Form 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended December 31, 2005 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 Check mark indicates whether Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------- Indicate by check mark whether the Company is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ------ ------- Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------ ------- The number of shares outstanding of each of the issuer's classes of common stock at the latest practical date are: Class Shares Outstanding at January 31, 2006 -------------------------------------------- Common Stock Class A, $.25 Par 4,069,009 Common Stock Class B, $.25 Par 2,760,905
<TABLE> PART I ITEM 1 FINANCIAL INFORMATION SENECA FOODS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Data) <CAPTION> Unaudited 12/31/05 3/31/05 -------- ------- <S> <C> <C> ASSETS Current Assets: Cash and Cash Equivalents $ 4,612 $ 5,179 Accounts Receivable, Net 49,171 43,664 Inventories: Finished Goods 312,674 209,874 Work in Process 34,400 17,168 Raw Materials 33,354 67,428 ------- ------- 380,428 294,470 Off-Season Reserve (Note 2) (56,218) - Deferred Income Tax Asset, Net 4,887 5,669 Assets Held For Sale 634 1,451 Refundable Income Taxes - 1,199 Other Current Assets 2,231 7,192 -------------- --------------- Total Current Assets 385,745 358,824 Property, Plant and Equipment, Net 151,679 163,290 Other Assets 5,526 2,381 -------------- --------------- Total Assets $542,950 $524,495 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable $ 79,491 $ 60,733 Accounts Payable 41,599 38,719 Accrued Expenses 34,334 38,271 Income Taxes 495 - Current Portion of Long-Term Debt and Capital Lease Obligations 11,240 15,671 --------------- --------------- Total Current Liabilities 167,159 153,394 Long-Term Debt 140,556 148,318 Capital Lease Obligations 3,944 5,807 Deferred Income Taxes 8,437 11,125 Other Long-Term Liabilities 14,025 10,042 --------------- --------------- Total Liabilities 334,121 328,686 --------------- --------------- Commitments 10% Preferred Stock, Series A, Voting, Cumulative, Convertible, $.025 Par Value Per Share 102 102 10% Preferred Stock, Series B, Voting, Cumulative, Convertible, $.025 Par Value Per Share 100 100 6% Preferred Stock, Voting, Cumulative, $.25 Par Value 50 50 Convertible, Participating Preferred Stock, $12.00 Stated Value Per Share 41,071 41,083 Convertible, Participating Preferred Stock, $15.50 Stated Value Per Share 13,229 15,000 Common Stock $.25 Par Value Per Share 2,889 2,859 Paid in Capital 17,746 15,992 Retained Earnings 133,642 120,623 --------------- --------------- Stockholders' Equity 208,829 195,809 --------------- --------------- Total Liabilities and Stockholders' Equity $542,950 $524,495 ======== ======== <FN> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. </FN> </TABLE>
<TABLE> SENECA FOODS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS (Unaudited) (In Thousands, Except Per Share Data) <CAPTION> Three Months Ended ------------------ 12/31/05 12/25/04 -------- -------- <S> <C> <C> Net Sales $ 316,253 $ 307,966 Costs and Expenses: Cost of Product Sold 292,858 291,385 Selling, General, and Administrative 9,120 9,038 Plant Restructuring 290 5,804 ------------------ ----------------- Total Costs and Expenses 302,268 306,227 ------------------ ----------------- Operating Income 13,985 1,739 Other Income (net) (563) - Interest Expense (net) 3,918 4,219 ------------------ ----------------- Earnings (Loss) Before Income Taxes 10,630 (2,480) Income Taxes 3,694 (967) ------------------ ----------------- Net Earnings(Loss) $ 6,936 $ (1,513) ================= ================ Earnings Applicable to Common Stock $ 4,254 $ (913) ================= ================ Basic Earnings (Loss) per Common Share $ .62 $ (.14) ================= ================ Diluted Earnings (Loss) per Common Share $ .62 $ (.14) ================= ================ <FN> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. </FN> </TABLE>
<TABLE> SENECA FOODS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS (Unaudited) (In Thousands, Except Per Share Data) Nine Months Ended ----------------- 12/31/05 12/25/04 -------- -------- <S> <C> <C> Net Sales $ 717,017 $ 693,019 Costs and Expenses: Cost of Product Sold 657,411 644,745 Selling, General, and Administrative 24,590 24,016 Plant Restructuring 1,751 6,423 ------------------ ----------------- Total Costs and Expenses 683,752 675,184 ------------------ ----------------- Operating Income 33,265 17,835 Other Expense (Income) (net) 842 (3,376) Interest Expense (net) 11,847 12,303 ------------------ ----------------- Earnings Before Income Taxes 20,576 8,908 Income Taxes 7,533 3,474 ------------------ ----------------- Net Earnings $ 13,043 $ 5,434 ================= ================ Earnings Applicable to Common Stock $ 7,966 $ 3,269 ================= ================ Basic Earnings per Common Share $ 1.17 $ .49 ================= ================ Diluted Earnings per Common Share $ 1.16 $ .48 ================= ================ <FN> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. </FN> </TABLE>
