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

Form 10-K

 

 

Commission File Number 001-32504

TreeHouse Foods, Inc.

(Exact name of the registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code

(708) 483-1300

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     o

 

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

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The aggregate market value of the Registrant’s common stock held by non-affiliates as of June 30, 2008, based on the $24.26 per share closing price on the New York Stock Exchange on such date, was approximately $745.5 million. Shares of common stock held by executive officers and directors of the registrant have been excluded from this calculation because such persons may be deemed to be affiliates.

 

The number of shares of the registrant’s common stock outstanding as of February 13, 2009 was 31,547,500.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on April 30, 2009 are incorporated by reference into Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Act of 1995. The words “believe,” “except,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those described in (1) Part I, Item 1A — Risk Factors and elsewhere in this Form 10-K, (2) our reports and registration statements filed from time to time with the SEC and (3) other announcements we make from time to time.

 

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.

 

 

Introduction

 

References herein to “we,” “us,” “our,” “Company” and “TreeHouse” refers to TreeHouse Foods, Inc. and its subsidiaries unless the context specifically states or implies otherwise.

 

TreeHouse is a Delaware corporation incorporated on January 25, 2005 by Dean Foods Company to accomplish a spin-off of certain specialty businesses to its shareholders which was completed on June 27, 2005. Since the Company began operating as an independent entity, it has expanded its product offerings through a number of acquisitions. On April 24, 2006, the Company acquired the private label soup and infant feeding business from Del Monte Corporation (“Soup and Infant Feeding”). On May 31, 2007, the Company acquired VDW Acquisition, Ltd (“San Antonio Farms”) a manufacturer of Mexican sauces. On October 15, 2007, the Company acquired the assets of E.D. Smith Income Fund (“E.D. Smith”), a manufacturer of salad dressings, jams and various sauces.

 

We are a food manufacturer servicing primarily the retail grocery and foodservice distribution channels. Our products include non-dairy powdered coffee creamer; private label soup, salad dressings and sauces; Mexican sauces; jams and pie fillings; pickles and related products; infant feeding products; and other food products. We manufacture and sell the following:

 

 

Effective January 1, 2008, we realigned the manner in which the business is managed and now focus on operating results based on channels of distribution, which has resulted in a change to the operating and reportable segments. Previously, we managed our business based on product categories. Our change in

operating and reportable segments from product categories to channel of distribution is consistent with management’s long-term growth strategy and was necessary due to the acquisitions that occurred during 2007. The change in operating and reportable segments will permit the Company to integrate future acquisitions more efficiently and provide our investors with greater comparability to our peer group, as many of them also present results based on channels of distribution.

 

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

 

Our North American Retail Grocery segment sells branded and private label products to customers within the United States and Canada. These products include non-dairy powdered creamer; condensed and ready to serve soups, broths and gravies; baby food; salad dressings and sauces; pickles, peppers and relishes; Mexican sauces; and jams, pie fillings and aseptic products. Brand names sold within the North American Retail Grocery segment include the following pickle brands, Farman’s^®, Nalley’s^®, Peter Piper ^®, and Steinfeld^®. Also sold are brands related to sauces and syrups, Bennet’s^®, Hoffman House^®, Roddenbery’s Northwoods^® and San Antonio Farms^®. Infant feeding products are sold under the Nature’s Goodness^® brand, while our non-dairy powdered creamer is sold under our proprietary Cremora^® brand. Our refrigerated products are sold under the Mocha Mix^® and Second Nature^® brand names, and our jams and other sauces are sold under the E.D. Smith^® and Habitant^® brand names.

 

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

 

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

 

See Note 23 to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for information related to the Company’s business segments.

 

We operate our business as Bay Valley Foods, LLC (“Bay Valley”) in the United States and E.D. Smith Foods, LTD (“E.D. Smith”) in Canada. Bay Valley is a Delaware limited liability company, a wholly owned subsidiary of TreeHouse Foods, Inc. and holds all of the real estate and operating assets related to our business. E.D. Smith is a wholly owned subsidiary of Bay Valley.

 

Business Strategy

 

Our strategy is to optimize our current business and grow through acquisitions.

 

Optimize the Current Business —

 

 

 

Grow Through Acquisitions —

 

 

Our Products

 

Financial information about our North American Retail Grocery, Food Away From Home, and Industrial and Export segments can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The following table sets forth our consolidated net sales by business segments and products, for the year ended December 31, 2008:

 

 

Non-Dairy Powdered Creamer — Non-dairy powdered creamer is produced from soybean oil, casein (a milk protein) and corn syrup. It is used as coffee creamer or whitener and as an ingredient in baking, beverages and gravy mixes and similar products.

 

Product offerings in this product category include private label products packaged for retailers, such as supermarkets and mass merchandisers, foodservice products for use in coffee service and other industrial applications, including repackaging in portion control packages and as an ingredient by other food

manufacturers. We also manufacture and sell the Cremora^® brand of non-dairy powdered creamer. Non-dairy powdered creamer represented 23.4% of our consolidated net sales, for the year ended December 31, 2008.

 

Soup and Infant Feeding — Soup, broth and gravy are manufactured using vegetables, meats and other ingredients which are sourced from outside suppliers. Our products are packaged in cans of various sizes, from single serve to larger sized cans. TreeHouse also manufactures infant feeding products at the Pittsburgh plant, primarily under the Nature’s Goodness^® brand. The majority of Nature’s Goodness^® products are manufactured by TreeHouse in glass jars, with co-packers producing a variety of cereals and juice products. Infant feeding products are developed and marketed around the different stages of a baby’s development. Nature’s Goodness^® products are all natural and are produced under very tight quality control, from sourcing of raw materials through glass handling and finished product processing. In 2008, the majority of the soup and infant feeding sales were to the retail channel and represented 22.4% of our consolidated net sales.

 

Pickles — We produce a variety of products at our pickle production facilities, including pickles, peppers, pickled vegetables, jalapeno peppers, pepperoncini peppers, sliced banana peppers and pickled okra. We also include sauces and syrups in our pickles product category. These products are sold to the retail, foodservice and industrial markets. Pickles and related products represented approximately 21.7% of our consolidated net sales in 2008.

