Five Year Selected Financial Data
Summary of Operations and Financial Condition
(In thousands, except per share data)
Years ended March 31, 2005 2004 2003 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Net sales $864,274 $890,850 $644,379 $ 651,075 $ 674,300
- -------------------------------------------------------------------------------------------------------------------
Operating earnings (before interest and
other (income) expense, net) $ 24,868 $36,476 $33,035 $ 20,406 $ 20,795
Net earnings 7,907 12,941 9,050 1,140 813
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per common share .71 1.18 .89 .11 .08
Diluted earnings per common share .70 1.17 .88 .11 .08
- ------------------------------------------------------------------------------------------------------------------
Working capital $205,430 $187,764 $172,382 $163,606 $163,367
Inventories 294,470 270,283 141,649 181,835 229,170
Net property, plant, and equipment 163,290 181,907 132,969 155,189 167,450
Total assets 524,495 533,903 379,540 403,576 444,233
Long-term debt and capital lease
obligations 154,125 160,987 133,337 156,100 171,346
Stockholders' equity 195,809 190,249 159,364 151,123 149,759
------------------------------------------------------------------------------------------------------------------
Additions to property, plant, and equipment $ 14,415 $ 23,109 $ 6,832 $ 13,423 $ 15,395
Interest expense, net 16,592 16,135 13,757 17,441 18,662
------------------------------------------------------------------------------------------------------------------
Net earnings/average equity 4.1% 7.4% 5.8% 0.8% 0.5%
Earnings before taxes/sales 1.4% 2.3% 2.3% 0.3% 0.2%
Net earnings/sales 0.9% 1.5% 1.4% 0.2% 0.1%
Long-term debt/equity 79% 85% 84% 103% 114%
Current ratio 2.3:1 2.2:1 3.4:1 3.0:1 2.5:1
------------------------------------------------------------------------------------------------------------------
Stockholders'equity per common share $ 20.77 $ 19.97 $ 17.64 $ 16.46 $ 16.26
Class A National Market System
closing price range 20.00-16.75 21.97-16.20 18.75-10.75 14.75-11.50 15.25-11.00
Class B National Market System
closing price range 19.45-16.99 22.88-16.85 18.38-12.75 14.78-12.00 14.88-10.75
Common cash dividends declared per share - - - - -
Price earnings ratio 23.8 16.0 13.6 84.3 110.2
------------------------------------------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
Our Business
Seneca Foods is the world's leading producer and distributor of canned
vegetables. Canned vegetables are sold nationwide in all channels serving retail
markets, certain export markets, the food service industry, and other food
processors. Canned vegetables represent 89% of the Company's sales. The Company
maintains a number one share in the private label, food service and export
canned vegetable markets; and a number three position in the branded canned
vegetable market. Our Company also supplies canned and frozen vegetable products
to General Mills Operations, Inc. ("GMOI") under an Alliance Agreement. In
addition, our Company is the supplier of frozen vegetable products principally
to the food service industry, and fruit and snack chip products principally
serving retail markets and other food processors.
Currently, our business strategies are designed to maintain our market share and
enhance our sales and margins and include: (1) position the Company as the
low-cost, high quality producer of canned vegetables through the elimination of
costs from our supply chain and investment in state-of-the-art production and
logistical technology; (2) effective integration of the recent Chiquita
Processed Foods acquisition ("the Acquisition"); (3) drive growth in earnings
through the use of cash flow to de-leverage the balance sheet; and (4) focus on
our growth segments to capitalize on their higher expected returns.
- -
The Acquisition
On May 27, 2003, the Company completed its acquisition of 100% of the membership
interest in Chiquita Processed Foods, L.L.C. ("CPF") from Chiquita Brands
International, Inc. The rationale for the acquisition was twofold: (1)
strengthen the Company's market position in the canned vegetable segment; and
(2) improve the Company's cost structure through the realization of cost savings
by eliminating duplicative functions and combining the purchasing power of the
two companies. The purchase price totaled $126.1 million plus the assumption of
certain liabilities. This acquisition was financed with cash, proceeds from a
new $200.0 million revolving credit facility, and $16.1 million of the Company's
Participating Convertible Preferred Stock. The Preferred Stock is convertible
into the Company's Class A Common Stock on a one-for-one basis subject to
antidilution adjustments. The Preferred Stock was valued at $16.60 per share
based on the market value of the Class A Common Stock at the time the
acquisition was announced.
Purchase Price Allocation
The purchase price to acquire CPF was allocated based on the fair value of the
assets and liabilities acquired. The Company obtained an independent valuation
of its property, plant and equipment, and internally determined the fair value
of its other assets and liabilities. The purchase price of $130.3 million has
been calculated as follows (in millions):
Cash $ 110.0
Issuance of convertible preferred stock 16.1
Closing costs 4.2
---------
Purchase Price $ 130.3
=========
The total purchase price of the transaction has been allocated as follows:
Current assets $ 137.8
Property, plant and equipment 87.8
Other assets 6.5
Current liabilities (69.6)
Long-term debt (27.9)
Other non-current liabilities (4.3)
---------
Total $ 130.3
=========
Restructuring
After a comprehensive review of our production capacities following the CPF
acquisition, the Company completed a plant restructuring program in 2005
resulting in a restructuring charge of $7.7 million. The restructuring charge
consisted of a non-cash impairment charge of $7.0 million and a cash severance
charge of $0.7 million which are included in Plant Restructuring in the
Consolidated Statement of Net Earnings. This restructuring program principally
involved the closure of three processing facilities including a green bean plant
in upstate New York and corn plants in Wisconsin and Washington. In addition,
the Company restructured the newly acquired Payette, Idaho facility through the
removal of canned meat production to focus exclusively on dry beans. The
rationalization of the Company's productive capacity will: 1) improve the
Company's overall cost structure and competitive position; 2) address the excess
capacity situation arising from the recent acquisition of CPF; and 3) mitigate
the effect of inflationary pressures on the Company's raw material inputs such
as steel and fuel.
The closure of the Washington corn processing facility coincided with an
amendment to the Alliance Agreement with GMOI. Under the above amendment, the
Blue Earth, Minnesota facility was removed from the Alliance Agreement due to a
reduction in GMOI volume requirements and will be operated by the Company as a
non-Alliance facility. Additionally, GMOI agreed to reimburse the Company in the
future for remaining lease and depreciation costs at the Blue Earth facility
which, on a net present value basis, approximate the closure costs associated
with the Washington facility.
Divestitures
The Company sold three former Chiquita Processed Foods plants and related assets
to Lakeside Foods, Inc. on June 17, 2003. The Company sold one additional plant
of Chiquita Processed Foods and related assets to Lakeside Foods, Inc. on August
6, 2003. The aforementioned divestitures to Lakeside Foods generated $46.0
million in cash proceeds, which was used to pay down debt. The Company sold
additional plant locations and related assets that were previously closed by
Chiquita Processed Foods and designated as assets held for sale during 2005 and
2004, generating $1.6 million and $2.5 million, respectively in additional
proceeds used for debt repayment.
Liquidity and Capital Resources
The Company's primary cash requirements are to make payments on our debt,
finance seasonal working capital needs and to make capital expenditures.
Internally generated funds and amounts under our revolving credit facility are
our primary sources of liquidity.
Revolving Credit Facility
On May 27, 2003, in connection with the Acquisition, the Company entered into a
$200.0 million five-year floating rate secured revolving credit facility (the
"Revolver") with several lenders, under which $118.2 million was initially
borrowed. As of March 31, 2005, the outstanding balance on the Revolver was
$60.7 million. In order to maintain availability of funds under the facility, we
pay a commitment fee on the unused portion of the Revolver. The Revolver is used
to fund our seasonal working capital needs, which are affected by the growing
cycles of the vegetables we process. The vast majority of vegetable inventories
are produced during the harvesting and packing months of May through October and
depleted through the remaining six months. Accordingly, our need to draw on the
Revolver may fluctuate significantly throughout the year. As a result of the
additional liquidity generated by the aforementioned divestitures, the Company
provided notice to its bank lenders during the first quarter in 2005 of its
intention to reduce the revolving credit facility from $200.0 million to $150.0
million. Correspondingly, the Company took a non-cash charge of $0.5 million
reflecting the write-down of the pro-rata amount of deferred financing costs,
which is included in Other Income (net) in the Consolidated Statements of Net
Earnings. During the fourth quarter of 2005, the Company provided notice to its
bank lenders of its intention to further reduce the revolving credit facility
from $150.0 million to $125.0 million and took a non-cash charge of $0.2 million
reflecting the write-down of the corresponding pro-rata amount of deferred
financing costs, which is included in Other Income (net) in the Consolidated
Statements of Net Earnings. Subsequent to 2005 year end, the Company and its
lenders extended the term of the Revolver for an additional year with a final
maturity date of May 27, 2009.
