Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.44M
2: EX-10.1 Material Contract HTML 1.78M
3: EX-10.2 Material Contract HTML 116K
4: EX-10.3 Material Contract HTML 44K
5: EX-22 Published Report re: Matters Submitted to a Vote HTML 27K
of Security Holders
6: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
7: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
8: EX-32.1 Certification -- §906 - SOA'02 HTML 25K
9: EX-32.2 Certification -- §906 - SOA'02 HTML 25K
15: R1 Cover Page HTML 78K
16: R2 Condensed Consolidated Balance Sheets HTML 129K
17: R3 Condensed Consolidated Balance Sheets HTML 38K
(Parenthetical)
18: R4 Condensed Consolidated Statements of Operations HTML 147K
19: R5 Condensed Consolidated Statements of Comprehensive HTML 51K
Income (Loss)
20: R6 Condensed Consolidated Statements of Stockholders' HTML 66K
Equity
21: R7 Condensed Consolidated Statements of Cash Flows HTML 145K
22: R8 Basis of Presentation HTML 31K
23: R9 Growth, Reinvestment, and Restructuring Programs HTML 60K
24: R10 Receivables Sales Program HTML 39K
25: R11 Inventories HTML 32K
26: R12 Divestiture HTML 45K
27: R13 Note Receivable HTML 39K
28: R14 Goodwill and Intangible Assets HTML 65K
29: R15 Income Taxes HTML 30K
30: R16 Long-Term Debt HTML 44K
31: R17 Earnings Per Share HTML 38K
32: R18 Stock-Based Compensation HTML 96K
33: R19 Accumulated Other Comprehensive Loss HTML 46K
34: R20 Employee Retirement and Postretirement Benefits HTML 49K
35: R21 Other Operating Expense, Net HTML 35K
36: R22 Commitments and Contingencies HTML 41K
37: R23 Derivative Instruments HTML 61K
38: R24 Disaggregation Of Revenue HTML 49K
39: R25 Subsequent Events HTML 27K
40: R26 Basis of Presentation (Policies) HTML 36K
41: R27 Growth, Reinvestment, and Restructuring Programs HTML 60K
(Tables)
42: R28 Receivable Sales Program (Tables) HTML 35K
43: R29 Inventories (Tables) HTML 33K
44: R30 Divestiture (Tables) HTML 44K
45: R31 Goodwill and Intangible Assets (Tables) HTML 105K
46: R32 Long-Term Debt (Tables) HTML 38K
47: R33 Earnings Per Share (Tables) HTML 38K
48: R34 Stock-Based Compensation (Tables) HTML 98K
49: R35 Accumulated Other Comprehensive Loss (Tables) HTML 46K
50: R36 Employee Retirement and Postretirement Benefits HTML 44K
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51: R37 Other Operating Expense, Net (Tables) HTML 35K
52: R38 Derivative Instruments (Tables) HTML 58K
53: R39 Disaggregation Of Revenue (Tables) HTML 42K
54: R40 Basis of Presentation - Additional Information HTML 28K
(Details)
55: R41 Growth, Reinvestment, and Restructuring Programs - HTML 31K
Additional Information (Details)
56: R42 Growth, Reinvestment, and Restructuring Programs - HTML 38K
Aggregate Expenses Incurred Associated with
Facility Closure (Details)
57: R43 Growth, Reinvestment, and Restructuring Programs - HTML 42K
Activity of Restructuring Program Liabilities
(Details)
58: R44 Receivables Sales Program - Additional Information HTML 34K
(Details)
59: R45 Receivables Sales Program - Accounts Receivable HTML 32K
Sold the Receivable Sales Program (Details)
60: R46 Inventories (Details) HTML 31K
61: R47 Divestiture - Additional Information (Details) HTML 52K
62: R48 Divestiture - Results of Discontinued Operations HTML 53K
on Income Statement (Details)
63: R49 Note Receivable (Details) HTML 45K
64: R50 Goodwill and Intangible Assets - Changes in HTML 38K
Carrying Amount of Goodwill (Details)
65: R51 Goodwill and Intangible Assets - Gross Carrying HTML 51K
Amounts and Accumulated Amortization of Intangible
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66: R52 Income Taxes (Details) HTML 28K
67: R53 Long-Term Debt - Components (Details) HTML 51K
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Director Restricted Stock and Restricted Stock
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Market Condition and Assumptions (Details)
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Unit Activity (Details)
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Unit Highlights (Details)
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(Address
of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (i708) i483-1300
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.01 par value
iTHS
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Preferred
stock, par value $ii0.01/ per share,
ii10.0/ shares authorized, iinone/
issued
i—
i—
Common
stock, par value $ii0.01/ per share, ii90.0/
shares authorized, i56.3 and i56.1 shares outstanding as of March 31, 2023 and December 31, 2022, respectively
i0.6
i0.6
Treasury
stock
(i133.3)
(i133.3)
Additional
paid-in capital
i2,207.3
i2,205.4
Accumulated
deficit
(i286.8)
(i302.0)
Accumulated
other comprehensive loss
(i83.4)
(i83.7)
Total
stockholders' equity
i1,704.4
i1,687.0
Total
liabilities and stockholders' equity
$
i4,254.0
$
i4,253.9
See
Notes to Condensed Consolidated Financial Statements.
The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. and its consolidated subsidiaries (the "Company,""TreeHouse,""we,""us," or "our"), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to quarterly reporting on Form 10-Q. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted as permitted by such rules and regulations.
The Condensed Consolidated Financial Statements and related notes should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Results of operations for interim periods are not necessarily indicative of annual results.
i
Reclassification
Certain
prior year amounts have been reclassified to conform to the current year presentation. Specifically, Interest income has been reclassified out of Other expense (income), net within the Condensed Consolidated Statements of Operations.
i
Use of Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires management to use judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the Condensed
Consolidated Financial Statements, and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates.
Summary of Significant Accounting Policies
A detailed description of the Company's significant accounting policies can be found in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
iSegment
Information
The Company manages operations on a company-wide basis, thereby making determinations as to the allocation of resources as ione segment. We manufacture and distribute private label food and beverages in North America. Our products are primarily shelf stable and share similar customers and distribution. The Chief Executive Officer, who has been identified as our Chief Operating Decision Maker ("CODM")
allocates resources and assesses performance based upon discrete financial information at the consolidated level. We have ione segment manager who reports directly to the CODM with incentive compensation based on aggregated consolidated results of the Company. The annual operating plan is prepared and approved by the CODM based on consolidated results of the Company. We operate
our business with a centralized financial systems infrastructure, and we share centralized resources for sales, procurement, and general and administrative activities. The majority of our manufacturing plants each produce one food or beverage category. Refer to Note 17 for disaggregation of revenue for additional information of our principal products sold.
/
9
i
2.
GROWTH, REINVESTMENT, AND RESTRUCTURING PROGRAMS
The Company’s growth, reinvestment, and restructuring activities are part of an enterprise-wide transformation to build long-term sustainable growth and improve profitability for the Company. These activities are aggregated into the following categories: (1) Strategic Growth Initiatives (expected completion in 2023) – a growth and reinvestment strategy and (2) other (collectively the "Growth, Reinvestment, and Restructuring Programs").
Below is a description of each of the Growth, Reinvestment, and Restructuring Programs:
(1) Strategic Growth Initiatives
In
the first quarter of 2021, the Company began executing on its growth and reinvestment initiatives designed to invest in our commercial organization, adapt the supply chain to better support long-term growth opportunities, and further enable the Company to build greater depth in growth categories. These initiatives are intended to better position the Company to accelerate future revenue and earnings growth, and improve the execution of our strategy to be our customers' preferred manufacturing and distribution partner. This reinvestment will occur through 2023, and the cumulative costs incurred to date are $i107.4
million. The Company currently expects the total costs will be up to $i130.0 million, comprised of consulting and professional fees, employee-related costs, and investment in information technology. Consulting and professional fees are expected to include TreeHouse Management Operating System ("TMOS") initiatives at our manufacturing plants, building digital capabilities, and advancing automation and value engineering in our supply chain network. Employee-related
costs primarily consist of severance, retention, and dedicated employee costs.