 

Salad Dressings — We produce both pourable and spoonable salad dressings. Our salad dressings are sold primarily to supermarkets and mass merchandisers throughout the United States and Canada, and encompass many different flavor varieties. We believe we are the largest supplier of private label salad dressings in both the United States and Canada. Salad dressings represented 10.5% of our consolidated net sales in 2008.

 

Jams and other sauces  — We produce jams, pie fillings and other sauces at our Winona, Ontario facility. These products are sold to supermarkets, mass merchandisers and foodservice customers in the United States and Canada, and represented 10.3% of our consolidated net sales in 2008.

 

Aseptic Products — Aseptic products are processed under heat and pressure in a sterile production and packaging environment, creating a product that does not require refrigeration prior to use. Our principal aseptic products are cheese sauces and puddings. These products are sold primarily in the foodservice market in cans and flexible packages. Aseptic products represented 5.5% of our consolidated net sales in 2008.

 

Other products — Our San Antonio plant, produces Mexican sauces, including salsa, picante sauce, cheese dip, enchilada and taco sauces, which are sold to retail and foodservice customers. We also make refrigerated salad dressings at our California facility for sale in the retail and foodservice markets. Each of these product lines represented less than 5% of our consolidated net sales in 2008.

 

Marketing, Sales and Distribution

 

We sell our products through various distribution channels, including retail grocery, foodservice distributors and industrial, including food manufacturers and repackagers of foodservice products. We have an internal sales force that manages customer relationships and also manages our broker network, which is used for sales to retail and foodservice accounts. Industrial food products are generally sold directly to customers without the use of a broker. Most of our customers, including long-standing customers, purchase products from us either by purchase order or pursuant to contracts that generally are terminable at will. We have many customer supply arrangements that are not evidenced by written agreements.

 

In 2008, sales to retailers, foodservice and industrial and export customers represented 61.1%, 19.6% and 19.3%, respectively, of our consolidated net sales.

 

A relatively limited number of customers account for a large percentage of our consolidated net sales. For the year ended December 31, 2008, our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for approximately 15.1% of our consolidated net sales. No other customer accounted for 10% or more of the Company’s consolidated net sales.

 

Our products are generally shipped from inventory upon receipt of a customer order. In certain cases, we produce to order. Sales order backlogs are not material to our business.

Products are shipped from our production facilities directly to customers or to our distribution centers, where products are consolidated for shipment to customers. We believe this consolidation of products enables us to improve customer service by offering our customers a single order, invoice and shipment.

 

Patents and Trademarks

 

We own a number of registered trademarks. While we consider our trademarks to be valuable assets, we do not consider any trademark to be of such material importance that its absence would cause a material disruption of our business. No trademark is material to any one segment.

 

Seasonality

 

Demand for our products does not vary significantly by quarter. However, sales of soup products have a higher percentage of sales in the fourth quarter and lower sales in the second quarter. Pickles tend to have higher sales in the second quarter and non-dairy powdered creamer tends to have higher sales in the fourth quarter.

 

Raw Materials

 

Raw materials used in our operations include processed vegetables and meats, soybean oil, coconut oil, casein, cheese, corn syrup, cucumbers, peppers and fruit. These raw materials generally are purchased under supply contracts, and we occasionally engage in forward buying, when we determine such buying to be to our advantage. We believe these raw materials to be generally available from a number of suppliers.

 

The most important packaging materials used in our operations are glass, plastic containers, corrugated containers, metal closures and metal cans. Most packaging materials are purchased under long-term supply contracts. We believe these packaging materials to be generally available from a number of suppliers, with the exception of glass, which we procure through a long-term supply contract that expires in December 2010.

 

Certain of our raw materials are purchased under long-term contracts in an attempt to guarantee supply and in order to obtain lower costs. The prices of our raw materials increase and decrease based on supply and demand, and other factors. We are not always able to adjust our pricing to reflect changes in raw materials costs. Volatility in the cost of our raw materials can adversely affect our performance, as price changes often lag behind changes in costs.

 

For additional discussion of the risks associated with the raw materials used in our operations, see “Known Trends and Uncertainties — Prices of Raw Materials.”

 

Working Capital

 

Our short-term financing needs are primarily for financing working capital during the year. Due to the seasonality of pickle and fruit production, driven by harvest cycles, which occur primarily during late spring and summer, inventories generally are at a low point in late spring and at a high point during the fall, increasing our working capital requirements. In addition, we build inventories of salad dressings in the spring and soup in the summer months in anticipation of large seasonal shipments that begin late in the second and third quarter, respectively. Our long-term financing needs will depend largely on potential acquisition activity. Our revolving credit agreement, plus cash flow from operations, is expected to be adequate to provide liquidity for our planned growth strategy and current operations, and is not expected to be impacted by the current credit crisis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

Competition

 

We have several competitors in each of our operating segments. For sales of private label products to retailers, the principal competitive factors are price, product quality and quality of service. For sales of products to foodservice and industrial and export customers, the principal competitive factors are product quality and specifications, reliability of service and price.

Competition to obtain shelf space for our branded products with retailers generally is based on the expected or historical performance of our product sales relative to our competitors. The principal competitive factors for sales of our branded products to consumers are brand recognition and loyalty, product quality and price. Most of our branded competitors have significantly greater resources and brand recognition than we do.

 

The consolidation trend is continuing in the retail grocery and foodservice industries, and mass merchandisers are gaining market share. As our customer base continues to consolidate, we expect competition to intensify as we compete for the business of fewer, large customers.

 

Employees

 

As of December 31, 2008, our work force consisted of approximately 3,300 full-time employees in the United States and Canada.

 

For More Information About Us

 

Our fiscal year ends on December 31. We furnish our stockholders with annual reports containing audited financial reports. As a public company, we regularly file reports and proxy statements with the Securities and Exchange Commission. These reports are required by the Securities Exchange Act of 1934 and include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8K, and proxy statements on Schedule 14A. Anyone may read and copy any of the materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC, 20549; information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains our report, proxy and information statements, and our other SEC filings. The SEC’s internet address is http://www.sec.gov. We make our SEC filings available on our own internet site as soon as reasonably practicable after they have been filed with the SEC. Our internet address is http://www.treehousefoods.com.

