TreeHouse(THS) - 2020 Q4 - Annual Report

Part I Business TreeHouse Foods is a leading North American private label food and beverage manufacturer, operating in two segments and focused on strategic growth and customer concentration - TreeHouse is a leading manufacturer and distributor of private label packaged foods and beverages in North America with approximately 40 production facilities[14] - The company's four-point enterprise strategy includes: Commercial Excellence, Operational Excellence, Optimized Portfolio, and People & Talent[17][18] - Effective January 1, 2020, the company reorganized into two reportable segments: Meal Preparation and Snacking & Beverages[22][23][24] - In 2020, the company acquired the majority of the U.S. branded pasta portfolio from Riviana Foods and sold two of its In-Store Bakery facilities[19][20] Customer Concentration (FY 2020) | Customer Group | Percentage of Consolidated Net Sales | | :--- | :--- | | Ten Largest Customers | 58.5% | | Walmart Inc. and affiliates | 23.9% | - As of December 31, 2020, the company had approximately 10,900 full-time employees, with about 2,400 being union members[50] Risk Factors The company faces multiple risks including pandemic disruptions, intense competition, customer concentration, supply chain issues, high indebtedness, and restructuring challenges - The COVID-19 pandemic poses risks of workforce and facility shutdowns, decreased demand in the food-away-from-home channel, and supply chain disruptions[54][55] - The company is highly dependent on a limited number of customers, with the ten largest accounting for 58.5% of net sales in 2020. The loss of a significant customer could adversely affect results[60] - The company's ability to manufacture and sell products is subject to supply chain disruptions from weather, natural disasters, pandemics, strikes, or other factors[64] - As of December 31, 2020, the company had $2,233.0 million of outstanding indebtedness. This leverage could limit management's flexibility and ability to service debt[83] - Agreements governing indebtedness contain restrictive covenants, including maintaining a specific consolidated net leverage ratio, which may limit operational and financial flexibility[84][85] - The company faces risks from its restructuring plans, such as TreeHouse 2020 and Structure to Win, which may not yield anticipated benefits and could divert management resources. Restructuring costs in 2020 were approximately $73.2 million[93] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[94] Properties As of December 31, 2020, the company operates numerous production facilities across the United States, Canada, and Italy, the majority of which are owned - The company operates production facilities, most of which it owns, across North America and Italy. It leases its principal executive offices in Oak Brook, Illinois[96] - Facilities are listed by their segment (Meal Preparation or Snacking & Beverages) and the principal products they produce[96] - Facilities in Sparks, Nevada and Lancaster, Ohio, related to the Ready-to-eat (RTE) Cereal business, are classified as discontinued operations and excluded from the main property list[98] Legal Proceedings Information regarding the company's legal proceedings is detailed in Note 19 to the Consolidated Financial Statements - Refer to Note 19 of the Consolidated Financial Statements for details on legal proceedings[99] Mine Safety Disclosures This item is not applicable to the company - Not applicable[100] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with no cash dividends paid, and an active stock repurchase program with $291.7 million remaining as of Q4 2020 - The company's common stock is traded on the New York Stock Exchange under the symbol "THS"[102] - The company has not paid any cash dividends and anticipates retaining earnings for business development for the foreseeable future[103] Q4 2020 Stock Repurchase Activity | Period | Total Shares Purchased (millions) | Weighted Average Price Paid per Share | Total Cost (millions) | Approx. Value Remaining for Purchase (millions) | | :--- | :--- | :--- | :--- | :--- | | Q4 2020 | 0.6 | $38.64 | $25.0 | $291.7 | Selected Financial Data This section presents five years of selected financial data, highlighting net sales, operating income, and cash flow, with retrospective adjustments for inventory and discontinued operations Selected Financial Data (2018-2020) | Metric (In millions, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Operating Data | | | | | Net sales | $4,349.7 | $4,288.9 | $4,587.8 | | Operating income (loss) | $149.1 | $(16.1) | $83.4 | | Net income (loss) from continuing operations | $49.2 | $(110.3) | $(46.2) | | Net income (loss) | $13.8 | $(361.0) | $(64.4) | | Earnings (loss) per diluted share | $0.24 | $(6.42) | $(1.15) | | Balance Sheet Data (at end of period) | | | | | Total assets | $5,485.7 | $5,139.4 | $5,629.3 | | Long-term debt, excluding current portion | $2,199.0 | $2,091.7 | $2,297.4 | | Cash Flow Data | | | | | Net cash provided by operating activities | $416.7 | $307.7 | $505.8 | - The company changed its inventory valuation method for Pickles from LIFO to FIFO, applying the change retrospectively. Additionally, the Snacks division and RTE Cereal business were classified as discontinued operations, with prior periods recast accordingly[113][114] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion covers recent developments, operational results, liquidity, and critical accounting policies, including a pasta acquisition, debt refinancing, and COVID-19 impacts Recent Developments In 2020, the company acquired a pasta business, refinanced debt, managed COVID-19 impacts on retail and food-away-from-home channels, and reorganized into two reporting segments - On December 11, 2020, the company acquired the majority of the U.S. branded pasta portfolio from Riviana Foods for approximately $239.2 million in cash[119] - On September 9, 2020, the company issued $500 million of 4.0% notes due 2028 and used the proceeds to redeem all of its outstanding 2022 Notes[120] - The COVID-19 pandemic led to a shift in consumer habits towards more food-at-home, which favorably impacted the retail grocery business (approx. 