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Seneca Foods Corp - Quarter Report: 2007 December (Form 10-Q)

a10q122907.htm
Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549


QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarter Ended December 29, 2007
Commission File Number  0-01989
Seneca Foods Corporation
(Exact name of Company as specified in its charter)
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)

Company's telephone number, including area code          315/926-8100

Not Applicable
Former name, former address and former fiscal year,
if changed since last report

Indicate by check mark whether the Company (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 Company 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 Company is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  ¨  Accelerated filer  þ Non-accelerated filer  ¨ Smaller reporting company  ¨

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨  No   þ

The number of shares outstanding of each of the issuer's classes of common stock at the latest practical date are:

Class
Shares Outstanding at January 31, 2008
Common Stock Class A, $.25 Par
4,830,268
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 29, 2007
   
March 31, 2007
 
ASSETS
           
             
Current Assets:
           
Cash and Cash Equivalents
  $ 12,185     $ 8,552  
Accounts Receivable, Net
    62,246       55,500  
Inventories:
               
Finished Goods
    441,401       286,866  
Work in Process
    43,427       21,635  
Raw Materials
    57,603       71,986  
Off-Season Reserve (Note 3)
    (66,835 )     -  
Total Inventory
    475,596       380,487  
Deferred Income Tax Asset, Net
    6,734       6,260  
Other Current Assets
    2,232       640  
Total Current Assets
    558,993       451,439  
Property, Plant and Equipment, Net
    183,780       172,235  
Deferred Income Tax Asset, Net
    979       -  
Other Assets
    2,498       3,041  
Total Assets
  $ 746,250     $ 626,715  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities:
               
Accounts Payable
  $ 67,928     $ 58,615  
Accrued Expenses
    45,455       38,980  
Accrued Vacation
    9,027       8,999  
Income Taxes Payable
    5,732       357  
Current Portion of Long-Term Debt and Capital
               
Lease Obligations
    10,063       10,033  
Total Current Liabilities
    138,205       116,984  
Long-Term Debt, Less Current Portion
    294,362       210,395  
Deferred Income Taxes, Net
    -       4,120  
Other Long-Term Liabilities
    20,508       21,645  
    Total Liabilities
    453,075       353,144  
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
    35,600       35,691  
Convertible, Participating Preferred Stock, $15.50
               
Stated Value Per Share
    8,597       8,676  
Convertible, Participating Preferred Stock, $24.39
               
Stated Value Per Share
    25,000       25,000  
Common Stock $.25 Par Value Per Share
    3,078       3,075  
Paid in Capital
    28,453       28,277  
Accumulated Other Comprehensive Loss
    (1,331 )     (1,253 )
Retained Earnings
    193,526       173,853  
Stockholders' Equity
    293,175       273,571  
Total Liabilities and Stockholders’ Equity
  $ 746,250     $ 626,715  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

 
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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 29, 2007
   
December 30, 2006
   
December 29, 2007
   
December 30, 2006
 
                         
Net Sales
  $ 381,193     $ 391,012     $ 845,080     $ 822,677  
                                 
Costs and Expenses:
                               
Cost of Product Sold
    348,671       353,668       754,051       730,248  
Selling and Administrative
    16,520       16,347       46,279       43,954  
Plant Restructuring
    14       374       104       374  
Other Operating (Income) Loss
    (10 )     (3,193 )     (299 )     (5,159 )
Total Costs and Expenses
    365,195       367,196       800,135       769,417  
      Operating Income
    15,998       23,816       44,945       53,260  
Interest Expense
    5,373       5,675       14,374       15,491  
Earnings Before Income Taxes
    10,625       18,141       30,571       37,769  
                                 
Income Taxes
    3,847       6,819       11,098       14,265  
Net Earnings
  $ 6,778     $ 11,322     $ 19,473     $ 23,504  
                                 
Earnings Applicable to Common Stock
  $ 4,228     $ 7,051     $ 12,139     $ 14,130  
                                 