<TABLE> SENECA FOODS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands) <CAPTION> Nine Months Ended ----------------- 12/31/05 12/25/04 -------- -------- <S> <C> <C> Cash Flows From Operating Activities: Net Earnings $ 13,043 $ 5,434 Adjustments to Reconcile Net Earnings to Net Cash Provided by Operations: Depreciation and Amortization 17,946 21,551 Gain on the Sale of Assets (990) (3,904) Plant Restructuring Non-Cash Charges - 3,798 Other Non-Cash Expenses 1,832 528 Deferred Income Taxes (1,906) (244) Changes in Working Capital: Accounts Receivable (5,144) (1,346) Inventories (85,958) (111,388) Off-Season Reserve 56,218 63,443 Other Current Assets 4,961 7,455 Refundable Income Taxes 1,694 (1,187) Accounts Payable, Accrued Expenses, and Other Liabilities (305) 30,043 ------------------ ----------------- Net Cash Provided by Operations 1,391 14,183 ------------------ ----------------- Cash Flows From Investing Activities: Additions to Property, Plant, and Equipment (8,225) (13,625) Proceeds from the Sale of Assets 1,247 5,824 ------------------ ----------------- Net Cash Used in Investing Activities (6,978) (7,801) ------------------ ----------------- Cash Flows From Financing Activities: Borrowings on Notes Payable 304,409 247,374 Payments on Notes Payable (285,651) (234,720) Payments of Long-Term Debt and Capital Lease Obligations (14,139) (8,471) Other Assets 330 912 Proceeds from Issuance of Long-Term Debt 83 8,959 Dividends Paid (12) (12) ------------------ ----------------- Net Cash Provided by Financing Activities 5,020 14,042 ------------------ ----------------- Net (Decrease) Increase in Cash and Cash Equivalents (567) 20,424 Cash and Cash Equivalents, Beginning of Period 5,179 4,570 ------------------ ----------------- Cash and Cash Equivalents, End of Period $ 4,612 $ 24,994 ================== ================== Cash Paid During the Periods For: Interest $ 12,114 $ 11,659 Income Taxes 7,745 4,882 <FN> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. </FN> </TABLE>
SENECA FOODS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In Thousands) December 31, 2005 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 the Company as of December 31, 2005 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, 2005 balance sheet was derived from the audited consolidated financial statements. The results of operations for the three and nine month periods ended December 31, 2005 are not necessarily indicative of the results to be expected for the full year. In the nine months ended December 31, 2005, the Company sold for cash, on a bill and hold basis, $186,451,000 ($175,366,000 for the nine-months ended December 25, 2004) of Green Giant finished goods inventory to General Mills Operations, Inc. ("GMOI"). At the time of the sale of the Green Giant vegetables to GMOI, title to the specified inventory transferred to GMOI. In addition, the aforementioned finished goods inventory was complete, ready for shipment and segregated from the Company's other finished goods inventory. Further, the Company had performed all of its obligations with respect to the sale of the specified Green Giant finished goods inventory. In the six months ended October 1, 2005, the Company recorded a change in estimate related to the reduction in estimated exposure to health care expenses which increased Earnings Before Income Taxes and Net Earnings by $1,276,000 and $784,000, respectively. The accounting policies followed by the Company are set forth in Note 1 to the Company's Consolidated Financial Statements in the 2005 Seneca Foods Corporation Annual Report and Form 10-K. Other footnote disclosures normally included in annual financial statements prepared in accordance with U. S. generally accepted accounting principles have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company's 2005 Annual Report and Form 10-K. 2. The seasonal nature of the Company's food processing business results in a timing difference between expenses (primarily overhead expenses) incurred and absorbed into product cost. All Off-Season Reserve balances, which essentially represent a contra-inventory account, are zero at fiscal year end. Depending on the time of year, Off-Season Reserve is either the excess of absorbed expenses over incurred expenses to date or the excess of incurred expenses over absorbed expenses to date. Other than at the end of the first and fourth quarter of each year, absorbed expenses exceed incurred expenses due to timing of production. 