Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended July 1, 2006 | Commission File Number 0-01989 |
Seneca Foods Corporation
(Exact name of Company as specified in its charter)
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) |
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 X No
Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer Accelerated filer X Non-accelerated filer
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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 July 31, 2006 |
Common Stock Class A, $.25 Par | 4,074,509 |
Common Stock Class B, $.25 Par | 2,760,905 |
PART I ITEM 1 FINANCIAL INFORMATION | |||||||
SENECA FOODS CORPORATION AND SUBSIDIARIES | |||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||
(In Thousands, Except Per Share Data) | |||||||
Unaudited | |||||||
July 1, 2006 | March 31, 2006 | ||||||
ASSETS | |||||||
Current Assets: | |||||||
Cash and Cash Equivalents | $ | 1,654 | $ | 6,046 | |||
Accounts Receivable, Net | 40,669 | 46,618 | |||||
Inventories: | |||||||
Finished Goods | 188,421 | 220,185 | |||||
Work in Process | 17,654 | 22,012 | |||||
Raw Materials | 95,166 | 65,095 | |||||
301,241 | 307,292 | ||||||
Off-Season Reserve (Note 2) | 42,013 | - | |||||
Deferred Income Tax Asset, Net | 6,032 | 6,426 | |||||
Assets Held For Sale | 901 | 1,369 | |||||
Other Current Assets | 6,281 | 2,141 | |||||
Total Current Assets | 398,791 | 369,892 | |||||
Property, Plant and Equipment, Net | 146,648 | 148,501 | |||||
Other Assets | 1,155 | 5,273 | |||||
Total Assets | $ | 546,594 | $ | 523,666 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current Liabilities: | |||||||
Notes Payable | $ | 55,483 | $ | 57,029 | |||
Accounts Payable | 59,277 | 35,163 | |||||
Accrued Expenses | 37,446 | 32,312 | |||||
Income Taxes Payable | 2,853 | 6,090 | |||||
Current Portion of Long-Term Debt and Capital | |||||||
Lease Obligations | 9,606 | 9,788 | |||||
Total Current Liabilities | 164,665 | 140,382 | |||||
Long-Term Debt, Less Current Portion | 137,564 | 138,813 | |||||
Capital Lease Obligations, Less Current Portion | 3,670 | 3,773 | |||||
Deferred Income Taxes | 6,608 | 7,538 | |||||
Other Long-Term Liabilities | 12,710 | 15,381 | |||||
Total Liabilities | 325,217 | 305,887 | |||||
Commitments | |||||||
10% Preferred Stock, Series A, Voting, Cumulative, | |||||||
Convertible, $.025 Par Value Per Share | 102 | 102 | |||||
10% Preferred Stock, Series B, Voting, Cumulative, | |||||||
Convertible, $.025 Par Value Per Share | 100 | 100 | |||||
6% Preferred Stock, Voting, Cumulative, $.25 Par Value | 50 | 50 | |||||
Convertible, Participating Preferred Stock, $12.00 | |||||||
Stated Value Per Share | 41,005 | 41,005 | |||||
Convertible, Participating Preferred Stock, $15.50 | |||||||
Stated Value Per Share | 13,229 | 13,229 | |||||
Common Stock $.25 Par Value Per Share | 2,890 | 2,890 | |||||
Paid in Capital | 17,810 | 17,810 | |||||
Accumulated Other Comprehensive Loss | (49 | ) | - | ||||
Retained Earnings | 146,240 | 142,593 | |||||
Stockholders' Equity | 221,377 | 217,779 | |||||
Total Liabilities and Stockholders’ Equity | $ | 546,594 | $ | 523,666 |
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 | |||||||
July 1, 2006 | July 2, 2005 | ||||||
Net Sales | $ | 148,341 | $ | 156,595 | |||
Costs and Expenses: | |||||||
Cost of Product Sold | 127,482 | 138,091 | |||||
Selling and Administrative | 11,979 | 10,969 | |||||
Other Operating Income | (688 | ) | (427 | ) | |||
Total Costs and Expenses | 138,773 | 148,633 | |||||
Operating Income | 9,568 | 7,962 | |||||
