Seneca Foods Corp - Quarter Report: 2008 December (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
Form
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For
the Quarter Ended December 27,
2008
|
Commission
File Number 0-01989
|
Seneca Foods
Corporation
(Exact
name of Company as specified in its charter)
|
New York
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16-0733425
|
|
(State
or other jurisdiction of
|
(I.
R. S. Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
3736 South Main Street, Marion, New
York
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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,
2009
|
|
Common
Stock Class A, $.25 Par
|
4,830,518
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Common
Stock Class B, $.25 Par
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2,760,905
|
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PART
I ITEM 1 FINANCIAL INFORMATION
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||||||||||||
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SENECA
FOODS CORPORATION AND SUBSIDIARIES
|
||||||||||||
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CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||||||
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(In
Thousands, Except Per Share Data)
|
||||||||||||
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Unaudited
|
Unaudited
|
|||||||||||
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December 27, 2008
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December 29, 2007
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March 31, 2008
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||||||||||
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ASSETS
|
||||||||||||
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Current
Assets:
|
||||||||||||
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Cash
and Cash Equivalents
|
$ | 13,637 | $ | 12,185 | $ | 10,322 | ||||||
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Accounts
Receivable, Net
|
83,211 | 62,246 | 62,012 | |||||||||
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Inventories:
|
||||||||||||
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Finished
Goods
|
447,629 | 426,967 | 274,543 | |||||||||
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Work
in Process
|
38,991 | 27,785 | 18,238 | |||||||||
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Raw
Materials and Supplies
|
52,221 | 67,527 | 102,905 | |||||||||
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Off-Season
Reserve (Note 3)
|
(50,558 | ) | (66,835 | ) | - | |||||||
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Total
Inventories (Note 2)
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488,283 | 455,444 | 395,686 | |||||||||
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Deferred
Income Tax Asset, Net
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5,275 | 6,734 | 6,685 | |||||||||
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Refundable
Income Taxes
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- | 4,601 | 8,303 | |||||||||
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Other
Current Assets
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6,910 | 2,232 | 2,419 | |||||||||
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Total
Current Assets
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597,316 | 543,442 | 485,427 | |||||||||
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Property,
Plant and Equipment, Net
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177,667 | 183,780 | 183,051 | |||||||||
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Deferred
Income Tax Asset, Net
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11,319 | 2,318 | 1,196 | |||||||||
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Other
Assets
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1,887 | 2,498 | 2,346 | |||||||||
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Total
Assets
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$ | 788,189 | $ | 732,038 | $ | 672,020 | ||||||
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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||||||||||||
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Current
Liabilities:
|
||||||||||||
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Accounts
Payable
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$ | 91,667 | $ | 75,321 | $ | 55,240 | ||||||
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Other
Accrued Expenses
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44,640 | 41,308 | 40,535 | |||||||||
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Accrued
Vacation
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9,591 | 9,027 | 9,390 | |||||||||
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Income
Taxes Payable
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3,685 | - | - | |||||||||
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Current
Portion of Long-Term Debt
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39,023 | 10,063 | 10,160 | |||||||||
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Total
Current Liabilities
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188,606 | 135,719 | 115,325 | |||||||||
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Long-Term
Debt, Less Current Portion
|
273,841 | 294,362 | 250,039 | |||||||||
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Other
Long-Term Liabilities
|
45,247 | 21,848 | 27,226 | |||||||||
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Total
Liabilities
|
507,694 | 451,929 | 392,590 | |||||||||
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Commitments
|
||||||||||||
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10%
Preferred Stock, Series A, Voting, Cumulative,
|
||||||||||||
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Convertible,
$.025 Par Value Per Share
|
102 | 102 | 102 | |||||||||
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10%
Preferred Stock, Series B, Voting, Cumulative,
|
||||||||||||
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Convertible,
$.025 Par Value Per Share
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100 | 100 | 100 | |||||||||
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6%
Preferred Stock, Voting, Cumulative, $.25 Par
Value
|
50 | 50 | 50 | |||||||||
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Convertible,
Participating Preferred Stock, $12.00
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||||||||||||
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Stated
Value Per Share
|
35,595 | 35,600 | 35,600 | |||||||||
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Convertible,
Participating Preferred Stock, $15.50
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||||||||||||
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Stated
Value Per Share
|
8,585 | 8,597 | 8,596 | |||||||||
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Convertible,
Participating Preferred Stock, $24.39
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||||||||||||
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Stated
Value Per Share