Basic Earnings per Common Share
  $ 0.56     $ 0.93     $ 1.60     $ 1.94  
                                 
Diluted Earnings per Common Share
  $ 0.55     $ 0.92     $ 1.59     $ 1.93  
                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
         


 
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SENECA FOODS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
(In Thousands)
 
   
   
Nine Months Ended
 
   
December 29, 2007
   
December 30, 2006
 
Cash Flows from Operating Activities:
           
Net Earnings
  $ 19,473     $  23,504  
Adjustments to Reconcile Net Earnings to
               
Net Cash  (Used in) Provided by Operations:
               
Depreciation & Amortization
    16,673       17,380  
Gain on the Sale of Assets
    (299 )     (5,159 )
Deferred Tax Benefit
    (5,350 )     (1,842 )
Changes in Working Capital (excluding effects of business
combination):
               
Accounts Receivable
    (6,746 )     (15,110 )
Inventories
    (161,944 )     (102,022 )
Off-Season Reserve
    66,835       75,327  
Other Current Assets
    (1,592 )     5,757  
Income Taxes
    5,375       2,090  
Accounts Payable,  Accrued Expenses
               
and Other Liabilities
    13,518       6,817  
Net Cash (Used in) Provided by Operations
    (54,057 )     6,742  
Cash Flows from Investing Activities:
               
Additions to Property, Plant and Equipment
    (27,064 )     (14,611 )
Cash Paid for Acquisition
    -       (22,288 )
Cash Received from Acquisition
    -       952  
Proceeds from the Sale of Assets
    298       4,040  
Net Cash Used in Investing Activities
    (26,766 )     (31,907 )
Cash Flow from Financing Activities:
               
Payments on Notes Payable
    -       (40,936 )
Borrowing on Notes Payable
    -       39,390  
Long-Term Borrowing
    360,916       371,475  
Payments on Long-Term Debt and Capital Lease Obligations
    (276,919 )     (347,755 )
Other
    471       706  
Dividends
    (12 )     (12 )
Net Cash  Provided by Financing Activities
    84,456       22,868  
Net Increase (Decrease) in Cash and Cash Equivalents
    3,633       (2,297 )
Cash and Cash Equivalents, Beginning of the Period
    8,552       6,046  
Cash and Cash Equivalents, End of the Period
  $ 12,185     $  3,749  
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
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SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
December 29, 2007

1.         Unaudited Condensed Consolidated Financial Statements
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of Seneca Foods Corporation (the “Company”) as of December 29, 2007 and results of its operations and its cash flows for the interim periods presented.  All significant intercompany transactions and accounts have been eliminated in consolidation.  The March 31, 2007 balance sheet was derived from the audited consolidated financial statements.
 
The results of operations for the three and nine month periods ended December 29, 2007 are not necessarily indicative of the results to be expected for the full year.

In the nine-months ended December 29, 2007, the Company sold product for cash, on a bill and hold basis of $176,657,000 of Green Giant finished goods inventory to General Mills Operations, Inc. (“GMOI”) as compared to $179,289,000 for the nine-months ended December 30, 2006. Under the terms of the bill and hold agreement, title to the specified inventory transferred to GMOI.  The Company believes it has met the criteria required for bill and hold treatment.

The accounting policies followed by the Company are set forth in Note 1 to the Company's Consolidated Financial Statements in the 2007 Seneca Foods Corporation Annual Report on Form 10-K.

Other footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company's 2007 Annual Report on Form 10-K.
 
2.  
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS Statement No. 109” (“FIN 48”), on April 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a minimum recognition threshold for a tax position taken or expected to be taken in a tax return that is required to be met before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The cumulative effect of adopting FIN 48 of $223,000 was recorded as an increase to Retained Earnings. The total amount of unrecognized tax benefits as of the date of adoption was $4,175,000.  The change in the FIN 48 liability in the nine months of 2008 is a $462,000 increase.

 
Included in the balance at adoption are $2,954,000 of tax positions that are highly certain but for which there is uncertainty about the timing. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these positions would not impact the annual effective tax rate but would accelerate the payment of cash to the tax authority to an earlier period.

