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SENEA > SEC Filings for SENEA > Form 10-Q on 29-Jan-2014All Recent SEC Filings

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Form 10-Q for SENECA FOODS CORP


29-Jan-2014

Quarterly Report


ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 28, 2013

Seneca Foods Corporation (the "Company") is a leading low cost producer and distributor of high quality processed fruits and vegetables. The Company's product offerings include canned, frozen and bottled produce and snack chips. Its products are sold under private label as well as national and regional brands that the Company owns or licenses, including Seneca®, Libby's®, Aunt Nellie's Farm Kitchen®, Stokely's®, Read® Taste of the West®, Cimarron® and Tendersweet®. The Company's canned fruits and vegetables are sold nationwide by major grocery outlets, including supermarkets, mass merchandisers, limited assortment stores, club stores and dollar stores. The Company also sells its products to foodservice distributors, industrial markets, other food processors, export customers in over 80 countries and federal, state and local governments for school and other food programs. In addition, the Company packs Green Giant®, Le Sueur® and other brands of canned vegetables as well as select Green Giant® frozen vegetables for General Mills Operations, LLC ("GMOL") under a long-term Alliance Agreement.

The Company's raw product is harvested mainly between June through November. The Company experienced unfavorable growing conditions related to our pea harvest this summer reflecting a combination of high temperatures and uneven moisture. These difficult growing conditions unfavorably impacted pea crop yields and plant recovery rates which resulted in unfavorable manufacturing variances.

Potential Acquisition-- On December 16, 2013 the Company signed an Asset Purchase Agreement to serve as the stalking horse bidder related to the potential acquisition of certain canning operations assets and assumption of certain liabilities of Allens, Inc. for a purchase price of approximately $148.0 million, subject to a working capital adjustment, plus the assumption of certain liabilities. Allens, Inc. filed a petition for bankruptcy on October 28, 2013 in the United States Bankruptcy Court for the Western District of Arkansas (the "Court") and the bankruptcy case is currently pending. On January 7, 2014 the Court approved bid procedures for the auction that allows other qualified bidders to submit higher or otherwise better offers, as required under Section 363 of the U.S. Bankruptcy Code. The auction is scheduled to be held on February 3, 2014 and if the Company is ultimately successful in its acquisition of these assets the closing of the acquisition is expected to occur in the fourth quarter of fiscal 2014. If Allens, Inc. accepts an offer other than the Company's Asset Purchase Agreement, the Company will be entitled to be paid a break-up fee and a reimbursement of its transaction expenses up to a specified maximum amount. The business, with plants located in Arkansas, North Carolina, and Wisconsin, is a processor of canned vegetables including southern vegetables in the United States. The rationale for the potential acquisition is twofold: (1) the business is a complementary fit with our existing business and (2) it provides an extension of our product offerings. The Company deposited $7,500,000 into an escrow fund upon signing the Asset Purchase Agreement and the remainder of the purchase price is expected to be funded with a combination of available cash and borrowings from the Company's Revolver.

Acquisition--On January 15, 2013, the Company completed the acquisition of 100% of the membership interest of Independent Foods, LLC. The business, based in Sunnyside, Washington, is a processor of canned pears, apples and cherries in the United States. The rationale for the acquisition was twofold: (1) the business is a complementary fit with the Company's existing business and (2) it provides an extension of the Company's product offerings. The purchase price was approximately $5,017,000 plus the assumption of certain liabilities. In conjunction with the closing, the Company paid $19,517,000 of liabilities acquired.

