Seneca Foods - 10-Q quarterly report FY2015 Q2

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   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   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  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   

The number of shares outstanding of each of the issuer's classes of common stock at the latest practical date are:

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

Subsequent Event—After the September 27, 2014 quarter end closing, the Company announced the closing of a plant in the Midwest. This plant closing will have no material impact on the financial position or results of operations of the Company.

Investment—In April 2014, the Company purchased a 50% equity interest in Truitt Bros. Inc. ("Truitt") for $16,308,000.  The purchase agreement grants the Company the right to acquire the remaining 50% ownership of Truitt in the future under certain conditions.  Truitt is known for its industry innovation related to packing shelf stable foods in trays, pouches and bowls. Truitt has two state-of-the-art plants located in Oregon and Kentucky.

Second fiscal quarter 2015 results include net sales of $312,161,000, which represents a 7.3% decrease, or $24,467,000, from the second quarter of fiscal 2014.  The decrease in sales is attributable to a sales volume decrease of $36,038,000, partially offset by higher selling prices/sales mix of $11,571,000. The decrease in sales is primarily from a $15,561,000 decrease in GMOL sales, a $9,048,000 decrease in Canned Fruit sales, and a $1,693,000 decrease in Frozen sales, partially offset by a $827,000 increase in Canned Vegetable sales and a $174,000 increase in Snack sales.  The GMOL sales decrease primarily reflects the acceleration of sales under the Green Giant Alliance in the prior year resulting from earlier maturities of certain commodities while the comparable Green Giant Alliance sales occurred in the third quarter of the current fiscal year.

Six months ended September 27, 2014 include net sales of $552,204,000, which represents a 2.9% decrease, or $16,551,000, from the first six months of fiscal 2014.  The decrease in sales is attributable to a sales volume decrease of $38,177,000, partially offset by higher selling prices/sales mix of $21,626,000. The decrease in sales is primarily from a $19,684,000 decrease in GMOL sales, a $10,823,000 decrease in Canned Fruit sales, and a $2,003,000 decrease in Frozen sales, partially offset by a $12,383,000 increase in Canned Vegetable sales and a $549,000 increase in Snack sales.

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

For the three month period ended September 27, 2014, the gross margin decreased from the prior year quarter from 6.6% to 5.4% due primarily to lower net selling prices (after considering promotions) compared to prior year partially offset by a lower LIFO charge in the current year as compared to the prior year. The LIFO charge for the second quarter ended September 27, 2014 was $5,919,000 as compared to a charge of $8,637,000 for the second quarter ended September 28, 2013 and reflects the impact on the quarter of lower cost increases expected in fiscal 2015, compared to fiscal 2014.  On an after-tax basis, LIFO net earnings decreased by $3,847,000 for the quarter ended September 27, 2014 and decreased LIFO net earnings by $5,614,000 for the quarter ended September 28, 2013, based on the statutory federal income tax rate.

For the six month period ended September 27, 2014, the gross margin decreased from the prior year period from 7.4% to 6.1% due primarily to lower net selling prices (after considering promotions) compared to the prior year partially offset by a lower LIFO charge in the current year as compared the prior year.  The LIFO charge for the six months ended September 27, 2014 was $5,570,000 as compared to a charge of $14,435,000 for the six months ended September 28, 2013 and reflects the impact on the six months of lower cost increases expected in fiscal 2015, compared to fiscal 2014.  On an after-tax basis, LIFO decreased net earnings by $3,621,000 for the six months ended September 27, 2014 and decreased net earnings by $9,383,000 for the six months ended September 28, 2013, based on the statutory federal income tax rate.

For the three month period ended September 27, 2014, selling costs as a percentage of sales increased from 2.6% to 2.7% for the same period in the prior year.  For the six month period ended September 28, 2013, selling costs as a percentage of sales were unchanged at 3.0%. The three month increase is primarily a result of the Green Giant Alliance sales decrease, which don't incur selling costs.

For the three month period ended September 27, 2014, administrative expense as a percentage of sales increased from 2.1% to 2.5% due primarily to higher software costs in the current year than the prior year and sales decreasing at a higher rate than these expenses in the current period.  For the six month period ended September 27, 2014, administrative expense as a percentage of sales increased from 2.6% to 2.8% due primarily to sales decreasing at a higher rate than these expenses in the current period.