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.
Long-Term Debt
On June 24, 2004, the Company issued a mortgage to GE Capital for $8.0 million
with an interest rate of 6.35% and a term of 15 years. The proceeds were used to
finance new warehouse construction in Janesville and Cambria, Wisconsin. The
Company did not issue any other significant long-term debt in 2005. During 2004,
the Company refinanced $42.5 million of debt outstanding under the revolving
credit facility with new term debt from John Hancock Life Insurance Company. At
issuance, the John Hancock note totaled $75.0 million and included the refinance
of $32.5 million in existing John Hancock debt. The John Hancock note has a
fixed interest rate of 8.03%, a fifteen-year amortization and a ten-year term.
The Company has two major long-term debt instruments: 1) a $70.9 million secured
note payable to John Hancock Life Insurance Company, with an interest rate of
8.03%, which is due through 2014; and 2) a $46.6 million secured nonrecourse
note payable to GMOI, with an interest rate of 8%, which is due through 2010.
At March 31, 2005, scheduled maturities of long-term debt in each of the five
succeeding fiscal years are as follows (in thousands):
2006 $14,896
2007 9,101
2008 8,956
2009 9,151
2010 38,110
Restrictive Covenants
Our credit facilities contain covenants that restrict our ability and the
ability of our subsidiaries to incur additional indebtedness, pay dividends on
and redeem our capital stock, make other restricted payments, including
investments, sell our assets, incur liens, transfer all or substantially all of
our assets and enter into consolidations or mergers. Our credit facilities also
require us to meet certain financial tests, including minimum fixed charge
coverage, minimum interest coverage and maximum total debt ratios. These
financial requirements and ratios generally become more restrictive over time,
subject to allowances for seasonal fluctuations. We are in compliance with all
such financial covenants, and were in compliance therewith as of March 31, 2005.
The most restrictive financial covenant in the credit agreements is the minimum
fixed charge coverage ratio.
Capital Expenditures
Capital expenditures in 2005 totaled $14.4 million and include $7.4 million of
construction costs for three warehouse expansion projects in Geneva, New York,
Janesville, Wisconsin, and Cambria, Wisconsin together with equipment
replacement and cost saving projects. Capital expenditures in 2004 totaled $23.1
million and include $7.2 million of construction in progress on warehouse
expansion projects in Janesville and Cambria plus equipment replacement and
other improvements, and economic return and cost saving projects. The total cost
of the Geneva, Janesville and Cambria warehouse projects over the two years was
$14.8 million.
Inventories
In 2005, inventories increased by $24.2 million primarily reflecting the effect
of unit cost increases for key commodity inputs including steel and energy. In
2004, inventories increased by $125.5 million primarily reflecting the effect of
seasonal production from the eight plants acquired in the CPF acquisition.
Inventories consist primarily of finished canned vegetable products and raw
materials and supplies including cans and ends.
Critical Accounting Policies
During the year ended 2005, the Company sold for cash, on a bill and hold basis,
$176.5 million of Green Giant finished goods inventory to GMOI. At the time of
the sale of the Green Giant vegetables to GMOI, 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.
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
recognized when the carrying value of an asset exceeds its fair value.
Obligations and Commitments
As of March 31, 2005, the Company is obligated to make cash payments in
connection with our capital leases, debt, and operating leases. The effect of
these obligations and commitments on our liquidity and cash flows in future
periods are listed below. All of these arrangements require cash payments over
varying periods of time. Certain of these arrangements are cancelable on short
notice and others require termination or severance payments as part of any early
termination.
Contractual Obligations
March 31, 2005
2011
2006 2007-8 2009-10 and beyond
----------------------------------------------------------------------
Long-term debt $14,896 $18,057 $47,261 $83,001
Interest 14,019 25,513 19,850 33,752
Notes payable - - 60,733 -
Operating lease obligations 18,415 27,922 18,888 15,049
Pension - 2,009 2,331 7,371
Purchase commitments 122,466 - - -
Capital lease obligations 775 1,527 1,105 3,175
--------------------------------------------------------------------------
Total $170,571 $75,028 $150,168 $142,348
--------------------------------------------------------------------------
We have no material off-balance sheet debt or other unrecorded obligations other
than the items noted in the above table.
Standby Letters of Credit
We have standby letters of credit for certain insurance-related requirements and
capital leases. The majority of our standby letters of credit are automatically
renewed annually, unless the issuer gives cancellation notice in advance. On
March 31, 2005, we had $6.2 million in outstanding standby letters of credit.
Cash Flows
In 2005, our cash and cash equivalents increased by $0.6 million, which is
primarily due to the net impact of $18.0 million provided by operating
activities, $8.2 million used in investing activities, and $9.2 million used by
financing activities.
Operating Activities
Cash provided by operating activities increased to $18.0 million in 2005 from
$1.6 million in 2004. The increase is primarily a function of the negative cash
flow impact in 2004 associated with the inventory increase related to the CPF
acquisition partially offset by lower operating earnings in 2005. The cash
requirements of the business fluctuate significantly throughout the year to
coincide with the seasonal growing cycles of vegetables. The vast majority of
the inventories are produced during the packing months, from May through
October, and then depleted during the remaining six months. Cash flow from
operating activities is one of our main sources of liquidity.
Cash provided by operating activities decreased from $68.8 million in 2003 to
$1.6 million in 2004. The decrease reflects higher inventory balances associated
with the seasonal production from the eight plants acquired in the CPF
acquisition, which were primarily funded through the issuance of debt.
Investing Activities
Cash used in investing activities was $8.2 million in 2005, principally
reflecting capital expenditures partially offset by $6.2 million in proceeds
from the sale of assets including $4.6 million from the sale of Class B Common
Stock of Moog Inc. Capital expenditures aggregated $14.4 million in 2005 versus
$23.1 million in 2004. Capital expenditures were unusually high in 2004
reflecting a significant number of equipment upgrades and other improvements in
connection with the CPF acquisition. Capital expenditures in 2005 and 2004
included $7.4 million and $7.2 million, respectively for warehouse expansion
projects. This included the completion of the Janesville and Cambria, Wisconsin
projects started in 2004 and a Geneva, New York warehouse expansion.
Cash used in investing activities was $85.9 million for 2004, primarily
reflecting the cash requirements of the CPF acquisition partially offset by
proceeds from the sale of assets primarily involving the divestiture of four
plants to Lakeside Foods. Capital expenditures aggregated $23.1 million in 2004
versus $6.8 million in 2003. The increase is primarily attributable to equipment
replacement and other improvements at the former CPF locations together with
$7.2 million of construction in progress on two warehouse expansion projects in
Janesville and Cambria, Wisconsin.
Cash used in investing activities was $6.2 million in 2003, principally
reflecting capital expenditures.
Financing Activities
Cash used in financing activities was $9.2 million in 2005 principally
consisting of the repayment of $21.9 million in long-term debt partially offset
by the $9.1 million in proceeds from long-term debt.
Cash provided by financing activities was $23.9 million in 2004. During 2004, we
borrowed cash to fund the CPF acquisition. Cash used in financing activities was
$22.6 million in 2003 principally reflecting debt repayment.
RESULTS OF OPERATIONS
Fiscal 2005 versus Fiscal 2004
Classes of similar
products/services: 2005 2004 2003
- -------------------------------------------------------------------------------
(In thousands)
Net Sales:
GMOI $ 225,527 $ 247,992 $ 252,059
Canned vegetables 581,486 586,594 328,907
Frozen vegetables 28,304 29,410 30,422
Fruit and chip products 16,674 15,347 20,784
Other 12,283 11,507 12,207
- --------------------------------------------------------------------------------
$ 864,274 $ 890,850 $ 644,379
================================================================================
Net sales for fiscal 2005 decreased $26.6 million, or 3%, from $890.9 million to
$864.3 million. The decrease primarily reflects a planned reduction of $22.5
million in GMOI production which was exacerbated by the poor sweet corn growing
conditions in the summer of 2004. In addition, we experienced a planned
reduction of $15.0 million in canned vegetable co-pack volume reflecting a
strategic decision by the Company to exit certain unprofitable co-pack business.