Results of Operations:

Sales:


Third fiscal quarter 2014 results include net sales of $477,694,000, which represents a 5.5% increase, or $24,963,000, from the third quarter of fiscal 2013. The increase in sales is attributable to higher selling prices/sales mix of $18,324,000 and a sales volume increase of $6,639,000. The increase in sales is primarily from a $17,762,000 increase in Canned Fruit sales (including the results from the Sunnyside operations which was acquired on January 15, 2013), $10,061,000 increase in Canned Vegetable sales, and a $6,862,000 increase in Frozen sales partially offset by an $11,080,000 decrease in GMOL sales and a $125,000 decrease in Snack sales. The GMOL sales decrease primarily reflects the acceleration of sales in the second quarter under the Green Giant Alliance resulting from earlier maturities of certain commodities in the current year.

Nine months ended December 28, 2013 include net sales of $1,046,449,000, which represents a 4.5% increase, or $45,074,000, from the first nine months of fiscal 2013. The increase in sales is attributable to a sales volume increase of $46,032,000, partially offset by lower selling prices/sales mix of $958,000. The increase in sales is primarily from a $25,672,000 increase in Canned Fruit sales (including the results from the Sunnyside operations which was acquired on January 15, 2013), a $16,436,000 increase in Frozen sales, and an $11,836,000 increase in GMOL sales, partially offset by a $10,780,000 decrease in Canned Vegetable sales and a $222,000 decrease in Snack sales.

The following table presents sales by product category (in millions):

                                                  Three Months Ended                     Nine Months Ended
                                            December 28,       December 29,       December 28,       December 29,
                                                2013               2012               2013               2012
Canned Vegetables                          $        253.5      $       243.4     $        571.8     $        582.6
Green Giant Alliance                                102.0              113.1              176.4              164.6
Frozen                                               28.4               21.5               77.6               61.2
Fruit Products                                       84.3               66.5              195.7              170.0
Snack                                                 2.7                2.8                8.5                8.7
Other                                                 6.8                5.4               16.4               14.3
                                           $        477.7      $       452.7     $      1,046.4     $      1,001.4

Operating Income:

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

                                                  Three Months Ended                     Nine Months Ended
                                           December 28,        December 29,       December 28,        December 29,
                                               2013                2012               2013                2012
 Gross Margin                                        6.5 %               9.9 %              7.0 %              11.5 %

 Selling                                             2.4 %               2.4 %              2.7 %               2.7 %
 Administrative                                      1.8 %               1.7 %              2.2 %               2.2 %
 Restructuring                                         - %               0.6 %                - %               0.3 %
 Other Operating Income                              0.1 %                 - %                - %                 - %

 Operating Income                                    2.2 %               5.2 %              2.1 %               6.3 %

 Interest Expense, Net                               0.3 %               0.4 %              0.5 %               0.5 %


For the three month period ended December 28, 2013, the gross margin decreased from the prior year quarter from 9.9% to 6.5% due primarily to a higher LIFO charge in the current year as compared to the prior year. The LIFO charge for the third quarter ended December 28, 2013 was $7,676,000 as compared to $1,268,000 for the third quarter ended December 29, 2012 and reflects the impact on the current quarter of the current inflationary cost increases expected in fiscal 2014, compared to fiscal 2013. On an after-tax basis, LIFO reduced net earnings by $4,989,000 for the quarter ended December 28, 2013 and $824,000 for the quarter ended December 29, 2012, based on the statutory federal income tax rate.

For the nine month period ended December 28, 2013, the gross margin decreased from the prior year period from 11.5% to 7.0% due primarily to a LIFO charge in the current year as compared to a credit in prior year and lower net selling prices (after considering promotions) compared to the prior year end. The LIFO charge for the nine months ended December 28, 2013 was $22,111,000 as compared to a credit of $1,176,000 for the nine months ended December 29, 2012 and reflects the impact on the nine months of increased inflationary cost increases expected in fiscal 2014, compared to fiscal 2013. On an after-tax basis, LIFO decreased net earnings by $14,372,000 for the nine months ended December 28, 2013 and increased net earnings by $764,000 for the nine months ended December 29, 2012, based on the statutory federal income tax rate.