3. Comprehensive income equaled Net Earnings for the three months ended December 31, 2005 and December 25, 2004 and the nine months ended December 31, 2005. Comprehensive income consisted of Net Earnings and Net Unrealized Gains on Securities classified as available-for-sale for the three months ended June 26, 2004 therefore resulting in comprehensive income of $3,110,000 for the nine months ened December 25, 2004. The securities were sold during the quarter ended June 26, 2004. 4. In November 2004, the FASB (Financial Accounting Standards Board) issued Statement of Financial Accounting Standards No. 151, Inventory Costs - An Amendment of ARB No. 43, Chapter 4. This statement amends ARB No. 43, Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. Additionally, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company is required to adopt SFAS 151 effective April 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated financial statements and the impact has not yet been determined. 5. During the quarter ended October 1, 2005, as of result of a detailed review of property, plant and equipment at each plant, the Company recorded a non-cash loss on disposal of property and equipment of $1,832,000 which was included Other Expense (Income) (net) in the Unaudited Condensed Consolidated Statements of Net Earnings. 6. During the quarter ended October 1, 2005, the Company announced the phase out of the labeling operation within the leased distribution facility in Salem, Oregon which resulted in a restructuring charge of $1,461,000. During the quarter ended December 31, 2005, the Company recorded an additional restructuring charge of $290,000 which represented a planned further reduction in utilization of the facility. The total restructuring charge of $1,751,000 consisted of a provision for future lease payments of $1,306,000, a cash severance charge of $368,000, and a non-cash impairment charge of $77,000. With the closure of the Walla Walla facility in the fall of 2004, the Company's labeling and warehousing requirements at the Salem location were dramatically reduced. The Company intends to use a portion of the facility for warehousing and will attempt to sublease the remaining unutilized portion of the facility until the February 2008 expiration of the lease. 7. During the quarter ended December 31, 2005, the Company sold a warehouse location in Oregon, which resulted in cash proceeds of $569,000 and a pre-tax gain of $563,000. This gain was included in Other Income. 8. During the quarter ended December 25, 2004, the Company announced the closure of a processing facility in Walla Walla, Washington. This facility was sold during the quarter ended July 2, 2005 for $514,000 in cash and a $3,550,000 note which carries an interest rate of 8% and is due in full May 14, 2007. This Note is secured by a mortgage on the property. The Company accounted for the sale under the installment method. During the quarter ended July 2, 2005, $427,000 of the gain was included in Other Income and an additional $2,800,000 of the gain on this sale was deferred in Other Long-Term Liabilities. 9. The following table summarizes the restructuring and related asset impairment charges recorded and the accruals established: <TABLE> <CAPTION> Long-Lived Severance Asset Charges Other Costs Total --------- ------------- ----------- ----- <S> <C> <C> <C> <C> Total expected restructuring charge $ 1,094 $5,037 $3,298 $9,429 ============================================================================= Balance March 31, 2005 $ 256 $1,599 $1,992 $3,847 Second quarter charge 368 77 1,016 1,461 Third quarter charge - - 290 290 Disposal of assets - (1,676) - (1,676) Cash payments (390) - (311) (701) ----------------------------------------------------------------------------- Balance December 31, 2005 $ 234 $ - $2,987 $3,221 ============================================================================= Total costs incurred to date $ 860 $5,037 $ 311 $6,208 ============================================================================== </TABLE> The restructuring costs above relate to the phase out of the labeling operation of the leased distribution facility in Salem, Oregon, the closure of corn plants in Wisconsin and Washington and a green bean plant in upstate New York plus the removal of canned meat production from a plant in Idaho. The corn plant in Washington has been sold. The restructuring is complete in the Idaho plant and the New York plant. The Wisconsin plant is closed and is expected to be sold within a year. The remaining severance costs are expected to be paid prior to March 31, 2006. The other costs relate to outstanding lease payments which will be paid over the remaining lives of the corresponding lease terms, which are up to six years. 