 
The Company recognizes interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable settlements within income tax expense. As of the date of adoption, the Company had $450,000 of interest and penalties accrued associated with unrecognized tax benefits.

 
The Company files income tax returns in the U.S. federal jurisdiction and various states.  The Company is   no longer subject to U.S. federal income tax examinations by tax authorities for years before 2004.

3.  
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.

4.  
During the first quarter of fiscal 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 29, 2007 or December 30, 2006 and all unrealized losses recorded have been realized.

5.  
With the closure of a Washington facility in the fall of 2004, the Company’s labeling and warehousing requirements at its Oregon location were dramatically reduced.  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 July 2, 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.  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.  The Company used a portion of the facility for warehousing and attempted to sublease the remaining unutilized portion of the facility until the February 2008 expiration of the lease.  During the nine months ended December 29, 2007, the Company moved out of the facility and recorded a $104,000 charge as a result, which is included under Plant Restructuring in the nine months ended December 29, 2007 Unaudited Condensed Consolidated Statements of Net Earnings.

6.  
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.

7.  
During the nine-month period ended December 29, 2007; there were 12,750 shares or $170,000 of Participating Convertible Preferred Stock converted to Class A Common Stock and 3,834 shares of Class A Common issued for an Equity Compensation Plan.  During the nine-month period ended December 30, 2006, there were 737,175 shares or $9,843,000 of conversions of Participating Convertible Preferred Stock to Class A Common Stock.

 
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8.  
For the three months ended December 29, 2007, comprehensive income totaled $6,714,000, including a $64,000 Net Unrealized Loss on Securities, which are purchased solely for the Company’s 401(k) match.  Comprehensive income equaled Net Earnings for the three months ended December 30, 2006.  For the nine months ended December 29, 2007, comprehensive income totaled $19,394,000, including a $79,000 Net Unrealized Loss on Securities, which are purchased solely for the Company’s 401(k) match.  Comprehensive income equaled Net Earnings for the nine months ended December 30, 2006.

9.  
The only changes in Stockholders’ Equity accounts for the nine months period ended December 29, 2007, other than the Accumulated Other Comprehensive Income described above, is an increase of $19,473,000 for Net Earnings, an increase of $223,000 related to implementing FIN 48 as described above and a reduction of $11,000 for preferred cash dividends.

 

10.  
The net periodic benefit cost for pension plan consist of:

   
Three Months Ended
   
Nine months Ended
 
   
December 29, 2007
   
December 30, 2006
   
December 29, 2007
   
December 30, 2006
 
                         
Service  Cost
  $ 1,137     $ 1,039     $ 3,413     $ 3,119  
Interest Cost
    1,202       1,117       3,606       3,352  
Expected Return on Plan Assets
    (1,654 )     (1,458 )     (4,962 )     (4,375 )
Amortization of Transition Asset
    (69 )     (69 )     (207 )     (207 )
Net Periodic Benefit Cost
  $ 616     $ 629     $ 1,850     $ 1,889  

Although no pension contributions were required during fiscal 2008, the Company contributed $2.5 million during the third fiscal quarter. During the nine months ended December 30, 2006, the Company made a $2.5 million contribution to its defined benefit pension plan.

11.  
The following table summarizes the restructuring and related asset impairment charges recorded and the accruals established:

         
Long-Lived
             
   
Severance
   
Asset Charges
   
Other Costs
   
Total
 
Total expected
                       
 restructuring charge
  $ 1,248     $ 5,304     $ 3,772     $ 10,324  
                                 
Balance March 31, 2007
  $ 84     $ 267     $ 2,329     $ 2,680  
First nine months charge
                    104       104  
Cash payments/write-offs
    (63 )     (17 )     (927 )     (1,007 )
Balance December 29, 2007
  $ 21     $ 250     $ 1,506     $ 1,777  
                                 
Total costs incurred
                               
  to date
  $ 1,227     $ 5,054     $ 2,266     $ 8,547  

The restructuring costs above relate to the phase out of the labeling operation of the leased distribution facility in Oregon, the closure of corn plants in Wisconsin and Washington and of a green bean plant in upstate New York plus the removal of canned meat production from a plant in Idaho.  The corn plant in Washington has been sold.  The restructuring is complete in the Idaho plant and the New York plant.  The Wisconsin plant is closed and is being operated as a warehouse.