Interest Expense | 3,628 | 4,020 | |||||
Earnings Before Income Taxes | 5,940 | 3,942 | |||||
Income Taxes | 2,281 | 1,522 | |||||
Net Earnings | $ | 3,659 | $ | 2,420 | |||
Earnings Applicable to Common Stock | $ | 2,244 | $ | 1,465 | |||
Basic Earnings per Common Share | $ | 0.33 | $ | 0.22 | |||
Diluted Earnings per Common Share | $ | 0.33 | $ | 0.22 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SENECA FOODS CORPORATION AND SUBSIDIARIES | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(Unaudited) | |||||||
(In Thousands) | |||||||
Three Months Ended | |||||||
July 1, 2006 | July 2, 2005 | ||||||
Cash Flows from Operating Activities: | |||||||
Net Earnings | $ | 3,659 | $ | 2,420 | |||
Adjustments to Reconcile Net Earnings to | |||||||
Net Cash Provided by (Used in) Operations: | |||||||
Depreciation & Amortization | 5,390 | 6,769 | |||||
Gain on the Sale of Assets | (688 | ) | (427 | ) | |||
Deferred Tax Benefit | (536 | ) | (599 | ) | |||
Changes in Working Capital: | |||||||
Accounts Receivable | 9,499 | 8,241 | |||||
Inventories | 6,051 | 567 | |||||
Off-Season Reserve | (42,013 | ) | (39,472 | ) | |||
Other Current Assets | (4,140 | ) | 1,092 | ||||
Income Taxes | (3,237 | ) | 565 | ||||
Accounts Payable, Accrued Expenses | |||||||
and Other Liabilities | 26,891 | 19,551 | |||||
Net Cash Provided by (Used in) Operations | 876 | (1,293 | ) | ||||
Cash Flows from Investing Activities: | |||||||
Additions to Property, Plant and Equipment | (3,408 | ) | (2,483 | ) | |||
Proceeds from the Sale of Assets | 685 | 1,264 | |||||
Net Cash Used in Investing Activities | (2,723 | ) | (1,219 | ) | |||
Cash Flow from Financing Activities: | |||||||
Payments on Notes Payable | (40,936 | ) | (45,116 | ) | |||
Borrowing on Notes Payable | 39,390 | 50,652 | |||||
Long-Term Borrowing | 43 | - | |||||
Payments on Long-Term Debt and Capital Lease Obligations | (1,577 | ) | (4,605 | ) | |||
Other | 547 | (591 | ) | ||||
Dividends | (12 | ) | (12 | ) | |||
Net Cash (Used in) Provided by Financing Activities | (2,545 | ) | 328 | ||||
Net Decrease in Cash and Cash Equivalents | (4,392 | ) | (2,184 | ) | |||
Cash and Cash Equivalents, Beginning of the Period | 6,046 | 5,179 | |||||
Cash and Cash Equivalents, End of the Period | $ | 1,654 | $ | 2,995 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands)
July 1, 2006
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 July 1, 2006 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, 2006 balance sheet was derived from the audited consolidated financial statements.
The results of operations for the three month period ended July 1, 2006 are not necessarily indicative of the results to be expected for the full year.
In the three months ended July 1, 2006, the Company did not sell any product for cash, on a bill and hold basis, versus $11,796,000 for the three-months ended July 2, 2005 of Green Giant finished goods inventory to General Mills Operations, Inc. (“GMOI”). Under the terms of the above bill and hold agreement, title to the specified inventory transferred to GMOI. In addition, the aforementioned finished goods inventory was complete, ready for shipment and segregated from the Company’s other finished goods inventory. Further, the Company had performed all of its obligations with respect to the sale of the specified Green Giant finished goods inventory.
The accounting policies followed by the Company are set forth in Note 1 to the Company's Consolidated Financial Statements in the 2006 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 2006 Annual Report on Form 10-K.