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25,000 | 25,000 | 25,000 | |||||||||
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Common
Stock $.25 Par Value Per Share
|
3,079 | 3,078 | 3,079 | |||||||||
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Additional
Paid-in Capital
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28,505 | 28,453 | 28,460 | |||||||||
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Treasury
Stock, at Cost
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(257 | ) | - | - | ||||||||
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Accumulated
Other Comprehensive Loss
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(18,436 | ) | (1,331 | ) | (3,628 | ) | ||||||
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Retained
Earnings
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198,172 | 180,460 | 182,071 | |||||||||
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Stockholders'
Equity
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280,495 | 280,109 | 279,430 | |||||||||
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Total
Liabilities and Stockholders’ Equity
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$ | 788,189 | $ | 732,038 | $ | 672,020 | ||||||
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
Page
1
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SENECA
FOODS CORPORATION AND SUBSIDIARIES
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||||||||||||||||
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CONDENSED
CONSOLIDATED STATEMENTS OF NET EARNINGS
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||||||||||||||||
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(Unaudited)
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||||||||||||||||
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(In
Thousands, Except Per Share Data)
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||||||||||||||||
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Three Months Ended
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Nine Months Ended
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|||||||||||||||
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December 27, 2008
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December 29, 2007
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December 27, 2008
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December 29, 2007
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|||||||||||||
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Net
Sales
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$ | 463,322 | $ | 381,193 | $ | 995,453 | $ | 845,080 | ||||||||
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Costs
and Expenses:
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||||||||||||||||
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Cost
of Product Sold
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414,312 | 356,757 | 901,777 | 774,153 | ||||||||||||
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Selling
and Administrative
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20,489 | 16,520 | 54,096 | 46,279 | ||||||||||||
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Plant
Restructuring
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901 | 14 | 901 | 104 | ||||||||||||
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Other
Operating Expense (Income)
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49 | (10 | ) | (234 | ) | (299 | ) | |||||||||
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Total
Costs and Expenses
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435,751 | 373,281 | 956,540 | 820,237 | ||||||||||||
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Operating
Income
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27,571 | 7,912 | 38,913 | 24,843 | ||||||||||||
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Interest
Expense
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3,695 | 5,373 | 11,058 | 14,374 | ||||||||||||
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Earnings
Before Income Taxes
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23,876 | 2,539 | 27,855 | 10,469 | ||||||||||||
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Income
Taxes
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10,040 | 1,017 | 11,731 | 4,062 | ||||||||||||
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Net Earnings
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$ | 13,836 | $ | 1,522 | $ | 16,124 | $ | 6,407 | ||||||||
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Earnings
Applicable to Common Stock
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$ | 8,636 | $ | 947 | $ | 10,059 | $ | 3,986 | ||||||||
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Basic
Earnings per Common Share
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$ | 1.14 | $ | 0.12 | $ | 1.33 | $ | 0.53 | ||||||||
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Diluted
Earnings per Common Share
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$ | 1.13 | $ | 0.12 | $ | 1.31 | $ | 0.52 | ||||||||
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The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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||||||||||||||||
Page
2
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SENECA
FOODS CORPORATION AND SUBSIDIARIES
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||||||||
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CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
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||||||||
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(In
Thousands)
|
||||||||
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Nine Months Ended
|
||||||||
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December 27, 2008
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December 29, 2007
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|||||||
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Cash
Flows from Operating Activities:
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||||||||
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Net
Earnings
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$ | 16,124 | $ | 6,407 | ||||
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Adjustments
to Reconcile Net Earnings to
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||||||||
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Net
Cash Used in Operations:
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||||||||
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Depreciation
and Amortization
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16,467 | 16,673 | ||||||
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Gain
on the Sale of Assets
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(234 | ) | (299 | ) | ||||
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Deferred
Tax Expense (Benefit)
|
832 | (5,350 | ) | |||||
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Changes
in Operating Assets and Liabilities:
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||||||||