80% of net sales) but negatively impacted the food-away-from-home channel[123] - Effective January 1, 2020, the company reorganized from a three-segment structure to a two-segment structure: Meal Preparation and Snacking & Beverages[126] Results of Operations Consolidated net sales increased 1.4% in 2020 due to 2.7% organic growth, leading to a significant operating income turnaround from a prior-year loss, primarily due to the absence of impairment charges Consolidated Net Sales Change (2020 vs. 2019) | Component | Change (in millions) | Change (%) | | :--- | :--- | :--- | | 2019 Net Sales | $4,288.9 | | | Volume/mix (organic) | $115.5 | 2.7% | | Divestitures | $(59.4) | (1.4%) | | Acquisition | $11.6 | 0.3% | | 2020 Net Sales | $4,349.7 | 1.4% | Operating Income (Loss) Comparison (2018-2020) | Year | Operating Income (Loss) (in millions) | As % of Net Sales | | :--- | :--- | :--- | | 2020 | $149.1 | 3.5% | | 2019 | $(16.1) | (0.4%) | | 2018 | $83.4 | 1.8% | - The decrease in total operating expenses in 2020 compared to 2019 was primarily due to non-recurring impairment charges of $129.1 million in 2019[131] - Net loss from discontinued operations decreased to $35.4 million in 2020 from $250.7 million in 2019, mainly due to a large non-recurring impairment charge and loss on sale of the Snacks division in 2019[136] Liquidity and Capital Resources The company maintains strong liquidity with $364.6 million in cash and $727.1 million credit facility availability, driven by increased operating cash flow and strategic debt management, including a partial $200.0 million 2024 Notes redemption Cash Flow Summary (Continuing Operations) | Cash Flow Activity (In millions) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $403.6 | $263.9 | $472.1 | | Net Cash from Investing Activities | $(330.4) | $(139.3) | $(142.4) | | Net Cash from Financing Activities | $74.0 | $(206.9) | $(311.0) | - As of December 31, 2020, the company had approximately $727.1 million available under its Revolving Credit Facility[157] - The company utilized provisions of the CARES Act, deferring $22.8 million in payroll taxes and receiving a $71.4 million tax refund related to net operating loss carrybacks[158] - On January 15, 2021, the company issued a notice to redeem $200.0 million of its 6.000% Senior Notes due 2024, funded with available cash[159] Contractual Obligations Summary (as of Dec 31, 2020) | Obligation (In millions) | Total | Due in 1 Year | Due in 2-3 Years | Due in 4-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt obligations | $2,228.9 | $14.0 | $673.6 | $1,041.3 | $500.0 | | Debt interest payments | $326.5 | $76.0 | $142.3 | $68.2 | $40.0 | | Operating leases | $214.2 | $40.2 | $62.1 | $36.5 | $75.4 | | Purchase obligations | $686.9 | $596.1 | $83.4 | $6.0 | $1.4 | Critical Accounting Policies Critical accounting policies involve significant judgment, including goodwill and intangible asset impairment tests, purchase price allocation, income tax accounting, and employee benefit plan costs - Goodwill and indefinite-lived intangible assets totaled $2.2 billion and $22.4 million, respectively, as of December 31, 2020. The annual impairment test did not result in an impairment, with all three reporting units having fair values substantially in excess (68% to 122%) of their carrying values[206][208] - The fair value of one trademark with a book value of $16.4 million exceeds its book value by only 12%, indicating potential risk of future impairment if revenue and profit expectations are not met[209] - Purchase price allocation for acquisitions requires significant estimates for the fair value of assets and liabilities, impacting the amount of goodwill recorded[210] - Accounting for income taxes involves judgments on deferred tax assets and liabilities, valuation allowances, and uncertain tax positions[211] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from interest rate fluctuations, commodity price volatility, and foreign currency exchange rates through various hedging strategies and contracts - The company uses interest rate swaps to manage exposure on its variable-rate debt. As of Dec 31, 2020, $875.0 million of debt was covered by swaps. A 1% change in interest rates would impact annual interest expense by approximately $2.5 million after considering the swaps[238][239] - The company is exposed to commodity price risk for key ingredients and packaging. A hypothetical 10% change in commodity prices would impact the fair value of its derivative portfolio by $50.6 million[240] - Foreign currency risk is managed using foreign currency contracts. As of Dec 31, 2020, the company had $7.7 million of such contracts outstanding, and a 10% movement in exchange rates would not have a material impact[245] Financial Statements and Supplementary Data This section includes the audited consolidated financial statements and independent auditor's report, detailing financial position, performance, cash flows, and key accounting notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on financial statements and internal controls, identifying