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| THS > SEC Filings for THS > Form 10-Q on 4-Nov-2009 | All Recent SEC Filings |
4-Nov-2009
Quarterly Report
Business Overview
We believe we are the largest manufacturer of non-dairy powdered creamer and pickles in the United States, and the largest manufacturer of private label salad dressings in the United States and Canada, based upon total sales volumes. We believe we are also the leading retail private label supplier of non-dairy powdered creamer, soup and pickles in the United States, and jams in Canada. We sell our products primarily to the retail grocery and foodservice channels.
The following discussion and analysis presents the factors that had a material effect on our results of operations for the three and nine months ended September 30, 2009 and 2008. Also discussed is our financial position, as of the end of those periods. This should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes to those Condensed Consolidated Financial Statements included elsewhere in this report. This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements.
We discuss the following segments in this Management's Discussion and Analysis of Financial Condition and Results of Operations: North American Retail Grocery, Food Away From Home, and Industrial and Export. The key performance indicators of our segments are net sales dollars, gross profit and direct operating income, which is gross profit less the cost of transporting products to customer locations (referred to in the tables below as "freight out"), commissions paid to independent sales brokers, and direct sales and marketing expenses.
Our current operations consist of the following:
• Our North American Retail Grocery segment sells branded and private label products to customers within the United States and Canada. These products include pickles, peppers, relishes, Mexican sauces, condensed and ready to serve soup, broths, gravies, jams, salad dressings, sauces, non-dairy powdered creamer, aseptic products, and infant feeding products.
• Our Food Away From Home segment sells pickle products, non-dairy powdered creamers, Mexican sauces, aseptic and refrigerated products, and sauces to food service customers, including restaurant chains and food distribution companies, within the United States and Canada.
• Our Industrial and Export segment includes the Company's co-pack business and non-dairy powdered creamer sales to industrial customers for use in industrial applications, including for repackaging in portion control packages and for use as an ingredient by other food manufacturers. Export sales are primarily to industrial customers outside of North America.
Current economic conditions continue to remain constrained. During these times, the Company has focused its efforts not only on protecting its volume, but also on cost containment, pricing and margin improvement. This strategy has resulted in direct operating income growth of 23.7% for the three months ended September 30, 2009 when compared to the three months ended September 30, 2008. Likewise, direct operating income increased 23.0% for the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008.
Recent Developments
During the fourth quarter of 2009, the Company will begin implementation of an Enterprise Resource Planning ("ERP") system. The Company will utilize a combination of internal and external resources and plans for certain modules to be completed during 2011 with final completion in 2012. The Company expects cash flows from operations will be sufficient to fund the estimated project costs.
Results of Operations
The following table presents certain information concerning our financial
results, including information presented as a percentage of net sales:
Three Months Ended September 30, Nine Months Ended September 30,
2009 2008 2009 2008
Dollars Percent Dollars Percent Dollars Percent Dollars Percent
(Dollars in thousands)
Net sales $ 378,865 100.0 % $ 374,576 100.0 % $ 1,106,866 100.0 % $ 1,102,568 100.0 %
Cost of sales 298,347 78.7 301,416 80.5 874,793 79.0 890,390 80.8
Gross profit 80,518 21.3 73,160 19.5 232,073 21.0 212,178 19.2
Operating
expenses:
Selling and
distribution 25,671 6.8 29,060 7.7 79,969 7.2 86,672 7.9
General and
administrative 20,752 5.5 15,959 4.3 56,388 5.1 46,961 4.3
Other
operating
(income)
expense, net (14,354 ) (3.8 ) 722 0.2 (13,929 ) (1.2 ) 12,572 1.1
Amortization
expense 3,375 0.9 3,331 0.9 9,954 0.9 10,346 0.9
Total
operating
expenses 35,444 9.4 49,072 13.1 132,382 12.0 156,551 14.2
Operating
income 45,074 11.9 24,088 6.4 99,691 9.0 55,627 5.0
Other (income)