Although 2004 included only 10 months of CPF acquisition-related sales activity,
the sales retention rate from the acquisition was higher in 2004, reflecting
volume associated with plants that were ultimately divested to Lakeside Foods.
Cost of product sold as a percentage of sales increased from 92.2% in 2004 to
92.6% in 2005. The increase in the percentage of the cost of product sold
reflects higher production costs in fiscal 2005 associated with unfavorable
manufacturing variances principally the result of commodity inflation in key
inputs such as steel, natural gas, and fuel. In addition, last summer and fall,
we experienced a difficult growing season due to lower average temperatures in
August which impacted crop yields, plant recovery rates and further resulted in
certain contracted raw produce being unable to be harvested. The cost of
implementing the Sarbanes-Oxley Act of 2002, which totaled $2.5 million in 2005,
was also a significant factor in the cost increase. Furthermore, the cost of a
product recall, initiated in the second quarter of 2005, amounted to $1.4
million. Finally, we were unable to fully pass along those higher costs to our
customers, since many of our customer contracts are semi-annual and annual in
nature.
Selling, general and administrative expense remained at 3.7% of sales, as the
negative impact of the sales reduction was offset by effective expense control.
Interest expense increased from $16.1 million in 2004 to $16.6 million in 2005
primarily reflecting a full year of acquisition-related debt in 2005.
Plant restructuring costs were $7.7 million in 2005 primarily involving the
closure of three processing facilities which are detailed in the Restructuring
Program section above. As a result of the CPF acquisition, the Company was able
to complete some plant consolidations which will result in substantial savings
by moving the volumes into other plants with minimal capital investment.
Other income of $3.8 million in 2005 reflects the gain on the sale of Moog Inc.
stock of $3.9 million and the sale of certain fixed assets of $0.6 million. This
was partially offset by a non-cash charge of $0.7 million reflecting the
write-down of deferred financing costs associated with the reduction of the
Revolver from $200 million to $125 million. Other income of $0.2 million in 2004
reflects the gain on the sale of certain fixed assets.
As a result of the above factors, pre-tax earnings decreased from $20.5 million
in 2004 to $12.0 million in 2005. The effective tax rate was 34.3% in 2005 and
37.0% in 2004. The 2005 effective tax rate reduction is a result of the reversal
of certain tax reserves which were no longer required.
Fiscal 2004 versus Fiscal 2003
Net sales for fiscal 2004 increased $246.5 million, or 38%, from $644.4 million
to $890.9 million. The increase reflects ten months of operating activity
related to the CPF acquisition which resulted in a 35% increase in vegetable
unit volume.
Cost of product sold as a percentage of sales increased from 91.6% in 2003 to
92.2% in 2004. The increase in the percentage of the cost of product sold
reflects higher production costs in fiscal 2004 associated with unfavorable
manufacturing variances principally the result of drought conditions in the
Midwest growing areas and extreme heat in the Northwest growing areas, followed
by an early killing frost which included the late-season growing areas of
Illinois. The drought and hot weather conditions impacted crop yields, plant
recovery rates and further resulted in the bunching of crop maturities whereby
certain contracted raw produce was unable to be harvested. Although we were able
to increase selling prices over the second half of the fiscal year, the effect
of these increases was more than offset by the higher manufacturing costs.
Selling, General and Administrative expense increased as a percentage of sales
from 3.3% to 3.7% due in large part to the fact that GMOI sales do not involve
selling expense and GMOI sales decreased as a percentage of total sales from
39.1% in 2003 to 27.8% in 2004. In addition, outside warehousing expense
increased in connection with the CPF acquisition.
Interest expense increased from $13.8 million to $16.1 million reflecting the
new debt supporting the CPF acquisition.
Other income of $0.2 million in 2004 reflects the gain on the sale of certain
fixed assets. Other expense of $4.7 million in 2003 reflects a non-cash
impairment charge attributable to idle fixed assets.
As a result of the above factors, pre-tax earnings increased from $14.6 million
in 2003 to $20.5 million in 2004. The effective tax rate was 37.0% in 2004 and
37.8% in 2003.
Recently Issued Accounting Standards
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
As a result of its regular borrowing activities, the Company's operating results
are exposed to fluctuations in interest rates, which it manages primarily
through its regular financing activities. The Company uses bank lines of credit
with variable interest rates to finance seasonal working capital requirements.
The Company maintains $5.2 million in cash equivalents as of March 31, 2005.
Long-term debt represents secured and unsecured notes and debentures, certain
notes payable to insurance companies used to finance long-term investments such
as business acquisitions, and capital lease obligations. Long-term debt bears
interest at fixed and variable rates. With $80.5 million in average variable
rate debt, a 1% change in interest rates would have an $805 thousand effect on
interest expense. The following table provides information about the Company's
financial instruments that are sensitive to changes in interest rates. The table
presents principal cash flows and sinking fund requirements and related
weighted-average interest rates by expected maturity date. Weighted-average
interest rates on variable-rate debt are based on rates as of March 31, 2005.
Commodity Risk
The materials that the Company uses, such as vegetables, steel and packaging
materials are commodities that may experience price volatility caused by
external factors including market fluctuations, availability, currency
fluctuations and changes in governmental regulations and agricultural programs.
In light of the recent volatility in steel pricing, a 5% change in steel unit
costs would equate to a $3.1 million cost impact. These events can result in
reduced supplies of these materials, higher supply costs or interruptions in our
production schedules. If prices of these raw materials increase and the Company
is not able to effectively pass such price increases along to its customers,
operating income will decrease.
Interest Rate Sensitivity of Long-Term Debt, Short-Term Debt and Short-Term Investments
March 31, 2005
(In Thousands)
EXPECTED MATURITY DATE
--------------------------------------------------------------------------------
Total / Estimated
Weighted Fair
2006 2007 2008 2009 2010 Thereafter Average Value
- -------------------------- ------------- ------------- ------------ ------------ ------------ ------------ -------------- ----------
Fixed-rate L/T debt:
Principal cash flows $15,221 $9,446 $ 9,326 $ 9,541 $ 38,525 $63,246 $145,305 $ 140,516
Average interest rate 7.36% 6.88% 7.10% 7.10% 7.85% 7.71% 7.55% -
Variable-rate L/T debt:
Principal cash flows $ 450 $ 454 $ 358 $ 150 $ 150 $22,929 $ 24,491 $ 24,491
Average interest rate 2.09% 2.08% 2.25% 3.37% 3.25% 3.25% 3.17% -
Average variable-rate S/T debt:
Principal cash flows $ 55,996 $ 55,996
Average interest rate 3.70% -
Short-term investments:
Average balance $ 284 $ 284
Average interest rate 1.95% -
Consolidated Statements of Net Earnings
Seneca Foods Corporation and Subsidiaries
(In thousands, except per share amounts)
Years ended March 31, 2005 2004 2003
- --------------------------------------------------------------------------------------------------------------------------
Net sales $864,274 $890,850 $644,379
- --------------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of product sold 800,002 821,604 590,079
Selling, general, and administrative expense 31,726 32,770 21,265
Plant restructuring 7,678 - -
--------------- ----------------- ---------------
Total Costs and Expenses 839,406 854,374 611,344
--------------- --------------- ---------------
Operating income 24,868 36,476 33,035
Other (income) expense, net (3,757) (207) 4,719
Interest expense, net of interest income of
$102, $395, and $834, respectively 16,592 16,135 13,757
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 12,033 20,548 14,559
Income taxes 4,126 7,607 5,509
--------------------------------------------------
Net earnings $ 7,907 $ 12,941 $ 9,050
==========================================================================================================================
Basic earnings per common share $ .71 $ 1.18 $ .89
==========================================================================================================================
Diluted earnings per common share $ .70 $ 1.17 $ .88
==========================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
Consolidated Balance Sheets
Seneca Foods Corporation and Subsidiaries
(In thousands)
March 31, 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 5,179 $ 4,570
Marketable securities - 4,465
Accounts receivable, less allowance for doubtful accounts
of $625 and $945, respectively 43,664 46,180
Inventories:
Finished products 209,874 202,573
In process 17,168 15,365
Raw materials and supplies 67,428 52,345
Deferred income taxes 5,669 6,615
Assets held for sale 1,451 2,931
Refundable income taxes 1,199 451
Prepaid expenses 7,192 12,098
-------------------------------------
Total Current Assets 358,824 347,593
- ------------------------------------------------------------------------------------------------------------------------------------
Other assets 2,381 4,403
Property, Plant, and Equipment:
Land 9,981 9,222
Building 122,644 112,061
Equipment 296,512 313,494
-------------------------------------
429,137 434,777
Less accumulated depreciation and amortization 265,847 252,870
-------------------------------------
Net Property, Plant, and Equipment 163,290 181,907
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 524,495 $533,903
====================================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 60,733 $ 58,395
Accounts payable 38,719 37,362
Accrued expenses 38,271 42,553
Current portion of long-term debt and capital lease obligations 15,671 21,519
-------------------------------------
Total Current Liabilities 153,394 159,829
- ------------------------------------------------------------------------------------------------------------------------------------
Long-Term Debt 148,318 154,428
Capital Lease Obligations 5,807 6,559
Other Liabilities 10,042 7,790
Deferred Income Taxes 11,125 15,048
-------------------------------------
Total Liabilities 328,686 343,654
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and other contingencies (Note 14)
Stockholders' Equity:
Preferred stock 56,335 56,338
Common stock 2,859 2,859
-------------------------------------
Total Capital Stock 59,194 59,197
Additional paid-in capital 15,992 15,989
Accumulated other comprehensive income - 2,324
Retained earnings 120,623 112,739
-------------------------------------
Total Stockholders' Equity 195,809 190,249
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 524,495 $533,903
- -----------------------------------------------------------------------------------------------=====================================
<FN>
See notes to consolidated financial statements.
