Attached files

file filename
EX-31.2 - 302 CFO CERTIFICATION - TreeHouse Foods, Inc.q32009_31-2.htm
EX-32.1 - 906 CEO CERTIFICATION - TreeHouse Foods, Inc.q32009_32-1.htm
EX-31.1 - 302 CEO CERTIFICATION - TreeHouse Foods, Inc.q32009_31-1.htm
EX-32.2 - 906 CFO CERTIFICATION - TreeHouse Foods, Inc.q32009_32-2.htm
EX-3.2 - AMENDED CORPORATE BYLAWS - TreeHouse Foods, Inc.q32009_exhibit3-2.htm
EX-15.1 - AWARENESS LETTER - TreeHouse Foods, Inc.q32009_exhibit15-1.htm
 


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)

 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
For the Quarterly Period Ended September 30, 2009.
or

 
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from                            to

Commission File Number 001-32504

TreeHouse Foods, Inc.
(Exact name of the registrant as specified in its charter)


Delaware
 
20-2311383
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
     
Two Westbrook Corporate Center, Suite 1070
   
Westchester, IL
 
60154
(Address of principal executive offices)
 
(Zip Code)

(Registrant’s telephone number, including area code) (708) 483-1300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x     No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
x
 
Accelerated filer
o
         
Non-accelerated filer
o
 
Smaller reporting Company
o
(Do not check if a smaller reporting company)
       
         
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o     No x

There were 31,928,672 shares of Common Stock, par value $0.01 per share, outstanding as of October 30, 2009.
 




 
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Part I — Financial Information


Item 1. Financial Statements

TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

                 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
 
Assets
               
Current assets:
               
Cash and cash equivalents
 
$
3,654
   
$
2,687
 
Receivables, net
   
105,765
     
86,837
 
Inventories, net
   
303,955
     
245,790
 
Deferred income taxes
   
7,418
     
6,769
 
Prepaid expenses and other current assets
   
8,991
     
10,315
 
Assets held for sale
   
4,081
     
4,081
 
Total current assets
   
433,864
     
356,479
 
Property, plant and equipment, net
   
278,702
     
270,664
 
Goodwill
   
576,094
     
560,874
 
Identifiable intangible and other assets, net
   
166,848
     
167,665
 
Total assets
 
$
1,455,508
   
$
1,355,682
 
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable and accrued expenses
 
$
176,499
   
$
187,795
 
Current portion of long-term debt
   
597
     
475
 
Total current liabilities
   
177,096
     
188,270
 
Long-term debt
   
475,477
     
475,233
 
Deferred income taxes
   
44,092
     
27,485
 
Other long-term liabilities
   
38,319
     
44,563
 
Total liabilities
   
734,984
     
735,551
 
Commitments and contingencies (Note 16)
               
Stockholders’ equity:
               
Preferred stock, par value $0.01 per share, 10,000,000 shares authorized, none issued
   
     
 
Common stock, par value $0.01 per share, 90,000,000 and 40,000,000 shares authorized, respectively, 31,928,544 and 31,544,515 shares issued and outstanding, respectively
   
319
     
315
 
Additional paid-in capital
   
582,348
     
569,262
 
Retained earnings
   
173,173
     
113,948
 
Accumulated other comprehensive loss
   
(35,316
)
   
(63,394
)
Total stockholders’ equity
   
720,524
     
620,131
 
Total liabilities and stockholders’ equity
 
$
1,455,508
   
$
1,355,682
 

See Notes to Condensed Consolidated Financial Statements.


TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(Unaudited)
   
(Unaudited)
 
Net sales
  $ 378,865     $ 374,576     $ 1,106,866     $ 1,102,568  
Cost of sales
    298,347       301,416       874,793       890,390  
Gross profit
    80,518       73,160       232,073       212,178  
Operating expenses:
                               
Selling and distribution
    25,671       29,060       79,969       86,672  
General and administrative
    20,752       15,959       56,388       46,961  
Other operating (income) expense, net
    (14,354 )     722       (13,929 )     12,572  
Amortization expense
    3,375       3,331       9,954       10,346  
Total operating expenses
    35,444       49,072       132,382       156,551  
Operating income
    45,074       24,088       99,691       55,627  
Other (income) expense:
                               
Interest expense
    4,807       6,493       14,144       21,785  
Interest income
    (21 )           (39 )     (107 )
Loss (gain) on foreign currency exchange
    (2,968 )     1,869       (4,772 )     3,724  
Other income, net
    (151 )     (87 )     (1,416 )     (268 )
Total other expense
    1,667       8,275       7,917       25,134  
Income before income taxes
    43,407       15,813       91,774       30,493  
Income taxes
    15,343       4,733       32,553       9,060  
Net income
  $ 28,064     $ 11,080     $ 59,221     $ 21,433  
                                 
Weighted average common shares:
                               
Basic
    32,280       31,397       31,797       31,281  
Diluted
    33,129       31,514       32,387       31,399  
Net earnings per common share:
                               
Basic
  $ .87     $ .35     $ 1.86     $ .69  
Diluted
  $ .85     $ .35     $ 1.83     $ .68  

See Notes to Condensed Consolidated Financial Statements.


TREEHOUSE FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

                 
   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
   
(Unaudited)
 
Cash flows from operating activities:
               
Net income
 
$
59,221
   
$
21,433
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
24,978
     
25,160
 
Amortization
   
9,954
     
10,346
 
Loss (gain) on foreign currency exchange, intercompany note
   
(4,465
)
   
3,107
 
Mark to market adjustment on interest rate swap
   
(1,229
)
   
 
Excess tax benefits from stock-based payment arrangements
   
(60
)
   
(325
)
Stock-based compensation
   
9,951
     
8,795
 
Write down of impaired assets
   
     
5,173
 
Gain on disposition of assets, net
   
(12,612
)
   
(652
)
Deferred income taxes
   
11,743
     
7,165
 
Other
   
120
     
393
 
Changes in operating assets and liabilities, net of acquisitions:
               
Receivables
   
(5,614
)
   
(16,630
)
Inventories
   
(54,083
)
   
6,535
 
Prepaid expenses and other current assets
   
1,584
     
(6,358
)
Accounts payable, accrued expenses and other liabilities
   
(10,561
)
   
28,550
 
Net cash provided by operating activities
   
28,927
     
92,692
 
Cash flows from investing activities:
               
Additions to property, plant and equipment
   
(30,877
)
   
(40,799
)
Insurance proceeds
   
     
4,800
 
Acquisitions of businesses
   
     
(251
)
Proceeds from sale of fixed assets
   
35
     
1,659
 
Net cash used in investing activities
   
(30,842
)
   
(34,591
)
Cash flows from financing activities:
               
Net repayment of debt
   
(949
)
   
(69,460
)
Proceeds from stock option exercises
   
3,405
     
3,965
 
Excess tax benefits from stock-based payment arrangements
   
60
     
325
 
Cash used to net share settle equity awards
   
(324
)
   
 
Net cash provided by (used in) financing activities
   
2,192
     
(65,170
)
Effect of exchange rate changes on cash and cash equivalents
   
690
     
(287
)
Net increase (decrease) in cash and cash equivalents
   
967
     
(7,356
)
Cash and cash equivalents, beginning of period
   
2,687
     
9,230
 
Cash and cash equivalents, end of period
 
$
3,654
   
$
1,874
 

See Notes to Condensed Consolidated Financial Statements.


