Seneca Foods Corp - Quarter Report: 2006 December (Form 10-Q)

For the Quarter Ended December 30, 2006

Commission File Number 0-01989

New York	16-0733425
(State or other jurisdiction of	(I. R. S. Employer
incorporation or organization)	Identification No.)

3736 South Main Street, Marion, New York	14505
(Address of principal executive offices)	(Zip Code)

 

 

Class	Shares Outstanding at January 31, 2007
Common Stock Class A, $.25 Par	4,811,684
Common Stock Class B, $.25 Par	2,760,905

 

PART I ITEM 1 FINANCIAL INFORMATION
SENECA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
		Unaudited
		December 30, 2006			March 31, 2006
ASSETS
Current Assets:
Cash and Cash Equivalents		$	3,749		$	6,046
Accounts Receivable, Net			76,964			46,618
Inventories:
Finished Goods			406,063			220,185
Work in Process			33,665			22,012
Raw Materials			47,043			65,095
			486,771			307,292
Off-Season Reserve (Note 2)			(66,958	)		-
Deferred Income Tax Asset, Net			6,535			6,426
Assets Held For Sale			28,000			1,369
Other Current Assets			979			2,141
Total Current Assets			536,040			369,892
Property, Plant and Equipment, Net			171,419			148,501
Other Assets			3,187			5,273
Total Assets		$	710,646		$	523,666
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable		$	-		$	57,029
Accounts Payable			61,480			35,163
Accrued Expenses			49,073			32,312
Income Taxes Payable			8,180			6,090
Current Portion of Long-Term Debt and Capital
Lease Obligations			9,993			9,788
Total Current Liabilities			128,726			140,382
Long-Term Debt, Less Current Portion			290,399			138,813
Capital Lease Obligations, Less Current Portion			-			3,773
Deferred Income Taxes			5,805			7,538
Other Long-Term Liabilities			19,380			15,381
Total Liabilities			444,310			305,887
Commitments
10% Preferred Stock, Series A, Voting, Cumulative,
Convertible, $.025 Par Value Per Share			102			102
10% Preferred Stock, Series B, Voting, Cumulative,
Convertible, $.025 Par Value Per Share			100			100
6% Preferred Stock, Voting, Cumulative, $.25 Par Value			50			50
Convertible, Participating Preferred Stock, $12.00
Stated Value Per Share			35,714			41,005
Convertible, Participating Preferred Stock, $15.50
Stated Value Per Share			8,677			13,229
Convertible, Participating Preferred Stock, $24.39
Stated Value Per Share			25,000			-
Common Stock $.25 Par Value Per Share			3,074			2,890
Paid in Capital			28,253			17,810
Accumulated Other Comprehensive Income			77			-
Retained Earnings			165,289			142,593
Stockholders' Equity			266,336			217,779
Total Liabilities and Stockholders’ Equity		$	710,646		$	523,666
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SENECA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS
(Unaudited)
(In Thousands, Except Per Share Data)
		Three Months Ended						Nine Months Ended
		December 30, 2006			December 31, 2005			December 30, 2006			December 31, 2005
Net Sales		$	391,012		$	316,253		$	822,677		$	717,017
Costs and Expenses:
Cost of Product Sold			353,668			290,007			730,248			647,311
Selling and Administrative			16,347			11,971			43,954			34,690
Plant Restructuring			374			290			374			1,751
Other Operating (Income) Loss			(3,193	)		(563	)		(5,159	)		842
Total Costs and Expenses			367,196			301,705			769,417			684,594
Operating Income			23,816			14,548			53,260			32,423
Interest Expense			5,675			3,918			15,491			11,847
Earnings Before Income Taxes			18,141			10,630			37,769			20,576
Income Taxes			6,819			3,694			14,265			7,533
Net Earnings		$	11,322		$	6,936		$	23,504		$	13,043
Earnings Applicable to Common Stock		$	7,051		$	4,254		$	14,130		$	7,966
Basic Earnings per Common Share		$	0.93		$	0.62		$	1.94		$	1.17
Diluted Earnings per Common Share		$	0.92		$	0.62		$	1.93		$	1.16

