Seneca Foods Corp: Form 10-Q for the period ended Dec 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®, Green Giant®, 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, supply chain disruptions (including raw material shortages), labor shortages, the conflict between Russia and Ukraine, and the conflict in Israel and Gaza. While we have no direct exposure to these conflicts, we have experienced increased costs for transportation, energy and raw materials due in part to their negative impact 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 December 30, 2023 and December 31, 2022

Net sales totaled $444.5 million for the three months ended December 30, 2023 as compared with $473.3 million for the three months ended December 31, 2022. The overall net sales decrease of $28.8 million, or 6.1%, was predominantly due to lower sales volumes having an unfavorable impact of $50.9 million to net sales, partially offset by $22.1 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, frozen vegetables, and fruit products decreased $20.3 million, $6.3 million and $1.3 million, respectively, over the prior year quarter driven by lower volume. 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. Net sales in the snack products category remained relatively consistent quarter over quarter with a $0.1 million increase. The remaining net sales decrease of $1.0 million was contributed by non-food packaging sales related to the sale of cans and ends, and outside revenue from trucking and aircraft operations.

Nine Months Ended December 30, 2023 and December 31, 2022

Net sales totaled $1,150.6 million for the nine months ended December 30, 2023 as compared with $1,178.3 million for the nine months ended December 31, 2022. The overall net sales decrease of $27.7 million, or 2.4%, was predominantly due to lower sales volumes having an unfavorable impact of $105.6 million to net sales, partially offset by higher selling prices and favorable mix, contributing favorability of $77.9 million, as compared to the prior year nine-month interim period.

Net sales for canned vegetables, frozen vegetables, and fruit products decreased $23.8 million, $1.5 million and $4.1 million, respectively, over the prior year nine-month interim period as increased pricing did not offset lower sales volume for these categories. Net sales in the snack products category remained relatively consistent year-over-year with a $0.8 million increase. The remaining net sales increase of $1.0 million as compared to the prior year nine-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 (percentages shown as absolute values):

Three Months Ended December 30, 2023 and December 31, 2022

Gross margin: Gross margin for the three months ended December 30, 2023 was 12.2% as compared with 11.4% for the three months ended December 31, 2022. The increase in gross margin for the three months ended December 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 December 30, 2023 was $12.0 million as compared to a LIFO charge of $30.9 million for the three months ended December 31, 2022.

Selling, General, and Administrative: Selling, general, and administrative costs as a percentage of net sales for the three months ended December 30, 2023, were 5.2% as compared with 4.6% 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 Expense (Income), net: The Company had net other operating expense of $0.4 million during the three months ended December 30, 2023, which was driven by $0.6 million of transition service fees incurred in connection with the asset acquisition. Refer to Note 14 of the Notes to Condensed Consolidated Statements contained herein for further details of that transaction. During the three months ended December 31, 2022, the Company had net other operating expense of $0.2 million, which was driven primarily by a write down of idle production equipment to estimated selling price, less commission, as the assets met the criteria to be classified as held for sale at December 31, 2022. The write down was partially offset by a gain on the sale of an aircraft.

Restructuring: During the three months ended December 30, 2023, the Company incurred restructuring charges primarily related to plants that were closed in previous periods. During the three months ended December 31, 2022, the Company ceased production of green beans at a plant in the Northeast. As a result, the Company incurred severance costs and a write down of production equipment that was sold during the subsequent twelve months.

Other Non-Operating Income: Other non-operating income totaled $1.8 million and $2.0 million for the three months ended December 30, 2023, and December 31, 2022, respectively, and is comprised of the non-service related pension amounts that are actuarially determined.

Interest Expense, net: Interest expense as a percentage of net sales was 2.1% for the three months ended December 30, 2023, as compared to 0.9% for the three months ended December 31, 2022. Interest expense increased from $4.3 million in the prior year quarter to $9.4 million for the current quarter as a result of higher interest rates and increased long-term debt levels.

Nine Months Ended December 30, 2023 and December 31, 2022

Gross margin: Gross margin for the nine months ended December 30, 2023 was 14.6% as compared with 10.0% for the nine months ended December 31, 2022. The increase in gross margin for the nine months ended December 30, 2023 was due primarily to the Company incurring a decrease to the LIFO charge for the current nine-month interim period as compared the prior year nine-month interim period. The Company’s LIFO charge for the nine months ended December 30, 2023 was $19.6 million as compared to a LIFO charge of $79.3 million for the nine months ended December 31, 2022.

Selling, General, and Administrative: Selling, general, and administrative costs as a percentage of net sales for the nine months ended December 30, 2023, were 5.5% as compared with 5.1% for the prior year nine-month interim period. The increase in selling, general, and administrative costs as a percentage of net sales was primarily due to net sales decreasing slightly year over year and the fixed nature of certain other expenses within the category. There were also routine increases to labor costs due to annual cost of living wage adjustments which impacted the current nine-month period.

Other Operating Income, net: The Company had net other operating income of $1.2 million during the nine months ended December 30, 2023, which was driven primarily by $1.8 million from the sale of non-operational assets in the Pacific Northwest, offset by $0.6 million of transition service fees during the nine-month period. During the nine months ended December 31, 2022, the Company had net other operating income of $2.4 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, partially offset by the aforementioned write down of idle production equipment.