</FN>
Consolidated Statements of Cash Flows
Seneca Foods Corporation and Subsidiaries
(In thousands)
Years ended March 31, 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 7,907 $ 12,941 $ 9,050
Adjustments to reconcile net earnings to
net cash provided by operations:
Depreciation and amortization 29,178 29,393 22,597
Deferred income taxes (1,552) 1,107 3,520
Gain on the sale of assets (4,469) (207) -
Impairment provision and other expenses 5,673 - 4,719
Changes in operating assets and liabilities:
Accounts receivable 2,516 9,991 236
Inventories (24,187) (41,122) 40,186
Prepaid expenses 4,906 (10,782) (892)
Accounts payable, accrued expenses, and other liabilities (1,218) (1,686) (11,588)
Income taxes (748) 1,987 942
------------------------------------------------
Net cash provided by operations 18,006 1,622 68,770
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant, and equipment (14,415) (23,109) (6,832)
Proceeds from the sale of assets 6,233 48,808 677
Acquisition - (114,172) -
Cash received from acquisition - 2,560 -
------------------------------------------------
Net cash used in investing activities (8,182) (85,913) (6,155)
- -------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on notes payable 285,425 396,568 -
Payments on notes payable (283,087) (363,548) -
Payments of long-term debt and capital lease obligations (21,856) (51,903) (22,834)
Proceeds from issuance of long-term debt 9,146 42,562 235
Other assets 1,180 221 18
Preferred dividends paid (23) (23) (23)
------------------------------------------------
Net cash (used in) provided by financing activities (9,215) 23,877 (22,604)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 609 (60,414) 40,011
Cash and cash equivalents, beginning of year 4,570 64,984 24,973
------------------------------------------------
Cash and cash equivalents, end of year $ 5,179 $ 4,570 $64,984
===============================================================================================================================
<FN>
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 16,973 $ 15,023 $ 15,122
Income taxes 6,425 5,768 2,025
Supplemental information of non-cash investing and financing activities:
$16.1 million of Preferred Stock was issued in partial consideration for
the CPF acquisition in 2004. The Company assumed $9.1 million of long-term
debt related to the CPF acquisition.
===============================================================================================================================
See notes to consolidated financial statements.
</FN>
Consolidated Statements of Stockholders' Equity
Seneca Foods Corporation and Subsidiaries
(In thousands, except share amounts)
Preferred Stock
--------------------------------------------------------------
6% 10%
Cumulative Par Cumulative Par Participating Participating
Value $.25 Value $.025 Convertible Par Convertible Par Class A Class B Additional
Callable at Par Convertible Value Value Common Stock Common Stock Paid-In
Voting Voting $.025 $.025 Par Value $.25 Par Value $.25 Capital
- ------------------------------------------------------------------------------------------------------------------------------------
Shares authorized 200,000 1,400,000 967,742 4,166,667 20,000,000 10,000,000
=====================================================================================================================
Shares issued and outstanding:
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2002 200,000 807,240 -- 3,485,506 3,908,470 2,764,005
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2003 200,000 807,240 967,742 3,443,596 3,950,380 2,764,005
- ---------------------------------------------------------------------------------------------------------------------
March 31, 2005 200,000 807,240 967,742 3,443,359 3,951,717 2,762,905
- ---------------------------------------------------------------------------------------------------------------------
Balance March 31, 2002 $50 $ 20 $ -- $42,605 $956 $1,871 $13,619
Net earnings -- -- -- -- -- -- --
Cash dividends paid
on preferred stock -- -- -- -- -- -- --
Preferred stock conversion -- -- -- (1,019) 22 -- 997
Minimum pension liability -- -- -- -- -- -- --
Net unrealized gain on
investments -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2003 50 20 -- 41,586 978 1,871 14,616
Net earnings -- -- -- -- -- -- --
Cash dividends paid
on preferred stock -- -- -- -- -- -- --
Preferred stock conversion -- -- -- (500) 10 -- 490
Preferred stock issued -- -- 15,000 -- -- -- 1,065
Minimum pension liability
(net of tax $477) -- -- -- -- -- -- --
Preferred stock adjustment -- 182 -- -- -- -- (182)
Net unrealized gain on
investments
(net of tax $658) -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2004 50 202 15,000 41,086 988 1,871 15,989
Net earnings -- -- -- -- -- -- --
Cash dividends paid
on preferred stock -- -- -- -- -- -- --
Preferred stock conversion -- -- -- (3) -- -- 3
Net unrealized gain on
investments (net of
tax of $16) -- -- -- -- -- -- --
Net reclassification of
accumulated other
comprehensive income
(net of tax $1,160) -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2005 $50 $202 $15,000 $41,083 $988 $1,871 $15,992
====================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
Accumulated
Other
Comprehensive Retained Comprehensive
Income Earnings Income
- ------------------------------------------------------------------
Balance March 31, 2002 $1,208 $90,794
Net earnings -- 9,050 $ 9,050
Cash dividends paid
on preferred stock -- (23) --
Preferred stock conversion -- -- --
Minimum pension liability (778) -- (778)
Net unrealized gain on
investments (8) -- (8)
- ----------------------------------------------------------------
Balance March 31, 2003 422 99,821 $ 8,264
========
Net earnings -- 12,941 $ 12,941
Cash dividends paid
on preferred stock -- (23) --
Preferred stock conversion -- -- --
Preferred stock issued -- -- --
Minimum pension liability
(net of tax $477) 778 -- 778
Preferred stock adjustment -- -- --
Net unrealized gain on
investments
(net of tax $658) 1,124 -- 1,124
- ----------------------------------------------------------------
Balance March 31, 2004 2,324 112,739 $ 14,843
========
Net earnings -- 7,907 $ 7,907
Cash dividends paid
on preferred stock -- (23) --
Preferred stock conversion -- -- --
Net unrealized gain on
investments (net of
tax of $16) 32 -- 32
Net reclassification of
accumulated other
comprehensive income
(net of tax $1,160) (2,356) -- (2,356)
- ----------------------------------------------------------------
Balance March 31, 2005 $ -- $120,623 $5,583
================================================================
Notes to Consolidated Financial Statements
Seneca Foods Corporation and Subsidiaries
1. Summary of Significant Accounting Policies
Nature of Operations - The Company conducts its business almost entirely in food
processing, operating 27 plants and warehouses in seven states. The Company
markets branded and private label processed foods to retailers and institutional
food distributors.
Principles of Consolidation - The consolidated financial statements include the
accounts for the parent Company and all of its wholly-owned subsidiaries after
elimination of intercompany transactions, profits, and balances.
Revenue Recognition - Sales and related cost of product sold are recognized when
legal title passes to the purchaser which is primarily upon shipment of
products. When customers, under the terms of specific orders, request that the
Company invoice goods and hold the goods for future shipment, the Company
recognizes revenue when legal title to the finished goods inventory passes to
the purchaser. Generally, the Company receives cash from the purchaser when
legal title passes.
Concentration of Credit Risk - Financial instruments that potentially subject
the Company to credit risk consist of trade receivables and interest-bearing
investments. Wholesale and retail food distributors comprise a significant
portion of the trade receivables; collateral is generally not required. The risk
associated with the concentration is limited due to the large number of
wholesalers and retailers and their geographic dispersion. The Company places
substantially all its interest-bearing investments with financial institutions
and monitors credit exposure. Cash and short-term investments in certain
accounts exceed the federal insured limit, however, the Company has not
experienced any losses in such accounts.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with an original maturity of three months or less as short-term
investments.