SENECA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
		Nine Months Ended
		December 30, 2006			December 31, 2005
Cash Flows from Operating Activities:
Net Earnings		$	23,504		$	13,043
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operations:
Depreciation & Amortization			17,380			17,946
Gain on the Sale of Assets			(5,159	)		(990	)
Non-Cash Disposal of Property and Equipment			-			1,832
Deferred Tax Benefit			(1,842	)		(1,906	)
Changes in Working Capital (excluding effects of
business combination):
Accounts Receivable			(15,110	)		(5,144	)
Inventories			(102,022	)		(85,958	)
Off-Season Reserve			75,327			56,218
Other Current Assets			5,757			4,961
Income Taxes			2,090			1,694
Accounts Payable, Accrued Expenses
and Other Liabilities			6,817			(305	)
Net Cash Provided by Operations			6,742			1,391
Cash Flows from Investing Activities:
Additions to Property, Plant and Equipment			(14,611	)		(8,225	)
Cash Paid For Acquisition			(22,288	)		-
Cash Received from Acquisition			952			-
Proceeds from the Sale of Assets			4,040			1,247
Net Cash Used in Investing Activities			(31,907	)		(6,978	)
Cash Flow from Financing Activities:
Payments on Notes Payable			(40,936	)		(285,651	)
Borrowing on Notes Payable			39,390			304,409
Long-Term Borrowing			371,475			83
Payments on Long-Term Debt and Capital Lease Obligations			(347,755	)		(14,139	)
Other			706			330
Dividends Paid			(12	)		(12	)
Net Cash Provided by Financing Activities			22,868			5,020
Net Decrease in Cash and Cash Equivalents			(2,297	)		(567	)
Cash and Cash Equivalents, Beginning of the Period			6,046			5,179
Cash and Cash Equivalents, End of the Period		$	3,749		$	4,612
Supplemental information of non-cash investing and financing activities:
$25.0 million of Preferred Stock was issued in partial consideration for the Signature acquisition in 2006. A dividend of $784,000 was recorded based on the beneficial conversion of this Preferred Stock for the difference between the exercise price of $24.385 and the average price when the acquisition was announced. The Company assumed $45.5 million of Signature long-term debt.

 

 

 

2.

In November 2004, the FASB (Financial Accounting Standards Board) issued Statement of Financial Accounting Standards No. 151, Inventory Costs - An Amendment of ARB No. 43, Chapter 4. This statement amends ARB No. 43, Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. Additionally, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. As required, the Company adopted SFAS 151 effective April 1, 2006. This statement did not have a material impact on the Company’s financial position or results of operations.

3.

The fiscal 2006 asparagus harvest, completed in the first fiscal quarter, represented a partial pack as GMOI moved the production of asparagus offshore from the Dayton, Washington manufacturing facility. As fiscal 2006 represents the final year of operation for the Dayton, Washington facility, the Company and GMOI have negotiated a definitive agreement related to the pending closure of this facility. Under the terms of the agreement, any costs incurred by the Company related to the asparagus production prior to March 31, 2006 were paid by GMOI. The Company retained ownership of the real estate associated with the Dayton facility. In addition, the manufacturing equipment of the Dayton facility was either conveyed to GMOI, redeployed by the Company, or salvaged. GMOI reduced the principal balance of the $43.1 million secured nonrecourse subordinated promissory note by $0.6 million in November 2005, which represents the net book value of the equipment to be conveyed to GMOI or salvaged.

4.

The seasonal nature of the Company's food processing business results in a timing difference between expenses (primarily overhead expenses) incurred and absorbed into product cost. All Off-Season Reserve balances, which essentially represent a contra-inventory account, are zero at fiscal year end. Depending on the time of year, Off-Season Reserve is either the excess of absorbed expenses over incurred expenses to date or the excess of incurred expenses over absorbed expenses to date. Other than at the end of the first and fourth fiscal quarter of each year, absorbed expenses exceed incurred expenses due to timing of production.

5.