Restructuring: During the nine months ended December 30, 2023, the Company incurred restructuring charges primarily due to equipment moves from plants that were closed in the previous fiscal year. During the nine months ended December 31, 2022, the Company incurred restructuring charges primarily associated with ceasing production of green beans at a plant in the Northeast. The charges were comprised of severance costs and a write down of production equipment that was sold during the subsequent twelve months.

Other Non-Operating Income: Other non-operating income totaled $4.5 million and $5.1 million for the nine months ended December 30, 2023, and December 31, 2022, respectively, and is comprised of the non-service related pension amounts that are actuarially determined.

Interest Expense, net: Interest expense as a percentage of net sales was 2.0% for the nine months ended December 30, 2023, as compared to 0.7% for the nine months ended December 31, 2022. Interest expense increased from $8.0 million in the prior year nine-month interim period to $23.1 million for the current nine-month interim period as a result of higher interest rates and increased long-term debt levels.

Income Taxes:

The Company’s effective tax rate was 23.8% and 23.5% for the nine months ended December 30, 2023 and December 31, 2022, respectively. The effective tax rate increased in the current nine-month interim period primarily due to state rate changes having an unfavorable impact on the effective rate which increased the rate by 0.3%.

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. The Company may also seek strategic acquisitions to leverage existing capabilities and further build upon its existing business. Liquidity requirements are funded primarily through cash generated from operations and external sources of financing, including the revolving credit facility. The Company believes that its operations along with existing liquidity sources will satisfy its cash requirements for at least the next twelve months. The Company has borrowed funds and continues to believe that it has the ability to do so at reasonable interest rates, however additional borrowings would result in increased interest expense. The Company does not have any off-balance sheet financing arrangements.

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 nine months ended December 30, 2023, cash used in operating activities was $128.1 million, which consisted of a use of cash of $249.4 million by operating assets and liabilities partially offset by net earnings of $65.6 million, adjusted by non-cash charges of $55.7 million. The non-cash charges were largely driven by $38.1 million of depreciation and amortization and $19.6 million LIFO charge. The change in operating assets and liabilities was due to inventories being a principal use of cash as the nine-month period covered the primary seasonal pack harvest month. The increase in inventories was also impacted by finished goods acquired in the asset acquisition, refer to Note 14 of the Notes to Condensed Consolidated Statements contained herein for further details of that transaction.

For the nine months ended December 31, 2022, cash used in operating activities was $189.5 million, which consisted of a use of cash of $351.3 million by operating assets and liabilities partially offset by net earnings of $42.3 million, adjusted by non-cash charges of $119.5 million. The non-cash charges were largely driven by $39.7 million of depreciation and amortization and $79.3 million LIFO charge. 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 $23.8 million for the nine months ended December 30, 2023, and consisted of cash used for capital expenditures of $31.8 million partially offset by proceeds from the sale of assets totaling $8.0 million.

Net cash used in investing activities was $51.5 million for the nine months ended December 31, 2022, and consisted of cash used for capital expenditures of $56.5 million partially offset by proceeds from the sale of assets totaling $5.0 million.

Net Cash Provided by Financing Activities: Net cash provided by financing activities was $154.1 million for the nine months ended December 30, 2023, driven primarily by a net increase in the Company’s debt borrowings of $187.6 million during the nine-month interim period. Additionally, the Company used cash of $27.1 million to purchase treasury stock and $6.4 million to make payments on financing leases, which partially offset the increased cash provided.

Net cash provided by financing activities was $242.6 million for the nine months ended December 31, 2022, driven by a net increase in debt borrowings of $290.3 million. These cash proceeds were partially offset by purchasing treasury stock of $41.2 million and by making payments of $6.5 million on financing leases.

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. The Company believes these non-GAAP financial measures provide investors with helpful information to evaluate financial performance, perform comparisons from period to period, and to compare results against the Company’s industry peers. 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 which excludes the impact from the application of LIFO. Set forth below is a reconciliation of reported earnings before income taxes to adjusted net earnings (in thousands):

(1) For the three months ended December 30, 2023 and December 31, 2022, income taxes on adjusted earnings before taxes were calculated using the income tax provision amounts of $5.5 million and $6.5 million, respectively, and applying the statutory rate of 24.9% for each of the respective periods to the pre-tax LIFO charge. For the nine months ended December 30, 2023 and December 31, 2022, income taxes on adjusted earnings before taxes were calculated using the income tax provision amounts of $20.5 million and $13.0 million, respectively, and applying the statutory 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’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):

(1) Reconciling item needed to exclude debt issuance cost amortization from the amount shown for interest expense.

New Accounting Standards

Refer to Note 1, “Basis of Preparation and Presentation”, to the Condensed Consolidated Financial Statements contained herein.

Critical Accounting Policies and Estimates

A description of the Company's critical accounting policies and estimates is contained in the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended March 31, 2023. There were no material changes to the Company's critical accounting policies or estimates during the three and nine months ended December 30, 2023.

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 December 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.

Other than the remedial actions noted above, there have been no changes during the period covered by this report to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.