Seneca Foods Corp - Quarter Report: 2011 January (Form 10-Q)

For the Quarter Ended January 1, 2011

Commission File Number  0-01989

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

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

 
 

Class	Shares Outstanding at January 26, 2011
Common Stock Class A, $.25 Par	9,587,709
Common Stock Class B, $.25 Par	2,147,922

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
		January 1,  2011				December 26,  2009				March 31, 2010
ASSETS
Current Assets:
Cash and Cash Equivalents		$	8,115			$	18,233			$	7,421
Accounts Receivable, Net			55,654				60,503				73,460
Inventories (Note 3):
Finished Goods			500,135				532,723				338,891
Work in Process			19,397				10,758				8,176
Raw Materials and Supplies			85,184				60,312				99,397
Off-Season (Note 4)			(59,644	)			(59,099	)			-
Total Inventories			545,072				544,694				446,464
Deferred Income Tax Asset, Net			7,382				6,840				10,032
Other Current Assets			7,268				15,186				2,850
Total Current Assets			623,491				645,456				540,227
Property, Plant and Equipment, Net			190,136				177,976				178,113
Other Assets			560				1,270				993
Total Assets		$	814,187			$	842,702			$	719,333
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes Payable		$	4,188			$	13,197			$	-
Accounts Payable			82,574				86,028				67,674
Other Accrued Expenses			38,166				38,575				32,608
Accrued Vacation			9,949				9,678				10,059
Accrued Payroll			3,718				6,620				12,798
Income Taxes Payable			3,293				6,853				6,122
Current Portion of Long-Term Debt			186,815				6,231				6,356
Total Current Liabilities			328,703				167,182				135,617
Long-Term Debt, Less Current Portion			91,828				293,856				207,924
Deferred Income Taxes, Net			1,676				4,844				3,085
Other Long-Term Liabilities			37,586				28,813				37,697
Total Liabilities			459,793				494,695				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				1,500				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				3,847				3,861
Additional Paid-in Capital			90,753				65,134				65,910
Treasury Stock, at cost			(257	)			(257	)			(257	)
Accumulated Other Comprehensive Loss			(15,271	)			(13,731	)			(15,030	)
Retained Earnings			268,726				242,918				249,201
Stockholders' Equity			354,394				330,007				335,010
Total Liabilities and Stockholders’ Equity		$	814,187			$	824,702			$	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								Nine Months Ended
		January 1,  2011				December 26,  2009				January 1,  2011				December 26,  2009
Net Sales		$	446,250			$	447,027			$	941,640			$	1,000,760
Costs and Expenses:
Cost of Product Sold			411,736				398,421				862,715				877,552
Selling and Administrative			15,913				16,210				45,006				49,228
Plant Restructuring			109				17				1,320				17
Other Operating Income			(720	)			(43	)			(804	)			(74	)
Total Costs and Expenses			427,038				414,605				908,237				926,723
Operating Income			19,212				32,422				33,403				74,037
Interest Expense, Net			2,414				2,006				6,590				7,189
Earnings Before Income Taxes			16,798				30,416				26,813				66,848
Income Taxes			5,336				11,810				7,265				24,731
Net  Earnings		$	11,462			$	18,606			$	19,548			$	42,117
Earnings Attributable to Common Stock		$	11,064			$	16,306			$	18,497			$	33,361
Basic Earnings per Common Share		$	0.94			$	1.53			$	1.61			$	3.47
Diluted Earnings per Common Share		$	0.94			$	1.52			$	1.60			$	3.44

SENECA FOODS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In Thousands)
		Nine Months Ended
		January 1, 2011				December 26, 2009
Cash Flows from Operating Activities:
Net Earnings		$	19,548			$	42,117
Adjustments to Reconcile Net Earnings to
Net Cash Used in Operations:
Depreciation & Amortization			16,755				16,413
Gain on the Sale of Assets			(172	)			(62	)
Deferred Income Tax Expense			1,241				7,644
Changes in operating assets and liabilities (net of acquisition):
Accounts Receivable			21,221				16,210
Inventories			(147,961	)			(210,838	)
Off-Season			59,644				59,099
Other Current Assets			(4,275	)			(9,220	)
Income Taxes			(2,676	)			5,305
Accounts Payable, Accrued Expenses
and Other Liabilities			3,151				17,417
Net Cash Used in Operations			(33,524	)			(55,915	)
Cash Flows from Investing Activities:
Cash Paid for Acquisition (Net of  Cash Acquired)			(20,348	)			-
Additions to Property, Plant and Equipment			(15,538	)			(14,641	)
Proceeds from the Sale of Assets			1,203				84
Net Cash Used in Investing Activities			(34,683	)			(14,557	)
Cash Flow from Financing Activities:
Long-Term Borrowing			319,344				408,814
Payments on Long-Term Debt			(254,981	)			(339,529	)
Borrowings on Notes Payable			4,188				13,197
Other			362				386
Dividends			(12	)			(12	)
Net Cash Provided by Financing Activities			68,901				82,856
Net Increase in Cash and Cash Equivalents			694				12,384
Cash and Cash Equivalents, Beginning of the Period			7,421				5,849
Cash and Cash Equivalents, End of the Period		$	8,115			$	18,233

