10-K 1 ths12-31x201810k.htm 10-K Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from          to
Commission File Number 001-32504
ths.jpg
TreeHouse Foods, Inc.
(Exact name of the registrant as specified in its charter)
Delaware
 
20-2311383
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification no.)
2021 Spring Road, Suite 600
 
 
Oak Brook, IL
 
60523
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code (708) 483-1300
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
 
New York Stock Exchange
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 ¨

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 ¨    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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes þ    No ¨
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.     ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new of revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes ¨    No þ
The aggregate market value of the registrant’s common stock held by non-affiliates as of June 29, 2018, based on the $52.51 per share closing price on the New York Stock Exchange on such date, was approximately $2,903.4 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 January 31, 2019 was 55,988,420.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held on April 25, 2019 are incorporated by reference into Part III of this Form 10-K.





TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
 
 
Item 15
Item 16
 
 


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements and information in this Form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”). The words “believe,” “estimate”, “project”, “expect,” “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. These forward-looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. Such factors include, but are not limited to: our level of indebtedness and related obligations; disruptions in the financial markets; interest rates; changes in foreign currency exchange rates; customer consolidation; raw material and commodity costs; competition, and our ability to continue to make acquisitions in accordance with our business strategy or effectively manage the growth from acquisitions; changes and developments affecting our industry, including customer preferences; the outcome of litigation and regulatory proceedings to which we may be a party; product recalls; changes in laws and regulations applicable to us; disruptions in or failures of our information technology systems; and labor strikes or work stoppages and other risks that are described Part I, Item 1A – Risk Factors and our other reports filed from time to time with the Securities and Exchange Commission (the “SEC”).
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date that such statements are made. 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.


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PART I
 
Item 1.
Business
References herein to “we”, “us”, “our”, “Company”, and “TreeHouse” refer to TreeHouse Foods, Inc. and its consolidated subsidiaries unless the context specifically states or implies otherwise.
We are a consumer packaged food and beverage manufacturer operating over 40 manufacturing facilities across the United States, Canada, and Italy servicing primarily retail grocery and food away from home customers. We manufacture a variety of shelf stable, refrigerated, fresh, and frozen products. We have a comprehensive offering of packaging formats and flavor profiles, and we also offer natural, organic, and preservative-free ingredients in many categories.
The Company was 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 strategic and bolt-on acquisitions. We manufacture and sell the following:
private label products to retailers, such as supermarkets, mass merchandisers, and specialty retailers, for resale under the retailers’ own or controlled labels,
private label and branded products to the foodservice industry, including foodservice distributors and national restaurant operators,
branded products under our own proprietary brands, primarily on a regional basis to retailers,
branded products under co-pack agreements to other major branded companies for their distributions, and
products to our industrial customer base for repackaging in portion control packages and for use as ingredients by other food manufacturers.
Our reportable segments, and the principal products that comprise each segment, are as follows:
principalproductsgraphic.jpg







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Net sales are relatively evenly distributed across segments:
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See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 21 to the Consolidated Financial Statements for financial information by segment.
We operate our business as Bay Valley Foods, LLC ("Bay Valley"), Sturm Foods, Inc., S.T. Specialty Foods, Inc., Cains Foods, Inc., Associated Brands, Inc., Protenergy Natural Foods, Inc., Flagstone Foods, Inc., TreeHouse Private Brands, Inc., American Italian Pasta Company, Nutcracker Brands, Inc., Linette Quality Chocolates, Inc., Ralcorp Frozen Bakery Products, Inc., Cottage Bakery, Inc., and The Carriage House Companies, Inc. in the United States, E.D. Smith Foods, Ltd., Associated Brands, Inc., Protenergy Natural Foods Corporation, BFG Canada Ltd., and Western Waffles Corp. in Canada, and Pasta Lensi, S.r.l. in Italy. Bay Valley is a Delaware limited liability company, and a 100% owned subsidiary of TreeHouse. All operating units are directly or indirectly 100% owned subsidiaries of Bay Valley.
Significant Divestitures and Acquisitions
On February 1, 2016, the Company acquired all of the outstanding common stock of Ralcorp Holdings, Inc., the corporation through which the private brands business of ConAgra Foods, Inc. (“Private Brands Business”) was operated. The Private Brands Business is a leading manufacturer of private label refrigerated and shelf stable products in the bars, bakery, cereal, condiments, pasta, and snacks categories. Ralcorp Holdings, Inc. was renamed TreeHouse Private Brands, Inc. during the first quarter of 2016.
On April 25, 2017, the Company announced that it had entered into a definitive agreement to sell its canned soup and infant feeding (“SIF”) business. The SIF business is based in Pittsburgh, Pennsylvania and produced private label condensed and ready-to-serve soup, baby food, and gravies for the Meals segment. The transaction closed on May 22, 2017 and final working capital adjustments were recorded in the fourth quarter of 2017.

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Customers and Distribution
We sell our products through various distribution channels, including grocery retailers, foodservice distributors, and industrial and export, which includes food manufacturers and repackagers of foodservice products. We have an internal sales force that manages customer relationships and a broker network for sales to retail, foodservice, and export accounts. Industrial food products are generally sold directly to customers without the use of a broker. Most of our customers purchase products from us either by purchase order or pursuant to contracts that generally are terminable at will.
Products are shipped from our production facilities directly to customers, or from warehouse distribution centers where products are consolidated for shipment to customers if an order includes products manufactured in more than one production facility or product category. We believe this consolidation of products enables us to improve customer service by offering our customers a single order, invoice, and shipment. Some customers also pick up their orders at our production facilities or distribution centers.
We sell our products to a diverse customer base, including the leading grocery retailers and foodservice operators in the United States and Canada, and also a variety of customers that purchase bulk products for industrial food applications. We currently supply more than 1,000 total customers in North America, including over 50 of the 75 largest non-convenience food retailers.
A relatively limited number of customers account for a large percentage of our consolidated net sales. For the year ended December 31, 2018, our ten largest customers accounted for approximately 59.0% of our consolidated net sales. For the years ended December 31, 2018, 2017 and 2016, our largest customer, Walmart Inc. and its affiliates, accounted for approximately 22.2%, 22.0%, and 18.7%, respectively, of our consolidated net sales. Costco Wholesale Corporation accounted for approximately 10.3% of consolidated net sales in 2017, with less than 10% in 2018 and 2016. No other customer accounted for 10% or more of the Company’s consolidated net sales. Total trade receivables with Walmart Inc. and affiliates represented less than 10.0% and 21.8% of our total trade receivables as of December 31, 2018 and 2017, respectively, when taking into account those receivables sold under our Receivables Sales Agreement (refer to Note 6 for more information). Total trade receivables with Aldi represented approximately 12.0% and 12.2% of our total trade receivables as of December 31, 2018 and 2017, respectively. Total trade receivables with Costco represented approximately 6.4% of our total trade receivables as of December 31, 2017. The Company had revenues from customers outside of the United States of approximately 9.0%, 8.8%, and 8.7% of total consolidated net sales in 2018, 2017, and 2016, respectively, with 6.9%, 6.8%, and 6.9% from Canada in 2018, 2017, and 2016, respectively. Sales are determined based on the customer destination where the products are shipped.
Backlog
We generally ship our products from inventory upon receipt of a customer order. Sales order backlog is not material to our business.
Competition
Our business faces intense competition from large branded manufacturers and highly competitive private label and foodservice manufacturers. In some instances, large branded companies manufacture private label products. The industries in which we compete are expected to remain highly competitive for the foreseeable future. Our customers do not typically commit to buy predetermined amounts of products, and many retailers utilize bidding procedures to select vendors.
We have several competitors in each of our channels. For sales of private label products to retailers, the principal competitive factors are product quality, quality of service, and price. For sales of products to foodservice, industrial, and export customers, the principal competitive factors are price, product quality, specifications, and reliability of service.
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, promotion, and price. Some of our branded competitors have significantly greater resources and brand recognition than we do.
Recent trends impacting competition include an increase in snacking and awareness of healthier and “better for you” foods. These trends, together with a surge of specialty retailers who cater to consumers looking for either the highest quality ingredients, unique packaging, products to satisfy particular dietary needs, or value offerings where consumers are looking to maximize their food purchasing power, create pressure on manufacturers to provide a full array of products to meet customer and consumer demand.

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We believe our strategies for competing in each of our business segments, which include providing superior product quality, effective cost control, an efficient supply chain, successful innovation programs, and competitive pricing, allow us to compete effectively.
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
In the aggregate, our sales are generally weighted slightly toward the second half of the year, particularly the fourth quarter, with a more pronounced impact on profitability. As our product portfolio has grown, we have shifted to a higher percentage of cold weather products. Products that show a higher level of seasonality include non-dairy powdered creamer, coffee, specialty teas, cappuccinos, hot cereal, saltine and entertainment crackers, in-store bakery items, refrigerated dough products, and certain pasta products, all of which generally have higher sales in the first and fourth quarters. Additionally, sales of broth and snack nuts are generally higher in the fourth quarter. Warmer weather products such as dressings, pickles, and condiments typically have higher sales in the second quarter, while drink mixes generally show higher sales in the second and third quarters. As a result of our product portfolio and the related seasonality, our financing needs are generally highest in the first and third quarters due to inventory builds, while cash flow is highest in the second and fourth quarters following the seasonality of our sales.
Raw Materials and Supplies
Our raw materials consist of ingredients and packaging materials. Principal ingredients used in our operations include casein, cheese, cocoa, coconut oil, coffee, corn and corn syrup, cucumbers, eggs, fruit, non-fat dry milk, nuts (almonds, cashews, peanuts, and pecans), oats, palm oil, peppers, rice, soybean oil, sugar, tea, tomatoes, and wheat (including durum wheat). These ingredients are generally purchased under supply contracts. We believe these ingredients generally are available from a number of suppliers. The cost of raw materials used in our products may fluctuate due to weather conditions, regulations, fuel prices, energy costs, labor disputes, transportation delays, political unrest, industry, general U.S. and global economic conditions, or other unforeseen circumstances. The most important packaging materials and supplies used in our operations are cartons, composite cans, corrugated containers, glass, metal cans, metal closures, and plastic. Most packaging materials are purchased under long-term supply contracts. We believe these packaging materials are generally available from a number of suppliers. Volatility in the cost of our raw materials and packaging supplies can adversely affect our performance, as price changes often lag behind changes in costs, and we are not always able to adjust our pricing to reflect changes in raw material and supply costs.
For additional discussion of the risks associated with the raw materials used in our operations, see Part 1, Item 1A – Risk Factors and Item 7 - Known Trends and Uncertainties.
Working Capital
Our short-term financing needs are primarily for financing working capital and are generally highest in the first and third quarters as inventory levels increase relative to other quarters, due to the seasonal nature of our business. As a result of our product portfolio and the related seasonality, our financing needs are generally highest in the first and third quarters, while cash flow is highest in the second and fourth quarters following the seasonality of our sales.
Employees
As of December 31, 2018, our work force consisted of approximately 12,700 full-time employees, with 10,600 in the United States, 2,000 in Canada, and 100 in Italy.
Regulatory Environment and Environmental Compliance
The conduct of our businesses, and the production, distribution, sale, labeling, safety, transportation, and use of our products, are subject to various laws and regulations administered by federal, state, and local governmental agencies in the United States, as well as to foreign laws and regulations administered by government entities and agencies in markets where we operate. It is our policy to abide by the laws and regulations that apply to our businesses.

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We are subject to national and local environmental laws in the United States and in foreign countries in which we do business including laws relating to water consumption and treatment, air quality, waste handling and disposal, and other regulations intended to protect public health and the environment. We are committed to meeting all applicable environmental compliance requirements.
The cost of compliance with national and international laws does not have, and is not expected to have, a material financial impact on our capital expenditures, earnings, or competitive position.
Executive Officers as of February 14, 2019
Executive Officer
 
Age
 
Title
Steven Oakland
 
57
 
Chief Executive Officer and President since March 2018.
Matthew J. Foulston
 
54
 
Executive Vice President and Chief Financial Officer since December 2016.
Thomas E. O'Neill
 
63
 
Executive Vice President since July 2011.  General Counsel, Chief Administrative Officer and Corporate Secretary since January 2005.
Lori G. Roberts
 
58
 
Senior Vice President, Human Resources since January 2015. Senior Vice President, Chief Human Resources Officer since January 2019.
C. Shay Braun
 
51
 
Senior Vice President, Chief Operations Officer since January 2019.
Triona C. Schmelter
 
49
 
Senior Vice President, Division President, Meal Solutions since January 2019 (1).
Mark A. Fleming
 
48
 
Senior Vice President, Division President, Baked Goods since January 2019.
Maurice "Moe" Alkemade
 
51
 
Senior Vice President, Division President, Beverages since January 2019.
Chris C. Wilkins
 
47
 
Senior Vice President, Division President, Snacks since January 2019.
(1) Refer to Note 21 to the Consolidated Financial Statements in this report for additional information regarding a change in organizational structure beginning in the first quarter of 2019.
Available Information
We make available, free of charge, through the “Investor Relations—SEC Filings” link on our Internet website at www.treehousefoods.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. We use our Internet website, through the “Investor Relations” link, as a channel for routine distribution of important information, including news releases, analyst presentations, and financial information. We are not, however, including the information contained on our website, or information that may be accessed through links to our website, as part of, or incorporating such information by reference into, this Form 10-K. Copies of any materials the Company files with the SEC can be obtained free of charge through the SEC’s website at http://www.sec.gov or by calling the SEC’s Office of Investor Education and Assistance at 1-800-732-0330.

Item 1A.
Risk Factors

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.