 

The information on our website is not incorporated by reference into this annual report on Form 10-K.

 

Corporate Governance

 

Our Code of Ethics, which is applicable to all of our employees and directors, is available on our corporate website at http://www.treehousefoods.com, along with the Corporate Governance Guidelines of our Board of Directors and the charters of the Committees of our Board of Directors. Any waivers that we may grant to our executive officers or directors under the Code of Ethics, and any amendments to our Code of Ethics, will be posted on our corporate website. Any of these items or any of our filings with the Securities and Exchange Commission are available in print to any shareowner who requests them. Requests should be sent to Investor Relations, TreeHouse Foods, Inc., Two Westbrook Corporate Center, Suite 1070, Westchester, IL 60154.

 

We submitted the certification of our chief executive officer required by Section 303A.12 of the NYSE Listed Company Manual, relating to our compliance with the NYSE’s corporate governance listing standards, on June 2, 2008 without qualification. In addition, we have included the certifications required of our chief executive officer and our chief financial officer by Section 302 of the Sarbanes-Oxley Act of 2002 and related rules with respect to the quality of our disclosures in our Form 10-K for the year ended December 31, 2008, as Exhibits 31.1 and 31.2, respectively, to this Form 10-K.

 

 

In addition to the factors discussed elsewhere in this Report, the following risks and uncertainties could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows. Additional risks and uncertainties not presently known to the Company also may impair the Company’s business operations and financial condition.

Continued disruptions in the financial markets could affect our ability to fund acquisitions or to renew our outstanding credit agreements upon expiration at our current favorable terms.

 

As of December 31, 2008, we had $472.0 million of outstanding indebtedness under our $100 million senior notes private placement, which expires on September 30, 2013 and our $600 million revolving credit agreement, which expires August 31, 2011. The inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our debt obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition, and results of operations. In addition, the inability to access additional borrowing at commercially reasonable terms could affect our ability to pursue additional acquisitions. U.S. credit markets have recently experienced significant dislocations and liquidity disruptions which have caused credit spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in debt markets, making financial terms for borrowers less attractive, and in certain cases have resulted in the unavailability of certain types of debt refinancing. Continued uncertainty in the credit markets may negatively impact our ability to access additional debt financing or to refinance existing indebtedness on favorable terms, or at all. Events affecting the credit markets have also had an adverse effect on other financial markets in the U.S., which may make it more difficult or costly for us to raise capital through the issuance of common stock or other equity securities. Any of these risks could impair our ability to fund our operations or limit our ability to expand our business and could possibly increase our interest expense, which could have a material adverse effect on our financial results.

 

Increases in interest rates may negatively affect earnings.

 

We had outstanding variable rate debt of $372.0 million with an average interest rate of 1.80% as of December 31, 2008, which accounts for approximately 78.2% of our total debt outstanding at December 31, 2008. In October, 2008, we entered into an interest rate swap for two years, with an effective date of November 19, 2008, at a fixed rate of 2.9% on $200 million of our variable rate debt which effectively results in an average interest rate of 3.06% on our variable rate debt at December 31, 2008. However, as we still have a significant portion of variable rate debt, we may still experience interest rate volatility. Increases in interest rates we pay on our variable rate debt could materially affect our earnings.

 

Fluctuations in foreign currencies may adversely affect earnings.

 

The Company is exposed to fluctuations in foreign currency exchange rates primarily related to raw material purchases. We are also exposed to fluctuations in the value of our foreign currency investment in our Canadian subsidiary, E.D. Smith. Additionally, input costs for certain Canadian sales are denominated in U.S. dollars, further impacting the effect foreign currency fluctuations may have on the Company.

 

The Canadian assets, liabilities, revenues and expenses are translated into U.S. dollars at applicable exchange rates. Accordingly, we are exposed to volatility in the translation of foreign currency earnings due to fluctuations in the value of the Canadian dollar, which may negatively impact the Company’s results of operations and financial position.

 

As we are dependent upon a limited number of customers, the loss of a significant customer, or consolidation of our customer base, could adversely affect our operating results.

 

A limited number of customers represent a large percentage of our consolidated net sales. Our operating results are contingent on our ability to maintain our sales to these customers. The competition to supply products to these high volume customers is very high. We expect that a significant portion of our net sales will continue to be derived from a small number of customers. These customers typically do not enter into written contracts, and the contracts that they do enter into generally are terminable at will. Our customers make purchase decisions based on a combination of price, product quality and customer service performance. If our product sales to one or more of these customers are reduced, this reduction may have a material adverse effect on our business, results of operations and financial condition.

Increases in input costs, such as raw materials, packaging materials and fuel costs, could adversely affect earnings.

 

The costs of raw materials, as well as packaging materials and fuel, have varied widely in recent years, and future changes in such costs may cause our results of operations and our operating margins to fluctuate significantly. Many of the raw materials used in our products rose to unusually high cost levels during 2008 and 2007, including processed vegetables and meats, soybean oil, casein, cheese and packaging materials. In addition, fuel costs, which represent the most significant factor affecting utility costs at our production facilities and our transportation costs have fluctuated widely over the last twenty-four months. Furthermore, certain input requirements, such as glass used in packaging, are available only from a limited number of suppliers.

 

Changes in the prices of our products may lag behind changes in the costs of our materials. Competitive pressures also may limit our ability to quickly raise prices in response to increased raw materials, packaging and fuel costs. Accordingly, if we are unable to increase our prices to offset increased raw material, packaging and fuel costs, our operating profits and margins could be adversely affected. In addition, during periods of falling costs of inputs, customers may request price decreases from us in situations where we have made forward purchases of key inputs at higher costs than the current market.

 

Our private label and regionally branded products may not be able to compete successfully with nationally branded products.

 

For sales of private label products to retailers, the principal competitive factors are price, product quality and quality of service. For sales of private label products to consumers, the principal competitive factors are price and product quality. In many cases, competitors with nationally branded products have a competitive advantage over private label products primarily due to name recognition. In addition, when branded competitors focus on price and promotion, the environment for private label producers becomes more challenging because the price difference between private label products and branded products can become less meaningful.

