a10q092813.htm
 
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.  20549

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 28, 2013
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  þ No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  þ No  ¨

Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨  Accelerated filer  þ Non-accelerated filer  ¨ Smaller reporting company  ¨

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨  No   þ

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 October 17, 2013
Common Stock Class A, $.25 Par
8,731,483
Common Stock Class B, $.25 Par
2,013,953

 
 

 

 
Seneca Foods Corporation
     
 
Quarterly Report on Form 10-Q
     
 
Table of Contents
     
         
     
Page
 
         
PART 1
 FINANCIAL INFORMATION
     
         
  Item 1
Financial Statements:
     
         
      1  
           
         
 
  September 28, 2013 and September 29, 2012
    2  
           
         
 
  September 28, 2013 and September 29, 2012
    2  
           
         
      3  
           
         
 
  September 28, 2013
    4  
           
      5  
           
  Item 2
       
 
  and Results of Operations
    11  
           
  Item 3
    17  
           
  Item 4
    18  
           
PART II
 OTHER INFORMATION
       
           
  Item 1
    19  
           
  Item 1A
    19  
           
  Item 2
    19  
           
  Item 3
    19  
           
  Item 4
    19  
           
  Item 5
    19  
           
  Item 6
    19  
           
      21  

 
 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In Thousands, Except Per Share Data)
 
                   
   
Unaudited
   
Unaudited
       
   
September 28,
   
September 29,
   
March 31,
 
   
2013
   
2012
   
2013
 
ASSETS
                 
                   
Current Assets:
                 
Cash and Cash Equivalents
  $ 18,068     $ 18,800     $ 14,104  
Accounts Receivable, Net
    96,089       83,506       82,933  
Inventories
                       
  Finished Goods
    655,058       650,324       351,231  
  Work in Process
    8,450       5,982       10,032  
  Raw Materials and Supplies
    95,146       70,592       118,467  
    Total Inventories
    758,654       726,898       479,730  
Deferred Income Tax Asset, Net
    10,946       9,279       9,400  
Other Current Assets
    36,398       17,001       25,299  
  Total Current Assets
    920,155       855,484       611,466  
Property, Plant and Equipment, Net
    184,882       190,231       188,407  
Deferred Income Tax Asset, Net
    5,205       279       2,097  
Other Assets
    1,010       1,368       1,179  
    Total Assets
  $ 1,111,252     $ 1,047,362     $ 803,149  
LIABILITIES AND STOCKHOLDERS' EQUITY
                       
                         
Current Liabilities:
                       
  Notes Payable
  $ 4,392     $ -     $ -  
  Accounts Payable
    299,446       281,209       72,128  
  Accrued Vacation
    11,057       10,576       10,877  
  Accrued Payroll
    13,481       11,335       7,537  
  Other Accrued Expenses
    37,861       28,630       29,755  
  Income Taxes Payable
    468       4,954       4,100  
  Current Portion of Long-Term Debt
    2,101       42,941       40,170  
Total Current Liabilities
    368,806       379,645       164,567  
Long-Term Debt, Less Current Portion
    322,959       276,530       230,016  
Other Long-Term Liabilities
    44,889       41,563       41,400  
    Total Liabilities
    736,654       697,738       435,983  
Commitments and Contingencies
                       
Stockholders' Equity:
                       
  Preferred Stock
    5,410       6,244       5,422  
  Common Stock, $.25 Par Value Per Share
    2,955       2,942       2,955  
  Additional Paid-in Capital
    93,135       92,211       93,069  
  Treasury Stock, at cost
    (31,764 )     (29,300 )     (31,204 )
  Accumulated Other Comprehensive Loss
    (22,548 )     (23,255 )     (22,548 )
  Retained Earnings
    327,410       300,782       319,472  
    Total Stockholders' Equity
    374,598       349,624       367,166  
      Total Liabilities and Stockholders’ Equity
  $ 1,111,252     $ 1,047,362     $ 803,149  
           
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
         

1

 
 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS
 
(Unaudited)
 
(In Thousands, Except Per Share Data)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net Sales
  $ 336,628     $ 317,593     $ 568,755     $ 548,644  
                                 
Costs and Expenses:
                               
  Cost of Product Sold
    314,249       276,688       526,696       478,664  
  Selling and Administrative
    15,856       16,245       31,775       31,073  
  Plant Restructuring
    347       -       501       -  
  Other Operating Income
    (607 )     (274 )     (788 )     (292 )
  Total Costs and Expenses
    329,845       292,659       558,184       509,445  
      Operating Income
    6,783       24,934       10,571       39,199  
Interest Expense, Net
    1,548       1,836       3,375       3,314  
Earnings Before Income Taxes
    5,235       23,098       7,196       35,885  
                                 
Income Taxes (Benefit) Expense
    (1,368 )     8,577       (754 )     13,173  
Net  Earnings
  $ 6,603     $ 14,521     $ 7,950     $ 22,712  
                                 
Earnings Attributable to Common Stock
  $ 6,387     $ 14,010     $ 7,685     $ 21,920  
                                 
    Basic Earnings per Common Share
  $ 0.59     $ 1.23     $ 0.71     $ 1.90  
                                 
    Diluted Earnings per Common Share
  $ 0.59     $ 1.22     $ 0.71     $ 1.89  
                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
         

SENECA FOODS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
(Unaudited)
 
(In Thousands)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Comprehensive income:
                       
  Net earnings
  $ 6,603     $ 14,521     $ 7,950     $ 22,712  
  Change in pension and post retirement benefits (net of tax)
    -       90       -       64  
    Total
  $ 6,603     $ 14,611     $ 7,950     $ 22,776  
                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
       

2

 
 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
(In Thousands)
 
   
Six Months Ended
 
   
September 28, 2013
   
September 29, 2012
 
Cash Flows from Operating Activities:
           
  Net Earnings
  $ 7,950     $ 22,712  
  Adjustments to Reconcile Net Earnings to
               
    Net Cash Used in Operations:
               
      Depreciation & Amortization
    11,679       11,424  
      Gain on the Sale of Assets
    (869 )     (292 )
      Impairment Provision
    501       -  
      Deferred Income Tax Benefit
    (4,654 )     (559 )
      Changes in Operating Assets and Liabilities:
               
        Accounts Receivable
    (13,156 )     (6,401 )
        Inventories
    (279,084 )     (294,465 )
        Other Current Assets
    (11,099 )     (7,988 )
        Income Taxes
    (3,632 )     5,270  
        Accounts Payable, Accrued Expenses
               
            and Other Liabilities
    244,939       224,166  
  Net Cash Used in Operations
    (47,425 )     (46,133 )
Cash Flows from Investing Activities:
               
  Additions to Property, Plant and Equipment
    (8,412 )     (12,317 )
  Proceeds from the Sale of Assets
    970       306  
  Payment of Loan Receivable
    -       10,000  
  Net Cash Used in Investing Activities
    (7,442 )     (2,011 )
Cash Flow from Financing Activities:
               
  Long-Term Borrowing
    261,823       249,465  
  Payments on Long-Term Debt
    (206,949 )     (164,203 )
  Borrowings on Notes Payable
    4,392       -  
  Other
    137       139  
  Purchase of Treasury Stock
    (560 )     (27,865 )
  Dividends
    (12 )     (12 )
  Net Cash Provided by Financing Activities
    58,831       57,524  
                 
Net Increase in Cash and Cash Equivalents
    3,964       9,380  
Cash and Cash Equivalents, Beginning of the Period
    14,104       9,420  
Cash and Cash Equivalents, End of the Period
  $ 18,068     $ 18,800  
                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

3

 
 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS STOCKHOLDERS' EQUITY
 
(Unaudited)
 
(In Thousands)
 
                                     
               
Additional
         
Accumulated Other
       
   
Preferred
   
Common
   
Paid-In
   
Treasury
   
Comprehensive
   
Retained
 
 
 
Stock
   
Stock
   
Capital
   
Stock
   
Loss
   
Earnings
 
                                     
Balance March 31, 2013
  $ 5,422     $ 2,955     $ 93,069     $ (31,204 )   $ (22,548 )   $ 319,472  
Net earnings
    -       -       -       -       -       7,950  
Cash dividends
                                               
  on preferred stock
    -       -       -       -       -       (12 )
Equity incentive program
    -       -       50       -       -       -  
Stock issued for profit sharing plan
    -       -       4       -       -       -  
Preferred stock conversion
    (12 )     -       12       -       -       -  
Purchase treasury stock
                      (560 )            
Balance September 28, 2013
  $ 5,410     $ 2,955     $ 93,135     $ (31,764 )   $ (22,548 )   $ 327,410  
                                                 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 

4

 
 

 
SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2013




 
1.
Unaudited Condensed Consolidated Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of Seneca Foods Corporation (the “Company”) as of September 28, 2013 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, 2013 balance sheet was derived from the audited consolidated financial statements.
 
The results of operations for the three and six month periods ended September 28, 2013 are not necessarily indicative of the results to be expected for the full year.

During six months ended September 28, 2013, the Company sold $52,199,000 of Green Giant finished goods inventory to General Mills Operations, LLC (“GMOL”) for cash, on a bill and hold basis, as compared to $38,593,000 for the six months ended September 29, 2012.  Under the terms of the bill and hold agreement, title to the specified inventory transferred to GMOL.  The Company believes it has met the criteria required for bill and hold treatment.

The accounting policies followed by the Company are set forth in Note 1 to the Company's Consolidated Financial Statements in the Company’s 2013 Annual Report on Form 10-K.

 
Other footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.  These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company's 2013 Annual Report on Form 10-K.

 
All references to years are fiscal years ended or ending March 31 unless otherwise indicated.  Certain percentage tables may not foot due to rounding.

2.
On January 15, 2013, the Company completed its acquisition of 100% of the membership interest in Independent Foods, LLC ("Sunnyside").  The business, based in Sunnyside, Washington, is a processor of canned pears, apples and cherries in the United States.  The rationale for the acquisition was twofold: (1) the business is a complementary fit with the Company's existing business and (2) it provides an extension of the Company's product offerings. The purchase price totalled $5,017,000 plus the assumption of certain liabilities. In conjunction with the closing, the Company paid $19,517,000 of liabilities acquired.  This acquisition was financed with proceeds from the Company's revolving credit facility.  The purchase price to acquire Sunnyside was allocated based on the internally developed fair value of the assets acquired and liabilities assumed and the independent valuation of property, plant, and equipment.  The purchase price of $5,017,000 has been allocated as follows (in millions):

5

 
 

 
SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2013



Purchase Price (net of cash received)
  $ 5.0  
         
Allocated as follows:
       
Current assets
  $ 32.7  
Property, plant and equipment
    7.4  
Bargain purchase gain
    (1.9 )
Current liabilities
    (33.2 )
Total
  $ 5.0  

In 2013, the Company recorded a $1,971,000 gain as a result of the estimated fair market value of the net assets acquired exceeding the purchase price for Sunnyside.  During the first six months of 2014, the Company determined an adjustment to the net assets acquired was required and, as a result, recorded a reduction of the gain on the bargain purchase by $81,000 to $1,890,000. This gain and subsequent reduction is included in other operating income on the Consolidated Statements of Net Earnings.

3.
First-In, First-Out (“FIFO”) based inventory costs exceeded LIFO based inventory costs by $147,449,000 as of the end of the second quarter of fiscal 2014 as compared to $134,783,000 as of the end of the second quarter of fiscal 2013.  The change in the LIFO Reserve for the three months ended September 28, 2013 was an increase of $8,637,000 as compared to a decrease of $3,706,000 for the three months ended September 29, 2012.  The LIFO Reserve increased by $14,435,000 in the first six months of fiscal 2014 compared to a decrease of $2,444,000 in the first six months of fiscal 2013.  This reflects the projected impact of increased inflationary cost increases expected in fiscal 2014 versus fiscal 2013.

4.
The Company completed the closing of a new five year revolving credit facility (“Revolver”) on July 20, 2011.  Maximum borrowings under the Revolver total $300,000,000 from April through July and $400,000,000 from August through March.   The Revolver balance as of September 28, 2013 was $282,000,000 and is included in Long-Term Debt in the accompanying Condensed Consolidated Balance Sheet due to its five year term. The Company utilizes its Revolver for general corporate purposes, including seasonal working capital needs, to pay debt principal and interest obligations, and to fund capital expenditures and acquisitions.  Seasonal working capital needs are affected by the growing cycles of the vegetables and fruits the Company processes.  The majority of vegetable and fruit inventories are produced during the months of June through November and are then sold over the following year.  Payment terms for vegetable and fruit produce are generally three months but can vary from a few days to seven months.  Accordingly, the Company’s need to draw on the Revolver may fluctuate significantly throughout the year.

The increase in average amount of Revolver borrowings during the first six months of fiscal 2014 compared to the first six months of fiscal 2013 was attributable to the payoff of the note payable to an insurance company of $36,742,000, the Sunnyside acquisition in the fourth quarter of fiscal 2013 and reduced operating results.

General terms of the Revolver include payment of interest at LIBOR plus a defined spread.

The following table documents the quantitative data for Revolver borrowings during the second quarter and year-to-date periods of fiscal 2014 and fiscal 2013:

6

 
 

 
SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2013



   
Second Quarter
   
Year-to-Date
 
   
2014
   
2013
   
2014
   
2013
 
   
(In thousands)
   
(In thousands)
 
Reported end of period:
                       
  Outstanding borrowings
  $ 282,000     $ 233,000     $ 282,000     $ 233,000  
  Weighted average interest rate
    1.68 %     1.47 %     1.68 %     1.47 %
Reported during the period:
                               
  Maximum amount of borrowings
  $ 292,578     $ 234,000     $ 292,578     $ 234,000  
  Average outstanding borrowings
    227,234       152,537       192,360       132,009  
  Weighted average interest rate
    1.70 %     1.50 %     1.71 %     1.54 %

5.
During the six month period ended September 28, 2013, there were 41,579 shares, or $10,000, of Class B Common Stock (at Par), converted to Class A Common Stock and there were 1,061 shares, or $12,000 of Participating Preferred Stock, also converted to Class A Common Stock.  During the six-month period ended September 28, 2013, the Company repurchased 16,400 shares or $560,000 of its Class A Common Stock as Treasury Stock.  As of September 28, 2013, there are 1,078,014 shares or $31,764,000 of repurchased stock.  These shares are not considered outstanding.  During the three-month period ended June 29, 2013, there were 108 shares, or $4,000 of Class B Common Stock issued in lieu of cash compensation under the Company’s Profit Sharing Bonus Plan.

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

   
Three Months Ended
   
Six Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2013
   
2012
   
2013
   
2012
 
   
(In thousands)
 
Service  Cost
  $ 1,863     $ 2,223     $ 3,726     $ 4,444  
Interest Cost
    1,890       1,763       3,780       3,527  
Expected Return on Plan Assets
    (2,372 )     (2,291 )     (4,745 )     (4,582 )
Amortization of Actuarial Loss
    583       337       1,167       675  
Amortization of Transition Asset
    -       (57 )     -       (114 )
  Net Periodic Benefit Cost
  $ 1,964     $ 1,975     $ 3,928     $ 3,950  

No contributions were required or made in the three and six month periods ended September 28, 2013 and September 29, 2012.


7

 
 

 
SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2013


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

         
Long-Lived
             
   
Severance
   
Asset Charges
   
Other Costs
   
Total
 
   
(In thousands)
 
Balance March 31, 2013
    20       1,174       307       1,501  
First Quarter Charge
    -       -       154       154  
Second Quarter Charge
    -       341       6       347  
Cash payments/write offs
    (5 )     -       (303 )     (308 )
Balance September 28, 2013
  $ 15     $ 1,515     $ 164     $ 1,694  
                                 
Balance March 31, 2012
    37       -       -       37  
Cash payments/write offs
    (10 )     -       -       (10 )
Balance September 29, 2012
    27     $ -     $ -     $ 27  

 
During the third quarter of fiscal 2013, the Company implemented a product rationalization program and recorded a restructuring charge of $2,510,000 for related equipment costs, lease impairment costs (net of realizable value), and certain inventory costs.  During the first quarter of fiscal 2014, the Company recorded an additional restructuring charge of $154,000 related to this matter.  During the second quarter of fiscal 2014, the Company recorded an additional restructuring charge of $347,000 related to this matter of which $341,000 was related to equipment costs (contra fixed assets).

8.
During the six months ended September 28, 2013, the Company sold unused fixed assets which resulted in a gain of $869,000 as compared to a gain of $292,000 during the six months ended September 29, 2012.  These gains are included in other operating income in the Unaudited Condensed Consolidated Statements of Net Earnings.

 
9.
Recently Issued and Adopted Accounting Standards - There were no recently issued accounting pronouncements that impacted the Company’s condensed consolidated financial statements. In addition, the Company did not adopt any new accounting pronouncements during the quarter ended September 28, 2013.
 
 
 

8

 
 

 
SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2013


10.
Earnings per share for the Quarters Ended September 28, 2013 and September 29, 2012 are as follows:


   
Q U A R T E R
   
YEAR TO DATE
 
   
Fiscal
   
Fiscal
   
Fiscal
   
Fiscal
 
   
2014
   
2013
   
2014
   
2013
 
   
(In thousands, except per share amounts)
 
Basic
                       
                         
Net  earnings
  $ 6,603     $ 14,521     $ 7,950     $ 22,712  
Deduct preferred stock dividends paid
    6       6       12       12  
                                 
Undistributed earnings
    6,597       14,515       7,938       22,700  
Earnings attributable to participating preferred
    210       505       253       780  
                                 
Earnings attributable to common shareholders
  $ 6,387     $ 14,010     $ 7,685     $ 21,920  
                                 
Weighted average common shares outstanding
    10,748       11,374       10,750       11,531  
                                 
Basic earnings per common share
  $ 0.59     $ 1.23     $ 0.71     $ 1.90  
                                 
Diluted
                               
                                 
Earnings attributable to common shareholders
  $ 6,387     $ 14,010     $ 7,685     $ 21,920  
Add dividends on convertible preferred stock
    5       5       10       10  
                                 
Earnings attributable to common stock on a diluted basis
  $ 6,392     $ 14,015     $ 7,695     $ 21,930  
                                 
Weighted average common shares outstanding-basic
    10,748       11,374       10,750       11,531  
Additional shares issuable related to the
                               
  equity compensation plan
    4       4       4       4  
Additional shares to be issued under full
                               
  conversion of preferred stock
    67       67       67       67  
                                 
Total shares for diluted
    10,819       11,445       10,821       11,602  
                                 
Diluted earnings per common share
  $ 0.59     $ 1.22     $ 0.71     $ 1.89  




11.
As required by Accounting Standards Codification ("ASC") 825, “Financial Instruments,” the Company estimates the fair values of financial instruments on a quarterly basis.  The estimated fair value for long-term debt (classified as Level 2 in the fair value hierarchy) is determined by the quoted market prices for similar debt (comparable to the Company’s financial strength) or current rates offered to the Company for debt with the same maturities.  Long-term debt, including current portion had a carrying amount of $325,060,000 and an estimated fair value of $326,283,000 as of September 28, 2013.  As of March 31, 2013, the carrying amount was $270,186,000 and the estimated fair value was $273,567,000.  The fair values of all the other financial instruments approximate their carrying value due to their short-term nature.


9

 
 

 
SENECA FOODS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 28, 2013


12.
In June 2010, the Company received a Notice of Violation of the California Safe Drinking Water and Toxic Enforcement Act of 1986, commonly known as Proposition 65, from the Environmental Law Foundation ("ELF").  This notice was made to the California Attorney General and various other government officials, and to 49 companies including Seneca Foods Corporation whom ELF alleges manufactured, distributed or sold packaged peaches, pears, fruit cocktail and fruit juice that contain lead without providing a clear and reasonable warning to consumers.  Under California law, proper notice must be made to the State and involved firms at least 60 days before any suit under Proposition 65 may be filed by private litigants like ELF.  That 60-day period has expired and to date neither the California Attorney General nor any appropriate district attorney or city attorney has initiated an action against the Company.  However, private litigant ELF filed an action against the Company and 27 other named companies on September 28, 2011, in Superior Court of Alameda County, California, alleging violations of Proposition 65 and seeking various measures of relief, including injunctive and declaratory relief and civil penalties.  The Company, along with the other named companies, vigorously defended itself from such claim.  A responsive answer was filed, the discovery process was completed and a trial on liability was held beginning in April of 2013 in accordance with court schedules.  The trial was completed on May 16, 2013 and, on July 15, 2013 the judge issued a tentative and proposed statement of decision agreeing with the Company, and the other defendants, that the “safe harbor” defense had been met under the regulations relating to Proposition 65 and the Company will not be required to place a Proposition 65 warning label on the products at issue in the case.  The trial decision was finalized and the decision was appealed by ELF with a filing dated October 3, 2013.  We are unable to determine the scope or the likelihood of success of the appeal. The Company, along with other defendants are planning on vigorously defending the appeal filed by ELF.  With the successful defense of the case, the remedies portion of the case was not litigated.  So far, our portion of legal fees in defense of this action have been sizable, as would be expected with litigation resulting in trial, and the appeal, but have not had a material adverse impact on the Company’s financial position, results of operations, or cash flows. Additionally, in the ordinary course of its business, the Company is made party to certain legal proceedings seeking monetary damages, including proceedings invoking product liability claims, either directly or through indemnification obligations, and we are not able to predict the probability of the outcome or estimate of loss, if any, related to any such matter.

 
 
13.
During the second quarter of fiscal 2014, the Company entered into some interim lease notes which financed down payments for various equipment orders at market rates.  As of September 28, 2013 , these interim notes had not been converted into operating leases since the equipment was not delivered.  These notes, which total $4,392,000 as of September 28, 2013, are included in notes payable in the accompanying Condensed Consolidated Balance Sheets.  These notes are expected to be converted into operating leases within the next twelve months.
 
 
 

10

 
 
 

 

 
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
 
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 28, 2013



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

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

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

Results of Operations:

Sales:

Second fiscal quarter 2014 results include net sales of $336,628,000, which represents a 6.0% increase, or $19,035,000, from the second quarter of fiscal 2013.  The increase in sales is attributable to a sales volume increase of $26,944,000, partially offset by lower selling prices/sales mix of $7,909,000.  The increase in sales is primarily from a $5,650,000 increase in Frozen sales, a $19,705,000  increase in GMOL sales, a $4,987,000 increase in Canned Fruit sales and a $320,000 increase in Snack sales partially offset by a $12,699,000 decrease in Canned Vegetable sales.  The GMOL sales increase primarily reflects the acceleration of sales under the Green Giant Alliance resulting from earlier maturities of certain commodities in the current year.

Six months ended September 28, 2013 include net sales of $568,755,000, which represents a 3.7% increase, or $20,111,000, from the first six months of fiscal 2013.  The increase in sales is attributable to a sales volume increase of $39,393,000, partially offset by lower selling prices/sales mix of $19,282,000.  The increase in sales is primarily from a $9,574,000 increase in Frozen sales, a $22,916,000  increase in GMOL sales as a result of the aforementioned increase in Green Giant Alliance sales  and a $7,910,000 increase in Canned Fruit sales partially offset by a $20,841,000 decrease in Canned Vegetable sales and a $97,000 decrease in Snack sales.

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

11

 
 

 

 
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
 
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 28, 2013



   
Three Months Ended
   
Six Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2013
   
2012
   
2013
   
2012
 
Canned Vegetables
  $ 175.7     $ 188.4     $ 318.3     $ 339.1  
GMOL*
    65.2       45.5       74.4       51.4  
Frozen
    24.7       19.0       49.3       39.7  
Fruit Products
    62.5       57.6       111.4       103.5  
Snack
    3.3       3.0       5.8       5.9  
Other
    5.2       4.1       9.6       9.0  
    $ 336.6     $ 317.6     $ 568.8     $ 548.6  
                                 
*GMOL includes frozen vegetable sales exclusively for GMOL.
                         

Operating Income:

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

   
Three Months Ended
   
Six Months Ended
 
   
September 28,
   
September 29,
   
September 28,
   
September 29,
 
   
2013
   
2012
   
2013
   
2012
 
  Gross Margin
    6.6 %     12.9 %     7.4 %     12.8 %
                                 
  Selling
    2.6 %     2.8 %     3.0 %     3.0 %
  Administrative
    2.1 %     2.4 %     2.6 %     2.7 %
  Plant Restructuring
    0.1 %     - %     0.1 %     - %
  Other Operating Income
    (0.2 ) %     (0.1 ) %     (0.1 ) %     (0.1 ) %
                                 
  Operating Income
    2.0 %     7.8 %     1.8 %     7.2 %
                                 
  Interest Expense, Net
    0.5 %     0.6 %     0.6 %     0.6 %
                                 

For the three month period ended September 28, 2013, the gross margin decreased from the prior year quarter from 12.9% to 6.6% due primarily to a LIFO charge in the current year as compared to a credit in prior year and lower net selling prices (after considering promotions) compared to prior year.  The LIFO charge for the second quarter ended September 28, 2013 was $8,637,000 as compared to a credit of $3,706,000 for the second quarter ended September 29, 2012 and reflects the impact on the quarter of increased inflationary cost increases expected in fiscal 2014, compared to fiscal 2013.  On an after-tax basis, LIFO net earnings decreased by $5,614,000 for the quarter ended September 28, 2013 and increased LIFO net earnings by $2,409,000 for the quarter ended September 29, 2012, based on the statutory federal income tax rate.

For the six month period ended September 28, 2013, the gross margin decreased from the prior year period from 12.8% to 7.4% due primarily to a LIFO charge in the current year as compared to a credit in prior year and lower net selling prices (after considering promotions) compared to the prior year.  The LIFO charge for the six months ended September 28, 2013 was $14,435,000 as compared to a credit of $2,444,000 for the six months ended September 29, 2012 and reflects the impact on the six months of increased inflationary cost increases expected in fiscal 2014, compared to fiscal 2013.  On an after-tax basis, LIFO decreased net earnings by $9,383,000 for the six months ended September 28, 2013 and increased net earnings by $1,589,000 for the six months ended September 29, 2012, based on the statutory federal income tax rate.

12
 

 
For the three month period ended September 28, 2013, selling costs as a percentage of sales decreased from 2.8% to 2.6% for the same period in the prior year.  For the six month period ended September 29, 2012, selling costs as a percentage of sales were unchanged at 3.0%. The three month decrease is primarily a result of the Green Giant Alliance sales increase, which don't incur selling costs.

For the three month period ended September 28, 2013, administrative expense as a percentage of sales decreased from 2.4% to 2.1% due primarily to sales increasing at a higher rate than these expenses in the current period.  For the six month period ended September 28, 2013, administrative expense as a percentage of sales decreased from 2.7% to 2.6% due primarily to sales increasing at a higher rate than these expenses in the current period.
 
 
During the six months ended September 28, 2013, the Company sold some unused fixed assets which resulted in a gain of $869,000.  During the six months ended September 29, 2012, the Company sold some unused fixed assets which resulted in a gain of $292,000. These gains are included in other operating income in the Unaudited Condensed Consolidated Statements of Net Earnings.
 
 
Interest expense for the second quarter ended September 28, 2013, as a percentage of sales, decreased from 0.6% to 0.5% from the second quarter ended September 29, 2012.  For the six month period ended September 28, 2013, interest expense as a percentage of sales were unchanged at 0.6%.The decrease for the second quarter was due to higher sales in the current year period compared to the prior year.

Income Taxes:

The effective tax rate was (10.5)% and 36.7% for the six month periods ended September 28, 2013 and September 29, 2012, respectively.  Of the 47.2 percentage point decrease in the effective tax rate for this period, the major contributors to this decrease are the following items, 1) with lower pre-tax earnings in the current year due to a large LIFO charge in the current year vs. a credit in the prior year, permanent items have a larger impact on the effective rate, 2) the manufacturers deduction is a higher percentage of current year earnings than the prior year, 3) the reversal of certain tax reserves related to New York State Investment Tax Credit and 4) research and experimentation credit, fuel tax credit and other miscellaneous permanent items.

Earnings per Share:

Basic earnings per share were $0.59 and $1.23 for the three months ended September 28, 2013 and September 29, 2012, respectively.  Diluted earnings per share were $0.59 and $1.22 for the three months ended September 28, 2013 and September 29, 2012, respectively.  Basic earnings per share were $0.71 and $1.90 for the six months ended September 28, 2013 and September 29, 2012, respectively.  Diluted earnings per share were $0.71 and $1.89 for the six months ended September 28, 2013 and September 29, 2012, respectively.  For details of the calculation of these amounts, refer to footnote 10 of the Notes to Condensed Consolidated Financial Statements.


13
 

 
Liquidity and Capital Resources:

The financial condition of the Company is summarized in the following table and explanatory review:

   
September 28,
   
September 29,
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Working capital:
                       
  Balance
  $ 551,349     $ 475,839     $ 446,899     $ 425,082  
  Change during quarter
    138,202       90,929                  
Long-term debt, less current portion
    322,959       276,530       226,873       226,873  
Total stockholders' equity per equivalent
                               
      common share (see Note)
    33.55       31.09       29.14       29.15  
Stockholders' equity per common share
    34.36       31.88       29.81       29.81  
Current ratio
    2.49       2.25       3.72       4.60  

Note: Equivalent common shares are either common shares or, for convertible preferred shares, the number of common shares that the preferred shares are convertible into.  See Note 8 of the Notes to Consolidated Financial Statements of the Company’s 2013 Annual Report on Form 10-K for conversion details.

As shown in the Condensed Consolidated Statements of Cash Flows, net cash used in operating activities was $47,425,000 in the first six months of fiscal 2014, compared to $46,133,000 in the first six months of fiscal 2013.  The $1,292,000 increase in cash used is primarily attributable to a $6,755,000 increase in cash used by accounts receivable, a $3,111,000 increase in cash used by other current assets, decreased net earnings of $14,762,000 as previously discussed and a $8,902,000 increase in cash used by income taxes, partially offset by a $279,084,000 increase in inventory in the first six months of fiscal 2014 as compared to $294,465,000 increase in inventory in the first six months of fiscal 2013.

As compared to September 29, 2012, inventory increased $31,756,000 to $758,654,000 at September 28, 2013.  The components of the inventory increase reflect a $4,734,000 increase in finished goods, a $2,468,000 increase in work in process and a $24,554,000 increase in raw materials and supplies.  The finished goods increase reflects higher inventory quantities due to the timing of the fiscal year 2014 pack versus fiscal year 2013 pack partially offset by increased sales volume as compared to the prior year.  The raw materials and supplies increase is primarily due to an increase in cans and raw steel quantities compared to the prior year.  FIFO based inventory costs exceeded LIFO based inventory costs by $147,449,000 as of the end of the second quarter of 2014 as compared to $134,783,000 as of the end of the second quarter of 2013.

Cash used in investing activities was $7,442,000 in the first six months of fiscal 2014 compared to cash used in investing activities of $2,011,000 in the first six months of fiscal 2013.  Additions to property, plant and equipment were $8,412,000 in the first six months of fiscal 2014 as compared to $12,317,000 in first six months of fiscal 2013.  Last year in the first six months of fiscal 2013,  the Loan Receivable of $10,000,000 was collected.

Cash provided by financing activities was $58,531,000 in the first six months of fiscal 2014, which included borrowings of $261,823,000 and the repayment of $206,949,000 of long-term debt, principally consisting of borrowing and repayment on the revolving credit facility (“Revolver”).  On August 1, 2013, the Company paid the final $36,742,000 principal payment due on a secured note payable to John Hancock Life Insurance Company.  The Company used borrowings under the Revolver to pay off the note.  Other than borrowings under the Revolver, there was no new long-term debt during the first six months of fiscal 2014.  During the six months ended September 28, 2013, the Company repurchased $27,865,000 of its Class A Common Stock as treasury stock.

14
 

 
Available borrowings on the Revolver total $300,000,000 from April through July and $400,000,000 from August through March with a maturity date of July 20, 2016.    The interest rate on the Revolver is based on LIBOR plus an applicable margin based on excess availability and the Company's fixed charge coverage ratio.  As of September 28, 2013, the interest rate was approximately 1.68% on a balance of $282,000,000.  We believe that cash flows from operations, availability under our Revolver and other financing sources will provide adequate funds for our working capital needs, planned capital expenditures, and debt obligations for at least the next 12 months.