2. | 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. All Off-Season Reserve balances, which essentially represent a contra-inventory account, are zero at fiscal year end. Depending on the time of year, Off-Season Reserve is either the excess of absorbed expenses over incurred expenses to date or the excess of incurred expenses over absorbed expenses to date. Other than at the end of the first and fourth quarter of each year, absorbed expenses exceed incurred expenses due to timing of production. |
3. | Comprehensive income totaled $3,610,000, including a $29,000 Net Unrealized Gain on Securities classified as available-for-sale, for the three months ended July 1, 2006 which are purchased solely for the Company’s 401(k) match and a $78,000 Net Unrealized Loss on a Natural Gas Hedge discussed below. Comprehensive income equaled Net Earnings for the three months ended July 2, 2005. |
4. | During the first quarter of 2007, the Company entered into a Natural Gas Hedge in the form of a swap transaction where the Company purchased, on a forward basis, 50% of its requirements for natural gas during the June 1, 2006 to December 31, 2006 time frame at $7.00 per decatherm. The Company realized a $43,000 loss on this hedge during the first quarter of 2007, and marked the remaining hedge to market resulting in a Net Unrealized Loss on this hedge of $78,000 which was recorded as an Accumulated Other Comprehensive Loss on the Balance Sheet. |
5. | In November 2004, the FASB (Financial Accounting Standards Board) issued Statement of Financial Accounting Standards No. 151, Inventory Costs - An Amendment of ARB No. 43, Chapter 4. This statement amends ARB No. 43, Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. Additionally, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. As required, the Company adopted SFAS 151 effective April 1, 2006. This statement did not have a material impact on the Company’s financial position or results of operations. |
6. | During the quarter ended October 1, 2005, the Company announced the phase out of the labeling operation within the leased distribution facility in Salem, Oregon which resulted in a restructuring charge of $1,461,000. During the quarter ended December 31, 2005, the Company recorded an additional restructuring charge of $290,000 which represented a planned further reduction in utilization of the facility. The total restructuring charge of $1,751,000 consisted of a provision for future lease payments of $1,306,000, a cash severance charge of $368,000, and a non-cash impairment charge of $77,000. With the closure of the Walla Walla facility in the fall of 2004, the Company’s labeling and warehousing requirements at the Salem location were dramatically reduced. The Company intends to use a portion of the facility for warehousing and will attempt to sublease the remaining unutilized portion of the facility until the February 2008 expiration of the lease. |
7. | During the quarter ended December 25, 2004, the Company announced the closure of a processing facility in Walla Walla, Washington. This facility was sold during the quarter ended July 2, 2005 for $514,000 in cash and a $3,550,000 note which carries an interest rate of 8% and is due in full May 14, 2007. This Note is secured by a mortgage on the property. The Company accounted for the sale under the installment method. During the quarter ended July 2, 2005, $427,000 of the gain was included in Other Income and an additional $2,800,000 of the gain on this sale was deferred in Other Long-Term Liabilities. |
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 | $ | 1,097 | $ | 5,287 | $ | 3,214 | $ | 9,598 | |||||
Balance March 31, 2006 | $ | 169 | $ | 250 | $ | 2,687 | $ | 3,106 | |||||
Cash payments | (10 | ) | (195 | ) | (205 | ) | |||||||
Balance July 1, 2006 | $ | 159 | $ | 250 | $ | 2,492 | $ | 2,901 | |||||
Total costs incurred | |||||||||||||
to date | $ | 938 | $ | 5,037 | $ | 722 | $ | 6,697 |
The restructuring costs above relate to the phase out of the labeling operation of the leased distribution facility in Salem, 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 expected to be sold within a year.
The remaining severance costs are expected to be paid prior to September 30, 2006. 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. | Earnings per share (In thousands, except per share data): |
Quarters Ended July 1, 2006 and July 2, 2005 | 2006 | 2005 | |||||
Basic | |||||||
Net Earnings | $ | 3,659 | $ | 2,420 | |||
Deduct preferred stock dividends paid | 6 | 6 | |||||
Undistributed earnings | 3,653 | 2,414 | |||||
Earnings allocated to participating preferred | 1,409 | 949 | |||||
Earnings allocated to common shareholders | $ | 2,244 | $ | 1,465 | |||
Weighted average common shares outstanding | 6,835 | 6,753 | |||||
Basis earnings per common share | $ | 0.33 | $ | 0.22 | |||
Diluted | |||||||
Earnings allocated to common shareholders | $ | 2,244 | $ | 1,465 | |||
Add dividends on convertible preferred stock | 5 | 5 | |||||
Earnings applicable to common stock on a diluted basis | $ | 2,249 | $ | 1,470 | |||
Weighted average common shares outstanding-basic | 6,835 | 6,753 | |||||
Additional shares to be issued under full conversion of preferred stock | 67 | 67 | |||||
Total shares for diluted | 6,902 | 6,820 | |||||
Diluted Earnings per common share | $ | 0.33 | $ | 0.22 |
10. | The net periodic benefit cost for pension plans consist of: |
Three Months Ended | |||||||
July 1, 2006 | July 2, 2005 | ||||||
Service Cost | $ | 1,059 | $ | 940 | |||
Interest Cost | 1,117 | 1,027 | |||||
Expected Return on Plan Assets | (1,458 | ) | (1,378 | ) | |||
Amortization of Transition Asset | (69 | ) | (69 | ) | |||
Net Periodic Benefit Cost | $ | 649 | $ | 520 |
During the three months ended July 1, 2006, the Company made no contributions to its defined benefit pension plans. No pension contributions are required during 2007.
