Seneca Foods Corp - Quarter Report: 2015 September (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

(Exact name of Company as specified in its charter)

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

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  ☑ No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ☑ 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.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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   ☑

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

 

 

 

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, 2015		$	2,119			$	3,010			$	96,578			$	(61,277	)		$	(31,804	)		$	343,104
Net earnings			-				-				-				-				-				9,490
Cash dividends paid
on preferred stock			-				-				-				-				-				(12	)
Equity incentive program			-				-				33				-				-				-
Stock issued for profit sharing plan			-				-				-				-				-				-
Preferred stock conversion			(775	)			13				762				-				-				-
Purchase treasury stock			-				-				-				(1,636	)			-				-
Balance September 26, 2015		$	1,344			$	3,023			$	97,373			$	(62,913	)		$	(31,804	)		$	352,582
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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 September 26, 2015 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, 2015 balance sheet was derived from the audited consolidated financial statements.

During the six months ended September 26, 2015, the Company sold $32,765,000 of Green Giant finished goods inventory to General Mills Operations, LLC ("GMOL") for cash, on a bill and hold basis, as compared to $37,373,000 for the six months ended September 27, 2014.  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 Company's 2015 Annual Report on Form 10-K.

Other footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States 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 2015 Annual Report on Form 10-K.

2.

In April 2014, the Company purchased a 50% equity interest in Truitt Bros. Inc. ("Truitt") for $16,308,000.  The purchase agreement grants the Company the right to acquire the remaining 50% ownership of Truitt in the future under certain conditions.  Truitt is known for its industry innovation related to packing shelf stable foods in trays, pouches and bowls.  Truitt has two state-of-the-art plants located in Oregon and Kentucky.  This investment is included in Other Assets in the Condensed Consolidated Balance Sheets and is accounted for using the equity method of accounting.

3.

First-In, First-Out ("FIFO") based inventory costs exceeded LIFO based inventory costs by $162,480,000 as of the end of the second quarter of fiscal 2016 as compared to $158,955,000 as of the end of the second quarter of fiscal 2015.  The change in the LIFO Reserve for the three months ended September 26, 2015 was an increase of $50,000 as compared to an increase of $5,919,000 for the three months ended September 27, 2014.  The LIFO Reserve decreased by $1,587,000 in the first six months of fiscal 2016 compared to an increase of $5,570,000 in the first six months of fiscal 2015.  This reflects the projected impact of an overall cost decrease expected in fiscal 2016 versus fiscal 2015.

5.

During the six-month period ended September 26, 2015 the Company repurchased 57,400 shares or $1,634,000 of its Class A Common Stock as Treasury Stock and 60 shares or $2,000 of its Class B Common Stock also as Treasury Stock.  As of September 26, 2015, there are 2,203,774 shares or $62,913,000 of repurchased stock.  These shares are not considered outstanding.

6.	The net periodic benefit cost for the Company's pension plan consisted of:

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

12.

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 has initiated an action against the Company.  However, private litigant ELF filed an action against the Company and 27 other named companies on September 28, 2011, in Superior Court of Alameda County, California, alleging violations of Proposition 65 and seeking various measures of relief, including injunctive and declaratory relief and civil penalties.  The Company, along with the other named companies, vigorously defended the claim.  A responsive answer was filed, the discovery process was completed and a trial on liability was held beginning in April of 2013 in accordance with court schedules.  The trial was completed on May 16, 2013 and, on July 15, 2013 the judge issued a tentative and proposed statement of decision agreeing with the Company, and the other defendants, that the "safe harbor" defense had been met under the regulations relating to Proposition 65 and the Company will not be required to place a Proposition 65 warning label on the products at issue in the case.  The trial decision was finalized and the decision was appealed by ELF with a filing dated October 3, 2013.  The California Court of Appeal, First Appellate District, Division One unanimously rejected the appeal by ELF in a decision dated March 17, 2015.  ELF filed a petition for review with the California Supreme Court on April 28, 2015, and the petition was denied on July 8, 2015.   With the successful defense of the case, the remedies portion of the case was not litigated and the denial of review by the California Supreme Court effectively ends the action, with only a few procedural matters to clean-up as a result of the denial of review.  Our portion of legal fees in defense of this action have been sizable, as would be expected with litigation resulting in trial, and the appeal, but have not had a material adverse impact on the Company's financial position, results of operations, or cash flows. 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.