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Accounts
Receivable
|
(21,199 | ) | (6,746 | ) | ||||
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Inventories
|
(143,155 | ) | (141,842 | ) | ||||
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Off-Season
Reserve
|
50,558 | 66,835 | ||||||
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Other
Current Assets
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(60 | ) | (1,592 | ) | ||||
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Income
Taxes
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11,919 | (1,661 | ) | |||||
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Accounts
Payable, Accrued Expenses
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||||||||
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and
Other Liabilities
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34,011 | 13,518 | ||||||
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Net
Cash Used in Operations
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(34,737 | ) | (54,057 | ) | ||||
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Cash
Flows from Investing Activities:
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||||||||
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Additions
to Property, Plant and Equipment
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(15,124 | ) | (27,064 | ) | ||||
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Proceeds
from the Sale of Assets
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393 | 298 | ||||||
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Net
Cash Used in Investing Activities
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(14,731 | ) | (26,766 | ) | ||||
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Cash
Flow from Financing Activities:
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||||||||
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Long-Term
Borrowing
|
402,428 | 360,916 | ||||||
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Payments
on Long-Term Debt and Capital Lease Obligations
|
(349,763 | ) | (276,919 | ) | ||||
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Other
|
387 | 471 | ||||||
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Repurchase
of Company Stock
|
(257 | ) | - | |||||
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Dividends
|
(12 | ) | (12 | ) | ||||
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Net
Cash Provided by Financing Activities
|
52,783 | 84,456 | ||||||
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Net
Increase in Cash and Cash Equivalents
|
3,315 | 3,633 | ||||||
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Cash
and Cash Equivalents, Beginning of the Period
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10,322 | 8,552 | ||||||
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Cash
and Cash Equivalents, End of the Period
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$ | 13,637 | $ | 12,185 | ||||
Page
3
SENECA
FOODS CORPORATION AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December
27, 2008
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 27, 2008 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, 2008 balance sheet was derived from the
audited consolidated financial statements. The December 29, 2007
results have been restated to reflect the Company’s change to the Last-In
First-Out (LIFO) inventory valuation method which occurred during fiscal
2008. As previously reported in the 2008 Seneca Foods Corporation
Report on Form 10-K, this resulted in a $20,102,000 increase in Cost of Sales
for the nine-month period ended December 29, 2007, which reduced Net Earnings by
$13,066,000 or $1.07 per diluted share. Cost of Sales for the
three-month period ended December 29, 2007 increased $8,086,000, which reduced
Net Earnings by $5,256,000 or $.43 per diluted share. In addition, certain
previously reported amounts for the periods ended December 29, 2007 and March
31, 2008 have been reclassified to conform to the current period
classification.
The
results of operations for the three and nine month periods ended December 27,
2008 are not necessarily indicative of the results to be expected for the full
year.
In the
nine months ended December 27, 2008, the Company sold $195,903,000 of Green
Giant finished goods inventory to General Mills Operations, LLC (“GMOL”) for
cash, on a bill and hold basis, as compared to $176,657,000 for the nine months
ended December 29, 2007. Under the terms of the bill and hold
agreement, title to the specified inventory transferred to GMOL. 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 2008 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 2008 Annual Report on Form
10-K.
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2.
|
The
Company implemented the LIFO inventory valuation method during
2008. First-In, First-Out (FIFO) based inventory costs exceeded
LIFO based inventory costs by $70,032,000 as of December 27,
2008. The increase in the LIFO Reserve for the first nine
months of fiscal 2009 ended December 27, 2008 was $41,892,000 as compared
to $20,102,000 for the first nine months ended December 29, 2007 and
reflects the impact of significant inflationary cost increases expected
throughout fiscal 2009.
|
|
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. These “off-season” variances
are reserved for in a contra-inventory account and are included in the
Inventory section of the Condensed Consolidated Balance Sheets. Depending
on the time of year, the Off-Season Reserve is either the excess of
absorbed expenses over incurred expenses to date resulting in a credit
reserve balance, or the excess of incurred expenses over absorbed expenses
to date resulting in a debit reserve balance. 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. All
Off-Season Reserve balances are zero at fiscal year
end.
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Page
4
|
4.
|
During
the nine-month period ended December 27, 2008, there were 1,152 shares, or
$17,000, of Convertible Participating Preferred Stock converted to Class A
Common Stock.
|
|
5.
|
The
following schedule presents Comprehensive Income for the three and nine
months ended December 27, 2008 and December 29,
2007:
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
December 27, 2008
|
December 29, 2007
|
December 27, 2008
|
December 29, 2007
|
|||||||||||||
|
Comprehensive
Income:
|
||||||||||||||||
|
Net
Earnings
|
$ | 13,836 | $ | 1,522 | $ | 16,124 | $ | 6,407 | ||||||||
|
Change
in pension and post retirement benefits
adjustment
(net of tax)
|
(14,930 | ) | - | (14,930 | ) | - | ||||||||||
|
Total
|
$ | (1,094 | ) | $ | 1,522 | $ | 1,194 | $ | 6,407 | |||||||
|
6.
|
The
changes in the Stockholders’ Equity accounts for the nine months period
ended December 27, 2008, consist of an increase of $16,124,000 for Net
Earnings, a decrease of $14,930,000 related to the change in pension and
post retirement benefits adjustment, a decrease of $257,000 for the
repurchase of the Company’s own stock, an increase of $122,000 for a
mark-to-market adjustment of 401(k) stock, an increase of $29,000 for the
equity compensation plan, and a reduction of $23,000 for preferred cash
dividends.