Inventories - Inventories are stated at lower of cost; determined under the
first-in, first-out (FIFO) method; or market.
Income Taxes - The provision for income taxes includes federal, foreign, and
state income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities.
Shipping and Handling Costs - The Company includes all shipping and handling
costs billed to customers in net sales and the corresponding costs in cost of
product sold.
Doubtful Accounts - A provision for doubtful accounts is recorded based upon an
assessment of credit risk within the accounts receivable portfolio, experience
of delinquencies (accounts over 15 days past due) and charge-offs (accounts
removed from accounts receivable for expectation of non-payment) and current
market conditions. Management believes these provisions are adequate based upon
the relevant information presently available. However, it is possible that the
Company's provisions may change in the future.
Notes to Consolidated Financial Statements (continued)
Earnings per Common Share
The Company has two classes of convertible preferred stock which are deemed to
be participating securities that are entitled to participate in any dividend on
Class A common stock as if the preferred stock had been converted into common
stock immediately prior to the record date for such dividend. Basic earnings per
share for common stock must be calculated using the "two-class" method by
dividing the earnings allocated to common stockholders by the weighted average
of common shares outstanding during the period.
Diluted earnings per share is calculated by dividing earnings allocated to
common stockholders by the sum of the weighted average common shares outstanding
plus the dilutive effect of convertible preferred stock using the "if-converted"
method, which treats the contingently-issuable shares of convertible preferred
stock as common stock.
Years ended March 31, 2005 2004 2003
- --------------------------------------------------------------------------------------------
(In thousands, except share amounts)
Basic
Net earnings $ 7,907 $ 12,941 $ 9,050
Deduct preferred stock dividends paid 23 23 23
---------------------------------------
Undistributed earnings 7,884 12,918 9,027
Earnings allocated to participating preferred 3,126 5,035 3,164
---------------------------------------
Earnings allocated to common shareholders $ 4,758 $ 7,883 $ 5,863
=======================================
Weighted average common shares outstanding 6,714 6,691 6,597
=======================================
Basis earnings per common share $ .71 $ 1.18 $ .89
=======================================
Diluted
Earnings allocated to common shareholders $ 4,758 $ 7,883 $ 5,863
Add dividends on convertible preferred stock 20 20 20
---------------------------------------
Earnings applicable to common stock on a diluted
basis $ 4,778 $ 7,903 $ 5,883
=======================================
Weighted average common shares outstanding-basic 6,714 6,691 6,597
Additional shares to be issued under full conversion
of preferred stock 67 67 67
---------------------------------------
Total shares for diluted 6,781 6,758 6,664
=======================================
Diluted earnings per common share $ .70 $ 1.17 $ .88
=======================================
Depreciation - Property, plant, and equipment are stated at cost or, in the case
of capital leases, the present value of future lease payments. For financial
reporting, the Company provides for depreciation and capital lease amortization
on the straight-line method at rates based upon the estimated useful lives of
the various assets. Depreciation and capital lease amortization was $28,503,000,
$28,676,000, and $22,597,000 in 2005, 2004, and 2003, respectively. The
estimated useful lives are as follows: buildings - 30 years; machinery and
equipment - 10-15 years; vehicles - 3-7 years; and land improvements - 10-20
years. Impairment losses are recognized when the carrying value of an asset
exceeds its fair value. The Company assesses its long-lived assets for
impairment whenever there is an indicator of impairment. There were $4,960,000
of impairment losses in 2005 that were included in Plant Restructuring (see
Plant Restructuring, note 15). There were no impairment losses in 2004.
Impairment losses of $4,719,000 were recognized in 2003 and were included in
Other (Income) Expense, net (see Other Income and Expense, note 11).
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
related revenues and expenses during the reporting period. Actual amounts could
differ from those estimated.
Recently Issued Accounting Standards - 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.
Reclassifications - Certain previously reported amounts have been reclassified
to conform to the current period classification.
Notes to Consolidated Financial Statements (continued)
2. Common Stock of Moog Inc.
During 2005, the Company sold its investment in the Common Stock of Moog Inc.
The sale provided proceeds of $4,578,000 and a realized gain of $3,862,000. The
Company's investment in the Class B Common Stock of Moog Inc. totaling
$4,465,000 as of March 31, 2004 was included in marketable securities. The gross
unrealized holding gains were $3,749,000 and $1,967,000 in 2004 and 2003,
respectively.
3. Lines of Credit
The Company obtains required short-term funds through bank borrowings. On May
27, 2003, in connection with the acquisition of CPF, the Company entered into a
$200 million five-year floating rate secured revolving credit facility with
various banks. During 2005, the Company provided its bank lenders with notice to
reduce the revolving credit facility from $200 million to $125 million.
Subsequent to 2005 year-end, the Company and its lenders extended the term of
the revolver for an additional year with a final maturity date of May 27, 2009.
As of March 31, 2005, the outstanding balance on the revolver was $60,733,000,
with a weighted average interest rate of 4.56%, and is included in notes payable
on the Consolidated Balance Sheet. The $125 million revolver is secured by
accounts receivable and inventory with a carrying value of $338,134,000. There
were $58,395,000 in bank borrowings under the revolver at March 31, 2004. The
Company had $6,187,000 and $7,120,000 of outstanding standby letters of credit
as of March 31, 2005 and 2004, respectively that reduce borrowing availability
under the revolver.
4. Long-Term Debt
2005 2004
- ------------------------------------------------------------------------------------------------------- --------------------------
(In thousands)
Secured note payable to insurance company, 8.03%, due through 2014 $ 70,862 $ 73,675
Secured nonrecourse subordinated promissory note, 8.00%, due through 2010 46,583 50,208
Secured Industrial Revenue Development Bonds, 3.53% and 3.24% due through 2029 22,630 22,630
Secured promissory note, 6.35% due through 2020 7,782 -
Secured Industrial Revenue Development Bond, 5.69%, due through 2010 3,173 3,763
Unsecured Industrial Revenue Development Bond, 7.75%, due through 2006 3,000 3,000
Unsecured Industrial Revenue Development Bond, 8.50%, due through 2006 2,500 2,500
Secured notes payable to utility company, 3.00%, due through 2009 2,295 1,956
Secured note payable to insurance company, 10.78%, due through 2005 - 12,000
Other 4,389 5,468
------------ -----------
163,214 175,200
Less current portion 14,896 20,772
------------ -----------
$ 148,318 $ 154,428
============ ===========
Our credit facilities contain covenants that restrict our ability and the
ability of our subsidiaries to incur additional indebtedness, pay dividends on
and redeem our capital stock, make other restricted payments, including
investments, sell our assets, incur liens, transfer all or substantially all of
our assets and enter into consolidations or mergers. Our credit facilities also
require us to meet certain financial tests, including minimum fixed charge
coverage, minimum interest coverage and maximum total debt ratios. These
financial requirements and ratios generally become more restrictive over time,
subject to allowances for seasonal fluctuations. We are in compliance with all
such financial covenants, and were in compliance therewith as of March 31, 2005.
The most restrictive financial covenant in the credit agreements is the minimum
fixed charge coverage ratio.
As of March 31, 2005, the most restrictive credit agreement limitation on the
Company's payment of dividends and other distributions, such as purchases of
shares, to holders of Class A or Class B Common Stock is an annual total
limitation of $500,000 reduced by aggregate annual dividend payments totaling
$23,000 which the Company presently pays on two outstanding classes of preferred
stock.
Notes to Consolidated Financial Statements (continued)
The Company has five Industrial Revenue Bonds ("IRB's") totaling $23,680,000,
which are secured by direct pay letters of credit. The interest rates in the
table above reflect the direct pay letters of credit costs and amortization of
other related costs for those IRB's. Other than the five IRB's above, the
carrying value of assets pledged for secured debt including the $125 million
revolver is $432,656,000.
Debt repayment requirements for the next five fiscal years are:
(In thousands)
2006 $14,896
2007 9,101
2008 8,956
2009 9,151
2010 38,110
5. Leases
The Company leases a portion of its equipment and buildings. Capitalized leases
consist primarily of limited obligation special revenue bonds, which bear
interest rates from 1.42% to 4.75%. Other leases include non-cancelable
operating leases expiring at various dates through 2025. Generally, operating
leases provide for early purchase options one year prior to expiration.
Leased assets under capital leases consist of the following:
2005 2004
--------------------------------------------------------------------------------
(In thousands)
Land $ 67 $ 67
Buildings 1,033 1,033
Equipment 11,476 11,313
---------------------------------
12,576 12,413
Less accumulated amortization 10,651 9,372
---------------------------------
1,925 3,041
Assets held for sale - 340
---------------------------------
$ 1,925 $ 3,381
================================================================================
The following is a schedule by year of minimum payments due under leases as of
March 31, 2005:
Operating Capital
----------------------------------------------------------------------------
(In thousands)
Years ending March 31:
2006 $18,415 $1,025
2007 15,160 1,025
2008 12,762 929
2009 10,066 719
2010 8,822 721
2011-2025 15,049 3,585
-----------------------------
Total minimum payment required $80,274 $8,004
============================================================
Less interest 1,422
--------------
Present value of minimum lease payments 6,582
Amount due within one year 775
--------------
Long-term capital lease obligations $5,807
============================================================================
Rental expense in 2005, 2004, and 2003 was $23,059,000, $20,538,000, and
$13,077,000, respectively.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
The Company files a consolidated income tax return. The provision for income
taxes is as follows:
2005 2004 2003
----------------------------------------
(In thousands)
Current:
Federal $ 4,489 $ 4,938 $ 1,529
State 1,189 1,562 460
----------------------------------------
5,678 6,500 1,989
----------------------------------------
Deferred:
Federal (1,448) 1,009 3,150
State (104) 98 370
----------------------------------------
(1,552) 1,107 3,520
----------------------------------------
Total income taxes $4,126 $ 7,607 $ 5,509
========================================
A reconciliation of the expected U.S. statutory rate to the effective rate follows:
2005 2004 2003
-----------------------------------------------------------------------------
Computed (expected tax rate) 35.0% 35.0% 35.0%
State income taxes (net of
federal tax benefit) 5.9 5.2 3.7
Reversal of tax reserves (4.2) - -
Other permanent differences
not deductible 1.7 1.1 0.4
Tax exempt income - (0.7) (1.5)
Other (4.1) (3.6) 0.2
-----------------------------------------
Effective tax rate 34.3% 37.0% 37.8%
=============================================================================
6. Income Taxes (continued)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of March 31, 2005 and 2004:
2005 2004
---------------------------------------------------------------------------------
(In thousands)
Deferred tax liabilities:
Basis and depreciation difference $ 14,178 $ 15,608
Other comprehensive income - 1,425
Other 142 309
-----------------------------------
14,320 17,342
-----------------------------------
Deferred tax assets:
Inventory valuation 704 1,534
Net operating loss carryforwards - 25
Employee benefits 2,667 2,697
Pension 3,028 2,142
Insurance 1,963 2,025
Deferred gain on sale/leaseback 405 486
Severance 97 -
-----------------------------------
8,864 8,909
-----------------------------------
Net deferred tax liability $ 5,456 $ 8,433
=================================================================================
Net current deferred tax assets of $5,669,000 and $6,615,000 as of March 31,
2005 and 2004, respectively, are recognized in the Consolidated Balance Sheets.
Also recognized are net non-current deferred tax liabilities of $11,125,000 and
$15,048,000 as of March 31, 2005 and 2004, respectively.
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity
Preferred Stock - The Company has issued a class of preferred stock
("Participating Preferred Stock") which is convertible, and participating. There
are 3,443,359 shares outstanding as of March 31, 2005. These shares are
convertible immediately on a one-for-one basis into shares of Class A Common
Stock subject to antidilution adjustments. There were no dividends on this class
of stock. These shares have a liquidation value of $12 per share. This preferred
stock has the right to receive dividends or distributions at a rate per share
equal to the amount of any dividend or distribution declared or made to Class A
Common Stock. In addition, this preferred stock has certain distribution rights
upon liquidation.
As part of the financing of the CPF acquisition, the Company issued 967,742
shares of Participating Convertible Preferred Stock. The Preferred Stock is
convertible into the Company's Class A Common Stock on a one-for-one basis
subject to antidilution adjustments. The Preferred Stock was valued at $16.60
per share based on the market value of the Class A Common Stock at the time the
acquisition was announced. This class of stock has a par value of $.025 per
share and a stated value of $15.50 per share.
The outstanding 10% cumulative, convertible, voting preferred stock consists of
407,240 Series A shares, convertible at the rate of one common share of Class A
and Class B for every twenty preferred shares, and 400,000 Series B shares,
which carry a one common share of Class A and Class B for thirty conversion
rate. The Series A and B shares have a $.25 stated value and a $.025 par value.
There are 2,633,333 shares authorized of Class A $.025 par value stock, which
are unissued and undesignated. In addition, there are 30,000 shares of no par
stock, which are also unissued and undesignated. The Company paid dividends
totaling $20,181, or $.025 per share, to the holders of this 10% preferred stock
for the years ended March 31, 2005 and 2004. The Company has 200,000 shares of
6%, cumulative, voting, $.25 stated value, preferred stock which is callable at
par value of $.25 per share. The Company paid dividends totaling $3,000 or $.015
per share to the holders of this 6% preferred cumulative, $.25 par value, voting
stock.
Common Stock - The Class A Common Stock and the Class B Common Stock have
substantially identical rights with respect to any dividends or distributions of
cash or property declared on shares of common stock and rank equally as to the
right to receive proceeds on liquidation or dissolution of the Company after
payment of the Company's indebtedness and liquidation right to the holders of
preferred shares. However, holders of Class B Common Stock retain a full vote
per share whereas the holders of Class A Common Stock have voting rights of
1/20th of one vote per share on all matters as to which shareholders of the
Company are entitled to vote.
Unissued shares of common stock reserved for conversion privileges were 33,695
of Class A and Class B as of March 31, 2005 and 2004. Additionally, there were
3,443,359 and 3,443,596 shares of Class A reserved for conversion of the
Participating Preferred Stock as of March 31, 2005 and 2004, respectively.
Comprehensive Income - Net unrealized gains and losses are net of their related
provision for income taxes.
Notes to Consolidated Financial Statements (continued)
8. Retirement Plans
The Company has a noncontributory defined benefit pension plan covering all
employees who meet certain age entry requirements and work a stated minimum
number of hours per year. Annual contributions are made to the Plan sufficient
to satisfy legal funding requirements.
The following tables provide a reconciliation of the changes in the Plan's
benefit obligation and fair value of plan assets over the two-year period ended
March 31, 2005 and a statement of the funded status as of March 31, of 2005 and
2004:
2005 2004
------------------------------
Change in Benefit Obligation (In thousands)
Benefit obligation at beginning of year $ 66,991 $ 41,369
Service cost 3,050 2,546
Interest cost 3,987 3,519
Actuarial gain 3,877 1,227
Acquisition - 20,821
Benefit payments and expenses (3,222) (2,491)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $ 74,683 $ 66,991
===============================================================================
Change in Plan Assets
Fair value of plan assets at beginning of year $ 59,687 $ 28,781
Actual return on plan assets 3,686 13,603
Employer contributions 2,821 241
Benefit payments and expenses (3,222) (2,491)
Acquisition - 19,553
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year $62,972 $ 59,687
===============================================================================
Funded Status
Funded status at end of year $ (11,711) $(7,304)
Unrecognized transition asset (1,885) (2,161)
Unrecognized loss 6,336 963
- -------------------------------------------------------------------------------
Accrued benefit cost $ (7,260) $ (8,502)
===============================================================================
The Plan holds the Company's common stock with a fair market value of
$4,418,000.
Notes to Consolidated Financial Statements (continued)
8. Retirement Plan (continued)
The following table provides the components of net periodic benefit cost for the
Plan for fiscal years 2005, 2004, and 2003:
2005 2004 2003
- -------------------------------------------------------------------------------------------------------
(In thousands)
Service cost $ 3,050 $ 2,545 $ 2,571
Interest cost 3,986 3,519 2,334
Expected return on plan assets (5,182) (3,850) (3,005)
Amortization of transition asset (276) (276) (276)
Amortization of net gain - 649 -
Amortization of prior service cost - - 31
- -------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,578 $ 2,587 $ 1,655
=======================================================================================================
The Plan's accumulated benefit obligation was $66,941,000 at March 31, 2005, and
$60,929,000 at March 31, 2004.
The prior service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Gains and losses in excess of
10% of the greater of the benefit obligation and the market-related value of
assets are amortized over the average remaining service period of active
participants.