Our TreeHouse 2020 restructuring plan could result, from time to time, in the impairment of assets, including goodwill and other intangible assets, and we may not realize some or all of the anticipated benefits of this plan in the anticipated time frame or at all.

On August 3, 2017, the Company announced the TreeHouse 2020 restructuring program, which is a comprehensive strategic blueprint intended to accelerate long-term growth through optimization of our manufacturing network, transformation of our mixing centers and warehouse footprint, and leveraging of systems and processes to drive performance. The plan targets a 300 basis point operating margin improvement by the end of 2020 through a comprehensive program of category and customer portfolio management, as well as manufacturing and supply chain optimization. This program began in 2017 and will be executed through 2020.  In 2017, the Company announced the closure of the Brooklyn Park, Minnesota and Plymouth, Indiana facilities, as well as the downsizing of the Dothan, Alabama facility.  In the first quarter of 2018, the Company announced the closure of the Company’s Visalia, California and Battle Creek, Michigan facilities. During the third quarter of 2018, the Company announced the closure of its Omaha, Nebraska office. TreeHouse 2020 could result, from time to time, in significant financial charges for the impairment of assets, including goodwill and other intangible assets. The calculation of anticipated charges, as well as cost savings and other benefits, resulting from our corporate restructuring are based on estimates and assumptions which are subject to uncertainties. If any of our estimates or assumptions prove to be inaccurate, we may incur greater than expected charges, which could have a material adverse effect on our financial condition and results of operations.

Events and circumstances, such as financial or strategic difficulties, delays and unexpected costs may occur that could result in our not realizing all or any of the anticipated benefits on our expected timetable or at all, and there can be no assurance that any benefits we realize from these restructuring efforts will be sufficient to offset the restructuring charges and other costs that we expect to incur. If our restructuring measures are not successful, we may need to undertake additional cost reduction efforts, which could result in future charges. If we fail to realize the anticipated benefits from these measures, our financial condition and operating results may be adversely affected.

In addition, we expect that our restructuring plan will require a substantial amount of management and operational resources. These and related demands on our resources may divert the Company’s attention from existing core businesses, potentially disrupting our operations and adversely affecting our relationships with suppliers and customers. As a result, our financial condition, results of operations or cash flows may be adversely affected.

Our indebtedness and our ability to service our debt could adversely affect our business and financial condition.

As of December 31, 2018, we had $2,321.3 million of outstanding indebtedness, including a $488.8 million term loan (“Term Loan A”) maturing on January 31, 2025, a $851.2 million term loan (“Term Loan A-1” and, together with Term Loan A, the “Term Loans”) maturing on February 1, 2023, $375.9 million of 4.875% notes due March 15, 2022 (the “2022 Notes”), $602.9 million of 6.0% notes due February 15, 2024 (the “2024 Notes”), and $2.5 million of capital lease obligations and other debt. The Revolving Credit Facility (as defined in Note 12) and the Term Loans are known collectively as the “Credit Agreement.” If new debt is added to our current debt levels, the risks described herein would increase. The degree to which we are leveraged could have adverse consequences to us, limiting management's choices in responding to business, economic, regulatory and other competitive conditions. In addition, our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, dispose of material assets or operations, seek additional debt or equity capital, or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.


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Disruptions in the financial markets could impair our ability to fund our operations or limit our ability to expand our business.

United States capital credit markets have experienced volatility, dislocations, and liquidity disruptions that caused tightened access to capital markets and other sources of funding. Capital and credit markets and the U.S. and global economies could be affected by additional volatility or economic downturns in the future. Events affecting the credit markets could have an adverse effect on other financial markets in the United States, which may make it more difficult or costly for us to raise capital through the issuance of common stock or other equity securities. There can be no assurance that future volatility or disruption in the capital and credit markets will not impair our liquidity or increase our costs of borrowing. Our business could also be negatively impacted if our suppliers or customers experience disruptions resulting from tighter capital and credit markets, or a slowdown in the general economy. 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.

Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks to our financial condition described above.

We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness.

The terms of the agreements governing our indebtedness may restrict our current and future operations.

The agreements governing our indebtedness contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to: incur additional indebtedness and guarantee indebtedness; pay dividends or make other distributions or repurchase or redeem our capital stock; prepay, redeem, or repurchase certain subordinated debt; issue certain preferred stock or similar equity securities; make loans and investments; sell assets; incur liens; enter into transactions with affiliates; enter into agreements restricting our subsidiaries’ ability to pay dividends; and consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets.

In addition, our Credit Agreement requires us to maintain a certain consolidated net leverage ratio tested on a quarterly basis. Our ability to meet these financial covenants can be affected by events beyond our control, and we may be unable to meet the required ratio.

A breach of the covenants or restrictions under the agreements governing our indebtedness could result in an event of default under the applicable indebtedness. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross acceleration or cross default provision applies. In addition, an event of default under the Credit Agreement may permit our lenders to terminate all commitments to extend further credit under those facilities. In the event our lenders or noteholders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, we may be:

limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, substantial indebtedness and credit ratings could materially adversely affect the availability and terms of our financing.

Increases in interest rates may negatively affect earnings.

As of December 31, 2018, the aggregate principal amount of our debt instruments with exposure to interest rate risk was approximately $1,340.0 million, based on the outstanding debt balance of our Credit Agreement. As a result, higher interest rates will increase the cost of servicing our financial instruments with exposure to interest rate risk, and could materially reduce our profitability and cash flows. Certain of our variable rate debt currently uses LIBOR as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in a change in the cost of our variable rate debt. In June 2016, we entered into $500.0 million of long-term interest rate swap agreements to lock into a fixed LIBOR rate base, beginning on January 31, 2017 and ending on

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February 28, 2020. In February 2018, we entered into an additional $1,625.0 million of staggered long-term interest rate swap agreements to lock into a fixed LIBOR base rate. As of December 31, 2018, each one percentage point change in LIBOR rates would result in an approximate $4.7 million change in the annual cash interest expense, before any principal payment, on our financial instruments with exposure to interest rate risk, including the impact of the $875 million in interest rate swap agreements that were effective in 2018.

Fluctuations in foreign currencies may adversely affect earnings.

The Company is exposed to fluctuations in foreign currency exchange rates. The Company’s foreign subsidiaries purchase various inputs that are based in U.S. dollars; accordingly, the profitability of the foreign subsidiaries are subject to foreign currency transaction gains and losses that affect earnings. We manage the impact of foreign currency fluctuations related to raw material purchases using foreign currency contracts. We are also exposed to fluctuations in the value of our foreign currency investment in our Canadian subsidiaries, which includes Canadian dollar denominated intercompany notes. We translate the Canadian and Italian assets, liabilities, revenues and expenses into U.S. dollars at applicable exchange rates. Accordingly, we are exposed to volatility in the translation of foreign currency denominated earnings due to fluctuations in the values of the Canadian dollar and Euro, which may negatively impact the Company’s results of operations and financial position.

We operate in the highly competitive and rapidly changing food industry.

The food industry is highly competitive, and faces increased competition as a result of consolidation, channel proliferation and the growth of online food retailers and new market participants. We face competition across our product lines from other companies that have varying abilities to withstand changes in market conditions. Some of our competitors have substantial financial, marketing, and other resources, and competition with them in our various business segments and product lines could cause us to reduce prices, increase capital, marketing or other expenditures, or lose sales, which could have a material adverse effect on our business and financial results. Category sales and growth could also be adversely impacted if we are not successful in introducing new products.

Some customer buying decisions are based on a periodic bidding process in which the successful bidder is reasonably assured the selling of its selected product to the food retailer, super center, mass merchandiser, or foodservice distributors, until the next bidding process. Our sales volume may decrease significantly if our offer is too high and we lose the ability to sell products through these channels, even temporarily. Alternatively, we risk reducing our margins if our offer is successful but below our desired price point. Either of these outcomes may adversely affect our results of operations. Additionally, competition can impact our ability to pass on increased costs or otherwise increase prices.

As new and evolving distribution channels acquire greater attention with consumers, we will need to evaluate whether our business methods and processes can be utilized or adopted in a manner that permits us to successfully serve these distribution channels. Our inability to offer competitive products to these customer segments could have an adverse impact on our results of operations.

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, quality demands, eating habits, and overall purchasing trends 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.

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 strong. We expect that a significant portion of our net sales will continue to arise from a small number of customers, consisting primarily of traditional grocery retailers, mass merchandisers, and foodservice operators. For the year ended December 31, 2018, our ten largest customers accounted for approximately 59.0% of our consolidated net sales. For the year ended December 31, 2018, our largest customer, Walmart Inc. and its affiliates, accounted for approximately 22.2% of our consolidated net sales. No other customer accounted for 10% or more of the Company’s consolidated net sales. These customers typically do not enter into written contracts with fixed purchase commitments, 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 decline, this reduction may have a material adverse effect on our business, results of operations, and financial condition.


10



Further, over the past several years, the retail grocery and foodservice industries have experienced a consolidation trend, which has resulted in mass merchandisers and non-traditional grocers, such as ecommerce grocers with direct-to-consumer channels, 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. As this trend continues and such customers grow larger, they may seek to use their position to improve their profitability through improved efficiency, lower pricing, or increased promotional programs. If we are unable to use our scale, product innovation, and category leadership positions to respond to these demands, our profitability or volume growth could be negatively impacted. Additionally, if the surviving entity of a consolidation or similar transaction is not a current customer of the Company, we may lose significant business once held with the acquired retailer.

Consolidation also increases the risk that adverse changes in our customers' business operations or financial performance will have a corresponding material adverse effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease, or cancel purchases of our products, or delay or fail to pay us for previous purchases.

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

The costs of raw materials, 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. We are also subject to delays caused by interruptions in production of raw materials based on conditions not within our control. Such conditions include job actions or strikes by employees of suppliers, weather, crop conditions, transportation shortages and interruptions, natural disasters, sustainability issues or other catastrophic events. While individual input cost changes varied throughout the year, with certain costs increasing and others decreasing, input costs were in the aggregate unfavorable in 2018 compared to 2017. We expect the volatile nature of these costs to continue with an overall long-term upward trend.

We manage the impact of increases in the costs of raw materials, wherever possible, by locking in prices on quantities required to meet our production requirements. The price of oil has been particularly volatile recently and there can be no assurance that our hedging activities will result in the optimal price. In addition, we attempt to offset the effect of such increases by raising prices to our customers. However, changes in the prices of our products may lag behind changes in the costs of our materials. Competitive pressures may also 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 increasing raw material, packaging, and fuel costs, our operating profits and margins could be materially affected. In addition, in instances of declining input costs, customers may look for price reductions in situations where we have locked into purchases at higher costs.

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 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 differential between private label products and branded products may become less significant.

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, promotion, and price. Some of our branded competitors have significantly greater resources and brand recognition than we do.

Competitive pressures or other factors could cause us to lose sales, which may require us to lower prices, increase the use of discounting or promotional programs, or increase marketing expenditures, 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.

Our future growth depends, in large part, on our acquisition of additional food manufacturing businesses, products or processes. 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

11



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 due to, 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 subject to product liability claims for misbranded, adulterated, contaminated, or spoiled food products.

We sell food products for human consumption, which involves 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.

New laws or regulations or changes in existing laws or regulations could adversely affect our business.

The food industry is subject to a variety of federal, state, local, and foreign laws and regulations, including those related to food safety, food labeling, and environmental matters. Governmental regulations also affect taxes and levies, healthcare costs, energy usage, international trade, immigration, and other labor issues, all of which may have a direct or indirect effect on our business or those of our customers or suppliers. Changes in these laws or regulations, or the introduction of new laws or regulations, could increase the costs of doing business for the Company, our customers, or suppliers, or restrict our actions, causing our results of operations to be adversely affected.

Increased government regulations to limit carbon dioxide and other greenhouse gas emissions as a result of concern over climate change may result in increased compliance costs, capital expenditures, and other financial obligations for us. We use natural gas, diesel fuel, and electricity in the manufacturing and distribution of our products. Legislation or regulation affecting these inputs could materially affect our profitability. In addition, climate change could affect our ability to procure needed commodities at costs and in quantities we currently experience, and may require us to make additional unplanned capital expenditures.

As a result of changes to U.S. administrative policy, among other possible changes, there may be changes to existing trade agreements, such as the North American Free Trade Agreement (“NAFTA”) and its anticipated successor agreement, the U.S.-Mexico-Canada Agreement (“USMCA”), which is subject to approval by the United States, Mexico and Canada. It remains unclear what the U.S. administration or foreign governments, including Canada, will or will not do with respect to tariffs, NAFTA, USMCA or other international trade agreements and policies. Any changes to NAFTA could impact our operations. A trade war or changes in U.S. political, regulatory and economic conditions or laws and policies governing U.S. tax laws and foreign trade in countries where we or our customers operate, in particular Canada and Italy, could adversely affect our operating results and our business.

The 2017 comprehensive tax reform bill could adversely affect our business and financial condition.

On December 22, 2017, The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in the United States. The enacted federal income tax law contains significant changes to corporate taxation, including, but not limited to, a reduction of the corporate tax rate to 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings, a one-time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, and elimination of U.S. tax on foreign earnings (subject to certain important exceptions), which are effective for tax years beginning after December 31, 2017. See Note 11 to the Consolidated Financial Statements for more information regarding the impact of the law change to U.S. federal income taxes. Ambiguities and uncertainties remain around certain provisions of the Tax Act due to the absence of current guidance from the IRS. Similarly, state governments and their taxing authorities continue to enact laws and issue guidance as to whether and how they intend to conform with the Tax Act. We used reasonable interpretations and assumptions about these provisions in our determination of the Tax Act’s impact to the Company. Subsequent guidance or technical corrections related to the Tax Act may be issued and could materially impact the Company’s income taxes and financial position.