TREEHOUSE FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the nine months ended September 30, 2009
(Unaudited)

1. Basis of Presentation

The Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q.  In our opinion, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations.  The Condensed Consolidated Financial Statements and related notes should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.  Results of operations for interim periods are not necessarily indicative of annual results.

The preparation of our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to use our judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of net sales and expenses during the reporting period.  Actual results could differ from these estimates.

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q on November 4, 2009.  We are not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Condensed Consolidated Financial Statements.

A detailed description of the Company’s significant accounting policies can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Unless otherwise indicated, references in this report to “we,” “us,” “our,” or the “Company” refer to TreeHouse Foods, Inc. and subsidiaries, taken as a whole.

2. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The provisions of the pronouncement are effective for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued another accounting pronouncement, which delayed the initial effective date for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008.  The adoption of the provisions of these pronouncements did not significantly impact our financial statements.

In December 2007, the FASB issued an accounting pronouncement on business combinations.  The provisions of this pronouncement establish principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest acquired and the goodwill acquired.  The pronouncement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination, and applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, and may not be early adopted.  The Company will apply the provisions of this pronouncement for all future acquisitions.

In December 2007, the FASB issued an accounting pronouncement on non-controlling interests in consolidated financial statements.  The provisions of this pronouncement outline the accounting and reporting for ownership interests in a subsidiary held by parties other than the parent and is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  This pronouncement is to be applied prospectively as of the beginning of the fiscal year in which it is initially adopted, except for the presentation and disclosure requirements, which are to be applied retrospectively for all periods presented.  Adoption of this pronouncement did not have an impact on our financial statements.


In March 2008, the FASB issued an accounting pronouncement regarding disclosures about derivative instruments and hedging activities, which requires increased qualitative, and credit-risk disclosures.  This pronouncement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  Further, entities are encouraged, but not required to provide comparative disclosures for earlier periods.  We adopted the provisions of this pronouncement beginning January 1, 2009 and have provided the required disclosures beginning with our first quarterly report on Form 10-Q in 2009.

The Emerging Issues Task Force (“EITF”) issued, in November 2008, an accounting pronouncement regarding equity method investment accounting considerations which is effective for transactions occurring in fiscal years beginning on or after December 15, 2008. The adoption of this pronouncement did not have a significant impact on our financial statements.

On December 30, 2008, the FASB issued an accounting pronouncement regarding employers’ disclosures about postretirement benefits.  This pronouncement is effective for fiscal years ending after December 15, 2009.  This pronouncement does not change current accounting methods, but requires disclosure about investment policies and strategies, the fair value of each major category of plan assets, the methods and inputs used to develop fair value measurements of plan assets, and concentrations of credit risk.  As this pronouncement only pertains to disclosures, the Company does not expect its impact upon adoption to be significant.

In April 2009, the FASB issued an accounting pronouncement regarding interim disclosures about the fair value of financial instruments.  This pronouncement requires disclosures about the fair value of financial instruments in financial statements for interim reporting periods and in annual financial statements of publicly-traded companies.  This pronouncement also requires entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods.  The effective date for this pronouncement is interim and annual periods ending after June 15, 2009.  We have complied with the disclosure provisions of this pronouncement.
 
In May 2009, the FASB issued an accounting pronouncement regarding subsequent events, which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This pronouncement is effective for fiscal years and interim periods ended after June 15, 2009.  We adopted the provisions of this pronouncement for the quarter ended June 30, 2009.  The adoption of these provisions did not have a material effect on our consolidated financial statements.

In June 2009, the FASB issued an accounting pronouncement regarding the FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.  This pronouncement establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative, nongovernmental U.S. GAAP.  The Codification is effective for financial statements for interim or annual reporting periods ending after September 15, 2009.  All U.S. GAAP accounting literature is now known as the “Accounting Standard Codification” (“ASC”) and updates to the Codification are now issued as “Accounting Standards Updates” (“ASU”). As the Codification was not intended to change or alter existing U.S. GAAP, it did not have any impact on our consolidated financial statements.

In August 2009, the FASB issued ASU 2009-5 which provides additional guidance on measuring the fair value of liabilities under ASC 820. ASU 2009-5 clarifies that the quoted price for the identical liability, when traded as an asset in an active market, is also a Level 1 measurement for that liability when no adjustment to the quoted price is required.  This pronouncement also requires that the fair value of a liability is measured using one or more of the following techniques when a quoted price in an active market for the identical liability is not available, (1) a valuation technique that uses the quoted price for the identical liability when traded as an asset, (2) quoted prices for similar liabilities or similar liabilities when traded as assets, or (3) another valuation technique consistent with the guidance in ASC 820, for example, an income approach such as a present value technique.  The adoption of ASU 2009-5 is not expected to significantly impact the Company.

3. Income Taxes

Income tax expense was recorded at an effective rate of 35.3% and 35.5% for the three and nine months ended September 30, 2009, respectively, compared to 29.9% and 29.7% for the three and nine months ended September 30, 2008, respectively.  The Company’s effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith, Canadian acquisition.  For the three and nine months ended September 30, 2009 and 2008, the Company recognized a tax benefit related to this item of approximately $1.3 million and $3.5 million and $1.4 million and $4.2 million, respectively.  As consolidated earnings for the three and nine months ended September 30, 2009 were significantly higher than consolidated earnings for the three and nine months ended September 30, 2008, this tax benefit was proportionally much smaller, therefore, increasing the net effective tax rate in the three and nine months ended September 30, 2009 compared to 2008.  In addition, in 2009 the Company recorded an additional $0.8 million in Canadian withholding tax related to the closure of our Cambridge, Ontario plant.

As of September 30, 2009, the Company does not believe that the gross recorded unrecognized tax benefits will materially change within the next 12 months.


The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, Canada and various state jurisdictions.  The Internal Revenue Service (“IRS”) began an examination of the Company’s 2007 federal income tax return in the second quarter of 2009.  The IRS has previously examined tax returns filed for years through 2006.  The Company has various state tax examinations in process, which are expected to be completed in 2010.  The outcome of the IRS examination and the various state tax examinations are unknown at this time.

E.D. Smith and its affiliates are subject to Canadian, U.S. and state tax examinations from 2005 forward.  The IRS completed an examination of E.D. Smith’s U.S. affiliates tax return for 2005 during the first quarter of 2009.  An insignificant tax adjustment was paid to settle the examination.  The Canada Revenue Agency (CRA) initiated an income tax audit for the E.D. Smith 2006 and 2007 tax years.  The Company expects this audit to conclude during the fourth quarter of 2009.  The outcome of this audit is unknown at this time.

4. Other Operating (Income) Expense

The Company had Other operating income of $14.4 million and $13.9 million for the three and nine months ended September 30, 2009, respectively, and expense of $0.7 million and $12.6 million for the three and nine months ended September 30, 2008, respectively.  For the three and nine months ended September 30, 2009, income consisted of a gain from insurance proceeds of $14.5 million related to a fire at our non-dairy powdered creamer facility located in New Hampton, Iowa, offset by $0.1 million and $0.6 million, respectively, of executory costs at our closed Portland, Oregon pickle plant.  For the three and nine months ended September 30, 2008, expenses consisted of $0.7 million and $12.1 million, respectively, relating to the closing of our Portland, Oregon plant plus $0.5 million in the nine months ended September 30, 2008, relating to the fire at our New Hampton, Iowa plant.

5. Facility Closings

On February 13, 2008, the Company announced plans to close its pickle plant in Portland, Oregon.  The Portland plant was the Company’s highest cost and least utilized pickle facility.  Operations in the plant ceased during the second quarter of 2008.  Net costs associated with the plant closure are estimated to be approximately $13.9 million, of which $8.6 million is expected to be in cash, net of estimated proceeds from the sale of assets.  The Company has incurred $13.8 million in Portland closure costs since 2008.  There are no accrued expenses related to this closure as of September 30, 2009, and insignificant accrued expenses as of December 31, 2008.  In connection with the Portland closure, the Company has $4.1 million of assets held for sale, which are primarily land and buildings.

On November 3, 2008, the Company announced plans to close its salad dressings manufacturing plant in Cambridge, Ontario.  Manufacturing operations in Cambridge ceased at the end of June 2009.  Production has been transitioned to the Company’s other manufacturing facilities in Canada and the United States.  The change will result in the Company’s production capabilities being more aligned with the needs of our customers.  The majority of the closure costs were included as costs of the acquisition of E.D. Smith and are not expected to significantly impact earnings.  Total costs are expected to be approximately $2.5 million, including severance costs of $1.3 million, and other costs of $1.2 million.  As of September 30, 2009, the Company had remaining accruals of approximately $1.0 million for the closure, the components of which include $0.6 million for severance and $0.4 million for closing and other costs.  The Company expects payments to be completed by the end of 2009, with all payments expected to be funded with cash from operations.  Severance payments during the nine months ended September 30, 2009 were approximately $0.7 million.

6. Insurance Claim – New Hampton

In February 2008, the Company’s non-dairy powdered creamer plant in New Hampton, Iowa was damaged by a fire, which left the facility unusable.  The Company has repaired the facility and it became operational in the first quarter of 2009.  The Company filed a claim with our insurance provider and have received approximately $37.5 million in reimbursements for property damage and incremental expenses incurred to service our customers throughout this period.  The claim was finalized in September 2009, and the Company received a final payment of approximately $10.6 million to close our claim in October.  As of September 30, 2009, the Company recorded this amount as a receivable and recognized income of approximately $15.4 million, of which $14.5 million is classified in Other operating (income) expense and $0.9 million is classified in Cost of sales.  Of the $14.5 million, $13.6 was related to a gain on the fixed assets destroyed in the incident.


7. Inventories

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Finished goods
 
$
229,228
   
181,311
 
Raw materials and supplies
   
95,070
     
82,869
 
LIFO reserve
   
(20,343
)
   
(18,390
)
Total
 
$
303,955
   
$
245,790
 

Approximately $115.9 million and $83.0 million of our inventory was accounted for under the LIFO method of accounting at September 30, 2009 and December 31, 2008, respectively.

8. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended September 30, 2009 are as follows:

   
North American
 
Food Away
 
Industrial
     
   
Retail Grocery
 
From Home
 
and Export
 
Total
 
   
(In thousands)
 
Balance at December 31, 2008
  $ 343,651     $ 83,641     $ 133,582     $ 560,874  
Currency exchange adjustment
    13,754       1,466             15,220  
Balance at September 30, 2009
  $ 357,405     $ 85,107     $ 133,582     $ 576,094  

The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of September 30, 2009 and December 31, 2008 are as follows:

   
September 30, 2009
   
December 31, 2008
 
   
Gross
         
Net
   
Gross
         
Net
 
   
Carrying
   
Accumulated
   
Carrying
   
Carrying
   
Accumulated
   
Carrying
 
   
Amount
   
Amortization
   
Amount
   
Amount
   
Amortization
   
Amount
 
   
(In thousands)
 
Intangible assets with indefinite lives:
                                               
Trademarks
 
$
30,566
   
$
   
$
30,566
   
$
27,824
   
$
   
$
27,824
 
Intangible assets with finite lives:
                                               
Customer-related
   
145,177
     
(32,296
)
   
112,881
     
137,693
     
(23,430
)
   
114,263
 
Non-compete agreement
   
2,620
     
(1,977
)
   
643
     
2,620
     
(1,422
)
   
1,198
 
Trademarks
   
17,610
     
(2,079
)
   
15,531
     
17,610
     
(1,385
)
   
16,225
 
Formulas/recipes
   
1,719
     
(659
)
   
1,060
     
1,583
     
(378
)
   
1,205
 
Total
 
$
197,692
   
$
(37,011
)
 
$
160,681
   
$
187,330
   
$
(26,615
)
 
$
160,715
 
                                                 
                                     

Amortization expense on intangible assets for the three months ended September 30, 2009 and 2008 was $3.4 million and $3.3 million, respectively and $10.0 million and $10.3 million for the nine months ended September 30, 2009 and 2008, respectively.  Estimated aggregate intangible asset amortization expense for the next five years is as follows:

 
(In thousands)
2010
$12,857
2011
$10,965
2012
$10,664
2013
$10,422
2014
$10,402



9. Long-Term Debt

                 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(In thousands)
 
Revolving credit facility
 
$
371,600
   
$
372,000
 
Senior notes
   
100,000
     
100,000
 
Tax increment financing and other
   
4,474
     
3,708
 
     
476,074
     
475,708
 
Less current portion
   
(597
)
   
(475
)
Total long-term debt
 
$
475,477
   
$
475,233
 
                 
             

Revolving Credit Facility — The Company maintains an unsecured revolving credit agreement with an aggregate commitment of $600 million, of which $219.6 million was available as of September 30, 2009, that expires August 31, 2011.  In addition, as of September 30, 2009, there were $8.8 million in letters of credit under the revolver that were issued but undrawn.  The credit facility contains various financial and other restrictive covenants and requires that the Company maintain certain financial ratios, including a leverage and interest coverage ratio.  The Company is in compliance with all applicable covenants as of September 30, 2009.  The Company believes that, given our cash flow from operating activities and our available credit capacity, we can comply with the current terms of the credit facility and meet foreseeable financial requirements.  Our average interest rate on debt outstanding under our credit agreement at September 30, 2009 was 0.82%.

Senior Notes — The Company also maintains a private placement of $100 million in aggregate principal of 6.03% senior notes due September 30, 2013, pursuant to a Note Purchase Agreement among the Company and a group of purchasers.  The Note Purchase Agreement contains covenants that will limit the ability of the Company and its subsidiaries to, among other things, merge with other entities, change the nature of the business, create liens, incur additional indebtedness or sell assets.  The Note Purchase Agreement also requires the Company to maintain certain financial ratios.  We are in compliance with the applicable covenants as of September 30, 2009.

Swap Agreements — During 2008, the Company entered into a $200 million long term interest rate swap agreement with an effective date of November 19, 2008 to lock into a fixed LIBOR interest base rate.  Under the terms of the agreement, $200 million in floating rate debt was swapped for a fixed 2.9% interest base rate for a period of 24 months, amortizing to $50 million for an additional nine months at the same 2.9% interest rate.  Under the terms of the Company’s revolving credit agreement and in conjunction with our credit spread, this will result in an all-in borrowing cost on the swapped principal being no more than 3.8% during the life of the swap agreement.  The Company did not apply hedge accounting to this swap.

In July 2006, the Company entered into a forward interest rate swap transaction for a notional amount of $100 million as a hedge of the forecasted private placement of $100 million senior notes.  The interest rate swap transaction was terminated on August 31, 2006, which resulted in a pre-tax loss of $1.8 million.  The unamortized loss is reflected, net of tax, in Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets.  The total loss will be reclassified ratably to our Condensed Consolidated Statements of Income as an increase to Interest expense over the term of the senior notes, providing an effective interest rate of 6.29% over the term of our senior notes.  In the nine months ended September 30, 2009, $0.2 million of the loss was taken into interest expense.  We anticipate that $0.3 million of the loss will be reclassified to interest expense in 2009.

Tax Increment Financing —As part of the acquisition of the soup and infant feeding business in 2006, the Company assumed the payments related to redevelopment bonds pursuant to a Tax Increment Financing Plan.  The Company has agreed to make certain payments with respect to the principal amount of the redevelopment bonds through May 2019.  As of September 30, 2009, $2.7 million remains outstanding.

10. Earnings Per Share

Basic earnings per share is computed by dividing net income by the number of weighted average common shares outstanding during the reporting period.  The weighted average number of common shares used in the diluted earnings per share calculation is determined using the treasury stock method and includes the incremental effect related to outstanding options, restricted stock, restricted stock units and performance units.


Certain restricted stock unit and restricted stock awards are subject to market conditions for vesting.  For the three months ended September 30, 2009 and 2008, none of the conditions for vesting were met for the restricted stock awards.  During the three months ended September 30, 2009, the conditions for vesting were met for the restricted stock unit awards, and the awards vested.  The Company has included their dilutive impact for the period of time during which they were not vested.  For the three months ended September 30, 2008, the restricted stock unit conditions were not met and were excluded from the diluted shares calculation.

For the nine months ended September 30, 2009, the conditions pertaining to the restricted stock and restricted stock unit awards were met and these awards were included in the diluted earnings per share calculation.  For the nine months ended September 30, 2008, none of the conditions for vesting were met for either the restricted stock awards or restricted stock unit awards, and they were excluded from the diluted earning per share calculation.

The Company’s performance unit awards contain both service and performance criteria.  For the three and nine months ended September 30, 2009, the performance criteria for a portion of the performance awards were met and, therefore, have been included in the diluted earnings per share calculation.  For the three months and nine months ended September 30, 2008, none of the performance criteria were met and these awards were excluded from the diluted earnings per share calculation.

The following table summarizes the effect of the share-based compensation awards on the weighted average number of shares outstanding used in calculating diluted earnings per share:

                       
   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
   
2009
 
2008
 
2009
 
2008
Weighted average common shares outstanding
 
32,280,059
   
31,396,886
   
31,797,354
   
31,281,338
Assumed exercise of stock options (1)
 
494,237
   
116,854
   
127,794
   
117,446
Assumed vesting of restricted stock, restricted stock units
and performance units (1)
 
354,444
   
   
462,319
   
Weighted average diluted common shares outstanding
 
33,128,740
   
31,513,740
   
32,387,467
   
31,398,784

     
(1)
 
Incremental shares from stock options, restricted stock, restricted stock units, and performance units are computed by the treasury stock method.  Stock options, restricted stock, restricted stock units, and performance units excluded from our computation of diluted earnings per share because they were anti-dilutive, 8,175 and 1,585,412 for the three and nine months ended September 30, 2009, respectively and 2,225,111 for the three and nine months ended September 30, 2008.

11. Stock-Based Compensation

Income before income taxes for the three and nine month periods ended September 30, 2009 and 2008 includes share-based compensation expense of $3.9 million, $10.0 million, $3.4 million and $8.8 million, respectively.  The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.5 million and $3.8 million for the three and nine month periods ended September 30, 2009, respectively, and $1.3 million and $3.5 million for the three and nine month periods ended September 30, 2008, respectively.

The following table summarizes stock option activity during the nine months ended September 30, 2009.  Options are granted under our long-term incentive plan, and have a three year vesting schedule, which vest one-third on each of the first three anniversaries of the grant date.  Options expire 10 years from the grant date.

                                     
                           
Weighted
       
                   
Weighted
     
Average
       
                   
Average
     
Remaining
   
Aggregate
 
     
Employee
     
Director
   
Exercise
     
Contractual
   
Intrinsic
 
     
Options
     
Options
   
Price
     
Term (yrs)
   
Value
 
Outstanding, December 31, 2008
   
2,485,937
     
126,117
   
$
27.21
     
7.4
   
$
3,394,930
 
Granted
   
2,400
     
   
$
26.69
             
 
Forfeited
   
(18,787
)
   
   
$
25.53
             
 
Exercised
   
(125,514
)
   
   
$
26.82
             
 
Outstanding, September 30, 2009
   
2,344,036
     
126,117
   
$
27.24
     
6.7
   
$
20,816,981
 
Vested/expected to vest, at September 30, 2009
   
2,300,746
     
126,117
   
$
27.28
     
6.6
   
$
20,373,503
 
Exercisable, September 30, 2009
   
1,896,310
     
111,981
   
$
27.77
     
6.3
   
$
15,873,304
 



Compensation cost related to unvested options totaled $2.8 million at September 30, 2009 and will be recognized over the remaining vesting period of the grants, which averages 1.5 years.  The average grant date fair value of the options granted in the nine months ended September 30, 2009 was $8.97.  The Company uses the Black-Scholes option pricing model to value its stock option awards.  The aggregate intrinsic value of stock options exercised during the three and nine months ended September 30, 2009 was approximately $1.1 million.

In addition to stock options, the Company also grants restricted stock, restricted stock units and performance unit awards.  These awards are granted under our long-term incentive plan.  Employee restricted stock and restricted stock unit awards granted during the nine months ended September 30, 2009 vest based on the passage of time.  These awards generally vest one-third on each anniversary of the grant date.  Director restricted stock units granted during the nine months ended September 30, 2009 vest over thirteen months.  A description of the restricted stock and restricted stock unit awards previously granted is presented in the Company’s annual report on Form 10-K for the year ended December 31, 2008.  The following table summarizes the restricted stock and restricted stock unit activity during the nine months ended September 30, 2009:

                                 
         
Weighted
       
Weighted
       
Weighted
 
   
Employee
   
Average
 
Employee
   
Average
   
Director
 
Average
 
   
Restricted
   
Grant Date
 
Restricted
   
Grant Date
   
Restricted
 
Grant Date
 
   
Stock
   
Fair Value
 
Stock Units
   
Fair Value
   
Stock Units
 
Fair Value
 
Outstanding, at December 31, 2008
   
1,412,322
   
$
24.15
     
598,939
   
$
25.28
     
22,200
   
$
24.06
 
Granted
   
59,340
   
$
26.36
     
187,550
   
$
28.65
     
26,900
   
$
28.95
 
Vested
   
(260,009
)
 
$
24.06
     
(4,688
)
 
$
24.10
     
(3,700
)
 
$
24.06
 
Forfeited
   
(8,117
)
 
$
24.74
     
(2,020
)
 
$
27.02
     
     
 
Outstanding, at September 30, 2009
   
1,203,536
   
$
24.28
     
779,781
   
$
26.09
     
45,400
   
$
26.96
 

Future compensation cost related to restricted stock and restricted stock units is approximately $16.6 million as of September 30, 2009, and will be recognized on a weighted average basis, over the next 2.0 years.  The grant date fair value of the awards granted in 2009 was equal to the Company’s closing stock price on the grant date.

Performance unit awards were granted to certain members of management.  These awards contain service and performance conditions.  For each of the three performance periods, one third of the units will accrue, multiplied by a predefined percentage between 0% and 200%, depending on the achievement of certain operating performance measures.  Additionally, for the cumulative performance period, a number of units will accrue, equal to the number of units granted multiplied by a predefined percentage between 0% and 200%, depending on the achievement of certain operating performance measures, less any units previously accrued.  Accrued units will be converted to stock or cash, at the discretion of the compensation committee on the third anniversary of the grant date.  The Company intends to settle these awards in stock and has the shares available to do so.  The following table summarizes the performance unit activity during the nine months ended September 30, 2009:

         
Weighted
   
         
Average
   
   
Performance
   
Grant Date
   
   
Units
   
Fair Value
   
Unvested, at December 31, 2008
 
72,900
   
$
24.06
   
Granted
 
54,900
   
$
28.92
   
Vested
 
     
   
Forfeited
 
     
   
Unvested, at September 30, 2009
 
127,800
   
$
26.15
   

Future compensation cost related to the performance units is estimated to be approximately $7.8 million as of September 30, 2009, and is expected to be recognized over the next 2.2 years.


12. Employee Retirement and Postretirement Benefits

Pension, Profit Sharing and Postretirement Benefits — Certain of our employees and retirees participate in pension and other postretirement benefit plans.  Employee benefit plan obligations and expenses included in the Condensed Consolidated Financial Statements are determined based on plan assumptions, employee demographic data, including years of service and compensation, benefits and claims paid, and employer contributions.

Defined Benefit Plans — The benefits under our defined benefit plans are based on years of service and employee compensation.

Components of net periodic pension expense are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
Service cost
 
$
490
   
$
430
   
$
1,470
   
$
1,290
 
Interest cost
   
524
     
430
     
1,572
     
1,290
 
Expected return on plan assets
   
(440
)
   
(358
)
   
(1,320
)
   
(1,074
)
Amortization of unrecognized net loss
   
149
     
     
447
     
 
Amortization of prior service costs
   
145
     
120
     
435
     
360
 
Effect of settlements
   
     
75
     
     
225
 
Net periodic pension cost
 
$
868
   
$
697
   
$
2,604
   
$
2,091
 

We contributed $8.9 million to the pension plans in the first nine months of 2009.  No additional contributions are required in 2009.

Postretirement Benefits — We provide healthcare benefits to certain retirees who are covered under specific group contracts.

Components of net periodic postretirement expenses are as follows:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
Service cost
 
$
63
   
$
59
   
$
189
   
$
177
 
Interest cost
   
64
     
58
     
192
     
174
 
Amortization of prior service credit
   
(18
)
   
(18
)
   
(54
)
   
(54
)
Amortization of unrecognized net loss
   
5
     
6
     
15
     
18
 
Net periodic postretirement cost
 
$
114
   
$
105
   
$
342
   
$
315
 

We expect to contribute approximately $0.1 million to the postretirement health plans during 2009.

13. Comprehensive Income

The following table sets forth the components of comprehensive income:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
Net income
 
$
28,064
   
$
11,080
   
$
59,221
   
$
21,433
 
Foreign currency translation adjustment
   
15,396
     
(6,647
)
   
27,439
     
(13,230
)
Amortization of pension and postretirement
                               
prior service costs and net loss, net of tax
   
171
     
67
     
512
     
201
 
Amortization of swap loss, net of tax
   
41
     
40
     
122
     
120
 
Other
   
     
10
     
5
     
10
 
Comprehensive income
 
$
43,672
   
$
4,550
   
$
87,299
   
$
8,534
 

We expect to amortize $0.7 million of prior service costs and net loss, net of tax and $0.2 million of swap loss, net of tax from other comprehensive income into earnings during 2009.


14. Fair Value of Financial Instruments

Cash and cash equivalents and accounts receivable are financial assets with carrying values that approximate fair value.  Accounts payable are financial liabilities with carrying values that approximate fair value.  As of September 30, 2009, the carrying value of the Company’s fixed rate senior notes was $100.0 million and fair value was estimated to be $102.6 million based on Level 2 inputs.  The fair value of the Company’s variable rate debt (revolving credit facility), with an outstanding balance of $371.6 million as of September 30, 2009, was $350.0 million, using Level 2 inputs.  Level 2 inputs are inputs other than quoted prices that are observable for an asset or liability, either directly or indirectly.

The fair value of the Company’s interest rate swap agreement as described in Notes 9 and 15 as of September 30, 2009 was a liability of approximately $5.8 million.  The fair value of the swap was determined using Level 2 inputs.

15. Derivative instruments

The Company is exposed to certain risks relating to its ongoing business operations.  The primary risks managed by derivative instruments are the interest rate risk and foreign currency risk.  Interest rate swaps are entered into to manage interest rate risk associated with the Company’s $600 million revolving credit facility.  Interest on our credit facility is variable and use of the interest rate swap establishes a fixed rate over the term of a portion of the facility.  The Company’s objective in using an interest rate swap is to establish a fixed interest rate, thereby enabling the Company to predict and manage interest expense and cash flows in a more efficient and effective manner.  The Company did not apply hedge accounting to the interest rate swap, and it is recorded at fair value on the Company’s Condensed Consolidated Balance Sheets. See Note 9 for more details of the interest rate swap, including the notional amount, interest rate and term.  Note 14 discusses the fair value of the interest rate swap.

The Company enters into foreign currency contracts to manage the risk associated with foreign currency cash flows.  The Company’s objective in using foreign currency contracts is to establish a fixed foreign currency exchange rate for certain Canadian raw material purchases that are denominated in U.S. dollars, thereby enabling the Company to manage its foreign currency exchange rate risk.  In May 2009, the Company entered into three foreign currency contracts for the purchase of $5.0 million U.S. dollars, in exchange for $5.6 million Canadian dollars.  These contracts expired during the third quarter and are no longer outstanding.  We did not apply hedge accounting to these foreign currency contracts.

As of September 30, 2009, the Company had no other derivative instruments.

The following table identifies the derivative, its fair value, and location on the Condensed Consolidated Balance Sheet:
                   
   
Liability Derivatives
 
   
September 30, 2009
 
December 31, 2008
 
   
Balance Sheet Location
 
 
Fair Value
 
Balance Sheet Location
 
 
Fair Value
 
   
(In thousands)
 
Derivatives not designated as hedging instruments
                 
Interest rate swap
 
Other long-term liabilities
 
 
$5,752
 
Other long-term liabilities
 
 
$6,981
 

The Company recognized a gain of $1.2 million relating to the change in the fair value of its interest rate swap derivative for the nine months ended September 30, 2009.  This gain is recorded in the Other income, net line of our Condensed Consolidated Statements of Income.

The Company recognized a loss of $0.2 million relating to the settlement of its foreign currency contracts for the nine months ended September 30, 2009.  This loss is recorded in the Loss (gain) on foreign currency exchange line of our Condensed Consolidated Statements of Income.

The Company does not use derivatives for speculative or trading purposes.

16. Commitments and Contingencies

Litigation, Investigations and Audits — We are party in the ordinary course of business to certain claims, litigation, audits and investigations.  We believe that we have established adequate reserves to satisfy any liability we may incur in connection with any such currently pending or threatened matters.  In our opinion, the settlement of any such currently pending or threatened matters is not expected to have a material adverse impact on our financial position, annual results of operations or cash flows.


17. Supplemental Cash Flow Information

Cash payments for interest were $15.0 million and $23.4 million for the nine months ended September 30, 2009 and 2008, respectively.  Cash payments for income taxes were $9.6 million and $10.0 million for the nine months ended September 30, 2009 and 2008, respectively.  As of September 30, 2009, the Company had accrued property, plant and equipment of approximately $1.8 million.  For the nine months ended September 30, 2009, the Company entered into capital leases totaling approximately $1.3 million.  Noncash financing activities for the three and nine months ended September 30, 2009 include the gross issuance of 284 and 268,397 shares, respectively, and the repurchase of 94 and 11,219 shares, respectively, to satisfy the minimum statutory withholding requirements associated with the lapse of restrictions on restricted stock and restricted stock unit awards.  The weighted average price of the issuance and repurchase of these shares for the three and nine months ended September 30, 2009 was $33.05 and $29.12, respectively.

18. Foreign Currency

The Company enters into foreign currency contracts due to the exposure to Canadian/U.S. dollar currency fluctuations on cross border transactions.  The Company does not apply hedge accounting to these contracts and records them at fair value on the Condensed Consolidated Balance Sheets, with changes in fair value being recorded through the Condensed Consolidated Statements of Income, within Loss (gain) on foreign currency exchange.  In May 2009, the Company entered into three foreign currency contracts for the purchase of $5.0 million U.S. dollars.  The contracts were entered into for the purchase of U.S. dollar denominated raw materials by our Canadian subsidiary.  These contracts expired during the third quarter of 2009.  Prior to these contracts, the Company had similar contracts that had expired by December 31, 2008.  For the three and nine months ended September 30, 2009, the Company recorded a loss on these contracts totaling approximately $0.4 million and $0.2 million, respectively.  For the three and nine months ended September 30, 2008, the Company recorded a loss on these contracts totaling approximately $12 thousand and a gain of $32 thousand, respectively.

The Company has an intercompany note denominated in Canadian dollars, which is eliminated during consolidation.  A portion of the note is considered to be permanent, with the remaining portion considered to be temporary.  Foreign currency fluctuations on the permanent portion are recorded through Accumulated other comprehensive loss, while foreign currency fluctuations on the temporary portion are recorded in the Company’s Condensed Consolidated Statements of Income, within Loss (gain) on foreign currency exchange.

The Company accrues interest on the intercompany note, which is also considered temporary.  Changes in the balance due to foreign currency fluctuations are also recorded in the Company’s Condensed Consolidated Statements of Income within Loss (gain) on foreign currency exchange.

For the three and nine months ended September 30, 2009 and 2008, the Company recorded a gain of $3.0 million, $4.8 million, and a loss of $1.9 million and $3.7 million, respectively, recorded in Loss (gain) on foreign currency exchange related to foreign currency fluctuations.  For the three and nine months ended September 30, 2009 and 2008, the Company recorded a gain of $15.4 million and $27.4 million and a loss of $6.6 million and $13.2 million, respectively, in Accumulated other comprehensive loss related to foreign currency fluctuations on the permanent portion of the note and translation of E.D. Smith financial statements from Canadian dollars to U.S. dollars.

19. Business and Geographic Information and Major Customers

The Company manages operations on a company-wide basis, thereby making determinations as to the allocation of resources in total rather than on a segment-level basis.  We have designated our reportable segments based on how management views our business.  We do not segregate assets between segments for internal reporting.  Therefore, asset-related information has not been presented.

The Company evaluates the performance of our segments based on net sales dollars, gross profit and direct operating income (gross profit less freight out, sales commissions and direct selling and marketing expenses).  The amounts in the following tables are obtained from reports used by our senior management team and do not include allocated income taxes.  There are no significant non-cash items reported in segment profit or loss other than depreciation and amortization.  Restructuring charges are not allocated to our segments, as we do not include them in the measure of profitability as reviewed by our chief operating decision maker.  Also excluded from the determination of direct operating income are warehouse distribution facility start up costs of approximately $0.2 million and $3.2 million incurred during the three and nine months ended September 30, 2009, respectively, as we did not include them in the measure of profitability as reviewed by our chief operating decision maker.  These costs are included in the Company’s cost of sales as presented in the Condensed Consolidated Statements of Income.  The accounting policies of our segments are the same as those described in the summary of significant accounting policies set forth in Note 1 to our 2008 Consolidated Financial Statements contained in our Annual Report on Form 10-K.



   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
Net sales to external customers:
                               
North American Retail Grocery
 
$
238,891
   
$
221,814
   
$
705,426
   
$
664,334
 
Food Away From Home
   
78,982
     
77,189
     
220,764
     
224,756
 
Industrial and Export
   
60,992
     
75,573
     
180,676
     
213,478
 
Total
 
$
378,865
   
$
374,576
   
$
1,106,866
   
$
1,102,568
 
Direct operating income:
                               
North American Retail Grocery
 
$
36,894
   
$
28,713
   
$
107,127
   
$
79,258
 
Food Away From Home
   
9,025
     
8,200
     
24,128
     
24,335
 
Industrial and Export
   
9,856
     
8,189
     
26,466
     
24,602
 
Direct operating income
   
55,775
     
45,102
     
157,721
     
128,195
 
Unallocated warehouse start-up costs (1)
   
(173
)
   
     
(3,223
)
   
 
Unallocated selling and distribution expenses
   
(755
)
   
(1,002
)
   
(2,394
)
   
(2,689
)
Unallocated corporate expense
   
(9,773
)
   
(20,012
)
   
(52,413
)
   
(69,879
)
Operating income
   
45,074
     
24,088
     
99,691
     
55,627
 
Other (expense) income
   
(1,667
)
   
(8,275
)
   
(7,917
)
   
(25,134
)
Income before income taxes
 
$
43,407
   
$
15,813
   
$
91,774
   
$
30,493
 

(1) Included in Cost of sales in the Condensed Consolidated Statements of Income.

Geographic Information — We had revenues to customers outside of the United States of approximately 13.7% and 14.6% of total consolidated net sales in the nine months ended September 30, 2009 and 2008, respectively, with 13.1% and 13.8% going to Canada, respectively.

Major Customers — Wal-Mart Stores, Inc. and affiliates accounted for approximately 14.4% and 14.7% of our consolidated net sales in the nine months ended September 30, 2009 and 2008, respectively.  No other customer accounted for more than 10% of our consolidated net sales.

Product Information — The following table presents the Company’s net sales by major products for the three and nine months ended September 30, 2009 and 2008:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(In thousands)
 
Products:
                               
Pickles
 
$
82,164
   
$
79,305
   
$
240,268
   
$
251,329
 
Non-dairy powdered creamer
   
75,620
     
84,249
     
236,229
     
251,536
 
Soup and infant feeding
   
85,606
     
87,740
     
232,607
     
232,616
 
Salad dressing
   
46,249
     
33,103
     
146,012
     
121,087
 
Jams and other
   
42,319
     
45,109
     
113,616
     
114,254
 
Aseptic
   
22,052
     
21,393
     
62,722
     
63,144
 
Mexican sauces
   
16,118
     
13,830
     
48,942
     
38,154
 
Refrigerated
   
8,737
     
9,847
     
26,470
     
30,448
 
Total net sales
 
$
378,865
   
$
374,576
   
$
1,106,866
   
$
1,102,568
 



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


Business Overview

We believe we are the largest manufacturer of non-dairy powdered creamer and pickles in the United States, and the largest manufacturer of private label salad dressings in the United States and Canada, based upon total sales volumes.  We believe we are also the leading retail private label supplier of non-dairy powdered creamer, soup and pickles in the United States, and jams in Canada.  We sell our products primarily to the retail grocery and foodservice channels.

The following discussion and analysis presents the factors that had a material effect on our results of operations for the three and nine months ended September 30, 2009 and 2008.  Also discussed is our financial position, as of the end of those periods.  This should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes to those Condensed Consolidated Financial Statements included elsewhere in this report.  This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements.  See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

We discuss the following segments in this Management’s Discussion and Analysis of Financial Condition and Results of Operations: North American Retail Grocery, Food Away From Home, and Industrial and Export.  The key performance indicators of our segments are net sales dollars, gross profit and direct operating income, which is gross profit less the cost of transporting products to customer locations (referred to in the tables below as “freight out”), commissions paid to independent sales brokers, and direct sales and marketing expenses.

Our current operations consist of the following:

 
Our North American Retail Grocery segment sells branded and private label products to customers within the United States and Canada.  These products include pickles, peppers, relishes, Mexican sauces, condensed and ready to serve soup, broths, gravies, jams, salad dressings, sauces, non-dairy powdered creamer, aseptic products, and infant feeding products.

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

 
Our Industrial and Export segment includes the Company’s co-pack business and non-dairy powdered creamer sales to industrial customers for use in industrial applications, including for repackaging in portion control packages and for use as an ingredient by other food manufacturers.  Export sales are primarily to industrial customers outside of North America.

Current economic conditions continue to remain constrained.  During these times, the Company has focused its efforts not only on protecting its volume, but also on cost containment, pricing and margin improvement.  This strategy has resulted in direct operating income growth of 23.7% for the three months ended September 30, 2009 when compared to the three months ended September 30, 2008.  Likewise, direct operating income increased 23.0% for the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008.

Recent Developments

During the fourth quarter of 2009, the Company will begin implementation of an Enterprise Resource Planning (“ERP”) system.  The Company will utilize a combination of internal and external resources and plans for certain modules to be completed during 2011 with final completion in 2012.  The Company expects cash flows from operations will be sufficient to fund the estimated project costs.


Results of Operations

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
 
2008
 
   
Dollars
 
Percent
   
Dollars
 
Percent
   
Dollars
 
Percent
 
Dollars
 
Percent
 
   
(Dollars in thousands)
 
Net sales
 
$
378,865
 
100.0
%
 
$
374,576
 
100.0
%
 
$
1,106,866
 
100.0
%
$
1,102,568
 
100.0
%
Cost of sales
   
298,347
 
78.7
     
301,416
 
80.5
     
874,793
 
79.0
   
890,390
 
80.8
 
Gross profit
   
80,518
 
21.3
     
73,160
 
19.5
     
232,073
 
21.0
   
212,178
 
19.2
 
Operating expenses:
                                             
Selling and distribution
   
25,671
 
6.8
     
29,060
 
7.7
     
79,969
 
7.2
   
86,672
 
7.9
 
General and administrative
   
20,752
 
5.5
     
15,959
 
4.3
     
56,388
 
5.1
   
46,961
 
4.3
 
Other operating (income) expense, net
   
(14,354
)
(3.8
)
   
722
 
0.2
     
(13,929
)
(1.2
)
 
12,572
 
1.1
 
Amortization expense
   
3,375
 
0.9
     
3,331
 
0.9
     
9,954
 
0.9
   
10,346
 
0.9
 
Total operating expenses
   
35,444
 
9.4
     
49,072
 
13.1
     
132,382
 
12.0
   
156,551
 
14.2
 
Operating income
   
45,074
 
11.9
     
24,088
 
6.4
     
99,691
 
9.0
   
55,627
 
5.0
 
Other (income) expense:
                                             
Interest expense
   
4,807
 
1.2
     
6,493
 
1.7
     
14,144
 
1.2
   
21,785
 
2.0
 
Interest income
   
(21
)
     
 
     
(39
)
   
(107
)
 
Loss (gain) on foreign currency exchange
   
(2,968
)
(0.8
)
   
1,869
 
0.5
     
(4,772
)
(0.4
)
 
3,724
 
0.3
 
Other income, net
   
(151
)
     
(87
)
     
(1,416
)
(0.1
)
 
(268
)
 
Total other expense
   
1,667
 
0.4
     
8,275
 
2.2
     
7,917
 
0.7
   
25,134
 
2.3
 
Income before income taxes
   
43,407
 
11.5
     
15,813
 
4.2
     
91,774
 
8.3
   
30,493
 
2.7
 
Income taxes
   
15,343
 
4.1
     
4,733
 
1.2
     
32,553
 
2.9
   
9,060
 
0.8
 
Net income
 
$
28,064
 
7.4
%
 
$
11,080
 
3.0
%
 
$
59,221
 
5.4
%
$
21,433
 
1.9
%
                                               

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Net Sales — Third quarter net sales increased 1.1% to $378.9 million in 2009 compared to $374.6 million in the third quarter of 2008.  The increase is primarily due to price increases taken in the second half of 2008, which more than offset the volume declines in the quarter and reduced revenues from the impact of foreign currency fluctuations.  Net sales by segment are shown in the following table:

   
Three Months Ended September 30,
 
                   
$ Increase/
   
% Increase/
 
   
2009
   
2008
   
(Decrease)
   
(Decrease)
 
   
(Dollars in thousands)
 
North American Retail Grocery
 
$
238,891
   
$
221,814
   
$
17,077
   
7.7
%
Food Away From Home
   
78,982
     
77,189
     
1,793
   
2.3
%
Industrial and Export
   
60,992
     
75,573
     
(14,581
)
 
(19.3
)%
Total
 
$
378,865
   
$
374,576
   
$
4,289
   
1.1
%

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales.  These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, including costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to our own distribution centers.  Cost of sales as a percentage of net sales was 78.7% in the third quarter of 2009 compared to 80.5% in 2008.  Although we have experienced increases in certain costs such as metal caps, cans and lids, glass and meat products in the third quarter of 2009 compared to 2008, these increases have been more than offset by decreases in the cost of casein, oils and plastic containers.  Raw material, ingredient and packaging costs continue to be volatile, and we anticipate this trend to continue.  The combination of price increases and the changes in commodity costs in the third quarter of 2009 versus 2008, have resulted in improvement in our consolidated gross margins.


Operating Expenses — Total operating expenses were $35.4 million during the third quarter of 2009 compared to $49.1 million in 2008.  Selling and distribution expenses decreased $3.4 million or 11.7% in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a reduction in freight costs related to reduced volume and a reduction in freight rates.  General and administrative expenses increased $4.8 million in the third quarter of 2009 compared to 2008.  The increase was primarily related to incentive based compensation expense and stock based compensation related to the Company’s performance.  Other operating expense decreased $15.1 million during the third quarter of 2009 compared to 2008 due to the gain related to our insurance settlement related to the fire at our New Hampton, Iowa plant.

Operating Income — Operating income for the third quarter of 2009 was $45.1 million, an increase of $21.0 million, or 87.1%, from operating income of $24.1 million in the third quarter of 2008.  Our operating margin was 11.9% in the third quarter of 2009 compared to 6.4% in 2008 due to favorable pricing, cost reductions and the gain related to our insurance settlement related to the fire at our New Hampton, Iowa plant.

Interest Expense — Interest expense decreased to $4.8 million in the third quarter of 2009, compared to $6.5 million in 2008 due to lower average interest rates and lower debt levels.

Foreign Currency — The Company’s foreign currency gain was $3.0 million for the three months ended September 30, 2009 compared to a loss of $1.9 million in 2008, due to fluctuations in currency exchange rates between the U.S. and Canadian dollar.

Income Taxes — Income tax expense was recorded at an effective rate of 35.3% in the third quarter of 2009 compared to 29.9% in the prior year’s quarter.  The Company’s effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith, Canadian acquisition.  As consolidated earnings for the three months ended September 30, 2009 were significantly higher than consolidated earnings for the three months ended September 30, 2008, this tax benefit was proportionally much smaller, therefore, increasing the net effective rate in the third quarter of 2009 compared to 2008.  In addition, in 2009 the Company recorded an additional $0.8 million in Canadian withholding tax related to the closure of our Cambridge, Ontario plant.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008 — Results by Segment

North American Retail Grocery —

   
Three Months Ended September 30,
 
   
2009
   
2008
 
   
Dollars
   
Percent
   
Dollars
   
Percent
 
   
(Dollars in thousands)
 
Net sales
 
$
238,891
     
100.0
%
 
$
221,814
     
100.0
%
Cost of sales
   
183,240
     
76.8
     
172,309
     
77.7
 
Gross profit
   
55,651
     
23.2
     
49,505
     
22.3
 
Freight out and commissions
   
12,019
     
5.0
     
14,677
     
6.6
 
Direct selling and marketing
   
6,738
     
2.8
     
6,115
     
2.8
 
Direct operating income
 
$
36,894
     
15.4
%
 
$
28,713
     
12.9
%

Net sales in the North American Retail Grocery segment increased by $17.1 million, or 7.7% in the third quarter of 2009 compared to the third quarter of 2008.  This change in net sales from 2008 to 2009 was due to the following:

   
Dollars
   
Percent
 
   
(Dollars in thousands)
 
2008 Net sales
 
$
221,814
         
Volume
   
5,493
     
2.5
%
Pricing
   
17,765
     
8.0
 
Foreign currency
   
(4,022
)
   
(1.8
)
Mix/other
   
(2,159
)
   
(1.0
)
2009 Net sales
 
$
238,891
     
7.7
%

The increase in net sales from 2008 to 2009 resulted primarily from higher unit sales and the carryover effect of price increases taken in the second half of 2008.  Overall volume is higher in the third quarter of 2009 compared to that of 2008, primarily due to new customers and line extensions in the pickle, Mexican sauces and salad dressings product lines.  These increases were partially offset by declines in our infant feeding products.  Also negatively impacting net sales are foreign currency fluctuations.


Cost of sales as a percentage of net sales decreased from 77.7% in the third quarter of 2008 to 76.8% in 2009 primarily as a result of price increases taken in the second half 2008 to offset the commodity, material and certain packaging cost increases previously incurred by the Company.  Also contributing to the decrease were several cost reduction initiatives, a shift in sales mix and moving away from certain low margin customers over the past year and net declines in raw material and packaging costs.

Freight out and commissions paid to independent sales brokers were $12.0 million in the third quarter of 2009 compared to $14.7 million in 2008, a decrease of 18.1%, primarily due to lower freight costs, as fuel prices have decreased since last year.

Direct selling and marketing increased $0.6 million, or 10.2% from 2008 primarily due to increased levels of incentive based compensation associated with the Company’s overall performance.

Food Away From Home —

   
Three Months Ended September 30,
 
   
2009
   
2008
 
   
Dollars
   
Percent
   
Dollars
   
Percent
 
   
(Dollars in thousands)
 
Net sales
 
$
78,982
     
100.0
%
 
$
77,189
     
100.0
%
Cost of sales
   
65,702
     
83.2
     
64,050
     
83.0
 
Gross profit
   
13,280
     
16.8
     
13,139
     
17.0
 
Freight out and commissions
   
2,627
     
3.3
     
3,469
     
4.5