Seneca Foods Corp - Quarter Report: 2018 September (Form 10-Q)

 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D. C. 20549

 

Form 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarter Ended September 29, 2018

Commission File Number 0-01989

Seneca Foods Corporation

(Exact name of Company as specified in its charter)

New York	16-0733425
(State or other jurisdiction of	(I. R. S. Employer
incorporation or organization)	Identification No.)

 

3736 South Main Street, Marion, New York	14505
(Address of principal executive offices)	(Zip Code)

 

Company's telephone number, including area code                     315/926-8100

 

Not Applicable

Former name, former address and former fiscal year,

if changed since last report

 

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

 

Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and an emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐         Accelerated filer ☑        Non-accelerated filer ☐        Smaller reporting company ☐        Emerging growth company ☐

 

Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No  ☑

 

If an emerging growth company, indicate by checkmark if the Company has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act ☐

 

The number of shares outstanding of each of the issuer's classes of common stock at the latest practical date are:

 

Class	Shares Outstanding at November 2, 2018
Common Stock Class A, $.25 Par	7,808,414
Common Stock Class B, $.25 Par	1,884,191

 

 

 

Seneca Foods Corporation

Quarterly Report on Form 10-Q

Table of Contents

 

		Page
PART 1	FINANCIAL INFORMATION
Item 1	Financial Statements:
	Condensed Consolidated Balance Sheets-September 29, 2018, September 30, 2017 and March 31, 2018	1
	Condensed Consolidated Statements of Net Earnings (Loss)-Three and Six Months Ended September 29, 2018 and September 30, 2017	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)-Three and Six Months Ended September 29, 2018 and September 30, 2017	3
	Condensed Consolidated Statements of Cash Flows-Six Months Ended September 29, 2018 and September 30, 2017	4
	Condensed Consolidated Statement of Stockholders' Equity-Six Months Ended September 29, 2018	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4	Controls and Procedures	25
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	26
Item 1A	Risk Factors	26
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3	Defaults Upon Senior Securities	26
Item 4	Mine Safety Disclosures	26
Item 5	Other Information	26
Item 6	Exhibits	26
SIGNATURES		27

 

 

 

		Unaudited				Unaudited
		September 29, 2018				September 30, 2017				March 31, 2018
ASSETS
Current Assets:
Cash and Cash Equivalents		$	12,795			$	14,940			$	15,102
Accounts Receivable, Net			99,799				97,484				66,210
Current Assets Held For Sale			23,148				-				-
Current Assets Held For Sale-Discontinued Operations			23,690				164,834				109,870
Inventories:
Finished Goods			537,050				527,358				388,905
Work in Process			40,355				32,284				41,663
Raw Materials and Supplies			106,492				96,620				116,391
Total Inventories			683,897				656,262				546,959
Refundable Income Taxes			1,466				336				1,142
Other Current Assets			5,443				2,649				1,856
Total Current Assets			850,238				936,505				741,139
Property, Plant and Equipment, Net			242,408				253,682				258,543
Deferred Income Taxes, Net			5,675				-				5,576
Noncurrent Assets Held For Sale-Discontinued Operations			20,641				20,011				20,098
Other Assets			2,938				3,666				3,489
Total Assets		$	1,121,900			$	1,213,864			$	1,028,845
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable		$	212,111			$	224,128			$	56,752
Deferred Revenue			9,357				9,468				8,362
Accrued Vacation			11,605				11,239				11,691
Accrued Payroll			10,745				11,828				4,955
Other Accrued Expenses			28,587				29,950				20,834
Current Liabilities Held For Sale			141				-				-
Current Liabilities Held For Sale-Discontinued Operations			16,300				33,399				28,573
Current Portion of Long-Term Debt and Capital Lease Obligations			6,633				7,198				7,468
Total Current Liabilities			295,479				327,210				138,635
Long-Term Debt, Less Current Portion			353,549				387,693				407,733
Capital Lease Obligations, Less Current Portion			30,757				36,371				34,331
Pension Liabilities			26,233				9,220				23,290
Deferred Income Taxes, Net			-				1,480				-
Noncurrent Liabilities Held For Sale			616				-				-
Noncurrent Liabilities Held For Sale-Discontinued Operations			552				8,943				7,964
Other Long-Term Liabilities			4,933				13,440				5,829
Total Liabilities			712,119				784,357				617,782
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock			707				719				707
Common Stock, $.25 Par Value Per Share			3,038				3,038				3,038
Additional Paid-in Capital			98,211				98,099				98,161
Treasury Stock, at Cost			(71,135	)			(69,195	)			(69,556	)
Accumulated Other Comprehensive Loss			(25,169	)			(11,073	)			(25,067	)
Retained Earnings			404,129				407,919				403,780
Total Stockholders' Equity			409,781				429,507				411,063
Total Liabilities and Stockholders’ Equity		$	1,121,900			$	1,213,864			$	1,028,845