The assumptions used to measure the Company's benefit obligation are shown in
the following table:
2005 2004
- ------------------------------------------------------------------------------
Discount rate 5.75% 6.00%
Expected return on plan assets 8.75% 8.75%
Rate of compensation increase 3.50% 3.50%
Plan Assets
Target Percentage of Plan
Allocation Assets at March 31,
2006 2005 2004
- -------------------------------------------------------------------------------------------------------
Plan Assets:
Equity Securities* 99% 99% 99%
Debt Securities - - -
Real Estate - - -
Cash 1 1 1
- ------------------------------------------------------------------------------------------------------
Total 100% 100% 100%
=======================================================================================================
Expected Return on Plan Assets
The expected rate of return on Plan assets is 8.75%. Seneca Foods Corporation
expects 8.75% to fall within the 40 to 50 percentile range of returns on
investment portfolios with asset diversification similar to that of the pension
plan's target asset allocation.
Investment Policy and Strategy
Seneca Foods Corporation maintains an investment policy designed to achieve a
long term rate of return, including investment income through dividends and
equity appreciation, sufficient to meet the actuarial requirements of the
pension plans. Seneca Foods Corporation seeks to accomplish its return
objectives by prudently investing in a diversified portfolio of public company
equities with broad industry representation seeking to provide long term growth
consistent with the performance of relevant market indices, as well as, maintain
an adequate level of liquidity for pension distributions as they fall due. The
strategy of being fully invested in equities has historically provided greater
rates of return over extended periods of time.
Cash Flows
Expected contributions for fiscal year ending March 31, 2006:
Expected employer contributions $ -
Expected employee contributions -
Estimated future benefit payments reflecting expected future service for the
fiscal years ending March 31:
2006 $ 2,839
2007 3,035
2008 3,262
2009 3,565
2010 3,742
2011-2015 23,106
The Company has Employees' Savings Plans (401(k)) covering all employees who
meet certain age entry requirements and work a stated minimum number of hours
per year. Participants may make contributions up to the legal limit. The
Company's matching contributions are discretionary. Costs charged to operations
for the Company's matching contributions amounted to $1,519,000, $1,708,000, and
$605,000, in 2005, 2004, and 2003, respectively.
9. Fair Value of Financial Instruments
The carrying amounts and the estimated fair values of the Company's financial
instruments are summarized as follows:
2005 2004
-----------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Long-term debt, including current portion $163,214 $159,211 $175,200 $175,850
Notes payable 60,733 60,733 58,395 58,395
Capital leases, including current portion 6,582 5,796 7,306 6,589
Class B Common Stock of Moog Inc. - - 4,465 4,465
The estimated fair values were determined as follows:
Long-term debt and capital lease obligations - The quoted market prices for
similar debt or current rates offered to the Company for debt with the same
maturities.
Notes payable - The carrying amount approximates fair value due to the
short-term maturity of the notes.
Class B Common Stock of Moog Inc. - Based on quoted market prices.
Notes to Consolidated Financial Statements (continued)
10. Acquisition
On May 27, 2003, the Company completed its acquisition of 100% of the membership
interest in Chiquita Processed Foods, L.L.C. ("CPF") from Chiquita Brands
International, Inc. The primary reason for the acquisition was to acquire
additional production capacity in the Canned Vegetable business. The purchase
price totaled $126.1 million plus the assumption of certain liabilities. This
acquisition was financed with cash, proceeds from a new $200.0 million revolving
credit facility, and $16.1 million of the Company's Participating Convertible
Preferred Stock. The Preferred Stock is convertible into the Company's Class A
Common Stock on a one-for-one basis. The Preferred Stock was valued at $16.60
per share based on the market value of the Class A Common Stock at the time the
acquisition was announced.
During the quarter ended September 27, 2003, the Company refinanced $42.5
million of debt outstanding under the revolving credit facility with new term
debt from an insurance company. The new term debt from the insurance company of
$42.5 million, when combined with the refinancing of existing insurance company
debt of $32.5 million, has an interest rate of 8.03%, a fifteen-year
amortization and a ten-year term.
As part of this acquisition, the Company assumed seasonal notes payable from the
CPF revolving credit facility of $25.4 million which was paid off at the time of
acquisition with proceeds from the new $200.0 million revolving credit facility.
The Company also assumed $35.9 million of CPF long-term debt and capital lease
obligations, of which $26.8 million was paid off at the time of acquisition with
proceeds from the new $200.0 million revolving credit facility. The remaining
long-term debt principally involves two Industrial Revenue Development Bonds
totaling $5.5 million and consisting of a $3 million Pickett, Wisconsin issue
due on June 1, 2005 with an interest rate of 7.75% and a $2.5 million Walla
Walla, Washington issue due on September 1, 2005 with an interest rate of 8.5%.
The balance of the debt acquired, totaling $3.6 million, has interest rates
ranging from 1.9% to 9% and is due through 2011.
The Company's consolidated statement of net earnings for the year ended March
31, 2004 includes ten months of the CPF acquired operations. A pro forma income
statement as if the operations were acquired at the beginning of the periods
presented follows:
2004 2003
- ---------------------------------------------------------------------------------------
(unaudited)
Net Sales $945,332 $945,217
- ----------------------------------------------------------------------------------------
Cost of Product Sold 872,534 874,797
Selling, General and Administrative 37,075 27,144
Interest Expense (net) 16,985 18,209
Other Expense (net) 1,675 2,409
- ----------------------------------------------------------------------------------------
Total Costs and Expenses 928,269 922,559
Earnings Before Income Taxes 17,063 22,658
Income Taxes 6,248 7,644
- ----------------------------------------------------------------------------------------
Net Earnings $ 10,815 $ 15,014
========================================================================================
Basic Earnings Per Share $ 0.96 $ 1.35
========================================================================================
Diluted Earnings Per Share $ 0.96 $ 1.35
========================================================================================
Notes to Consolidated Financial Statements (continued)
The Company sold three former Chiquita Processed Foods plants and related assets
to Lakeside Foods, Inc. on June 17, 2003. The Company sold one additional former
Chiquita Processed Foods plant and related assets to Lakeside Foods, Inc. on
August 6, 2003. The aforementioned sales to Lakeside Foods generated $46 million
in cash proceeds, which was used to pay down debt. The Company sold additional
plant locations that were designated as assets held for sale during 2005 and
2004.
The total purchase price of the transaction has been allocated as follows:
Current assets $ 137.8
Property, plant and equipment 87.8
Other assets 6.5
Current liabilities (69.6)
Long-term debt (27.9)
Other non-current liabilities (4.3)
---------
Total $ 130.3
=========
11. Other Income and Expense
Other income in 2005 consisted of a gain on the sale of Moog Inc. stock of
$3,862,000 and a gain of the sale of certain fixed assets of $607,000. Other
expenses included a $712,000 non-cash charge reflecting the write down of the
corresponding pro-rata amount of deferred financing cost due to reducing the
revolving credit facility from $200 million to $125 million.
Other income in 2004 consisted of a gain on the sale of certain fixed assets of
$207,000.
Other expense in 2003 consisted of an impairment loss of $4,719,000.
12. Concentrations
The Company sold $225,527,000, $247,992,000 and $252,059,000, representing 26%,
28% and 39% of net sales, to one customer in 2005, 2004, and 2003, respectively.
The Company has six collective bargaining agreements with three union locals
covering approximately 825 of its full time employees. The terms of these
agreements result in wages and benefits which are substantially the same for
comparable positions for the Company's non-union employees. Four collective
bargaining agreements expire in calendar 2008. Two agreements expire in calendar
2006.
13. Segment Information
The Company manages its business on the basis of one reportable segment - the
processing and sale of vegetables. The Company markets its product almost
entirely in the United States. The Company has an Alliance Agreement with
General Mills Operations, Inc. (GMOI) whereby the Company processes canned and
frozen vegetables for GMOI under the Green Giant brand name. GMOI continues to
be responsible for all of the sales, marketing, and customer service functions
for the Green Giant products. In 2005, 2004, and 2003, the sale of Green Giant
vegetables accounted for 26%, 28%, and 39% of net sales. The following
information is presented in accordance with SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information":
Classes of similar products/services: 2005 2004 2003
- -------------------------------------------------------------------------------------------------------
(In thousands)
Net Sales:
GMOI $ 225,527 $ 247,992 $ 252,059
Canned vegetables 581,486 586,594 328,907
Frozen vegetables 28,304 29,410 30,422
Fruit and chip products 16,674 15,347 20,784
Other 12,283 11,507 12,207
- -------------------------------------------------------------------------------------------------------
$ 864,274 $ 890,850 $ 644,379
=======================================================================================================
Notes to Consolidated Financial Statements (continued)
14. Commitments and Other Contingencies
In the ordinary course of its business, the Company is made a party to certain
legal proceedings seeking monetary damages. The Company does not believe that an
adverse decision in any of these proceedings would have a material adverse
impact on its financial position, results of operations or cash flows.