10. As previously reported, during the quarter ended June 26, 2004, the Company sold its investment in the Class B Common Stock of Moog Inc. for $4,578,000 and recorded a gain of $3,862,000 before income taxes, which is included in Other Expense (Income) (net) in the Unaudited Condensed Consolidated Statements of Net Earnings. 11. Earnings per share (In thousands, except per share data): Three Months Ended 12/31/05 12/25/04 -------- -------- Basic Net Earnings (Loss) Applicable to Common Stock: Net Earnings (Loss) $6,936 $(1,513) Deduct Preferred Cash Dividends 6 - ------------------- Undistributed Earnings (Loss) $ 6,930 $(1,513) Earnings (Loss) Allocated to Participating Preferred 2,676 (600) ------------------- Earnings (Loss) Allocated to Common Shareholders $ 4,254 $ (913) =================== Weighted Average Shares Outstanding for Basic Earnings (Loss) Per Common Share 6,829 6,714 =================== Basic Earnings (Loss) Per Common Share $ .62 $ (.14) =================== Diluted Net Earnings (Loss) Applicable to Common Stock: Net Earnings (Loss) Applicable to Common Stock $4,254 $(913) Add Back Preferred Cash Dividends related to convertible preferred stock 5 - ------------------- Net Earnings (Loss) Applicable to Common Stock Diluted $4,259 $(913) =================== Weighted Average Shares Outstanding for Basic Earnings (Loss) Per Common Share 6,829 6,714 Effect of Convertible Preferred Stock 67 - ------------------- Weighted Average Shares Outstanding for Diluted Earnings (Loss) Per Common Share 6,896 6,714 =================== Diluted Earnings (Loss) Per Common Share $ .62 $ (.14) =================== Nine Months Ended 12/31/05 12/25/04 -------- -------- Basic Net Earnings Applicable to Common Stock: Net Earnings $13,043 $5,434 Deduct Preferred Cash Dividends 17 17 ------------------- Undistributed Earnings $13,026 $5,417 Earnings allocated to participating preferred 5,060 2,148 ------------------- Earnings allocated to common shareholders $7,966 $3,269 =================== Weighted Average Shares Outstanding for Basic Earnings Per Common Share 6,804 6,714 =================== Basic Earnings Per Common Share $ 1.17 $ .49 =================== Diluted Net Earnings Applicable to Common Stock: Net Earnings Applicable to Common Stock $7,966 $3,269 Add Back Preferred Cash Dividends related to convertible preferred stock 10 10 ------------------- Net Earnings Applicable to Common Stock Diluted $7,976 $3,279 =================== Weighted Average Shares Outstanding for Basic Earnings Per Common Share 6,804 6,714 Effect of Convertible Preferred Stock 67 67 ------------------- Weighted Average Shares Outstanding for Diluted Earnings Per Common Share 6,871 6,781 =================== Diluted Earnings Per Common Share $ 1.16 $ .48 =================== 10. The net periodic benefit cost for pension plans consist of: Nine Months Ended 12/31/05 12/25/04 -------- -------- Service Cost $ 2,679 $ 2,531 Interest Cost 3,220 2,957 Expected Return on Plan Assets (4,132) (3,896) Amortization of Transition Asset (207) (207) ------------------ Net Periodic Benefit Cost $1,560 $1,385 ================== During the Nine Months Ended December 31, 2005, the Company made no contributions to its defined benefit pension plans. No pension contributions are required during 2006. 11. During June 2005, there were 114,242 shares of Participating Convertible Preferred Stock converted to Class A Common Stock.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION RESULTS AND OF OPERATIONS December 31, 2005 Seneca Foods Corporation is primarily a vegetable processing company with manufacturing facilities located throughout the United States. Its products are sold under the Libby's(R), Aunt Nellie's Farm Kitchen(R), Stokely's(R), READ(R), and Seneca(R) labels as well as through the private label and industrial markets. In addition, under an alliance with General Mills Operations, Inc. (GMOI), a successor to the Pillsbury Company and a subsidiary of General Mills, Inc., Seneca produces canned and frozen vegetables, which are sold by General Mills Operations, Inc. under the Green Giant(R) label. The Company's raw product is harvested mainly between May through October. The Company has experienced favorable growing conditions this summer and early fall reflecting a combination of adequate heat units and moisture. These beneficial growing conditions favorably impacted crop yields and plant recovery rates, and further resulted in favorable manufacturing variances. During fiscal 2005, the Company implemented a restructuring program which principally involved the closure of three processing facilities, including a green bean plant in upstate New York and corn plants in Wisconsin and Washington. The Company believes that 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 Chiquita Processed Foods and decline in GMOI volume requirements; and (3) mitigate the effect of