 

Competition to obtain shelf space for our branded products with retailers is primarily based on the expected or historical performance of our product sales relative to our competitors. The principal competitive factors for sales of our branded products to consumers are brand recognition and loyalty, product quality and price. Most of our branded competitors have significantly greater resources and brand recognition than we do.

 

Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing expenditures, or increase the use of discounting or promotional programs, each of which would adversely affect our margins and could result in a decrease in our operating results and profitability.

 

We may be unsuccessful in our future acquisition endeavors, if any, which may have an adverse effect on our business.

 

Consistent with our stated strategy, our future growth depends, in large part, on our acquisition of additional food manufacturing businesses, products or processes. As a result, we intend to engage in acquisition activity. We may be unable to identify suitable targets, opportunistic or otherwise, for acquisition or make acquisitions at favorable prices. If we identify a suitable acquisition candidate, our ability to successfully implement the acquisition would depend on a variety of factors, including our ability to obtain financing on acceptable terms.

 

Acquisitions involve risks, including those associated with integrating the operations, financial reporting, disparate technologies and personnel of acquired companies; managing geographically dispersed operations; the diversion of management’s attention from other business concerns; the inherent risks in entering markets or lines of business in which we have either limited or no direct experience; unknown risks; and the potential loss of key employees, customers and strategic partners of acquired companies. We may not successfully integrate businesses or technologies we acquire in the future and may not achieve anticipated revenue and cost

benefits. Acquisitions may not be accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, one time write-offs of goodwill and amortization expenses of other intangible assets. In addition, future acquisitions could result in dilutive issuances of equity securities.

 

We may be unable to anticipate changes in consumer preferences, which may result in decreased demand for our products.

 

Our success depends in part on our ability to anticipate the tastes and eating habits of consumers and to offer products that appeal to their preferences. Consumer preferences change from time to time and our failure to anticipate, identify or react to these changes could result in reduced demand for our products, which would adversely affect our operating results and profitability.

 

We may be subject to product liability claims for misbranded, adulterated, contaminated or spoiled food products.

 

We sell food products for human consumption, which involve risks such as product contamination or spoilage, misbranding, product tampering, and other adulteration of food products. Consumption of a misbranded, adulterated, contaminated or spoiled product may result in personal illness or injury. We could be subject to claims or lawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or that exceed our insurance coverage. Even if product liability claims against us are not successful or fully pursued, these claims could be costly and time consuming and may require management to spend time defending the claims rather than operating our business. A product that has been actually or allegedly misbranded or becomes adulterated could result in: product withdrawals, product recalls, destruction of product inventory, negative publicity, temporary plant closings, and substantial costs of compliance or remediation. Any of these events, including a significant product liability judgment against us, could result in a loss of confidence in our food products, which could have an adverse effect on our financial condition, results of operations or cash flows.

 

Our business could be harmed by strikes or work stoppages by our employees.

 

Currently, approximately 51% of our full time distribution, production and maintenance employees are covered by collective bargaining agreements with the International Brotherhood of Teamsters, United Food and Commercial Workers Union, or Retail, Wholesale and Department Store Union Central States Council. In addition, approximately 25% of the labor force is covered by agreements that expire within one year. If a dispute with one of these unions or the employees they represent were to arise, production interruptions caused by work stoppages could occur. If a strike or work stoppage were to occur, our business, financial condition and results of operations could be adversely affected.

 

 

Not applicable.

 

 

We currently operate seventeen production facilities, the majority of which are owned except for the facility in City of Industry, California, which is leased under an agreement that expires in September 2016; the Mendota, Illinois facility, which is leased from Del Monte Corporation under an agreement that expires in April 2035; the Springfield, Missouri facility, which is leased from Bell Carter under an agreement that expires in May 2009 and the Cambridge, Ontario facility, which is leased under an agreement that expires in December 2009. We believe that these facilities are suitable for our operations and provide sufficient capacity to meet our requirements for the foreseeable future. On November 3, 2008, the Company announced plans to

close the Cambridge, Ontario production facility by July 2009. The following chart lists the location and principal products produced at our production facilities:

 

 

Research and Development

 

Our research facilities include a Research and Development Center in Pecatonica, Illinois. The Center focuses on the development of aseptic and powdered creamer products. Product development work for aseptic products is also carried out at our production facility in Dixon, Illinois. Research and development for our pickle products is carried out at our production facility in Green Bay, Wisconsin. We conduct research and development activities for our soup and infant feeding products at our production facility in Pittsburgh, Pennsylvania. New formulations for salad dressings are created at our Seaforth, Canada location and new sauces and fruit based products are developed at our Winona, Canada facility. In addition, sample preparation, plant trials, ingredient approval and other quality control procedures are conducted at all our manufacturing facilities. Research and development expense totaled $6.9 million, $4.8 million, and $2.7 million in 2008, 2007, and 2006, respectively, and is included in the General and administrative line of the Consolidated Statements of Income.

 

 

We are party to a variety of legal proceedings arising out of the conduct of our business. While the results of proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on the Consolidated Financial Statements, annual results of operations or cash flows.

 

 

No matter was submitted by us during the fourth quarter of 2008 to a vote of security holders, through the solicitation of proxies or otherwise.

 

 

Our common stock is traded on the New York Stock Exchange under the symbol “THS.” The high and low sales prices of our common stock as quoted on the New York Stock Exchange for 2008 and 2007 are provided in the table below

 

 

The closing sales price of our common stock on February 13, 2009 as reported on the NYSE, was $27.97 per share. On February 13, 2009, there were 4,215 shareholders of record of our common stock.

 

We have not paid any cash dividends on the common stock and currently anticipate that, for the foreseeable future, any earnings will be retained for the development of our business. Accordingly, no dividends are expected to be declared or paid on the common stock. Moreover, our revolving credit facility contains certain restrictions on our ability to pay cash dividends. The declaration of dividends is at the discretion of our Board of Directors.

 

The Company did not purchase any shares of its common stock in either 2008 or 2007.