(2) Other
Other costs include restructuring costs incurred for retention, severance, organization redesign, information technology system implementation, costs to exit facilities or production, and other administrative costs. Retention includes one-time cash recognition payments that were expensed during the first quarter of 2022 as well as additional cash bonuses and stock-based compensation to drive retention through 2023.
i
The
costs by activity for the Growth, Reinvestment, and Restructuring Programs are outlined below:
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.
/
10
i
Below is a summary of costs by type associated
with the Growth, Reinvestment, and Restructuring Programs:
For
the three months ended March 31, 2023 and 2022, employee-related costs primarily consisted of retention, severance, and dedicated project employee cost; and other costs primarily consisted of consulting services. Employee-related and other costs are recognized in Other operating expense, net of the Condensed Consolidated Statements of Operations.
i
The table below presents the exit cost liabilities related to severance and retention activity
for the Growth, Reinvestment, and Restructuring Programs as of March 31, 2023:
The
severance and retention liabilities are included in Accrued expenses in the Condensed Consolidated Balance Sheets.
i
3. RECEIVABLES SALES PROGRAM
The Company has entered into agreements to sell certain trade accounts receivable to unrelated, third-party financial
institutions at a discount (collectively, "the Receivables Sales Program"). The agreements can be terminated by either party with i60 days' notice. The Receivables Sales Program is used by the Company to manage liquidity in a cost-effective manner. The Company has ino
retained interest in the receivables sold under the Receivables Sales Program; however, under the agreements, the Company does have collection and administrative responsibilities for the sold receivables. Under the Receivables Sales Program, the maximum amount of outstanding accounts receivables sold at any time is $i500.0 million.
i
The
following table includes the outstanding amount of accounts receivable sold under the Receivables Sales Program and the receivables collected from customers and not remitted to the financial institutions.
Receivables
collected and not remitted to financial institutions
i186.6
i204.5
/
Receivables
sold under the Receivables Sales Program are derecognized from the Company's Condensed Consolidated Balance Sheet at the time of the sale and the proceeds from such sales are reflected as a component of the change in receivables in the operating activities section of the Condensed Consolidated Statements of Cash Flows. The receivables collected and not remitted to financial institutions are included in Accounts payable in the Condensed Consolidated Balance Sheets.
/
11
The following table summarizes the cash flows of the
Company's accounts receivables associated with the Receivables Sales Program. All amounts in the table below include continuing and discontinued operations:
Receivables
collected and remitted to financial institutions
(i489.7)
(i543.1)
The
loss on sale of receivables represents the discount taken by third-party financial institutions and was $i3.3 million and $i0.4
million for the three months ended March 31, 2023 and 2022, respectively, and is included in Other expense (income), net in the Condensed Consolidated Statements of Operations. The Company has not recognized any servicing assets or liabilities as of March 31, 2023 or December 31, 2022, as the fair value of the servicing arrangement as well as the fees earned were not material to the financial statements.
Sale of a Significant Portion of the Meal Preparation Business
On October 3, 2022, the Company completed the sale of a significant portion of the Company’s Meal Preparation business (the "Business") to itwo
entities affiliated with Investindustrial: Rushmore Investment III LLC, a Delaware limited liability company ("US Buyer") and 1373978 B.C., ULC, a British Columbia unlimited liability company ("CA Buyer" and together with US Buyer, the "Buyer"). The closing purchase price was $i963.8 million, subject to customary purchase price post-closing adjustments. The closing purchase price consisted of approximately $i537.9 million
in cash and approximately $i425.9 million in a ifive-year secured Seller Promissory Note. Refer to Note 6 for
additional information on the secured Seller Promissory Note. The Company recognized an adjustment to its expected loss on disposal of $i4.5 million during the three months ended March 31, 2023. The expected loss on disposal is recognized within Net (loss) income from discontinued
operations in the Condensed Consolidated Statements of Operations.
The Business consists of consumer packaged food manufacturers operating i14 manufacturing facilities in the United States, Canada, and Italy servicing primarily retail grocery customers. The Business includes i11
categories and sells center of the store grocery and main course meal items, such as pasta, pourable dressings, sauces, red sauces (salsas and pasta sauces), spoonables (mayos and dips), syrups, preserves, dry dinners (macaroni and cheese), dry blends and baking goods, and pie filling as well as pita chips.
/
12
The Company entered into a Transition Services Agreement ("TSA") with the Buyer, which is designed to ensure and facilitate an orderly transfer of
business operations. The services provided under the TSA include, but are not limited to, IT systems implementation, IT and financial shared services, procurement and order processing, customer service, distribution network separation, and a supply agreement. These services terminate at various times up to itwenty-four months from the date of sale and certain services can be renewed with a maximum of an additional itwelve-month
period. Additionally, a $i35.0 million credit was provided to the Buyer by TreeHouse to cover initial TSA set-up costs that otherwise would have been incurred by the Buyer ("TSA Credit"). The TSA Credit is included in the fair value of consideration transferred, and it represents deferred income for TreeHouse until the Company incurs the related TSA costs, at which point deferred income is reduced and TSA income recognized. TSA income
is recognized as services are performed, and the income received under the TSA was $i13.4 million for the three months ended March 31, 2023. The TSA income is classified within Other operating expense, net in the Company's Condensed Consolidated Statements of Operations. As of March 31, 2023, the deferred income balance on the TSA
Credit was fully utilized with no balance remaining.
The Company has reflected this transaction as a discontinued operation. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate to the Company's continuing operations.
i
Results
of discontinued operations are as follows:
Selling,
general, administrative and other operating expenses
i—
i34.3
Amortization
expense
i—
i6.3
Loss
on sale of business
i4.5
i—
Operating
(loss) income from discontinued operations
(i4.5)
i15.4
Interest
and other expense
i—
i1.1
Other
(income) expense, net
(i1.1)
i—
Income
tax expense
i0.6
i3.5
Net
(loss) income from discontinued operations
$
(i4.0)
$
i10.8
/
6.
NOTE RECEIVABLE
On October 3, 2022, the Company entered into a ifive-year secured Seller Promissory Note ("Seller Note Credit Agreement") which matures on October 1, 2027. The Seller Note Credit Agreement sets forth the terms of the Seller Promissory Note and the loan evidenced thereby (the "Seller Loan"). The Seller Loan bears interest at a rate per annum equal to i10%
for the first two years thereof, i11% for the third year thereof, i12% for the fourth year thereof, and i13%
thereafter, payable quarterly in arrears. For the first year of the Seller Loan, a portion of the interest, of up to i1% per annum, may be paid in kind; all other interest for the first year, and all interest thereafter, will be paid in cash. Starting on March 31, 2025, the Loan Parties shall commence repayment of the principal amount of the Seller Loan on a quarterly basis at i0.25%
of the principal adjusted for prepayments.
The Seller Loan has a balance of $i428.1 million and $i427.0
million as of March 31, 2023 and December 31, 2022, respectively, included within Note receivable, net in the Condensed Consolidated Balance Sheets. During the three months ended March 31, 2023, the Company recognized $i10.7 million within Interest income
in the Condensed Consolidated Statements of Operations related to the Note Receivable. As of March 31, 2023, the Company has inot recorded an allowance for credit losses on uncollectible amounts related to the Note Receivable.
