Seneca Foods Corp: Form 10-Q for the period ended Sep 30, 2023

Seneca Foods Corporation is a leading provider of packaged fruits and vegetables, with facilities located throughout the United States. Our product offerings include canned, frozen and jarred produce and snack chips that are sold under private label as well as national and regional brands that the Company owns or licenses, including Seneca®, Libby’s®, Aunt Nellie’s®, Cherryman®, Green Valley® and READ®. Canned fruits and vegetables are sold nationwide by major grocery outlets, including supermarkets, mass merchandisers, limited assortment stores, club stores and dollar stores. We also sell products to foodservice distributors, restaurant chains, industrial markets, other food processors, export customers in approximately 60 countries and federal, state and local governments for school and other food programs. Additionally, the Company packs canned and frozen vegetables under contract packing agreements.

Business Trends

We purchase raw materials, including raw produce, steel, ingredients and packaging materials from growers, commodity processors, steel producers and packaging suppliers. Raw materials and other input costs, such as labor, fuel, utilities and transportation, are subject to fluctuations in price attributable to a number of factors. Fluctuations in commodity prices can lead to retail price volatility and can influence consumer and trade buying patterns. The cost of raw materials, fuel, labor, distribution and other costs related to our operations can increase from time to time significantly and unexpectedly.

We continue to experience material cost inflation for many of our raw materials and other input costs attributable to a number of factors, including but not limited to, the war in Ukraine, supply chain disruptions (including raw material shortages) and labor shortages. While we have no direct exposure to Russia and Ukraine, we have experienced increased costs for transportation, energy and raw materials due in part to the negative impact of the Russia-Ukraine conflict on the global economy. We attempt to manage cost inflation risks by locking in prices through short-term supply contracts, advance grower purchase agreements, and by implementing cost saving measures. We also attempt to offset rising input costs by raising sales prices to our customers. However, increases in the prices we charge our customers may lag behind rising input costs. Competitive pressures also may limit our ability to quickly raise prices in response to rising costs. To the extent we are unable to avoid or offset any present or future cost increases our operating results could be materially adversely affected.

Results of Operations

Net Sales:

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

Three Months Ended September 30, 2023 and October 1, 2022

Net sales totaled $407.5 million for the three months ended September 30, 2023 as compared with $439.8 million for the three months ended October 1, 2022. The overall net sales decrease of $32.3 million, or 7.4%, was predominantly due to lower sales volumes having an unfavorable impact of $43.7 million to net sales partially offset by $11.4 million of favorability due to higher selling prices and a favorable mix impact, as compared to the prior year three-month interim period.

Net sales for canned vegetables decreased $36.2 million over the prior year quarter driven by lower volume and was slightly offset by a $3.0 million increase in net sales for frozen vegetables. Higher pricing in each of these categories, which was necessitated by the material cost increases that the Company is experiencing, partially offset the unfavorable impact to net sales that was generated by the lower volume. While the Company’s fruit products category increased pricing in response to material cost pressures, decreased sales volumes had a larger impact on net sales for the quarter resulting in a $1.2 million decrease to net sales compared to the prior year quarter. Net sales in the snack products category remained relatively consistent quarter over quarter with a $0.6 million increase. The remaining net sales increase of $1.5 million was contributed by non-food packaging sales related to the sale of cans and ends, and outside revenue from trucking and aircraft operations.

Six Months Ended September 30, 2023 and October 1, 2022

Net sales totaled $706.1 million for the six months ended September 30, 2023 as compared with $705.0 million for the six months ended October 1, 2022. The overall net sales increase of $1.1 million, or 0.2%, was predominantly due to higher selling prices contributing favorability of $52.6 million offset by lower sales volumes having an unfavorable impact of $51.5 million to net sales, as compared to the prior year six-month interim period.

Net sales of canned vegetables decreased $3.5 million over the prior year six-month interim period as increased pricing did not offset lower sales volume for this category. Net sales of frozen vegetables contributed an increase of $4.8 million driven primarily by higher sales volumes which outpaced selling prices for this category. Fruit products decreased over the prior year six-month interim period by $2.8 million, primarily due to lower sales volume. Net sales in the snack products category remained relatively consistent year over year with a $0.7 million increase. The remaining net sales increase of $1.9 million as compared to the prior year six-month period was contributed by non-food packaging sales related to the sale of cans and ends, and outside revenue from trucking and aircraft operations.