expense:
Interest
expense 4,807 1.2 6,493 1.7 14,144 1.2 21,785 2.0
Interest
income (21 ) - - - (39 ) - (107 ) -
Loss (gain) on
foreign
currency
exchange (2,968 ) (0.8 ) 1,869 0.5 (4,772 ) (0.4 ) 3,724 0.3
Other income,
net (151 ) - (87 ) - (1,416 ) (0.1 ) (268 ) -
Total other
expense 1,667 0.4 8,275 2.2 7,917 0.7 25,134 2.3
Income before
income taxes 43,407 11.5 15,813 4.2 91,774 8.3 30,493 2.7
Income taxes 15,343 4.1 4,733 1.2 32,553 2.9 9,060 0.8
Net income $ 28,064 7.4 % $ 11,080 3.0 % $ 59,221 5.4 % $ 21,433 1.9 %
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Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Net Sales - Third quarter net sales increased 1.1% to $378.9 million in 2009 compared to $374.6 million in the third quarter of 2008. The increase is primarily due to price increases taken in the second half of 2008, which more than offset the volume declines in the quarter and reduced revenues from the impact of foreign currency fluctuations. Net sales by segment are shown in the following table:
Three Months Ended September 30,
$ Increase/ % Increase/
2009 2008 (Decrease) (Decrease)
(Dollars in thousands)
North American Retail Grocery $ 238,891 $ 221,814 $ 17,077 7.7 %
Food Away From Home 78,982 77,189 1,793 2.3 %
Industrial and Export 60,992 75,573 (14,581 ) (19.3 )%
Total $ 378,865 $ 374,576 $ 4,289 1.1 %
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Cost of Sales - All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, including costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to our own distribution centers. Cost of sales as a percentage of net sales was 78.7% in the third quarter of 2009 compared to 80.5% in 2008. Although we have experienced increases in certain costs such as metal caps, cans and lids, glass and meat products in the third quarter of 2009 compared to 2008, these increases have been more than offset by decreases in the cost of casein, oils and plastic containers. Raw material, ingredient and packaging costs continue to be volatile, and we anticipate this trend to continue. The combination of price increases and the changes in commodity costs in the third quarter of 2009 versus 2008, have resulted in improvement in our consolidated gross margins.
Operating Expenses - Total operating expenses were $35.4 million during the third quarter of 2009 compared to $49.1 million in 2008. Selling and distribution expenses decreased $3.4 million or 11.7% in the third quarter of 2009 compared to the third quarter of 2008 primarily due to a reduction in freight costs related to reduced volume and a reduction in freight rates. General and administrative expenses increased $4.8 million in the third quarter of 2009 compared to 2008. The increase was primarily related to incentive based compensation expense and stock based compensation related to the Company's performance. Other operating expense decreased $15.1 million during the third quarter of 2009 compared to 2008 due to the gain related to our insurance settlement related to the fire at our New Hampton, Iowa plant.
Operating Income - Operating income for the third quarter of 2009 was $45.1 million, an increase of $21.0 million, or 87.1%, from operating income of $24.1 million in the third quarter of 2008. Our operating margin was 11.9% in the third quarter of 2009 compared to 6.4% in 2008 due to favorable pricing, cost reductions and the gain related to our insurance settlement related to the fire at our New Hampton, Iowa plant.
Interest Expense - Interest expense decreased to $4.8 million in the third quarter of 2009, compared to $6.5 million in 2008 due to lower average interest rates and lower debt levels.
Foreign Currency - The Company's foreign currency gain was $3.0 million for the three months ended September 30, 2009 compared to a loss of $1.9 million in 2008, due to fluctuations in currency exchange rates between the U.S. and Canadian dollar.
Income Taxes - Income tax expense was recorded at an effective rate of 35.3% in the third quarter of 2009 compared to 29.9% in the prior year's quarter. The Company's effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith, Canadian acquisition. As consolidated earnings for the three months ended September 30, 2009 were significantly higher than consolidated earnings for the three months ended September 30, 2008, this tax benefit was proportionally much smaller, therefore, increasing the net effective rate in the third quarter of 2009 compared to 2008. In addition, in 2009 the Company recorded an additional $0.8 million in Canadian withholding tax related to the closure of our Cambridge, Ontario plant.