13
i
7.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
i
Changes in the carrying amount of goodwill for the three months ended March 31, 2023 are as follows:
Income taxes were recognized at effective rates of i26.4% and i14.3% for the
three months ended March 31, 2023 and 2022, respectively. The change in the Company's effective tax rate for the three months ended March 31, 2023 compared to 2022 is primarily the result of changes in the amount of tax deductible stock-based compensation and the amount of non-deductible executive compensation. Our effective tax rate may change from period to period based on recurring and non-recurring factors, including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.
Management estimates that it is reasonably possible that the
total amount of unrecognized tax benefits could decrease by as much as $i0.3 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. Approximately all of the $i0.3
million could affect net income when settled. The timing of cash settlement, if any, cannot be reasonably estimated for uncertain tax benefits.
On February 17, 2023, the Company entered into Amendment No. 6 to the Credit Agreement. Amendment No. 6 implemented the replacement provisions for LIBOR with rates based on Term SOFR, plus a credit spread adjustment of i0.10%. The material terms and conditions under the Credit Agreement are otherwise substantially consistent with those contained in the Credit
Agreement prior to Amendment No. 6.
Revolving Credit Facility — As of March 31, 2023, the Company had $i38.0 million drawn from its $i500.0
million Revolving Credit Facility. The Company had remaining availability of $i428.7 million under the Revolving Credit Facility, and there were $i33.3
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.
Interest is payable quarterly or, if earlier, at the end of the applicable interest period in arrears on any outstanding borrowings under the Revolving Credit Facility. The interest rates applicable to the Revolving Credit Facility are based upon the Company’s consolidated net leverage ratio or the Company’s Corporate Credit Rating, whichever results in lower pricing, and are determined by either (i) Term SOFR, plus a margin ranging from i1.20%
to i1.70%, or (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from i0.20% to i0.70%.
The unused fee on the Revolving Credit Facility is also based on the Company’s consolidated net leverage ratio or the Company’s Corporate Credit Rating, whichever results in lower pricing, and accrues at a rate ranging from i0.20% to i0.35%.
Term
Loan A — On December 1, 2017, the Company entered into a $i500 million term loan and amended the loan to extend the maturity date to March 26, 2028. The interest rates applicable to Term Loan A are based upon the Company’s consolidated net leverage ratio or the
Company’s Corporate Credit Rating, whichever results in lower pricing, and are determined by either (i) Term SOFR, plus a margin ranging from i1.675% to i2.175%,
or (ii) a Base Rate (as defined in the Credit Agreement), plus a margin ranging from i0.675% to i1.175%. As a result of the principal prepayment of $i174.8 million
on Term Loan A in October 2022, principal amortization payments are no longer due on a quarterly basis, and the remaining principal balance is due at maturity. Interest is payable quarterly or, if earlier, at the end of the applicable interest period in arrears on any outstanding borrowings under Term Loan A.
Term Loan A-1 — On December 1, 2017, the Company entered into a term loan and amended the loan amount to $i930 million
and extended the maturity date to March 26, 2026. The interest rates applicable to Term Loan A-1 are the same as those applicable to the Revolving Credit Facility (other than, for the avoidance of doubt, the unused fee). As a result of the principal prepayment of $i325.2 million on Term Loan A-1 in October 2022, principal amortization payments are no longer due on a quarterly basis, and the remaining principal balance is due at maturity. Interest is payable quarterly or, if earlier, at the end of the applicable interest
period in arrears on any outstanding borrowing under Term Loan A-1.
2028 Notes — On September 9, 2020, the Company completed its public offering of $i500 million aggregate principal amount of the 2028 Notes. The 2028 Notes pay interest at the rate of i4.000%
per annum and mature on September 1, 2028. Interest is payable on the 2028 Notes on March 1 and September 1 of each year. The payments began on March 1, 2021.
/
15
Fair Value —At March 31, 2023, the aggregate fair value of the Company's total debt was $i1,394.7
million and its carrying value was $i1,443.0 million. At December 31, 2022, the aggregate fair value of the Company's total debt was $i1,335.8
million and its carrying value was $i1,405.0 million. The fair values of 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
i56.7
i55.8
(1)For
the three months ended March 31, 2022, the weighted average common shares outstanding is the same for the computations of both basic and diluted shares outstanding because the Company had a net loss from continuing operations for the period. Equity awards, excluded from our computation of diluted earnings per share because they were anti-dilutive, were ii1.2/
million for both the three months ended March 31, 2023 and 2022.
//
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 authorized to be awarded under the Plan is approximately i17.5
million as of March 31, 2023.
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
$
i7.2
$
i3.8
Related
income tax benefit
i0.9
i0.9
/
All
amounts below include continuing and discontinued operations.
/
16
Stock Options — Stock options granted under the plan during 2022 have a ithree
year vesting schedule, vest one-third on the second anniversary of the grant date and two-thirds on the third anniversary of the grant date, and expire iten years from the grant date. Stock options are generally only granted to employees and non-employee directors.
i
The
following table summarizes stock option activity during 2023:
Employee Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (yrs.)
Unrecognized
compensation costs related to nonvested options totaled $i3.5 million at March 31, 2023 and are expected to be recognized over a weighted average period of i2.1
years.
Restricted Stock Units — Employee restricted stock unit awards generally vest based on the passage of time in approximately ithree equal installments on each of the first three anniversaries of the grant date with the following exceptions:
•On
June 9, 2022, restricted stock unit awards were granted that vest on the passage of time on the ieighteen month anniversary of the grant date. The fair value of the awards was $i37.90
on approximately i62,000 units granted.
•On December 29, 2021, restricted stock unit awards granted to certain executive members of management that vest on the passage of time in approximately ithree
equal installments on each of the ithreeisix
month anniversaries of the grant date. The fair value of the awards was $i40.03 on approximately i51,200
units granted.
Non-employee director restricted stock units generally vest on the first anniversary of the grant date. Certain non-employee 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, 2023:
Tax
benefit recognized from vested restricted stock units
i1.6
i1.2
/
17
Unrecognized
compensation costs related to nonvested restricted stock units are approximately $i26.5 million as of March 31, 2023 and will be recognized over a weighted average period of i2.1
years. The grant date fair value of the awards is equal to the Company's closing stock price on the grant date.
Performance Units — Performance unit awards are granted to certain members of management. These awards contain both service and performance conditions, and for certain executive members of management, a market condition, in each case as described below.
•Performance goals are set and measured annually with one-quarter of the units eligible to accrue for each year in the ithree-year
performance period. Accrued shares are earned at the end of each performance period but remain subject to forfeiture until the third anniversary of the grant date. Additionally, for the cumulative ithree-year performance period, one-quarter of the units will accrue. For both the annual and cumulative shares, the earned shares are equal to the number of units granted multiplied by a predefined percentage generally between i0%
and i200%, depending on the achievement of certain operating performance measures.
•For performance unit awards granted in 2021 through 2023, certain executive members of management received awards that were measured using a relative total shareholder return ("TSR") market condition over a ithree-year
performance goal. The units will accrue, multiplied by a predefined percentage between i0% and i150%
for the relative TSR measure, depending on the achievement attainment over the ithree-year performance period based on the Company's absolute annualized TSR relative to the annualized TSR of a Peer Group. The fair value of the portion of the awards based on relative TSR was valued using a Monte Carlo simulation model with a grant-date fair value of $i50.43
on approximately i22,000 units granted in 2023 and a grant-date fair value of $i26.84
on approximately i52,600 units granted in 2022.
•During the second quarter of 2022, the Company made grants to certain of the Company’s named executive officers and certain other executive officers of performance-based restricted stock units (the "PBRSU Awards").