11. | During June 2005, there were 114,242 shares of Participating Convertible Preferred Stock converted to Class A Common Stock. |
12. | Certain previously reported amounts have been reclassified to conform to current period classification. |
13. | During the first quarter of 2007, the Company sold a closed plant in Newark, New York and a receiving station in Pasco, Washington which resulted in gains of $282,000 and $406,000, respectively. These gains are included in Other Operating Income in the Statements of Net Earnings. Both of these facilities had been included in Assets Held For Sale on the Balance Sheet. |
14. | The only changes in Stockholders’ Equity accounts for the quarter ended July 1, 2006, other than the Accumulated Other Comprehensive Loss described above, is an increase of $3,659,000 for Net Earnings and a reduction of $12,000 for dividends. |
15. | Subsequent to the end of the quarter ended July 1, 2006, the Company began negotiations to acquire Signature Fruit Company, LLC. In conjunction with these negotiations, the Company deposited in escrow $5 million related to this potential transaction which is non-refundable under certain circumstances. |
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION RESULTS AND OF OPERATIONS
July 1, 2006
Seneca Foods Corporation is primarily a vegetable processing company with manufacturing facilities located throughout the United States. Its products are sold under the Libby’sÒ, Aunt Nellie’s Farm KitchenÒ, Stokely’sÒ, READÒ, and SenecaÒ labels as well as through the private label and industrial markets. In addition, under an alliance with General Mills Operations, Inc. (GMOI), a successor to the Pillsbury Company and a subsidiary of General Mills, Inc., Seneca produces canned and frozen vegetables, which are sold by General Mills Operations, Inc. under the Green GiantÒ 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, and further resulted in favorable manufacturing variances.
During fiscal 2005, the Company implemented a restructuring program which principally involved the closure of three processing facilities, including a green bean plant in upstate New York and corn plants in Wisconsin and Washington. The rationalization of the Company’s productive capacity: (1) improved the Company’s overall cost structure and competitive position; (2) addressed the excess capacity situation arising from the recent acquisition of Chiquita Processed Foods and decline in GMOI volume requirements; and (3) mitigated the effect of inflationary pressures on the Company’s raw material inputs such as steel and fuel.
During the quarter ended October 1, 2005, the Company announced the phase out of the labeling operation within the leased distribution facility in Salem, Oregon which resulted in a restructuring charge of $1,461,000. During the quarter ended December 31, 2005, the Company recorded an additional restructuring charge of $290,000 which represented a planned further reduction in utilization of the facility. The total restructuring charge of $1,751,000 consisted of a provision for future lease payments of $1,306,000, a cash severance charge of $368,000, and a non-cash impairment charge of $77,000. With the closure of the Walla Walla facility in the fall of 2004, the Company’s labeling and warehousing requirements at the Salem location were dramatically reduced. The Company intends to use a portion of the facility for warehousing and will attempt to sublease the remaining unutilized portion of the facility until the February 2008 expiration of the lease.
During the quarter ended December 25, 2004, the Company announced the closure of a processing facility in Walla Walla, Washington. This facility was sold during the quarter ended July 2, 2005 for $514,000 in cash and a $3,550,000 note which carries an interest rate of 8% and is due in full May 14, 2007. This Note is secured by a mortgage on the property. The Company accounted for the sale under the installment method. During the quarter ended July 2, 2005, $427,000 of the gain was included in Other Income and an additional $2,800,000 of the gain on this sale was deferred in Other Long-Term Liabilities.