The Company is one of a number of business and local government entities which
contributed waste materials to a landfill in Yates County in upstate New York,
which was operated by a party unrelated to the Company primarily in the 1970's
through the early 1980's. The Company's wastes were primarily food and juice
products. The landfill contained some hazardous materials and was remediated by
the State of New York. The New York Attorney General has advised the Company and
other known non-governmental waste contributors that New York has sustained a
total remediation cost of $4.9 million and seeks recovery of half that cost from
the non-governmental waste contributors. The Company is one of four identified
contributors who cooperatively are investigating the history of the landfill so
as to identify and seek out other potentially responsible parties who are not
defunct and are financially able to contribute to the non-governmental parties'
reimbursement liability. Until that search is completed, the Company's liability
cannot be definitively estimated. The Company does not believe that any ultimate
settlement in excess of the amount accrued will have a material impact on its
financial position or results of operations.
During 2004, various claims totaling approximately $3,211,000 were asserted by
the Fleming Companies against the Company and a subsidiary acquired in 2003 in
the Bankruptcy proceedings in the U.S. Bankruptcy Court for the District of
Delaware for (i) receipt of allegedly preferential payments under the U.S.
Bankruptcy Code ($1,292,000), (ii) receipt of alleged overpayments ($1,139,000)
and (iii) amounts allegedly owing under various vendor promotional programs
($780,000). During 2005, the Company settled these claims for $399,000.
On June 15, 2004, an accident occurred at the Company's aircraft hangar located
at the Yates County Airport in Penn Yan, New York. A collision occurred between
an automobile owned by an employee of an aircraft service company doing contract
work at the Company's hangar and two jet aircraft standing in the hangar. The
incident caused minor damage to the hangar and one of the airplanes and
substantial damage to the wing of the second airplane. A corporate customer of
the Company's Flight Division shares ownership with the Company of the
less-damaged aircraft and has sole ownership of the more-damaged aircraft. The
Company does not believe that any ultimate settlement will have a material
impact on its financial position or results of operations.
15. Plant Restructuring
After a comprehensive review of our production capacities following the CPF
acquisition in 2004, the Company completed a plant restructuring program in 2005
resulting in a restructuring charge of $7,678,000. The restructuring charge
consisted of a non-cash impairment charge of $6,952,000 and a cash severance
charge of $726,000 which are included in Plant Restructuring in the Consolidated
Statements of Net Earnings. The Company used two methods to determine fair
value: 1) no value was assigned to machinery and equipment that cannot be
redeployed within the Company and where there is no ready market for the asset;
and 2) quoted prices or prices for similar assets for real estate.
This restructuring program principally involved the closure of three processing
facilities including a green bean plant in upstate New York and corn plants in
Wisconsin and Washington. In addition, the Company restructured the newly
acquired Payette, Idaho facility through the removal of canned meat production
to focus exclusively on dry beans. The rationalization of the Company's
productive capacity will: 1) improve the Company's overall cost structure and
competitive position; 2) address the excess capacity situation arising from the
acquisition of CPF; and 3) mitigate the effect of inflationary pressures on the
Company's raw material inputs such as steel and fuel.
The closure of the Washington corn processing facility coincided with an
amendment to the Alliance Agreement with GMOI. Under the above amendment, the
Blue Earth, Minnesota facility was removed from the Alliance Agreement due to a
reduction in GMOI volume requirements and will be operated by the Company as a
non-Alliance facility. Additionally, GMOI agreed to reimburse the Company in the
future for remaining lease and depreciation costs at the Blue Earth facility
which, on a net present value basis, approximate the closure costs associated
with the Washington facility.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the restructuring and related asset impairment
charges recorded and the accruals established during 2005:
Long-Lived
Asset Other
Severance Charges Costs Total
--------- ---------- ----- -----
Total expected
restructuring charge $726 $4,960 $1,992 $7,678
===========================================================================================================
Balance March 31, 2004 - - - -
Second quarter charge
to expense 619 - - 619
Third quarter charge
to expense 94 3,798 1,912 5,804
Fourth quarter charge
to expense 13 1,162 80 1,255
Loss on disposal of
assets - (3,361) - (3,361)
Cash payments (470) - - (470)
- -----------------------------------------------------------------------------------------------------------
Balance March 31, 2005 $256 $1,599 $1,992 $3,847
===========================================================================================================
In addition, $771,000 was charged to Cost of Product Sold in the second quarter
of 2005 related to exiting a line of contract packing business.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Seneca Foods Corporation
Marion, New York
We have audited the accompanying consolidated balance sheets of Seneca Foods
Corporation and Subsidiaries as of March 31, 2005 and 2004, and the related
consolidated statements of net earnings, stockholders' equity, and cash flows
for years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Seneca
Foods Corporation and Subsidiaries as of March 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Seneca Foods
Corporation and its Subsidiaries' internal control over financial reporting as
of March 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated June 10, 2005
expressed an unqualified opinion on management's assessment and an adverse
opinion on the effectiveness of internal control over financial reporting.
ERNST & YOUNG LLP
Buffalo, New York
June 10, 2005
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Seneca Foods Corporation
Marion, New York
We have audited the accompanying consolidated statements of net earnings,
stockholders' equity, and of cash flows of Seneca Foods Corporation and
subsidiaries (the "Company") for the year ended March 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Seneca Foods
Corporation and subsidiaries for the year ended March 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Rochester, New York
May 21, 2003
Shareholder Information and Quarterly Results
The Company's common stock is traded on The NASDAQ National Stock Market. The
3.9 million of Class A outstanding shares and 2.8 million Class B outstanding
shares are owned by 288 and 279 shareholders of record, respectively. The high
and low prices of the Company's common stock during each quarter of the past two
years are shown below:
Class A: 2005 2004
------------------------------------------------
Quarter High Low High Low
---------------------------------------------------------------
First $20.00 $17.92 $18.50 $16.20
Second 18.81 18.25 19.30 17.30
Third 19.00 18.00 21.50 19.00
Fourth 18.75 16.75 21.97 18.00
Class B: 2005 2004
------------------------------------------------
Quarter High Low High Low
---------------------------------------------------------------
First $19.45 $18.25 $18.72 $16.85
Second 18.95 17.65 19.55 17.52
Third 19.10 18.25 22.88 19.05
Fourth 18.75 16.99 22.25 18.25
As of March 31, 2005, the most restrictive credit agreement limitation on the
Company's payment of dividends and other distributions, such as purchases of
shares, to holders of Class A or Class B Common Stock is an annual total
limitation of $500,000, reduced by aggregate annual dividend payments totaling
$23,000 which the Company presently pays on two outstanding classes of preferred
stock. Payment of dividends to common stockholders is made at the discretion of
the Company's Board of Directors and depends, among other factors, on earnings,
capital requirements, operating and financial condition of the Company. The
Company has not declared or paid a common dividend in many years.
The following is a summary of the unaudited interim results of operations by
quarter:
First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Year ended March 31, 2005:
Net sales $ 164,678 $ 220,375 $ 307,966 $ 171,255
Gross margin 15,147 16,546 16,580 15,999
Net earnings 4,502 2,445 (1,513) 2,473
Basic earnings per common share .40 .22 (.14) .23
Diluted earnings per common share .40 .22 (.14) .23
Year ended March 31, 2004:
Net sales $ 151,672 $ 248,610 $ 326,326 $ 164,242
Gross margin 15,567 18,812 16,410 18,457
Net earnings 3,672 3,910 1,887 3,472
Basic earnings per common share .35 .35 .17 .31
Diluted earnings per common share .35 .35 .17 .31
Earnings for the fourth quarter have historically reflected adjustments of
previously estimated raw material costs and production levels. Due to the
dependence on fruit and vegetable yields of the Company's food processing
segment, interim costing must be estimated. Significant adjustments recorded in
the fourth quarter include a net impairment charge of $1.3 million and a
reduction of the income tax provision of $571,000. During the fourth quarter,
certain reclassifications were made between net sales, cost of sales and
selling, general and administrative expense which changed previously reported
quarterly amounts. There was no effect on previously reported net earnings.