Seneca Foods Corp - Quarter Report: 2010 October (Form 10-Q)

For the Quarter Ended October 2, 2010

Commission File Number  0-01989

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

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

 
 

Class	Shares Outstanding at October 26, 2010
Common Stock Class A, $.25 Par	9,572,709
Common Stock Class B, $.25 Par	2,162,922

PART I FINANCIAL INFORMATION, ITEM 1 FINANCIAL STATEMENTS
SENECA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Per Share Data)
		Unaudited				Unaudited
		October 2,  2010				September 26,  2009				March 31, 2010
ASSETS
Current Assets:
Cash and Cash Equivalents		$	10,470			$	9,694			$	7,421
Accounts Receivable, Net			75,687				82,854				73,460
Inventories (Note 2):
Finished Goods			758,497				730,677				338,891
Work in Process			15,703				7,516				8,176
Raw Materials and Supplies			71,618				78,727				99,397
Off-Season (Note 3)			(88,035	)			(88,800	)			-
Total Inventories			757,783				728,120				446,464
Refundable Income Taxes			1,912				-				-
Deferred Income Tax Asset, Net			7,566				5,744				10,032
Other Current Assets			6,428				10,669				2,850
Total Current Assets			859,846				837,081				540,227
Property, Plant and Equipment, Net			190,922				179,267				178,113
Deferred Income Tax Asset, Net			-				4,976				-
Other Assets			692				1,426				993
Total Assets		$	1,051,460			$	1,022,750			$	719,333
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable		$	2,719			$	-			$	-
Accounts Payable			268,313				331,561				67,674
Prepaid Revenue			52,577				-				-
Other Accrued Expenses			34,367				36,209				32,608
Accrued Vacation			10,144				9,769				10,059
Accrued Payroll			7,755				10,898				12,798
Income Taxes Payable			-				3,952				6,122
Current Portion of Long-Term Debt			201,601				38,297				6,356
Total Current Liabilities			577,476				430,686				135,617
Long-Term Debt, Less Current Portion			93,538				240,525				207,924
Deferred Income Taxes, Net			520				-				3,085
Other Long-Term Liabilities			37,026				40,054				37,697
Total Liabilities			708,560				711,265				384,323
Commitments
10% Preferred Stock, Series A, Voting, Cumulative,
Convertible, $.025 Par Value Per Share			102				102				102
10% Preferred Stock, Series B, Voting, Cumulative,
Convertible, $.025 Par Value Per Share			100				100				100
6% Preferred Stock, Voting, Cumulative, $.25 Par Value			50				50				50
Convertible, Participating Preferred Stock, $12.00
Stated Value Per Share			1,217				1,589				1,217
Convertible, Participating Preferred Stock, $15.50
Stated Value Per Share			4,856				5,344				4,856
Convertible, Participating Preferred Stock, $24.39
Stated Value Per Share			-				25,000				25,000
Common Stock $.25 Par Value Per Share			4,118				3,844				3,861
Additional Paid-in Capital			90,728				65,028				65,910
Treasury Stock, at cost			(257	)			(257	)			(257	)
Accumulated Other Comprehensive Loss			(15,289	)			(13,627	)			(15,030	)
Retained Earnings			257,275				224,312				249,201
Stockholders' Equity			342,900				311,485				335,010
Total Liabilities and Stockholders’ Equity		$	1,051,460			$	1,022,750			$	719,333
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

SENECA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS
(Unaudited)
(In Thousands, Except Per Share Data)
		Three Months Ended								Six Months Ended
		October 2,  2010				September 26, 2009				October 2,  2010				September 26, 2009
Net Sales		$	275,448			$	323,205			$	495,390			$	553,733
Costs and Expenses:
Cost of Product Sold			256,321				284,612				450,979				479,131
Selling and Administrative			13,854				16,166				29,093				33,018
Plant Restructuring			1,211				-				1,211				-
Other Operating Income			(8	)			(31	)			(84	)			(31	)
Total Costs and Expenses			271,378				300,747				481,199				512,118
Operating Income			4,070				22,458				14,191				41,615
Interest Expense, Net			2,240				2,546				4,176				5,183
Earnings Before Income Taxes			1,830				19,912				10,015				36,432
Income Taxes			(981	)			7,487				1,929				12,921
Net  Earnings		$	2,811			$	12,425			$	8,086			$	23,511
Earnings Attributable to Common Stock		$	2,709			$	10,879			$	7,572			$	17,632
Basic Earnings per Common Share		$	0.23			$	1.02			$	0.66			$	1.94
Diluted Earnings per Common Share		$	0.23			$	1.02			$	0.66			$	1.92

SENECA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
		Six Months Ended
		October 2, 2010				September 26, 2009
Cash Flows from Operating Activities:
Net Earnings		$	8,086			$	23,511
Adjustments to Reconcile Net Earnings to
Net Cash Used in Operations:
Depreciation & Amortization			11,050				10,883
Gain on the Sale of Assets			(84	)			(38	)
Deferred Income Tax Expense			(99	)			(1,080	)
Changes in operating assets and liabilities (net of acquisition):
Accounts Receivable			1,188				(6,141	)
Inventories			(389,983	)			(423,965	)
Off-Season			88,035				88,800
Other Current Assets			(3,375	)			(4,703	)
Income Taxes			(7,869	)			2,337
Accounts Payable, Accrued Expenses
and Other Liabilities			242,173				276,491
Net Cash Used in Operations			(50,878	)			(33,905	)
Cash Flows from Investing Activities:
Cash Paid for Acquisition (Net of  Cash Acquired)			(20,348	)			-
Additions to Property, Plant and Equipment			(9,628	)			(10,561	)
Proceeds from the Sale of Assets			84				47
Net Cash Used in Investing Activities			(29,892	)			(10,514	)
Cash Flow from Financing Activities:
Long-Term Borrowing			242,703				234,633
Payments on Long-Term Debt			(161,844	)			(186,613	)
Borrowings on Notes Payable			2,719				-
Other			253				256
Dividends			(12	)			(12	)
Net Cash Provided by Financing Activities			83,819				48,264
Net Increase in Cash and Cash Equivalents			3,049				3,845
Cash and Cash Equivalents, Beginning of the Period			7,421				5,849
Cash and Cash Equivalents, End of the Period		$	10,470			$	9,694

 

 

 

2.

On August 6, 2010, the Company completed its acquisition of 100% of the partnership interest in Lebanon Valley Cold Storage, LP and the assets of Unilink, LLC (collectively “Lebanon”) from Pennsylvania Food Group, LLC and related entities. The rationale for the acquisition was twofold: (1) to broaden the Company’s product offerings in the frozen food business; and (2) to take advantage of distribution efficiencies by combining shipments since the customer bases of the Company and Lebanon are similar. The purchase price totaled $20.3 million plus the assumption of certain liabilities. This acquisition was financed with proceeds from our revolving credit facility.  The purchase price to acquire Lebanon 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 $20.3 million has been calculated as follows (in millions):

Purchase Price-Cash (net of cash received)

$

20.3

The total purchase price of the transaction has been allocated as follows:
Current assets		$	12.9
Property, plant and equipment			13.9
Current liabilities			(6.5	)
Total		$	20.3

3.

The Company implemented the Last-In, First-Out (“LIFO”) inventory valuation method during fiscal 2008.  First-In, First-Out (“FIFO”) based inventory costs exceeded LIFO based inventory costs by $93.0 million as of the end of the second quarter of fiscal 2011 as compared to $95.9 million as of the end of the second quarter of fiscal 2010.  The change in the LIFO Reserve for the three months ended October 2, 2010 was a reduction of $645,000 as compared to an increase of $4,728,000 for the three months ended September 26, 2009.  The change in the LIFO Reserve for the six months ended October 2, 2010 was a reduction of $4,777,000 as compared to an increase of $9,429,000 for the six months ended September 26, 2009.  This reflects the projected impact of reduced inflationary cost increases expected in fiscal 2011 versus fiscal 2010.