the valuation of acquired intangible assets as a critical audit matter - The auditor, Deloitte & Touche LLP, issued an unqualified opinion, stating the financial statements are presented fairly in conformity with U.S. GAAP[249] - An unqualified opinion was also issued on the company's internal control over financial reporting as of December 31, 2020[250] - The valuation of acquired intangible assets (customer relationships and trade names) from the Riviana pasta acquisition was identified as a Critical Audit Matter due to the significant and subjective management assumptions required[255][257] Consolidated Financial Statements The consolidated financial statements present the company's financial position, performance, and cash flows, showing total assets of $5.49 billion and net income of $13.8 million in 2020 Consolidated Balance Sheet Highlights (as of Dec 31, 2020) | Account (In millions) | Amount | | :--- | :--- | | Total Current Assets | $1,428.8 | | Total Assets | $5,485.7 | | Total Current Liabilities | $990.7 | | Long-term Debt | $2,199.0 | | Total Liabilities | $3,620.7 | | Total Stockholders' Equity | $1,865.0 | Consolidated Statement of Operations Highlights (Year Ended Dec 31, 2020) | Account (In millions) | Amount | | :--- | :--- | | Net Sales | $4,349.7 | | Gross Profit | $802.2 | | Operating Income | $149.1 | | Net Income from Continuing Operations | $49.2 | | Net Income | $13.8 | Consolidated Statement of Cash Flows Highlights (Year Ended Dec 31, 2020) | Account (In millions) | Amount | | :--- | :--- | | Net cash provided by operating activities | $416.7 | | Net cash used in investing activities | $(332.4) | | Net cash provided by financing activities | $74.0 | | Net increase in cash and cash equivalents | $162.3 | Notes to Consolidated Financial Statements The notes detail accounting policies and financial data, including restructuring costs, the pasta acquisition, discontinued operations, debt structure, and customer concentration - The TreeHouse 2020 and Structure to Win restructuring programs were completed in 2020, incurring cumulative costs of $299.8 million and $92.7 million, respectively[311][313][317] - The acquisition of the Riviana pasta business for $239.2 million resulted in the preliminary recognition of $113.3 million in intangible assets and $57.8 million in goodwill[342][344] - The Ready-to-eat (RTE) Cereal business remains classified as a discontinued operation, with an additional impairment charge of $51.2 million recognized in 2020[355] - Total outstanding debt as of Dec 31, 2020 was $2.23 billion, consisting of Term Loans and Senior Notes. The Credit Agreement requires maintaining a consolidated net leverage ratio no greater than 4.50 to 1.0[401][409] - Walmart Inc. and its affiliates accounted for 23.9% of consolidated net sales from continuing operations in 2020. No other customer exceeded 10%[516] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[526] Controls and Procedures Management, including the CEO and CFO, concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[527] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[529] - The assessment of internal control over financial reporting excluded the recently acquired pasta business from Riviana Foods, which represented 0.3% of net sales and 4.5% of total assets for the year ended December 31, 2020[529][537] Other Information The company reports no other information for this item - None[532] Part III Directors, Executive Officers and Corporate Governance Information required for this item, including details about directors, executive officers, the audit committee, and the code of ethics, is incorporated by reference from the company's 2021 Proxy Statement - Information regarding directors, executive officers, corporate governance, and the code of ethics is incorporated by reference from the definitive Proxy Statement for the 2021 Annual Meeting of Stockholders[544][545][546] Executive Compensation Information required for this item, including the Compensation Discussion and Analysis and details on executive compensation, is incorporated by reference from the company's 2021 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement[547] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans, with 2.7 million securities to be issued and 4.1 million available, and incorporates security ownership details by reference Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be Issued Upon Exercise (millions) | Securities Remaining Available for Future Issuance (millions) | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2.7 | 4.1 | | Equity compensation plans not approved by security holders | 0 | 0 | | Total | 2.7 | 4.1 | - Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 2021 Proxy Statement[549] Certain Relationships and Related Transactions, and Director Independence Information required for this item, concerning related party transactions and director independence, is incorporated by reference from the company's 2021 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement[550] Principal Accountant Fees and Services Information required for this item, detailing fees and services provided by the principal accountant, is incorporated by reference from the company's 2021 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[551] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, financial statement schedules, and a comprehensive list of exhibits filed as part of the Form 10-K - This section lists all financial statements, financial statement schedules (Schedule II), and exhibits filed with the Form 10-K[553][554] Form 10-K Summary This item is not applicable - Not applicable[556]