Three Months Ended September 30, 2009 Compared to Three Months Ended September
30, 2008 - Results by Segment
North American Retail Grocery -
Three Months Ended September 30,
2009 2008
Dollars Percent Dollars Percent
(Dollars in thousands)
Net sales $ 238,891 100.0 % $ 221,814 100.0 %
Cost of sales 183,240 76.8 172,309 77.7
Gross profit 55,651 23.2 49,505 22.3
Freight out and commissions 12,019 5.0 14,677 6.6
Direct selling and marketing 6,738 2.8 6,115 2.8
Direct operating income $ 36,894 15.4 % $ 28,713 12.9 %
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Net sales in the North American Retail Grocery segment increased by $17.1 million, or 7.7% in the third quarter of 2009 compared to the third quarter of 2008. This change in net sales from 2008 to 2009 was due to the following:
Dollars Percent
(Dollars in thousands)
2008 Net sales $ 221,814
Volume 5,493 2.5 %
Pricing 17,765 8.0
Foreign currency (4,022 ) (1.8 )
Mix/other (2,159 ) (1.0 )
2009 Net sales $ 238,891 7.7 %
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The increase in net sales from 2008 to 2009 resulted primarily from higher unit sales and the carryover effect of price increases taken in the second half of 2008. Overall volume is higher in the third quarter of 2009 compared to that of 2008, primarily due to new customers and line extensions in the pickle, Mexican sauces and salad dressings product lines. These increases were partially offset by declines in our infant feeding products. Also negatively impacting net sales are foreign currency fluctuations.
Cost of sales as a percentage of net sales decreased from 77.7% in the third quarter of 2008 to 76.8% in 2009 primarily as a result of price increases taken in the second half 2008 to offset the commodity, material and certain packaging cost increases previously incurred by the Company. Also contributing to the decrease were several cost reduction initiatives, a shift in sales mix and moving away from certain low margin customers over the past year and net declines in raw material and packaging costs.
Freight out and commissions paid to independent sales brokers were $12.0 million in the third quarter of 2009 compared to $14.7 million in 2008, a decrease of 18.1%, primarily due to lower freight costs, as fuel prices have decreased since last year.
Direct selling and marketing increased $0.6 million, or 10.2% from 2008 primarily due to increased levels of incentive based compensation associated with the Company's overall performance.
Food Away From Home -
Three Months Ended September 30,
2009 2008
Dollars Percent Dollars Percent
(Dollars in thousands)
Net sales $ 78,982 100.0 % $ 77,189 100.0 %
Cost of sales 65,702 83.2 64,050 83.0
Gross profit 13,280 16.8 13,139 17.0
Freight out and commissions 2,627 3.3 3,469 4.5
Direct selling and marketing 1,628 2.1 1,470 1.9
Direct operating income $ 9,025 11.4 % $ 8,200 10.6 %
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Net sales in the Food Away From Home segment increased by $1.8 million, or 2.3%, in the third quarter of 2009 compared to the prior year. The change in net sales from 2008 to 2009 was due to the following:
Dollars Percent
(Dollars in thousands)
2008 Net sales $ 77,189
Volume (104 ) (0.1 )%
Pricing 1,986 2.5
Foreign currency (69 ) (0.1 )
Mix/other (20 ) -
2009 Net sales $ 78,982 2.3 %
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Net sales increased during the third quarter of 2009 compared to 2008 primarily due to increased pricing in response to commodity cost increases over the past year. Price increases and new customers partially offset lower volumes resulting from the recent economic downturn, which led consumers to reduce their spending on dining and eating out. While overall volume contracted slightly in the third quarter of 2009 across most of the products sold within the segment, the Company experienced modest sales and volume increases in the aseptic and Mexican sauces products.