 

 

Operating Income:


The following table presents components of operating income as a percentage of net sales:

Income Taxes:

The effective tax rate was 33.7% and (32.8%) for the six month periods ended September 26, 2015 and September 27, 2014, respectively.  The majority of the 66.5 percentage point increase is made up of the following items:  In the prior year a valuation allowance related to the New York State Investment Tax Credit was re-established which created a $384,000 charge.  Due to the prior year-to-date pre-tax loss, this charge created a significant negative reconciling item.  The absence of this reconciling item is a major contributor to the difference in effective tax rate (72.8 percentage points).  The valuation allowance was re-established due to a change in the law. This is a discrete item and therefore was required to be booked in the quarter ended June 28, 2014.  Another major contributor to the change in effective tax rate is the decrease in the domestic manufacturer's deduction in relation to pre-tax book income (6.6 percentage points).  These differences were partially offset by the absence of an $81,000 credit (15.7 percentage points) related to interest received on tax refunds recorded during the quarter ended June 28, 2014.  Due to the prior year pre-tax loss, this credit had created a significant positive reconciling item.

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 2015 Annual Report on Form 10-K for conversion details.

As compared to September 27, 2014, inventory increased $30,176,000 to $761,703,000 at September 26, 2015.  The components of the inventory increase reflect a $39,626,000 increase in finished goods, an $11,251,000 decrease in work in process and a $1,801,000 increase in raw materials and supplies.  The finished goods increase reflects higher inventory quantities due to the magnitude and timing of the fiscal year 2016 pack versus fiscal year 2015 pack partially offset by decreased sales volume as compared to the prior year.  The raw materials and supplies increase is primarily due to an increase in cans and raw steel quantities compared to the prior year.  FIFO based inventory costs exceeded LIFO based inventory costs by $162,480,000 as of the end of the second quarter of 2016 as compared to $158,955,000 as of the end of the second quarter of 2015.

Cash provided by financing activities was $58,613,000 in the first six months of fiscal 2016, which included borrowings of $154,763,000 and the repayment of $84,525,000 of long-term debt, principally consisting of borrowing and repayment on the revolving credit facility ("Revolver").  Other than borrowings under the Revolver, there was no new long-term debt during the first six months of fiscal 2016.  During the six months ended September 26, 2015, the Company repurchased $1,634,000 of its Class A Common Stock as treasury stock. In addition, the Company paid down Notes Payable of $9,903,000 during the six month period ended September 26, 2015 related to some interim notes which became operating leases.

Seasonality

Forward-Looking Information

The information contained in this report contains, or may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company or its officers (including statements preceded by, followed by or that include the words "believes," "expects," "anticipates" or similar expressions) with respect to various matters, including (i) the Company's anticipated needs for, and the availability of, cash, (ii) the Company's liquidity and financing plans, (iii) the Company's ability to successfully integrate acquisitions into its operations, (iv) trends affecting the Company's financial condition or results of operations, including anticipated sales price levels and anticipated expense levels, in particular higher production, fuel and transportation costs, (v) the Company's plans for expansion of its business (including through acquisitions) and cost savings, and (vi) the impact of competition.

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.  Investors are cautioned not to place undue reliance on such statements, which speak only as of the date the statements were made.  Among the factors that could cause actual results to differ materially are:

·	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.

 

Except for ongoing obligations to disclose material information as required by the federal securities laws, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of the filing of this report or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

During the six months ended September 26, 2015, the Company sold $32,765,000 of Green Giant finished goods inventory to General Mills Operations, LLC ("GMOL") for cash, on a bill and hold basis, as compared to $37,373,000 for the six months ended September 27, 2014.  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.

 

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, 2015.

 

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.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of September 26, 2015, our disclosure controls and procedures were effective.  The Company continues to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.

Refer to footnote 12 to the Condensed Consolidated Financial Statements included in Part I Item 1 of this Form 10-Q.

There have been no material changes to the risk factors disclosed in the Company's Form 10-K for the period ended March 31, 2015.

Acquisition--On October 30, 2015, the Company completed the acquisition of 100% of the stock of Gray & Company.  The business, based in Hart, Michigan, is a processor of maraschino cherries and a provider of glace or candied fruit products.  This acquisition includes a plant in Dayton, Oregon. The purchase price was approximately $24,496,000 plus the assumption of certain liabilities.  In conjunction with the closing, the Company paid off $12,034,000 of liabilities acquired.  The rationale for the acquisition was twofold: (1) the business is a complementary fit with our existing business and (2) it provides an extension of our product offerings.

32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

101

The following materials from Seneca Foods Corporation's Quarterly Report on Form 10-Q for the three and six months ended September 26, 2015, formatted in XBRL (eXtensible Business Reporting Language):  (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of net earnings (loss), (iii) condensed consolidated statements of comprehensive income (loss), (iv) condensed consolidated statements of cash flows, (v) condensed consolidated statement of stockholders' equity and (vi) the notes to condensed consolidated financial statements.