The fiscal 2006 asparagus harvest, completed in the first quarter, represented a partial pack as GMOI moved the production of asparagus offshore from the Dayton, Washington manufacturing facility. As fiscal 2006 represents the final year of operation for the Dayton, Washington facility, the Company and GMOI have negotiated a definitive agreement related to the pending closure of this facility. Under the terms of the agreement, any costs incurred by the Company related to the asparagus production prior to March 31, 2006 were paid by GMOI. The Company retained ownership of the real estate associated with the Dayton facility. In addition, the manufacturing equipment of the Dayton facility was either conveyed to GMOI, redeployed by the Company, or salvaged. GMOI reduced the principal balance of the $43.1 million secured nonrecourse subordinated promissory note by $0.6 million, which represents the net book value of the equipment to be conveyed to GMOI or salvaged.
Results of Operations:
Sales:
First quarter results include Net Sales of $148.3 million, which represent a 5.3% reduction from the first quarter of fiscal 2006. This sales decrease primarily reflects a planned decrease in Green Giant Alliance sales of $20.3 million partially offset by canned vegetable sales increase of $13.7 million from growth in retail sales.
The following table presents the changes by business:
Three Months Ended | |||||||
July 1, 2006 | July 2, 2005 | ||||||
Canned Vegetables | $ | 130.1 | $ | 116.4 | |||
Green Giant Alliance | 3.1 | 23.4 | |||||
Frozen Vegetables | 6.6 | 6.4 | |||||
Fruit and Chip Products | 5.2 | 7.7 | |||||
Other | 3.3 | 2.7 | |||||
$ | 148.3 | $ | 156.6 |
Operating Income:
The following table presents components of Operating Income as a percentage of Net Sales:
Three Months Ended | |||||||
July 1, 2006 | July 2, 2005 | ||||||
Gross Margin | 14.1 | % | 11.8 | % | |||
Selling | 4.9 | % | 3.7 | % | |||
Administrative | 3.2 | % | 3.3 | % | |||
Other Operating Income | -0.5 | % | -0.3 | % | |||
Operating Income | 6.5 | % | 5.1 | % | |||
Interest Expense | 2.4 | % | 2.6 | % |
For the three month period ended July 1, 2006, the gross margin increased from 11.9% to 14.1% reflecting favorable manufacturing variances associated with the excellent growing season last year which drove improved crop yields and plant recovery rates. Furthermore, the Company’s overall cost structure benefited from the closure of three processing facilities in connection with the plant restructuring program implemented in 2005.
Interest decreased as a percentage of sales from 2.6% to 2.4% primarily due to lower average seasonal borrowings during the three-month period ended July 1, 2006 as compared to the three-month period end July 2, 2005.
Income Taxes:
The effective tax rate was 38.4% and 39.0% for the three month periods ended July 1, 2006 and July 2, 2005, respectively. The reduction in the rate reflects the impact of the second phase of the Manufacturers Credit on the Company’s effective tax rate. The American Jobs Creation Act of 2004 created the Manufacturers Credit which is commonly referred to as Section 199. Under this new law, once fully phased in, manufacturers will receive a nine percent tax credit for certain qualifying production activities income for the taxable year. This credit is limited to 50 percent of W-2 wages for the taxable year.
Earnings per Share
Basic and diluted earnings per share were $0.33 and $0.22 for the three months ended July 1, 2006 and July 2, 2005, respectively. For details of the calculation of these amounts, refer to footnote 8 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):
June | March | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Working Capital: | |||||||||||||
Balance | $ | 234,126 | $ | 209,292 | $ | 229,510 | $ | 205,430 | |||||
Change in Quarter | 4,616 | 3,862 | - | - | |||||||||
Notes Payable | 55,483 | 66,269 | 57,029 | 60,733 | |||||||||
Long-Term Debt | 141,234 | 152,430 | 142,586 | 154,125 | |||||||||
Current Ratio | 2.42 | 2.19 | 2.63 | 2.34 |
As shown in the Condensed Consolidated Statements of Cash Flows, Cash Provided by Operating Activities was $876,000 in the first quarter of 2007, compared to Cash Used by Operating Activities of $1,293,000 in the first quarter of 2006. The $2,169,000 increase in cash generation is primarily a result of improved operating earnings of $9.6 million in the first quarter of 2007 as compared to $8.0 million in the first quarter of 2006.