inflationary pressures on the Company's raw material inputs such as steel and fuel. During the quarter ended October 1, 2005, the Company announced the phase out of the labeling operation within the leased distribution facility in Salem, Oregon which resulted in a restructuring charge of $1,461,000. During the quarter ended December 31, 2005, the Company recorded an additional restructuring charge of $290,000 which represented a planned further reduction in utilization of the facility. The total restructuring charge of $1,751,000 consisted of a provision for future lease payments of $1,306,000, a cash severance charge of $368,000, and a non-cash impairment charge of $77,000. With the closure of the Walla Walla facility in the fall of 2004, the Company's labeling and warehousing requirements at the Salem location were dramatically reduced. The Company intends to use a portion of the facility for warehousing and will attempt to sublease the remaining unutilized portion of the facility until the February 2008 expiration of the lease. During the quarter ended December 31, 2005, the Company sold a warehouse location in Oregon, which resulted in cash proceeds of $569,000 and a pre-tax gain of $563,000. This gain was included in Other Income. During the quarter ended December 25, 2004, the Company announced the closure of a processing facility in Walla Walla, Washington. This facility was sold during the quarter ended July 2, 2005 for $514,000 in cash and a $3,550,000 note which carries an interest rate of 8% and is due in full May 14, 2007. This Note is secured by a mortgage on the property. The Company accounted for the sale under the installment method. During the quarter ended July 2, 2005, $427,000 of the gain was included in Other Income and an additional $2,800,000 of the gain on this sale was deferred in Other Long-Term Liabilities. The fiscal 2006 asparagus harvest, completed in the first quarter, represented a partial pack as GMOI is in process of moving the production of asparagus offshore from the Dayton, Washington manufacturing facility. As fiscal 2006 represents the final year of operation for the Dayton, Washington facility, the Company and GMOI have negotiated a definitive agreement related to the pending closure of this facility. Under the terms of the agreement, any costs incurred by the Company related to the asparagus production prior to March 31, 2006 will be paid by GMOI. The Company shall retain ownership of the real estate associated with the Dayton facility. In addition, the manufacturing equipment of the Dayton facility shall either be conveyed to GMOI, redeployed by the Company, or salvaged. GMOI shall reduce the principal balance of the $43.1 million secured nonrecourse subordinated promissory note by $0.6 million, which represents the net book value of the equipment to be conveyed to GMOI or salvaged. Results of Operations: Sales: Third quarter results include Net Sales of $316.3 million, which represent a 2.7% increase from the third quarter of fiscal 2005. This sales increase primarily reflects an increase in canned vegetable sales of $8.1 million from growth in retail sales. Nine months ended December 31, 2005 include Net Sales of $717.0 million, which represent an increase of $24.0 million, or 3.5%, compared to the prior year. The sales increase reflects an increase in Green Giant Alliance sales of $15.7 million associated with favorable growing conditions together with a $5.1 million increase in Fruit and Chip Product sales reflecting increased co-pack potato chip volume associated with improved market conditions. The following table presents the changes by business: Three Months Ended Nine Months Ended 12/31/05 12/25/04 12/31/05 12/25/04 -------- -------- -------- -------- Canned Vegetables $181.6 $173.5 $434.8 $434.1 Green Giant Alliance 117.4 119.9 235.0 219.3 Frozen Vegetables 8.1 7.2 21.0 19.8 Fruit and Chip Products 5.2 3.3 16.5 11.4 Other 4.0 4.1 9.7 8.4 -------------------------------------------- $316.3 $308.0 $717.0 $693.0 ============================================
Operating Income: The following table presents components of Operating Income as a percentage of Net Sales: Three Months Ended Nine Months Ended 12/31/05 12/25/04 12/31/05 12/25/04 -------- -------- -------- -------- Gross Margin 7.5% 5.4% 8.2% 7.0% Selling 2.5 2.5 2.8 3.0 Plant Restructuring 0.1 1.9 0.2 0.9 Administrative 0.5 0.4 0.6 0.5 --------------------------------------------- Operating Income 4.4% 0.6% 4.6% 2.6% ============================================== For the three month period ended December 31, 2005, the operating income margin increased from 0.6% to 4.4% reflecting a combination of improved margins in the canned vegetable retail businesses as compared to the prior year, and the continuing improved profitability in Fruit and Chip Products resulting from strong volume increases in our co-pack potato chip business. The prior year was negatively impacted by a $5.8 million restructuring charge related to a non-cash impairment charge and severance expenses related to the closure of processing facilities in Washington and New York. For the nine month period ended December 31, 2005, the operating income margin increased from 2.6% to 4.6% primarily reflecting improved margins in the canned vegetable retail and contract packaging businesses and improved profitability in Fruit and Chip Products. Income Taxes: The effective tax rate was 36.6% and 39.0% for the nine month periods ended December 31, 2005 and December 25, 2004, respectively. The reduction in the rate reflects the impact of the first phase of the Manufacturers Credit on the Company's effective tax rate. The American Jobs Creation Act of 2004 created the Manufacturers Credit which is commonly referred to as Section 199. Under this new law, once fully phased in, manufacturers will receive a nine percent tax credit for certain qualifying production activities income for the taxable year. This credit is limited to 50 percent of W-2 wages for the taxable year. Earnings Per Share: Basic and diluted earnings (loss) per share were $.62 and $(.14) for the three months ended December 31, 2005 and December 25, 2004, respectively. Basic earnings per share were $1.17 and $.49 for the nine month periods ended December 31, 2005 and December 25, 2004, respectively. Diluted earnings per share were $1.16 and $.48 for the nine month periods ended December 31, 2005 and December 25, 2004, respectively. For details of the calculation of these amounts, refer to footnote 11 of the Notes to Condensed Consolidated Financial Statements. Liquidity and Capital Resources: The financial condition of the Company is summarized in the following table and explanatory review (In Thousands): <TABLE> <CAPTION> December March -------- ----- 2005 2004 2005 2004 ---- ---- ---- ---- <S> <C> <C> <C> <C> Working Capital: Balance $218,586 $197,108 $205,430 $187,764 Change in Quarter 2,789 (804) - - Notes Payable 79,491 71,049 60,733 58,395 Long-Term Debt 144,500 155,417 154,125 160,987 Current Ratio 2.31:1 1.94:1 2.34:1 2.18:1 </TABLE> As shown in the Condensed Consolidated Statements of Cash Flows, Cash Provided by Operating Activities was $1,391,000 in the first three quarters of 2006, compared to $14,183,000 in the first three quarters of 2005. The $12,792,000 decrease in cash generation is primarily a result of lower accounts payable, accrued expenses and other liabilities, which decreased $30.3 million and primarily reflects a timing difference in the fiscal quarter end date (December 31 vs. December 25 last year). This factor was partially offset by improved operating earnings of $33.3 million in the first three quarters of 2006 as compared to $17.8 million in the first three quarters of 2005. In addition, as compared to December 25, 2004, Inventory increased $6.0 million (net of the Off Season Reserve decrease, which is contra inventory, of $7.2 million). The Inventory increase primarily reflects a $10.4 million increase (net of the Off Season Reserve increase) in Finished Goods, a $6.5 million decrease in Work in Process and $2.1 million increase in Raw Materials. The Finished Goods increase reflects a larger harvest this year. The Work in Process decrease is due to an $8.9 million reduction in frozen vegetables. Cash Used in Investing Activities was $6,978,000 in the first three quarters of 2006 compared to $7,801,000 in the first three quarters of 2005. Additions to Property, Plant and Equipment were $8,225,000 in fiscal 2006 as compared to $13,625,000 in fiscal 2005. The additions in fiscal 2005 included warehouse expansion projects totaling $7,186,000. In 2006, there were no significant capital projects. As previously reported, during the quarter ended June 26, 2004, the Company sold its investment in the Class B Common Stock of Moog Inc. for $4,578,000 and recorded a gain of $3,862,000 before income taxes, which is included in Other Income (net) in the Unaudited Condensed Consolidated Statements of Net Earnings. Cash Provided by Financing Activities was $5,020,000 in the first three quarters of 2006, principally consisting of the issuance of $18,758,000 in Notes Payable partially offset by the repayment of $14,139,000 in Long-Term Debt. Cash Provided by Financing Activities of $14,042,000 in the first three quarters of 2005 which included $8,959,000 in proceeds from Long-Term Debt. On June 24, 2004, the Company issued a mortgage payable to GE Capital for $8 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. In connection with the May 27, 2003 acquisition of Chiquita Processed Foods, the Company entered into a $200 million revolving credit facility (subsequently