Operating and Non-Operating Income:

The following table presents components of operating and non-operating income as a percentage of net sales:

Three Months Ended September 30, 2023 and October 1, 2022

Gross margin: Gross margin for the three months ended September 30, 2023 was 14.3% as compared with 9.5% for the three months ended October 1, 2022. The increase in gross margin for the three months ended September 30, 2023 was due primarily to the Company incurring a decrease in the LIFO charge for the current quarter as compared to the prior year quarter. The Company’s LIFO charge for the three months ended September 30, 2023 was $9.3 million as compared to a LIFO charge of $29.2 million for the three months ended October 1, 2022.

Selling, General, and Administrative: Selling, general, and administrative costs as a percentage of net sales for the three months ended September 30, 2023, were 5.2% as compared with 4.7% for the prior year quarter. The increase in selling, general, and administrative costs as a percentage of net sales was largely driven by the decrease in net sales and the fixed nature of certain other expenses. Also, there were routine increases to other expenses within the category, such as cost of living wage adjustments.

Other Operating Income, net: The Company had net other operating income of $1.3 million during the three months ended September 30, 2023, which was driven primarily by the sale of non-operational assets in the Pacific Northwest which were previously classified as held for sale. During the three months ended October 1, 2022, the Company had net other operating income of $0.6 million, driven primarily by a true-up of the supplemental early retirement plan accrual partially offset by a gain on the sale of various fixed assets.

Restructuring: During the three months ended September 30, 2023, the Company incurred restructuring charges primarily due to equipment moves from ceasing production of green beans at a plant in the Northeast in the previous fiscal year. During the three months ended October 1, 2022, the Company incurred restructuring charges primarily related to plants that were closed in previous periods.

Other Non-Operating Income: Other non-operating income totaled $1.3 million and $1.5 million for the three months ended September 30, 2023, and October 1, 2022, respectively, and is comprised of the non-service related pension amounts that are actuarially determined.

Interest Expense: Interest expense as a percentage of net sales was 1.8% for the three months ended September 30, 2023, as compared to 0.5% for the three months ended October 1, 2022. Interest expense increased from $2.4 million in the prior year quarter to $7.2 million for the current quarter as a result of higher interest rates and increased borrowings under the Amended Term Loan A-2.

Six Months Ended September 30, 2023 and October 1, 2022

Gross margin: Gross margin for the six months ended September 30, 2023 was 16.1% as compared with 9.2% for the six months ended October 1, 2022. The increase in gross margin for the six months ended September 30, 2023 was due primarily to the Company incurring a decrease to the LIFO charge for the current six-month interim period as compared the prior year six-month interim period. The Company’s LIFO charge for the six months ended September 30, 2023 was $7.6 million as compared to a LIFO charge of $48.4 million for the six months ended October 1, 2022.

Selling, General, and Administrative: Selling, general, and administrative costs as a percentage of net sales for the six months ended September 30, 2023, were 5.8% as compared with 5.5% for the prior year six-month interim period. The increase in selling, general, and administrative costs as a percentage of net sales was primarily due to net sales remaining relatively flat year over year and routine increases to labor costs due to annual cost of living wage adjustments. This impact was partially offset by the fixed nature of certain other expenses within the category.

Other Operating Income, net: The Company had net other operating income of $1.5 million during the six months ended September 30, 2023, which was driven primarily by the sale of non-operational assets in the Pacific Northwest which were previously classified as held for sale. During the six months ended October 1, 2022, the Company had net other operating income of $2.6 million which was driven primarily by a gain on the sale of the Company’s western trucking fleet amongst other fixed assets and a true-up of the supplemental early retirement plan accrual.

Restructuring: During the six months ended September 30, 2023, the Company incurred restructuring charges primarily due to equipment moves from ceasing production of green beans at a plant in the Northeast in the previous fiscal year. During the six months ended October 1, 2022, the Company incurred restructuring charges primarily related to plants that were closed in previous periods.

Other Non-Operating Income: Other non-operating income totaled $2.7 million and $3.1 million for the six months ended September 30, 2023, and October 1, 2022, respectively, and is comprised of the non-service related pension amounts that are actuarially determined.

Interest Expense: Interest expense as a percentage of net sales was 1.9% for the six months ended September 30, 2023, as compared to 0.5% for the six months ended October 1, 2022. Interest expense increased from $3.8 million in the prior year six-month interim period to $13.8 million for the current six-month interim period as a result of higher interest rates and increased borrowings under the Amended Term Loan A-2.