In addition, as compared to July 2, 2005, Inventory increased $9.8 million (including the Off Season Reserve, which is $2.5 million). The Inventory increase primarily reflects a $4.4 million increase (including the Off Season Reserve increase) in Finished Goods, a $8.2 million decrease in Work in Process and $13.9 million increase in Raw Materials. The Finished Goods increase reflects a larger harvest this year. The Work in Process decrease and the Raw Materials increase are both due to Cans and Ends which net to $6.0 million increase between the two categories due to increased internalization of production of Cans and Ends.
Cash Used in Investing Activities was $2.7 million in the first quarter of 2007 compared to $1.2 million in the first three quarter of 2006. Additions to Property, Plant and Equipment were $3.4 million in fiscal 2007 as compared to $2.5 million in fiscal 2006. In 2007, there were no significant capital projects.
Cash Used in Financing Activities was $2.5 million in the first quarter of 2007, principally consisting of the repayment of $1.6 million of Long-Term Debt. Cash Provided by Financing Activities of $0.3 million in the first quarter of 2006 included the issuance of $5.5 million of Notes Payable partially offset by the repayment of $4.6 million of Long-Term Debt.
In connection with the May 27, 2003 acquisition of Chiquita Processed Foods, the Company entered into a $200 million revolving credit facility (subsequently reduced to $125 million at the request of the Company) with a five-year term to finance its seasonal working capital requirements. During the first quarter of 2006, the Company and its lenders extended the term of the Revolver for an additional year with a final maturity date of May 27, 2009. The Company reduced the Revolver from $125 million to $100 million in the fourth quarter of fiscal 2006. In the first quarter of fiscal 2007, the Company and its lenders extended the term of the Revolver for an additional two years with a final maturity date of July 31, 2011. We believe that cash flows from operations and availability under our Revolver 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 July 1, 2006, the Company was in compliance with all such financial covenants.
Seasonality
The Company's revenues typically have been higher in the second and third quarters, primarily because the Company sells, on a bill and hold basis, Green Giant canned and frozen vegetables to General Mills Operations, Inc. at the end of each pack cycle. The two largest commodities are peas and corn, which are sold in the second and third quarters, respectively. See the Critical Accounting Policies section below for further details. In addition, our non Green Giant sales have exhibited seasonality with the third quarter generating the highest sales. This quarter reflects increased sales of the Company’s products 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.
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
In the three months ended July 1, 2006, the Company did not sell any product for cash, on a bill and hold basis, versus $11,796,000 for the three-months ended July 2, 2005 of Green Giant finished goods inventory to General Mills Operations, Inc. (“GMOI”). Under the terms of the above bill and hold agreement, title of the specified inventory transferred to GMOI. In addition, the aforementioned finished goods inventory was complete, ready for shipment and segregated from the Company’s other finished goods inventory. Further, the Company had performed all of its obligations with respect to the sale of the specified Green Giant finished goods inventory.
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. All Off-Season Reserve balances, which essentially represent a contra-inventory account, are zero at fiscal year end. Depending on the time of year, Off-Season Reserve is either the excess of absorbed expenses over incurred expenses to date or the excess of incurred expenses over absorbed expenses to date. Other than at the end of the first and fourth quarter of each year, absorbed expenses exceed incurred expenses due to timing of production.
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.
Recently issued accounting standards have been considered by the Company and are not expected to have a material effect on the Company’s financial position or results of operations.
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. During fiscal 2006, the Company entered into a natural gas hedge for 50% of its requirements during the production season. There have been no other material changes to the Company’s exposure to market risk since March 31, 2006.
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 July 1, 2006, 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.
There were no changes in the Company's internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
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, 2006.
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 | |||
04/01/06 - 04/30/06 | 14,000 | - | $20.87 | - | N/A | N/A |
05/01/06 - 05/31/06 | - | - | - | - | N/A | N/A |
06/01/06 - 06/30/06 | 4,500 | - | $23.93 | - | N/A | N/A |
Total | 18,500 | - | $21.62 | - | 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.
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 Philip G. Paras 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)
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
August 4, 2006
Kraig H. Kayser
President and
Chief Executive Officer
/s/Jeffrey L. Van Riper
August 4, 2006
Jeffrey L. Van Riper
Controller and
Chief Accounting Officer