12



If we are unable to attract, hire or retain key employees or a highly skilled and diverse global workforce, it could have an adverse impact on our business, financial condition and results of operations.

The competitive environment requires us to attract, hire, retain and develop key employees, including our executive officers and senior management team, and maintain a highly skilled and diverse global workforce. We compete to attract and hire highly skilled employees and our own employees are highly sought after by our competitors and other companies. Competition could cause us to lose talented employees, and unplanned turnover could deplete our institutional knowledge and result in increased costs due to increased competition for employees.

Our business operations could be disrupted if our information technology systems fail to perform adequately or are breached.

The efficient operation of our business depends on our information technology systems. We rely on our information technology systems, including the internet, to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. These information technology systems, some of which are dependent on services provided by third parties, may be susceptible to damage, invasions, disruptions, or shutdowns due to hardware failures, computer viruses, hacker attacks, and other cybersecurity risks, telecommunication failures, user errors, employee error or malfeasance, catastrophic events, natural disasters, fire or other factors. If we are unable to prevent or adequately respond to and resolve these breaches, disruptions or failures, our business may be disrupted, and we may suffer other adverse consequences such as data loss, financial or reputational damage or penalties, legal claims or proceedings, remediation costs, or the loss of sales or customers.

Changes in weather conditions, natural disasters, and other events beyond our control could adversely affect our results of operations.

Changes in weather conditions, climate changes, and natural disasters such as floods, droughts, frosts, earthquakes, hurricanes, fires, or pestilence, may affect the cost and supply of commodities and raw materials. Additionally, these events could result in reduced supplies of raw materials. Our competitors may be affected differently by weather conditions and natural disasters depending on the location of their suppliers and operations. Further, changes in weather could impact consumer demand and our earnings may be affected by seasonal factors including the seasonality of our supplies and such changes in consumer demand. Damage or disruption to our production or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes, or other reasons could impair our ability to manufacture or sell our products. Failure to take adequate steps to reduce the likelihood or mitigate the potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single location, could adversely affect our business and results of operations, as well as require additional resources to restore our supply chain.

Disruption of our supply chain or distribution capabilities could have an adverse effect on our business, financial condition, and results of operations.

Our ability to manufacture, move, and sell products is critical to our success. We are subject to damage or disruption to raw material supplies or our manufacturing or distribution capabilities (in particular, to the extent that our raw materials are sourced globally) due to weather, including any potential effects of climate change, natural disaster, fire, terrorism, adverse changes in political conditions or political unrest, pandemic, strikes, import restrictions, or other factors that could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition, and results of operations, as well as require additional resources to restore our supply chain.

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

Currently, collective bargaining agreements cover a significant number of our full-time distribution, production, and maintenance employees. A dispute with a union or employees represented by a union could result in production interruptions caused by work stoppages. If a strike or work stoppage were to occur, our results of operations could be adversely affected.

Item 1B.
Unresolved Staff Comments
None.

13



Item 2.
Properties
We operate the following production facilities, the majority of which we own, as shown below. We lease our principal executive offices in Oak Brook, Illinois and other office space in Green Bay, Wisconsin; Omaha, Nebraska (1); St. Louis, Missouri (2); and Winona, Ontario, Canada. We believe our owned and leased facilities are suitable for our operations and provide sufficient capacity to meet our requirements for the foreseeable future. See Note 3 to the Consolidated Financial Statements for information regarding restructuring programs including facility closures. The following chart lists the location and principal products produced (by segment) at our production facilities at December 31, 2018:
Baked Goods:
 
 
 
 
 
 
Lodi, California
(In-store bakery)
 
Brantford, Ontario, Canada (Frozen griddle)
 
Georgetown, Ontario, Canada (Crackers)
 
Kitchener, Ontario, Canada (Crackers)
Visalia, California (3)
(Pretzels)
 
Forest Park, Georgia (Refrigerated dough)
 
South Beloit, Illinois
(Cookies)
 
Princeton, Kentucky
(Crackers)
Fridley, Minnesota
(In-store bakery)
 
Tonawanda, New York (Cookies)
 
Hanover, Pennsylvania
(Pretzels)
 
Lancaster, Pennsylvania (Pretzels)
Womelsdorf, Pennsylvania (Candy)
 
Carrollton, Texas
(Refrigerated dough)
 
Milwaukee, Wisconsin
(Pita chips)
 
Ogden, Utah*
(In-store bakery)
 
 
 
 
 
 
 
Beverages:
 
 
 
 
 
 
Delta, British Columbia, Canada* (Specialty tea)
 
Richmond Hill, Ontario, Canada* (Broths and gravies)
 
Pecatonica, Illinois
(Non-dairy powdered creamer)
 
New Hampton, Iowa
(Non-dairy powdered creamer)
Cambridge, Maryland*
(Broths and gravies)
 
Wayland, Michigan
(Non-dairy powdered creamer)
 
Manawa, Wisconsin (5)
(Beverages)
 
Medina, New York (5)
(Beverages, and beverage enhancers)
 
 
 
 
 
 
 
Condiments:
 
 
 
 
 
 
Winona, Ontario, Canada (Jams, pies fillings, and specialty sauces)
 
Atlanta, Georgia
(Dressings, sauces, and dips)
 
Chicago, Illinois
(Refrigerated foodservice pickles)
 
Dixon, Illinois
(Aseptic cheese sauces, puddings, and gravies)
Buckner, Kentucky
(Syrups, mayonnaise, preserves, jams, barbeque, and other sauces)
 
Faison, North Carolina
(Pickles, peppers, relish, and sauces)
 
North East, Pennsylvania
(Salad dressings and mayonnaise)
 
San Antonio, Texas
(Mexican sauces)
Green Bay, Wisconsin
(Pickles, peppers, relish, and sauces)
 
 
 
 
 
 
 
 
 
 
 
 
 
Meals:
 
 
 
 
 
 
Tolleson, Arizona
(Dry pasta)
 
Cedar Rapids, Iowa
(Hot cereal)
 
Fara Gera d'Adda, Bergamo, Italy* (Dry pasta)
 
Verolanuova, Brescia, Italy
(Dry pasta)
Battle Creek, Michigan (4) (Ready-to-eat-cereal)
 
Excelsior Springs, Missouri
(Dry pasta)
 
Sparks, Nevada
(Ready-to-eat-cereal)
 
Medina, New York (5)
(Dry dinners and dry soup)
Lancaster, Ohio
(Ready-to-eat-cereal)
 
Columbia, South Carolina
(Dry pasta)
 
Kenosha, Wisconsin
(Macaroni and cheese and skillet dinners)
 
Manawa, Wisconsin (5)
(Hot cereal)
 
 
 
 
 
 
 
Snacks:
 
 
 
 
 
 
Dothan, Alabama*
(Snack nuts, trail mix)
 
Lakeville, Minnesota
(Bars, fruit snacks)
 
Minneapolis, Minnesota
(Snack nuts, trail mix)
 
Robersonville, North Carolina* (Snack nuts, trail mix)
El Paso, Texas*
(Snack nuts, trail mix)
 
 
 
 
 
 
*The Company leases these facilities.
(1)
On July 18, 2018, the Company announced the planned closure of this administrative office. See Note 3 to the Consolidated Financial Statements for more information.
(2)
On January 23, 2019, the Company announced the planned closure of this administrative office. See Note 3 to the Consolidated Financial Statements for more information.

14



(3)
On February 15, 2018, the Company announced the planned closure of this facility. See Note 3 to the Consolidated Financial Statements for more information.
(4)
On November 3, 2016, the Company announced the planned downsizing of this facility. On January 31, 2018, the Company announced the full closure of this facility. See Note 3 to the Consolidated Financial Statements for more information.
(5)
Production facility crosses multiple segments; principal products produced for each segment included within the above table.

Item 3.
Legal Proceedings

Information regarding legal proceedings is available in Note 19 to the Consolidated Financial Statements in this report.

Item 4.
Mine Safety Disclosures

Not applicable.


15



PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “THS.”
On January 31, 2019, there were 2,214 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, we will retain any earnings for the development of our business. Accordingly, no dividends are expected to be declared or paid on the common stock. The declaration of dividends is at the discretion of our board of directors (“Board of Directors”).
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 2, 2017, the Company announced that the Board of Directors adopted a stock repurchase program. The stock repurchase program authorizes the Company to repurchase up to $400 million of the Company’s common stock at any time, or from time to time. Any repurchases under the program may be made by means of open market transactions, negotiated block transactions, or otherwise, including pursuant to a repurchase plan administered in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The size and timing of any repurchases will depend on price, market and business conditions, and other factors. The Company was authorized to enter into an administrative repurchase plan for $50 million of the $400 million in fiscal 2018. The administrative repurchase plan expired as of December 31, 2018. The Company continues to have the ability to make discretionary repurchases up to an annual cap of $150 million under the $400 million total authorization. Any shares repurchased will be held as treasury stock.
The following table presents the total number of shares of common stock purchased during the fourth quarter of 2018, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase program, and the approximate dollar value of the maximum number of shares that may yet be purchased under the share repurchase program:
Period
 
Weighted Average Price Paid per Share
 
Total Number of Shares Purchased
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Maximum Number of Shares that may yet be Purchased under the Program
 
 
 
 
(in millions)
October 1 through October 31, 2018
 
$
47.24

 
0.1

 
0.1

 
$
324.9

November 1 through November 30, 2018
 
45.54

 
0.1

 
0.1

 
319.0

December 1 through December 31, 2018
 
50.99

 
0.1

 
0.1

 
316.7

For the Quarter Ended December 31, 2018
 
$
47.05

 
0.3

 
0.3

 
$
316.7


For the quarter ended December 31, 2018, the Company repurchased approximately 0.3 million shares of common stock for a total of $12.4 million.

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 December 31, 2013 through December 31, 2018. The graph and accompanying table compare the cumulative total stockholders’ return on our common stock with the cumulative total return of the S&P MidCap 400 Index and the Peer Group Index. Our Current Peer Group includes the following companies based on the similar nature of their business to ours: General Mills, Inc.; Kellogg Co.; Conagra Brands, Inc.; Post Holdings, Inc.; Campbell Soup Co.; McCormick & Co., Inc.; JM Smucker Co.; Cott Corp.; Lancaster Colony Corp.; Flowers Foods, Inc.; The Hain Celestial Group, Inc.; Snyder’s-Lance, Inc. (included through March 26, 2018 when it was acquired by Campbell Soup Co.); J&J Snack Foods Corp.; B&G Foods, Inc.; Farmer Bros. Co.; Dean Foods; and Pinnacle Foods, Inc. (included through October 25, 2018 when it was acquired by Conagra Brands, Inc). The graph assumes an investment of $100 on December 31, 2013 in each of TreeHouse Foods’ common stock, the stocks comprising the S&P MidCap 400 Index, and the Peer Group Index.


16



Comparison of Cumulative Total Return of $100 among TreeHouse Foods, Inc., S&P MidCap 400 Index, and the Peer Group Index
chart-1e6d3d1e59b0fa32857.jpg

 
 
Base
Period
 
INDEXED RETURNS
Years Ending
Company Name/Index
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
TreeHouse Foods, Inc.
 
100
 
$
124.10

 
$
113.84

 
$
104.74

 
$
71.76

 
$
73.58

S&P MidCap 400 Index
 
100
 
109.77

 
107.38

 
129.65

 
150.71

 
134.01

Peer Group
 
100
 
108.88

 
125.22

 
141.05

 
139.03

 
117.44



17



Item 6.
Selected Financial Data
The following table provides selected financial data as of and for each of the five years in the period ended December 31, 2018. The selected financial data should be read in conjunction with Item 7, and our Consolidated Financial Statements and related Notes.
 
Year Ended December 31,
 
2018
 
2017
 
2016 (1)
 
2015
 
2014 (2)
 
(in millions, except per share data)
Operating data:
 
 
 
 
 
 
 
 
 
Net sales
$
5,812.1

 
$
6,307.1

 
$
6,175.1

 
$
3,206.4

 
$
2,946.1

Operating income (loss) (3)
67.9

 
(412.8
)
 
(95.5
)
 
241.3

 
219.3

Net (loss) income
(61.4
)
 
(286.2
)
 
(228.6
)
 
114.9

 
89.9

Net (loss) earnings per basic share
$
(1.10
)
 
$
(5.01
)
 
$
(4.10
)
 
$
2.67

 
$
2.28

Net (loss) earnings per diluted share
$
(1.10
)
 
$
(5.01
)
 
$
(4.10
)
 
$
2.63

 
$
2.23

Weighted average shares -- basic
56.0

 
57.1

 
55.7

 
43.1

 
39.3

Weighted average shares -- diluted
56.0

 
57.1

 
55.7

 
43.7

 
40.2

Other data:
 
 
 
 
 
 
 
 
 
Balance sheet data (at end of period):
 
 
 
 
 
 
 
 
 
Total assets
$
5,599.3

 
$
5,779.3

 
$
6,545.8

 
$
3,702.8

 
$
3,858.3

Long-term debt, excluding current portion
2,297.4

 
2,535.7

 
2,724.8

 
1,221.7

 
1,437.7

Other long-term liabilities
170.6

 
202.1

 
202.3

 
71.6

 
67.6

Total stockholders’ equity
2,141.9

 
2,263.3

 
2,503.3

 
1,854.9

 
1,759.3

Cash flow data:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
505.8

 
$
506.0

 
$
478.6

 
$
290.6

 
$
229.6

Capital expenditures
196.2

 
185.8

 
187.0

 
86.1

 
99.2


(1)
The Company acquired the Private Brands Business in 2016.
(2)
The Company acquired Protenergy and Flagstone in 2014.
(3)
Prior periods restated due to the adoption impact of ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Refer to Note 2 for additional information.