Income Taxes:

The Company’s effective tax rate was 23.8% and 23.4% for the six months ended September 30, 2023 and October 1, 2022, respectively. The effective tax rate increased in the current six-month interim period primarily due to generating fewer federal credits in fiscal year 2024, which increased the current year’s effective tax rate by 1.0%. This increase was partially offset by permanent differences and state rate changes having a favorable impact on the effective rate, reducing the rate by a combined 0.6%.

Earnings per Share:

A summary of the Company’s earnings per common share is as follows:

For details of the calculation of these amounts, refer to Note 3 “Earnings per Common Share.”

Liquidity and Capital Resources

The financial condition of the Company is summarized in the following table and explanatory review (dollar amounts in thousands, except per share data):

Note (1): 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 12 of the Notes to Consolidated Financial Statements of the Company’s 2023 Annual Report on Form 10-K/A (Amendment No. 1) for conversion details.

Material Cash Requirements: The Company’s primary liquidity requirements include debt service, capital expenditures and working capital needs. Liquidity requirements are funded primarily through cash generated from operations and external sources of financing, including the revolving credit facility. The Company does not have any off-balance sheet financing arrangements. Refer to Note 16 of the Notes to Condensed Consolidated Statements contained herein for additional discussion of material cash requirements.

Summary of Cash Flows: The following table presents a summary of the Company’s cash flows from operating, investing, and financing activities (in thousands):

Net Cash Used in Operating Activities: For the six months ended September 30, 2023, cash used in operating activities was $26.3 million, which consisted of net earnings of $47.9 million, adjusted by non-cash charges of $20.0 million, partially offset by operating assets and liabilities using cash of $94.2 million. The non-cash charges were largely driven by $21.8 million of depreciation and amortization. The change in operating assets and liabilities was due to inventories being a principal use of cash as the six-month period covered the primary seasonal pack harvest months.

For the six months ended October 1, 2022, cash used in operating activities was $133.6 million, which consisted of a use of cash of $173.4 million by operating assets and liabilities partially offset by net earnings of $21.2 million, adjusted by non-cash charges of $18.6 million. The non-cash charges were largely driven by $19.8 million of depreciation and amortization. The change in operating assets and liabilities was largely due to inventories being a use of cash driven by the material cost inflation to various production inputs. The increase in inventories was partially offset by an associated increase in accounts payable.

The cash requirements of the business fluctuate significantly throughout the year to coincide with the seasonal growing cycles of vegetables. The majority of the inventories are produced during the packing months, from June through November, and are then sold over the following year. Cash flow from operating activities is one of the Company’s main sources of liquidity.

Net Cash Used in Investing Activities: Net cash used in investing activities was $18.9 million for the six months ended September 30, 2023, and consisted of cash used for capital expenditures of $26.5 million partially offset by proceeds from the sale of assets totaling $7.6 million. Net cash used in investing activities was $29.8 million for the six months ended October 1, 2022, and consisted of cash used for capital expenditures of $33.8 million partially offset by proceeds from the sale of assets totaling $4.0 million.

Net Cash Provided by Financing Activities: Net cash provided by financing activities was $45.0 million for the six months ended September 30, 2023, driven primarily by a net increase in the Company’s borrowings of $69.2 million during the six-month interim period. Additionally, the Company used cash of $19.6 million to purchase treasury stock and $4.6 million to make payments on financing leases, which partially offset the increased cash provided.

Net cash provided by financing activities was $165.4 million for the six months ended October 1, 2022, driven by a net increase in debt borrowings of $206.7 million. These cash proceeds were partially offset by purchasing treasury stock of $37.0 million and by making payments of $4.3 million on financing leases.

Revolving Credit Facility: On March 24, 2021, the Company entered into a Fourth Amended and Restated Loan and Security Agreement that provides for a senior revolving credit facility of up to $400.0 million that is seasonally adjusted (the “Revolver”). Maximum borrowings under the Revolver total $300.0 million from April through July and $400.0 million from August through March. The Revolver balance is included in Long-Term Debt in the accompanying condensed consolidated balance sheets due to the Revolver’s March 24, 2026 maturity. In order to maintain availability of funds under the facility, the Company pays a commitment fee on the unused portion of the Revolver. The Revolver is secured by substantially all of the Company’s accounts receivable and inventories and contains borrowing base requirements as well as a financial covenant, if certain circumstances apply. The Company utilizes its Revolver for general corporate purposes, including seasonal working capital needs, to pay debt principal and interest obligations, and to fund capital expenditures and acquisitions.