|
|
7.
|
The
net periodic benefit cost for Company’s pension plan consisted
of:
|
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
December 27, 2008
|
December 29, 2007
|
December 27, 2008
|
December 29, 2007
|
|||||||||||||
|
Service Cost
|
$ | 999 | $ | 1,137 | $ | 2,512 | $ | 3,413 | ||||||||
|
Interest
Cost
|
1,435 | 1,202 | 4,304 | 3,606 | ||||||||||||
|
Expected
Return on Plan Assets
|
(1,474 | ) | (1,654 | ) | (4,423 | ) | (4,962 | ) | ||||||||
|
Amortization
of Transition Asset
|
(69 | ) | (69 | ) | (207 | ) | (207 | ) | ||||||||
|
Net
Periodic Benefit Cost
|
$ | 891 | $ | 616 | $ | 2,186 | $ | 1,850 | ||||||||
No
pension contributions are required during fiscal 2009; however, the Company made
a $10,000,000 contribution during the third fiscal quarter of 2009.
The
pension liability was increased by $24.5 million during the third fiscal quarter
of 2009 to reflect the current unfunded liability based on the estimated
projected benefit obligation and actual fair value of plan assets as of December
27, 2008. The impact on accumulated other comprehensive income was
$14.9 million after the income tax provision of $9.6 million.
|
8.
|
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
|
$ | 2,152 | $ | 5,749 | $ | 3,914 | $ | 11,815 | ||||||||
|
Balance
March 31, 2008
|
$ | - | $ | 250 | $ | 1,286 | $ | 1,536 | ||||||||
|
Third
Quarter Charge
|
904 | - | (3 | ) | 901 | |||||||||||
|
Cash
payments/write offs
|
- | - | (188 | ) | (188 | ) | ||||||||||
|
Balance
December 27, 2008
|
$ | 904 | $ | 250 | $ | 1,095 | $ | 2,249 | ||||||||
|
Total
costs incurred
|
||||||||||||||||
|
to
date
|
$ | 1,248 | $ | 5,499 | $ | 2,816 | $ | 9,563 | ||||||||
During
the third fiscal quarter of 2009, the Company announced a Voluntary Workforce
Reduction Program at its plant in Modesto, California which resulted in a
restructuring charge for severance costs of $904,000 This
program, which is expected to result in a more efficient operation, was
completed in January 2009, subsequent to the end of the third
fiscal quarter of 2009. This charge is included under Plant
Restructuring in the Unaudited Condensed Consolidated Statements of Net
Earnings.
Page
5
The other
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 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 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.
|
9.
|
During
the nine months ended December 27, 2008, the Company sold some unused
fixed assets which resulted in a gain totaling $234,000. During
the nine months ended December 29, 2007, the Company sold some unused
fixed assets which resulted in a gain of $299,000. Both gains
are included in Other Operating Income in the Unaudited Condensed
Consolidated Statements of Net
Earnings.
|
|
10.
|
In
September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards) 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 was initially effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB approved the issuance of FASB Staff
Position (FSP) FAS 157-2. FSP FAS 157-2 defers 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. On October 10, 2008, the FASB issued FSP FAS
157-3 to clarify the application of fair value measurements of a financial
asset when the market for that asset is not active. This clarifying
guidance became effective upon issuance, including prior periods for which
financial statements had not been issued. The Company does not expect that
the adoption of SFAS 157 and FSP FAS 157-3 will have a material impact on
its results of operations or financial position; however, additional
disclosures will be required under SFAS 157. Through December
27, 2008, SFAS 157 and FSP FAS 157-3 had no effect on the Company’s
consolidated results of operations or financial position with respect to
its financial assets and liabilities. Effective April 1, 2009,
the Company will apply the fair value measurement and disclosure
provisions of SFAS 157 to its nonfinancial assets and liabilities measured
on a nonrecurring basis. This is not expected to have a
material impact on the Company’s consolidated results of operations or
financial position. The Company measures the fair value of
long-lived assets on a non-recurring
basis.
|
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 has assessed the impact of SFAS 159 and has determined it
had no impact on its consolidated financial statements.
Page
6
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS
141(R)”) to further enhance the accounting and financial reporting related to
business combinations. SFAS 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 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 141(R) will depend upon the extent and
magnitude of acquisitions after March 2009.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
U.S. generally accepted accounting principles (GAAP). SFAS 162
directs the GAAP hierarchy to the entity, not the independent auditors, as the
entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. SFAS 162 is
November 15, 2008. The Company has assessed the impact of SFAS 162
and has determined it has no impact on its consolidated financial
statements.