PERFORMANCE GRAPH

 

The price information reflected for our common stock in the following performance graph and accompanying table represents the closing sales prices of the common stock for the period from June 28, 2005 through December 31, 2008. The graph and accompanying table compare the cumulative total stockholders’ return on our common stock with the cumulative total return of the S&P Small Cap 600 Index, Russell 2000 Index and a Peer Group Index consisting of the following group of companies selected based on the similar nature of their business: Kraft Foods Inc., Sara Lee Corp., General Mills, Inc., Kellogg Co., ConAgra Foods Inc., Archer Daniels Midland Co., H.J. Heinz Company, Campbell Soup Co., McCormick & Co. Inc., The JM Smucker Co., Del Monte Foods Co., Corn Products Int’l., Lancaster Colony Corp., Flowers Foods, Inc., Ralcorp Holdings Inc., The Hain Celestial Group, Inc., Lance, Inc., J&J Snack Foods Corp., B&G Foods, Inc., American Italian Pasta Co., Farmer Bros. Inc. and Peet’s Coffee and Tea. The graph assumes an investment of $100 on June 28, 2005, in each of TreeHouse Foods’ common stock, the stocks comprising the S&P Small Cap 600 Index, Russell 2000 Index and the Peer Group Index.

 

COMPARISON OF CUMULATIVE TOTAL RETURN OF $100 AMONG TREEHOUSE FOODS, INC., S&P SMALL CAP 600 INDEX, RUSSELL 2000 INDEX AND THE PEER GROUP INDEX

 

 

Equity Compensation Plan Information

 

The following table provides information about our common stock that may be issued upon the exercise of options under all of our equity compensation plans as of December 31, 2008:

 

 

The following selected financial data as of and for each of the five years in the period ended December 31, 2008 has been derived from the Consolidated Financial Statements. The selected financial data do not purport to indicate results of operations as of any future date or for any future period. The selected financial data should be read in conjunction with the Consolidated Financial Statements and related Notes. For periods prior to June 27, 2005, all of the historical assets, liabilities, sales, expenses, income, cash flows, products, businesses and activities of our business that we describe in this report as “ours” are in fact the historical assets, liabilities, sales, expenses, income, cash flows, products, businesses and activities of the businesses transferred to TreeHouse by Dean Foods.

 

 

Executive Overview

 

We believe we are the largest manufacturer of non-dairy powdered creamer and pickles in the United States, and the largest manufacturer of private label salad dressings in the United States and Canada, based upon total sales volumes. We believe we are also the leading retail private label supplier of non-dairy powdered creamer, soup and pickles in the United States, and jams in Canada. In 2008, based on information provided by AC Nielsen, private label products sold in the retail grocery channel in the United States, which compete with branded products on the basis of equivalent quality at a lower price, represented approximately 36% of all pickle products, approximately 54% of all non-dairy powdered creamer and approximately 16% of all canned soup.

 

We sell our products primarily to the retail grocery and foodservice channels. For the year ended December 31, 2008, sales to the retail grocery and foodservice channels represented 61.1% and 19.6%, respectively, of our consolidated net sales. The remaining 19.3% represented industrial and export sales. A majority of our sales are private label products.

 

The following discussion and analysis presents the factors that had a material effect on our results of operations for the years ended December 31, 2008, 2007 and 2006. Also discussed is our financial position, as of the end of those periods. This should be read in conjunction with the Consolidated Financial Statements and the Notes to those Consolidated Financial Statements included elsewhere in this report. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

 

The Company completed its annual assessment of goodwill and indefinite lived assets as of December 31, 2008 and did not have goodwill impairment. The Company did have impairment of our San Antonio Farms^® trade name totaling approximately $0.6 million, which is related to the North American Retail Grocery segment. No other impairment was noted. For a more detailed description of the results of our analysis and the related assumptions, see our “Critical Accounting Policies.”

 

General economic conditions deteriorated throughout 2008 and resulted in rising commodity prices, the tightening of credit markets, job losses, fluctuating interest rates and foreign exchange rates. These factors have impacted the Company and its comparisons to the results achieved in 2007 and will impact the Company’s expectations for 2009.

 

The acquisition landscape in 2008 was negatively impacted by high seller price expectations, tightening credit at high borrowing costs and a more limited field of potential acquirers. We expect to be active in expanding our business through acquisitions as soon as conditions improve.

 

The Company’s exposure to foreign exchange rates is primarily limited to the Canadian dollar. During 2008, the exchange rate between the United States and Canada was relatively consistent, until later in the year, when the U.S. dollar strengthened. The strengthening of the U.S. dollar has resulted in significant other comprehensive losses due to the change in foreign exchange rates. Also impacted are the line items in the Company’s Consolidated Statements of Income. If the U.S. dollar had not strengthened as it did during 2008, the Company’s net sales and profits from its Canadian subsidiary would have been greater.

Results of Operations

 

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

 

 

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

 

Net Sales — Net sales increased 29.6% to $1,500.7 million for the year ended December 31, 2008, compared to $1,157.9 million, for the year ended December 31, 2007. Net sales by segment are shown in the following table:

 

The increase in net sales is primarily due to the full year impact in 2008 of the 2007 acquisitions of E.D. Smith and San Antonio Farms along with price increases taken to offset rising input costs, which were partially offset by volume decreases in the North American Retail Grocery and Food Away From Home segments. Volume decreases were primarily in the pickle and non-dairy powder creamer businesses, reflecting the Company’s decision to move away from low margin customers and the impact of the slowing global economy.

 

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw material, ingredient and packaging costs, labor costs, facility and equipment costs, including costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to our own distribution centers. Cost of sales as a percentage of consolidated net sales increased to 80.5% in 2008 from 79.2% in the prior year. Significant raw material cost increases in 2008 include a 43% increase in casein, a 39% increase in oils, an 11% increase in sweeteners and an 8% increase in cucumber crop costs. Packaging cost increases include a 21% increase in plastic containers and a 12% increase in glass containers. We continued to experience increased raw material and packaging costs that we were able to partially offset with increased operating efficiencies and increases in the prices of our products. See — “Results by Segment.”

 

Operating Costs and Expenses — Operating expenses increased to $204.9 million in 2008 compared to $155.3 million in 2007. The increase in 2008 resulted from the following:

 

Selling and distribution expenses increased $21.1 million, primarily due to the full year impact in 2008 of the acquisitions of San Antonio Farms in May, 2007 and E.D. Smith in October, 2007.