For the three month period ended December 28, 2013, selling costs as a percentage of sales remained unchanged at 2.4% from the same period in the prior year. For the nine month period ended December 28, 2013, selling costs as a percentage of sales remained unchanged at 2.7% from the same period in the prior year.

For the three month period ended December 28, 2013, administrative expense as a percentage of sales increased from 1.7% to 1.8% from the same period in the prior year. For the nine month period ended December 28, 2013, administrative expense as a percentage of sales was unchanged at 2.2% from the third quarter ended December 29, 2012. Administrative expense increased for the three month period ended December 28, 2013 due primarily to higher employment costs in the current period.

During the third quarter of fiscal 2013, the Company implemented a product rationalization program and recorded a restructuring charge of $2,510,000 for related equipment costs, lease impairment costs (net of realizable value), and certain inventory costs. This charge is included in restructuring in the Unaudited Condensed Consolidated Statements of Net Earnings.

During the nine months ended December 28, 2013, the Company sold some unused fixed assets which resulted in a gain of $423,000. During the nine months ended December 29, 2012, the Company sold some unused fixed assets which resulted in a gain of $330,000. These gains are included in other operating income in the Unaudited Condensed Consolidated Statements of Net Earnings.

Interest expense for the third quarter ended December 28, 2013, as a percentage of sales, decreased from 0.4% to 0.3% from the third quarter ended December 29, 2012. This decrease was due to lower interest expense related to the Company's Revolver and decreased long-term debt interest attributable to scheduled debt payments. Interest expense for the nine months ended December 28, 2013, as a percentage of sales, remained unchanged at 0.5% from the nine months ended December 29, 2012.

Income Taxes:


The effective tax rate was 9.3% and 35.2% for the nine month periods ended December 28, 2013 and December 29, 2012, respectively. Of the 25.9 percentage point decrease in the effective tax rate for this period, the major contributors to this decrease are the following items, 1) with lower pre-tax earnings in the current year due to a large LIFO charge in the current year vs. a credit in the prior year, therefore permanent items have a larger impact on the effective rate, 2) the manufacturers deduction is a higher percentage of current year earnings than the prior year, 3) the reversal of certain tax reserves related to New York State Investment Tax Credit and 4) research and experimentation credit, fuel tax credit and other miscellaneous permanent items.

Earnings per Share:

Basic earnings per share was $0.62 and $1.32 for the three months ended December 28, 2013 and December 29, 2012, respectively. Diluted earnings per share was $0.61 and $1.32 for the three months ended December 28, 2013 and December 29, 2012, respectively. Basic earnings per share was $1.33 and $3.21 for the nine months ended December 28, 2013 and December 29, 2012, respectively. Diluted earnings per share was $1.32 and $3.19 for the nine months ended December 28, 2013 and December 29, 2012, respectively. For details of the calculation of these amounts, refer to footnote 10 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:

                                             December 28,       December 29,      March 31,      March 31,
                                                 2013               2012             2013           2012

Working capital:
 Balance                                    $      502,661     $      443,332     $  446,899     $  425,082
 Change during quarter                             (48,688 )          (32,507 )
Long-term debt, less current portion               266,416            228,412        226,873        226,873
Total stockholders' equity per equivalent
   common share (see Note)                           34.16              32.41          32.83          29.15
Stockholders' equity per common share                35.00              33.18          33.62          29.81
Current ratio                                         3.89               3.33           3.72           4.60

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 8 of the Notes to Consolidated Financial Statements of the Company's 2013 Annual Report on Form 10-K for conversion details.

As shown in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $12,559,000 in the first nine months of fiscal 2014, compared to net cash used in operating activities of $614,000 in the first nine months of fiscal 2013. The $13,173,000 increase in cash provided is primarily attributable to a $24,020,000 lower increase in inventory in the first nine months of fiscal 2014 as compared to the first nine months of fiscal 2013, a $2,802,000 increase in cash provided by accounts receivable, a $4,541,000 decrease in cash used by other current assets, , partially offset by decreased net earnings of $22,706,000 as previously discussed, a $13,983,000 increase in the cash provided by Accounts Payable, Accrued Expenses and Other Liabilities and a $8,757,000 increase in cash used by income taxes.