FSP FAS
132(R)-1, issued on December 30, 2008, amends FAS 132(R), “Employers’
Disclosures about Pensions and Other Postretirement Benefits”, to expand
disclosures in an employer’s financial statements about plan assets. Among
other things, the FSP requires employers to disclose information regarding the
fair value measurements of plan assets that are similar to the disclosures
required by FAS 157 (e.g., information regarding the fair value disclosure
hierarchy and rollforward of assets measured using Level 3 inputs). The
disclosures about plan assets required by the FSP are required for fiscal years
ending after December 15, 2009.
|
11.
|
Earnings
per share for the Quarters and Year-to-date Periods Ended December 27,
2008 and December 29, 2007 are as
follows:
|
|
Q U
A R T E R
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands, except share amounts)
|
||||||||
|
Basic
|
||||||||
|
Net
Earnings
|
$ | 13,836 | $ | 1,522 | ||||
|
Deduct
preferred stock dividends paid
|
6 | 6 | ||||||
|
Undistributed
earnings
|
13,830 | 1,516 | ||||||
|
Earnings
allocated to participating preferred
|
5,194 | 569 | ||||||
|
Earnings
allocated to common shareholders
|
$ | 8,636 | $ | 947 | ||||
|
Weighted
average common shares outstanding
|
7,587 | 7,590 | ||||||
|
Basic
earnings per common share
|
$ | 1.14 | $ | 0.12 | ||||
|
Diluted
|
||||||||
|
Earnings
allocated to common shareholders
|
$ | 8,636 | $ | 947 | ||||
|
Add
dividends on convertible preferred stock
|
5 | 5 | ||||||
|
Earnings
applicable to common stock on a diluted basis
|
$ | 8,641 | $ | 952 | ||||
|
Weighted
average common shares outstanding-basic
|
7,587 | 7,590 | ||||||
|
Additional
shares issued related to the equity compensation plan
|
1 | - | ||||||
|
Additional
shares to be issued under full conversion of preferred
stock
|
67 | 67 | ||||||
|
Total
shares for diluted
|
7,655 | 7,657 | ||||||
|
Diluted
earnings per common share
|
$ | 1.13 | $ | 0.12 | ||||
Page
7
|
Y E
A R T O D A T E
|
||||||||
|
2008
|
2007
|
|||||||
|
(In
thousands, except share amounts)
|
||||||||
|
Basic
|
||||||||
|
Net
Earnings
|
$ | 16,124 | $ | 6,407 | ||||
|
Deduct
preferred stock dividends paid
|
18 | 18 | ||||||
|
Undistributed
earnings
|
16,106 | 6,389 | ||||||
|
Earnings
allocated to participating preferred
|
6,047 | 2,403 | ||||||
|
Earnings
allocated to common shareholders
|
$ | 10,059 | $ | 3,986 | ||||
|
Weighted
average common shares outstanding
|
7,590 | 7,582 | ||||||
|
Basic
earnings per common share
|
$ | 1.33 | $ | 0.53 | ||||
|
Diluted
|
||||||||
|
Earnings
allocated to common shareholders
|
$ | 10,059 | $ | 3,986 | ||||
|
Add
dividends on convertible preferred stock
|
10 | 10 | ||||||
|
Earnings
applicable to common stock on a diluted basis
|
$ | 10,069 | $ | 3,996 | ||||
|
Weighted
average common shares outstanding-basic
|
7,590 | 7,582 | ||||||
|
Additional
shares issued related to the equity compensation plan
|
- | - | ||||||
|
Additional
shares to be issued under full conversion of preferred
stock
|
67 | 67 | ||||||
|
Total
shares for diluted
|
7,657 | 7,649 | ||||||
|
Diluted
earnings per common share
|
$ | 1.31 | $ | 0.52 | ||||
Page
8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December
27, 2008
Seneca
Foods Corporation (the “Company”) 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, LLC (GMOL), a successor to the Pillsbury
Company and a subsidiary of General Mills, Inc., Seneca produces canned and
frozen vegetables, which are sold by GMOL 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 which resulted in favorable manufacturing variances.
During
the third fiscal quarter of 2009, the Company announced a Voluntary Workforce
Reduction Program at its plant in Modesto, California which resulted in a
restructuring charge for severance costs of $904,000 This
program, which is expected to result in a more efficient operation, was
completed in January 2009, subsequent to the end of the third
fiscal quarter of 2009. This charge 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 $463.3 million, which represents a
21.5% increase, or $82.1 million, from the third quarter of fiscal
2008. The increase in sales is attributable to increased selling
prices/improved sales mix of $70.6 million while sales volume accounted for
$11.5 million of this increase. The increase in sales is primarily from a
$51.4 million increase in Canned Vegetable sales, a $16.8 million increase in
Green Giant Alliance sales and a $10.2 million increase in Fruit
sales.
Net Sales
for the nine months ended December 27, 2008 were $995.5 million, which
represents a 17.8%, or $150.4 million, increase from the nine months ended
December 29, 2007. Selling prices/improved sales mix
represented $124.5 million of the increase while sales volume accounted for
$25.9 million of this increase. The increase in sales is primarily due to
a $90.7 million increase in Canned Vegetable sales, a $23.3 million increase in
Fruit Products sales, and a $27.7 million increase in Green Giant Alliance
sales.
The
following table presents sales by product category (in millions):
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
December 27, 2008
|
December 29, 2007
|
December 27, 2008
|
December 29, 2007
|
|||||||||||||
|
Canned
Vegetables
|
$ | 231.8 | $ | 180.5 | $ | 550.2 | $ | 459.5 | ||||||||
|
Green
Giant Alliance
|
143.6 | 126.8 | 223.8 | 196.1 | ||||||||||||
|
Frozen
Vegetables
|
10.1 | 9.9 | 30.7 | 27.8 | ||||||||||||
|
Fruit
Products
|
66.8 | 56.6 | 162.6 | 139.3 | ||||||||||||
|
Snack
|
3.5 | 3.7 | 10.6 | 11.6 | ||||||||||||
|
Other
|
7.5 | 3.7 | 17.6 | 10.8 | ||||||||||||
| $ | 463.3 | $ | 381.2 | $ | 995.5 | $ | 845.1 | |||||||||
Page
9
Operating
Income:
The
following table presents components of Operating Income as a percentage of Net
Sales:
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
December 27, 2008
|
December 29, 2007
|
December 27, 2008
|
December 29, 2007
|
|||||||||||||
|
Gross
Margin
|
10.6 | % | 6.4 | % | 9.4 | % | 8.4 | % | ||||||||
|
Selling
|
2.7 | % | 3.0 | % | 3.3 | % | 3.5 | % | ||||||||
|
Administrative
|
1.7 | % | 1.3 | % | 2.1 | % | 2.0 | % | ||||||||
|
Plant
Restructuring
|
0.2 | % | 0.0 | % | 0.1 | % | 0.0 | % | ||||||||
|
Other
Operating Income
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||
|
Operating
Income
|
6.0 | % | 2.1 | % | 3.9 | % | 2.9 | % | ||||||||
|
Interest
Expense
|
0.8 | % | 1.4 | % | 1.1 | % | 1.7 | % | ||||||||
For the
three month period ended December 27, 2008, the gross margin increased from the
prior year quarter from 6.4% to 10.6% due primarily to higher selling prices
compared to the prior year which was partially offset by higher produce and
steel costs of the current year pack as compared to the prior
year. FIFO based inventory costs exceeded LIFO based
inventory costs by $70,032,000 as of the end of the third quarter of
2009. The increase in the LIFO Reserve for the third quarter ended
December 27, 2008 was $17,320,000 as compared to $8,086,000 for the third
quarter ended December 29, 2007 and reflects the impact on the quarter of
significant inflationary cost increases expected throughout fiscal
2009. On an after-tax basis, LIFO reduced Net Earnings by $11,258,000
for the quarter ended December 27, 2008 and by $5,256,000 for the quarter ended
December 29, 2007.
For the
nine month period ended December 27, 2008, the gross margin increased from the
prior year year-to-date from 8.4% to 9.4% due primarily to higher selling prices
compared to the prior year which was partially offset by higher costs of the
current year pack as compared to the prior year. The increase in the
LIFO Reserve for the nine month period ended December 27, 2008 was $41,892,000
as compared to $20,102,000 for the nine months ended December 29, 2007 and
reflects the impact on the period of significant inflationary cost increases
expected throughout fiscal 2009. On an after-tax basis, LIFO reduced
Net Earnings by $27,230,000 for the year to date period ended December 27, 2008
and by $13,066,000 for the year to date period ended December 29,
2007.
Selling
costs as a percentage of sales decreased as a result of the high rate of sales
in the current year periods as compared to the prior year periods and the fact
that a portion of the selling costs are fixed in nature.
Administrative
expense increased for the three months and nine months ended December 27, 2008
due primarily to increased employment costs.