Cost of sales as a percentage of net sales increased from 83.0% in the third quarter of 2008 to 83.2% in 2009, due to costs associated with re-work of certain products, offset by net declines in raw material and packaging costs.
Freight out and commissions paid to independent sales brokers were $2.6 million in the third quarter of 2009 compared to $3.5 million in 2008, a decrease of 24.3%, primarily due to lower freight costs, as fuel costs have decreased since last year.
Direct selling and marketing increased $0.2 million in the third quarter of 2009 compared to 2008, an increase of 10.7% primarily due to higher levels of incentive based compensation associated with the Company's overall performance.
Industrial and Export -
Three Months Ended September 30,
2009 2008
Dollars Percent Dollars Percent
(Dollars in thousands)
Net sales $ 60,992 100.0 % $ 75,573 100.0 %
Cost of sales 49,232 80.7 65,057 86.1
Gross profit 11,760 19.3 10,516 13.9
Freight out and commissions 1,396 2.3 2,087 2.8
Direct selling and marketing 508 0.8 240 0.3
Direct operating income $ 9,856 16.2 % $ 8,189 10.8 %
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Net sales in the Industrial and Export segment decreased $14.6 million or 19.3% in the third quarter of 2009 compared to the prior year. The change in net sales from 2008 to 2009 was due to the following:
Dollars Percent
(Dollars in thousands)
2008 Net sales $ 75,573
Volume (18,874 ) (25.0 )%
Pricing (2,502 ) (3.3 )
Foreign currency 443 0.6
Mix/other 6,352 8.4
2009 Net sales $ 60,992 (19.3 )%
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The decrease in net sales is primarily due to reduced volumes resulting from a decline in co-pack sales of branded products for other food companies. While the decline in net sales included the majority of the products sold within this segment, the most significant declines were in the non-dairy powdered creamer, soup and infant feeding categories. Partially offsetting the volume declines was a shift in product sales mix.
Cost of sales as a percentage of net sales decreased from 86.1% in the third quarter of 2008 to 80.7% in 2009 reflecting productivity improvements realized in the quarter and net declines in raw material and packaging costs.
Freight out and commissions paid to independent sales brokers were $1.4 million in the third quarter of 2009 compared to $2.1 million in 2008, a decrease of 33.1%, primarily due to reduced volumes and lower freight costs, as fuel costs have decreased since last year.
Direct selling and marketing was $0.5 million in the third quarter of 2009 compared to $0.2 million in the third quarter of 2008, an increase of $0.3 million, primarily due to higher levels of incentive based compensation associated with the Company's overall performance.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net Sales - Net sales increased $4.3 million to $1,106.9 million in the first nine months of 2009 compared to $1,102.6 million in the first nine months of 2008. Reduced volume, the impact of foreign currency and a shift in sales mix were offset by increased pricing. Net sales by segment are shown in the following table:
Nine Months Ended September 30,
$ Increase/ % Increase/
2009 2008 (Decrease) (Decrease)
(Dollars in thousands)
North American Retail Grocery $ 705,426 $ 664,334 $ 41,092 6.2 %
Food Away From Home 220,764 224,756 (3,992 ) (1.8 )%
Industrial and Export 180,676 213,478 (32,802 ) (15.4 )%
Total $ 1,106,866 $ 1,102,568 $ 4,298 0.4 %
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Cost of Sales - All expenses incurred to bring a product to completion are included in cost of sales. These costs include raw materials, ingredient and packaging costs, labor costs, facility and equipment costs, including costs to operate and maintain our warehouses, and costs associated with transporting our finished products from our manufacturing facilities to our own distribution centers. Cost of sales as a percentage of net sales was 79.0% in the first nine months of 2009 compared to 80.8% in 2008. We have experienced increases in certain costs, such as metal cans, metal caps, glass, meat products, sweeteners and cucumbers in the first nine months of 2009 compared to 2008. These increases have been more than offset by decreases in the cost of casein, oils and plastic containers. The combination of price increases, which have now caught up with the commodity cost increases experienced last year, and the net decrease in ingredient and packaging costs in the first nine months of 2009 versus 2008, have resulted in improvement in our consolidated gross margins.