Seasonal working capital needs are affected by the growing cycles of the vegetables the Company packages. The majority of vegetable inventories are produced during the months of June through November and are then sold over the following year. Payment terms for vegetable produce are generally three months but can vary from a few days to seven months. Accordingly, the Company’s need to draw on the Revolver may fluctuate significantly throughout the year.

On September 14, 2022, the Company entered into a First Amendment to the Fourth Amended and Restated Loan and Security Agreement (the “Revolver Amendment”) which amended several provisions to replace LIBOR with SOFR plus a spread adjustment as the interest rate benchmark on the Revolver. The transition to SOFR did not materially impact the interest rates applied to the Company’s borrowings. No other material changes were made to the terms of the Company’s Revolver as a result of the Revolver Amendment.

Term Loans: On May 28, 2020, the Company entered into an Amended and Restated Loan and Guaranty Agreement with Farm Credit East, ACA that provides for a $100.0 million unsecured term loan. The amended and restated agreement has a maturity date of June 1, 2025 and converted the term loan to a fixed interest rate of 3.3012% until maturity in addition to requiring quarterly principal payments of $1.0 million, which commenced during fiscal year 2021. This agreement contains certain covenants, including maintaining a minimum EBITDA and minimum tangible net worth.

On January 20, 2023, the Company entered into a Second Amended and Restated Loan and Guaranty Agreement with Farm Credit East, ACA (the “Agreement”) which governs two term loans, as summarized below:

Term Loan A-1: The Agreement continues certain aspects of the existing $100.0 million term loan described above, namely Term Loan A-1 will continue to bear interest at a fixed interest rate of 3.3012%, mature on June 1, 2025, require quarterly principal payments of $1.0 million, and remain unsecured.

Term Loan A-2: The Agreement adds an additional term loan in the amount of $175.0 million that will mature on January 20, 2028, and is secured by a portion of the Company’s property, plant and equipment. Term Loan A-2 bears interest at a variable interest rate based upon SOFR plus an additional margin determined by the Company’s leverage ratio. Quarterly payments of principal outstanding on Term Loan A-2 in the amount of $1.5 million commenced on March 1, 2023.

On May 23, 2023, the Agreement was amended by the Second Amended and Restated Loan and Guaranty Agreement Amendment 1 which amends, restates and replaces in its entirety Term Loan A-2 (the “Amendment”). The Amendment provides a single advance term facility in the principal amount of $125.0 million to be combined with the outstanding principal balance of $173.5 million on Term Loan A-2 into one single $298.5 million term loan (“Amended Term Loan A-2”). Amended Loan Term A-2 is secured by a portion of the Company’s property, plant and equipment and bears interest at a variable interest rate based upon SOFR plus an additional margin determined by the Company’s leverage ratio. Quarterly payments of principal outstanding on Amended Term Loan A-2 in the amount of $3.75 million commenced on June 1, 2023. The Amendment continues all aspects of Term Loan A-1 as defined in the Agreement.

The Amendment contains restrictive covenants usual and customary for loans of its type, in addition to financial covenants including minimum EBITDA and minimum tangible net worth. In connection with Amended Term Loan A-2, the Company incurred $1.1 million of financing costs which will be deferred and amortized over the life of the term loan.

As of September 30, 2023, the Company was in compliance with all covenants for its revolving credit facility and term loan agreements.

Impact of Seasonality on Financial Position and Results of Operations:

While individual vegetables have seasonal cycles of peak production and sales, the different cycles are somewhat offsetting. Minimal food packaging occurs in the Company's last fiscal quarter ending March 31, which is the optimal time for maintenance, repairs and equipment changes in its packaging plants. The supply of commodities, current pricing, and expected new crop quantity and quality affect the timing and amount of the Company’s sales and earnings. When the seasonal harvesting periods of the Company's major vegetables are newly completed, inventories for these packaged vegetables are at their highest levels. For peas, the peak inventory time is mid-summer and for corn and green beans, the Company's highest volume vegetables, the peak inventory is in mid-autumn. The seasonal nature of the Company’s production cycle results in inventory and accounts payable reaching their lowest point late in the fourth quarter/early in the first quarter prior to the new seasonal pack commencing. As the seasonal pack progresses, these components of working capital both increase until the pack is complete.