The remaining severance costs are expected to be paid prior to February 29, 2008.  The other costs relate to outstanding lease payments which will be paid over the remaining lives of the corresponding lease terms, which are up to five years.

12.  
During the nine months ended December 2007, the Company sold some unused fixed assets which resulted in gains totaling $299,000.  During the first fiscal quarter of 2007, the Company sold a closed plant in Newark, New York and a receiving station in Pasco, 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 East Williamson, New York which resulted in a gain of $1,610,000 and a warehouse facility in New Plymouth, Idaho which resulted in a loss of $321,000.  In addition, during the third fiscal quarter of 2007, the Company auctioned off unused equipment from the Idaho facility which resulted in a $3,193,000 net gain which is also included in Other Operating Income in the Unaudited Condensed Consolidated Statements of Net Earnings.

13.  
In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 redefines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect that the adoption of SFAS 157 will have a material impact on its results of operations or financial position; however, additional disclosures will be required under SFAS 157.

 
In December 2007, the FASB issued Proposed FASB Staff Position (FSP) FAS 157-b.  FSP FAS 157-b proposes deferral of the effective date of SFAS 157 until April 1, 2009 (for the Company) for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis.  FSP FAS 157-b will become effective upon issuance.

14.  
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the potential impact of SFAS 159 on our consolidated financial statements.

15.  
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” to further enhance the accounting and financial reporting related to business combinations.  SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Therefore, the effects of the Company’s adoption of SFAS No. 141(R) will depend upon the extent and magnitude of acquisitions after March 31, 2009.


 
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16.  
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 29, 2007 and 2006
 
2007
   
2006
   
2007
   
2006
 
   
(In thousands, except share amounts)
 
Basic
                       
                         
Net Earnings
  $ 6,778     $ 11,322     $ 19,473     $ 23,504  
Deduct preferred stock dividends paid
    6       6       17       801  
                                 
Undistributed earnings
    6,772       11,316       19,456       22,703  
Earnings allocated to participating preferred
    2,544       4,265       7,317       8,573  
                                 
Earnings allocated to common shareholders
  $ 4,228     $ 7,051     $ 12,139     $ 14,130  
                                 
Weighted average common shares outstanding
    7,590       7,572       7,582       7,279  
                                 
Basis earnings per common share
  $ 0.56     $ 0.93     $ 1.60     $ 1.94  
                                 
Diluted
                               
                                 
Earnings allocated to common shareholders
  $ 4,228     $ 7,051     $ 12,139     $ 14,130  
Add dividends on convertible preferred stock
    5       5       15       15  
                                 
Earnings applicable to common stock on a diluted basis
  $ 4,233     $ 7,056     $ 12,149     $ 14,145  
                                 
Weighted average common shares outstanding-basic
    7,590       7,572       7,582       7,279  
Additional shares added related to equity compensation plan
    -       -       -       -  
Additional shares to be issued under full conversion of preferred stock
    67       67       67       67  
                                 
Total shares for diluted
    7,657       7,639       7,649       7,346  
                                 
Diluted earnings per common share
  $ 0.55     $ 0.92     $ 1.59     $ 1.93  


17.  
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 the independent valuation of property, plant, and equipment.  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
  $ 131.6  
Property, plant and equipment
    26.1  
Other assets
    2.3  
Current liabilities
    (59.2 )
Long-term debt
    (45.5 )
Other non-current liabilities
    (8.0 )
Total
  $ 47.3  

The Company negotiated the sale of one of the plants and associated warehouses located in California that were acquired in the Signature Fruit acquisition.  During the fourth fiscal quarter of 2007, the plant was sold which resulted in cash proceeds of $27.8 million.  There was no gain or loss recorded on this sale since the property was valued at the net proceeds as part of the purchase price allocation.  The proceeds were used to reduce debt under the Revolving Credit Facility.