The PBRSU Awards include a relative TSR market condition over a itwo-year performance period beginning on the date of grant. The units will accrue, multiplied by a predefined percentage between i0%
to i450% for the relative TSR measure, depending on the achievement attainment over the itwo-year
performance period based on Company’s absolute annualized TSR relative to the annualized TSR of the S&P Food & Beverage Select Industry Index (the "Index"). The fair value of the awards was valued using a Monte Carlo simulation model with a weighted average grant-date fair value of $i58.36 on approximately i239,300
units granted in 2022.
These awards will be converted to stock or cash, at the discretion of the Compensation Committee, generally, on the third anniversary of the grant date with the exception of the PBRSU Awards on the second anniversary. The Company intends to settle these awards in stock and has the shares available to do so.
Performance unit awards with market conditions are valued using a Monte Carlo simulation model. Expected volatility is based on the historical volatility of the Company’s stock price, average Peer Group stock price, or the total return value of the Index. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of the grant
with a term equivalent to the expected term of the award. The expected term is the time period from the grant date to the end of the performance period. iThe weighted average assumptions used in the Monte Carlo simulations were as follows:
Tax
benefit recognized from performance units vested
i0.4
i0.2
/
Unrecognized
compensation costs related to nonvested performance units are estimated to be approximately $i15.8 million as of March 31, 2023 and are expected to be recognized over a weighted average period of i1.7
years. The fair value of the portion of the awards earned based on market conditions were valued using a Monte Carlo simulation model. For other awards, the grant date fair value is equal to the Company's closing stock price on the date of grant.
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, 2023 and 2022.
//
(2)Refer to Note 13 for additional information regarding these reclassifications.
19
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:
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 expense (income), net of the Condensed Consolidated Statements of Operations.
/
i
14. OTHER OPERATING EXPENSE, NET
i
The Company incurred other operating expense for the three months ended March 31, 2023 and 2022, which consisted of the following:
Growth, reinvestment, and restructuring programs (1)
$
i15.3
$
i30.1
TSA
income (2)
(i13.4)
i—
Other
i0.7
(i1.0)
Total
other operating expense, net
$
i2.6
$
i29.1
(1)
Refer to Note 2 for more information.
(2) Refer to Note 5 for more information.
//
20
i
15.
COMMITMENTS AND CONTINGENCIES
Shareholder Class Action and Related Derivative Actions
The Company, as nominal defendant, and certain of its directors, officers and former directors and officers are parties to the following ifour shareholder derivative suits, each of which involves substantially similar claims and allegations:
(i)Wells
v. Reed, et al., Case No. 2016-CH-16359 (filed Dec. 22, 2016 in the Circuit Court of Cook County, Illinois), asserting state law claims for breach of fiduciary duty, unjust enrichment and corporate waste;
(ii)Lavin v. Reed, et al., Case No. 17-cv-01014 (filed Feb. 7, 2017 in the United States District Court for the Northern District of Illinois), asserting state law claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste;
(iii)Bartelt v. Reed, et al., Case No. 1:19-cv-00835 (filed Feb. 8, 2019 in the United States District Court for the Northern District
of Illinois), asserting state law claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and corporate waste, as well as violations of Section 14 of the Securities Exchange Act of 1934; and
(iv)City of Ann Arbor Employees' Retirement System v. Reed, et al., Case No. 2019-CH-06753 (filed June 3, 2019 in the Circuit Court of Cook County, Illinois), asserting claims breach of fiduciary duty, aiding and abetting breaches of fiduciary duty and contribution and indemnification from the individual defendants for losses incurred by the Company.
Essentially, all ifour
complaints allege that TreeHouse, under the authority and control of the individual defendants: (i) made certain false and misleading statements regarding the Company's business, operations, and future prospects; and (ii) failed to disclose that (a) the Company's private label business was underperforming; (b) the Company's Flagstone Foods business was underperforming; (c) the Company's acquisition strategy was underperforming; (d) the Company had overstated its full-year 2016 guidance; and (e) TreeHouse's statements lacked reasonable basis.
The complaints allege, among other things, that these actions artificially inflated the market price of TreeHouse common stock and resulted in harm to the Company, including the filing of the MPERS class action (see below). The Bartelt action also includes substantially similar allegations concerning events in 2017.
Each of these cases involves allegations similar to those in an earlier-filed, resolved federal securities class action, Public Employees' Retirement Systems of Mississippi v. TreeHouse Foods, Inc., et al., Case No. 1:16-cv-10632 ("MPERS") (filed Nov. 16, 2016), in the United
States District Court for the Northern District of Illinois brought on behalf of a class of all purchasers of TreeHouse common stock from January 20, 2016 through and including November 2, 2016. The MPERS complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and was based on essentially the same facts described above. The parties filed a stipulation of settlement to resolve the MPERS class action for a cash payment of $i27.0
million (funded by D&O insurance) in exchange for dismissal with prejudice of the class claims and full releases. After briefing, preliminary approval, notice and a hearing, on November 17, 2021, the Court granted final approval of the settlement and entered a final judgment dismissing the case with prejudice on a classwide basis.
Due to the similarity of the derivative complaints, Bartelt was consolidated with Lavin, and Ann Arbor was consolidated with Wells. On August 26, 2022, plaintiffs in the consolidated Wells case filed a second amended complaint, which was dismissed
with prejudice on March 15, 2023. On March 16, 2023 plaintiffs in the consolidated Wells case filed a notice of appeal
seeking an order from the Appellate Court reversing the dismissal and remanding the case with directions to reinstate the consolidated amended complaint in its entirety for adjudication on the merits as to all claims; or, in the alternative, reversing the dismissal and remanding the case with directions to grant plaintiffs-appellants leave to amend their consolidated amended complaint, and for such other and further relief as the Appellate Court may deem proper. On October 24, 2022, the plaintiffs’ designated an operative complaint in the Lavin case, which defendants have moved
to dismiss pursuant to a briefing schedule set by the Court.
/
21
Other Claims
In addition, the Company is party in the ordinary course of business to certain claims, litigation, audits, and investigations. The Company will record an accrual for a loss contingency when it is probable that a loss has been incurred
and the amount of the loss can be reasonably estimated. The Company believes it has established adequate accruals for liabilities that are probable and reasonably estimable that may be incurred in connection with any such currently pending or threatened matter. In the Company's opinion, the eventual resolution of such matters, either individually or in the aggregate, is not expected to have a material impact on the Company's financial position, results of operations, or cash flows. However, litigation is inherently unpredictable and resolutions or dispositions of claims or lawsuits by settlement or otherwise could have an adverse impact on our financial position, results of operations or cash flows for the reporting
period in which any such resolution or disposition occurs.
In February 2014, TreeHouse, along with its 100% owned subsidiaries, Bay Valley Foods, LLC and Sturm Foods, Inc., filed suit against Keurig Dr. Pepper Inc.'s wholly-owned subsidiary, Keurig Green Mountain ("KGM"), in the U.S. District Court for the Southern District of New York captioned TreeHouse Foods, Inc. et al. v. Green Mountain Coffee Roasters, Inc. et al. asserting claims under the federal antitrust laws, various state antitrust laws and unfair competition statutes, contending that KGM had monopolized alleged markets for single serve coffee brewers and single serve coffee pods. The Company is seeking monetary damages,
declaratory relief, injunctive relief, and attorneys' fees. The matter remains pending, with summary judgment, motions to exclude certain expert opinions, and discovery sanctions motions fully briefed. On March 28, 2022, the Magistrate Judge issued a non-public Opinion and Order granting in part and denying in part the TreeHouse sanctions motion against KGM and denying the KGM sanctions motion against TreeHouse. KGM has appealed a portion of the Opinion and Order awarding sanctions to the Company. KGM is denying the allegations made by the Company in the litigation. The Company has not recorded any amount in its Condensed Consolidated Financial Statements as of
March 31, 2023.
i
16. DERIVATIVE INSTRUMENTS
Interest Rate Swap Agreements - The Company manages its exposure to changes in interest
rates by optimizing the use of variable-rate and fixed-rate debt and by utilizing interest rate swaps to hedge our exposure to changes in interest rates, to reduce the volatility of our financing costs, and to achieve a desired proportion of fixed versus floating-rate debt, based on current and projected market conditions.
