Seneca Foods Corp: Form 10-Q for the period ended Sep 28, 2024

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®. Our products 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 55 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 experienced material cost increases to various production inputs during the last several years due to a number of factors, including but not limited to, supply chain disruptions, steel supply and pricing, raw material shortages, labor shortages, and the conflicts between Russia and Ukraine. While we have no direct exposure to this foreign conflict, it had a negative impact on the global economy which increased certain of our input costs. While certain of the factors mentioned above have started to ease and stabilize during the current six-month interim period, our costs remain elevated as compared to historical levels.

We attempt to manage costs 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 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 28, 2024 and September 30, 2023

Net sales totaled $425.5 million for the three months ended September 28, 2024 as compared with $407.5 million for the three months ended September 30, 2023. The overall net sales increase of $18.0 million, or 4.4%, was due to higher sales volumes contributing favorability of $8.5 million, coupled with product mix and increased selling prices which had a favorable impact of $9.5 million as compared to the prior year three-month interim period.

Net sales of canned vegetables and frozen vegetables increased by a combined $18.7 million over the prior year quarter. The categories were impacted by overall higher demand, complemented by increased pricing and favorable product mix. Net sales in the fruit products and snack products categories remained relatively consistent with the prior year quarter with a nominal combined $0.7 million decrease. Net sales attributable to the other category also remained flat as compared to the prior year quarter for seed, cans and ends, and outside revenue from aircraft operations, which are ancillary to the Company’s main operations.

Six Months Ended September 28, 2024 and September 30, 2023

Net sales totaled $730.2 million for the six months ended September 28, 2024 as compared with $706.1 million for the six months ended September 30, 2023. The overall net sales increase of $24.1 million, or 3.4%, was due to higher sales volumes contributing favorability of $20.0 million, coupled with product mix and increased selling prices which had a favorable impact of $4.1 million as compared to the prior year six-month interim period.

Net sales of canned vegetables increased $25.4 million over the prior year six-month interim period primarily driven by increased demand, combined with favorability from product mix and increased pricing for this category. Net sales of frozen vegetables remained flat as compared to the prior year six-month period. Fruit products increased over the prior year six-month interim period by $1.6 million, primarily due to increased pricing. Net sales in the snack products category remained relatively consistent year-over-year with a slight decrease of $0.5 million. The remaining net sales decrease of $2.4 million, driven by lower demand as compared to the prior year six-month period, was contributed by non-food packaging sales related to the sale of seed, cans and ends, and outside revenue from aircraft operations, which are ancillary to the Company’s main operations.

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 September 28, 2024 and September 30, 2023

Gross Margin: Gross margin for the three months ended September 28, 2024 was 10.1% as compared to 14.3% for the three months ended September 30, 2023. The decrease in gross margin for the three months ended September 28, 2024 was mainly due to continued elevated costs. Refer to the section above for additional discussion regarding business trends. The Company’s LIFO charge for the three months ended September 28, 2024 was $15.0 million as compared to a LIFO charge of $9.3 million for the three months ended September 30, 2023. The LIFO charge amounts have the impact of increasing cost of products sold.

Selling, General, and Administrative: Selling, general and administrative expense for the three months ended September 28, 2024 decreased $3.0 million from the three months ended September 30, 2023. Selling, general, and administrative expense as a percentage of net sales for the three months ended September 28, 2024, was 4.2% as compared with 5.2% for the prior year quarter. The decrease in selling, general, and administrative expense as a percentage of net sales was mainly due to the increase in net sales and the fixed nature of certain expenses.

Restructuring: The Company incurred minimal restructuring charges during the three months ended September 28, 2024, attributable to equipment moves for the Northeast trucking fleet which ceased operations in the previous fiscal year. 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.

Other Operating Income, net: The Company had net other operating income of $0.1 million during the three months ended September 28, 2024, which was driven primarily by the sale of a small portion of land in the Midwest. During the three months ended September 30, 2023, the Company had net other operating income of $1.3 million, which was driven primarily by the sale of non-operational assets in the Pacific Northwest.

Non-Operating Income (Expense):

Other Non-Operating Income: Other non-operating income totaled $1.4 million and $1.3 million for the three months ended September 28, 2024, and September 30, 2023, 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 September 28, 2024, as compared to 1.8% for the three months ended September 30, 2023. Interest expense increased from $7.2 million in the prior year quarter to $9.0 million for the current quarter as a result of higher interest rates and increased borrowings under the Company’s revolving credit facility as compared to the prior year quarter.

Six Months Ended September 28, 2024 and September 30, 2023

Gross Margin: Gross margin for the six months ended September 28, 2024 was 11.7% as compared to 16.1% for the six months ended September 30, 2023. The decrease in gross margin for the six months ended September 28, 2024 was mainly due to continued elevated costs. Refer to the section above for additional discussion regarding business trends. The Company’s LIFO charge for the six months ended September 28, 2024 was $12.1 million as compared to a LIFO charge of $7.6 million for the six months ended September 30, 2023. The LIFO charge amounts have the impact of increasing cost of products sold.

Selling, General, and Administrative: Selling, general and administrative expense for the six months ended September 28, 2024 decreased $5.3 million from the six months ended September 30, 2023. Selling, general, and administrative expense as a percentage of net sales for the six months ended September 28, 2024, was 4.9% as compared with 5.8% for the prior year six-month interim period. The decrease in selling, general, and administrative expense as a percentage of net sales was mainly due to the increase in net sales and the fixed nature of certain expenses.

Restructuring: The Company incurred minimal restructuring charges during the six months ended September 28, 2024, attributable to equipment moves for the Northeast trucking fleet which ceased operations in the previous fiscal year. 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.

Other Operating Income, net: The Company had net other operating income of $0.5 million during the six months ended September 28, 2024, which was driven primarily by the sale of a small portion of land in the Midwest. During the six months ended September 30, 2023, the Company had net other operating income of $1.5 million, which was driven primarily by the sale of non-operational assets in the Pacific Northwest.

Non-Operating Income (Expense):

Other Non-Operating Income: Other non-operating income totaled $2.8 million and $2.7 million for the six months ended September 28, 2024, and September 30, 2023, 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 2.7% for the six months ended September 28, 2024, as compared to 1.9% for the six months ended September 30, 2023. Interest expense increased from $13.8 million in the prior year six-month interim period to $19.4 million for the current six-month interim period as a result of higher interest rates and increased borrowings under the Company’s revolving credit facility as compared to the prior year. Additionally, the six months ended September 30, 2023 did not have Term Loan A-2 outstanding for the entire period which contributed to a lower interest expense amount for that prior year interim period.

Income Taxes:

The Company’s effective tax rate was 22.7% and 23.8% for the six months ended September 28, 2024 and September 30, 2023, respectively. The effective tax rate decreased in the current six-month period as compared to the prior year six-month period driven by the impact of federal credits which reduced the effective rate by 1.1% and interest received on a federal income tax refund which reduced the effective tax rate by 0.4%. These decreases were partially offset by the impact of state rate changes driven by apportionment which increased the effective rate by 0.4%.

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):

(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 11 of the Notes to Consolidated Financial Statements of the Company’s 2024 Annual Report on Form 10-K 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.

During the preceding fiscal years, working capital needs trended higher than previously experienced by the Company in part because of larger annual pack sizes needed to replenish the Company’s post-pandemic inventory levels to meet customer demand, and because of supply chain challenges in the steel industry which impacted can manufacturing operations. To successfully navigate the uncertainty driven by inflation and import tariffs, and a desire to diversify its steel supply, the Company employed a strategic approach during those fiscal years and increased steel coil purchases to better position itself for subsequent years. The Company’s larger seasonal pack sizes driven by favorable growing conditions, coupled with lower sales in an industry that is experiencing negative sales category trends overall, resulted in higher inventory levels for finished goods as of the end of fiscal year 2024. This will have a favorable impact on the availability of products in fiscal year 2025, resulting in a lower planned seasonal pack and the opportunity to normalize working capital trends, specifically surrounding inventory.

During the current fiscal year, the Company has experienced an easing of working capital needs driven by the factors previously mentioned. However, adverse weather conditions during the planting and harvesting seasons have had a notable impact, especially in the upper Midwest where the Company has its primary growing region. Reduced growing conditions and crop yields resulted in a seasonal pack that is lower than originally planned. This in turn has resulted in a higher-cost seasonal pack on a per unit basis as of the six months ended September 28, 2024; however the overall costs from a cash requirements perspective are favorable as compared to the preceding fiscal years.

The Company believes that its operations along with existing liquidity sources will satisfy its cash requirements for at least the next twelve months. This includes the Company’s expectation with respect to Term Loan A-1 that matures on June 1, 2025, that it will maintain or have access to sufficient liquidity to retire or refinance long-term debt at maturity or otherwise, using operating cash flows, access to the capital markets, and access to its revolving credit facility. 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 Provided by (Used in) Operating Activities: For the six months ended September 28, 2024, cash provided by operating activities was $125.9 million, which consisted of $66.4 million from changes in operating assets and liabilities, coupled with net earnings of $26.0 million and non-cash charges of $33.5 million. The non-cash charges were driven by $22.0 million of depreciation and amortization, $2.9 million of non-cash lease expense, and a $12.1 million LIFO charge. The change in operating assets and liabilities was largely due to working capital needs as the six-month period covered the primary seasonal pack harvest months. Cash utilized for inventories and higher accounts payable activity were the main drivers, although the use of cash for these items was lower than in the prior year six-month interim period resulting from factors discussed above within the material cash requirements section.

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 $32.2 million, partially offset by operating assets and liabilities using cash of $106.4 million. The non-cash charges were largely driven by $21.8 million of depreciation and amortization, $3.7 million of non-cash lease expense, and a $7.6 million LIFO charge. The change in operating assets and liabilities was due to inventories being a use of cash as the six-month period covered the primary seasonal pack harvest months, in addition to material cost inflation to various production inputs.

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 twelve months. Cash flow from operating activities is one of the Company’s main sources of liquidity, excluding usual seasonal working capital swings.

Net Cash Used in Investing Activities: Net cash used in investing activities was $19.9 million for the six months ended September 28, 2024, and consisted of cash used for capital expenditures of $17.6 million and $2.7 million paid as deposits to vendors for the installation of a new can manufacturing line. Offsetting those amounts, the Company received proceeds from the sale of assets totaling $0.4 million.

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) Provided by Financing Activities: Net cash used in financing activities was $100.7 million for the six months ended September 28, 2024, driven primarily by a net paydown on the Company’s revolving credit facility of $90.8 million and term loan payments of $9.5 million during the six-month interim period. Offsetting the outflows was a $12.4 million increase in the note payable borrowings associated with the Company’s new can manufacturing line. Additionally, the Company used cash of $10.0 million to purchase treasury stock and made payments of $2.8 million on financing leases.

Net cash provided by financing activities was $45.0 million for the six months ended September 30, 2023, driven primarily by a net paydown on the Company’s revolving credit facility of $45.7 million and term loan payments of $9.5 million. That activity was offset by the Company receiving proceeds of $124.4 million from a new term loan during the six-month interim period. Additionally, the Company used cash of $19.6 million to purchase treasury stock and made payments of $4.6 million on financing leases, which partially offset the increased cash provided.

Impact of Seasonality on Financial Position and Results of Operations:

The Company’s production cycle begins with planting in the spring followed by harvesting and packaging during the second and third fiscal quarters with sales spanning over the following twelve months. 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 in mid-to-late 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 during the pack cycle, the majority of which typically occurs in 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 informational 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 the Company’s 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 the 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 are calculated on a FIFO basis which excludes the impact from the application of LIFO. Set forth below is a reconciliation of reported net earnings before income taxes to adjusted net earnings (in thousands):

(1) For the three months ended September 28, 2024 and September 30, 2023, income taxes on adjusted earnings before taxes were calculated using the income tax provision amounts of $3.8 million and $7.8 million, respectively, and applying the statutory tax rates of 24.5% and 24.9%, respectively, for each of the respective periods to the pre-tax LIFO charge. For the six months ended September 28, 2024 and September 30, 2023, income taxes on adjusted earnings before taxes were calculated using the income tax provision amounts of $7.6 million and $14.9 million, respectively, and applying the statutory tax rates of 24.5% and 24.9%, respectively, 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, non-cash lease expense, 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) Includes non-cash lease expense consistent with financial covenant calculations.

(2) 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 Estimates

A description of the Company's critical accounting estimates is contained in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2024. There were no material changes to the Company's critical accounting policies or estimates during the six months ended September 28, 2024.

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, 2024. 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.

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 28, 2024, 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.

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, 2024, except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors.