TREEHOUSE FOODS, INC., 10-Q filed on 11/5/2010
Quarterly Report
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $)
In Thousands
9 Months Ended
Sep. 30, 2010
Year Ended
Dec. 31, 2009
Current assets:
 
 
Cash and cash equivalents
$ 3,456 
$ 4,415 
Receivables, net
125,432 
86,557 
Inventories, net
312,693 
264,933 
Deferred income taxes
3,962 
3,397 
Prepaid expenses and other current assets
16,624 
7,269 
Assets held for sale
4,081 
4,081 
Total current assets
466,248 
370,652 
Property, plant and equipment, net
358,243 
276,033 
Goodwill
953,938 
575,007 
Intangible assets, net
404,381 
153,569 
Other assets, net
19,252 
9,167 
Total assets
2,202,062 
1,384,428 
Current liabilities:
 
 
Accounts payable and accrued expenses
188,827 
148,819 
Current portion of long-term debt
981 
906 
Deferred income tax
16,805 
0 
Total current liabilities
206,613 
149,725 
Long-term debt
875,522 
401,640 
Deferred income taxes
146,795 
45,381 
Other long-term liabilities
36,229 
31,453 
Total liabilities
1,265,159 
628,199 
Commitments and contingencies (Note 17)
 
 
Stockholders' equity:
 
 
Preferred stock, par value $0.01 per share, 10,000 shares authorized, none issued
0 
0 
Common stock, par value $0.01 per share, 90,000 shares authorized, 35,397 and 31,999 shares issued and outstanding, respectively
354 
320 
Additional paid-in capital
698,100 
587,598 
Retained earnings
258,100 
195,262 
Accumulated other comprehensive loss
(19,651)
(26,951)
Total stockholders' equity
936,903 
756,229 
Total liabilities and stockholders' equity
$ 2,202,062 
$ 1,384,428 
PARENTHETICAL DATA TO THE CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (USD $)
In Thousands, except Per Share data
Sep. 30, 2010
Dec. 31, 2009
Stockholders' equity:
 
 
Preferred stock, par value per share
$ 0.01 
$ 0.01 
Preferred stock, shares authorized (in shares)
10,000 
10,000 
Preferred stock, shares issued (in shares)
0 
0 
Common stock, par value per share
$ 0.01 
$ 0.01 
Common stock, shares authorized (in shares)
90,000 
90,000 
Common stock, shares issued (in shares)
35,397 
31,999 
Common stock, shares outstanding (in shares)
35,397 
31,999 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (USD $)
In Thousands, except Per Share data
3 Months Ended
Sep. 30,		 9 Months Ended
Sep. 30,
2010
2009
2010
2009
Income Statement
 
 
 
 
Net sales
$ 464,242 
$ 378,865 
$ 1,307,561 
$ 1,106,866 
Cost of sales
354,005 
298,347 
1,002,396 
874,793 
Gross profit
110,237 
80,518 
305,165 
232,073 
Operating expenses:
 
 
 
 
Selling and distribution
28,740 
25,671 
86,423 
79,969 
General and administrative
25,561 
20,752 
79,123 
56,388 
Other operating expense (income) net
1,103 
(14,354)
861 
(13,929)
Amortization expense
7,040 
3,375 
18,774 
9,954 
Total operating expenses
62,444 
35,444 
185,181 
132,382 
Operating income
47,793 
45,074 
119,984 
99,691 
Other expense (income):
 
 
 
 
Interest expense, net
12,867 
4,786 
31,473 
14,105 
Gain on foreign currency exchange
(46)
(2,968)
(2,116)
(4,772)
Other income, net
(1,838)
(151)
(3,044)
(1,416)
Total other expense (income)
10,983 
1,667 
26,313 
7,917 
Income before income taxes
36,810 
43,407 
93,671 
91,774 
Income taxes
11,943 
15,343 
30,833 
32,553 
Net income
24,867 
28,064 
62,838 
59,221 
Weighted average common shares:
 
 
 
 
Basic
35,421 
32,280 
34,870 
31,797 
Diluted
36,373 
33,129 
35,935 
32,387 
Net earnings per common share:
 
 
 
 
Basic
0.70 
0.87 
1.80 
1.86 
Diluted
$ 0.68 
$ 0.85 
$ 1.75 
$ 1.83 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (USD $)
In Thousands
9 Months Ended
Sep. 30,
2010
2009
Cash flows from operating activities:
 
 
Net income
$ 62,838 
$ 59,221 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
31,868 
24,978 
Amortization
18,774 
9,954 
Loss (gain) on foreign currency exchange
1,012 
(4,465)
Mark to market adjustment on derivative contracts
(3,176)
(1,229)
Excess tax deficiency (benefits) from stock-based payment arrangements
440 
(60)
Stock-based compensation
11,817 
9,951 
Loss (gain) on disposition of assets, net
2,552 
(12,612)
Deferred income taxes
7,918 
11,743 
Curtailment of postretirement benefit obligation
(2,357)
0 
Other
121 
120 
Changes in operating assets and liabilities, net of acquisitions:
 
 
Receivables
2,244 
(5,614)
Inventories
459 
(54,083)
Prepaid expenses and other assets
(4,592)
1,584 
Accounts payable, accrued expenses and other liabilities
20,734 
(10,561)
Net cash provided by operating activities
150,652 
28,927 
Cash flows from investing activities:
 
 
Additions to property, plant and equipment
(30,477)
(30,877)
Additions to other intangible assets
(16,788)
0 
Acquisition of business, net of cash acquired
(664,655)
0 
Proceeds from sale of fixed assets
16 
35 
Net cash used in investing activities
(711,904)
(30,842)
Cash flows from financing activities:
 
 
Proceeds from issuance of debt
400,000 
0 
Borrowings under revolving credit facility
324,600 
248,500 
Payments under revolving credit facility
(251,300)
(248,900)
Payments on capitalized lease obligations
(836)
(549)
Proceeds from issuance of common stock, net of expenses
110,688 
0 
Payment of deferred financing costs
(10,783)
0 
Proceeds from stock option exercises
3,606 
3,405 
Excess tax (deficiency) benefits from stock-based payment arrangements
(440)
60 
Cash used to net share settle equity awards
(15,334)
(324)
Net cash provided by financing activities
560,201 
2,192 
Effect of exchange rate changes on cash and cash equivalents
92 
690 
Net (decrease) increase in cash and cash equivalents
(959)
967 
Cash and cash equivalents, beginning of period
4,415 
2,687 
Cash and cash equivalents, end of period
$ 3,456 
$ 3,654 
Basis of Presentation
Basis of Presentation
1. Basis of Presentation

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by TreeHouse Foods, Inc. (the “Company,” “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 generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations.  Certain prior year amounts have been reclassified to conform to the current period presentation, primarily to present borrowings and payments under our line of credit on a gross versus net basis.  These reclassifications had no effect on reported net income, total assets or net cash flows.  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, 2009.  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.

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, 2009.
Recent Accounting Pronouncements
Recent Accounting Pronouncements
2. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-06, Fair Value Measurements and Disclosures ("ASU 2010-06") to provide additional guidance on fair value disclosures.  ASU 2010-06 requires new disclosures about transfers in and out of Level 1 and 2, and requires that the activity in Level 3 disclosures be presented on a gross basis rather than as a net number.  The ASU also clarifies existing disclosures about the level of disaggregation and information on inputs and valuation techniques, and includes confirming amendments to the guidance on employers' disclosures about postretirement benefit plan assets.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009.  The Company adopted the provisions of this ASU effective January 1, 2010, and the adoption did not significantly impact the Company's Condensed Consolidated Financial Statements.

In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses to provide more robust and disaggregated disclosures regarding the credit quality of financing receivables and the related allowance for credit losses.  This guidance is effective for fiscal years ending on or after December 15, 2010 and is not expected to have a significant impact on the Company's disclosures.
Acquisition
Acquisition
3. Acquisition

On March 2, 2010, the Company acquired Sturm Foods, Inc. ("Sturm"), a private label manufacturer of hot cereal and powdered soft drink mixes that serves retail and foodservice customers in the United States with annual sales of approximately $340 million.  The acquisition of Sturm has strengthened the Company's presence in private label dry grocery categories.

The Company paid a cash purchase price of $664.7 million, before adjusting for a $5.0 million working capital adjustment to reduce the purchase price, for 100% of the issued and outstanding stock of Sturm.  The $5.0 million working capital adjustment is recorded in the Receivables, net line of our Condensed Consolidated Balance Sheets as of September 30, 2010.  The transaction was financed through the issuance of $400 million in high yield notes, the issuance of 2.7 million shares of Company common stock at $43.00 per share and borrowings under the Company's credit facility.

The acquisition is being accounted for under the purchase method of accounting and the results of operations are included in our financial statements from the date of acquisition and are included in each of our segments.  Sturm contributed $187.4 million to net sales and $18.0 million in net income since the March 2, 2010 acquisition date through September 30, 2010.  At the date of acquisition, the purchase price was allocated to the assets acquired and liabilities assumed based upon estimated fair market values.  The Company's purchase price allocation set forth below is preliminary and subject to tax and working capital adjustments that are expected to be completed in the fourth quarter of 2010.  Adjustments may impact the total purchase price, deferred taxes and goodwill.

     
   
(In thousands)
 
Receivables
 $35,774 
Inventory
  47,525 
Property plant and equipment
  86,106 
Customer relationships
  229,000 
Trade name
  10,000 
Formulas
  5,000 
Other intangible assets
  5,835 
Other assets
  3,813 
Goodwill
  377,143 
Total assets acquired
  800,196 
      
Accounts payable and accruals
  (33,410 )
Other long-term liabilities
  (4,295 )
Deferred taxes
  (102,805 )
Total liabilities acquired
  (140,510 )
Total purchase price
 $659,686 
      
The Company allocated $229.0 million to customer relationships that have an estimated life of twenty years.  The acquired trade name will be amortized over fifteen years.  Formulas have an estimated useful life of five years.  Other intangible assets consist of capitalized computer software that is being amortized over three years.  The Company increased the cost of acquired inventories by approximately $6.2 million, and expensed that amount as a component of cost of sales through the second quarter of 2010.  The Company has allocated $371.0 million of goodwill to the North American Retail Grocery segment and $6.1 million of goodwill to the Food Away From Home segment.  No goodwill is expected to be deductible for tax purposes.  Goodwill arises principally as a result of expansion opportunities, employed workforce, and the impact of Sturm's first mover advantage.  The Company incurred approximately $5.4 million in acquisition related costs during the nine months ended September 30, 2010.   These costs are included in the General and administrative expense line on the Condensed Consolidated Statements of Income.  In connection with the issuance of debt and equity to finance the acquisition, the Company incurred approximately $10.8 million in debt issue costs that were capitalized and are amortized over the term of the debt on a straight line basis, and are included as a component of interest expense.  The Company also incurred approximately $5.5 million of stock issuance costs, that reduced the proceeds and were recorded as a component of additional paid in capital.

The following pro forma summary presents the effect of the Sturm acquisition as though the business had been acquired as of January 1 of each period presented and is based upon unaudited financial information of the acquired entity and may not be indicative of actual results:


                                 
                                 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands, except per share data)
 
Net sales as reported
 
$
464,242
   
$
378,865
   
$
1,307,561
   
$
1,106,866
 
Net sales of purchased businesses, for the period prior to acquisition
   
-
     
83,958
     
64,905
     
255,657
 
Pro forma net sales
 
$
464,242
   
$
462,823
   
$
1,372,466
   
$
1,362,523
 
Net income, as reported
 
$
24,867
   
$
28,064
   
$
62,838
   
$
59,221
 
Net income of purchased businesses, for the period prior to acquisition
   
-
     
4,701
     
3,927
     
15,624
 
Pro forma net income
 
$
24,867
   
$
32,765
   
$
66,765
   
$
74,845
 
Basic earnings per common share:
                               
As reported
 
$
.70
   
$
.87
   
$
1.80
   
$
1.86
 
Effect of purchased businesses, for the period prior to acquisition
   
-
     
.07
     
.11
     
.31
 
Pro forma earnings per share - basic
 
$
.70
   
$
.94
   
$
1.91
   
$
2.17
 
Diluted earnings per common share
                               
       As reported
 
$
.68
   
$
.85
   
$
1.75
   
$
1.83
 
       Effect of purchased businesses for the period prior to acquisition
   
-
     
.06
     
.11
     
.30
 
       Pro forma earnings per share - diluted
 
$
.68
   
$
.91
   
$
1.86
   
$
2.13
 

See Note 22 for information regarding the Company's acquisition of STSF Holdings, Inc on October 28, 2010.
Income Taxes
Income Taxes
4. Income Taxes

Income tax expense was recorded at an effective rate of 32.4% and 32.9% for the three and nine months ended September 30, 2010, respectively, compared to 35.3% and 35.5% for the three and nine months ended September 30, 2009, 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.  The Company's tax rate is lower in 2010 due to a lower state tax rate resulting from the acquisition of Sturm and an increased benefit for the deduction for domestic production activities.

As of September 30, 2010, 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., Canada and various state jurisdictions.  E.D. Smith and its affiliates are subject to Canadian, U.S. and state tax examinations from 2005 forward.  During the quarter ended March 31, 2010, the Company settled with the Internal Revenue Service an audit related to its 2007 federal income tax return.  The audit resulted in a small refund to the Company.  During the second quarter of 2010, the Canada Revenue Agency (CRA) completed an income tax audit for E.D. Smith's 2006 and 2007 income tax years.  The Company did not incur any material adjustments as a result of the tax audit.
Other Operating Expense
Other Operating Expense
5. Other Operating Expense (Income)

The Company had Other operating expenses of $1.1 million and $0.9 million for the three and nine months ended September 30, 2010, respectively, and income of $14.4 million and $13.9 million for the three and nine months ended September 30, 2009, respectively.  For the three months ended September 30, 2010, expenses consisted primarily of costs associated with the exit from a third party warehouse and the realignment of the infant feeding business.  For the nine months ended September 30, 2010, expenses consisted of the costs associated with the realignment of the infant feeding business offset by a gain on a postretirement plan curtailment.  See Note 13.  For the three and nine months ended September 30, 2009, income consisted primarily 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.

Inventories
Inventories
6. Inventories

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Raw materials and supplies
 
$
111,270
   
$
86,223
 
Finished goods
   
221,152
     
197,539
 
LIFO reserve
   
(19,729
)
   
(18,829
)
Total
 
$
312,693
   
$
264,933
 
                 

Approximately $111.6 million and $98.7 million of our inventory was accounted for under the LIFO method of accounting at September 30, 2010 and December 31, 2009, respectively.
 
The increase in inventories from December 31, 2009 to September 30, 2010 is primarily due to the Sturm acquisition.  Excluding the effect of the Sturm acquisition, inventory levels increased by $1.3 million.
Property, Plant and Equipment
Property, Plant and Equipment
7. Property, Plant and Equipment

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Land
 
$
13,624
   
$
11,335
 
Buildings and improvements
   
134,849
     
99,856
 
Machinery and equipment
   
368,498
     
310,265
 
Construction in progress
   
22,635
     
6,778
 
Total
   
539,606
     
428,234
 
Less accumulated depreciation
   
(181,363
)
   
(152,201
)
Property, plant and equipment, net
 
$
358,243
   
$
276,033
 
                 

The increase in property, plant and equipment from December 31, 2009 to September 30, 2010 is primarily due to the Sturm acquisition.  Excluding the effect of the Sturm acquisition, property, plant and equipment decreased by $4.4 million.
Accounts Payable and Accrued Expenses
Accounts Payable and Accrued Expenses
8. Accounts Payable and Accrued Expenses

   
September 30,
 
December 31,
   
2010
 
2009
   
(In thousands)
Accounts payable
 
$
118,605
 
$
81,967
Payroll and benefits
   
34,371
   
29,921
Interest and taxes
   
8,324
   
12,015
Health insurance, workers' compensation and other insurance costs
   
5,527
   
4,837
Marketing expenses
   
8,457
   
10,558
Other accrued liabilities
   
13,543
   
9,521
Total
 
$
188,827
 
$
148,819
             
 
The increase in accounts payable from December 31, 2009 to September 30, 2010 is primarily due to the Sturm acquisition.  Excluding the effect of the Sturm acquisition, accounts payable and accrued expenses decreased by $4.3 million.
Goodwill and Intangible Assets
Goodwill and Intangible Assets
9. Goodwill and Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended September 30, 2010 are as follows:

   
North American
  
Food Away
  
Industrial
    
   
Retail Grocery
  
From Home
  
and Export
  
Total
 
   
(In thousands)
 
Balance at December 31, 2009
 $355,925  $85,500  $133,582  $575,007 
Acquisition
  376,296   6,232   -   382,528 
Currency exchange adjustment
  1,922   205   -   2,127 
Purchase price adjustment
  (5,635 )  (89 )  -   (5,724 )
Balance at September 30, 2010
 $728,508  $91,848  $133,582  $953,938 
                  

Purchase price adjustments are primarily related to working capital and tax adjustments for the Sturm acquisition.  The Company has not incurred any goodwill impairments since its inception.  The gross carrying amount and accumulated amortization of our intangible assets other than goodwill as of September 30, 2010 and December 31, 2009 are as follows:

   
September 30, 2010
 
December 31, 2009
 
   
Gross
        
Net
 
Gross
      
Net
 
   
Carrying
   
Accumulated
   
Carrying
 
Carrying
 
Accumulated
   
Carrying
 
   
Amount
   
Amortization
   
Amount
 
Amount
 
Amortization
   
Amount
 
   
(In thousands)
 
Intangible assets with indefinite lives:
                                           
Trademarks
 
$
31,921
   
$
-
   
$
31,921
 
$
31,422
 
$
-
   
$
31,422
 
Intangible assets with finite lives:
                                           
Customer-related
   
384,896
     
(50,756
)
   
334,140
   
147,346
   
(35,400
)
   
111,946
 
Non-compete agreement
   
1,000
     
(917
)
   
83
   
2,620
   
(2,162
)
   
458
 
Trademarks
   
20,010
     
(3,094
)
   
16,916
   
10,010
   
(2,311
)
   
7,699
 
Formulas/recipes
   
6,787
     
(1,613
)
   
5,174
   
1,762
   
(761
)
   
1,001
 
Computer software
   
20,200
     
(4,053
)
   
16,147
   
3,363
   
(2,320
)
   
1,043
 
Total
 
$
464,814
   
$
(60,433
)
 
$
404,381
 
$
196,523
 
$
(42,954
)
 
$
153,569
 
                                             
                              

Amortization expense on intangible assets for the three months ended September 30, 2010 and 2009 was $7.0 million and $3.4 million, respectively, and $18.8 million and $10.0 million for the nine months ended September 30, 2010 and 2009, respectively.  Estimated amortization expense on intangible assets for 2010 and the next four years is as follows:
   
(In thousands)
 
2010
 $25,800 
2011
 $28,471 
2012
 $28,077 
2013
 $26,001 
2014
 $25,793 

Long-Term Debt
Long-Term Debt
10. Long-Term Debt
                 
   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(In thousands)
 
Revolving credit facility
 
$
371,500
   
$
298,200
 
High yield notes
   
400,000
     
-
 
Senior notes
   
100,000
     
100,000
 
Tax increment financing and other
   
5,003
     
4,346
 
     
876,503
     
402,546
 
Less current portion
   
(981
)
   
(906
)
Total long-term debt
 
$
875,522
   
$
401,640
 
                 
           
Revolving Credit Facility - The Company is party to an unsecured revolving credit facility with an aggregate commitment of $600 million, of which $219.2 million was available as of September 30, 2010, that expires August 31, 2011.  In addition, as of September 30, 2010, there were $9.3 million in letters of credit under the revolving credit facility that were issued but undrawn.  Our revolving 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, 2010.  The Company's average interest rate on debt outstanding under our revolving credit facility at September 30, 2010 was 0.85%.

See Note 22 regarding the Company's Amended and Restated Credit Agreement entered into on October 27, 2010.

High Yield Notes - On March 2, 2010, TreeHouse Foods, Inc. completed its offering of $400 million in aggregate principal amount of 7.75% high yield notes due 2018 (the "Notes").  The net amount of the proceeds of $391.0 million ($400.0 million notes less underwriting discount of $9.0 million providing an effective interest rate of 8.03%) were used as partial payment in the acquisition of all of the issued and outstanding stock of Sturm.  The Company issued the Notes pursuant to an Indenture, dated March 2, 2010 (the "Base Indenture"), among the Company, the subsidiary guarantors party thereto (Bay Valley Foods, LLC and EDS Holdings, LLC, the "Initial Guarantors") and Wells Fargo Bank, National Association, (Trustee), as supplemented by a First Supplemental Indenture, dated March 2, 2010 (the "First Supplemental Indenture"), among the Company, the Initial Guarantors and the Trustee.  In addition, on March 2, 2010, the Company entered into a Second Supplemental Indenture, dated March 2, 2010 (the "Second Supplemental Indenture" and together with the Base Indenture and the First Supplemental Indenture, the "Indenture"), pursuant to which Sturm (together with the Initial Guarantors, the "Guarantors") became an additional guarantor of the Notes, with the same force and effect as if Sturm was initially named as a guarantor under the Indenture.

The Indenture provides, among other things, that the Notes will be senior unsecured obligations of the Company.  Interest is payable on the Notes on March 1 and September 1 of each year, beginning September 1, 2010.  The Notes will mature on March 1, 2018.

The Company may redeem some or all of the Notes at any time prior to March 1, 2014 at a price equal to 100% of the principal amount of the Notes redeemed, plus an applicable "make-whole" premium.  On or after March 1, 2014, the Company may redeem some or all of the Notes at redemption prices set forth in the First Supplemental Indenture.  In addition, at any time prior to March 1, 2013, the Company may redeem up to 35% of the Notes at a redemption price of 107.75% of the principal amount of the Notes redeemed with the net cash proceeds of certain equity offerings.

Subject to certain limitations, in the event of a change of control of the Company, the Company will be required to make an offer to purchase the Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest.

The Company's payment obligations under the Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Guarantors and future domestic subsidiaries of the Company, other than certain excluded subsidiaries and unrestricted subsidiaries.  The Notes are not guaranteed by any of the Company's foreign subsidiaries.

The Indenture contains restrictive covenants that, among other things, limit the ability of the Company and the Guarantors to: (i) pay dividends or make other restricted payments, (ii) make certain investments, (iii) incur additional indebtedness or issue preferred stock, (iv) create liens, (v) allow restrictions on the ability of certain of its subsidiaries to pay dividends or make other payments to the Company or the Guarantors, (vi) merge or consolidate with other entities or sell substantially all of its assets, (vii) enter into transactions with affiliates and (viii) engage in certain sale and leaseback transactions.  The foregoing limitations are subject to exceptions as set forth in the First Supplemental Indenture.  In addition, if in the future the Notes have an investment grade credit rating by both Moody's Investors Services, Inc. and Standard & Poor's Ratings Services, certain of these covenants will, thereafter, no longer apply to the Notes for so long as the Notes are rated investment grade by the two rating agencies.  The Company is in compliance with the applicable covenants as of September 30, 2010.

The Indenture provides for customary events of default that include, among other things (subject in certain cases to customary grace and cure periods):  (i) non-payment of principal or interest; (ii) breach of certain covenants contained in the Indenture or the Notes, (iii) defaults in failure to pay certain other indebtedness or the acceleration of certain other indebtedness prior to maturity, (iv) the failure to pay certain final judgments, (v) the failure of certain guarantees to be enforceable and (vi) certain events of bankruptcy or insolvency.  Generally, if an event of default occurs (subject to certain exceptions), the Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately.

Senior Notes - The Company 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.  The Company is in compliance with the applicable covenants as of September 30, 2010.

Swap Agreement - 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 of not more than 3.8% during the life of the swap agreement.  The Company did not apply hedge accounting to this swap.  In the three and nine months ended September 30, 2010, and 2009 a gain of $1.1 million, $3.0 million, $23 thousand and $1.2 million, respectively, was recognized in the Other income, net line of our Condensed Consolidated Statements of Income.

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, 2010, $2.5 million remains outstanding.
Earnings Per Share
Earnings Per Share
11. 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.

In March 2010, the Company issued 2,702,500 shares of common stock in connection with the acquisition of Sturm.  For the three and nine months ended September 30, 2010, these shares have been included on a weighted average basis in basic shares outstanding.

With respect to awards issued to our founders in connection with the founding of the Company and pursuant to certain employment agreements, the Company issued restricted stock and restricted stock units that are subject to service and market conditions.  The restricted stock awards expired in June 2010 as the conditions for vesting were not met.  For the three and nine months ended September 30, 2010, the market conditions were not met and these awards have been excluded from diluted earnings per share.  For the three months ended September 30, 2009, the market conditions were not met and the awards were excluded from diluted earnings per share.  For the nine months ended September 30, 2009, the market conditions were met and these awards have been included in diluted earnings per share.  With respect to the restricted stock unit awards issued to our founders, the market conditions for these awards were satisfied in July 2009 and the awards vested.  These vested awards have been included in basic shares outstanding since that time.  For the three and nine months ended September 30, 2009, the market conditions were met and the awards were included in diluted earnings per share, on a weighted average basis.

Beginning in June 2008, the Company issued performance unit awards that contain both service and performance criteria.  These awards accrue over the performance periods and 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 using available shares.  For the three and nine months ended September 30, 2010, and 2009, the performance criteria for a portion of the awards were met and have been included in diluted earnings per share.

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,
   
2010
 
2009
 
2010
 
2009
Weighted average common shares outstanding
 
35,421,250
   
32,280,059
   
34,870,110
   
31,797,354
Assumed exercise of stock options (1)
 
716,384
   
494,237
   
709,760
   
127,794
Assumed vesting of restricted stock, restricted stock units
and performance units (1)
 
235,356
   
354,444
   
354,659
   
462,319
Weighted average diluted common shares outstanding
 
36,372,990
   
33,128,740
   
35,934,529
   
32,387,467
                       

     
(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, were 132,859 and 132,840 for the three and nine months ended September 30, 2010 and 8,175 and 1,585,412 for the three and nine months ended September 30, 2009.

Stock-Based Compensation
Stock-Based Compensation
12. Stock-Based Compensation

Income before income taxes for the three and nine month periods ended September 30, 2010 and 2009 includes share-based compensation expense of $4.0 million, $11.8 million, $3.9 million and $10.0 million, respectively.  The tax benefit recognized related to the compensation cost of these share-based awards was approximately $1.5 million and $4.6 million for the three and nine month periods ended September 30, 2010, respectively, and $1.5 million and $3.8 million for the three and nine month periods ended September 30, 2009, respectively.

The following table summarizes stock option activity during the nine months ended September 30, 2010.  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 ten 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, 2009
2,292,744
 
107,773
   
$
27.28
 
6.4
 
$
27,792,212
 
Granted
130,550
 
-
   
$
46.47
 
-
   
-
 
Forfeited
(6,601
)
-
   
$
26.87
 
-
   
-
 
Exercised
(119,097
)
(12,977
)
 
$
27.36
 
-
   
-
 
Outstanding, September 30, 2010
2,297,596
 
94,796
   
$
28.33
 
5.9
 
$
47,570,219
 
Vested/expected to vest, at September 30, 2010
2,280,092
 
94,796
   
$
28.30
 
5.9
 
$
42,325,392
 
Exercisable, September 30, 2010
2,012,610
 
93,196
   
$
27.51
 
5.5
 
$
39,148,715
 
                           

Compensation costs related to unvested options totaled $3.0 million at September 30, 2010 and will be recognized over the remaining vesting period of the grants, which averages 2.2 years.  The Company uses the Black-Scholes option pricing model to value its stock option awards.  The assumptions used to calculate the fair value of stock options issued in 2010 include the following: expected volatility of 35%, expected term of six years, risk free rate of 3.87% and no dividends.  The average grant date fair value of stock options granted in the nine months ended September 30, 2010 was $19.11.  The aggregate intrinsic value of stock options exercised during the nine months ended September 30, 2010 was approximately $2.4 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 generally vest based on the passage of time.  These awards generally vest one-third on each anniversary of the grant date.  Director restricted stock units vest over thirteen months.  Certain directors have deferred receipt of their awards until their departure from the Board.  A complete description of restricted stock and restricted stock unit awards is presented in the Company's annual report on Form 10-K for the year ended December 31, 2009.  The following table summarizes the restricted stock and restricted stock unit activity during the nine months ended September 30, 2010:

                           
        
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, 2009
   
1,202,319
   
$
24.28
     
784,931
   
$
26.16
     
45,400
   
$
26.96
 
Granted
   
-
     
-
     
246,955
   
$
45.66
     
16,870
   
$
46.47
 
Vested
   
(277,254
)
 
$
24.22
     
(617,466
)
 
$
25.59
     
-
     
-
 
Forfeited
   
(632,587
)
 
$
24.28
     
(10,373
)
 
$
30.18
     
-
     
-
 
Outstanding, at September 30, 2010
   
292,478
   
$
24.33
     
404,047
   
$
38.84
     
62,270
   
$
32.24
 
                                                 
Future compensation costs related to restricted stock and restricted stock units is approximately $16.8 million as of September 30, 2010, and will be recognized on a weighted average basis, over the next 1.9 years.  The grant date fair value of the awards granted in 2010 is equal to the Company's closing stock price on the grant date.

Performance unit awards are 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, 2010:

     
Weighted
 
     
Average
 
 
Performance
 
Grant Date
 
 
Units
 
Fair Value
 
Unvested, at December 31, 2009
127,800
 
$
26.15
 
Granted
38,885
 
$
46.29
 
Vested
-
   
-
 
Forfeited
-
   
-
 
Unvested, at September 30, 2010
166,685
 
$
30.85
 
           
Future compensation cost related to the performance units is estimated to be approximately $3.8 million as of September 30, 2010, and is expected to be recognized over the next 1.6 years.
Employee Retirement and Postretirement Benefits
Employee Retirement and Postretirement Benefits
13. 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.

Effective March 31, 2010, the Company negotiated the transfer of the postretirement union retiree medical plan at the Dixon production facility to the Central States multiemployer plan.  The Company transferred its liability to the multiemployer plan and no longer carries a liability for the accumulated benefit obligation of the employees covered under that plan, resulting in a plan curtailment.  The curtailment resulted in a gain of $2.4 million, $1.4 million net of tax, which is included in Other operating (income) expense, net on the Condensed Consolidated Statements of Income.

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,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Service cost
 
$
515
   
$
490
   
$
1,545
   
$
1,470
 
Interest cost
   
551
     
524
     
1,653
     
1,572
 
Expected return on plan assets
   
(549
)
   
(440
)
   
(1,647
)
   
(1,320
)
Amortization of unrecognized net loss
   
124
     
149
     
372
     
447
 
Amortization of prior service costs
   
151
     
145
     
453
     
435
 
Net periodic pension cost
 
$
792
   
$
868
   
$
2,376
   
$
2,604
 
                                 

We contributed $0.9 million to the pension plans in the first nine months of 2010.  We expect to contribute approximately $1.3 million in 2010.

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,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Service cost
 
$
18
   
$
63
   
$
84
   
$
189
 
Interest cost
   
45
     
64
     
129
     
192
 
Amortization of prior service credit
   
(35
)
   
(18
)
   
(70
)
   
(54
)
Amortization of unrecognized net loss
   
(20
)
   
5
     
(31
)
   
15
 
Net periodic postretirement cost
 
$
8
   
$
114
   
$
112
   
$
342
 
                                 

We expect to contribute approximately $0.2 million to the postretirement health plans during 2010.
Comprehensive Income
Comprehensive Income
14. Comprehensive Income

The following table sets forth the components of comprehensive income:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Net income
 
$
24,867
   
$
28,064
   
$
62,838
   
$
59,221
 
Foreign currency translation adjustment
   
5,096
     
15,396
     
5,845
     
27,439
 
Amortization of pension and postretirement
                               
prior service costs and net loss, net of tax
   
158
     
171
     
473
     
512
 
Curtailment of postretirement plan
   
-
     
-
     
862
     
-
 
Amortization of swap loss, net of tax
   
40
     
41
     
120
     
122
 
Other
   
-
     
-
     
-
     
5
 
Comprehensive income
 
$
30,161
   
$
43,672
   
$
70,138
   
$
87,299
 
                                 

We expect to amortize $0.6 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 2010.
Fair Value of Financial Instruments
Fair Value of Financial Instruments
15. 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, 2010, the outstanding balance of the Company's variable rate debt (revolving credit facility) was $371.5 million, the fair value of which is estimated to be $365.4 million, using a present value technique and market based interest rates and credit spreads.  As of September 30, 2010, the carrying value of the Company's fixed rate senior notes was $100.0 million and fair value was estimated to be $106.8 million based on a present value technique using market based interest rates and credit spreads.  The fair value of the Company's 7.75% high yield notes due 2018, with an outstanding balance of $400.0 million as of September 30, 2010, was estimated at $429.0 million, based on quoted market prices.

The fair value of the Company's interest rate swap agreement, as described in Notes 10 and 16, was a liability of approximately $1.9 million as of September 30, 2010.  The fair value of the swap was determined using Level 2 inputs, which are inputs other than quoted prices that are observable for an asset or liability, either directly or indirectly.  The fair value is based on a market approach, comparing the fixed rate of 2.9% to the current and forward one month LIBOR rates throughout the term of the swap agreement.

The fair value of the Company's commodity contract as described in Note 16 was an asset of approximately $0.2 million as of September 30, 2010.  The fair value of the commodity contract was determined using Level 1 inputs.
Derivative instruments
Derivative instruments
16. Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations.  Derivative instruments are used on occasion to manage interest rate, foreign currency and commodity input cost risks.

Interest rate swaps are used 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 10 for more details of the interest rate swap, including the notional amount, interest rate and term.  Note 15 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.  There were no foreign currency contracts outstanding as of September 30, 2010 and 2009.

During the second quarter of 2010, the Company entered into a commodity swap contract for 5.4 million pounds of High Density Polyethylene ("HDPE") to manage the Company's risk associated with the underlying commodity cost of a significant component used in packaging materials.  The objective in using this swap is to establish a fixed commodity cost over the term of the contract.  The trade date was June 3, 2010, with an effective date of July 1, 2010 and an expiration date of December 31, 2011.  The Company will settle 0.3 million pounds on a monthly basis over the term of the contract.  The Company did not apply hedge accounting to the commodity swap, and it is recorded at fair value on the Company's Condensed Consolidated Balance Sheets.

The following table identifies the derivative, its fair value, and location on the Condensed Consolidated Balance Sheets.
       
         
Fair Value
 
   
Balance Sheet Location
   
September 30, 2010
 
December 31, 2009
 
Liability Derivatives:
       
(In thousands)
 
Interest rate swap
 
Accounts payable and accrued expenses
   
$                1,870
 
$                3,327
 
         
$                1,870
 
$                3,327
 
                 
Interest rate swap
 
Other Long-term liabilities
   
$                     -
 
$                1,550
 
         
$                     -
 
$                1,550
 
                 
Asset Derivative:
               
Commodity contract
 
Prepaid expenses and other current assets
   
$                   135
 
$                     -
 
         
$                   135
 
$                     -
 
                 
Commodity contract
 
Other assets, net
   
$                     34
 
$                     -
 
         
$                     34
 
$                     -
 
                 

The Company recognized a gain of $1.5 million and $3.2 million relating to the change in the fair value of its interest rate swap and commodity contract derivatives for the three and nine months ended September 30, 2010, respectively, compared to a gain of $23 thousand and $1.2 million in the three and 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 does not use derivatives for speculative or trading purposes.

Commitments and Contingencies
Commitments and Contingencies
17. 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.
Supplemental Cash Flow Information
Supplemental Cash Flow Information
18. Supplemental Cash Flow Information

Cash payments for interest were $29.3 million and $15.0 million for the nine months ended September 30, 2010 and 2009, respectively.  Cash payments for income taxes were $23.4 million and $9.6 million for the nine months ended September 30, 2010 and 2009, respectively.  As of September 30, 2010 and 2009, the Company had accrued property, plant and equipment of approximately $1.0 million and $1.8 million, respectively.  The Company also accrued other intangible assets of $1.5 million at September 30, 2010.  For the nine months ended September 30, 2009, the Company entered into capital leases of approximately $1.3 million.  There were no new capital leases in the first nine months of 2010.  As of September 30, 2010, the Company recorded a receivable of $5.0 million for a working capital adjustment to the purchase price of Sturm.  As this adjustment is a noncash item, we have excluded it from the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010.  Noncash financing activities for the nine months ended September 30, 2010 and 2009 include the vesting of 891,005 shares and 268,397 shares, respectively, of restricted stock and restricted stock units, where shares were withheld to satisfy the minimum statutory tax withholding requirements.
Foreign Currency
Foreign Currency
19. 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 Gain on foreign currency exchange.  In August 2010 and May 2009, the Company entered into foreign currency contracts for the purchase of $4.0 million and $5.0 million U.S. dollars, respectively.  The contracts were entered into for the purchase of U.S. dollar denominated raw materials by our Canadian subsidiary.  These contracts expired by the end of September 2010 and 2009, 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 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 Gain on foreign currency exchange.

For the three and nine months ended September 30, 2010 and 2009, the Company recorded a gain of $46 thousand, $2.1 million, $3.0 million and $4.8 million, respectively, related to foreign currency fluctuations, recorded in the Gain on foreign currency exchange line of the Condensed Consolidated Statement of Income.  For the three and nine months ended September 30, 2010 and 2009, the Company recorded a gain of $5.1 million, $5.8 million, $15.4 million and $27.4 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.
Business and Geographic Information and Major Customers
Business and Geographic Information and Major Customers
20. 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.  The Company has designated our reportable segments based on how management views our business.  The Company does 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.  Other expenses not allocated include warehouse start-up costs, unallocated selling and distribution expenses and corporate expenses which consist of general and administrative expenses, amortization expense, other operating (income) expense, interest expense, interest income, foreign currency exchange and other (income) expense.  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 2009 Consolidated Financial Statements contained in our Annual Report on Form 10-K.


   
Three Months Ended
 
Nine Months Ended
 
   
September 30,
 
September 30,
 
   
2010
   
2009
 
2010
 
2009
 
   
(In thousands)
 
Net sales to external customers:
                           
North American Retail Grocery
 
$
319,174
   
$
238,891
 
$
888,254
 
$
705,426
 
Food Away From Home
   
83,330
     
78,982
   
237,099
   
220,764
 
Industrial and Export
   
61,738
     
60,992
   
182,208
   
180,676
 
Total
 
$
464,242
   
$
378,865
 
$
1,307,561
 
$
1,106,866
 
Direct operating income:
                           
North American Retail Grocery
 
$
60,863
   
$
36,894
 
$
154,955
 
$
107,127
 
Food Away From Home
   
12,775
     
9,025
   
34,917
   
24,128
 
Industrial and Export
   
8,663
     
9,856
   
31,658
   
26,466
 
Total
   
82,301
     
55,775
   
221,530
   
157,721
 
                             
Unallocated warehouse start-up costs (1)
   
-
     
(173
)
 
-
   
(3,223
)
Unallocated selling and distribution expenses
   
(804
)
   
(755
)
 
(2,788
)
 
(2,394
)
Unallocated corporate expense
   
(33,704
)
   
(9,773
)
 
(98,758
)
 
(52,413
)
Operating income
   
47,793
     
45,074
   
119,984
   
99,691
 
Other expense
   
(10,983
)
   
(1,667
)
 
(26,313
)
 
(7,917
)
Income before income taxes
 
$
36,810
   
$
43,407
 
$
93,671
 
$
91,774
 
                             
(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 13.8% and 13.7% of total consolidated net sales in the nine months ended September 30, 2010 and 2009, respectively, with 13.0% and 13.1% going to Canada, respectively.

Major Customers - Wal-Mart Stores, Inc. and affiliates accounted for approximately 18.7% and 14.4% of our consolidated net sales in the nine months ended September 30, 2010 and 2009, 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, 2010 and 2009:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(In thousands)
 
Products:
                               
Pickles
 
$
81,152
   
$
82,164
   
$
250,840
   
$
240,268
 
Soup and infant feeding
   
85,759
     
85,606
     
220,760
     
232,607
 
Non-dairy powdered creamer
   
68,094
     
75,620
     
217,246
     
236,229
 
Salad dressing
   
50,003
     
46,249
     
160,825
     
146,012
 
Jams and other sauces
   
42,162
     
42,319
     
122,704
     
113,616
 
Powdered drinks
   
54,690
     
-
     
121,070
     
-
 
Hot cereals
   
31,415
     
-
     
66,336
     
-
 
Aseptic products
   
22,384
     
22,052
     
65,580
     
62,722
 
Mexican sauces
   
20,652
     
16,118
     
58,020
     
48,942
 
Refrigerated products
   
7,931
     
8,737
     
24,180
     
26,470
 
Total net sales
 
$
464,242
   
$
378,865
   
$
1,307,561
   
$
1,106,866
 
                                 

Guarantor and Non-Guarantor Financial Information
Guarantor and Non-Guarantor Financial Information
21.
Guarantor and Non-Guarantor Financial Information

On March 2, 2010, the Company issued 7.75% high yield notes due 2018, that are guaranteed by its wholly owned domestic subsidiaries (Guarantor Subsidiaries) in accordance with the applicable Indenture and fully, jointly, severally and unconditionally guarantee our payment obligations under the debt securities offered.  The notes are not guaranteed by the foreign subsidiaries of TreeHouse (Non-Guarantor Subsidiaries).  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 condensed consolidating financial information presents the results of operations, financial position and cash flows of TreeHouse Foods, Inc., its Guarantor Subsidiaries, its Non-Guarantor Subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of September 30, 2010 and December 31, 2009 and for the three and nine months ended September 30, 2010 and 2009.  The equity method has been used with respect to investments in subsidiaries.  The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

 
Condensed Supplemental Consolidating Balance Sheet
September 30, 2010
(In thousands)
 
   
Parent
  
Guarantor
  
Non-Guarantor
       
   
Company
  
Subsidiaries
  
Subsidiaries
  
Eliminations
  
Consolidated
 
                 
Assets
                 
Current assets:
               
Cash and cash equivalents
 $-  $1,597  $1,859  $-  $3,456 
Receivables, net
  2,577   105,201   17,654   -   125,432 
Inventories, net
  -   277,346   35,347   -   312,693 
Deferred income taxes
  726   2,875   361       3,962 
Assets held for sale
  -   4,081   -   -   4,081 
Prepaid expenses and other current assets
  768   15,150   706   -   16,624 
Total current assets
  4,071   406,250   55,927       466,248 
Property, plant and equipment, net
  11,165   311,713   35,365   -   358,243 
Goodwill
  -   843,417   110,521   -   953,938 
Investment in subsidiaries
  1,166,929   133,881   -   (1,300,810 )  - 
Intercompany accounts receivable, net
  626,546   (513,160 )  (113,386 )  -   - 
Deferred income taxes
  12,142   -   -   (12,142 )  - 
Identifiable intangible and other assets, net
  34,685   306,025   82,923   -   423,633 
Total assets
 $1,855,538  $1,488,126  $171,350  $(1,312,952) $2,202,062 
                      
Liabilities and Stockholders' Equity
                      
Current liabilities:
                    
Accounts payable and accrued expenses
 $33,363  $134,158  $21,306  $-  $188,827 
Current portion of long-term debt
  -   981   -   -   981 
Deferred income taxes
  -   642   16,163   -   16,805 
Total current liabilities
  33,363   135,781   37,469   -   206,613 
Long-term debt
  862,327   13,195   -   -   875,522 
Deferred income taxes
  8,947   149,990   -   (12,142 )  146,795 
Other long-term liabilities
  13,998   22,231   -   -   36,229 
Stockholders' equity
  936,903   1,166,929   133,881   (1,300,810 )  936,903 
Total liabilities and stockholders' equity
 $1,855,538  $1,488,126  $171,350  $(1,312,952) $2,202,062 
                      

   
Condensed Supplemental Consolidating Balance Sheet
 
December 31, 2009
 
(In thousands)
 
   
       
Parent
     
Guarantor
     
Non-Guarantor
               
       
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
                                         
 
Assets
                                         
 
Current assets:
                                     
 
Cash and cash equivalents
 
$
1
   
$
8
   
$
4,406
   
$
-
   
$
4,415
 
Receivables, net
   
325
     
66,573
     
19,659
     
-
     
86,557
 
Inventories, net
   
-
     
229,185
     
35,748
     
-
     
264,933
 
Deferred income taxes
   
1,875
     
990
     
532
     
-
     
3,397
 
Assets held for sale
   
-
     
4,081
     
-
     
-
     
4,081
 
Prepaid expenses and other current assets
   
384
     
6,253
     
632
     
-
     
7,269
 
Total current assets
   
2,585
     
307,090
     
60,977
     
-
     
370,652
 
Property, plant and equipment, net
   
11,549
     
230,595
     
33,889
     
-
     
276,033
 
Goodwill
   
-
     
466,274
     
108,733
     
-
     
575,007
 
Investment in subsidiaries
   
1,054,776
     
94,804
     
-
     
(1,149,580
)
   
-
 
Intercompany accounts receivable, net
   
87,643
     
65,683
     
(153,326
)
   
-
     
-
 
Deferred income taxes
   
21,186
     
-
     
-
     
(21,186
)
   
-
 
Identifiable intangible and other assets, net
   
14,328
     
65,156
     
83,252
     
-
     
162,736
 
Total assets
 
$
1,192,067
   
$
1,229,602
   
$
133,525
   
$
(1,170,766
)
 
$
1,384,428
                                         
 
Liabilities and Stockholders' Equity
                                         
 
Current liabilities:
                                     
 
Accounts payable and accrued expenses
 
$
31,458
   
$
94,936
   
$
22,425
   
$
-
   
$
148,819
 
Current portion of long-term debt
   
200
     
554
     
152
     
-
     
906
 
Total current liabilities
   
31,658
     
95,490
     
22,577
     
-
     
149,725
 
Long-term debt
   
390,037
     
11,603
     
-
     
-
     
401,640
 
Deferred income taxes
   
5,609
     
44,914
     
16,044
     
(21,186
)
   
45,381
 
Other long-term liabilities
   
8,534
     
22,819
     
100
     
-
     
31,453
 
Stockholders' equity
   
756,229
     
1,054,776
     
94,804
     
(1,149,580
)
   
756,229
 
Total liabilities and stockholders' equity
 
$
1,192,067
   
$
1,229,602
   
$
133,525
   
$
(1,170,766
)
 
$
1,384,428
                                         

     
Condensed Supplemental Consolidating Statement of Income
   
Three Months Ended September 30, 2010
   
(In thousands)
   
     
     
Parent
     
Guarantor
     
Non-Guarantor
                 
     
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
 
                                         
Net sales
 
$
-
   
$
408,383
   
$
61,788
   
$
(5,929
)
 
$
464,242
 
Cost of sales
   
-
     
312,472
     
47,462
     
(5,929
)
   
354,005
 
Gross profit
   
-
     
95,911
     
14,326
     
-
     
110,237
 
Selling, general and administrative expense
   
10,784
     
38,450
     
5,067
     
-
     
54,301
 
Amortization
   
131
     
5,723
     
1,186
     
-
     
7,040
 
Other operating expense, net
           
1,103
     
-
     
-
     
1,103
 
Operating (loss) income
   
(10,915
)
   
50,635
     
8,073
     
-
     
47,793
 
Interest expense (income), net
   
12,585
     
(3,146
)
   
3,428
     
-
     
12,867
 
Other income, net
   
(1,081
)
   
(413
)
   
(390
)
   
-
     
(1,884
)
(Loss) income from continuing operations, before income taxes
   
(22,419
)
   
54,194
     
5,035
     
-
     
36,810
 
Income taxes (benefit)
   
(7,502
)
   
18,426
     
1,019
     
-
     
11,943
 
Equity in net income of subsidiaries
   
39,784
     
4,016
     
-
     
(43,800
)
   
-
 
Net income (loss)
 
$
24,867
   
$
39,784
   
$
4,016
   
$
(43,800
)
 
$
24,867
 
                                         

     
Condensed Supplemental Consolidating Statement of Income
   
Three Months Ended September 30, 2009
   
(In thousands)
   
     
     
Parent
     
Guarantor
     
Non-Guarantor
                 
     
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
 
                                         
Net sales
 
$
-
   
$
325,971
   
$
61,404
   
$
(8,510
)
 
$
378,865
 
Cost of sales
   
-
     
255,885
     
50,972
     
(8,510
)
   
298,347
 
Gross profit
   
-
     
70,086
     
10,432
     
-
     
80,518
 
Selling, general and administrative expense
   
9,601
     
31,361
     
5,461
     
-
     
46,423
 
Amortization
   
231
     
1,902
     
1,242
     
-
     
3,375
 
Other operating expense, net
   
-
     
(14,354
)
   
-
     
-
     
(14,354
)
Operating (loss) income
   
(9,832
)
   
51,177
     
3,729
     
-
     
45,074
 
Interest expense (income), net
   
4,566
     
(3,368
)
   
3,588
     
-
     
4,786
 
Other income (expense), net
   
(23
)
   
1,783
     
(4,879
)
   
-
     
(3,119
)
(Loss) income from continuing operations, before income taxes
   
(14,375
)
   
52,762
     
5,020
     
-
     
43,407
 
Income taxes (benefit)
   
(2,259
)
   
15,163
     
2,439
     
-
     
15,343
 
Equity in net income (loss) of subsidiaries
   
40,180
     
2,581
     
-
     
(42,761
)
   
-
 
Net income (loss)
 
$
28,064
   
$
40,180
   
$
2,581
   
$
(42,761
)
 
$
28,064
 
                                         

     
Condensed Supplemental Consolidating Statement of Income
   
Nine Months Ended September 30, 2010
   
(In thousands)
   
     
     
Parent
     
Guarantor
     
Non-Guarantor
                 
     
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
 
                                         
Net sales
 
$
-
   
$
1,143,184
   
$
184,757
   
$
(20,380
)
 
$
1,307,561
 
Cost of sales
   
-
     
876,305
     
146,471
     
(20,380
)
   
1,002,396
 
Gross profit
   
-
     
266,879
     
38,286
     
-
     
305,165
 
Selling, general and administrative expense
   
36,564
     
112,103
     
16,879
     
-
     
165,546
 
Amortization
   
394
     
14,867
     
3,513
     
-
     
18,774
 
Other operating income, net
   
-
     
861
     
-
     
-
     
861
 
Operating (loss) income
   
(36,958
)
   
139,048
     
17,894
     
-
     
119,984
 
Interest expense (income), net
   
30,923
     
(9,673
)
   
10,223
     
-
     
31,473
 
Other (income) expense, net
   
(3,007
)
   
975
     
(3,128
)
   
-
     
(5,160
)
(Loss) income from continuing operations, before income taxes
   
(64,874
)
   
147,746
     
10,799
     
-
     
93,671
 
Income taxes (benefit)
   
(22,734
)
   
50,781
     
2,786
     
-
     
30,833
 
Equity in net income of subsidiaries
   
104,978
     
8,013
     
-
     
(112,991
)
   
-
 
Net income (loss)
 
$
62,838
   
$
104,978
   
$
8,013
   
$
(112,991
)
 
$
62,838
 
                                         


     
Condensed Supplemental Consolidating Statement of Income
   
Nine Months Ended September 30, 2009
   
(In thousands)
   
     
     
Parent
     
Guarantor
     
Non-Guarantor
                 
     
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
 
                                         
Net sales
 
$
-
   
$
946,877
   
$
188,248
   
$
(28,259
)
 
$
1,106,866
 
Cost of sales
   
-
     
746,433
     
156,619
     
(28,259
)
   
874,793
 
Gross profit
   
-
     
200,444
     
31,629
     
-
     
232,073
 
Selling, general and administrative expense
   
25,118
     
94,221
     
17,018
     
-
     
136,357
 
Amortization
   
694
     
5,736
     
3,524
     
-
     
9,954
 
Other operating expense, net
   
-
     
(13,929
)
   
-
     
-
     
(13,929
)
Operating (loss) income
   
(25,812
)
   
114,416
     
11,087
     
-
     
99,691
 
Interest expense (income), net
   
13,640
     
(9,829
)
   
10,294
     
-
     
14,105
 
Other income, net
   
(1,229
)
   
(422
)
   
(4,537
)
   
-
     
(6,188
)
(Loss) income from continuing operations, before income taxes
   
(38,223
)
   
124,667
     
5,330
     
-
     
91,774
 
Income taxes (benefit)
   
(13,577
)
   
43,399
     
2,731
     
-
     
32,553
 
Equity in net income of subsidiaries
   
83,867
     
2,599
     
-
     
(86,466
)
   
-
 
Net income
 
$
59,221
   
$
83,867
   
$
2,599
   
$
(86,466
)
 
$
59,221
 
                                         

Condensed Supplemental Consolidating Statement of Cash Flows
 
Nine Months Ended September 30, 2010
 
(In thousands)
 
   
     
Parent
     
Guarantor
     
Non-Guarantor
                 
     
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
 
                                         
Net cash provided by operating activities
 
$
(16,185
)
 
$
163,284
   
$
3,553
   
$
-
   
$
150,652
 
Cash flows from investing activities:
                                       
Additions to property, plant and equipment
   
(64
)
   
(25,839
)
   
(4,574
)
   
-
     
(30,477
)
Additions to other intangible assets
   
(9,482
)
   
(5,842
)
   
(1,464
)
   
-
     
(16,788
)
Acquisition of business, net of cash acquired
   
-
     
(664,655
)
   
-
     
-
     
(664,655
)
Proceeds from sale of fixed assets
   
-
     
16
     
-
     
-
     
16
 
Net cash used in investing activities
   
(9,546
)
   
(696,320
)
   
(6,038
)
   
-
     
(711,904
)
Cash flows from financing activities:
                                       
Proceeds from issuance of debt for acquisitions
   
400,000
     
-
     
-
     
-
     
400,000
 
Borrowings under revolving credit facility
   
324,600
     
-
     
-
     
-
     
324,600
 
Payments under revolving credit facility
   
(251,300
)
   
-
     
-
     
-
     
(251,300
)
Payments on capitalized lease obligations
   
-
     
(682
)
   
(154
)
   
-
     
(836
)
Intercompany transfer
   
(535,307
)
   
535,307
     
-
     
-
     
-
 
Proceeds from issuance of common stock, net of expenses
   
110,688
     
-
     
-
     
-
     
110,688
 
Payment of deferred financing costs
   
(10,783
)
   
-
     
-
     
-
     
(10,783
)
Excess tax (deficiency) benefits from stock-based payment arrangements
   
(440
)
   
-
     
-
     
-
     
(440
)
Cash used to net share settle equity awards
   
(15,334
)
   
-
     
-
     
-
     
(15,334
)
Proceeds from stock option exercises
   
3,606
     
-
     
-
     
-
     
3,606
 
Net cash provided by financing activities
   
25,730
     
534,625
     
(154
)
   
-
     
560,201
 
Effect of exchange rate changes on cash and cash equivalents
   
-
     
-
     
92
     
-
     
92
 
Net decrease in cash and cash equivalents
   
(1
)
   
1,589
     
(2,547
)
   
-
     
(959
)
Cash and cash equivalents, beginning of period
   
1
     
8
     
4,406
     
-
     
4,415
 
Cash and cash equivalents, end of period
 
$
0
   
$
1,597
   
$
1,859
   
$
-
   
$
3,456
 
                                         

 
Condensed Supplemental Consolidating Statement of Cash Flows
 
Nine Months Ended September 30, 2009
 
(In thousands)
 
   
     
Parent
     
Guarantor
     
Non-Guarantor
                 
     
Company
     
Subsidiaries
     
Subsidiaries
     
Eliminations
     
Consolidated
 
                                         
Net cash provided by operating activities
 
$
(67,918
)
 
$
82,141
   
$
14,704
   
$
-
   
$
28,927
 
Cash flows from investing activities:
                                       
Additions to property, plant and equipment
   
(39
)
   
(28,537
)
   
(2,301
)
   
-
     
(30,877
)
Proceeds from sale of fixed assets
   
-
     
35
     
-
     
-
     
35
 
Net cash used in investing activities
   
(39
)
   
(28,502
)
   
(2,301
)
           
(30,842
)
Cash flows from financing activities:
                                       
Borrowings under revolving credit facility
   
248,500
     
-
     
-
     
-
     
248,500
 
Payments under revolving credit facility
   
(248,900
)
   
-
     
-
     
-
     
(248,900
)
Payments on capitalized lease obligations
   
-
     
(549
)
   
-
     
-
     
(549
)
Intercompany transfer
   
65,215
     
(53,090
)
   
(12,125
)
   
-
     
-
 
Proceeds from stock option exercises
   
3,405
     
-
     
-
     
-
     
3,405
 
Excess tax benefits from stock based payment arrangements
   
60
     
-
     
-
     
-
     
60
 
Cash used to net share settle equity awards
   
(324
)
   
-
     
-
     
-
     
(324
)
Net cash provided by financing activities
   
67,956
     
(53,639
)
   
(12,125
)
   
-
     
2,192
 
Effect of exchange rate changes on cash and cash equivalents
   
-
     
-
    
690
     
-
    
690
 
Net decrease in cash and cash equivalents
   
(1
)
   
-
     
968
     
-
     
967
 
Cash and cash equivalents, beginning of period
   
12
     
7
     
2,668
     
-
     
2,687
 
Cash and cash equivalents, end of period
 
$
11
   
$
7
   
$
3,636
   
$
-
   
$
3,654
 
                                         

Subsequent Events
Subsequent Events
22.
Subsequent Events

On October 27, 2010, the Company entered into an Amended and Restated Credit Agreement with a group of participating lenders which amends and restates the Credit Agreement dated June 27, 2005 (as amended) and was to expire August 31, 2011.  The Amended and Restated Credit Agreement provides for an increase in the aggregate commitment under the revolving credit facility from $600 million to $750 million and extends the maturity to October 27, 2015.  The interest rate under the Amended and Restated Credit Agreement will be based on the Company's consolidated leverage ratio, and will be determined by either LIBOR plus a margin ranging from 1.50% to 2.50% or a base rate (as defined in the Amended and Restated Credit Agreement) plus a margin ranging from 0.50% to 1.50%.  Proceeds from the credit facility may be used for working capital and general corporate purposes, including acquisition financing.  The credit facility contains various financial and other restrictive covenants and requires that we maintain certain financial ratios, including a leverage and interest coverage ratio.

On October 28, 2010, the Company acquired all of the outstanding securities of STSF Holdings, Inc. (Holdings) for approximately $180 million in cash (subject to adjustment) plus up to an additional $15 million if S.T. Specialty Foods, Inc. achieves certain earnings targets for the twelve month period ending December 31, 2010.  S.T. Specialty Foods, Inc., a wholly owned subsidiary of Holdings, has annual net sales of approximately $100 million and is a manufacturer of private label macaroni and cheese, skillet dinners and other value-added side dishes.  The acquisition will add another category to the Company's product portfolio for the retail grocery channel.  The acquisition was financed through the Company's Amended and Restated Credit Agreement.  Due to the timing of the acquisition, information required to adequately provide proforma disclosures is not available.  We expect this information to be available in sufficient detail later in the fourth quarter and will be disclosed in our annual report on Form 10-K.

Following the completion of the acquisition, Holdings and S.T. Specialty Foods will become guarantors under the Amended and Restated Credit Agreement and the indentures governing the Company's 6.03% senior notes due 2013 and High Yield Notes due 2018.
Document Information
9 Months Ended
Sep. 30, 2010
Document Type
10-Q 
Amendment Flag
FALSE 
Document Period End Date
2010-09-30 
Entity Information
9 Months Ended
Sep. 30, 2010
Oct. 29, 2010
Jun. 30, 2009
Entity Registrant Name
TreeHouse Foods, Inc. 
 
 
Entity Central Index Key
0001320695 
 
 
Current Fiscal Year End Date
12/31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
897,700,000 
Entity Common Stock, Shares Outstanding
 
35,400,837 
 
Document Fiscal Year Focus
2010 
 
 
Document Fiscal Period Focus
Q3