18



Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are a consumer packaged food and beverage manufacturer operating over 40 facilities in the United States, Canada, and Italy that has a comprehensive offering of packaging formats and flavor profiles, and we also offer natural, organic, and preservative-free ingredients in many categories. We believe we are the largest manufacturer of private label snack nuts, trail mixes, refrigerated dough, crackers, pickles, salsa, non-dairy powdered creamer, ready-to-eat cereals, bouillon, and dry pasta in the United States, the largest manufacturer of private label pretzels, retail griddle items, powdered drink mixes, retail salad dressings, macaroni and cheese dinners, and instant hot cereals in both the United States and Canada, and the largest manufacturer of private label jams and pasta sauces in Canada, based on volume. We also believe we are one of the largest manufacturers of private label in-store bakery products, cookies, pitas, snack bars, table syrup, flavored syrup, barbeque sauce, preserves, and jellies in the United States, based on volume. We sell our products primarily to the retail grocery and food away from home channels. A majority of our sales are private label products.
According to independent market research studies, it is believed that nearly one in every five products sold in United States supermarkets is a private label product. Additionally, it is expected that private label market share will increase approximately 8% versus branded competitors over the next ten years. This increase is expected to be driven by retailers increasingly emphasizing private label products as a differentiator and margin builder, continued expansion of retailers which focus their business model on private label, and the continued emergence of e-commerce. In 2018, based on available industry data, private label products sold in the retail grocery channel in the United States compete with branded products on the basis of equivalent quality at a lower price. Based on available measured channel data, these private label products comprise the following approximate market share percentages of all products in their respective categories:
Private Label Market Share (1) 
newsegment.jpg
(1) Private label share of total category based on measured channels.

19



We make high quality food beverages affordable to all. Our vision is to be the undisputed solutions leader for custom brands. Our mission is to create value as our customers’ preferred manufacturing and distribution partner, providing thought leadership, superior innovation and a relentless focus on execution. To achieve our mission we have developed a four point, customer centric enterprise strategy, as depicted graphically and explained further below:
strategygraphica01.jpg
Commercial Excellence. An unrelenting focus on the customer must be at the heart of everything we do. As private label continues to grow and evolve, our strategy is to be the solutions provider for our customers. To be a solutions provider, we must: understand our customers' needs and challenges; execute flawlessly; ensure products meet quality and safety standards and are competitively priced; and continue to innovate. As a result, we have started the process of centralizing our go-to-market approach to be more retailer-friendly and to provide better service to the customer. We believe that our revised go-to-market platform will lead us to stronger and more valuable partnerships with our customers.
Operational Excellence. We strive to be the supplier of choice and a world-class partner to our customers, a great investment to our shareholders, and a great place to work for our employees. We are working to build a high performance culture, as we communicate and engage our people with common metrics and build a continuous improvement mindset whereby the status quo is challenged. As we engage, educate and enable our employees, we are building a winning mindset rooted in the new TreeHouse mission, vision and purpose. In conjunction with this tenet of our strategy, we continue to progress in our rollout of a standardized management operating system across our manufacturing facilities ("TMOS"). Through December 31, 2018, we completed full implementations of TMOS in 14 plants. We expect all of North America to be completed by year-end 2020. We also continue to work to optimize our plant and line network to simplify and streamline operations.
Optimized Portfolio. We will periodically review our portfolio in an attempt to identify areas of optimization. As part of this review, we may identify specific businesses (typically lower growth and lower margin) which may be better served by a fundamental change in tactics, strategy, or ownership. Optimizing the portfolio will allow us to focus our resources on fewer business in order to drive improved results and future cash generation.
People & Talent. We are working to build a performance-based culture. We will be disciplined in our approach to building this culture, by communicating clear goals and fostering decision ownership. Our goal is to align and incentivize our people and celebrate our successes together.
The following discussion and analysis presents the factors that had a material effect on our financial condition, changes in financial condition, and results of operations for the years ended December 31, 2018, 2017, and 2016. This should be read in conjunction with the Consolidated Financial Statements and the Notes to those Consolidated Financial Statements included elsewhere in this report.

20



This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See Cautionary Statement Regarding Forward-Looking Information for a discussion of the uncertainties, risks, and assumptions associated with these statements.
Current Market Environment
Retail food sales and volumes have been under pressure in recent years. However, trends might be starting to shift as positive sales growth has returned across most measured channels during the past year. Based on the Citi DD’s Nielsen AOC+C Data Analysis – 12/1/18 report, total retail food sales increased 0.7% over the past year as minimal volume decreases of 0.6% were more than offset by price increases of 1.3%. Private label sales and volume growth continues to outpace branded products as total private label sales in measured channels over the past year increased 3.3% compared to an increase of 0.1% for branded products. These increases were led by private label pricing and volume increases of 1.8% and 1.5%, respectively, compared to branded pricing increases of 1.7% and volume decreases of 1.6%. As such, on an industry basis, strong private label sales and volumes continue to be attractive compared to branded counterparts.

Retail sectors are continuing to experience growth in premium, better for you, natural, and organic foods (collectively referred to as “PBFY”) as consumers shift their consumptions trends towards a focus on healthier eating with cleaner labels. PBFY foods include items such as fresh or freshly prepared foods, foods with premium ingredients, natural, organic, clean label, or specialty foods, most of which are located in the perimeter of the store. Recent data shows that these product offerings are expected to be the primary growth area for both branded and private label products, and that growth in private label is expected to drive the overall growth in these product categories.  These trends are prompting companies, TreeHouse included, to increase or adjust their offerings, while retaining their commitment to provide products at reasonable prices.  The margin on these PBFY products tend to be higher and more stable than other labels.  In an effort to respond to shifting consumer demand, the Company offers an increasing variety of PBFY products, currently offering PBFY products in 28 of our categories.

Recent Developments

TreeHouse 2020

On August 3, 2017, the Company announced the TreeHouse 2020 program, which is a comprehensive strategic blueprint intended to accelerate long-term growth through optimization of our manufacturing network, transformation of our mixing centers and warehouse footprint, and leveraging of systems and processes to drive performance.  TreeHouse 2020 is a multi-year plan to fully integrate the business and reduce its cost structure in order to invest in market-differentiated capabilities, including higher growth potential product categories to serve the rapidly evolving needs of customers which are strategically focused and highly committed to their corporate brands. TreeHouse 2020 is expected to produce significant savings to achieve our operating margin expansion targets creating reinvestment opportunities to drive future growth.  Specifically, we are targeting to improve our operating margin structure by approximately 300 basis points by the end of 2020. In the short-term, while we continue to execute on these margin improvement initiatives we might experience modest sales declines due to the rationalization of low margin business.

The TreeHouse 2020 program will be executed through 2020.  In 2017, the Company announced the closure of its Brooklyn Park, Minnesota and Plymouth, Indiana facilities, as well as the downsizing of the Dothan, Alabama facility.  Production at the Brooklyn Park, Minnesota and Plymouth, Indiana facilities ceased in the fourth quarter of 2017.  The partial facility downsizing at Dothan, Alabama was completed in the third quarter of 2018.  In 2018, the Company announced the closure of its Battle Creek, Michigan and Visalia, California manufacturing facilities, as well as its Omaha, Nebraska administrative office. In addition, we have taken steps toward increasing our capacity utilization, operational margin expansion, and streamlining our plant structure to optimize our supply chain. Plant closings, line shutdowns, warehouse consolidations, and the rollout of TMOS continues to track to plan. See Note 3 to our Consolidated Financial Statements for additional information regarding restructuring programs.

Structure to Win 

In the first quarter of 2018, the Company announced an operating expenses improvement program designed to align our organization structure with strategic priorities.  The program is intended to support operational effectiveness, cost reduction, and position the Company for growth with a focus on a lean, customer-focused go-to-market team, centralized supply chain, and streamlined administrative functions.  In the year ended December 31, 2018, we incurred costs of $45.1 million on this program.

21



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,
 
2018
 
2017
 
2016 (1)
 
Dollars
 
Percent
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
5,812.1

 
100.0
 %
 
$
6,307.1

 
100.0
 %
 
$
6,175.1

 
100.0
 %
Cost of sales
4,856.7

 
83.6

 
5,226.7

 
82.9

 
5,049.0

 
81.8

Gross profit
955.4

 
16.4

 
1,080.4

 
17.1

 
1,126.1

 
18.2

Operating expenses:
 

 
 

 
 

 
 

 
 

 
 

Selling and distribution
378.4

 
6.5

 
402.3

 
6.4

 
404.8

 
6.6

General and administrative
280.0

 
4.8

 
298.4

 
4.7

 
340.0

 
5.5

Amortization expense
86.4

 
1.5

 
114.1

 
1.8

 
109.9

 
1.8

Impairment of goodwill and other intangible assets

 

 
549.7

 
8.7

 
352.2

 
5.7

Other operating expense, net
142.7

 
2.5

 
128.7

 
2.0

 
14.7

 
0.2

Total operating expenses
887.5

 
15.3

 
1,493.2

 
23.6

 
1,221.6

 
19.8

Operating income (loss)
67.9

 
1.1

 
(412.8
)
 
(6.5
)
 
(95.5
)
 
(1.6
)
Other expense (income):
 

 
 

 
 

 
 

 
 

 
 

Interest expense
114.6

 
2.0

 
126.8

 
2.1

 
119.2

 
1.9

Loss (gain) on foreign currency exchange
8.6

 
0.1

 
(5.0
)
 
(0.1
)
 
(5.6
)
 
(0.1
)
Other expense (income), net
29.5

 
0.5

 
(10.0
)
 
(0.2
)
 
(13.7
)
 
(0.3
)
Total other expense
152.7

 
2.6

 
111.8

 
1.8

 
99.9

 
1.5

Loss income before income taxes
(84.8
)
 
(1.5
)
 
(524.6
)
 
(8.3
)
 
(195.4
)
 
(3.1
)
Income tax (benefit) expense
(23.4
)
 
(0.4
)
 
(238.4
)
 
(3.8
)
 
33.2

 
0.6

Net loss
$
(61.4
)
 
(1.1
)%
 
$
(286.2
)
 
(4.5
)%
 
$
(228.6
)
 
(3.7
)%
(1)
The Company acquired the Private Brands Business in 2016.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Net Sales – Consolidated net sales decreased 7.8% to $5,812.1 million for the year ended December 31, 2018, compared to $6,307.1 million for the year ended December 31, 2017. The change in net sales from 2017 to 2018 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2017 Net Sales
$
6,307.1

 
 

SKU rationalization
(178.4
)
 
(2.8
)%
Volume/mix excluding SKU rationalization
(335.8
)
 
(5.3
)
Pricing
90.2

 
1.4

Product recalls
(5.5
)
 
(0.1
)
Divestitures
(65.9
)
 
(1.0
)
Foreign currency
0.4

 

2018 Net sales
$
5,812.1

 
(7.8
)%
The change in net sales includes the ongoing efforts to simplify and rationalize low margin SKUs, which contributed 2.8% to the year-over-year decline, and the divestiture of the McCann's business in July 2018 and the SIF business in May 2017, which contributed 1.0% to the year-over-year decrease.  Excluding the impact of SKU rationalization and the divestitures, net sales decreased 4.0% for the year ended December 31, 2018 compared to 2017, driven by the following:

22



Volume/mix excluding SKU rationalization was 5.3% unfavorable year-over-year driven by the Snacks and Meals segments.
Included in 2017 net sales was a $5.5 million product recall reimbursement, which did not repeat in 2018, that contributed a decrease of 0.1% to the change in net sales year-over-year.
Pricing was favorable 1.4% in 2018 compared to 2017 reflecting pricing actions to cover commodity and freight inflation and tariffs.
Gross Profit  — Gross profit as a percentage of net sales was 16.4% for the year ended December 31, 2018 compared to 17.1% for the year ended December 31, 2017, a decrease of 0.7 percentage points. An increase of 0.1 percentage points was related to $25.7 million of expenses for restructuring programs and $10.4 million for plant restoration in 2018, compared to $46.3 million for restructuring programs and an $8.4 million reimbursement related to product recalls in 2017. The remaining 0.8 percentage point decrease in gross profit as a percentage of net sales was primarily due to lower volumes, higher production costs including costs associated with a labor dispute in the Beverages segment and higher freight costs, higher commodity costs, and higher variable incentive compensation partially offset by pricing and lower costs resulting from a LIFO liquidation.
Operating Expenses — Total operating expenses decreased to $887.5 million in 2018 compared to $1,493.2 million in 2017. The decrease in 2018 resulted from the following:
Selling and distribution expenses decreased $23.9 million, or 5.9%, in 2018 compared to 2017. Selling and distribution expenses as a percentage of net sales increased to 6.5% in 2018, compared to 6.4% in 2017. The increase was primarily related to an increase in variable incentive compensation and freight cost inflation in 2018, partially offset by lower volumes and savings from the Structure to Win initiative and other cost savings measures.
General and administrative expenses decreased $18.4 million, or 6.2%, to $280.0 million in 2018 compared to $298.4 million in 2017. General and administrative expenses as a percentage of net sales increased 0.1 percentage point from 4.7% in 2017 to 4.8% in 2018. An increase of 0.2 percentage points was related to $13.0 million of CEO transition expense mostly related to incremental stock backed compensation expense for modified awards and $11.6 million of expenses related to restructuring programs; acquisition, integration, divestiture and related costs; product recall expenses; and debt amendment and repurchase activity in 2018 compared to $15.8 million in 2017 related to acquisition, integration, divestiture and related costs and debt amendment and repurchase activity. The remaining 0.1 percentage point decline in general and administrative expenses as a percentage of net sales was due to savings from the Structure to Win initiative and other cost saving measures, partially offset by increased variable incentive compensation.
Amortization expense decreased $27.7 million in 2018 compared to 2017, reflecting the impairment of the customer related intangible assets in the Snacks segment in the fourth quarter of 2017.
Impairment of goodwill and other intangible assets was $549.7 million in 2017.  There was no impairment recorded in 2018. See Note 9 to our Consolidated Financial Statements for additional information regarding these impairments. The Company recorded impairment losses of $276.4 million related to the Snacks segment’s goodwill and $273.3 million related to the Snacks customer lists in 2017.
Other operating expense was $142.7 million in 2018 compared to $128.7 million in 2017. Included in other operating expense in 2018 was costs associated with restructuring programs with respect to the Company's TreeHouse 2020 margin improvement program and other plant closures, and acquisition, integration, divestiture and related costs, partially offset by the gain on the divestiture of the McCann's business of $14.3 million in the third quarter of 2018. Other operating expense in 2017 reflects a loss on the divestiture of the SIF business of $86.0 million in the second quarter of 2017, costs associated with restructuring programs with respect to the Company's TreeHouse 2020 margin improvement activities and other plant closures, and acquisition, integration, divestiture and related costs. See Note 3 to our Consolidated Financial Statements for additional information regarding restructuring activity.
Interest Expense Interest expense in 2018 was $114.6 million, a decrease of $12.2 million from 2017, due to lower net debt and lower credit facility pricing from the December 1, 2017 credit agreement amendment, partially offset by higher interest rates and the write-off of $2.4 million deferred debt issuance costs associated with the repurchase of the 2022 Notes and 2024 Notes in the second and third quarters of 2018. The higher interest rates reflect the year-over-year increase in the LIBOR interest rate.
Foreign Currency The Company’s foreign currency impact was a $8.6 million loss in 2018, compared to a gain of $5.0 million in 2017, primarily due to the Company's Canadian dollar denominated intercompany loans and the fluctuations in currency exchange rates between the U.S. and Canadian dollar during the respective periods.

23



Other Expense (Income), net Other expense was $29.5 million in 2018, compared to income of $10.0 million in 2017. This change was primarily due to the non-cash mark-to-market adjustments on derivative instruments, primarily interest rate swaps and foreign currency contracts, a loss on debt extinguishment related to repurchases of the 2022 Notes and 2024 Notes, and expenses associated with tax indemnification.
Income Taxes — Income tax benefit was recorded at an effective rate of 27.6% in 2018 compared to 45.4% in 2017. The change in the Company's effective tax rate year-over-year is primarily due to the enactment of the Tax Cuts and Jobs Act, the 2017 impairment of goodwill that was not deductible for tax purposes, restructuring of the Company's foreign operations in 2017, and compensation of officers that is not deductible for tax purposes.
In addition, the Company’s effective tax rate in 2018 was favorably impacted by the reversal of $7.5 million of tax reserves assumed in prior acquisitions. The Company also recognized $7.5 million of non-operating expense for the write-off of the related indemnification assets, which is included in Other expense (income), net.
Our effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017 — Results by Segment
Baked Goods
 
Year Ended December 31,
 
2018
 
2017
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,385.3

 
100.0
%
 
$
1,403.9

 
100.0
%
Cost of sales
1,104.8

 
79.8

 
1,108.0

 
78.9

Gross profit
280.5

 
20.2

 
295.9

 
21.1

Freight out and commissions
106.0

 
7.7

 
89.1

 
6.3

Direct selling, general, and administrative
24.7

 
1.7

 
31.3

 
2.2

Direct operating income
$
149.8

 
10.8
%
 
$
175.5

 
12.6
%
Net sales in the Baked Goods segment decreased by $18.6 million, or 1.3%, for the year ended December 31, 2018 compared to the prior year. The change in net sales from 2017 to 2018 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2017 Net Sales
$
1,403.9

 
 

SKU rationalization
(26.3
)
 
(1.8
)%
Volume/mix excluding SKU rationalization
(21.9
)
 
(1.6
)
Pricing
29.3

 
2.1

Foreign currency
0.3

 

2018 Net sales
$
1,385.3

 
(1.3
)%
The change in net sales from 2017 to 2018 was due to the ongoing efforts to simplify and rationalize low margin SKUs, unfavorable volume/mix (predominantly in the dough and in-store bakery categories), partially offset by favorable pricing in response to commodity and freight inflation.
Gross profit as a percentage of net sales decreased 0.9 percentage points, from 21.1% in 2017 to 20.2% in 2018, primarily due to higher production costs, higher commodity costs (wheat, resin, and eggs) and unfavorable volume/mix partially offset by favorable pricing.
Freight out and commissions paid to independent sales brokers were $106.0 million in 2018 compared to $89.1 million in 2017, an increase of $16.9 million. Freight and commissions as a percentage of net sales increased 1.4 percentage points in 2018 compared with 2017 due to freight cost inflation, particularly in the temperature controlled freight market.

24



Direct selling, general and administrative expenses were $24.7 million in 2018 compared to $31.3 million in 2017. The decrease in direct selling, general and administrative expenses as a percentage of net sales was primarily attributable to lower expenses due to Structure to Win savings combined with lower expenses due to other cost savings activities.
Beverages
 
Year Ended December 31,
 
2018
 
2017
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,008.4

 
100.0
%
 
$
1,073.4

 
100.0
%
Cost of sales
772.7

 
76.6

 
781.9

 
72.8

Gross profit
235.7

 
23.4

 
291.5

 
27.2

Freight out and commissions
38.5

 
3.8

 
44.3

 
4.1

Direct selling, general, and administrative
16.9

 
1.7

 
20.3

 
1.9

Direct operating income
$
180.3

 
17.9
%
 
$
226.9

 
21.2
%
Net sales in the Beverages segment decreased by $65.0 million, or 6.1%, for the year ended December 31, 2018 compared to the prior year. The change in net sales from 2017 to 2018 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2017 Net Sales
$
1,073.4

 
 

SKU rationalization
(24.1
)
 
(2.3
)%
Volume/mix excluding SKU rationalization
(34.3
)
 
(3.2
)
Pricing
(6.6
)
 
(0.6
)
2018 Net sales
$
1,008.4

 
(6.1
)%
Net sales decreased in 2018 compared to 2017 primarily due to unfavorable volume/mix related to a labor dispute at one of our Beverage plants, competitive pressure in the single serve beverage category, and capacity constraints in the broth category. Net sales also decreased due to the ongoing efforts to simplify and rationalize low margin SKUs, and unfavorable pricing primarily due to competitive pressure.
Gross profit as a percentage of net sales decreased 3.8 percentage points, from 27.2% in 2017 to 23.4% in 2018, primarily due to higher production costs (creamers) and unfavorable pricing due to competitive pressure.
Freight out and commissions paid to independent sales brokers was $38.5 million in 2018, compared to $44.3 million in 2017, a decrease of $5.8 million. Freight out and commissions as a percentage of net sales decreased year-over-year by 0.3 percentage points due to improvements in logistics efficiency partially offset by freight cost inflation.
Direct selling, general and administrative expenses were $16.9 million in 2018 compared to $20.3 million in 2017. The decrease in direct selling, general and administrative expenses as a percentage of net sales was primarily attributable to lower expenses due to Structure to Win savings combined with lower expenses due to other cost savings activities.

25



Condiments
 
Year Ended December 31,
 
2018
 
2017
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,252.5

 
100.0
%
 
$
1,300.6

 
100.0
%
Cost of sales
1,026.1

 
81.9

 
1,082.4

 
83.2

Gross profit
226.4

 
18.1

 
218.2

 
16.8

Freight out and commissions
58.1

 
4.6

 
55.9

 
4.3

Direct selling, general, and administrative
19.8

 
1.6

 
25.8

 
2.0

Direct operating income
$
148.5

 
11.9
%
 
$
136.5

 
10.5
%
Net sales in the Condiments segment decreased by $48.1 million, or 3.7%, for the year ended December 31, 2018 compared to the prior year. The change in net sales from 2017 to 2018 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2017 Net Sales
$
1,300.6

 
 

SKU rationalization
(58.5
)
 
(4.5
)%
Volume/mix excluding SKU rationalization
(19.6
)
 
(1.5
)
Pricing
29.9

 
2.3

Foreign currency
0.1

 

2018 Net sales
$
1,252.5

 
(3.7
)%
Net sales decreased in 2018 compared to 2017 primarily due to the ongoing efforts to simplify and rationalize low margin SKUs and unfavorable volume/mix in the pickles, preserves and dressings categories, partially offset by favorable pricing to cover commodity and freight inflation and tariffs.
Gross profit as a percentage of net sales increased 1.3 percentage points, from 16.8% in 2017 to 18.1% in 2018, primarily due to favorable pricing and lower costs resulting from a LIFO liquidation partially offset by higher production costs.
Freight out and commissions paid to independent sales brokers were $58.1 million in 2018 and $55.9 million in 2017. Freight out and commissions as a percentage of net sales increased year-over-year by 0.3 percentage points primarily due to freight cost inflation.
Direct selling, general and administrative expenses were $19.8 million in 2018 compared to $25.8 million in 2017. The decrease in direct selling, general and administrative expenses as a percentage of net sales was primarily attributable to lower expenses due to Structure to Win savings combined with lower expenses due to other cost savings activities.
Meals
 
Year Ended December 31,
 
2018
 
2017
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,040.0

 
100.0
%
 
$
1,189.2

 
100.0
%
Cost of sales
842.2

 
81.0

 
970.8

 
81.6

Gross profit
197.8

 
19.0

 
218.4

 
18.4

Freight out and commissions
46.0

 
4.4

 
51.4

 
4.3

Direct selling, general, and administrative
25.9

 
2.5

 
29.7

 
2.5

Direct operating income
$
125.9

 
12.1
%
 
$
137.3

 
11.6
%

26



Net sales in the Meals segment decreased by $149.2 million, or 12.5%, for the year ended December 31, 2018 compared to the prior year. The change in net sales from 2017 to 2018 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2017 Net Sales
$
1,189.2

 
 

SKU rationalization
(23.2
)
 
(1.9
)%
Volume/mix excluding SKU rationalization
(85.8
)
 
(7.3
)
Pricing
25.7

 
2.2

Divestitures
(65.9
)
 
(5.5
)
2018 Net sales
$
1,040.0

 
(12.5
)%
Net sales decreased in 2018 compared to 2017 primarily due to unfavorable volume/mix from competitive pressure (principally in the pasta, ready-to-eat cereal, and dry dinner categories) and category softness (primarily in the ready-to-eat cereal category), the divestiture of the SIF and McCann's businesses, and the ongoing efforts to simplify and rationalize low margin SKUs. These declines were partially offset by favorable pricing to cover commodity and freight inflation.
Gross profit as a percentage of net sales increased 0.6 percentage points, from 18.4% in 2017 to 19.0% in 2018, primarily due to lower production costs driven by plant closures and improved operational performance, and favorable pricing to cover commodity cost inflation (durum, flour, and packaging).
Freight out and commissions paid to independent sales brokers were $46.0 million in 2018 and $51.4 million in 2017. Freight out and commissions as a percentage of net sales increased year-over-year by 0.1 percentage points primarily due to freight cost inflation.
Direct selling, general and administrative expenses were $25.9 million in 2018 compared to $29.7 million in 2017. Direct selling, general and administrative expenses as a percentage of net sales was flat year-over-year and reflects lower expenses due to Structure to Win savings combined with lower expenses due to other cost savings activities, partially offset by advertising investments in the pasta category.

Snacks
 
Year Ended December 31,
 
2018
 
2017
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,125.9

 
100.0
%
 
$
1,334.5

 
100.0
%
Cost of sales
1,079.7

 
95.9

 
1,253.8

 
94.0

Gross profit
46.2

 
4.1

 
80.7

 
6.0

Freight out and commissions
29.9

 
2.7

 
32.2

 
2.4

Direct selling, general, and administrative
14.0

 
1.2

 
23.0

 
1.7

Direct operating income
$
2.3

 
0.2
%
 
$
25.5

 
1.9
%
Net sales in the Snacks segment decreased by $208.6 million, or 15.6%, for the year ended December 31, 2018 compared to the prior year. The change in net sales from 2017 to 2018 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2017 Net Sales
$
1,334.5

 
 

SKU rationalization
(46.3
)
 
(3.4
)%
Volume/mix excluding SKU rationalization
(174.2
)
 
(13.1
)
Pricing
11.9

 
0.9

2018 Net sales
$
1,125.9

 
(15.6
)%

27



Net sales decreased in 2018 compared to 2017 primarily due to lost distribution driven by competitive pressure in the snack nuts and trail mix category, and the ongoing efforts to simplify and rationalize low margin SKUs. Favorable pricing actions were partially offset by commodity-based price reductions.
Gross profit as a percentage of net sales decreased 1.9 percentage points, from 6.0% in 2017 to 4.1% in 2018, primarily due to higher production costs, unfavorable mix, and higher commodity costs, partially offset by favorable pricing.
Freight out and commissions paid to independent sales brokers were $29.9 million in 2018 and $32.2 million in 2017. Freight out and commissions as a percentage of net sales increased year-over-year by 0.3 percentage points due to freight cost inflation.
Direct selling, general and administrative expenses were $14.0 million in 2018 compared to $23.0 million in 2017. The decrease in direct selling, general and administrative expenses as a percentage of net sales was primarily attributable to lower expenses due to Structure to Win savings combined with lower expenses due to other cost savings activities.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Net Sales – Consolidated net sales increased 2.1% to $6,307.1 million for the year ended December 31, 2017, compared to $6,175.1 million for the year ended December 31, 2016. The change in net sales from 2016 to 2017 was due to the following:
 
 
Dollars
 
Percent
 
(Dollars in millions)
2016 Net sales
$
6,175.1

 
 

Volume/mix
34.1

 
0.6
%
Pricing
(4.5
)
 
(0.1
)
Product recalls
15.4

 
0.2

Acquisition/divestiture
81.8

 
1.3

Foreign currency
5.2

 
0.1

2017 Net sales
$
6,307.1

 
2.1
%
The change in net sales was primarily due to an additional month of sales related to the 2016 acquisition of the Private Brands Business, partially offset by the divestiture of the SIF business in the second quarter of 2017. Favorable volume/mix in the Beverages, Condiments, and Baked Goods segments contributed to the increase in net sales, partially offset by unfavorable volume/mix in Snacks and Meals. Included in net sales was a $5.4 million product recall reimbursement, compared to a $9.9 million cost in 2016, that contributed an increase of 0.2% to net sales year-over-year.