reduced to $125 million at the request of the Company) with a five-year term to finance its seasonal working capital requirements. During the first quarter of 2006, the Company and its lenders extended the term of the Revolver for an additional year with a final maturity date of May 27, 2009. Subsequent to the end of the third quarter of 2006, the Company provided its bank lenders with notice to reduce the Revolver from $125 million to $100 million. We believe that cash flows from operations and availability under our Revolver will provide adequate funds for our working capital needs, planned capital expenditures, and debt service obligations for at least the next 12 months. The Company's credit facilities contain various financial covenants. At December 31, 2005, the Company was in compliance with all such financial covenants. Seasonality The Company's revenues typically have been higher in the second and third quarters, primarily because the Company sells, on a bill and hold basis, Green Giant canned and frozen vegetables to General Mills Operations, Inc. at the end of each pack cycle. The two largest commodities are peas and corn, which are sold in the second and third quarters, respectively. See the Critical Accounting Policies section below for further details. In addition, our non Green Giant sales have exhibited seasonality with the third quarter generating the highest sales. This quarter reflects increased sales of the Company's products during the holiday period. Forward-Looking Statements Statements that are not historical facts, including statements about management's beliefs or expectations, are forward-looking statements as defined in the Private Securities Litigation Reform Act (PSLRA) of 1995. The Company wishes to take advantage of the "safe harbor" provisions of the PSLRA by cautioning that numerous important factors which involve risks and uncertainties in the future could affect the Company's actual results and could cause its actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. These factors include, among others: general economic and business conditions; cost and availability of commodities and other raw materials such as vegetables, steel and packaging materials; transportation costs; climate and weather affecting growing conditions and crop yields; leverage and ability to service and reduce the Company's debt; foreign currency exchange and interest rate fluctuations; effectiveness of marketing and trade promotion programs; changing consumer preferences; competition; product liability claims; the loss of significant customers or a substantial reduction in orders from these customers; changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including environmental regulations; and other factors discussed in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. Critical Accounting Policies In the nine months ended December 31, 2005, the Company sold for cash, on a bill and hold basis, $186,451,000 ($175,366,000 for the nine-months ended December 25, 2004) of Green Giant finished goods inventory to General Mills Operations, Inc. ("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. The seasonal nature of the Company's Food Processing business results in a timing difference between expenses (primarily overhead expenses) incurred and absorbed into product cost. All Off-Season Reserve balances, which essentially represent a contra-inventory account, are zero at fiscal year end. Depending on the time of year, Off-Season Reserve is either the excess of absorbed expenses over incurred expenses to date or the excess of incurred expenses over absorbed expenses to date. Other than at the end of the first and fourth quarter of each year, absorbed expenses exceed incurred expenses due to timing of production. Trade promotions are an important component of the sales and marketing of the Company's branded products, and are critical to the support of the business. Trade promotion costs, which are recorded as a reduction of net sales, include amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, amounts paid to obtain favorable display positions in retailers' stores, and amounts paid to retailers for shelf space in retail stores. Accruals for trade promotions are recorded primarily at the time of sale of product to the retailer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a retailer from amounts otherwise due to us. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by retailers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time. Recently issued accounting standards have been considered by the Company and are not expected to have a material effect on the Company's financial position or results of operations. ITEM 3 Quantitative and Qualitative Disclosures about Market Risk In the ordinary course of business, the Company is exposed to various market risk factors, including changes in general economic conditions, competition and raw material pricing and availability. In addition the Company is exposed to fluctuations in interest rates, primarily related to its revolving credit facility. To manage interest rate risk, the Company uses both fixed and variable interest rate debt. There have been no material changes to the Company's exposure to market risk since March 31, 2005. ITEM 4 Controls and Procedures As previously reported in our Annual Report on Form 10-K for the year ended March 31, 2005, we concluded that, as of March 31, 2005, our disclosure controls and procedures were not effective in alerting management prior to the end of a reporting period to all material information required to be included in our periodic filings with the SEC because we identified that we had a material weakness in the design of internal controls over financial reporting because we had insufficient controls to review the application of accounting principles over the determination and calculation of asset impairments in accordance with FAS 144, insufficient controls over the calculation and review of accrued promotion expense, and insufficient controls over the selection and monitoring of key assumptions supporting accounting estimates. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report. Our disclosure controls and procedures have been designed to ensure that information we are required to disclose in our reports that we file with the SEC under the Exchange Act is recorded, processed and reported on a timely basis. During the nine months ended December 31, 2005, the Company implemented controls and procedures to address the material weaknesses identified as of March 31, 2005 and believes that these controls and procedures will correct the material weaknesses discussed above. We plan to complete our testing of these control procedures during the fourth quarter to determine their effectiveness. However, pending completion of our testing of these controls, we have not concluded that our disclosure controls and procedures are effective in alerting management prior to the end of a reporting period to all material information required to be included in our periodic filings with the SEC. Except as discussed above, there were no changes in the Company's internal control over financial reporting during its most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- None. Item 2. Unregistered Sales of Equity Securites and Use of Proceeds ---------------------------------------------------------- <TABLE> <CAPTION> - ------------------- ------------------------ ----------------------- ---------------------- ---------------------- Maximum Number (or Total Number of Approximate Dollar Shares Purchased as Value) or Shares Part of Publicly that May Yet Be Total Number of Shares Average Price Paid Announced Plans or Purchased Under the Period Purchased (1) per Share Programs Plans or Programs - ------------------- ------------ ----------- ----------- ----------- ---------------------- ---------------------- Class A Class B Class A Class B Common Common Common Common - ------------------- ------------ ----------- ----------- ----------- ---------------------- ---------------------- <S> <C> <C> <C> <C> <C> <C> 10/01/05 - - - - - N/A N/A 10/31/05 - ------------------- ------------ ----------- ----------- ----------- ---------------------- ---------------------- 11/01/05 - - - - - 11/30/05 N/A N/A - ------------------- ------------ ----------- ----------- ----------- ---------------------- ---------------------- 12/01/05 - 29,500 - $20.16 - 12/30/05 N/A N/A - ------------------- ------------ ----------- ----------- ----------- ---------------------- ---------------------- Total 29,500 - $20.16 - N/A N/A - ------------------- ------------ ----------- ----------- ----------- ---------------------- ---------------------- - ---------- <FN> (1) These purchases were made in open market transactions by the trustees under the Seneca Foods Corporation Employees' Savings Plan 401(k) Retirement Savings Plan to provide employee matching contributions under the plan. </FN> </TABLE> Item 3. Defaults on Senior Securities ----------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- None. Item 6. Exhibits -------- 31.1 Certification of Kraig H. Kayser pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) 31.2 Certification of Philip G. Paras pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) 32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Seneca Foods Corporation (Company) /s/Kraig H. Kayser ------------------------ February 8, 2006 Kraig H. Kayser President and Chief Executive Officer /s/Jeffrey L. Van Riper ------------------------ February 8, 2006 Jeffrey L. Van Riper Controller and Chief Accounting Officer