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| PFACP > SEC Filings for PFACP > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
The purpose of this discussion is to outline the reasons for material changes in Pro-Fac's financial condition and results of operations in the third quarter and first nine months of fiscal 2009 as compared to the third quarter and first nine months of fiscal 2008. This section should be read in conjunction with Part I, Item 1. Financial Statements, of this Report.
Since 1960, Pro-Fac has operated as an agricultural cooperative, owned and controlled by its members, to purchase, market, and sell crops grown by its member-growers, for the mutual benefit of its members. The Cooperative's core business focus has not changed in 49 years and its current strategy is to continue its business of purchasing, marketing, and selling its member-grower crops to its customers.
One of the challenges Pro-Fac faces, which is discussed below under "Liquidity and Capital Resources", is the Cooperative's source of available cash to fund its operations and pay its dividends. In recent years, Pro-Fac's primary source of cash to fund its operations and pay dividends was the $10.0 million in payments it received annually under the Termination Agreement described above, with the final installment of $2.0 million received in July 2007. Currently, Pro-Fac's primary sources of cash are cash on hand, gross profit and margin on certain sales, interest income and possible distributions, if any, made by Holdings LLC to Pro-Fac under the Limited Liability Company Agreement.
In July 2007, Pro-Fac received a distribution of approximately $120.1 million from Holdings LLC. During the first quarter of fiscal year 2008, Pro-Fac used this distribution: to redeem all retained earnings allocated to its members at a cost of approximately $6.8 million; to pay dividends on its non-cumulative preferred stock and its Class A cumulative preferred stock at a cost of approximately $5.4 million; and to repay principal and interest owed under its Credit Agreement with Birds Eye Foods in an amount equal to approximately $1.1 million. During the second quarter of fiscal year 2008, Pro-Fac used this distribution: to redeem all of Pro-Fac's non-cumulative preferred stock at a price of $25.00 per share for an aggregate redemption cost of approximately $0.7 million; to redeem 3,155,433 shares of its Class A cumulative preferred stock at a price of $25.00 per share for an aggregate redemption cost of approximately $78.9 million; and to pay dividends on its preferred stock to the date of redemption at a cost of approximately $2.1 million. On October 31, 2008, Pro-Fac used this distribution to redeem 390,887 shares of Class A preferred stock at a price of $25.00 per share for an aggregate redemption cost of approximately $9.8 million.
The Board of Directors periodically evaluates Pro-Fac's business plan in consideration of Pro-Fac's receipt of the distribution from Holdings LLC in the first quarter of fiscal year 2008 and possible future events.
Net sales, cost of sales and gross profit: Net sales increased from $11,000 in the quarter ended March 29, 2008 to $0.7 million in the quarter ended March 28, 2009, and cost of sales increased from $42,000 in the quarter ended March 29, 2008 to $0.7 million in the quarter ended March 28, 2009, as the Cooperative entered into more sales transactions as a principal. Volume and pricing differences resulted in a $68,000 increase in gross profit for the quarter ended March 28, 2009 compared to the quarter ended March 29, 2008.
Margin on delivered product:The Cooperative negotiates certain sales transactions on behalf of its members, which result in margin being earned by the Cooperative. The Cooperative earned $17,000 in margin during the quarter ended March 28, 2009 and $0.1 million in margin during the quarter ended March 29, 2008. The decrease resulted from volume differences.
Selling, administrative, and general expense: Selling, administrative, and general expenses totaled $0.6 million and $0.5 million for the quarters ended March 28, 2009 and March 29, 2008, respectively. The increase relates to an increase of $0.1 million in the reserve for uncollectable accounts receivable recorded during the quarter ended March 28, 2009.
Investment income: Investment income decreased from $0.3 million for the quarter ended March 29, 2008, to $31,000 for the quarter ended March 28, 2009, due to use of the proceeds from the $120.1 million distribution from Holdings LLC in July 2007 to redeem equity interests in July and October 2007 and October 2008 and pay dividends. Investment income for the quarters ended March 28, 2009 and March 29, 2008, included unrealized gains/(losses) of approximately ($1,000) and $46,000, respectively.
During the first quarter of fiscal year 2008, Pro-Fac received a $120.1 million distribution from Holdings LLC pursuant to the terms of the Limited Liability Company Agreement. Approximately $10.1 million of the amount received was a taxable dividend, subject to the qualified dividends received deduction, with the remaining amount representing a return of capital.
The Cooperative's tax basis of its investment in Holdings LLC at June 28, 2008 was $76.4 million. A deferred income tax asset has not been recognized on the estimated excess of the tax basis over the recorded financial statement value of Pro-Fac's investment in Holdings LLC at March 28, 2009. This asset would only be realized upon the sale of Pro-Fac's investment based on the proceeds received or receipt of a distribution representing a return of capital, neither of which is expected to occur in the foreseeable future.
The income tax benefit for the quarters ended March 28, 2009 and March 29, 2008 were based on the Cooperative's estimated effective tax rates for the respective fiscal years applied to the respective quarters.
For fiscal year 2009, the Cooperative expects to generate a net operating loss carry forward for income tax purposes. Realization of the related deferred tax asset is not assured. Accordingly, a valuation allowance has been recorded to offset the deferred tax asset, resulting in a reduction in the effective rate The Cooperative also generated a loss for income tax purposes in 2008, all of which was carried back to generate refunds of taxes previously paid resulting in the income tax benefit recorded in the quarter ended March 29, 2008.
Gain from transaction with Birds Eye Foods and related agreements: In the first nine months of fiscal year 2008, Pro-Fac recognized, approximately $1.2 million, as additional gain from the receipt of the final termination payment under the Termination Agreement in July 2007.
Margin on delivered product:The Cooperative negotiates certain sales transactions on behalf of its members, which result in margin being earned by the Cooperative. The Cooperative earned $0.3 million in margin during the first nine months of fiscal 2009 and $0.2 million in margin during the first nine months of fiscal 2008. Volume and pricing differences accounted for the majority of the improvement in margin for the nine months ended March 28, 2009.
Selling, administrative, and general expense: Selling, administrative, and general expenses totaled $1.6 million and $1.4 million for the nine months ended March 28, 2009 and March 29, 2008, respectively. The increase relates to an increase of $0.1 million in the reserve for uncollectable accounts receivable recorded during the quarter ended March 28, 2009
Investment income: Investment income decreased from $2.4 million for the nine months ended March 29, 2008 to $0.3 million for the nine months ended March 28, 2009 due to use of the proceeds from the $120.1 million distributions from Holdings, LLC in July 2007 to redeem equity interests in July and October 2007 and October 2008 and pay dividends. Investment income for the nine months ended March 28, 2009 and March 29, 2008, included unrealized gains/(losses) of approximately ($1,000) and $46,000, respectively.
Distribution from Holdings LLC:During the first quarter of 2008, Pro-Fac received a distribution of approximately $120.1 million from Holdings LLC under the Limited Liability Agreement. In accordance with the cost method of accounting for the investment in Holdings LLC, Pro-Fac reduced its investment in Holdings LLC by $3.5 million to zero with the remaining $116.6 million of the distribution recorded as income.
Income taxes: The income tax benefit for the nine months ended March 28, 2009 is based on the Cooperative's estimated effective tax rate for fiscal year 2009. The Cooperative does not expect to record a net deferred tax asset for any expected fiscal year 2009 net operating loss carry forward as realization is not reasonably assured. A valuation allowance has been recorded to offset the deferred tax asset. The Cooperative recorded a tax benefit of $1.0 million for the nine month period ended March 29, 2008 because the Cooperative expected to have a loss for tax purposes which would be carried back to recover taxes paid in prior periods.
"NOTE 1. Description of Business and Summary of Accounting Policies" under "Notes to Condensed Financial Statements" included in Part I, Item 1 of this Report discusses the significant accounting policies of Pro-Fac. Pro-Fac's discussion and analysis of its financial condition and results of operations are based upon its condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Pro-Fac's management to make estimates, judgments and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. On an ongoing basis, Pro-Fac evaluates its estimates.
Certain accounting policies deemed critical to Pro-Fac's results of operations or financial position are discussed below.
The Cooperative accounts for its investment in Holdings LLC under the cost method of accounting. Under the cost method, distributions of earnings are reported as income and distributions that represent a return of capital reduce the carrying value of the investment, but not below zero. As a result of the $120.1 million distribution received from Holdings LLC during the first quarter of fiscal year 2008, Pro-Fac's investment in Holdings LLC was reduced to zero. However, Pro-Fac continues to own an approximate 40% interest in Holdings LLC through its ownership of Class B common units.
A deferred income tax asset has not been recognized on the estimated excess of the tax basis over the recorded financial statement value of the investment in Holdings LLC at March 28, 2009, of approximately $76.4 million. This potential asset would only be recognized upon the sale of the investment based on the proceeds received or receipt of a distribution representing a return of capital, which was not considered probable at March 28, 2009.
Pro-Fac markets and sells its members' crops to food processors. Under the provisions of Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross Versus Net as an Agent", the Cooperative records activity among its customers, itself and its members on a net basis. For transactions in which Pro-Fac acts a principal rather than an agent, sales and cost of sales are reported.
Historically, Pro-Fac has had four sources or potential sources of available
cash to fund its operating expenses and the payment of its quarterly dividends:
(i) cash from its sale of raw products to its customers, (ii) payments received
under the Termination Agreement with Birds Eye Foods, (iii) cash distributions
related to its investment in Holdings LLC, and (iv) borrowings.
Pro-Fac receives cash payments equal to the CMV of crops sold to Birds Eye Foods, Allens, Inc. and other customers pursuant to the Amended and Restated Marketing and Facilitation Agreement, the Allens supply agreement and other supply agreements. Although CMV payments are considered a potential source of cash to Pro-Fac, Pro-Fac has typically paid 100 percent of CMV to its member-growers for crops delivered and did so in fiscal years 2008 and 2007. Since CMV payments are approximately equal to the cash Pro-Fac receives from its customers for its raw products, CMV payments are not a significant source of available cash from which Pro-Fac can pay operating expenses and quarterly dividends.
While Pro-Fac principally acts as agent for its member-growers in the marketing and sale of crops, Pro-Fac does occasionally engage in crop sales transactions as a principal, resulting in gross profit or margin being earned by the Cooperative. Although the amounts earned increased through fiscal year 2007, subsequent increases have not been significant and future increases are not expected to be significant. Net cash available to Pro-Fac, after payment of CMV to Pro-Fac's member-growers, has historically been used to pay Pro-Fac's operating expenses as well as its quarterly dividends on its preferred stock and to fund repurchases of its common stock.
The final installment payment to Pro-Fac under the Termination Agreement was received in July 2007.
The Limited Liability Company Agreement provides that, subject to restrictions
contained in any financing arrangements of Holdings LLC or its subsidiaries
(including Birds Eye Foods), Holdings LLC will use commercially reasonable
efforts to cause Birds Eye Foods to distribute annually to Holdings LLC up to
$24.8 million of cash flow from operations of Birds Eye Foods, which Holdings
LLC will then distribute to the holders of its common units, including Pro-Fac.
In July 2007, Pro-Fac received a $120.1 million cash distribution from Holdings
LLC. Holdings LLC has advised Pro-Fac that it will not speculate as to whether
further distributions will be made under the Limited Liability Company Agreement
and, as a minority owner of Holdings LLC, Pro-Fac has no control over the
determination of whether such distributions will be made. Pro-Fac is operating
under a business plan that assumes no further distributions will be made under
the Limited Liability Agreement.
The Board of Directors periodically evaluates Pro-Fac's business plan. There can be no assurances that Pro-Fac will continue to pay dividends and the declaration of any future dividends is subject to Board action in advance of any such declaration based upon all of the facts and circumstances at such time. On April 3, 2009, the Cooperative announced that future quarterly dividends, beginning with the July 31, 2009 dividend, if declared by its Board of Directors, are expected to be at the rate of $.20 per share. Any future difference between a quarterly dividend payment and the full quarterly preferred dividend of $0.43 per share must be paid in full before the payment of dividends on any other Pro-Fac equity and before the redemption of any Pro-Fac equity.
A discussion of "Statement of Cash Flows" for the nine months ended March 28, 2009, follows:
Net cash used in operating activities was $2.4 million for the first nine months of fiscal year 2009 compared to cash provided by operating activities of approximately $111.0 million in the first nine months of fiscal year 2008. The change primarily represents income from the receipt of the $120.1 million distribution from Holdings LLC in the first nine months of fiscal year 2008, changes in investments classified as trading securities and changes in the timing of cash receipts from customers other than Birds Eye Foods and related cash payments to member-growers between the first nine months of fiscal year 2009 and the first nine months of fiscal year 2008.
In the first nine months of fiscal year 2009, no cash was provided by investing activities. Cash provided by investing activities for the first nine months of fiscal year 2008 was $5.5 million related to the receipt of $2.0 million from Birds Eye Foods as the final payment under the Termination Agreement and the portion of the distribution from Holdings LLC classified as a return of capital, approximately $3.5 million.
Net cash used in financing activities during the first nine months of fiscal year 2009 included payment of dividends of $2.1 million and the redemption of preferred shares of $9.8 million. During the first nine months of fiscal year 2008, net cash used in financing activities included $1.0 million to repay amounts previously borrowed, $6.8 million to redeem all retained earnings allocated to members, $8.3 million in dividends paid and $79.6 million for the redemption of preferred shares.
In January 2003, the Pro-Fac Board of Directors suspended the payment of dividends on the Cooperative's common stock for an indefinite period of time and, in January 2006, the Board placed a moratorium on Pro-Fac's repurchase of shares of its common stock from its member-growers. Any repurchase by Pro-Fac of its common stock is subject to pre-approval by the Board.
Based on the assumptions contained in Pro-Fac's business plan, the Board currently believes that Pro-Fac has sufficient sources of cash to fund its operations at least through the end of fiscal 2013.
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