The Company’s fruit and vegetable sales exhibit seasonal increases in the third fiscal quarter due to increased retail demand during the holiday seasons. In addition, the Company sells canned and frozen vegetables to a co-pack customer on a bill and hold basis at the end of each pack cycle, which typically occurs during the second and third quarters. The seasonal nature of the Company’s sales, particularly holiday driven retail sales, result in the accounts receivable balance reaching its highest point at the end of the second and third fiscal quarters, while typically being the lowest at the end of the first quarter.

Non-GAAP Financial Measures:

Adjusted net earnings, EBITDA, and FIFO EBITDA are non-GAAP financial measures and are provided for information purposes only. A non-GAAP financial measure is defined as a numerical measure of our financial performance that excludes or includes amounts so as to be different from the most directly comparable measure calculated and presented in accordance with GAAP in our condensed consolidated balance sheets and related condensed consolidated statements of net earnings, comprehensive income, stockholders’ equity and cash flows. The Company does not intend for this information to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.

Adjusted net earnings is calculated on a FIFO basis. The Company believes excluding the impact from the application of LIFO improves the comparability of the Company's financial performance from period to period and with the Company's peers. Set forth below is a reconciliation of reported earnings before income taxes to adjusted net earnings (in thousands):

(1) For the three months ended September 30, 2023 and October 1, 2022, income taxes on adjusted earnings before taxes were calculated using the income tax provision amounts of $7.8 million and $4.9 million, respectively, and applying the effective statutory tax rate of 24.9% for each of the respective periods to the pre-tax LIFO charge. For the six months ended September 30, 2023 and October 1, 2022, income taxes on adjusted earnings before taxes were calculated using the income tax provision amounts of $14.9 million and $6.5 million, respectively, and applying the effective statutory tax rate of 24.9% for each of the respective periods to the pre-tax LIFO charge.

The Company believes EBITDA is often a useful measure of a Company’s operating performance because EBITDA excludes charges for depreciation, amortization and interest expense as well as the Company’s provision for income tax expense. EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry. FIFO EBITDA also excludes non-cash charges related to the LIFO inventory valuation method. The Company believes FIFO EBITDA improves comparability of the Company’s financial performance from period to period and with the Company’s peers. The Company’s revolving credit facility and term loan agreements use FIFO EBITDA in the financial covenants thereunder. Set forth below is a reconciliation of reported net earnings to EBITDA and FIFO EBITDA (in thousands):

New Accounting Standards

Refer to Note 1 “Basis of Preparation and Presentation.”

Critical Accounting Policies and Estimates

Revenue Recognition and Trade Promotion Expenses: Revenue recognition is completed for most customers at a point in time basis when product control is transferred to the customer. In general, control transfers to the customer when the product is shipped or delivered to the customer based upon applicable shipping terms, as the customer can direct the use and obtain substantially all of the remaining benefits from the asset at this point in time. The Company sells certain finished goods inventory for cash on a bill and hold basis. The terms of the bill and hold agreement provide that title to the specified inventory is transferred to the customer prior to shipment and the Company has the right to payment (prior to physical delivery) which results in recorded revenue as determined under the revenue recognition standard.

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 the Company’s products to consumers, amounts paid to obtain favorable display positions in retail 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 products 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 the Company. 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.

Inventories: The Company uses the lower of cost, determined under the LIFO method, or market, to value substantially all of its inventories. In the high inflation environment that the Company is experiencing, the Company believes that the LIFO method was preferable over the FIFO method because it better matches the cost of current production to current revenue. An actual valuation of inventory under the LIFO method is made at the end of each fiscal year based on the inventory levels and costs at that time. In contrast, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, production pack yields, sales and the expected rate of inflation or deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation.

Long-Lived Assets: 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.

Income Taxes: As part of the income tax provision process of preparing the consolidated financial statements, the Company estimates income taxes. This process involves estimating current tax expenses together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. The Company then assesses the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent it is believed the recovery is not likely, a valuation allowance is established.

Pension Expense: The Company has a defined benefit plan which is subject to certain actuarial assumptions. The funded status of the pension plan is dependent upon many factors, including returns on invested assets and the level of certain market interest rates, employee-related demographic factors, such as turnover, retirement age and mortality, and the rate of salary increases. Certain assumptions reflect the Company's historical experience and management’s best judgment regarding future expectations.