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

New Accounting Standards

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

Seasonality

The Company's revenues are typically higher in the second and third fiscal quarters. This is due in part because the Company sells, on a bill and hold basis, Green Giant canned and frozen vegetables to GMOL at the end of each pack cycle, which typically occurs during these quarters.  GMOL buys the product from the Company at cost plus a specified fee for each equivalent case.  See the Critical Accounting Policies section below for further details.  The Company’s non-Green Giant sales also exhibit seasonality with the third fiscal quarter generating the highest retail sales due to holidays that occur during that quarter.

Forward-Looking Information

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

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

15
 

 
·  
general economic and business conditions;
·  
cost and availability of commodities and other raw materials such as vegetables, steel and packaging materials;
·  
transportation costs;
·  
climate and weather affecting growing conditions and crop yields;
·  
the availability of financing;
·  
leverage and the Company’s ability to service and reduce its debt;
·  
foreign currency exchange and interest rate fluctuations;
·  
effectiveness of the Company’s marketing and trade promotion programs;
·  
changing consumer preferences;
·  
competition;
·  
product liability claims;
·  
the loss of significant customers or a substantial reduction in orders from these customers;
·  
changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including environmental and health and safety regulations; and
·  
other risks detailed from time to time in the reports filed by the Company with the SEC.

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

Critical Accounting Policies

In the six months ended September 28, 2013, the Company sold $52,199,000 of Green Giant finished goods inventory to General Mills Operations, LLC (“GMOL”) for cash, on a bill and hold basis, as compared to $38,593,000 for the six months ended September 29, 2012.  Under the terms of the bill and hold agreement, title to the specified inventory transferred to GMOL.  The Company believes it has met the criteria required for bill and hold treatment.

Trade promotions are an important component of the sales and marketing of the Company’s branded products, and are critical to the support of the business. Trade promotion costs, which are recorded as a reduction of net sales, include amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, amounts paid to obtain favorable display positions in retailers’ stores, and amounts paid to retailers for shelf space in retail stores. Accruals for trade promotions are recorded primarily at the time of sale of product to the retailer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a retailer from amounts otherwise due to us. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by retailers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time.

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

16

 
 

 

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

In the ordinary course of business, the Company is exposed to various market risk factors, including changes in general economic conditions, competition and raw material pricing and availability.  In addition, the Company is exposed to fluctuations in interest rates, primarily related to its revolving credit facility.  To manage interest rate risk, the Company uses both fixed and variable interest rate debt.  There have been no material changes to the Company’s exposure to market risk since March 31, 2013.

17

 
 

 

ITEM 4 Controls and Procedures

The Company maintains a system of internal and disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported on a timely basis. The Company’s Board of Directors, operating through its Audit Committee, which is composed entirely of independent outside directors, provides oversight to the financial reporting process.

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of September 28, 2013, our disclosure controls and procedures were effective.  The Company continues to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.

There have been no changes during the period covered by this report to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

18

 
 

 
PART II - OTHER INFORMATION

Item 1.                       Legal Proceedings

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

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, 2013.

Item 2.
  Unregistered Sales of Equity Securities and Use of Proceeds

 
Total Number of
 
Average Price Paid
Total Number
Maximum Number
 
Shares Purchased (1)
 
per Share
of Shares
(or Approximate
             
Purchased as
Dollar Value) or
             
Part of Publicly
Shares that May
             
Announced
Yet Be Purchased
 
Class A
Class B
Class A
 
Class B
Plans or
Under the Plans or
Period
Common
Common
Common
 
Common
Programs
Programs
7/01/13 –
 8,200
-
$
35.22
$
-
-
 
7/31/13
             
8/01/13 –
-
-
$
-
$
-
-
 
9/01/13 –
-
-
$
-
$
-
-
 
9/30/13
               
Total
 8,200
-
$
35.22
$
-
-
346,121

(1)  8,200 shares were purchased 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 Upon Senior Securities

None.

Item 4.                          Mine Safety Disclosures

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 Timothy J. Benjamin 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)
101
The following materials from Seneca Foods Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2013, formatted in XBRL (eXtensible Business Reporting Language):  (i) consolidated balance sheets, (ii) consolidated statements of net earnings, (iii) condensed consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, (v) consolidated statement of stockholders’ equity and (vi) the notes to the consolidated financial statements.**

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**  Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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PART II - OTHER INFORMATION

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                              
October 23, 2013
Kraig H. Kayser
President and
Chief Executive Officer


/s/Timothy J. Benjamin                                           
October 23, 2013
Timothy J. Benjamin
Chief Financial Officer


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