 
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
December 29, 2007
 
Seneca Foods Corporation is primarily a vegetable and fruit processing company with manufacturing facilities located throughout the United States.  Its products are sold under the Libby’s®, Aunt Nellie’s Farm Kitchen®, Stokely’s®, READ®, and SenecaÒ labels as well as through the private label and industrial markets.  In addition, under an alliance with General Mills Operations, Inc. (GMOI), a successor to the Pillsbury Company and a subsidiary of General Mills, Inc., Seneca produces canned and frozen vegetables, which are sold by General Mills Operations, Inc. under the Green Giant® label.

The Company’s raw product is harvested mainly between June through November. The Company experienced favorable growing conditions last summer and early fall reflecting a combination of adequate heat units and moisture.  These beneficial growing conditions favorably impacted crop yields and plant recovery rates, and further resulted in favorable manufacturing variances.

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 the independent valuation of property, plant, and equipment.  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
  $ 131.6  
Property, plant and equipment
    26.1  
Other assets
    2.3  
Current liabilities
    (59.2 )
Long-term debt
    (45.5 )
Other non-current liabilities
    (8.0 )
Total
  $ 47.3  

The Company negotiated the sale of one of the plants and associated warehouses located in California that were acquired in the Signature Fruit acquisition.  During the fourth fiscal quarter of 2007, the plant was sold which resulted in cash proceeds of $27.8 million.  There was no gain or loss recorded on this sale since the property was valued at the net proceeds as part of the purchase price allocation.  The proceeds were used to reduce debt under the Revolving Credit Facility.

During fiscal 2005, the Company implemented a restructuring program which principally involved the closure of three processing facilities, including a green bean plant in upstate New York and corn plants in Wisconsin and Washington. The rationalization of the Company’s productive capacity: (1) improved the Company’s overall cost structure and competitive position; (2) addressed the excess capacity situation arising from the recent acquisition of Chiquita Processed Foods and decline in GMOI volume requirements; and (3) mitigated the effect of inflationary pressures on the Company’s raw material inputs such as steel and fuel.

With the closure of a Washington facility in the fall of 2004, the Company’s labeling and warehousing requirements at its Oregon location were dramatically reduced.  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 July 1, 2006, 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.  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 nine months ended December 29, 2007, the Company moved out of the facility and recorded a $104,000 charge as a result, which is included under Plant Restructuring in the Unaudited Condensed Consolidated Statements of Net Earnings.


Results of Operations:

Sales:

Third fiscal quarter results include Net Sales of $381.2 million, which represent a 2.5% decrease, or $9.8 million from the third fiscal quarter of fiscal 2007. This sales decrease reflects a planned reduction in Green Giant Alliance sales of $12.0 million and a reduction in sales of Fruit and Chips which amounted to approximately $7.3 million, partially offset by an increase in the Net Sales of Canned Vegetables of $8.8 million.  The primary reason for the Fruit and Chips sales reduction was due to a short fruit pack in the previous year (calendar 2006), resulting in the Company running out of certain fruit inventory items, which negatively impacted Food Service and U.S. Government sales.

Nine months Ended December 29, 2007 Net Sales were $845.1 million, which represent a 2.7% increase, or $22.4 million from the nine months ended December 30, 2006. This sales increase primarily reflects an increase in sales from the Signature Fruit acquisition which amounted to approximately $29.0 million.

The following table presents sales by product category:

   
Three Months Ended
   
Nine months Ended
 
   
December 29, 2007
   
December 30, 2006
   
December 29, 2007
   
December 30, 2006
 
Canned Vegetables
  $ 180.5     $ 171.7     $ 459.5     $ 451.8  
Green Giant Alliance
    126.8       138.8       196.1       209.8  
Frozen Vegetables
    9.9       9.8       27.8       25.5  
Fruit and Chip Products
    60.3       67.6       150.9       124.4  
Other
    3.7       3.1       10.8       11.2  
    $ 381.2     $ 391.0     $ 845.1     $ 822.7  

 
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Operating Income:

The following table presents components of Operating Income as a percentage of Net Sales:

   
Three Months Ended
   
Nine Months Ended
 
   
December 29, 2007
   
December 30, 2006
   
December 29, 2007
   
December 30, 2006
 
  Gross Margin
    8.5 %     9.6 %     10.8 %     11.2 %
                                 
  Selling
    3.0 %     2.6 %     3.5 %     3.2 %
  Administrative
    1.3 %     1.6 %     2.0 %     2.1 %
  Plant Restructuring
    0.0 %     0.1 %     0.0 %     0.0 %
  Other Operating Income
    0.0 %     -0.8 %     0.0 %     -0.6 %
                                 
  Operating Income
    4.2 %     6.1 %     5.3 %     6.5 %
                                 
  Interest Expense
    1.4 %     1.5 %     1.7 %     1.9 %

For the three month period ended December 29, 2007, the gross margin decreased from the prior year quarter of 9.6% to 8.5% due primarily to higher costs of the current year pack as compared to the prior year.  Selling costs as a percentage of sales increased as the result of sales mix.

For the nine month period ended December 29, 2007, the gross margin decreased slightly from 11.2% in the prior nine month period compared to the same period in the current year at 10.8% due primarily to higher costs of the current year pack as compared to the prior year.  Selling costs as a percentage of sales increased as a result of sales mix.  Administrative costs as a percentage of sales remained largely unchanged for this period as compared to same period in the prior year.

During the nine months ended December 29, 2007, the Company sold some unused fixed assets which resulted in a gain of $299,000.  During the first fiscal quarter of 2007, the Company sold a closed plant in Newark, New York and a receiving station in Pasco, 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 East Williamson, New York which resulted in a gain of $1,610,000 and a warehouse facility in New Plymouth, Idaho which resulted in a loss of $321,000.  In addition, during the third fiscal quarter of 2007, the Company auctioned off unused equipment from the Idaho facility which resulted in a $3,193,000 net gain which is also included in Other Operating Income in the Unaudited Condensed Consolidated Statements of Net Earnings.

For the nine month period ended December 29, 2007, interest as a percentage of sales decreased from 1.9% to 1.7%.  Interest dollars decreased 7.2% from $15.5 million in the nine month period ended December 30, 2006 to $14.4 million in the nine month period ended December 29, 2007.  This was largely due to lower average borrowings in the current year period compared to the prior year.

 
Income Taxes:

The effective tax rate was 36.2% and 37.6% for the three month periods ended December 29, 2007 and December 30, 2006, respectively.  The 1.4% effective tax rate reduction is largely a function of increased research and experimentation and manufacturers credits recognized as compared to the prior year.  The effective tax rate was 36.3% and 37.8% for the nine month periods ended December 29, 2007 and December 30, 2006, respectively.

Earnings per Share:

Basic earnings per share were $.56 and $.93 for the three months ended December 29, 2007 and December 30, 2006, respectively.  Diluted earnings per share were $.55 and $.92 for the three months ended December 29, 2007 and December 30, 2006, respectively.  Basic earnings per share were $1.60 and $1.94 for the nine months ended December 29, 2007 and December 30, 2006, respectively.  Diluted earnings per share were $1.59 and $1.93 for the nine months ended December 29, 2007 and December 30, 2006, respectively.  For details of the calculation of these amounts, refer to footnote 16 of the Notes to Condensed Consolidated Financial Statements.

Liquidity and Capital Resources:
The financial condition of the Company is summarized in the following table and explanatory review (in thousands except ratios):

   
December
   
March
 
   
2007
   
2006
   
2007
   
2006
 
Working Capital:
                       
Balance
  $ 420,788     $ 407,314     $ 334,455     $ 229,510  
Change in Quarter
    (16,889 )     (39,294 )     -       -  
Long-Term Debt, less Current Portion
    294,362       290,399       210,395       142,586  
Current Ratio
    4.04       4.16       3.86       2.63  


As shown in the Condensed Consolidated Statements of Cash Flows, Cash Used by Operating Activities was $54.1 million in the first nine months of fiscal 2008, compared to Cash Provided by Operating Activities of $6.7 million in the first nine months of fiscal 2007.  The $60.8 million decrease in cash generation is primarily a result of the increase in inventory of $95.1 million (net of the increase in the Off Season Reserve of $66.8 million) in the first nine months of fiscal 2008 as compared to $26.7 million in the first nine months of fiscal 2007.

As compared to December 30, 2006, Inventory increased $55.8 million. The Inventory increase primarily reflects a $35.5 million increase (net of the Off Season Reserve) in Finished Goods, a $9.7 million increase in Work in Process and $10.6 million increase in Raw Materials.  The Finished Goods increase reflects a larger harvest this year and higher per unit costs in the current year than the prior year.  The Work in Process increase is primarily due to the $4.4 million of higher can sheets in the current year over the prior year and higher frozen vegetables in the current year of $3.8 million.  The Raw Materials increase is primarily due to can supplies increase of $8.1 million over the prior year.

Cash Used in Investing Activities was $26.8 million in the first nine months of fiscal 2008 compared to $31.9 million in the first nine months of fiscal 2007.  The first nine months of fiscal 2007 includes $22.3 million paid for the Signature acquisition.  Additions to Property, Plant and Equipment were $27.1 million in fiscal 2008 as compared to $14.6 million in fiscal 2007.  In fiscal 2008, the most significant investment was a $4.7 million warehouse built in Gillett, Wisconsin.

Cash Provided by Financing Activities was $84.5 million in the first nine months of fiscal 2008, which included borrowings of $360.9 million and the repayment of $276.9 million of Long-Term Debt principally consisting of borrowing and repayment on the revolving credit facility.  This increase is directly related to the increase in inventory of $55.8 million as compared to the prior year.
 
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In connection with the August 18, 2006 acquisition of Signature Fruit Company, LLC, the Company expanded its revolving credit facility (“Revolver”) from $100 million to $250 million with a five-year term to finance its seasonal working capital requirements.  As of December 29, 2007, the outstanding balance of the Revolver was $165.3 million.  We believe that cash flows from operations and availability under our Revolver will provide adequate funds for our working capital needs, planned capital expenditures, and debt service obligations for at least the next 12 months.

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.

The Company’s credit facilities contain various financial covenants.  At December 29, 2007, the Company was in compliance with all such financial covenants.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 redefines fair value, establishes a framework for measuring fair value and expands the disclosure requirements regarding fair value measurement. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect that the adoption of SFAS 157 will have a material impact on its results of operations or financial position; however, additional disclosures will be required under SFAS 157.

In December 2007, the FASB issued Proposed FASB Staff Position (FSP) FAS 157-b.  FSP FAS 157-b proposes deferral of the effective date of SFAS 157 until April 1, 2009 (for the Company) for nonfinancial assets and nonfinancial liabilities except those items recognized or disclosed at fair value on an annual or more frequently recurring basis.  FSP FAS 157-b will become effective upon issuance.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the potential impact of SFAS 159 on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” to further enhance the accounting and financial reporting related to business combinations.  SFAS No. 141(R) establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Therefore, the effects of the Company’s adoption of SFAS No. 141(R) will depend upon the extent and magnitude of acquisitions after March 31, 2009.

Seasonality

The Company's revenues typically have been higher in the second and third fiscal quarters, primarily because the Company sells, on a bill and hold basis, Green Giant canned and frozen vegetables to General Mills Operations, Inc. at the end of each pack cycle.  The two largest commodities are peas and corn, which are primarily sold in the second and third fiscal quarters, respectively.  See the Critical Accounting Policies section below for further details.  In addition, the Company’s non-Green Giant sales have exhibited seasonality with the third fiscal quarter generating the highest sales.  The third fiscal quarter reflects increased sales of the Company’s products during the holiday period.
 
Forward-Looking Statements

Statements that are not historical facts, including statements about management's beliefs or expectations, are forward-looking statements as defined in the Private Securities Litigation Reform Act (PSLRA) of 1995.  The Company wishes to take advantage of the "safe harbor" provisions of the PSLRA by cautioning that numerous important factors which involve risks and uncertainties in the future could affect the Company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company.  These factors include, among others: general economic and business conditions; cost and availability of commodities and other raw materials such as vegetables, steel and packaging materials; transportation costs; climate and weather affecting growing conditions and crop yields; leverage and ability to service and reduce the Company's debt; foreign currency exchange and interest rate fluctuations; effectiveness of marketing and trade promotion programs; changing consumer preferences; competition; product liability claims; the loss of significant customers or a substantial reduction in orders from these customers; changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including environmental regulations; and other factors discussed in the Company's filings with the Securities and Exchange Commission.

Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof.  The Company assumes no obligation to update forward-looking statements.

Critical Accounting Policies

In the nine-months ended December 29, 2007, the Company sold product for cash, on a bill and hold basis of $176,657,000 of Green Giant finished goods inventory to General Mills Operations, Inc. (“GMOI”) as compared to $179,289,000 for the nine-months ended December 30, 2006.  Under the terms of the bill and hold agreement, title to the specified inventory transferred to GMOI.  The Company believes it has met the criteria required for bill and hold treatment.

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.

Trade promotions are an important component of the sales and marketing of the Company’s branded products, and are critical to the support of the business. Trade promotion costs, which are recorded as a reduction of net sales, include amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, amounts paid to obtain favorable display positions in retailers’ stores, and amounts paid to retailers for shelf space in retail stores. Accruals for trade promotions are recorded primarily at the time of sale of product to the retailer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a retailer from amounts otherwise due to us. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by retailers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time.

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

In the ordinary course of business, the Company is exposed to various market risk factors, including changes in general economic conditions, competition and raw material pricing and availability.  In addition, the Company is exposed to fluctuations in interest rates, primarily related to its revolving credit facility.  To manage interest rate risk, the Company uses both fixed and variable interest rate debt.  During fiscal 2007, the Company entered into a natural gas hedge for 50% of its requirements during the production season from June 1 to December 31, 2006.  The Company has not entered into a similar hedge arrangement during fiscal 2008.  There have been no other material changes to the Company’s exposure to market risk since March 31, 2007.

 
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ITEM 4 Controls and Procedures

The Company maintains a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely basis. The Company’s Board of Directors, operating through its Audit Committee, which is composed entirely of independent outside directors, provides oversight to the financial reporting process.

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Our disclosure controls and procedures have been designed to ensure that information we are required to disclose in our reports that we file with the SEC under the Exchange Act is recorded, processed and reported on a timely basis. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of December 29, 2007, our disclosure controls and procedures were effective at providing reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that our controls and procedures are effective in timely alerting them to material information required to be included in this report.

There were no changes in the Company's internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.


PART II - OTHER INFORMATION


Item 1.                       Legal Proceedings

None.

Item 1A.                       Risk Factors

There have been no material changes to the risk factors disclosed in the Company’s Form 10-K for the period ended March 31, 2007.

Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds


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
10/01/07 – 10/31/07
-
-
-
-
N/A
N/A
11/01/07 – 11/30/07
-
-
-
-
N/A
N/A
12/01/07 – 12/31/07
10,191
-
$25.18
-
N/A
N/A
Total
10,191
-
$25.18
-
N/A
N/A
__________
(1) These purchases were made in open market transactions by the trustees under the Seneca Foods Corporation Employees' Savings Plan 401(k) Retirement Savings Plan to provide employee matching contributions under the plan.

Item 3.                          Defaults on Senior Securities

None.

Item 4.                          Submission of Matters to a Vote of Security Holders

None.

Item 5.                          Other Information

None.

Item 6.                          Exhibits


31.1 Certification of Kraig H. Kayser pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of Roland E. Breunig pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

 
Page 10

 

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





Seneca Foods Corporation
      (Company)



/s/Kraig H. Kayser                                           
February 6, 2008
Kraig H. Kayser
President and
Chief Executive Officer


/s/Roland E. Breunig
February 6, 2008
Roland E. Breunig
Chief Financial Officer

 
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