The Company has entered into long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base that have a notional value of $ii875.0/
million as of both March 31, 2023 and December 31, 2022. Under the terms of the agreements, $ii875.0/
million in variable-rate debt is swapped for a weighted average fixed interest rate base of approximately ii2.91/%
through February 28, 2025.
Commodity Contracts- Certain commodities the Company uses in the production and distribution of its products are exposed to market price risk. The Company utilizes derivative contracts to manage this risk. The majority of commodity forward contracts are not derivatives, and those that are generally qualify for the normal purchases and normal sales scope exception
under the guidance for derivative instruments and hedging activities and, therefore, are not subject to its provisions. For derivative commodity contracts that do not qualify for the normal purchases and normal sales scope exception, the Company accounts for the contracts as derivatives.
The Company's derivative commodity contracts may include contracts for diesel, oil, plastics,
natural gas, electricity, resin, and other commodity contracts that do not meet the requirements for the normal purchases and normal sales scope exception. Diesel contracts are used to manage the Company's risk associated with the underlying cost of diesel fuel used to deliver products. Contracts for oil, plastics, and resin are used to manage the Company's risk associated with the underlying commodity cost of a significant component used in packaging materials. Contracts
for natural gas and electricity are used to manage the Company's risk associated with the utility costs of its manufacturing facilities, and other commodity contracts that are derivatives that do not meet the normal purchases and normal sales scope exception are used to manage the price risk associated with raw material costs. At March 31, 2023, there were ino
derivative commodity contracts outstanding, and at December 31, 2022, the notional value of the derivative commodity contracts outstanding was $i8.9 million.
/
22
Total
Return Swap Contract - The Company had an economic hedge program that used 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 had a duration of one month and were rebalanced and re-hedged at the end of each monthly term. While the total return swap contract was treated as an economic
hedge, the Company did not designate it as a hedge for accounting purposes. The total return swap contract was 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. At March 31, 2023, the Company had ino
outstanding and unsettled total return swap contracts, and at December 31, 2022, the notional value of the total return swap contract was $i3.9 million.
iiThe
following table identifies the fair value of each derivative instrument:/
As
of March 31, 2023 and 2022, asset derivatives are included within Other assets, net, and liability derivatives are included within Accrued expenses in the Condensed Consolidated Balance Sheets.
The fair values of the commodity contracts, interest rate swap agreements, and the total return swap contract are determined using Level 2 inputs. Level 2 inputs are inputs other than quoted market prices that are observable for an asset or liability, either directly or indirectly. The fair values of the commodity contracts, interest rate swap
agreements, and total return swap contract are based on an analysis comparing the contract rates to the market rates at the balance sheet date.
iWe recognized the following gains and losses on our derivative contracts
in the Condensed Consolidated Statements of Operations:
On April 1, 2023, the Company completed the acquisition of seasoned pretzel capability for a total purchase price of $i14.0 million. The acquisition is in line with our strategy to build category leadership,
depth and capabilities to drive profitable growth. The seasoned pretzel acquisition expands our current portfolio of traditional, filled and enrobed pretzels and extends our capabilities into this growing sub-sector of the Pretzels category. The acquisition will be accounted for under the acquisition method of accounting. The required disclosures have not been provided as the initial accounting for the business combination was not complete prior to the issuance of these financial statements.
/
25
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
Business Overview
TreeHouse Foods, Inc. is a leading private label food and beverage manufacturer in North America. Our purpose is to engage and delight - one customer at a time. Through our customer focus and category experience, we strive to deliver excellent service and build capabilities and insights to drive mutual profitable growth for TreeHouse and for our customers. Our purpose is supported by investment in depth, capabilities and operational efficiencies which are aimed to capitalize on the long-term growth prospects in the categories in which we operate. Our purpose underscores our mission, to make high quality food and beverages affordable to all.
TreeHouse
believes it is well positioned across attractive snacking and beverage growth categories fueled by strong consumer demand trends. The portfolio includes snacking offerings (crackers, pretzels, in-store bakery items, frozen griddle items, cookies, snack bars, and unique candy offerings), beverage & drink mix offerings (non-dairy creamer, single serve beverages, broths/stocks, powdered beverages and other blends, tea, and ready-to-drink-beverages), and grocery offerings (pickles, refrigerated dough, hot cereal, and cheese & pudding). The Company sells its products to retail, co-manufacturing, and food-away-from-home customers in shelf stable, refrigerated, and frozen formats. TreeHouse also offers its customer partners a range of value and nutritional solutions, including natural, organic and gluten free so they can meet the unique needs of their consumers.
The
following discussion and analysis presents the factors that had a material effect on our financial condition, changes in financial condition, and results of operations for the three month periods ended March 31, 2023 and 2022. 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.
26
Executive
Summary
The following table summarizes our consolidated financial results (in millions, except per share data and percentages):
Diluted
earnings (loss) per share from continuing operations
0.34
(0.25)
236.0
%
Non-GAAP
Results (1)
Adjusted EBITDA from continuing operations
$
90.6
$
37.3
142.9
%
Adjusted
net income (loss) from continuing operations
38.4
(9.2)
517.4
%
Adjusted diluted EPS from continuing operations
0.68
(0.16)
525.0
%
(1)Adjusted
EBITDA from continuing operations, adjusted net income (loss) from continuing operations, and adjusted diluted EPS from continuing operations are Non-GAAP financial measures. Refer to the "Non-GAAP Measures" section for additional information.
First Quarter 2023 Financial Highlights
The following are highlights in our net sales and earnings for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Refer to the "Results of Operations" section for further discussion and analysis.
•Net sales increased 15.8% primarily due to our pricing actions to recover commodity inflation as well as service improvements
in the majority of our categories, which allowed the Company to capture increased demand and fulfill certain customer orders earlier than planned.
•Earnings increased primarily due to the Company's pricing actions to recover commodity and freight inflation experienced in prior periods, which was partially offset by increased costs to invest in the supply chain to improve service levels.
27
Known Trends or Uncertainties
Macroeconomic Conditions
Consumers
have faced significant inflationary pressure, which has strengthened the private label value proposition and supported private label unit share gains in our categories across the retail channel. Supply chain disruption has been constraining our ability to service all of the customer orders we have received, but we have invested in the supply chain and inventory which has resulted in improvements in service compared to the prior year. We continue to make steady progress in enhancing our service levels to target to capture private label demand.
Commodity Inflation
The inflationary environment continues to be volatile and has led to higher costs for raw materials and agricultural commodities, packaging materials, fuel, energy, and other supply chain components. As a result of the inflationary environment, we implemented waves of pricing actions during
2022 that remain in effect in 2023. The Federal Reserve has raised the federal funds interest rate throughout 2022 and has continued to raise rates in 2023 in its effort to take action against domestic inflation. We will continue to monitor the inflationary environment and its economic impact on pricing and consumer trends.
Additionally, as a result of the invasion of Ukraine by Russia, the United States and other countries imposed economic sanctions on Russian financial institutions, oil and gas imports, and other businesses. TreeHouse Foods is a North American focused company with no direct exposure to Russia or Ukraine. As such, the impact to TreeHouse has not been material to date. However, sanctions imposed by the United States on Russia oil and gas imports, as well as disruption caused to Ukraine's wheat and other agricultural supply due to the ongoing military conflict, is causing further inflation
to our commodity costs. We will continue to monitor any broader economic impact from the current conflict.