Forward-Looking Information

This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments, and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words "will," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "seeks," "should," "likely," "targets," "may", "can" and variations thereof and similar expressions. Forward-looking statements are subject to known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed. We believe important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following:

• the effects of rising costs and availability of raw fruit and vegetables, steel, ingredients, packaging, other raw materials, distribution and labor;
• crude oil prices and their impact on distribution, packaging and energy costs;
• an overall labor shortage, ability to retain a sufficient seasonal workforce, lack of skilled labor, labor inflation or increased turnover impacting our ability to recruit and retain employees;
• climate and weather affecting growing conditions and crop yields;
• our ability to successfully implement sales price increases and cost saving measures to offset cost increases;
• the loss of significant customers or a substantial reduction in orders from these customers;
• effectiveness of our marketing and trade promotion programs;
• competition, changes in consumer preferences, demand for our products and local economic and market conditions;
• the impact of a pandemic on our business, suppliers, customers, consumers and employees;
• unanticipated expenses, including, without limitation, litigation or legal settlement expenses;
• product liability claims;
• the anticipated needs for, and the availability of, cash;
• the availability of financing;
• leverage and the ability to service and reduce debt;
• foreign currency exchange and interest rate fluctuations;
• the risks associated with the expansion of our business;
• the ability to successfully integrate acquisitions into our operations;
• our ability to protect information systems against, or effectively respond to, a cybersecurity incident or other disruption;
• other factors that affect the food industry generally, including:
• recalls if products become adulterated or misbranded, liability if product consumption causes injury, ingredient disclosure and labeling laws and regulations and the possibility that consumers could lose confidence in the safety and quality of certain food products;
• competitors’ pricing practices and promotional spending levels;
• fluctuations in the level of our customers’ inventories and credit and other business risks related to our customers operating in a challenging economic and competitive environment; and
• the risks associated with third-party suppliers, including the risk that any failure by one or more of our third-party suppliers to comply with food safety or other laws and regulations may disrupt our supply of raw materials or certain finished goods products or injure our reputation; and
• changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including health, environmental, and safety regulations.

Any of these factors, as well as such other factors as discussed in our other periodic filings with the SEC, could cause our actual results to differ materially from our anticipated results. The information provided in this Form 10-Q is based upon the facts and circumstances known as of the date of this report, and any forward-looking statements made by us in this Form 10-Q speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of this Form 10-Q to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.

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. There have been no material changes to the Company’s exposure to market risk since March 31, 2023. In addition, the Company is exposed to fluctuations in interest rates, primarily related to its revolving credit facility and Amended Term Loan A-2. To manage interest rate risk, the Company uses both fixed and variable interest rate debt plus fixed interest rate lease obligations.

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.

As reported in the Company’s amended Annual Report on Form 10-K/A for the year ended March 31 2023, subsequent to the year-end audit, the Company’s management identified a material weakness in the Company’s internal control over financial reporting relating to the accounting for valuing inventory using the LIFO method, specifically the review controls in place with respect to a year-end adjustment to the calculation of the LIFO reserve were not effective. An actual valuation of inventory under the LIFO method is made at the end of each fiscal year based on the inventory levels and costs at that time. During the formulaic valuation of actual inventory values at fiscal year-end, incorrect quantities were applied to the calculation which resulted in an understatement of the LIFO reserve as of March 31, 2023 and 2022. In contrast, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, production pack yields, sales and the expected rate of inflation or deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation.

A material weakness relating to the year-end adjustment to the calculation of the LIFO reserve cannot be considered remediated until the applicable remedial controls operate for a sufficient time. Notwithstanding the existence of the above-mentioned material weakness, the Company believes that the consolidated financial statements in this filing fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. generally accepted accounting principles. Additionally, our management has concluded that the Company’s interim LIFO calculations are not impacted by this material weakness.

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 30, 2023, 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.

In response to the previously disclosed material weakness, the Company has identified certain remedial actions to mitigate the material weakness, including the implementation of new controls and the enhancement of existing controls to reconcile the inventory quantities used in the year-end LIFO calculation to the quantities in the Company’s enterprise resource planning system. The Company will also utilize newly developed software, equipped with analytical features allowing for comparison and trend analysis to previous periods, to perform the LIFO calculation. The Company’s management will review and investigate material irregularities identified by this software and document the cause of those irregularities prior to approval of the final LIFO calculation.

There have been no material changes to the risk factors disclosed in the Company’s Annual Report Form 10-K for the period ended March 31, 2023 except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors.