NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December
29, 2007
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 December 29, 2007 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, 2007 balance sheet was derived from the
audited consolidated financial statements.
The
results of operations for the three and nine month periods ended December 29,
2007 are not necessarily indicative of the results to be expected for the full
year.
In the
nine-months ended December 29, 2007, the Company sold product for cash, on a
bill and hold basis of $176,657,000 of Green Giant finished goods inventory to
General Mills Operations, Inc. (“GMOI”) as compared to $179,289,000 for the
nine-months ended December 30, 2006. Under the terms of the bill and hold
agreement, title to the specified inventory transferred to GMOI. 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 2007 Seneca Foods Corporation
Annual Report on Form 10-K.
Other
footnote disclosures normally included in annual financial statements prepared
in accordance with U.S. generally accepted accounting principles have been
condensed or omitted. These unaudited condensed consolidated
financial statements should be read in conjunction with the financial statements
and notes included in the Company's 2007 Annual Report on Form
10-K.
2.
|
The
Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS
Statement No. 109” (“FIN 48”), on April 1, 2007. FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing a minimum
recognition threshold for a tax position taken or expected to be taken in
a tax return that is required to be met before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effect of adopting FIN
48 of $223,000 was recorded as an increase to Retained Earnings. The total
amount of unrecognized tax benefits as of the date of adoption was
$4,175,000. The change in the FIN 48 liability in the nine
months of 2008 is a $462,000
increase.
|
|
Included
in the balance at adoption are $2,954,000 of tax positions that are highly
certain but for which there is uncertainty about the timing. Because of
the impact of deferred tax accounting, other than interest and penalties,
the disallowance of these positions would not impact the annual effective
tax rate but would accelerate the payment of cash to the tax authority to
an earlier period.
|
|
The
Company recognizes interest and penalties accrued on unrecognized tax
benefits as well as interest received from favorable settlements within
income tax expense. As of the date of adoption, the Company had $450,000
of interest and penalties accrued associated with unrecognized tax
benefits.
|
|
The
Company files income tax returns in the U.S. federal jurisdiction and
various states. The Company is no longer
subject to U.S. federal income tax examinations by tax authorities for
years before 2004.
|
3.
|
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 fiscal
quarter of each year, absorbed expenses exceed incurred expenses due to
timing of production.
|
4.
|
During
the first quarter of fiscal 2007, the Company entered into a Natural Gas
Hedge in the form of a swap transaction where the Company purchased, on a
forward basis, 50% of its requirements for natural gas during the June 1,
2006 to December 31, 2006 time frame at $7.00 per
decatherm. The Company realized a $381,000 loss on this hedge
during the nine months ended December 30, 2006. No hedging
transactions remain open as of December 29, 2007 or December 30, 2006 and
all unrealized losses recorded have been
realized.
|
5.
|
With
the closure of a Washington facility in the fall of 2004, the Company’s
labeling and warehousing requirements at its Oregon location were
dramatically reduced. During the quarter ended October 1, 2005,
the Company announced the phase out of the labeling operation within the
leased distribution facility in Oregon which resulted in a restructuring
charge of $1,461,000. During the quarter ended July 2, 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. During the quarter ended December 30, 2006, the
Company recorded an additional restructuring charge of $374,000 which
represented a further reduction in utilization of the
facility. The Company used a portion of the facility for
warehousing and attempted to sublease the remaining unutilized portion of
the facility until the February 2008 expiration of the
lease. During the nine months ended December 29, 2007, the
Company moved out of the facility and recorded a $104,000 charge as a
result, which is included under Plant Restructuring in the nine months
ended December 29, 2007 Unaudited Condensed Consolidated Statements of Net
Earnings.
|
6.
|
On
November 20, 2006, the Company issued a mortgage payable to GE Commercial
Finance Business Property Corporation for $23.8 million with an interest
rate of 6.98% and a term of 15 years. The proceeds were used to pay down
debt associated with the acquisition of Signature Fruit Company,
LLC. This mortgage is secured by a portion of property in
Modesto, California acquired via the Signature Fruit Company, LLC
acquisition.
|
7.
|
During
the nine-month period ended December 29, 2007; there were 12,750 shares or
$170,000 of Participating Convertible Preferred Stock converted to Class A
Common Stock and 3,834 shares of Class A Common issued for an Equity
Compensation Plan. During the nine-month period ended December
30, 2006, there were 737,175 shares or $9,843,000 of conversions of
Participating Convertible Preferred Stock to Class A Common
Stock.
|
8.
|
For
the three months ended December 29, 2007, comprehensive income totaled
$6,714,000, including a $64,000 Net Unrealized Loss on Securities, which
are purchased solely for the Company’s 401(k)
match. Comprehensive income equaled Net Earnings for the three
months ended December 30, 2006. For the nine months ended
December 29, 2007, comprehensive income totaled $19,394,000, including a
$79,000 Net Unrealized Loss on Securities, which are purchased solely for
the Company’s 401(k) match. Comprehensive income equaled Net
Earnings for the nine months ended December 30,
2006.
|
9.
|
The
only changes in Stockholders’ Equity accounts for the nine months period
ended December 29, 2007, other than the Accumulated Other Comprehensive
Income described above, is an increase of $19,473,000 for Net Earnings, an
increase of $223,000 related to implementing FIN 48 as described above and
a reduction of $11,000 for preferred cash
dividends.
|
10.
|
The
net periodic benefit cost for pension plan consist
of:
|
|
|
Three
Months Ended
|
|
|
Nine
months Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Cost
|
|
$
|
1,137
|
|
|
$
|
1,039
|
|
|
$
|
3,413
|
|
|
$
|
3,119
|
|
Interest
Cost
|
|
|
1,202
|
|
|
|
1,117
|
|
|
|
3,606
|
|
|
|
3,352
|
|
Expected
Return on Plan Assets
|
|
|
(1,654
|
)
|
|
|
(1,458
|
)
|
|
|
(4,962
|
)
|
|
|
(4,375
|
)
|
Amortization
of Transition Asset
|
|
|
(69
|
)
|
|
|
(69
|
)
|
|
|
(207
|
)
|
|
|
(207
|
)
|
Net
Periodic Benefit Cost
|
|
$
|
616
|
|
|
$
|
629
|
|
|
$
|
1,850
|
|
|
$
|
1,889
|
|
Although
no pension contributions were required during fiscal 2008, the Company
contributed $2.5 million during the third fiscal quarter. During the nine months
ended December 30, 2006, the Company made a $2.5 million contribution to its
defined benefit pension plan.
11.
|
The
following table summarizes the restructuring and related asset impairment
charges recorded and the accruals
established:
|
|
|
|
|
|
Long-Lived
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Asset Charges
|
|
|
Other Costs
|
|
|
Total
|
|
Total
expected
|
|
|
|
|
|
|
|
|
|
|
|
|
restructuring
charge
|
|
$
|
1,248
|
|
|
$
|
5,304
|
|
|
$
|
3,772
|
|
|
$
|
10,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
March 31, 2007
|
|
$
|
84
|
|
|
$
|
267
|
|
|
$
|
2,329
|
|
|
$
|
2,680
|
|
First
nine months charge
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
104
|
|
Cash
payments/write-offs
|
|
|
(63
|
)
|
|
|
(17
|
)
|
|
|
(927
|
)
|
|
|
(1,007
|
)
|
Balance
December 29, 2007
|
|
$
|
21
|
|
|
$
|
250
|
|
|
$
|
1,506
|
|
|
$
|
1,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs incurred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
date
|
|
$
|
1,227
|
|
|
$
|
5,054
|
|
|
$
|
2,266
|
|
|
$
|
8,547
|
|
The
restructuring costs above relate to the phase out of the labeling operation of
the leased distribution facility in Oregon, the closure of corn plants in
Wisconsin and Washington and of 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 being operated as a warehouse.
The
remaining severance costs are expected to be paid prior to February 29,
2008. The other costs relate to outstanding lease payments which will
be paid over the remaining lives of the corresponding lease terms, which are up
to five years.
12.
|
During
the nine months ended December 2007, the Company sold some unused fixed
assets which resulted in gains totaling $299,000. During the
first fiscal quarter of 2007, the Company sold a closed plant in Newark,
New York and a receiving station in Pasco, Washington which resulted in
gains of $282,000 and $406,000, respectively. During the second
fiscal quarter of 2007, the Company sold a closed plant in East
Williamson, New York which resulted in a gain of $1,610,000 and a
warehouse facility in New Plymouth, Idaho which resulted in a loss of
$321,000. In addition, during the third fiscal quarter of 2007,
the Company auctioned off unused equipment from the Idaho facility which
resulted in a $3,193,000 net gain which is also included in Other
Operating Income in the Unaudited Condensed Consolidated Statements of Net
Earnings.
|
13.
|
In
September 2006, the FASB issued Statement of Financial Accounting
Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”).
SFAS 157 redefines fair value, establishes a framework for measuring fair
value and expands the disclosure requirements regarding fair value
measurement. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The
Company does not expect that the adoption of SFAS 157 will have a material
impact on its results of operations or financial position; however,
additional disclosures will be required under SFAS
157.
|
|
In
December 2007, the FASB issued Proposed FASB Staff Position (FSP) FAS
157-b. FSP FAS 157-b proposes deferral of the effective date of
SFAS 157 until April 1, 2009 (for the Company) for nonfinancial assets and
nonfinancial liabilities except those items recognized or disclosed at
fair value on an annual or more frequently recurring basis. FSP
FAS 157-b will become effective upon
issuance.
|
14.
|
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159
permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be
measured at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. SFAS 159 does
not affect any existing accounting literature that requires certain assets
and liabilities to be carried at fair value. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company is
currently assessing the potential impact of SFAS 159 on our consolidated
financial statements.
|
15.
|
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,”
to further enhance the accounting and financial reporting related to
business combinations. SFAS No. 141(R) establishes principles
and requirements for how the acquirer in a business combination (i)
recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest
in the acquiree, (ii) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, and (iii)
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after December 15,
2008. Therefore, the effects of the Company’s adoption of SFAS
No. 141(R) will depend upon the extent and magnitude of acquisitions after
March 31, 2009.
|
16.
|
Earnings
per share (In thousands, except per share
data):
|
Quarters
and Year-to-date Periods Ended
|
|
Q U
A R T E R
|
|
|
Y E
A R T O D A T E
|
|
December
29, 2007 and 2006
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands, except share amounts)
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Earnings
|
|
$
|
6,778
|
|
|
$
|
11,322
|
|
|
$
|
19,473
|
|
|
$
|
23,504
|
|
Deduct
preferred stock dividends paid
|
|
|
6
|
|
|
|
6
|
|
|
|
17
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed
earnings
|
|
|
6,772
|
|
|
|
11,316
|
|
|
|
19,456
|
|
|
|
22,703
|
|
Earnings
allocated to participating preferred
|
|
|
2,544
|
|
|
|
4,265
|
|
|
|
7,317
|
|
|
|
8,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
allocated to common shareholders
|
|
$
|
4,228
|
|
|
$
|
7,051
|
|
|
$
|
12,139
|
|
|
$
|
14,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
7,590
|
|
|
|
7,572
|
|
|
|
7,582
|
|
|
|
7,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis
earnings per common share
|
|
$
|
0.56
|
|
|
$
|
0.93
|
|
|
$
|
1.60
|
|
|
$
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
allocated to common shareholders
|
|
$
|
4,228
|
|
|
$
|
7,051
|
|
|
$
|
12,139
|
|
|
$
|
14,130
|
|
Add
dividends on convertible preferred stock
|
|
|
5
|
|
|
|
5
|
|
|
|
15
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
applicable to common stock on a diluted basis
|
|
$
|
4,233
|
|
|
$
|
7,056
|
|
|
$
|
12,149
|
|
|
$
|
14,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding-basic
|
|
|
7,590
|
|
|
|
7,572
|
|
|
|
7,582
|
|
|
|
7,279
|
|
Additional
shares added related to equity compensation plan
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Additional
shares to be issued under full conversion of preferred
stock
|
|
|
67
|
|
|
|
67
|
|
|
|
67
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shares for diluted
|
|
|
7,657
|
|
|
|
7,639
|
|
|
|
7,649
|
|
|
|
7,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$
|
0.55
|
|
|
$
|
0.92
|
|
|
$
|
1.59
|
|
|
$
|
1.93
|
|
17.
|
On
August 18, 2006, the Company completed its acquisition of 100% of the
membership interest in Signature Fruit Company, LLC (“Signature”) from
John Hancock Life Insurance Company and John Hancock Variable Life
Insurance Company. The rationale for the acquisition was twofold: (1) to
broaden the Company’s product offerings into the canned fruit business;
and (2) to take advantage of distribution efficiencies by combining
vegetables and fruits on shipments since the customer base of the two
companies is similar. The purchase price totaled $47.3 million plus the
assumption of certain liabilities. This acquisition was financed with
proceeds from a newly expanded $250.0 million revolving credit facility,
and $25.0 million of the Company’s Participating Convertible Preferred
Stock. The Preferred Stock is convertible into the Company’s Class A
Common Stock on a one-for-one basis subject to antidilution adjustments.
The Preferred Stock was valued at $24.385 per share based on the market
value of the Class A Common Stock during the 30 day average period prior
to the acquisition. A dividend of $784,000 was recorded based
on the beneficial conversion of this Preferred Stock for the difference
between the exercise price of $24.385 and the average price when the
acquisition was announced. The purchase price to acquire
Signature was allocated based on the internally developed fair value of
the assets and liabilities acquired and the independent valuation of
property, plant, and equipment. The purchase price of $47.3
million has been calculated as follows (in
millions):
|
Cash
|
|
$
|
20.0
|
|
Issuance
of convertible preferred stock
|
|
|
25.0
|
|
Closing
costs
|
|
|
2.3
|
|
Purchase
Price
|
|
$
|
47.3
|
|
The
total purchase price of the transaction has been allocated as
follows:
|
|
|
|
Current
assets
|
|
$
|
131.6
|
|
Property,
plant and equipment
|
|
|
26.1
|
|
Other
assets
|
|
|
2.3
|
|
Current
liabilities
|
|
|
(59.2
|
)
|
Long-term
debt
|
|
|
(45.5
|
)
|
Other
non-current liabilities
|
|
|
(8.0
|
)
|
Total
|
|
$
|
47.3
|
|
The
Company negotiated the sale of one of the plants and associated warehouses
located in California that were acquired in the Signature Fruit
acquisition. During the fourth fiscal quarter of 2007, the plant was
sold which resulted in cash proceeds of $27.8 million. There was no
gain or loss recorded on this sale since the property was valued at the net
proceeds as part of the purchase price allocation. The proceeds were
used to reduce debt under the Revolving Credit Facility.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December
29, 2007
Seneca
Foods Corporation is primarily a vegetable and fruit processing company with
manufacturing facilities located throughout the United States. Its
products are sold under the Libby’s®, Aunt Nellie’s Farm Kitchen®, Stokely’s®,
READ®, and Seneca
Ò
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®
label.
The
Company’s raw product is harvested mainly between June through November. The
Company experienced favorable growing conditions last summer and early fall
reflecting a combination of adequate heat units and moisture. These
beneficial growing conditions favorably impacted crop yields and plant recovery
rates, and further resulted in favorable manufacturing variances.
On August
18, 2006, the Company completed its acquisition of 100% of the membership
interest in Signature Fruit Company, LLC (“Signature”) from John Hancock Life
Insurance Company and John Hancock Variable Life Insurance Company. The
rationale for the acquisition was twofold: (1) to broaden the Company’s product
offerings into the canned fruit business; and (2) to take advantage of
distribution efficiencies by combining vegetables and fruits on shipments since
the customer base of the two companies is similar. The purchase price totaled
$47.3 million plus the assumption of certain liabilities. This acquisition was
financed with proceeds from a newly expanded $250.0 million revolving credit
facility, and $25.0 million of the Company’s Participating Convertible Preferred
Stock. The Preferred Stock is convertible into the Company’s Class A Common
Stock on a one-for-one basis subject to antidilution adjustments. The Preferred
Stock was valued at $24.385 per share based on the market value of the Class A
Common Stock during the 30 day average period prior to the
acquisition. A dividend of $784,000 was recorded based on the
beneficial conversion of this Preferred Stock for the difference between the
exercise price of $24.385 and the average price when the acquisition was
announced. The purchase price to acquire Signature was allocated
based on the internally developed fair value of the assets and liabilities
acquired and the independent valuation of property, plant, and
equipment. The purchase price of $47.3 million has been calculated as
follows (in millions):
Cash
|
|
$
|
20.0
|
|
Issuance
of convertible preferred stock
|
|
|
25.0
|
|
Closing
costs
|
|
|
2.3
|
|
Purchase
Price
|
|
$
|
47.3
|
|
The
total purchase price of the transaction has been allocated as
follows:
|
|
|
|
Current
assets
|
|
$
|
131.6
|
|
Property,
plant and equipment
|
|
|
26.1
|
|
Other
assets
|
|
|
2.3
|
|
Current
liabilities
|
|
|
(59.2
|
)
|
Long-term
debt
|
|
|
(45.5
|
)
|
Other
non-current liabilities
|
|
|
(8.0
|
)
|
Total
|
|
$
|
47.3
|
|
The
Company negotiated the sale of one of the plants and associated warehouses
located in California that were acquired in the Signature Fruit
acquisition. During the fourth fiscal quarter of 2007, the plant was
sold which resulted in cash proceeds of $27.8 million. There was no
gain or loss recorded on this sale since the property was valued at the net
proceeds as part of the purchase price allocation. The proceeds were
used to reduce debt under the Revolving Credit Facility.
During
fiscal 2005, the Company implemented a restructuring program which principally
involved the closure of three processing facilities, including a green bean
plant in upstate New York and corn plants in Wisconsin and Washington. The
rationalization of the Company’s productive capacity: (1) improved the Company’s
overall cost structure and competitive position; (2) addressed the excess
capacity situation arising from the recent acquisition of Chiquita Processed
Foods and decline in GMOI volume requirements; and (3) mitigated the effect of
inflationary pressures on the Company’s raw material inputs such as steel and
fuel.
With the
closure of a Washington facility in the fall of 2004, the Company’s labeling and
warehousing requirements at its Oregon location were dramatically
reduced. During the quarter ended October 1, 2005, the Company
announced the phase out of the labeling operation within the leased distribution
facility in Oregon which resulted in a restructuring charge of
$1,461,000. During the quarter ended July 1, 2006, 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. 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 nine months ended December 29, 2007, the Company
moved out of the facility and recorded a $104,000 charge as a result, which is
included under Plant Restructuring in the Unaudited Condensed Consolidated
Statements of Net Earnings.
Results
of Operations:
Sales:
Third
fiscal quarter results include Net Sales of $381.2 million, which represent a
2.5% decrease, or $9.8 million from the third fiscal quarter of fiscal 2007.
This sales decrease reflects a planned reduction in Green Giant Alliance sales
of $12.0 million and a reduction in sales of Fruit and Chips which amounted to
approximately $7.3 million, partially offset by an increase in the Net Sales of
Canned Vegetables of $8.8 million. The primary reason for the Fruit
and Chips sales reduction was due to a short fruit pack in the previous year
(calendar 2006), resulting in the Company running out of certain fruit inventory
items, which negatively impacted Food Service and U.S. Government
sales.
Nine
months Ended December 29, 2007 Net Sales were $845.1 million, which represent a
2.7% increase, or $22.4 million from the nine months ended December 30, 2006.
This sales increase primarily reflects an increase in sales from the Signature
Fruit acquisition which amounted to approximately $29.0 million.
The
following table presents sales by product category:
|
|
Three
Months Ended
|
|
|
Nine
months Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
Canned
Vegetables
|
|
$
|
180.5
|
|
|
$
|
171.7
|
|
|
$
|
459.5
|
|
|
$
|
451.8
|
|
Green
Giant Alliance
|
|
|
126.8
|
|
|
|
138.8
|
|
|
|
196.1
|
|
|
|
209.8
|
|
Frozen
Vegetables
|
|
|
9.9
|
|
|
|
9.8
|
|
|
|
27.8
|
|
|
|
25.5
|
|
Fruit
and Chip Products
|
|
|
60.3
|
|
|
|
67.6
|
|
|
|
150.9
|
|
|
|
124.4
|
|
Other
|
|
|
3.7
|
|
|
|
3.1
|
|
|
|
10.8
|
|
|
|
11.2
|
|
|
|
$
|
381.2
|
|
|
$
|
391.0
|
|
|
$
|
845.1
|
|
|
$
|
822.7
|
|
Operating
Income:
The
following table presents components of Operating Income as a percentage of Net
Sales:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
Gross
Margin
|
|
|
8.5
|
%
|
|
|
9.6
|
%
|
|
|
10.8
|
%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
3.0
|
%
|
|
|
2.6
|
%
|
|
|
3.5
|
%
|
|
|
3.2
|
%
|
Administrative
|
|
|
1.3
|
%
|
|
|
1.6
|
%
|
|
|
2.0
|
%
|
|
|
2.1
|
%
|
Plant
Restructuring
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Other
Operating Income
|
|
|
0.0
|
%
|
|
|
-0.8
|
%
|
|
|
0.0
|
%
|
|
|
-0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
4.2
|
%
|
|
|
6.1
|
%
|
|
|
5.3
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
1.4
|
%
|
|
|
1.5
|
%
|
|
|
1.7
|
%
|
|
|
1.9
|
%
|
For the
three month period ended December 29, 2007, the gross margin decreased from the
prior year quarter of 9.6% to 8.5% due primarily to higher costs of the current
year pack as compared to the prior year. Selling costs as a
percentage of sales increased as the result of sales mix.
For the
nine month period ended December 29, 2007, the gross margin decreased slightly
from 11.2% in the prior nine month period compared to the same period in the
current year at 10.8% due primarily to higher costs of the current year pack as
compared to the prior year. Selling costs as a percentage of sales
increased as a result of sales mix. Administrative costs as a
percentage of sales remained largely unchanged for this period as compared to
same period in the prior year.
During
the nine months ended December 29, 2007, the Company sold some unused fixed
assets which resulted in a gain of $299,000. During the first fiscal
quarter of 2007, the Company sold a closed plant in Newark, New York and a
receiving station in Pasco, Washington which resulted in gains of $282,000 and
$406,000, respectively. During the second fiscal quarter of 2007, the
Company sold a closed plant in East Williamson, New York which resulted in a
gain of $1,610,000 and a warehouse facility in New Plymouth, Idaho which
resulted in a loss of $321,000. In addition, during the third fiscal
quarter of 2007, the Company auctioned off unused equipment from the Idaho
facility which resulted in a $3,193,000 net gain which is also included in Other
Operating Income in the Unaudited Condensed Consolidated Statements of Net
Earnings.
For the
nine month period ended December 29, 2007, interest as a percentage of sales
decreased from 1.9% to 1.7%. Interest dollars decreased 7.2% from
$15.5 million in the nine month period ended December 30, 2006 to $14.4 million
in the nine month period ended December 29, 2007. This was largely
due to lower average borrowings in the current year period compared to the prior
year.
Income
Taxes:
The
effective tax rate was 36.2% and 37.6% for the three month periods ended
December 29, 2007 and December 30, 2006, respectively. The 1.4%
effective tax rate reduction is largely a function of increased research and
experimentation and manufacturers credits recognized as compared to the prior
year. The effective tax rate was 36.3% and 37.8% for the nine month
periods ended December 29, 2007 and December 30, 2006,
respectively.
Earnings per
Share
:
Basic
earnings per share were $.56 and $.93 for the three months ended December 29,
2007 and December 30, 2006, respectively. Diluted earnings per share
were $.55 and $.92 for the three months ended December 29, 2007 and December 30,
2006, respectively. Basic earnings per share were $1.60 and $1.94 for
the nine months ended December 29, 2007 and December 30, 2006,
respectively. Diluted earnings per share were $1.59 and $1.93 for the
nine months ended December 29, 2007 and December 30, 2006,
respectively. For details of the calculation of these amounts, refer
to footnote 16 of the Notes to Condensed Consolidated Financial
Statements.
Liquidity and Capital
Resources:
The
financial condition of the Company is summarized in the following table and
explanatory review (in thousands except ratios):
|
|
December
|
|
|
March
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Working
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
420,788
|
|
|
$
|
407,314
|
|
|
$
|
334,455
|
|
|
$
|
229,510
|
|
Change
in Quarter
|
|
|
(16,889
|
)
|
|
|
(39,294
|
)
|
|
|
-
|
|
|
|
-
|
|
Long-Term
Debt, less Current Portion
|
|
|
294,362
|
|
|
|
290,399
|
|
|
|
210,395
|
|
|
|
142,586
|
|
Current
Ratio
|
|
|
4.04
|
|
|
|
4.16
|
|
|
|
3.86
|
|
|
|
2.63
|
|
As shown
in the Condensed Consolidated Statements of Cash Flows, Cash Used by Operating
Activities was $54.1 million in the first nine months of fiscal 2008, compared
to Cash Provided by Operating Activities of $6.7 million in the first nine
months of fiscal 2007. The $60.8 million decrease in cash generation
is primarily a result of the increase in inventory of $95.1 million (net of the
increase in the Off Season Reserve of $66.8 million) in the first nine months of
fiscal 2008 as compared to $26.7 million in the first nine months of fiscal
2007.
As
compared to December 30, 2006, Inventory increased $55.8 million. The Inventory
increase primarily reflects a $35.5 million increase (net of the Off Season
Reserve) in Finished Goods, a $9.7 million increase in Work in Process and $10.6
million increase in Raw Materials. The Finished Goods increase
reflects a larger harvest this year and higher per unit costs in the current
year than the prior year. The Work in Process increase is primarily
due to the $4.4 million of higher can sheets in the current year over the prior
year and higher frozen vegetables in the current year of $3.8
million. The Raw Materials increase is primarily due to can supplies
increase of $8.1 million over the prior year.
Cash Used
in Investing Activities was $26.8 million in the first nine months of fiscal
2008 compared to $31.9 million in the first nine months of fiscal
2007. The first nine months of fiscal 2007 includes $22.3 million
paid for the Signature acquisition. Additions to Property, Plant and
Equipment were $27.1 million in fiscal 2008 as compared to $14.6 million in
fiscal 2007. In fiscal 2008, the most significant investment was a
$4.7 million warehouse built in Gillett, Wisconsin.
Cash
Provided by Financing Activities was $84.5 million in the first nine months of
fiscal 2008, which included borrowings of $360.9 million and the repayment of
$276.9 million of Long-Term Debt principally consisting of borrowing and
repayment on the revolving credit facility. This increase is directly
related to the increase in inventory of $55.8 million as compared to the prior
year.
In
connection with the August 18, 2006 acquisition of Signature Fruit Company, LLC,
the Company expanded its revolving credit facility (“Revolver”) from $100
million to $250 million with a five-year term to finance its seasonal working
capital requirements. As of December 29, 2007, the outstanding
balance of the Revolver was $165.3 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.
On
November 20, 2006, the Company issued a mortgage payable to GE Commercial
Finance Business Property Corporation for $23.8 million with an interest rate of
6.98% and a term of 15 years. The proceeds were used to pay down debt associated
with the acquisition of Signature Fruit Company, LLC. This mortgage
is secured by a portion of property in Modesto, California acquired via the
Signature Fruit Company, LLC acquisition.
The
Company’s credit facilities contain various financial covenants. At
December 29, 2007, the Company was in compliance with all such financial
covenants.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 redefines fair value, establishes a
framework for measuring fair value and expands the disclosure requirements
regarding fair value measurement. SFAS 157 is effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company does not expect that the adoption of SFAS 157 will have a
material impact on its results of operations or financial position; however,
additional disclosures will be required under SFAS 157.
In
December 2007, the FASB issued Proposed FASB Staff Position (FSP) FAS
157-b. FSP FAS 157-b proposes deferral of the effective date of SFAS
157 until April 1, 2009 (for the Company) for nonfinancial assets and
nonfinancial liabilities except those items recognized or disclosed at fair
value on an annual or more frequently recurring basis. FSP FAS 157-b
will become effective upon issuance.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be carried
at fair value. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently assessing the potential impact
of SFAS 159 on our consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” to
further enhance the accounting and financial reporting related to business
combinations. SFAS No. 141(R) establishes principles and requirements
for how the acquirer in a business combination (i) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS No. 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Therefore, the effects of the Company’s adoption of SFAS
No. 141(R) will depend upon the extent and magnitude of acquisitions after March
31, 2009.
Seasonality
The
Company's revenues typically have been higher in the second and third fiscal
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 primarily sold in the second and third fiscal quarters,
respectively. See the Critical Accounting Policies section below for
further details. In addition, the Company’s non-Green Giant sales
have exhibited seasonality with the third fiscal quarter generating the highest
sales. The third fiscal 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 29, 2007, the Company sold product for cash, on a
bill and hold basis of $176,657,000 of Green Giant finished goods inventory to
General Mills Operations, Inc. (“GMOI”) as compared to $179,289,000 for the
nine-months ended December 30, 2006. Under the terms of the bill and
hold agreement, title to the specified inventory transferred to
GMOI. The Company believes it has met the criteria required for bill
and hold treatment.
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
fiscal 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.