SENECA FOODS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(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			-				-				-				-				-				19,548
Cash dividends paid
on preferred stock			-				-				-				-				-				(23	)
Equity incentive program			-				-				67				-				-				-
Stock issued for bonus program			-				-				33				-				-				-
Stock conversions (Note 6)			(25,000	)			257				24,743				-				-				-
Change in 401(k) stock
adjustment(net of tax $153)			-				-				-				-				(241	)			-
Balance January 1, 2011		$	6,325			$	4,118			$	90,753			$	(257	)		$	(15,271	)		$	268,726

 

 

 

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 allocated 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		$	13.8
Property, plant and equipment			13.9
Current liabilities			(7.4	)
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 $90.8 million as of the end of the third quarter of fiscal 2011 as compared to $99.9 million as of the end of the third quarter of fiscal 2010.  The change in the LIFO Reserve for the three months ended January 1, 2011 was a reduction of $2,113,000 as compared to an increase of $3,967,000 for the three months ended December 26, 2009.  The change in the LIFO Reserve for the nine months ended January 1, 2011 was a reduction of $6,890,000 as compared to an increase of $13,396,000 for the nine months ended December 26, 2009.  These decreases for the current fiscal year reflect 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 as well as standard cost differences between prior and current pack.  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 a January 1, 2011 balance of $180,095,000, has a maturity date of August 18, 2011, and therefore is included in Current Portion of Long-Term Debt which is classified as a current liability on the accompanying Condensed Consolidated Balance Sheet.  Prior to the second quarter of fiscal 2011 it was classified as Long-Term Debt.

6.

The changes in the stockholders’ equity accounts for the nine months period ended January 1, 2011 are included in the Condensed Consolidated Statements of Stockholders’ Equity.  During the nine-month period ended January 1, 2011, there were 1,025,220 shares, or $25,000,000, of Convertible Participating Preferred Stock converted to Class A Common Stock and 30,000 shares, or $7,500, of Class B Common Stock (at par), converted to Class A Common Stock.  During that period, there were 1,086 shares, or $33,000 of Class B Common Stock issued related to the Company’s Profit Sharing Bonus Plan.

As previously disclosed, on July 21, 2009 certain shareholders of the Company closed on the sale of 3,756,332 shares of Class A Common Stock (including the shares sold pursuant to the underwriters' over allotment option) pursuant to an Underwriting Agreement among the Company, the selling shareholders, Merrill Lynch Pierce Fenner & Smith Inc. and Piper Jaffray & Co.  The Company received none of the proceeds of the offering.  During the second quarter of fiscal 2010, 2,607,156 shares, or $31,104,000, of Convertible Participating Preferred Stock and 556,088 shares, or $139,000, of Class B Common Stock (at par), were converted to Class A Common Stock in connection with this secondary stock offering.

7.	The following schedule presents comprehensive income (loss) for the three and nine-month periods ended January 1, 2011 and December 26, 2009:

		Three Months Ended								Nine Months Ended
		January 1,  2011				December 26,  2009				January 1,  2011			December 26,  2009
		(In thousands)
Comprehensive income (loss):
Net earnings		$	11,462			$	18,606			$	19,548			$	42,117
Change in 401(k) stock adjustment (net of tax)			18				(103	)			(241	)			(47	)
Change in pension and post retirement benefits   adjustment (net of tax)			-				-				-				5,476
Total		$	11,480			$	18,503			$	19,307			$	47,546

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

		Three Months Ended								Nine Months Ended
		January 1, 2011				December 26, 2009				January 1, 2011				December 26, 2009
		(In thousands)
Service  Cost		$	1,300			$	1,346			$	3,900			$	4,069
Interest Cost			1,637				1,157				4,911				3,469
Expected Return on Plan Assets			(1,844	)			(997	)			(5,531	)			(2,992	)
Amortization of Actuarial Loss			364				603				1,091				1,809
Amortization of Transition Asset			(69	)			(69	)			(207	)			(207	)
Net Periodic Benefit Cost		$	1,388			$	2,040			$	4,164			$	6,148

9.	The following table summarizes the restructuring charges recorded and the accruals established:

10.

During the nine months ended January 1, 2011 and December 26, 2009, the Company sold some unused fixed assets which resulted in a gain of $172,000 and $62,000, respectively.  In addition, during the three and nine months ended January 1, 2011, a gain of $632,000 was recorded related the acquisition of Lebanon and is discussed above in Note 2.  These gains are 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 January 1, 2011 and December 26, 2009 are as follows:

Quarters and Year-to-date Periods Ended		Q U A R T E R								Y E A R T O D A T E
January 1, 2011 and December 26, 2009		Fiscal 2011				Fiscal 2010				Fiscal 2011				Fiscal 2010
		(In thousands, except share amounts)
Basic
Net  Earnings		$	11,462			$	18,606			$	19,548			$	42,117
Deduct preferred stock dividends paid			6				6				17				17
Undistributed earnings			11,456				18,600				19,531				42,100
Earnings attributable to participating preferred			392				2,294				1,034				8,739
Earnings attributable to common shareholders		$	11,064			$	16,306			$	18,497			$	33,361
Weighted average common shares outstanding			11,736				10,648				11,507				9,624
Basic earnings per common share		$	0.94			$	1.53			$	1.61			$	3.47
Diluted
Earnings attributable to common shareholders		$	11,064			$	16,306			$	18,497			$	33,361
Add dividends on convertible preferred stock			5				5				15				15
Earnings attributable to common stock on a diluted   basis		$	11,069			$	16,311			$	18,512			$	33,376
Weighted average common shares outstanding-basic			11,736				10,648				11,507				9,624
Additional shares issuable related to the equity   compensation plan			4				2				4				2
Additional shares to be issued under full conversion   of preferred stock			67				67				67				67
Total shares for diluted			11,807				10,717				11,578				9,693
Diluted Earnings per common share		$	0.94			$	1.52			$	1.60			$	3.44

13.

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 $278,643,000 and an estimated fair value of $277,138,000 as of January 1, 2011.  As of March 31, 2010, the carrying amount was $214,280,000 and the estimated fair value was $212,035,000.

14.

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.  Additionally, in the ordinary course of its business, the Company is made party to certain legal proceedings seeking monetary damages, including proceedings invoking product liability claims, either directly or through indemnification obligations, and we are not able to predict the probability of the outcome or estimate of loss, if any, related to any such matter.

 

15.

The Company reached a settlement with the Internal Revenue Service (IRS) during the quarter ended October 2, 2010 for the 2006, 2007 and 2008 tax years.  As a result, the Company recorded the tax benefits of those settlements as a reduction 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.

 

16.

During the third 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 January 1, 2011, these interim notes had not been converted into operating leases since the equipment was not delivered.  These notes, which total $4,188,000 as of January 1, 2011, are included in notes payable in the accompanying Condensed Consolidated Balance Sheets.  These notes are expected to be substantially converted into operating leases by the end of Company’s fiscal year.  Excluding the $4,188,000, the Company has an additional purchase commitment of $4,017,000 related to these projects.

 

 

 

 

 

		Three Months Ended								Nine Months Ended
		January 1, 2011				December 26, 2009				January 1, 2011				December 26, 2009
Canned Vegetables		$	213.3			$	220.2			$	528.3			$	560.2
Green Giant Alliance			144.0				155.9				192.2				231.9
Frozen			28.2				11.7				57.3				34.9
Fruit Products			55.1				51.7				145.8				145.4
Snack			2.5				3.7				8.4				17.8
Other			3.2				3.8				9.6				10.6
		$	446.3			$	447.0			$	941.6			$	1,000.8

		Three Months Ended		Nine Months Ended
	January 1, 2011		December 26, 2009		January 1, 2011	December 26, 2009
Gross Margin	7.7%		10.9%		8.4%	12.3%
Selling	2.3%		2.1%		2.8%	2.7%
Administrative	1.3%		1.5%		2.1%	2.2%
Plant Restructuring	0.0%		0.0%		0.1%	0.0%
Other Operating Income	-0.2%		0.0%		-0.1%	0.0%
Operating Income	4.3%		7.3%		3.5%	7.4%
Interest Expense, Net	0.5%		0.4%		0.7%	0.7%

 

 

		January 1,  2011				December 26, 2009				March 31,  2010				March 31, 2009
Working capital:
Balance		$	294,788			$	478,274			$	404,610			$	332,082
Change during quarter			12,417				71,879				-				-
Long-term debt, less current portion			91,828				293,856				207,924				191,853
Total stockholders' equity per equivalent
common share (see Note)			29.01				27.02				27.43				23.13
Stockholders' equity per common share			29.66				27.97				28.37				28.10
Current ratio			1.90				3.86				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;

·	the availability of financing;

·	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
10/01/10 – 10/31/10	-	-	-	-	N/A
11/01/10 – 11/30/10	-	-	-	-	N/A
12/01/10 – 12/31/10	7,200	-	$25.14	-	N/A
Total	7,200	-	$25.14	-	N/A	486,500