Sales of
unused fixed assets resulted in losses totaling $49,000 during the three months
ended December 27, 2008, compared to a gain of $10,000 during the three months
ended December 29, 2007. During the nine months ended December 27,
2008, gains from the sale of unused fixed assets totaled $234,000 versus a gain
of $299,000 during the nine months ended December 29, 2007. All gains and losses
are included in Other Operating Income in the Unaudited Condensed Consolidated
Statements of Net Earnings.
For the
three month period ended December 27, 2008, interest expense as a percentage of
sales decreased from 1.4% to 0.8%. For the nine month period ended
December 27, 2008, interest expense as a percentage of sales decreased from 1.7%
to 1.1%. These increases were largely due to lower interest rates and
higher sales in the current year period, compared to the prior
year.
Page
10
Income
Taxes:
The
effective tax rate was 42.1% and 40.1% for the three month periods ended
December 27, 2008 and December 29, 2007, respectively. The effective tax rate
was 42.1% and 38.8% for the nine month periods ended December 27, 2008 and
December 29, 2007, respectively. Of the 3.3% increase in the
effective tax rate for the nine months period, 1.9% is due to an AMT credit
adjustment and permanent items from an IRS audit recognized in connection with
FIN 48 and 0.8% is an increase due to a higher effective state tax rate in 2008
versus 2007.
Earnings per
Share:
Basic
earnings per share were $1.14 and $.12 for the three months ended December 27,
2008 and December 29, 2007, respectively. Diluted earnings per share
were $1.13 and $.12 for the three months ended December 27, 2008 and December
29, 2007, respectively. Basic earnings per share were $1.33 and $.53
for the nine months ended December 27, 2008 and December 29, 2007,
respectively. Diluted earnings per share were $1.31 and $.52 for the
nine months ended December 27, 2008 and December 29, 2007,
respectively. For details of the calculation of these amounts,
refer to footnote 11 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
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Working
Capital:
|
||||||||||||||||
|
Balance
|
$ | 408,710 | $ | 407,723 | $ | 370,102 | $ | 334,455 | ||||||||
|
Change
in Quarter
|
10,525 | (22,146 | ) | - | - | |||||||||||
|
Long-Term
Debt
|
273,841 | 294,362 | 250,039 | 210,395 | ||||||||||||
|
Total
Stockholders' Equity Per Equivalent
|
||||||||||||||||
|
Common Share (see Note)
|
22.98 | 22.92 | 22.86 | 22.39 | ||||||||||||
|
Stockholders' Equity Per Common Share
|
27.85 | 27.75 | 27.66 | 26.93 | ||||||||||||
|
Current
Ratio
|
3.17 | 4.00 | 4.21 | 3.86 | ||||||||||||
Note:
Equivalent common shares are either common shares or, for convertible preferred
shares, the number of common shares that the preferred shares are convertible
into. See Note 7 of the Notes to Consolidated Financial Statements of
the Company’s 2008 Annual Report on Form 10-K for conversion
details.
As shown
in the Condensed Consolidated Statements of Cash Flows, net Cash Used in
Operating Activities was $34.7 million in the first nine months of fiscal 2009,
compared to net Cash Used in Operating Activities of $54.1 million in the first
nine months of fiscal 2008. The $19.4 million increase in cash
generation is attributable to increased net earnings of $9.7 million as
previously discussed, greater income tax refunds and lower income tax payments
of $19.8 million as a result of implementing LIFO as discussed previously,
increased inventory of $92.6 million (net of the increase in the Off-Season
Reserve of $50.6 million) in the first nine months of fiscal 2009 as compared to
$75.0 million increase in inventory in the first nine months of fiscal 2008 and
the $20.5 million increase in Accounts Payable, Accrued Expenses and Other
Liabilities as compared to the first nine months of December 29,
2007. This increase is due to higher costs including commodity and
steel costs.
As
compared to December 29, 2007, inventory increased $32.8 million. The components
of the inventory increase reflect a $36.9 million increase in Finished Goods
(net of the Off-Season Reserve), a $11.2 million increase in Work in Process and
$15.3 million decrease in Raw Materials and Supplies. The Finished
Goods increase reflects higher per unit costs in the current year than the prior
year partially offset by lower inventory quantities due to a late harvest this
year. FIFO based inventory costs exceeded LIFO based inventory costs
by $70.0 million as of the end of the third quarter of 2009 as compared to $20.1
million as of the end of the third quarter of 2008. The Work in
Process increase is primarily due to an increase in frozen vegetables of $13.9
million over the prior year. This is due to a combination of higher
quantities and unit costs in inventory in the current year as compared to the
prior year. The Off-Season Reserve decreased by $16.3 million as
compared to December 2007. The difference is due to timing and mostly
related to seed ($5.2 million) and warehouse costs ($4.8
million). Refer to the Critical Accounting Policies section of this
Form 10-Q for further details on the Off-Season Reserve.
Page
11
Cash Used
in Investing Activities was $14.7 million in the first nine months of fiscal
2009 compared to $26.8 million in the first nine months of fiscal
2008. Additions to Property, Plant and Equipment were $15.1 million
in the first nine months of fiscal 2009 as compared to $27.1 million in fiscal
2008 due to fewer large capital projects and an increase in operating leases in
the first nine months of fiscal 2009 compared to the prior year.
Cash
Provided by Financing Activities was $52.8 million in the first nine months of
fiscal 2009, which included borrowings of $402.4 million and the repayment of
$349.8 million of Long-Term Debt principally consisting of borrowing and
repayment on the revolving credit facility. The $31.7 million
year-over-year reduction in net cash provided by financing activities is
primarily related to a $20.5 million increase in Accounts Payable, Accrued
Expenses and Other Liabilities as discussed above. There was $0.8
million of new Long Term Debt related to some energy savings projects included
in the borrowings above.
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 27, 2008, the outstanding
balance of the Revolver was $168.0 million. The secured subordinated
promissory note, with a balance of $32.1 million, due GMOL, matures in September
2009 and is therefore included in current portion of long-term debt in the
Consolidated Balance Sheet. We believe that cash flows from
operations, availability under our Revolver and other financing sources, will
provide adequate funds for our working capital needs, planned capital
expenditures, and debt service obligations for at least the next 12
months.
The
Company’s credit facilities contain various financial covenants. At
December 27, 2008, the Company was in compliance with all such financial
covenants.
New Accounting
Standards
Refer to
footnote 10 of the Notes to Condensed Consolidated Financial
Statements.
Seasonality
The
Company's revenues typically have been higher in the second and third fiscal
quarters. This is due in part because the Company sells, on a bill
and hold basis, Green Giant canned and frozen vegetables to GMOL at the end of
each pack cycle, which typically occurs during these quarters. GMOL
buys the product from the Company on a cost plus basis with a per equivalent
case fee. See the Critical Accounting Policies section below for
further details. The Company’s non-Green Giant sales also exhibit
seasonality with the third fiscal quarter generating the highest sales due to
retail sales 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.
Page
12
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
During
the nine months ended December 27, 2008, the Company sold $195,903,000 of Green
Giant finished goods inventory to GMOL for cash, on a bill and hold basis as
compared to $176,657,000 for the nine-months ended December 29,
2007. Under the terms of the bill and hold agreement, title to the
specified inventory transferred to GMOL. 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. These “off-season” variances are reserved for in a
contra-inventory account and are included in the Inventory section of the
Condensed Consolidated Balance Sheets. Depending on the time of year, the
Off-Season Reserve is either the excess of absorbed expenses over incurred
expenses to date resulting in a credit reserve balance, or the excess of
incurred expenses over absorbed expenses to date resulting in a debit reserve
balance. 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. All Off-Season Reserve balances are zero at fiscal year
end.
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. There have been no material
changes to the Company’s exposure to market risk since March 31,
2008.
Page
13
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 27, 2008, 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.
We are in
the process of implementing SAP, an enterprise resource planning (“ERP”) system,
over a multi-year period for our entire company. During the second quarter ended
September 27, 2008, we successfully replaced our financial reporting, fixed
assets and procure-to-pay systems. There were no major changes to our
systems during the third quarter ended December 29, 2008. The second
phase of the SAP project will focus on our on our human resource information
system. The third phase of the SAP project will focus on our order-
to-cash system. This implementation has resulted in certain changes to business
processes and internal controls impacting financial reporting. We have evaluated
the control environment as affected by the implementation and believe that our
controls remained effective.
There
have been no other changes during the period covered by this report to the
Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Page
14
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, 2008.
|
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
|
|||
|
10/01/08
– 10/31/08
|
20,000
|
29,924
|
17.60
|
18.89
|
N/A
|
N/A
|
|
11/01/08
– 11/30/08
|
-
|
-
|
-
|
N/A
|
N/A
|
|
|
12/01/08
– 12/31/08
|
13,500
|
-
|
$19.05
|
-
|
N/A
|
N/A
|
|
Total
|
33,500
|
29,924
|
$18.19
|
$18.89
|
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 and a stock repurchase in
December 2008 related to the previously announced stock repurchase
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
15
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
5, 2009
Kraig H. Kayser
President and
Chief Executive Officer
/s/Roland E.
Breunig
February
5, 2009
Roland E. Breunig
Chief Financial Officer