 

General and administrative expenses increased $7.8 million in 2008 compared to 2007, due to the acquisition of San Antonio Farms, in May 2007 and E.D. Smith in October 2007. However, due to synergies realized, general and administrative costs as a percent of revenue decreased from 4.7% in 2007 to 4.2% in 2008.

 

Amortization expenses increased to $13.5 million in 2008 from $7.2 million in 2007, due to the full year impact in 2008 of the acquisition of the San Antonio Farms in the second quarter of 2007 and the acquisition of E.D. Smith in the fourth quarter of 2007.

 

Other operating expense in 2008 increased $14.3 million primarily due to the closing of our pickle plant located in Portland, Oregon.

 

Operating Income — Operating income in 2008 was $87.1 million, an increase of $2.2 million, or 2.6% from operating income of $84.9 million in 2007. Our operating margin was 5.8% in 2008 compared to 7.3% in 2007. The impact of the Portland plant closure on operating margin for 2008 was a reduction of 0.9%.

 

Other (income) expense — Other (income) expense includes interest expense, interest income, foreign exchange gains and losses, and other (income) and expenses.

 

Interest expense in 2008 was $27.6 million, an increase of $5.6 million from 2007. The increase is primarily due to increased debt levels resulting from our 2007 acquisitions. The increase in interest expense was mitigated, as the Company paid down debt during the year and interest rates lowered. Interest income in 2008 and 2007 was $0.1 million.

 

The impact of changes in foreign currency resulted in an expense of $13.0 million in 2008 versus a gain in 2007 of $3.5 million. In 2008, approximately $9.1 million of the foreign currency expense was due to the revaluation of an intercompany note. The remaining $3.9 million of foreign currency expense is primarily due to a full year of foreign currency transaction gains and losses occurring in 2008. The gain in 2007 was primarily due to the forward purchase of Canadian currency used in the 2007 acquisition of E.D. Smith. This did not repeat in 2008.

Other (income) expense was a loss of $7.1 million in 2008 versus a gain of $36 thousand in 2007. The increase is primarily related to the mark to market adjustment of our interest rate swap agreement, totaling approximately $7.0 million.

 

Income Taxes — Income tax expense was recorded at an effective rate of 27.6% for 2008 compared to 37.4% for 2007. The lower effective tax rate in 2008 is due to the favorable intercompany financing structure entered into in conjunction with the E.D. Smith acquisition (See Note 9), combined with the tax benefit of the mark to market adjustment of our interest rate swap agreement.

 

Discontinued operations — Our loss on discontinued operations was $0.3 million in 2008 versus $30 thousand in 2007. The increase of $0.3 million was due to the write off of assets held for sale during 2008. The Company was unable to locate a buyer for these assets and has determined they have no value.

 

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 — Results by Segment

 

North American Retail Grocery

 

 

Net sales in the North American Retail Grocery segment increased by $253.6 million, or 38.2%, for the year ended December 31, 2008 compared to the prior year. The change in net sales from 2007 to 2008 was due to the following:

 

 

The increase in net sales from 2007 to 2008 resulted mainly from the full year impact in 2008 of the acquisition of San Antonio Farms in the second quarter of 2007 and E.D. Smith in the fourth quarter of 2007. Price increases taken due to rising raw material and packaging costs more than offset lower case sales of baby food and retail branded pickles. The volume declines related to retail pickle low margin customer rationalization and a decline in branded baby food.

 

Cost of sales as a percentage of sales increased from 76.8% in 2007 to 78.6% in 2008 primarily as a result of input cost increases throughout 2008 which were not fully offset by price increases.

 

Freight out and commissions paid to independent brokers increased $13.6 million or 30.2%, to $58.8 million in 2008 compared to $45.1 million in 2007, as a result of increased sales and higher shipping costs primarily due to elevated fuel costs early in 2008.

Food Away From Home

 

 

Net sales in the Food Away From Home segment increased by $39.4 million, or 15.5%, for the year ended December 31, 2008 compared to the prior year. The change in net sales from 2007 to 2008 was due to the following:

 

 

Sales increased in 2008 compared to 2007 primarily due to the acquisitions of San Antonio Farms in May 2007, and the E.D. Smith acquisition in October 2007. Price increases taken in 2008 to offset rising input costs also contributed to the increase. Volume declined as the Company moved away from low margin pickle customers and experienced adverse economic conditions in the Food Away From Home industry in 2008.

 

Cost of sales as a percentage of net sales decreased from 82.5% in 2007 to 82.3% in 2008, as price increases to our customers offset increases in raw material, packaging, and energy costs, combined with improvements in operating efficiencies.

 

Freight out and commissions paid to independent brokers increased $2.6 million or 24.1% to $13.6 million in 2008 compared to $10.9 million in 2007, primarily as a result of the higher sales and increased shipping costs due to elevated fuel costs early in 2008.

 

Industrial and Export

 

Net sales in the Industrial and Export segment increased by $49.7 million, or 20.7%, for the year ended December 31, 2008 compared to the prior year. The change in net sales from 2007 to 2008 was due to the following:

 

 

Price increases were taken in 2008 in an effort to offset the significant increases in input costs. In addition, we realized volume increases during the year from the existing customer base.

 

Cost of sales as a percentage of net sales increased from 82.7% in 2007 to 85.0% in 2008 as price increases to our customers did not fully offset increases in raw materials and packaging costs. Also contributing to the increase was a shift in our mix of customers towards lower margin co-pack customers.

 

Freight out and commissions paid to independent brokers increased by $0.8 million to $8.8 million as a result of increased fuel costs early in 2008. However, these costs decreased as a percent of revenue from 3.3% in 2007 to 3.0% in 2008 due to combining shipments and leveraging freight rates with the other product lines.

 

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

 

Net Sales — Net sales increased approximately 23.3% to $1,157.9 million for the year ended December 31, 2007, compared to $939.4 million for the year ended December 31, 2006. Net sales by segment are shown in the following table:

 

 

The increase in net sales was primarily driven by the full year impact in 2007 of the acquisition of the Soup and Infant Feeding Business in the second quarter of 2006 and the acquisitions of San Antonio Farms in May 2007 and E.D. Smith in October 2007. Sales increases were realized in all segments in 2007 as we increased prices to pass along the effect of increased input costs to our customers.

 

Cost of Sales — All expenses incurred to bring a product to completion are included in cost of sales, such as raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, including costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to our own distribution centers. Cost of sales as a percentage of consolidated net sales increased to 79.2% in 2007 from 78.7% in the prior year. Significant raw material cost increases in 2007 included a 31% increase in sweeteners, a 27% increase in oils, an 11% increase in casein and a 7% increase in cucumber crop costs. Packaging cost increases include an 8% in corrugated containers offset by a 4% decrease in plastic containers. We continued to experience increased raw material and packaging costs that we were able to partially offset with increased operating efficiencies and increases in the prices of our products. See — “Results by Segment.”

Operating Costs and Expenses — Operating expenses increased to $155.3 million in 2007 compared to $116.2 million in 2006. The increase in 2007 resulted from the following:

 

Selling and distribution expenses increased $19.8 million, primarily due to the full year impact in 2007 of the acquisition of the Soup and Infant Feeding Business, which occurred the second quarter of 2006, and the acquisition of San Antonio Farms in May 2007 and E.D. Smith in October 2007. Selling and distribution expenses as a percent of revenue increased from 8.0% in 2006 to 8.2% in 2007, primarily as a result of higher sales volume and average fuel costs.

 

General and administrative expenses decreased $4.0 million in 2007 compared to 2006, primarily for the following reasons: (1) the reduction of stock-based compensation expense of $5.2 million due to graded vesting which front loads the expense in earlier years related to equity grants to senior management at the time of the distribution and (2) the reduction of professional fees associated with Sarbanes-Oxley compliance of $1.4 million and (3) the reduction of pension administrative expenses of $0.7 million. The previous year incurred higher expenses, due to the initial compliance effort required for TreeHouse as a public company. These reductions were partially offset by additional costs related to the acquisitions made during the year.

 

Amortization expenses increased to $7.2 million in 2007 from $3.3 million in 2006, due to the full impact in 2007 of the acquisition of the Soup and Infant Feeding Business which occurred in the second quarter of 2006, the acquisition of San Antonio Farms in the second quarter of 2007, and the acquisition of E.D. Smith in the fourth quarter of 2007.

 

Other operating income in 2007 decreased $19.4 million due to several non-recurring items which occurred in 2006. In 2007, we recognized a gain on the sale of certain assets related to the La Junta, Colorado facility of $0.3 million.

 

Other operating expense in 2006 includes a $29.4 million curtailment gain generated as a result of transferring the postretirement medical benefits of certain union employees from a company funded plan to a multiemployer union sponsored plan. In 2006, we also recorded an $8.2 million charge to write down the Mocha Mix^® trademark to reflect a reduction in its realizable value. The $8.2 million charge is related to the North American Retail Grocery segment. Also included in 2006 is the income from the sale of the La Junta, Colorado distribution center of $1.3 million, offset by $2.6 million of costs associated with the closing of the La Junta, Colorado facilities.

 

Operating Income — Operating income in 2007 was $84.9 million, an increase of $0.6 million, or 0.7% from operating income of $84.4 million in 2006, largely as a result of solid operating results and the effect of the acquisitions in 2006 and 2007, which offset the $29.4 million curtailment gain of postretirement benefits recorded in 2006. Our operating margin was 7.3% in 2007 as compared to 9.0% in the prior year.

 

Other (income) expense — Other (income) expense includes interest expense, interest income, foreign exchange gains and losses, and other (income) and expenses.

 

Interest expense in 2007 was $22.0 million, an increase of $9.1 million from 2006. The increase is primarily due to increased debt levels resulting from our 2007 acquisitions.

 

Interest income in 2007 was $0.1 million versus $0.7 million in 2006. Interest income in 2006 was the result of investment income.

 

The impact of changes in foreign currency resulted in a gain in 2007 of $3.5 million, primarily due to the forward purchase of Canadian currency used in the 2007 acquisition of E.D. Smith.

 

Income Taxes — Income tax expense was recorded at an effective rate of 37.4% for 2007 compared to 37.9% for 2006. The decrease is primarily due to the lower tax rate on the Canadian operations of E.D. Smith.

 

Discontinued operations — Our loss on discontinued operations was $30 thousand in 2007 versus a gain of $155 thousand in 2006 due to the sale of assets in 2006.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 — Results by Segment

 

North American Retail Grocery

 

 

Net sales in the North American Retail Grocery segment increased by $160.7 million, or 32.0% for the year ended December 31, 2007 compared to the prior year. The change in net sales was due to the following:

 

 

The increase in net sales from 2006 to 2007 resulted primarily from the full year impact on sales from the Soup and Infant Feeding acquisition in 2006 and the acquisitions of San Antonio Farms in May 2007 and E.D. Smith in October 2007. Price increases were taken in the second half of 2007, due to rising raw material, packaging and natural gas costs.

 

Cost of sales increased from $386.2 million in 2006 to $509.3 million in 2007 primarily as a result of acquisitions, as cost of sales as a percentage of net sales was the same as in 2006.

 

Freight out and commissions paid to independent brokers increased $12.1 million or 36.4%, to $45.1 million in 2007 compared to $33.1 million in 2006 as a result of acquisitions and increased volume, as a percentage of net sales, freight out and commissions remained consistent with 2006 levels.

 

Food Away From Home

 

Net sales of the Food Away From Home segment increased by $13.8 million, or 5.7%, for the year ended December 31, 2007 compared to the prior year. The change in net sales was due to the following;

 

 

The increase in net sales from 2006 to 2007 resulted primarily from the full year impact on sales from the Soup and Infant Feeding acquisition in 2006 and the acquisitions of San Antonio Farms in May 2007 and E.D. Smith in October 2007 and price increases taken in the second half of 2007 due to rising raw material, packaging and natural gas costs. Volume declined as the Company moved away from certain low margin customers.

 

Cost of sales as a percentage of net sales increased from 80.6% in 2006 to 82.5% in 2007, as price increases to our customers only partially offset increases in raw material, packaging, and energy costs, combined with improvements in operating efficiencies.

 

Freight out and commissions paid to independent brokers decreased $1.4 million to $10.9 million in 2007 compared to $12.3 million in 2006. Freight out and commissions as a percentage of net sales decreased from 5.1% in 2006 compared to 4.3% in 2007, as a result of better management of customer shipments.

 

Industrial and Export

 

 

Net sales of the Industrial and Export segment increased by $44.0 million, or 22.5%, for the year ended December 31, 2007 compared to the prior year. The change in net sales was due to the following:

 

 

The increase in net sales from 2006 to 2007 resulted primarily from acquisition of the soup co-pack business and price increases in 2007 due to rising input costs.

Cost of sales as a percentage of net sales increased from 81.0% in 2006 to 82.7% in 2007, as price increases to our customers did not fully offset increases in raw material, packaging, and energy costs, combined with improvements in operating efficiencies.

 

Freight out and commissions paid to independent brokers increased $0.4 million to $8.0 million in 2007 compared to $7.5 million in 2006, primarily due to acquisitions. Freight out and commissions as a percentage of net sales decreased from 3.9% in 2006 compared to 3.3% in 2007, as a result of a change in the mix of shipping methods towards customer provided freight.

 

Known Trends and Uncertainties

 

Prices of Raw Materials

 

We were adversely affected by rising input costs during 2008 and 2007, and we expect our financial results to be affected by fluctuating input costs throughout 2009.

 

Many of the raw materials used in our products rose to unusually high levels during 2008, including processed vegetables and meats, soybean oil, casein, cheese and packaging materials. Fluctuating fuel costs are also impacting our results. While prices for many of our raw materials decreased from their historic highs reached earlier this year, the Company expects moderate price volatility for the next year with an upward trend. We manage the impact, wherever possible, by locking in prices on quantities required to meet our production requirements. In addition, we offset the effect by raising prices to our customers. However, for competitive reasons, we may not be able to pass along the full effect of increases in raw materials and other input costs as we incur them. In addition, in instances of declining input costs, customers may be looking for price reductions in situations where we have locked into pricing at higher costs.

 

Competitive Environment

 

There has been significant consolidation in the retail grocery and foodservice industries in recent years, and mass merchandisers are gaining market share. As our customer base continues to consolidate, we expect competition to intensify as we compete for the business of fewer, large customers. There can be no assurance that we will be able to keep our existing customers, or gain new customers. As the consolidation of the retail grocery and foodservice industry continues, we could lose sales if any one or more of our existing customers were to be sold.

 

Both the difficult economic environment and the increased competitive environment at the retail and foodservice levels have caused competition to become increasingly intense in our business. We expect this trend to continue for the foreseeable future.

 

Liquidity and Capital Resources

 

Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing activities. The Company continues to generate substantial cash from operating activities and remains in a strong financial position, with resources available for reinvestment in existing businesses, acquisitions and managing its capital structure on a short and long-term basis. Over the most recent three year period, the Company has generated $331.7 million in cash flow from operating activities. We use this source of liquidity to finance acquisitions, pay down outstanding debt, and fund our annual capital expenditures. Management increased its focus on working capital management and has taken actions to reduce inventories and drive incremental cash flow. If additional borrowing is needed to finance future acquisitions, approximately $219.4 million was available on the revolving credit facility as of December 31, 2008. This facility expires in 2011. We believe that, given our cash flow from operating activities and our available credit capacity, we can comply with the current terms of the credit facility and meet foreseeable financial requirements.

 

The Company believes it has sufficient liquidity and does not anticipate a significant risk to cash flows in the foreseeable future despite the current disruption of the credit markets, because the Company operates in a

relatively stable industry and has sizable market share across its product lines. Our long-term financing needs will depend largely on potential acquisition activity.

 

The impact of the reduction in equity values of the stock market has resulted in a reduced funded balance of our Pension Plan, and will require additional cash contributions, which we expect to fund by cash flows from operations. The Company expects to make contributions of approximately $7.0 million in 2009.

 

Sources of Capital

 

Revolving Credit Facility — On August 30, 2007, the Company entered into Amendment No. 2 to our unsecured revolving Credit Agreement, as amended (the “Credit Agreement”), dated June 27, 2005, with a group of participating financial institutions. Among other things, Amendment No. 2 reduces the available liquidity requirement with respect to permitted acquisitions and reduces the required consolidated interest coverage ratio at the end of each fiscal quarter. The Company also exercised its option under the Credit Agreement to increase the aggregate commitments under the revolving credit facility from $500 million to $600 million. The Credit Agreement also provides for a $75 million letter of credit sublimit, against which $8.6 million in letters of credit have been issued but undrawn. 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. We are in compliance with all applicable covenants as of December 31, 2008.

 

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 rate base. Under the terms of the agreement, $200 million in floating rate debt was swapped for a fixed rate of 2.9% interest rate base for a period of 24 months, amortizing to $50 million for an additional nine months at the same 2.9% interest rate. The Company did not apply hedge accounting and recorded the fair value of this instrument on its balance sheet within other long term liabilities. The fair value of the swap, using Level 2 inputs, was a liability of approximately $7.0 million. The Company recorded the expense related to the mark to market adjustment of $7.0 million within the Other (income) expense line of the Consolidated Statements of Income.

 

On September 22, 2006, we completed 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 TreeHouse and a group of purchasers. All of the Company’s obligations under the senior notes are fully and unconditionally guaranteed by Bay Valley Foods, LLC, a wholly-owned subsidiary of the Company. The senior notes have not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption. Net proceeds were used to repay outstanding indebtedness under the revolving Credit Agreement. We are in compliance with all applicable covenants as of December 31, 2008.

 

Seasonality

 

Our short-term financing needs are primarily for financing working capital during the year. Due to the seasonality of cucumber and fruit production driven by harvest cycles, which occur primarily during the spring and summer, inventories generally are at a low point in late spring and at a high point during the fall, increasing our working capital requirements. In addition, we build inventories of soup in the summer months in anticipation of large seasonal shipments that begin late in the third quarter.

 

 

Our cash from operations increased from $96.4 million in 2007 to $175.6 million in 2008, primarily due to an aggressive effort at reducing our working capital investment. Significant improvements were made by managing both inventories, a $70.5 million improvement compared to 2007, and accounts payable, a $22.3 million improvement compared to 2007.