Gross Profit  — Gross profit as a percentage of net sales was 17.1% for the year ended December 31, 2017 compared to 18.2% for the year ended December 31, 2016, a decrease of 1.1 percentage points. Included in gross profit in 2017 was $46.3 million related to restructuring and other margin improvements activities compared to $7.9 million in 2016 and $8.4 million of product recall reimbursement in 2017 compared to expense of $15.6 million in 2016. Also included in gross profit was $8.4 million of acquisition, integration, divestiture, and related costs in 2016 that did not repeat in 2017. These transactions, coupled with the product recall reimbursement outlined above in net sales, decreased gross profit as a percentage of net sales by 0.6% in 2017 and 0.5% in 2016. The remaining 1.0% decrease in gross profit as a percentage of net sales was primarily higher operating costs, higher commodity costs, and unfavorable mix, partially offset by a reduction in variable incentive compensation and depreciation.

Operating Costs and Expenses - Operating expenses increased to $1,493.2 million in 2017 compared to $1,221.6 million in 2016. The increase in 2017 resulted from the following:

Selling and distribution expenses decreased $2.5 million, or 0.6%, in 2017 compared to 2016. Selling and distribution expenses as a percentage of net sales decreased to 6.4% in 2017, compared to 6.6% in 2016. The decrease was primarily related to a reduction in variable incentive compensation and cost savings in 2017, partially offset by unfavorable freight rates.

General and administrative expenses decreased $41.6 million, or 12.2%, in 2017 compared to 2016. This decrease is primarily related to lower acquisition, integration, divestiture, and related costs in 2017. In 2016, the Company incurred approximately $51.5 million of acquisition, integration, divestiture, and related costs primarily related to the Private Brands Business acquisition, compared to $15.8 million in 2017 including debt refinancing costs. Excluding the impact of acquisition, integration, divestiture, and related costs and debt refinancing costs, general and administrative expenses declined 2.0% year-

28



over-year as a reduction in variable incentive compensation and cost savings more than offset an additional month of Private Brands business.

Amortization expense increased $4.2 million in 2017 compared to 2016, primarily due to the amortization of intangible assets from an additional month of the Private Brands Business.

Impairment of goodwill and other intangible assets was $549.7 million in 2017 compared to $352.2 million in 2016. See Note 9 to our Consolidated Financial Statements for additional information regarding these impairments. The Company recorded impairment losses of $276.4 million related to the Snacks segment’s goodwill and $273.3 million related to the Snacks customer lists in 2017.

Other operating expense was $128.7 million in 2017 compared to $14.7 million in 2016. The increase was primarily due to a loss on the divestiture of the SIF business, higher costs associated with restructuring and other margin improvement activities that were announced in recent quarters with respect to the TreeHouse 2020 margin improvement plan, and various plant closures. See Note 3 to our Consolidated Financial Statements for additional information regarding restructuring programs.

Interest Expense - Interest expense in 2017 was $126.8 million, an increase of $7.6 million from 2016, due to higher average
interest rates on outstanding debt primarily related to LIBOR interest rate increases.

Foreign Currency - The Company’s foreign currency impact was a $5.0 million gain in 2017, compared to a gain of $5.6 million in 2016, primarily due to fluctuations in currency exchange rates between the U.S. and Canadian dollar during the respective periods.

Other Expense (Income), net - Other income was $10.0 million in 2017, compared to income of $13.7 million in 2016. The variance was primarily due to the non-cash mark-to-market adjustments on derivative contracts, primarily interest rate swap agreements and commodity contracts.

Income Taxes - Income tax benefit was recorded at an effective rate of 45.4% in 2017 compared to income tax expense that was recorded at an effective rate of (17.0)% in 2016. The change in the Company’s effective tax rate year-over-year is primarily due to the enactment of the Tax Cuts and Jobs Act, the impairment of goodwill that was not deductible for tax purposes, and restructuring of the Company’s foreign operations in 2017.
Our effective tax rate may change from period to period based on recurring and non-recurring factors including the jurisdictional mix of earnings, enacted tax legislation, state income taxes, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 — Results by Segment
Baked Goods
 
Year Ended December 31,
 
2017
 
2016
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,403.9

 
100.0
%
 
$
1,288.2

 
100.0
%
Cost of sales
1,108.0

 
78.9

 
1,011.5

 
78.5

Gross profit
295.9

 
21.1

 
276.7

 
21.5

Freight out and commissions
89.1

 
6.3

 
80.6

 
6.3

Direct selling, general, and administrative
31.3

 
2.2

 
33.7

 
2.6

Direct operating income
$
175.5

 
12.6
%
 
$
162.4

 
12.6
%

29



Net sales in the Baked Goods segment increased by $115.7 million, or 9.0%, for the year ended December 31, 2017 compared to the prior year. The change in net sales from 2016 to 2017 was due to the following:

 
Dollars
 
Percent
 
(Dollars in millions)
2016 Net sales
$
1,288.2

 
 
Volume/mix
9.8

 
0.8
 %
Pricing
(7.2
)
 
(0.6
)
Acquisition/divestiture
112.0

 
8.7

Foreign currency
1.1

 
0.1

2017 Net sales
$
1,403.9

 
9.0
 %

Net sales increased from 2016 to 2017 mostly due to an additional month of Private Brands Business in 2017 and favorable volume/mix (predominantly in the cracker, dough, and griddle categories), partially offset by unfavorable pricing mostly from competitive pressure.

Gross profit as a percentage of net sales decreased 0.4 percentage points in 2017 compared to the prior year, primarily due to higher operating costs partially offset by lower commodity costs (flour, sugar, and eggs).

Freight out and commissions paid to independent sales brokers were $89.1 million in 2017 compared to $80.6 million in 2016, an increase of $8.5 million. The increase is primarily associated with the additional month of Private Brands Business in 2017. Freight and commissions as a percentage of net sales was flat year-over-year.

Direct selling and marketing expenses were $31.3 million in 2017 and $33.7 million in 2016. The decrease in direct selling and marketing expenses as a percentage of net sales was primarily related to cost savings.
Beverages
 
Year Ended December 31,
 
2017
 
2016
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,073.4

 
100.0
%
 
$
973.0

 
100.0
%
Cost of sales
781.9

 
72.8

 
674.7

 
69.3

Gross profit
291.5

 
27.2

 
298.3

 
30.7

Freight out and commissions
44.3

 
4.1

 
30.2

 
3.1

Direct selling, general, and administrative
20.3

 
1.9

 
23.4

 
2.5

Direct operating income
$
226.9

 
21.2
%
 
$
244.7

 
25.1
%
Net sales in the Beverages segment increased by $100.4 million, or 10.3%, for the year ended December 31, 2017 compared to the prior year. The change in net sales from 2016 to 2017 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2016 Net sales
$
973.0

 
 

Volume/mix
117.5

 
12.1
 %
Pricing
(14.6
)
 
(1.5
)
Acquisition/divestiture
(2.5
)
 
(0.3
)
2017 Net sales
$
1,073.4

 
10.3
 %
Net sales increased in 2017 compared to 2016 primarily due to favorable volume/mix associated with additional distribution, primarily in the single serve beverage, broth, non-dairy creamer, and tea categories, partially offset by unfavorable pricing due to competitive pressure and lower sales due to the sale of a part of the Tetra re-cart broth business associated with the divestiture of the SIF business in the second quarter of 2017.

30




Gross profit as a percentage of net sales decreased to 27.2% in 2017 from 30.7% in 2016 primarily due to higher commodity costs (primarily oils and coffee) and unfavorable mix.

Freight out and commissions paid to independent sales brokers increased by $14.1 million in 2017 compared to 2016. Freight out and commissions paid as a percentage of net sales increased year-over-year by 1.0%. The increase was primarily related to increased volume year-over-year and a shift in mix from customer pick-up to delivery.

Direct selling and marketing decreased to $20.3 million in 2017 from $23.4 million in 2016, due to cost savings.
Condiments
 
Year Ended December 31,
 
2017
 
2016
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,300.6

 
100.0
%
 
$
1,258.1

 
100.0
%
Cost of sales
1,082.4

 
83.2

 
1,021.7

 
81.2

Gross profit
218.2

 
16.8

 
236.4

 
18.8

Freight out and commissions
55.9

 
4.3

 
53.6

 
4.3

Direct selling, general, and administrative
25.8

 
2.0

 
28.7

 
2.3

Direct operating income
$
136.5

 
10.5
%
 
$
154.1

 
12.2
%
Net sales in the Condiments segment increased by $42.5 million, or 3.4%, for the year ended December 31, 2017 compared to the prior year. The change in net sales from 2016 to 2017 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2016 Net sales
$
1,258.1

 
 

Volume/mix
14.0

 
1.1
%
Pricing
4.5

 
0.4

Acquisition/divestiture
19.8

 
1.6

Foreign currency
4.2

 
0.3

2017 Net sales
$
1,300.6

 
3.4
%
Net sales increased in 2017 compared to 2016 mostly due to an additional month of Private Brands Business in 2017, favorable volume/mix from increased distribution (predominantly in the pickles and dressings categories), and favorable pricing and foreign currency.

Gross profit as a percentage of net sales decreased from 18.8% in 2016 to 16.8% in 2017, primarily due to higher operating costs and higher commodity costs primarily for soybean oil, cucumbers, peppers, and packaging.

Freight out and commissions paid to independent sales brokers were $55.9 million in 2017 and $53.6 million in 2016. Costs remained consistent with sales activity as freight out and commissions as a percentage of net sales was 4.3% for both 2017 and 2016.

Direct selling and marketing decreased to $25.8 million in 2017 from $28.7 million in 2016, primarily due to cost savings.

31



Meals
 
Year Ended December 31,
 
2017
 
2016
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,189.2

 
100.0
%
 
$
1,335.2

 
100.0
%
Cost of sales
970.8

 
81.6

 
1,107.4

 
82.9

Gross profit
218.4

 
18.4

 
227.8

 
17.1

Freight out and commissions
51.4

 
4.3

 
56.8

 
4.3

Direct selling, general, and administrative
29.7

 
2.5

 
33.9

 
2.5

Direct operating income
$
137.3

 
11.5
%
 
$
137.1

 
10.3
%
Net sales in the Meals segment decreased by $146.0 million, or 10.9%, for the year ended December 31, 2017 compared to the prior year. The change in net sales from 2016 to 2017 was due to the following:

 
Dollars
 
Percent
 
(Dollars in millions)
2016 Net sales
$
1,335.2

 
 

Volume/mix
(50.6
)
 
(3.8
)%
Pricing
(13.5
)
 
(1.0
)
Acquisition/divestiture
(81.9
)
 
(6.1
)
2017 Net sales
$
1,189.2

 
(10.9
)%
Net sales decreased from 2016 to 2017 primarily due to the divestiture of the SIF business, unfavorable volume/mix (predominantly in the cereal and pasta categories), and unfavorable pricing related to commodity-based price reductions and competitive pressure, partially offset by an additional month of Private Brands Business in 2017.

Gross profit as a percentage of net sales increased from 17.1% in 2016 to 18.4% in 2017, primarily due to favorable mix and lower depreciation, commodity, and operating costs.

Freight out and commissions paid to independent sales brokers were $51.4 million in 2017 and $56.8 million in 2016. Freight out and commissions as a percentage of net sales was flat in 2017 compared to 2016.

Direct selling and marketing decreased to $29.7 million in 2017 from $33.9 million in 2016. Direct selling, general, and administrative expenses as a percentage of net sales was flat in 2017 compared to 2016.
Snacks
 
Year Ended December 31,
 
2017
 
2016
 
Dollars
 
Percent
 
Dollars
 
Percent
 
(Dollars in millions)
Net sales
$
1,334.5

 
100.0
%
 
$
1,330.5

 
100.0
%
Cost of sales
1,253.8

 
94.0

 
1,209.8

 
90.9

Gross profit
80.7

 
6.0

 
120.7

 
9.1

Freight out and commissions
32.2

 
2.4

 
31.4

 
2.4

Direct selling, general, and administrative
23.0

 
1.7

 
23.1

 
1.7

Direct operating income
$
25.5

 
1.9
%
 
$
66.2

 
5.0
%





32




Net sales in the Snacks segment increased by $4.0 million, or 0.3%, for the year ended December 31, 2017 compared to the prior year. The change in net sales from 2016 to 2017 was due to the following:
 
Dollars
 
Percent
 
(Dollars in millions)
2016 Net sales
$
1,330.5

 
 

Volume/mix
(56.6
)
 
(4.3
)%
Pricing
26.1

 
2.0

Acquisition/divestiture
34.5

 
2.6

2017 Net sales
$
1,334.5

 
0.3
 %
Net sales increased in 2017 compared to 2016 primarily due to an additional month of Private Brands Business in 2017 and favorable pricing, partially offset by unfavorable volume/mix from weak consumer trends in 2017 compared to the prior year and the exit of low margin co-pack business.

Gross profit as a percentage of net sales decreased from 9.1% in 2016 to 6.0% in 2017, primarily due to the impact of higher commodity costs (mostly in cashews), an unfavorable shift in sales mix, and higher operating costs, partially offset by costs associated with a quality issue in 2016 that did not recur in 2017.

Freight out and commissions paid to independent sales brokers were $32.2 million in 2017 and $31.4 million in 2016. Freight out and commissions as a percentage of net sales was flat in 2017 compared to 2016.
Direct selling and marketing was relatively flat year-over-year in both dollars and as a percentage of net sales.
Known Trends and Uncertainties
The costs of raw materials, ingredients, packaging materials, fuel, and energy have been volatile in recent years and future changes in such costs may cause our results of operations and our operating margins to fluctuate significantly. We expect these costs to continue to be volatile with an overall long-term upward trend. We manage the impact of cost increases, wherever possible, on commercially reasonable terms, by locking in prices on the quantities we expect are required to meet our production requirements. In addition, we offset the effect of increased costs 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. Additionally, the Company expects to incur additional costs related to compliance with the Nutrition Labeling and Education Act.
The U.S. retail food industry has continued to struggle with respect to volumes. Based on the Citi DD’s Nielsen AOC+C Data Analysis – 12/1/18 report, during 2018, overall retail food volume in measured channels contracted by approximately 0.6%, with branded manufacturers experiencing contraction of 1.6% and private label manufacturers experiencing a gain 1.5%. This contraction is in contradiction to a strong economy as well as lower oil and fuel prices. The Company expects that overall tonnage will continue to be challenged, with pockets of growth in areas such as PBFY products.  This expectation is based on reports that indicate an increased focus on clean ingredients and labels, resulting in higher demand for “natural” or organic type products. For example, consumers appear to be more interested in foods described as being “better for you,” which include fresh or freshly prepared foods, and natural, organic, or specialty foods, most of which are located at the perimeter of the store. We believe we have the necessary resources available to address these trends and to continue to focus on consumer’s needs by developing new formulations, packaging, and sizes.
Freight rates rose during 2018 compared to 2017. This increase in rates was primarily due to tight capacity and strong demand in the trucking market. The Company attempts to secure freight agreements when available and price accordingly to offset the increase in rates.
The U.S. dollar continued to strengthen compared to the Canadian dollar in 2018. The Canadian dollar exposure to revenue is greater than the exposure to input costs for Canadian produced products. As such, an unfavorable Canadian dollar leads to an unfavorable impact to the Company’s operating results. The average exchange rate for fiscal year 2018 compared to fiscal year 2017 between the U.S. and Canadian dollar has remained relatively flat year-over-year, while the exchange rate at December 31, 2018 shows that the U.S. dollar strengthened approximately 7.9% as compared to the rate at December 31, 2017. The Company enters hedging arrangements to limit the impact of these fluctuations. In addition to higher input costs, the

33



Company is impacted by the re-measurement of the Canadian dollar denominated intercompany loans and the translation of the Canadian dollar financial statements.

In December 2018, the Company announced a strategic review of the Snack Nuts & Trail Mix business as well as certain other businesses. The strategic review is on-going and may result in a restructuring, disposition or similar action related to these businesses. Consequently, the Company may incur restructuring, impairment, disposal or other related charges in future periods.

Competitive Environment
There has been significant consolidation in the retail grocery and foodservice industries in recent years resulting in mass merchandisers and non-traditional grocers, such as those offering a limited assortment of products, 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. Additionally, the introduction of e-commerce grocers brings new opportunities and risks. 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 and profits if any one or more of our existing customers were to be sold or if limited assortment stores reduce the variety of products that we sell.
Both the difficult economic environment and the increased competitive environment in the retail and foodservice channels have caused competition to become increasingly intense in our business. We expect this trend to continue for the foreseeable future.
Consistent with our strategy, our future growth depends, in part, on our ability to streamline and simplify our operations and product offerings. The Company feels well positioned to take advantage of the shift to “premium” and “better-for-you” products and believes the future growth of the industry lies in these offerings.
Liquidity and Capital Resources

Cash Flow

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 reinvesting in existing businesses, conducting acquisitions, and managing its capital structure on a short and long-term basis. If additional borrowings are needed, approximately $719.7 million was available under the Revolving Credit Facility as of December 31, 2018. See Note 12 to our Consolidated Financial Statements for additional information regarding our Revolving Credit Facility. We believe that, given our cash flow from operating activities and our available credit capacity, we comply with the current terms of the Revolving Credit Facility and can meet foreseeable financial requirements.

The following table is derived from our Consolidated Statement of Cash Flows:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Net Cash Flows Provided By (Used In):
 

 
 

 
 

Operating activities
$
505.8

 
$
506.0

 
$
478.6

Investing activities
(160.9
)
 
(159.8
)
 
(2,831.3
)
Financing activities
(311.0
)
 
(278.3
)
 
2,377.7


Operating Activities

Our cash provided by operations was $505.8 million in 2018 compared to $506.0 million in 2017, a decrease of $0.2 million. The decrease is primarily attributable to higher restructuring program expenses in 2018 fully offset by improved working capital management. Working capital management is focused around driving faster collection of receivables, managing inventory, and extending vendor payment terms. In the fourth quarter of 2017, the Company entered into an agreement (the “Receivables Sales Agreement”) to sell, on a revolving basis, certain trade receivable balances to an unrelated institution. The agreement allows us to sell our accounts receivable to increase operating cash flow, while reducing the cost of borrowing on the Revolver, net working capital, and interest expense. Incremental cash provided under the agreement in 2018 compared to 2017 was $221.7 million. Refer to Note 6 to the Consolidated Financial Statements for more information regarding the Receivables Sales Agreement.

34




Investing Activities

Cash used in investing activities was $160.9 million in 2018 compared to $159.8 million in 2017, an increase in cash used of $1.1 million. During 2018, capital expenditures were higher compared to 2017, partially offset by increased proceeds from divestitures.   

We expect capital spending programs to be approximately $190 million in 2019. Capital spending in 2019 will focus on TreeHouse 2020 initiatives, the continued implementation of an Enterprise Resource Planning system, food safety, quality, productivity improvements, and routine equipment upgrades or replacements at our plants.

Financing Activities

Net cash used in financing activities was $311.0 million in 2018 compared to $278.3 million in 2017, an increase in cash used of $32.7 million. The increase is primarily attributable to repurchases of the 2022 Notes and 2024 Notes (refer to Note 12) and common stock repurchases, partially offset by reduced net loan activity under the Revolver during 2018.  The Company reduced net debt by $285 million since December 31, 2017, consistent with our objective of using available cash to pay down outstanding debt.

Free Cash Flow

In addition to measuring our cash flow generation and usage based upon the operating, investing, and financing classifications included in the Consolidated Statements of Cash Flows, we also measure free cash flow (a Non-GAAP measure) which represents net cash provided by operating activities less capital expenditures.  We believe free cash flow is an important measure of operating performance because it provides management and investors a measure of cash generated from operations that is available for mandatory payment obligations and investment opportunities such as funding acquisitions, repaying debt, and repurchasing our common stock.

The following table reconciles our free cash flow to cash flow provided by operating activities, the most comparable GAAP measure:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Cash flow provided by operating activities
$
505.8

 
$
506.0

 
$
478.6

Less:  Capital expenditures
(196.2
)
 
(185.8
)
 
(187.0
)
Free cash flow
$
309.6

 
$
320.2

 
$
291.6


Free cash flow in 2018 decreased $10.6 million over the prior year primarily due to higher capital expenditures in 2018. During 2018, the Company used free cash flow to pay down term loans, repurchase senior public debt, repurchase shares, and fund investments in property, plant, and equipment.

Debt

At December 31, 2018, we had $488.8 million outstanding under Term Loan A, $851.2 million outstanding under Term Loan A-1, $375.9 million of the 2022 Notes outstanding, $602.9 million of the 2024 Notes outstanding, and $2.5 million of other obligations. In addition, at December 31, 2018, there were $30.3 million in letters of credit under the Revolving Credit Facility that were issued but undrawn.

Interest rates on debt outstanding under the Revolving Credit Facility, Term Loan A, and Term Loan A-1 (collectively known as the “Amended and Restated Credit Agreement”) for the year ended December 31, 2018 averaged 3.97%. Including the interest rate swap agreements in effect as of December 31, 2018, the average rate decreases to 3.24%.

We are in compliance with all applicable financial debt covenants as of December 31, 2018. See Note 12 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements.

35



Contractual Obligations
The following table summarizes the Company’s obligations and commitments to make future payments as of December 31, 2018:
 
Payments Due by Period
 
Total
 
Year
1
 
Years
2-3
 
Years
4-5
 
More Than
5 Years
 
(in millions)
Debt obligations
$
2,318.8

 
$

 
$
28.0

 
$
1,219.1

 
$
1,071.7

Debt interest payments (1)
544.9

 
112.9

 
224.7

 
164.7

 
42.6

Capital lease obligations
2.5

 
1.2

 
0.7

 
0.3

 
0.3

Purchasing obligations (2)
886.9

 
821.6

 
44.3

 
17.5

 
3.5

Operating leases (3)
200.5

 
41.4

 
64.2

 
35.9

 
59.0

Benefit obligations (4)
216.2

 
21.2

 
42.0

 
43.8

 
109.2

Deferred compensation (5)
13.2

 
2.1

 
2.2

 
4.8

 
4.1

Unrecognized tax benefit (6)
17.0

 
3.8

 
9.8

 
1.9

 
1.5

Total
$
4,200.0

 
$
1,004.2

 
$
415.9

 
$
1,488.0

 
$
1,291.9

(1)
Debt interest payments represent estimated future interest payments based on applicable interest rates at December 31, 2018.
(2)
Purchasing obligations primarily represent commitments to purchase minimum quantities of raw materials used in our production processes. We enter into these contracts from time to time in an effort to ensure a sufficient supply of raw ingredients. In addition, we have contractual obligations to purchase various services that are a part of our production process.
(3)
In accordance with generally accepted accounting principles in the United States of America (“GAAP”), the accompanying balance sheets do not reflect operating lease obligations. Operating lease obligations consist of minimum rental payments under non-cancelable operating leases.
(4)
Benefit obligations consist of future payments related to pension and postretirement benefits as estimated by an actuarial valuation.
(5)
Deferred compensation obligations have been allocated to payment periods based on existing payment plans for terminated employees and the estimated timing of distributions to current employees based on age.
(6)
The unrecognized tax benefit liability recorded by the Company was $17.0 million at December 31, 2018. The timing of cash settlement, if any, cannot be reasonably estimated. The Company’s gross unrecognized tax benefit included in the tabular reconciliation (see Note 11 to our Consolidated Financial Statements for additional information) was $17.3 million.
In addition to the commitments set forth in the above table, at December 31, 2018, the Company had $30.3 million in letters of credit, the majority of which related to the Company’s workers’ compensation program.
Off-Balance Sheet Arrangements
The Company does not have any obligations that meet the definition of an off-balance sheet arrangement, other than operating leases and letters of credit, which have or are reasonably likely to have a material effect on the Consolidated Financial Statements.
Other Commitments and Contingencies
The Company also has selected levels of property and casualty risks, primarily related to employee health care, workers’ compensation claims, and other casualty losses, in addition to contingent liabilities related to ordinary course litigation, investigations, and tax audits.
See Note 19 to our Consolidated Financial Statements for more information about the Company’s commitments and contingent obligations.


36



Critical Accounting Policies

Critical accounting policies are defined as those most important to the portrayal of a company’s financial condition and results, and require the most difficult, subjective, or complex judgments. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP with no need for the application of our judgment. In certain circumstances, however, the preparation of the Consolidated Financial Statements in conformity with GAAP requires us to use our judgment to make certain estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of net sales and expenses during the reporting period. We have identified the policies described below as our critical accounting policies. See Note 1 to the Consolidated Financial Statements for a detailed discussion of significant accounting policies.
Trade Allowances — We maintain an allowance for customer promotional programs, marketing co-op programs, and other sales and marketing expenses. This allowance is based on a combination of historical rolling twelve month average program activity and specific customer program accruals, and can fluctuate due to the level of sales and marketing programs, and timing of deductions. This allowance was $45.7 million and $56.9 million at December 31, 2018 and 2017, respectively.
Goodwill and Intangible Assets — Goodwill and intangible assets totaled $2,861.6 million as of December 31, 2018, resulting primarily from acquisitions. Upon acquisition, the purchase price is first allocated to identifiable assets and liabilities, including but not limited to inventory, accounts payable, trademarks, and customer-related intangible assets, with any remaining purchase price recorded as goodwill. Goodwill and indefinite lived trademarks are not amortized.
The Company has five reporting units, which are the same as our reportable and operating segments.
The Company completed its annual goodwill and intangible asset impairment analysis as of December 31, 2018. Our assessment did not result in an impairment. Our analysis employed the use of an income approach, corroborated by a market approach. The Company believes the income approach is the most reliable indicator of the fair value of the reporting units. Significant assumptions used in the income approach include growth and discount rates, margins, and the Company’s weighted average cost of capital. We used historical performance and management estimates of future performance to determine margins and growth rates. The income approach utilizes projected cash flow estimates developed by the Company to determine fair value, which are unobservable, Level 3 inputs. Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available. The Company developed our estimates using the best information available at the time. Discount rates selected for each reporting unit approximated the total Company discount rate. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. The Company's Snacks reporting unit did not have any remaining goodwill at December 31, 2018 and 2017 due to historical impairments. The four reporting units with goodwill all have fair values that the Company considers to be substantially in excess of their carrying values (between 26% and 112%). Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Assumptions used, such as forecasted growth rates and our cost of capital, are consistent with our internal projections and operating plans. Changes in our estimates or any of our other assumptions used in our analysis could result in a different conclusion.
We reviewed our indefinite lived intangible assets, which consist of trademarks totaling $21.4 million as of December 31, 2018, using the relief from royalty method. Significant assumptions include the royalty, growth, margins, and discount rates. Our assumptions were based on historical performance and management estimates of future performance, as well as available data on licenses of similar products. The Company’s policy is that indefinite lived assets must have a history of strong sales and cash flow performance that we expect to continue for the foreseeable future. When these criteria are no longer met, the Company changes the classification. Considerable management judgment is necessary to evaluate the impact of operating changes and to estimate future cash flows. Our analysis resulted in fair values that are in excess of the asset’s carrying value by 40% to 139%. Changes in our estimates or any of our other assumptions used in our analysis could result in a different conclusion.
We evaluate amortizable intangible assets, which primarily include customer related and trademarks, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable (a "triggering event"). If an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its fair value, which is generally based on discounted future cash flows. No triggering events occurred in 2018, and the Company concluded no changes are necessary to the remaining useful lives or values of the remaining amortizable intangible assets as of December 31, 2018.
Income Taxes — Deferred taxes are recognized for future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. We periodically estimate our probable tax obligations using historical experience in tax jurisdictions and informed judgments. There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which we operate. These judgments and

37



estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations. If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings. Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time.
Employee Benefit Plan Costs — We provide a range of benefits to our employees, including pension and postretirement benefits to our eligible employees and retirees. We record annual amounts relating to these plans based on calculations specified by GAAP, which include various actuarial assumptions, such as discount rates, assumed investment rates of return, compensation increases, employee turnover rates, and health care cost trend rates. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. As required by GAAP, the effect of such modifications is generally deferred and subsequently amortized over future periods. Different assumptions that we make could result in the recognition of different amounts of expense over different periods.
While a number of the key assumptions related to our qualified pension plans are long-term in nature, including assumed investment rates of return, compensation increases, employee turnover rates, and mortality rates, GAAP requires that our discount rate assumption be more heavily weighted to current market conditions. As such, our discount rate will likely change frequently. We used a discount rate to determine our estimated future benefit obligations of 4.40% at December 31, 2018. If the discount rate were one percent higher, the pension plan liability would have been approximately 10.0%, or $29.9 million, lower as of December 31, 2018. If the discount rate were one percent lower, the pension plan liability would have been approximately 12.1%, or $36.2 million, higher as of December 31, 2018.
See Note 17 to our Consolidated Financial Statements for more information regarding our employee pension and retirement benefit plans.
Workers' Compensation - The measurement of the liability for our cost of providing these benefits is largely based upon loss development factors that contemplate a number of variables, including claims history and expected trends. These loss development factors are based on industry factors and, along with the estimated liabilities, are developed by us in consultation with external insurance brokers and actuaries. Changes in loss development factors, claims history, and cost trends could result in substantially different results in the future.

Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is provided in Note 2 to the Consolidated Financial Statements.
Non-GAAP Measures
We have included in this report measures of financial performance that are not defined by GAAP (“Non-GAAP”). A non-GAAP financial measure is a numerical measure of financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the Company’s Consolidated Financial Statements. We believe these measures provide useful information to the users of the financial statements as we also have included these measures in other communications and publications.
For each of these non-GAAP financial measures, we provide a reconciliation between the non-GAAP measure and the most directly comparable GAAP measure, an explanation of why management believes the non-GAAP measure provides useful information to financial statement users, and any additional purposes for which management uses the non-GAAP measure. This non-GAAP financial information is provided as additional information for the financial statement users and is not in accordance with, or an alternative to, GAAP. These non-GAAP measures may be different from similar measures used by other companies.
Adjusted Diluted Earnings Per Share, Adjusting for Certain Items Affecting Comparability
Adjusted earnings per fully diluted share (“adjusted diluted EPS”) reflects adjustments to GAAP earnings per fully diluted share to identify items that, in management’s judgment, significantly affect the assessment of earnings results between periods. This information is provided in order to allow investors to make meaningful comparisons of the Company’s earnings performance between periods and to view the Company’s business from the same perspective as Company management. This measure is also used as a component of the Board of Director’s measurement of the Company’s performance for incentive compensation purposes. As the Company cannot predict the timing and amount of charges that include, but are not limited to, items such as acquisition, integration, divestiture, and related costs, mark-to-market adjustments on derivative contracts, or foreign currency exchange impact on the re-measurement of intercompany notes, management does not consider these costs when evaluating the Company’s performance, when making decisions regarding the allocation of resources, in determining incentive compensation, or in determining earnings estimates.

38



The reconciliation of adjusted diluted EPS, excluding certain items affecting comparability, to the relevant GAAP measure of diluted EPS as presented in the Consolidated Statements of Operations, is as follows:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(unaudited)
Diluted loss per share per GAAP
 
$
(1.10
)
 
$
(5.01
)
 
$
(4.10
)
Restructuring programs
(1)
3.29

 
1.52

 
0.37

Mark-to-market adjustments
(2)
0.40

 
(0.04
)
 
(0.25
)
CEO transition costs
(3)
0.23

 

 

Plant restoration costs
(4)
0.18

 

 

Debt amendment and repurchase activity
(5)
0.12

 
0.09

 

Foreign currency loss (gain) on re-measurement of intercompany notes
(6)
0.11

 
(0.10
)
 
(0.05
)
Tax indemnification
(7)
0.06

 

 

Product recall
(8)
0.01

 
(0.15
)
 
0.28

Acquisition, integration, divestiture, and related costs
(9)
(0.12
)
 
1.76

 
1.06

Impairment of goodwill and other intangible assets
(10)

 
9.55

 
6.30

Tax reform
(11)

 
(1.86
)
 

Taxes on adjusting items
 
(1.00
)
 
(2.99
)
 
(0.66
)
Dilutive impact of shares 1
 
0.02

 
0.04

 

Adjusted diluted EPS
 
$
2.20

 
$
2.81

 
$
2.95

(1) - As reported results reflect a loss, therefore, all equity awards were considered anti-dilutive and excluded from the EPS calculation.  However, adjusted amounts reflect net income, therefore, equity awards are considered dilutive, and an adjustment is required to reflect total dilutive shares of 56.5 million compared to basic shares of 56.0 million and total dilutive shares of 57.6 million compared to basic shares of 57.1 million for the years ended December 31, 2018 and 2017, respectively.
During the years ended December 31, 2018 and 2017, the Company entered into transactions that affected the year-over-year comparison of its financial results that included the following:
(1) The Company’s restructuring and margin improvement activities are part of an enterprise-wide transformation to improve long-term profitability of the Company. During 2018, the Company incurred approximately $186.0 million in restructuring program costs versus $87.7 million in 2017 and $21.0 million in 2016. See Note 3 of the Consolidated Financial Statements for additional information.
(2) The Company’s derivative contracts are marked-to-market each period with the unrealized changes in fair value being recorded in the Consolidated Statements of Operations. These are non-cash charges. As the contracts are settled, realized gains and losses are recognized and included in earnings. The mark-to-market impacts only are treated as non-GAAP adjustments. Refer to Note 20 for additional details.
(3) The CEO transition cost line primarily relates to accelerated stock-based compensation and modification accounting related to the transition of Chief Executive Officer. Refer to Note 15 for additional details.

(4) During 2018, the Company incurred $10.4 million in plant restoration costs.  In the third quarter of 2018, these costs related to an unplanned and extended shutdown at a Snacks plant in Robersonville, North Carolina and primarily reflected the unabsorbed expenses associated with the volume loss.  In the fourth quarter of 2018, we recognized abnormal inventory spoilage costs directly related to this temporary plant shutdown.  The shutdown and related costs were necessary to restore the quality and performance of our equipment and processes. 

(5) During 2018, the Company amended its Credit Agreement, resulting in third party costs to complete the transaction. The Company also completed the repurchase of certain of its outstanding debt in 2018.  This activity resulted in the write-off of a portion of deferred financing costs as well as a loss on debt extinguishment. During 2017, the Company refinanced our credit facility including our revolver and related term loans. This activity resulted in the write-off of a portion of deferred financing costs as well as third party costs to complete the transactions.


39



(6) The Company has Canadian dollar denominated intercompany loans and incurred foreign currency loss in 2018 and foreign currency gain in 2017 to re-measure the loans at year end. These charges are non-cash and the loans are eliminated in consolidation.

(7) The tax indemnification line represents the non-cash write off of indemnification assets that were recorded in connection with acquisitions from prior years.  These write-offs arose as a result of the related uncertain tax position being released due to the statute of limitation lapse or settlement with taxing authorities.  Refer to Note 11 for additional details.
(8) The product recall costs (reimbursement) primarily represents an announced voluntary recall of products that occurred in 2016 regarding products that may be impacted by sunflower seeds potentially contaminated with Listeria monocytogenes (L.mono) that were provided by a supplier. Product was distributed nationwide through retail stores. TreeHouse initiated the voluntary recall as a cautionary measure to protect public health. Costs include, but are not limited to, customer fees, customer reimbursements, inventory write-offs, and other costs to manage the recall. The Company expects to be reimbursed for these costs and has excluded related recoveries from adjusted earnings for proceeds received in 2017. In February 2017 and August 2017, the Company received $4.0 million reimbursements ($8.0 million combined).
(9) The acquisition, integration, divestiture, and related costs line represents costs associated with completed and potential acquisitions, the related integration of the acquisitions, and divestitures. Gains incurred in 2018 primarily related to divestiture activity and transition services agreement (“TSA”) revenue related to the SIF divestiture, while costs incurred in 2017 primarily related to the divestiture of the SIF business and the continued integration of the Private Brands business.
(10) During 2017, the Company incurred $549.7 million of impairment of goodwill and other intangible assets.  This amount is comprised of a $276.4 million non-cash impairment charge related to goodwill allocated to the Snacks reporting unit and a $273.3 million non-cash impairment charge related to the customer related intangible assets of the Snacks reporting unit.
(11) The tax reform line represents the impact of the Tax Act which was signed into law on December 22, 2017 and made significant changes to the Internal Revenue Code.  For the period ending December 31, 2017, the Company recorded a provisional net benefit of $104.2 million, primarily attributable to adjustments to our net deferred tax liability, partially offset with a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings. The tax impact recorded for the year ended December 31, 2018 was insignificant and the Company considers all provisional amounts to be final.
The tax impact on adjusting items is calculated based upon the tax laws and statutory tax rates applicable in the tax jurisdiction of the underlying non-GAAP adjustments.
Adjusted Net Income, Adjusted EBIT, and Adjusted EBITDAS, Adjusting for Certain Items Affecting Comparability
Adjusted net income represents GAAP net loss as reported in the Consolidated Statements of Operations adjusted for items that, in management’s judgment, significantly affect the assessment of earnings results between periods as outlined in the adjusted diluted EPS section above. This information is provided in order to allow investors to make meaningful comparisons of the Company’s earnings performance between periods and to view the Company’s business from the same perspective as Company management. This measure is also used as a component of the Board of Director’s measurement of the Company’s performance for incentive compensation purposes and is the basis of calculating the adjusted diluted EPS metric outlined above.
Adjusted EBIT represents adjusted net income before interest expense, interest income, and income tax expense. Adjusted EBITDAS represents adjusted net income before interest expense, interest income, income tax expense, depreciation and amortization expense, and non-cash stock-based compensation expense. Adjusted EBITDAS is a performance measure commonly used by management to assess operating performance, and the Company believes it is commonly reported and widely used by investors and other interested parties as a measure of a company’s operating performance between periods and as a component of our debt covenant calculations.

40



The following table reconciles the Company’s net loss as presented in the Consolidated Statements of Operations, the relevant GAAP measure, to Adjusted net income, Adjusted EBIT, and Adjusted EBITDAS for the years ended December 31, 2018, 2017, and 2016:
 
 
Year Ended December 31,
 
 
2018
 
2017
 
2016
 
 
(unaudited in millions)
Net loss per GAAP
 
$
(61.4
)
 
$
(286.2
)
 
$
(228.6
)
Restructuring programs
(1)
186.0

 
87.7

 
21.0

Mark-to-market adjustments
(2)
22.5

 
(2.3
)
 
(14.1
)
CEO transition costs
(3)
13.0

 

 

Plant restoration costs
(4)
10.4

 

 

Debt amendment and repurchase activity
(5)
6.8

 
5.0

 

Foreign currency loss (gain) on re-measurement of intercompany notes
(6)
6.2

 
(5.9
)
 
(3.0
)
Tax indemnification
(7)
3.2

 

 

Product recall
(8)
0.4

 
(8.4
)
 
15.6

Acquisition, integration, divestiture, and related costs
(9)
(6.6
)
 
101.4

 
60.1

Impairment of goodwill and other intangible assets
(10)

 
549.7

 
352.2

Tax reform
(11)

 
(106.8
)
 

Less: Taxes on adjusting items
 
(56.3
)
 
(172.3
)
 
(37.0
)
Adjusted net income
 
124.2

 
161.9