HNFSA/HNFSB - Hanover Foods

[oddballstocks]

Received my annual report in the mail today, much more verbose note than in the past.  I haven't had a time to read it fully, but this is encouraging. 

 

Someone mentioned the margin decline, could it be related to coupons?  My wife has been buying more Hanover products than in the past, and she buys what's cheapest with coupons.  They've been issuing a lot of coupons recently.

[wknecht]

Received my annual report in the mail today, much more verbose note than in the past.  I haven't had a time to read it fully, but this is encouraging. 

 

Someone mentioned the margin decline, could it be related to coupons?  My wife has been buying more Hanover products than in the past, and she buys what's cheapest with coupons.  They've been issuing a lot of coupons recently.

Seems to be mainly driven by a decrease in gross margins (from 13.4% to 11.6%). But there was also an increase in selling expenses from 3.9% of revenue to 4.1% (think these are the coupons). I'm not sure what's driving the increase in COGS.

 

They also terminated a post-retirement benefit plan for certain employees. This produced a $2.9mm (0.7% of revenue) benefit to operating profit due to the liability being released. I think this is encouraging from the standpoint of simplifying things. But also slightly discouraging because (a) the margins were still down a healthy amount despite this one time boost, and (b) seems a little bizarre to me (more in-fighting?).

[Spekulatius]

I received my annual report as well from Interactive brokers. While pretax earnings are down ~20%, it is nice that they cleared up the confusion about the shares in the employee trust fund. So at least we now know how many shares are actually outstanding (~720k).

[matjone]

I didn't think Interactive Brokers would send reports to customers.  How did you get them to do that?

[nkp007]

I own one share and IB automatically mailed me a report.

[randomep]

 

Can someone post a scanned copy of the 2013 report (oddballstocks?), I am not a shareholder but would like to be.....

 

thanks in advance

[oddballstocks]

 

Can someone post a scanned copy of the 2013 report (oddballstocks?), I am not a shareholder but would like to be.....

 

thanks in advance

 

Hi, I'm typically not in the business of scanning these things and sending them out.  I have paper copies of all my reports, sounds weird I know, but I prefer to read a paper copy.  I don't have a way to easily scan it, maybe someone else can help?

 

With many of these stocks you will never receive anything electronic, but register for paper statements with the broker and you'll be shocked at what stuff is sent to you in the mail.  I'm convinced 90% of investors never receive this stuff because they sign up for electronic statements.

[randomep]

 

But how did you post the copy of the 2012 annual report?

[Hielko]

With many of these stocks you will never receive anything electronic, but register for paper statements with the broker and you'll be shocked at what stuff is sent to you in the mail.  I'm convinced 90% of investors never receive this stuff because they sign up for electronic statements.

I have signed up for electronic statements with IB (no point in receiving a paper copy when it takes weeks after it's released online), but they do send paper annual reports for stocks like this. Don't think I'm missing anything.

[oddballstocks]

With respect to the 2012 annual report, a friend sent it to me, he received it from a friend of his.  Maybe the friend of a friend has IB like Hielko said.

 

I wonder about the electronic vs paper statements.  I routinely get letters from these small companies, I wonder if electronic shareholders are getting those as well.  It seems common for many of these dark companies to send a simple one page letter explaining what happened over the past quarter and then include a few figures on the back, or at the bottom.  I haven't received one of these from Hanover, but have plenty of other ones in my files.

[Kraven]

With many of these stocks you will never receive anything electronic, but register for paper statements with the broker and you'll be shocked at what stuff is sent to you in the mail.  I'm convinced 90% of investors never receive this stuff because they sign up for electronic statements.

I have signed up for electronic statements with IB (no point in receiving a paper copy when it takes weeks after it's released online), but they do send paper annual reports for stocks like this. Don't think I'm missing anything.

 

I have found that I receive some interesting things in the mail that I would not have received if I was only signed up for electronic statements. Today I got a holiday card from a company I own.  I haven't seen that before.  Of course it doesn't matter in the grand scheme of things, but it was interesting nonetheless.

[Spekulatius]

Attached is a PDF of Hanover Foods 2013 annual report:

20131213075835309.pdf

[mbrock77]

Thanks very much for posting the 2013 report.

 

I'm sure this is an easy question, but can someone explain the treatment of the ESOP share repurchase on the cash flow statement? I see it as a source of cash in notes payable. Is it not also a use of cash?

[wknecht]

I assume you're referring to the repurchase from the ESOT and not the 61 shares repurchased from the ESOP beneficiaries.

 

My understanding is that the ESOT transaction has zero impact to any of the statements because the financials of the trust are consolidated with those of Hanover.

 

Are you looking at the "Proceeds on notes payable and long-term debt" line item? I believe this is unrelated to the ESOT transaction.

 

Appreciate it if someone corrects me if my interpretation is incorrect.

[mbrock77]

Right, I'm talking about the 340k Class B shares repurchased from the Trust.

 

The notes indicate that they issued a promissory note for $37 million to purchase these shares. There seems to be a corresponding increase in notes payable on the balance sheet and cash-flow statement, so I assumed that was it.

 

Another newbie questions on this one: they only break out depreciation and amortization expense on the cash flow statement. Which line item would it be buried in on the earnings statement? Is it common not to break it out?

[randomep]

Attached is a PDF of Hanover Foods 2013 annual report:

 

THANK YOU! may god bless you with many prosperous children!

[mbrock77]

Not that a deal is necessarily in the future for Hanover, but In case anyone is interested, a recent summary of M&A activity in the food and beverage sector can be found here:

 

http://www.harriswilliams.com/sites/default/files/industry_reports/foodbeverage_industry_update_5.28.13.pdf

 

Looks like average deal these days is around 11x EV/EBITDA. Even if you take the trough multiple of 8x in 2010/2011, that would mean almost a double in Hanover’s shares, and the stock would still be below book value.

 

Also, this probably means nothing, but the new CFO (hat tip to a commentator on Oddball stocks for noticing the change) was CFO at Keystone foods for this deal, although he had just been promoted to the position:

 

http://online.wsj.com/news/articles/SB10001424052748704009804575308580852562558

[deadspace]

While a sale of the company would be the most immediate route to unlock value - I wonder about the incentives of the owner operators.

 

Does anyone have a breakdown of how much stock the family actually owns now.  Just rying to understand if there is an incentive for them to seek out a sale in the near future?

 

[oddballstocks]

While a sale of the company would be the most immediate route to unlock value - I wonder about the incentives of the owner operators.

 

Does anyone have a breakdown of how much stock the family actually owns now.  Just rying to understand if there is an incentive for them to seek out a sale in the near future?

 

Um...hmmm...not exactly sure where to start here.  The simplest answer is this, no one knows the family's ownership currently, but all indications are that it's much less than 50%.

 

Incentives...this is the interesting one.  How familiar are you with Hanover?  The incentive I see is this.  John is getting old, his son is in the CEO role now.  The trust has been wound down and John is no longer in control.  What that means is that his brother and sister who both fought extensively with him in and out of court for control now can take a shot at it again.  There are also the three kids John has who can vie for control, or Michael's two kids, or Sally's two kids, all shareholders, all who seemingly hate each other. 

 

The dictator loosen up his grip on power, now you have nine heirs all battling for control, none of them own controlling positions, none are going to band together.  You also have outside shareholders with influence now if they wake up.

 

Read through that again and think about possible outcomes, they cleaned up the capital structure, have a CFO with M&A experience, what do you think the likely path is?

[deadspace]

Thanks for the quick response  I hear what you are saying.

I just wasnt sure whether the ownership at the level of the 3rd and 4th genertaions now represents just a few thousand dollars or many millions - the incentive to get a deal done would be much greater if this reperesents  a large source of capital for the stakeholders

 

 

[mbrock77]

Last ownership info I could find was a 10k before they went dark in 2004. At least at that time, it looks like the various Warehime's held almost all the class B shares that were not in the employee trust. See p 27:

 

http://www.sec.gov/Archives/edgar/data/853733/000095011604002943/tenka.htm

[oddballstocks]

mbrock,

 

The devil is in the details.  John himself owns about 10%.  The Warehime trusts are the issue, they're held for the benefit of the grandchildren if I remember correctly.  Michael has sold many of his shares, I have no idea is Sally still owns hers.

 

There is not one large holder, this is split up in many 5% positions held by people who all loath and disagree with each other. 

 

One point on the trusts, the beneficiaries are all the grandkids for one, and I believe the siblings for the other.  The only way anyone can tap into those is via a liquidity event.

 

Nate

[mbrock77]

Nate,

 

Good to know that they are not a united group and that individually they should still a sizable financial stake in what happens. Bodes well...

 

While I have you, do you find the rising inventory levels at all concerning? It's ticked up as a percent of sales from about 23% to 29% in the last three years. Also, was the jump in notes payable to fund the stock repurchase? If so, any idea why the repurchase amount doesn't show up on the cash flow statement as use of cash?

 

Thanks

 

MB

[wknecht]

Generically, the jump in notes payable is due to the 32mm used in operations/working capital and investment combined (note the incorrect sign of CFO in the AR).

 

The repurchase did not show up show up in the cash flow statement because because no cash changed hands (inside or outside the consolidated entity).

[mbrock77]

I'm so confused. Note 4 in the report specifies that the shares in the trust were purchased using 37 million in proceeds from a Promissory Note. This doesn't need to be accounted for in the financial statements? It seems to me to be an actual liability since the Trust is for the employees and not the company.

 

Apologies if I am missing something basic here.

 

Thanks

 

MB