During the quarter ended October 1, 2005, as of result of a detailed review of property, plant and equipment at each plant, the Company recorded a non-cash loss on disposal of property and equipment of $1,832,000 which was included in Other Expense (Income) (net) in the Unaudited Condensed Consolidated Statements of Net Earnings.

6.

During the first fiscal quarter of 2007, the Company entered into a Natural Gas Hedge in the form of a swap transaction where the Company purchased, on a forward basis, 50% of its requirements for natural gas during the June 1, 2006 to December 31, 2006 time frame at $7.00 per decatherm. The Company realized a $381,000 loss on this hedge during the nine months ended December 30, 2006. No hedging transactions remain open as of December 30, 2006.

7.

During the quarter ended October 1, 2005, the Company announced the phase out of the labeling operation within the leased distribution facility in Oregon which resulted in a restructuring charge of $1,461,000. During the quarter ended December 31, 2005, the Company recorded an additional restructuring charge of $290,000 which represented a planned further reduction in utilization of the facility. The total restructuring charge of $1,751,000 consisted of a provision for future lease payments of $1,306,000, a cash severance charge of $368,000, and a non-cash impairment charge of $77,000. With the closure of this Washington facility in the fall of 2004, the Company’s labeling and warehousing requirements at the Oregon location were dramatically reduced. The Company intends to use a portion of the facility for warehousing and will attempt to sublease the remaining unutilized portion of the facility until the February 2008 expiration of the lease. During the quarter ended December 30, 2006, the Company recorded an additional restructuring charge of $374,000 which represented a further reduction in utilization of the facility.

8.

On November 20, 2006, the Company issued a mortgage payable to GE Commercial Finance Business Property Corporation for $23.8 million with an interest rate of 6.98% and a term of 15 years. The proceeds were used to pay down debt associated with the acquisition of Signature Fruit Company, LLC. This mortgage is secured by a portion of property in Modesto, California acquired via the Signature Fruit Company, LLC acquisition.

9.

In July 2006, the FASB issued Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ,” (“FIN 48”), which seeks to reduce the diversity in practice associated with the accounting and reporting for uncertainty in income tax positions. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. An uncertain tax position will be recognized if it is determined that it is more likely than not to be sustained upon examination. The tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The cumulative effect of applying the provisions of this interpretation is to be reported as a separate adjustment to the opening balance of retained earnings in the year of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006 and the Company plans to adopt the pronouncement in the first fiscal quarter of fiscal 2008. The Company is in the process of evaluating the impact of the adoption of FIN 48 on its consolidated financial statements.

10.

In September 2006, the FASB issued Statement of Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This standard requires employers to recognize the underfunded or overfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income, which is a component of stockholders’ equity. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as of the date of its year-end statement of financial position, which is consistent with the Company’s present measurement date. The Company has evaluated the impact that the implementation of SFAS No. 158 will have on its financial statements. Utilizing current assumptions, which may change by the March 31, 2007 measurement date, the Company anticipates an approximately $2.9 million after-tax decrease to accumulated other comprehensive income, which would result in a reduction to stockholders’ equity. SFAS No. 158 does not change the amount of actuarially determined expense that is recorded in the consolidated statement of income. The new reporting requirements and related new footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending after December 15, 2006.

11.

During the nine month period ended December 30, 2006, there were 737,175 shares or $9,843,000 of Participating Convertible Preferred Stock converted to Class A Common Stock. During the nine month period ended December 31, 2005, there were 115,292 shares or $1,783,000 of Participating Convertible Preferred Stock converted to Class A Common Stock.

 

12.

For the three months ended December 30, 2006, comprehensive income totaled $11,305,000, including a $55,000 Net Unrealized Loss on Securities classified as available-for-sale, which are purchased solely for the Company’s 401(k) match and the reversal of a $38,000 Net Unrealized Loss on a Natural Gas Hedge since the hedge is now closed, which is discussed above. For the nine months ended December 30, 2006, Comprehensive income totaled $23,581,000, including a $77,000 Net Unrealized Gain on Securities classified as available-for-sale, which are purchased solely for the Company’s 401(k) match. Comprehensive income equaled Net Earnings for the three and nine months ended December 31, 2005.

13.

The only changes in Stockholders’ Equity accounts for the nine months period ended December 30, 2006, other than the Accumulated Other Comprehensive Income described above, is an increase of $23,504,000 for Net Earnings, an increase of $25,000,000 for the new Participating Preferred Stock to partially fund the Signature Fruit Company, LLC acquisition discussed below, and a reduction of $24,000 for preferred cash dividends.

14.	Certain previously reported amounts have been reclassified to conform to current period classification.

 

15.	The net periodic benefit cost for pension plans consist of:

		Three Months Ended						Nine Months Ended
		December 30, 2006			December 31, 2005			December 30, 2006			December 31, 2005
Service Cost		$	1,039		$	620		$	3,119		$	2,819
Interest Cost			1,117			1,027			3,352			3,081
Expected Return on Plan Assets			(1,458	)		(1,378	)		(4,375	)		(4,133	)
Amortization of Transition Asset			(69	)		(69	)		(207	)		(207	)
Net Periodic Benefit Cost		$	629		$	200		$	1,889		$	1,560

16.

During the quarter ended December 25, 2004, the Company announced the closure of a processing facility in Washington. This facility was sold during the quarter ended July 2, 2005 for $514,000 in cash and a $3,550,000 note which carries an interest rate of 8% and is due in full May 14, 2007. This Note was secured by a mortgage on the property. The Company accounted for the sale under the installment method. During the quarter ended July 2, 2005, $427,000 of the gain was included in Other Income and an additional $2,800,000 of the gain on this sale was deferred in Other Long-Term Liabilities. During the quarter ended December 30, 2006, the $3,550,000 note was collected and the gain of $2,800,000 was recorded and included in Other Operating Income in the Unaudited Condensed Consolidated Statements of Net Earnings.

					Long-Lived
		Severance			Asset Charges			Other Costs			Total
Balance March 31, 2006		$	169		$	250		$	2,687		$	3,106
Third fiscal quarter charge			-			-			374			374
Cash payments			(155	)		-			(689	)		(844	)
Balance December 30, 2006		$	14		$	250		$	2,372		$	2,636

17.

During the first fiscal quarter of 2007, the Company sold a closed plant in New York and a receiving station in Washington which resulted in gains of $282,000 and $406,000, respectively. During the second fiscal quarter of 2007, the Company sold a closed plant in New York which resulted in a gain of $1,610,000 and a warehouse facility in Idaho which resulted in a loss of $321,000. These gains and losses are included in Other Operating Income in the Unaudited Condensed Consolidated Statements of Net Earnings. Each of these facilities had been included in Assets Held For Sale on the Balance Sheet.

18.	Earnings per share (In thousands, except per share data):

Quarters and Year-to-date Periods Ended		Q U A R T E R						Y E A R T O D A T E
December 30, 2006 and December 31, 2005		2006			2005			2006			2005
		(In thousands, except share amounts)
Basic
Net Earnings		$	11,322		$	6,936		$	23,504		$	13,043
Deduct preferred stock dividends			6			6			801			17
Undistributed earnings			11,316			6,930			22,703			13,026
Earnings allocated to participating preferred			4,265			2,676			8,573			5,060
Earnings allocated to common shareholders		$	7,051		$	4,254		$	14,130		$	7,966
Weighted average common shares outstanding			7,572			6,829			7,279			6,804
Basis earnings per common share		$	0.93		$	0.62		$	1.94		$	1.17
Diluted
Earnings allocated to common shareholders		$	7,051		$	4,254		$	14,130		$	7,966
Add dividends on convertible preferred stock			5			5			15			15
Earnings applicable to common stock on a diluted basis		$	7,056		$	4,259		$	14,145		$	7,981
Weighted average common shares outstanding-basic			7,572			6,829			7,279			6,804
Additional shares to be issued under full conversion of preferred stock			67			67			67			67
Total shares for diluted			7,639			6,896			7,346			6,871
Diluted Earnings per common share		$	0.92		$	0.62		$	1.93		$	1.16

19.

On August 18, 2006, the Company completed its acquisition of 100% of the membership interest in Signature Fruit Company, LLC (“Signature”) from John Hancock Life Insurance Company and John Hancock Variable Life Insurance Company. The rationale for the acquisition was twofold: (1) to broaden the Company’s product offerings into the canned fruit business; and (2) to take advantage of distribution efficiencies by combining vegetables and fruits on shipments since the customer base of the two companies is similar. The purchase price totaled $47.3 million plus the assumption of certain liabilities. This acquisition was financed with proceeds from a newly expanded $250.0 million revolving credit facility, and $25.0 million of the Company’s Participating Convertible Preferred Stock. The Preferred Stock is convertible into the Company’s Class A Common Stock on a one-for-one basis subject to antidilution adjustments. The Preferred Stock was valued at $24.385 per share based on the market value of the Class A Common Stock during the 30 day average period prior to the acquisition. A dividend of $784,000 was recorded based on the beneficial conversion of this Preferred Stock for the difference between the exercise price of $24.385 and the average price when the acquisition was announced. The purchase price to acquire Signature was allocated based on the internally developed fair value of the assets and liabilities acquired and is subject to revision after the results of the independent valuation of property, plant, and equipment becomes available. The purchase price of $47.3 million has been calculated as follows (in millions):

Cash		$	20.0
Issuance of convertible preferred stock			25.0
Closing costs			2.3
Purchase Price		$	47.3

The total purchase price of the transaction has been allocated as follows:
Current assets		$	131.0
Property, plant and equipment			25.9
Other assets			2.3
Current liabilities			(58.4	)
Long-term debt			(45.5	)
Other non-current liabilities			(8.0	)
Total		$	47.3

 

 

Cash		$	20.0
Issuance of convertible preferred stock			25.0
Closing costs			2.3
Purchase Price		$	47.3

The total purchase price of the transaction has been allocated as follows:
Current assets		$	131.0
Property, plant and equipment			25.9
Other assets			2.3
Current liabilities			(58.4	)
Long-term debt			(45.5	)
Other non-current liabilities			(8.0	)
Total		$	47.3

		Three Months Ended						Nine Months Ended
		December 30, 2006			December 31, 2005			December 30, 2006			December 31, 2005
Canned Vegetables		$	172.1		$	180.5		$	452.3		$	429.0
Green Giant Alliance			138.4			117.4			209.3			235.0
Frozen Vegetables			9.8			8.1			25.5			21.0
Fruit and Chip Products			67.6			6.2			124.4			21.8
Other			3.1			4.1			11.2			10.2
		$	391.0		$	316.3		$	822.7		$	717.0

		Three Months Ended						Nine Months Ended
		December 30, 2006			December 31, 2005			December 30, 2006			December 31, 2005
Gross Margin			9.6	%		8.4	%		11.3	%		9.7	%
Selling			2.6	%		2.4	%		3.3	%		2.9	%
Administrative			1.6	%		1.4	%		2.1	%		2.0	%
Plant Restructuring			0.1	%		0.1	%		0.0	%		0.2	%
Other Operating Income			-0.8	%		-0.2	%		-0.6	%		0.1	%
Operating Income			6.1	%		4.7	%		6.5	%		4.5	%
Interest Expense			1.5	%		1.2	%		1.9	%		1.7	%

 

		December						March
		2006			2005			2006			2005
Working Capital:
Balance			407,314			218,586			229,510			205,430
Change in Quarter			(39,294	)		2,789			-			-
Notes Payable			-			79,491			57,029			60,733
Long-Term Debt			290,399			144,500			142,586			154,125
Current Ratio			4.16			2.31			2.63			2.34

 

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) or Shares that May Yet Be Purchased Under the Plans or Programs
	Class A Common	Class B Common	Class A Common	Class B Common
10/01/06 - 10/31/06	-	-	-	-	N/A	N/A
11/01/06 - 11/30/06	-	-	-	-	N/A	N/A
12/01/06 - 12/31/06	1,000	-	$26.06	-	N/A	N/A
Total	1,000	-	$26.06	-	N/A	N/A