Operating Expenses - Total operating expenses were $132.4 million during the first nine months of 2009 compared to $156.6 million in 2008. Selling and distribution expenses decreased $6.7 million or 7.7% in the third quarter of 2009 compared to the first nine months of 2008 primarily due to a reduction in freight costs related to lower unit volume and a reduction in freight rates. General and administrative expenses increased $9.4 million in the third quarter of 2009 compared to 2008. This increase was primarily related to incentive based compensation expense and stock based compensation related to the Company's performance. Other operating income was $13.9 million during the first nine months of 2009, compared to operating expense of $12.6 million in 2008. Income in 2009 was related to the gain on our insurance settlement relating to a fire at our New Hampton, Iowa plant, while the expense in 2008 reflected the initial Portland plant closing costs of $12.1 million and $0.5 million related to the New Hampton fire.
Operating Income - Operating income for the first nine months of 2009 was $99.7 million, an increase of $44.1 million, or 79.2%, from operating income of $55.6 million in the first nine months of 2008. Our operating margin was 9.0% in the first nine months of 2009 compared to 5.0% in 2008 due to higher profit margins resulting from favorable pricing and cost reductions, significantly lower costs in 2009 related to the Portland plant closure and the gain relating to the insurance settlement of the New Hampton fire.
Interest Expense - Interest expense decreased to $14.1 million in the first nine months of 2009, compared to $21.8 million in 2008 due to lower average interest rates and lower debt levels.
Foreign Currency - Foreign currency gains were $4.8 million for the nine months ended September 30, 2009 compared to a loss of $3.7 million for the nine months ended September 30, 2008, due to fluctuations in currency exchange rates between the U.S. and Canadian dollar.
Other (Income) Expense, Net - Other income increased for the nine months ended September 30, 2009 by $1.1 million, primarily reflecting the gain associated with the Company's fair value adjustment of its interest rate swap.
Income Taxes - Income tax expense was recorded at an effective rate of 35.5% in the first nine months of 2009 compared to 29.7% in 2008. The Company's effective tax rate is favorably impacted by an intercompany financing structure entered into in conjunction with the E.D. Smith, Canadian acquisition. As consolidated earnings for the nine months ended September 30, 2009 were significantly higher than consolidated earnings for the nine months ended September 30, 2008, this tax benefit was proportionally much smaller, therefore, increasing the net effective rate in the first nine months of 2009 compared to 2008. In addition, in 2009 the Company recorded an additional $0.8 million in Canadian withholding tax related to the closure of our Cambridge, Ontario plant.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008 - Results by Segment
North American Retail Grocery -
Nine Months Ended September 30,
2009 2008
Dollars Percent Dollars Percent
(Dollars in thousands)
Net sales $ 705,426 100.0 % $ 664,334 100.0 %
Cost of sales 539,451 76.5 523,921 78.9
Gross profit 165,975 23.5 140,413 21.1
Freight out and commissions 37,558 5.3 43,446 6.5
Direct selling and marketing 21,290 3.0 17,709 2.7
Direct operating income $ 107,127 15.2 % $ 79,258 11.9 %
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Net sales in the North American Retail Grocery segment increased by $41.1 million, or 6.2% in the first nine months of 2009 compared to the first nine months of 2008. This change in net sales from 2008 to 2009 was due to the following:
Dollars Percent
(Dollars in thousands)
2008 Net sales $ 664,334
Volume (16,055 ) (2.4 )%
Pricing 76,029 11.4
Foreign currency (23,821 ) (3.5 )
Mix/other 4,939 0.7
2009 Net sales $ 705,426 6.2 %
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The increase in net sales from 2008 to 2009 resulted from the carryover effect of price increases taken in the second half of 2008 to cover the rising raw material and packaging costs, partially offset by lower case sales of infant feeding products and retail branded pickles, and the impact of foreign currency. While overall case sales decreased in this segment, the Company . . .
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