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 14 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, 2020 for additional information about our commitments and contingent obligations.
Except for changes to the scheduled maturities of debt obligations and debt interest payments due to the Company's debt refinancing as
disclosed in Note 9 to our Condensed Consolidated Financial Statements, there were no material changes outside the ordinary course of business within the Contractual Obligations table in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2 to the Company’s Condensed Consolidated Financial Statements.
Critical
Accounting Policies
A description of the Company’s critical accounting policies is contained in our Annual Report on Form 10-K for the year ended December 31, 2020. There were no material changes to the Company's critical accounting policies in the three months ended March 31, 2021.
Off-Balance Sheet Arrangements
We do not have any obligations that meet the definition of an off-balance sheet arrangement,
other than letters of credit, which have or are reasonably likely to have a material effect on our Condensed Consolidated Financial Statements.
From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Quarterly Report on Form 10-Q, which are deemed to be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.
41
The
words "anticipate,""believe,""estimate,""project,""expect,""intend,""plan,""should," and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended. We do not intend to update these forward-looking statements 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: 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; disruptions or inefficiencies in our supply chain and/or operations, including from the ongoing COVID-19 outbreak; our ability to continue to make acquisitions in accordance with our business strategy or effectively manage the growth from acquisitions; 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; costs associated with shareholder activism, disruptions in or failures of our information technology systems; and labor strikes or work stoppages; 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, 2020, 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 15 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 2020 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 2020 year-end except for the Total Return Swap Contract as disclosed in Note 15.
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 to allow timely decisions regarding required disclosures.
As of March 31, 2021, management with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("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. The scope of management’s assessment of the effectiveness of internal control over financial reporting as of March 31, 2021 includes all of the Company’s subsidiaries with the exception of the operations of the pasta acquisition from Riviana Foods, which was completed on December 11, 2020. This exclusion is in accordance with the general guidance from the Staff of the SEC that an assessment of a recently acquired business may be omitted from the scope of management’s assessment of internal control over financial reporting for up to one year following the acquisition. We are in the process of implementing
the Company’s internal control over financial reporting of the pasta acquisition. The net sales and total assets of the pasta acquisition represented approximately 3.9% and 4.8%, respectively, of the Condensed Consolidated Financial Statement amounts as of and for the three months ended March 31, 2021.
There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2021 that has materially affected or is reasonably likely to materially affect the Company’s internal control over financial
reporting.
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of TreeHouse Foods, Inc.
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of TreeHouse Foods, Inc. and subsidiaries (the "Company") as of March 31, 2021, the related condensed consolidated
statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the three-month periods ended March 31, 2021 and 2020, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and
the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 11, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Information regarding legal proceedings is available in Note 14 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, 2020. 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, 2020 with the exception of the following:
Shareholder activism could cause us to incur significant expense, disrupt our business, and impact our stock price.
We have
recently been subject to shareholder activism and may be subject to such activism in the future, which could result in substantial costs and divert management’s and our board’s attention and resources from our business. Additionally, such shareholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with our employees, customers or service providers, and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant fees and other expenses related to activist shareholder matters, including for third-party advisors. Our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any shareholder activism.
Item 2. Unregistered
Sale of Equity Securities and Use of Proceeds
**The XBRL Instance Document and Cover Page Interactive Data File do not appear in the Interactive Data File because the XBRL tags are embedded within the Inline XBRL document.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