We manage the impact of cost increases, wherever possible, on commercially reasonable terms, by locking in prices on the quantities we expect are required to meet our production requirements. In addition, as input costs rise, we seek to recover inflation by implementing higher pricing. However, our pricing actions often lag commodity cost changes temporarily, or we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them.
Banking Sector Developments
During the first quarter of 2023, the shutdown of certain financial institutions raised economic concerns over disruption in the U.S. banking system. The U.S. government took
certain actions to strengthen public confidence in the U.S. banking system. We continue to monitor the financial institutions we borrow from and maintain cash and cash equivalent balances with. In particular, the Company has a syndicate of banks with its Revolving Credit Facility, and our cash deposits are placed with high credit quality financial institutions. Additionally, we have been monitoring the solvency of our suppliers and customers, and the impact of the banking sector developments has not been material to the Company to date. The Company continues to closely monitor this situation and will take appropriate measures, when necessary, to minimize potential risk exposure to our financial institutions, suppliers,
and customers.
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 — Net sales for the first quarter of 2023 totaled $894.8 million compared to $772.6 million for the same period last year, an increase of $122.2 million, or 15.8%. The change in net sales from 2022 to 2023 was due to the following:
Dollars
Percent
(In
millions)
2022 Net sales
$
772.6
Pricing
128.8
16.7
%
Volume/mix
(4.2)
(0.6)
Foreign
currency
(2.4)
(0.3)
2023 Net sales
$
894.8
15.8
%
Foreign
currency
0.3
Percent change in organic net sales (1)
16.1
%
(1)Organic net sales is a Non-GAAP financial measure. Refer to the "Non-GAAP Measures" section for additional information.
The net sales increase of 15.8% was primarily driven by favorable pricing to recover commodity
inflation and service improvements in the majority of our categories, which allowed the Company to capture increased demand and fulfill certain customer orders earlier than planned. This was partially offset by the exit of lower margin business, particularly in Pickles.
Gross Profit — Gross profit as a percentage of net sales was 17.0% in the first quarter of 2023, compared to 12.8% in the first quarter of 2022, an increase of 4.2 percentage points. The increase is primarily due to the Company's pricing actions to recover commodity and freight inflation experienced in prior periods and favorable category mix. This was partially offset by increased costs
to invest in the supply chain to improve service levels as well as increased costs for investment in warehouse capacity.
Total Operating Expenses — Total operating expenses were $113.0 million in the first quarter of 2023 compared to $155.0 million in the first quarter of 2022, a decrease of $42.0 million. The decreaseis primarily due to $13.4 million of TSA income, lower severance and retention expense due to a non-recurring one-time employee recognition bonus, and lower freight costs due to declining freight rates and improved utilization of full truck load shipments.
Total Other Expense (Income) —Total other income of $40.2 million in the first quarter of 2022 decreased by $53.4 million to be total other expense of $13.2 million in the first quarter of 2023. The decrease was primarily due to a $56.7 million unfavorable change in non-cash mark-to-market impacts from hedging activities, largely driven by an unfavorable change to interest rate swaps and less favorable impacts from commodity contracts. Additionally, rising interest rates led to higher costs with selling receivables in our Receivables Sales Program, higher costs in our pension plans, and higher interest expense. This was partially offset by $10.7 million of interest income received from our Note Receivable.
Income Taxes — Income taxes were
recognized at an effective rate of 26.4% in the first quarter of 2023 compared to 14.3% recognized in the first quarter of 2022. The change in the Company's effective tax rate is primarily the result of changes in the amount of tax deductible stock-based compensation and the amount of non-deductible executive compensation.
Our effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.
30
Discontinued
Operations
Discontinued Operations — Net (loss) income from discontinued operations was a $4.0 million loss in the first quarter of 2023 compared to $10.8 million of income in the first quarter of 2022, a decrease of $14.8 million. The decrease is primarily a result of the divestiture of a significant portion of the Meal Preparation business on October 3, 2022 and an expected loss on disposal adjustment of $4.5 million during the first quarter of 2023. Refer to Note 5 of our Condensed Consolidated Financial Statements for additional details.
31
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.
Seller Note Credit Agreement
On October 3, 2022,
the Company entered into a five-year secured Seller Promissory Note ("Seller Note Credit Agreement") which matures on October 1, 2027. The Seller Note Credit Agreement sets forth the terms of the Seller Promissory Note and the loan evidenced thereby (the "Seller Loan"). The Seller Loan bears interest at a rate per annum equal to 10% for the first two years thereof, 11% for the third year thereof, 12% for the fourth year thereof, and 13% thereafter, payable quarterly in arrears. For the first year of the Seller Loan, a portion of the interest, of up to 1% per annum, may be paid in kind; all other interest for the first year, and all interest thereafter, will be paid in cash. Starting on March 31, 2025, the Loan Parties shall commence repayment of the principal amount of
the Seller Loan on a quarterly basis at 0.25% of the principal adjusted for prepayments. The Seller Loan has a balance of $428.1 million as of March 31, 2023.
Receivables Sales Program
The Company has the ability to strategically manage customer payment terms and counterparty risk by selling receivables in a cost-effective manner through its Receivables Sales Program. Approximately $170.7 million was available under the Receivables Sales Program limit as of March 31, 2023. See Note 3 to our Consolidated Financial Statements for additional information regarding our Receivables Sales Program. Our Receivables Sales Program provides us lower cost access to liquidity
when compared to the Revolving Credit Facility.
Revolving Credit Facility
If additional borrowings are needed, approximately $428.7 million was available under the Revolving Credit Facility as of March 31, 2023. See Note 9 to our Consolidated Financial Statements for additional information regarding our Revolving Credit Facility. We are in compliance with the terms of the Revolving Credit Facility and expect to meet foreseeable financial requirements.
CARES Act
Under the CARES Act, we deferred the payment of $21.7 million in payroll taxes in 2020, with $12.3 million paid in 2021 and 2022, and the remaining $9.4 million was paid in the first quarter of 2023.
The
following table is derived from our Condensed Consolidated Statement of Cash Flows:
Net
cash used in operating activities from continuing operations was $30.9 million in the first three months of 2023 compared to $96.1 million in the first three months of 2022, a decrease in cash used of $65.2 million. The cash flow improvement was primarily attributable to higher cash earnings reflecting the Company's pricing actions to recover commodity and freight inflation experienced in prior periods. Additionally, the Company had an increase in cash flows from the Receivables Sales Program. Refer to Note 3 to our Condensed Consolidated Financial Statements for additional information. This was partially offset by a decrease in cash flow driven primarily by payment timing in accounts payable and increases in inventory to improve service.
Investing
Activities From Continuing Operations
Net cash used in investing activities from continuing operations was $32.0 million in the first three months of 2023 compared to $14.6 million in the first three months of 2022, an increase in cash used of $17.4 million. This was primarily driven by the exercise of a purchase option on the lease of our Cambridge, Maryland facility for $8.1 million, higher capital expenditures for growth and supply chain initiatives as well as infrastructure and maintenance at our manufacturing plants, and non-recurring proceeds received from the sale of fixed assets in the first quarter of 2022.
Financing Activities From Continuing Operations
Net
cash provided by financing activities from continuing operations was $32.5 million in the first three months of 2023 compared to $19.6 million net cash used in financing activities from continuing operations in the first three months of 2022, an increase in cash provided of $52.1 million. The increase in cash provided is due to a $38.0 million increase in cash drawn on the Revolving Credit Facility in the first quarter of 2023 to invest in inventory to improve service levels. Additionally, as a result of the prepayment of $500.0 million on the Term Loans in the fourth quarter of 2022, principal amortization payments are no longer due on a quarterly basis, and the remaining principal balance is due at maturity. As such, cash provided increased due to a non-recurring payment of $14.3 million on the Term Loans in the first quarter of 2022.