4.

The seasonal nature of the Company's food processing business results in a timing difference between expenses (primarily overhead expenses) incurred and absorbed into product cost.  These “off-season” variances are accounted for in an inventory account and are included in inventories on the Condensed Consolidated Balance Sheets. Depending on the time of year, the off-season account reflects either the excess of absorbed expenses over incurred expenses to date resulting in a credit balance, or the excess of incurred expenses over absorbed expenses to date resulting in a debit balance.  Other than at the end of the first and fourth fiscal quarters of each year, absorbed expenses exceed incurred expenses due to timing of production.  All off-season balances are zero at fiscal year end.

5.

The Company’s revolving credit facility (“Revolver”) totaling $250,000,000, with an October 2, 2010 balance of $195,000,000, has a maturity date of August 18, 2011, and therefore is now included in Current Portion of Long-Term Debt which is classified as a current liability on the accompanying Condensed Consolidated Balance Sheet.  Previously it was classified as Long-Term Debt.

6.	The changes in the stockholders’ equity accounts for the six months period ended October 2, 2010 consist of the following (in thousands):

										Additional								Accumulated Other
		Preferred				Common				Paid-In				Treasury				Comprehensive				Retained
		Stock				Stock				Capital				Stock				Loss				Earnings
Balance March 31, 2010		$	31,325			$	3,861			$	65,910			$	(257	)		$	(15,030	)		$	249,201
Net earnings			-				-				-				-				-				8,086
Cash dividends paid
on preferred stock			-				-				-				-				-				(12	)
Equity incentive program			-				-				42				-				-				-
Stock issued for bonus program			-				-				33				-				-				-
Stock conversions			(25,000	)			257				24,743				-				-				-
Change in pension and post retirement
benefits adjustment (net of tax $165)			-				-				-				-				(259	)			-
Balance October 2, 2010		$	6,325			$	4,118			$	90,728			$	(257	)		$	(15,289	)		$	257,275

7.	The following schedule presents comprehensive income (loss) for the three and six month periods ended October 2, 2010 and September 26, 2009 (in thousands):

		Three Months Ended								Six Months Ended
		October 2,  2010				September 26, 2009				October 2,  2010				September 26, 2009
Comprehensive income (loss):
Net earnings		$	2,811			$	12,425			$	8,086			$	23,511
Change in pension and post retirement benefits   adjustment (net of tax)			(91	)			(67	)			(259	)			5,532
Total		$	2,720			$	12,358			$	7,827			$	29,043

8.	The net periodic benefit cost for the Company’s pension plan consisted of:

		Three Months Ended								Six Months Ended
		October 2, 2010				September 26, 2009				October 2, 2010				September 26, 2009
		(In thousands)
Service  Cost		$	1,300			$	2,315			$	2,600			$	2,723
Interest Cost			1,637				767				3,274				2,312
Expected Return on Plan Assets			(1,843	)			(998	)			(3,687	)			(1,995	)
Amortization of Actuarial Loss			363				1,206				727				1,206
Amortization of Transition Asset			(69	)			(69	)			(138	)			(138	)
Net Periodic Benefit Cost		$	1,388			$	3,221			$	2,776			$	4,108

9.	The following table summarizes the restructuring charges recorded and the accruals established (in thousands):

10.

The Other Costs above relate lease obligations related plant closures that are expected to be paid over the next five years.  During the six months ended October 2, 2010 and September 26, 2009, the Company sold some unused fixed assets which resulted in a gain of $84,000 and $31,000, respectively.  This gain is included in other operating income in the Unaudited Condensed Consolidated Statements of Net Earnings.

 

11.

Recently Issued Accounting Standards – In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which requires additional disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 fair value measurements. This standard also clarifies existing disclosure requirements related to the level of disaggregation of fair value measurements for each class of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and non-recurring Level 2 and Level 3 measurements. Since this new accounting standard only required additional disclosure, the adoption of the standard in the first quarter of 2011 did not impact the Company’s consolidated financial statements. Additionally, effective for interim and annual periods beginning after December 15, 2010, this standard will require additional disclosure and require an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis, rather than one net amount.

 

12.	Earnings per share for the Quarters and Year-to-Date periods Ended October 2, 2010 and September 26, 2009 are as follows:

			Q U A R T E R
Quarter Ended October 2, 2010 and September 26, 2009			Fiscal 2011		Fiscal 2010
			(In thousands, except per share amounts)
	Basic
	Net  earnings	$               2,811		$              12,425
	Deduct preferred stock dividends paid	6		6
	Undistributed earnings	2,805		12,419
	Earnings attributable to participating preferred	96		1,540
	Earnings attributable to common shareholders	$               2,709		$              10,879
	Weighted average common shares outstanding	11,736		10,640
	Basis earnings per common share	$                  0.23		$                  1.02
	Diluted
	Earnings attributable to common shareholders	$               2,709		$              10,879
	Add dividends on convertible preferred stock	5		5
	Earnings attributable to common stock on a diluted basis	$               2,714		$              10,884
	Weighted average common shares outstanding-basic	11,736		10,640
	Additional shares issuable related to the equity compensation plan	4		1
	Additional shares to be issued under full conversion of preferred stock	67		67
	Total shares for diluted	11,807		10,708
	Diluted earnings per common share	$                 0.23		$                  1.02

			Y E A R  T O D A T E
Six Months Ended October 2, 2010 and September 26, 2009			Fiscal 2011		Fiscal 2010
			(In thousands, except per share amounts)
	Basic
	Net  earnings	$               8,086		$              23,511
	Deduct preferred stock dividends paid	12		12
	Undistributed earnings	8,074		23,499
	Earnings attributable to participating preferred	503		5,868
	Earnings attributable to common shareholders	$               7,571		$              17,631
	Weighted average common shares outstanding	11,392		9,112
	Basic earnings per common share	$                  0.66		$                  1.94
	Diluted
	Earnings attributable to common shareholders	$               7,571		$             17,631
	Add dividends on convertible preferred stock	10		10
	Earnings attributable to common stock on a diluted basis	$               7,581		$              17,641
	Weighted average common shares outstanding-basic	11,392		9,112
	Additional shares issuable related to the equity compensation plan	4		1
	Additional shares to be issued under full conversion of preferred stock	67		67
	Total shares for diluted	11,463		9,180
	Diluted earnings per common share	$                 0.66		$                  1.92

13.

On September 28, 2009, the Company, GMOL and General Mills, Inc. entered into a Second Amended and Restated Alliance Agreement (the “Alliance Agreement”) pursuant to which certain provisions were modified to (i) amend numerous definitions to reflect current practices and various changes in the administrative and working capital costs included in the calculation of fees payable to the Company under the Alliance Agreement (resulting in a net increase of such components of the calculation); (ii) provide that the tolling fee per standard case paid to the Company shall be modified each year using an index to account for inflation factors, but in no event less than a base tolling fee; (iii) clarify risk allocation for losses related to damage claims not covered by insurance; (iv) require release of GMOL’s lien on certain core plants used by the Company to perform the Services upon the Company’s final note payment to GMOL on September 30, 2009; (v) provide that the remaining depreciation and lease costs related to certain closed plants that reduced the final note payment on September 30, 2009; and (vi) reduce the termination fee and extend the length of the advance notice time period required to terminate the Alliance Agreement without cause.  This Alliance Agreement was filed with the second quarter of Fiscal 2010 Form 10-Q as Exhibit 10.

The secured subordinated promissory note to GMOL, with a balance of $32.1 million, matured on September 30, 2009 and was paid off.

14.

As required by FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” codified in ASC 825, “Financial Instruments,” the Company estimates the fair values of financial instruments on a quarterly basis.  Long-term debt, including current portion, had a carrying amount of $295,139,000 and an estimated fair value of $292,816,000 as of October 2, 2010.  As of March 31, 2010, the carrying amount was $214,280,000 and the estimated fair value was $212,035,000.

15.

In June, 2010, the Company received a Notice of Violation of the California Safe Drinking Water and Toxic Enforcement Act of 1986, commonly known as Proposition 65, from the Environmental Law Foundation (ELF).  This notice was made to the California Attorney General and various other government officials, and to 49 companies including Seneca Foods Corporation whom ELF alleges manufactured, distributed or sold packaged peaches, pears, fruit cocktail and fruit juice that contain lead without providing a clear and reasonable warning to consumers.  Under California law, proper notice must be made to the State and involved firms at least 60 days before any suit under Proposition 65 may be filed by private litigants like ELF.  That 60-day period has expired and to date neither the California Attorney General nor any appropriate district attorney or city attorney, nor any private litigants like ELP, has initiated an action against the Company.  If an action is commenced under Proposition 65, the Company will defend itself vigorously.  As this matter is at a very early stage, we are not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.

 

16.

The Company reached a settlement with the IRS for the 2006, 2007 and 2008 tax years during the quarter ended October 2, 2010.  As a result, the Company was able to record the tax benefits of those settlements as reductions to income tax expense of $1.5 million and reductions to unrecognized tax benefits amounting to $5.2 million for the quarter ended October 2, 2010.  The Company is generally no longer subject to U.S. federal income tax examinations for any year before 2009.

 

 

 

17.

During the second quarter of fiscal 2011, the Company entered into some interim lease notes which financed down payments for various equipment orders at market rates.  As of October 2, 2010, these interim notes had not been converted into operating leases since the equipment was not delivered.  These notes, which total $2,719,000 as of October 2, 2010, are included in notes payable in the accompanying Condensed Consolidated Balance Sheets.  These notes are expected to be converted into operating leases by the end of Company’s fiscal year.  Excluding the $2,719,000, the Company has an additional purchase commitment of $4,079,000 related to this project.

 

 

 

 

 

 

		Three Months Ended								Six Months Ended
		October 2, 2010				September 26, 2009				October 2, 2010				September 26, 2009
Canned Vegetables		$	159.2			$	177.7			$	314.1			$	338.9
Green Giant Alliance			41.6				74.2				48.2				76.0
Frozen			19.4				13.3				29.2				23.2
Fruit Products			48.5				46.6				90.7				93.7
Snack			3.2				6.7				5.9				14.0
Other			3.5				4.7				7.3				7.9
		$	275.4			$	323.2			$	495.4			$	553.7

		Three Months Ended		Six Months Ended
	October 2, 2010		September 26, 2009		October 2, 2010	September 26, 2009
Gross Margin	6.9%		11.9%		9.0%	13.5%
Selling	2.8%		2.8%		3.2%	3.3%
Administrative	2.2%		2.2%		2.7%	2.7%
Plant Restructuring	0.4%		0.0%		0.2%	0.0%
Other Operating Income	0.0%		0.0%		0.0%	0.0%
Operating Income	1.5%		6.9%		2.9%	7.5%
Interest Expense, Net	0.8%		0.8%		0.8%	0.9%

 

 

		October 2, 2010				September 26, 2009				March 31, 2010				March 31,2009
Working capital:
Balance		$	282,370			$	406,395			$	404,610			$	332,082
Change in quarter			(105,524	)			90,811				-				-
Long-term debt, less current portion			93,538				240,525				207,924				191,853
Total stockholders' equity per equivalent
common share (see Note)			28.06				25.50				27.43				23.13
Stockholders' equity per common share			28.68				26.24				28.37				28.10
Current ratio			1.49				1.94				3.98				3.13

·	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 the Company’s ability to service and reduce its debt;

·	foreign currency exchange and interest rate fluctuations;

·	effectiveness of the Company’s 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 and health and safety regulations; and

·	other risks detailed from time to time in the reports filed by the Company with the SEC.

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
7/01/10 – 7/31/10	-	-	-	-	N/A
8/01/10 – 8/31/10	6,100	-	$24.83	-	N/A
9/01/10 – 9/30/10	-	-	-	-	N/A
Total	6,100	-	$24.83	-	N/A	486,500