Interest expense for the second quarter ended September 27, 2014, as a percentage of sales, remained the same at 0.5% compared to second quarter ended September 28, 2013.  For the six month period ended September 27, 2014, interest expense as a percentage of sales decreased from 0.6% to 0.5% compared to six months ended September 28, 2013 .The decrease for the six months was due to decreased long-term debt interest attributable to scheduled debt payments.

The effective tax rate was (32.8)% and (10.5)% for the six month periods ended September 27, 2014 and September 28, 2013, respectively.  Due to the year to date pre-tax loss, the 22.3 percentage point decrease in the effective tax rate represents an increase in tax expense as a percentage of book income when compared to the same quarter last year.  The major contributor to this increase is the re-establishment of the valuation allowance related to the New York State Investment Tax Credit which created a $384,000 charge (74.4 percentage points).  The valuation allowance was re-established due to a change in the law. This is a discrete item and therefore was required to be booked in the quarter ended June 28, 2014.  This difference was partially offset by the impact of 1) the expiration of the research and experimentation credit, work opportunity tax credit, fuel tax credit, California enterprise zone credit, and the California hiring credit (36.8 percentage points) and 2) an $81,000 credit (15.7 percentage points) related to interest received on tax refunds recorded during the quarters ended June 28, 2014 and September 27, 2014.

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

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 2014 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 $76,667,000 in the first six months of fiscal 2015, compared to $48,354,000 in the first six months of fiscal 2014. The $28,313,000 increase in cash used is primarily attributable to a $57,297,000 increase in cash used for accounts payable, accrued expenses and other liabilities and decreased net earnings of $8,635,000 as previously discussed, partially offset by a $23,079,000 decrease in cash used by other current assets, a $280,277,000 increase in inventory in the first six months of fiscal 2015 as compared to $279,084,000 increase in inventory in the first six months of fiscal 2014, a $9,139,000 decrease in cash used by accounts receivable and a $6,819,000 decrease in cash used by income taxes.

As compared to September 28, 2013, inventory decreased $27,127,000 to $731,527,000 at September 27, 2014.  The components of the inventory decrease reflect a $63,217,000 decrease in finished goods, a $9,908,000 increase in work in process and a $26,182,000 increase in raw materials and supplies. The finished goods decrease reflects lower inventory quantities due to the magnitude and timing of the fiscal year 2015 pack versus fiscal year 2014 pack and decreased 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 $158,955,000 as of the end of the second quarter of 2015 as compared to $147,449,000 as of the end of the second quarter of 2014.

Cash used in investing activities was $32,703,000 in the first six months of fiscal 2015 compared to cash used in investing activities of $7,442,000 in the first six months of fiscal 2014. Additions to property, plant and equipment were $16,665,000 in the first six months of fiscal 2015 as compared to $8,412,000 in first six months of fiscal 2014.  In April 2014, the Company purchased a 50% equity interest in Truitt Bros. Inc. for $16,308,000.

Cash provided by financing activities was $109,568,000 in the first six months of fiscal 2015, which included borrowings of $199,232,000 and the repayment of $73,145,000 of long-term debt, principally consisting of borrowing and repayment on the revolving credit facility ("Revolver").  Other than borrowings under the Revolver, there was no new long-term debt during the first six months of fiscal 2015.  During the six months ended September 27, 2014, the Company repurchased $9,201,000 of its Class A Common Stock as treasury stock. In addition, the Company paid down Notes Payable of $7,375,000 during the six month period ended September 27, 2014 related to some interim notes which became operating leases.

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 27, 2014, the interest rate was approximately 1.45% on a balance of $302,220,000.  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 27, 2014, the Company was in compliance with all such financial covenants.

Refer to footnote 8 of the Notes to Condensed Consolidated Financial Statements.

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.

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:

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.

During the six months ended September 27, 2014, the Company sold $36,766,000 of Green Giant finished goods inventory to General Mills Operations, LLC ("GMOL") for cash, on a bill and hold basis, as compared to $52,199,000 for the six months ended September 28, 2013.  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.

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, 2014.

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 27, 2014, 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.

(1)  Of these shares, 14,800 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.

**  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.

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.

October 23, 2014