As compared to December 29, 2012, inventory increased $23,117,000 to $550,723,000 at December 28, 2013. The components of the inventory increase reflect a $1,135,000 increase in finished goods, a $4,114,000 increase in work in process and a $17,868,000 increase in raw materials and supplies. The finished goods increase reflects slightly higher inventory quantities partially offset by increased 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 $155,126,000 as of the end of the third quarter of 2014 as compared to $136,051,000 as of the end of the third quarter of 2013.

Cash used in investing activities was $11,062,000 in the first nine months of fiscal 2014 compared to cash used in investing activities of $3,753,000 in the first nine months of fiscal 2013. Additions to property, plant and equipment were $12,058,000 in the first nine months of fiscal 2014 as compared to $14,103,000 in the first nine months of fiscal 2013. Last year in the first nine months of fiscal 2013, the Loan Receivable of $10,000,000 was collected.

Cash provided by financing activities was $2,279,000 in the first nine months of fiscal 2014, which included borrowings of $362,048,000 and the repayment of $363,682,000 of long-term debt, principally consisting of borrowing and repayment on the revolving credit facility ("Revolver"). On August 1, 2013, the Company paid the final $36,742,000 principal payment due on a secured note payable to John Hancock Life Insurance Company. The Company used borrowings under the Revolver to pay off the note. Other than borrowings under the Revolver, there was no new long-term debt during the first nine months of fiscal 2014. During the nine months ended December 29, 2012, the Company repurchased $28,448,000 of its Class A Common Stock as treasury stock.

Available borrowings on the Revolver total $300,000,000 from April through July and $400,000,000 from August through March with a maturity date of July 20, 2016. The interest rate on the Revolver is based on LIBOR plus an applicable margin based on excess availability and the Company's fixed charge coverage ratio. As of December 28, 2013, the interest rate was approximately 1.42% on a balance of $226,000,000. 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 obligations for at least the next 12 months. The Revolver contains an accordion feature that allows the Company to request an increase in the aggregate commitments thereunder in an amount up to $150,000,000. In contemplation of the Allens, Inc. Asset Purchase Agreement, the Company received commitment letters from the lenders to increase the available borrowings under the Revolver. If the Company is the successful bidder in the Allens' bankruptcy case, the accordion feature will be exercised on or prior to closing of that transaction.

The Company's credit facilities contain standard representations and warranties, events of default, and certain affirmative and negative covenants, including various financial covenants. At December 28, 2013, the Company was in compliance with all such financial covenants.

New Accounting Standards

Refer to footnote 9 of the Notes to Condensed Consolidated Financial Statements.

Seasonality

The Company's revenues are typically 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 at cost plus a specified fee for each equivalent case. 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 retail sales due to holidays that occur during that quarter.


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 nine months ended December 28, 2013, the Company sold $150,345,000 of Green Giant finished goods inventory to General Mills Operations, LLC ("GMOL") for cash, on a bill and hold basis, as compared to $151,240,000 for the nine months ended December 29, 2012. Under the terms of the bill and hold agreement, title to the specified inventory transferred to GMOL. The Company believes it has met the revenue recognition criteria required for bill and hold treatment.

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.

The Company assesses its long-lived assets for impairment whenever there is an indicator of impairment. Property, plant, and equipment are depreciated over their assigned lives. The assigned lives and the projected cash flows used to test impairment are subjective. If actual lives are shorter than anticipated or if future cash flows are less than anticipated, a future impairment charge or a loss on disposal of the assets could be incurred. Impairment losses are evaluated if the estimated undiscounted value of the cash flows is less than the carrying value. If such is the case, a loss is recognized when the carrying value of an asset exceeds its fair value.


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