Cash Flows From Discontinued Operations
There
was no cash provided by discontinued operations in the first three months of 2023 compared to $14.3 million of cash provided in the first three months of 2022, a decrease in cash provided of $14.3 million. The decrease in cash provided by discontinued operations is due to the completion of the sale of a significant portion of the Meal Preparation business on October 3, 2022. Refer to Note 5 to our Condensed Consolidated Financial Statements for additional information.
Debt Obligations
At March 31, 2023, we had $38.0 million outstanding under the Revolving Credit Facility, $316.4 million outstanding under Term Loan A, $588.6 million outstanding under Term Loan A-1, $500.0 million of the 2028 Notes outstanding, and $1.0 million
of finance lease obligations.
As of March 31, 2023, the Company had $38.0 million drawn from its $500.0 million Revolving Credit Facility. The Company had remaining availability of $428.7 million under the Revolving Credit Facility, and there were $33.3 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.
The Company has long-term interest rate swap agreements to lock into a fixed LIBOR interest rate base in order to
mitigate the Company's exposure to interest rate risk. As of March 31, 2023, we have an outstanding variable-rate debt balance of $943.0 million, and our interest rate swap agreements with a fixed LIBOR interest rate base have a notional value of $875.0 million and mature on February 28, 2025. As a result, our variable-rate debt is nearly fully hedged with our fixed rate interest rate swaps.
33
The Credit Agreement contains various financial and restrictive covenants and requires that the
Company maintain a consolidated net leverage ratio of no greater than 4.50 to 1.0, and our debt obligations contain customary representations and events of default. We are in compliance with all applicable debt covenants as of March 31, 2023.
See Note 9 to our Condensed Consolidated Financial Statements for information on our debt obligations.
Guarantor Summarized Financial Information
The 2028 Notes issued by TreeHouse Foods, Inc. are fully and unconditionally, as well as jointly and severally, guaranteed by our directly and indirectly owned domestic subsidiaries, which are collectively known as the "Guarantor Subsidiaries."
The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances, only upon the occurrence of certain customary conditions. There are no significant restrictions on the ability of the parent company or any guarantor to obtain funds from its subsidiaries by dividend or loan.
The following tables present summarized financial information of TreeHouse Foods, Inc. and the Guarantor Subsidiaries on a combined basis. The combined summarized financial information eliminates intercompany balances and transactions among TreeHouse Foods, Inc. and the Guarantor Subsidiaries
and equity in earnings and investments in any Guarantor Subsidiaries or Non-Guarantor Subsidiaries. The summarized financial information is provided in accordance with the reporting requirements of Rule 13-01 under SEC Regulation S-X for the issuer and Guarantor Subsidiaries.
(1)For the three months ended
March 31, 2023, TreeHouse Foods, Inc. and Guarantor Subsidiaries recorded $20.5 million of net sales to the Non-Guarantor Subsidiaries and $70.6 million of purchases from the Non-Guarantor Subsidiaries.
We have included in this report measures of financial performance that are not defined by GAAP ("Non-GAAP"). A Non-GAAP financial measure is a numerical measure of financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the Company's Condensed Consolidated Financial Statements. We believe these measures provide useful information to the users of the financial statements as we also have included these measures in other communications and publications.
For each of these Non-GAAP financial measures, we provide a reconciliation between the Non-GAAP measure and the most directly comparable GAAP measure, an explanation
of why management believes the Non-GAAP measure provides useful information to financial statement users, and any additional purposes for which management uses the Non-GAAP measure. This Non-GAAP financial information is provided as additional information for the financial statement users and is not in accordance with, or an alternative to, GAAP. These Non-GAAP measures may be different from similar measures used by other companies.
Organic Net Sales
Organic net sales is defined as net sales excluding the impacts of acquisitions, divestitures, and foreign currency. This information is provided in order to allow investors to make meaningful comparisons of the Company's sales between periods and to view the
Company's business from the same perspective as Company management.
Adjusted Earnings Per Diluted Share From Continuing Operations, Adjusting for Certain Items Affecting Comparability
Adjusted earnings (loss) 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 divestiture, acquisition, integration, and related costs, mark-to-market adjustments on derivative contracts, foreign currency exchange impact on the re-measurement of intercompany notes, growth, reinvestment, and restructuring programs, 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.
35
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:
Divestiture,
acquisition, integration, and related costs
(3)
0.07
0.05
Shareholder activism
(4)
0.01
0.01
Tax
indemnification
(5)
—
—
Foreign currency gain on re-measurement of intercompany notes
(6)
—
(0.01)
Central
services and conveyed employee costs
(7)
—
0.39
Litigation matter
(8)
—
0.01
Taxes
on adjusting items
(0.11)
0.01
Adjusted diluted EPS from continuing operations (Non-GAAP)
$
0.68
$
(0.16)
During
the three months ended March 31, 2023 and 2022, 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, 2023 and 2022, the Company incurred growth, reinvestment, and restructuring program costs of approximately $15.3 million and $30.1 million, respectively.
Refer to Note 2 to our Condensed Consolidated Financial Statements for additional information.
(2)
The Company's derivative
contracts are marked-to-market each period. The non-cash unrealized changes in fair value recognized in Other expense (income), net within the Condensed Consolidated Statements of Operations are treated as Non-GAAP adjustments. As the contracts are settled, realized gains and losses are recognized, and only the mark-to-market impacts are treated as Non-GAAP adjustments.
Refer to Note 16 to our Condensed Consolidated Financial Statements for additional information.
(3)
Divestiture,
acquisition, integration, 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 5 to our Condensed Consolidated Financial Statements for additional information.
(4)
The Company incurred fees related to shareholder activism which include directly applicable third-party advisory and professional service fees.
(5)
Tax
indemnification represents the non-cash write off of indemnification assets that were recorded in connection with acquisitions from prior years. These write-offs arose as a result of the related uncertain tax position being released due to the statute of limitation lapse or settlement with taxing authorities.
36
(6)
The Company has foreign currency denominated
intercompany loans and incurred foreign currency gains of $0.2 million and $0.8 million for the three months ended March 31, 2023 and 2022, respectively, to re-measure the loans at quarter end. These amounts are non-cash and the loans are eliminated in consolidation.
(7)
As a result of the sale of a significant portion of the Meal Preparation business, the Company identified two items affecting comparability – 1) central service costs and 2) conveyed employee costs.
1) The
Company has historically provided central services to the Meal Preparation business including, but not limited to, IT and financial shared services, procurement and order processing, customer service, warehousing, logistics, and customs. These costs were historically incurred by TreeHouse and include employee and non-employee expenses to support the services. There were no costs for the three months ended March 31, 2023, and for the three months ended March 31, 2022, central service costs were approximately $13.4 million.
2) Conveyed employee costs represent compensation costs for employees that were not historically dedicated to the sold business and transferred to the buyer after the sale. There were no costs for the three months ended March 31, 2023,
and for the three months ended March 31, 2022, conveyed employee costs were approximately $8.4 million.
(8)
During the three months ended March 31, 2022, the Company recognized $0.4 million incremental expense for the settlement payment of the $9.0 million accrual related to a litigation matter challenging wage and hour practices at three former manufacturing facilities in California.
The tax impact on adjusting items is calculated based upon the tax laws and statutory tax rates applicable
in the tax jurisdiction of the underlying Non-GAAP adjustments.
Adjusted Net Income (Loss) from Continuing Operations, Adjusted EBIT from Continuing Operations, Adjusted EBITDA from Continuing Operations, Adjusted EBITDAS from Continuing Operations, Adjusted Net Income (Loss) Margin from Continuing Operations, Adjusted EBIT Margin from Continuing Operations, Adjusted EBITDA Margin from Continuing Operations, and Adjusted EBITDAS Margin from Continuing Operations, Adjusting for Certain Items Affecting Comparability
Adjusted net income (loss) from continuing operations represents GAAP net income (loss) from continuing operations 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.
Adjusted EBIT from continuing operations represents adjusted net income (loss) from continuing operations before interest expense, interest income, and
income tax expense. Adjusted EBITDA from continuing operations represents adjusted net income (loss) from continuing operations before interest expense, interest income, income tax expense, and depreciation and amortization expense. Adjusted EBITDAS from continuing operations represents adjusted EBITDA from continuing operations before non-cash stock-based compensation expense. Adjusted EBIT from continuing operations, adjusted EBITDA from continuing operations, and adjusted EBITDAS from continuing operations are performance measures commonly used by management to assess operating performance and incentive compensation, 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 (loss) margin from continuing operations, adjusted EBIT margin from continuing operations, adjusted EBITDA margin from continuing operations, and adjusted EBITDAS 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.
37
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 (loss) from continuing operations, Adjusted EBIT from continuing operations, Adjusted EBITDA from continuing operations, and Adjusted EBITDAS from continuing operations for the three months ended March 31, 2023 and 2022:
Net income (loss) from continuing operations
(GAAP)
$
19.2
$
(13.8)
Growth, reinvestment, and restructuring programs
(1)
15.3
30.1
Mark-to-market
adjustments
(2)
5.9
(50.8)
Divestiture, acquisition, integration, and related costs
(3)
3.8
3.0
Shareholder
activism
(4)
0.3
0.6
Tax indemnification
(5)
0.2
—
Foreign
currency gain on re-measurement of intercompany notes
(6)
(0.2)
(0.8)
Central services and conveyed employee costs
(7)
—
21.8
Litigation
matter
(8)
—
0.4
Less: Taxes on adjusting items
(6.1)
0.3
Adjusted
net income (loss) from continuing operations (Non-GAAP)
38.4
(9.2)
Interest expense
17.8
16.7
Interest
income
(14.6)
(4.1)
Income taxes
6.9
(2.3)
Add: Taxes
on adjusting items
6.1
(0.3)
Adjusted EBIT from continuing operations (Non-GAAP)
54.6
0.8
Depreciation
and amortization
36.0
36.5
Adjusted EBITDA from continuing operations (Non-GAAP)
90.6
37.3
Stock-based
compensation expense
(9)
5.0
3.3
Adjusted EBITDAS from continuing operations (Non-GAAP)
$
95.6
$
40.6
Net
income (loss) margin from continuing operations
2.1
%
(1.8)
%
Adjusted net income (loss) margin from continuing operations
4.3
%
(1.2)
%
Adjusted
EBIT margin from continuing operations
6.1
%
0.1
%
Adjusted EBITDA margin from continuing operations
10.1
%
4.8
%
Adjusted
EBITDAS margin from continuing operations
10.7
%
5.3
%
38
Location
in Condensed
Three Months Ended March 31,
Consolidated Statements of Operations
2023
2022
(unaudited
in millions)
(1)
Growth, reinvestment, and restructuring programs
Other operating expense, net
$
15.3
$
30.1
(2)
Mark-to-market
adjustments
Other expense (income), net
5.9
(50.8)
(3)
Divestiture, acquisition, integration, and related costs
General and administrative
3.1
1.9
Other
operating expense, net
0.7
—
Cost of sales
—
1.1
(4)
Shareholder
activism
General and administrative
0.3
0.6
(5)
Tax
indemnification
Other expense (income), net
0.2
—
(6)
Foreign currency gain on re-measurement of intercompany notes
Loss (gain) on foreign currency exchange
(0.2)
(0.8)
(7)
Central
services and conveyed employee costs
Cost of sales
—
5.0
General and administrative
—
16.8
(8)
Litigation
matter
General and administrative
—
0.4
(9)
Stock-based
compensation expense included as an adjusting item
Other operating expense, net
2.2
0.5
Free Cash Flow From Continuing Operations
In addition to measuring our cash flow generation and usage based upon the operating, investing, and financing classifications included in the Condensed Consolidated Statements of Cash Flows, we also measure free cash flow from continuing operations (a Non-GAAP measure) which represents net cash used in
operating activities from continuing operations less capital expenditures. We believe free cash flow is an important measure of operating performance because it provides management and investors a measure of cash generated from operations that is available for mandatory payment obligations and investment opportunities such as funding acquisitions, repaying debt, repurchasing public debt, and repurchasing our common stock.
The following table reconciles cash flow used in operating activities from continuing operations (a GAAP measure) to our free cash flow from continuing operations (a Non-GAAP measure).
Cash flow used in operating activities from continuing operations
$
(30.9)
$
(96.1)
Less: Capital expenditures
(32.0)
(19.4)
Free
cash flow from continuing operations
$
(62.9)
$
(115.5)
39
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 15 to our Condensed Consolidated Financial Statements included herein and Note 20 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for additional information about our commitments and contingent obligations.
Recent Accounting Pronouncements
The
Company has considered all recent accounting pronouncements and has concluded there are no new pronouncements that had or will have a material impact on the Company’s results of operations, comprehensive income, financial condition, cash flows, shareholders’ equity or related disclosures based on current information.
Critical Accounting Estimates
A description of the Company's critical accounting estimates is contained in our Annual Report on Form 10-K for the year ended December 31, 2022. There were no
material changes to the Company's critical accounting estimates in the three months ended March 31, 2023.
From time to time, we and our representatives may provide information, whether orally or in writing, including certain statements in this Quarterly Report on Form 10-Q, which are deemed to be "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). These forward-looking statements and other information are based on our beliefs as well as assumptions
made by us using information currently available.
The words "believe,""estimate,""project,""expect,""anticipate,""plan,""intend,""foresee,""should,""would,""could," and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended. We do not intend to update these forward-looking statements following the date of this report. In accordance with the provisions of the Litigation Reform Act, we are making investors aware that
such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q and other public statements we make. Such factors include, but are not limited to: risks related to the impact that the divestiture of a significant portion of our Meal Preparation Business or any such divestiture might have on the Company’s operations; disruptions or inefficiencies in our supply chain and/or operations; loss of key suppliers; raw material and commodity costs due to inflation; labor strikes or work stoppages; multiemployer pension plans; labor shortages and increased competition for labor; 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; collectibility of our note receivable, customer concentration and consolidation; competition; our ability to execute on our business strategy; our ability to continue to make acquisitions and execute on divestitures or effectively manage the growth from acquisitions; impairment of goodwill or long lived assets; changes and developments affecting our industry, including customer preferences; the outcome of litigation and regulatory proceedings to which we may be a party; product recalls; changes in laws and regulations applicable to us; shareholder activism; disruptions in or failures of our information technology systems; changes in weather conditions, climate changes, and natural disasters; 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, 2022, and from time to time in our filings with the Securities and Exchange Commission ("SEC").
40
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 16 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 2022 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 2022 year-end.
Item 4.
Controls and Procedures
The Company maintains a system of disclosure controls and procedures to give reasonable assurance that information required to be disclosed in the Company's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), to allow timely decisions regarding required disclosures.
As of March
31, 2023, management, with the participation of our CEO and CFO, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2023 that has materially affected or are reasonably likely to materially affect the
Company's internal control over financial reporting.
41
Part II — Other Information
Item 1. Legal Proceedings
Information regarding legal proceedings is available in Note 15 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, 2022. 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, 2022.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
The cover page from TreeHouse Foods, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (included as Exhibit 101).
**Management contract or compensatory plan or arrangement.
43
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.