---

 

		Three Months Ended								Six Months Ended
		September 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Net Sales		$	320,660			$	327,664			$	564,753			$	568,839
Costs and Expenses:
Cost of Product Sold			309,652				305,993				536,957				533,667
Selling, General and Administrative			18,355				18,017				36,043				34,782
Plant Restructuring Charge (Income)			845				(25	)			883				56
Other Operating Income			(3,359	)			(20	)			(4,274	)			(2,632	)
Total Costs and Expenses			325,493				323,965				569,609				565,873
Operating (Loss) Income			(4,833	)			3,699				(4,856	)			2,966
Earnings From Equity Investment			-				-				-				(21	)
Other Income			(1,022	)			(1,469	)			(2,042	)			(2,936	)
Interest Expense, Net			3,898				2,900				7,723				5,578
(Loss) Earnings From Continuing Operations Before Income Taxes			(7,709	)			2,268				(10,537	)			345
Income Taxes (Benefit) Expense From Continuing Operations			(2,075	)			825				(2,743	)			(465	)
(Loss) Earnings From Continuing Operations			(5,634	)			1,443				(7,794	)			810
Earnings (Loss) From Discontinued Operations (net of income taxes)			14,750				(2,543	)			8,155				(2,752	)
Net Earnings (Loss)		$	9,116			$	(1,100	)		$	361			$	(1,942	)
Basic (Loss) Earnings per Common Share:
Continuing Operations		$	(0.58	)		$	0.15			$	(0.80	)		$	0.08
Discontinued Operations			1.51				(0.26	)			0.83				(0.28	)
Net Basic Earnings (Loss) per Common Share		$	0.93			$	(0.11	)		$	0.03			$	(0.20	)
Diluted (Loss) Earnings per Common Share:
Continuing Operations		$	(0.58	)		$	0.15			$	(0.80	)		$	0.08
Discontinued Operations			1.50				(0.26	)			0.83				(0.28	)
Net Diluted Earnings (Loss) per Common Share		$	0.92			$	(0.11	)		$	0.03			$	(0.20	)

---

 

		Three Months Ended								Six Months Ended
		September 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Comprehensive income (loss):
Net earnings (loss)		$	9,116			$	(1,100	)		$	361			$	(1,942	)
Change in pension, post retirement benefits and other (net of tax)			51				43				102				102
Total comprehensive income (loss)		$	9,167			$	(1,057	)		$	463			$	(1,840	)

---

 

		Six Months Ended
		September 29, 2018				September 30, 2017
Cash Flows from Operating Activities:
Net (Loss) Earnings From Continuing Operations		$	(7,794	)		$	810
Net Earnings (Loss) From Discontinued Operations (Net of Tax)			8,155				(2,752	)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash Used In Operations (Net of Acquisition):
Net Cash Used In Operations (Net of Acquisition):
Depreciation & Amortization			16,086				15,349
(Gain) Loss on the Sale of Assets			(10,115	)			(1,591	)
Bargain Purchase Gain			-				(1,096	)
Provision for Restructuring and Impairment			4,287				56
Earnings From Equity Investment			-				(21	)
Deferred Income Tax Benefit			(99	)			(2,357	)
Changes in Operating Assets and Liabilities:
Accounts Receivable			(25,797	)			(34,173	)
Inventories			(72,266	)			(192,151	)
Other Current Assets			(3,226	)			1,106
Income Taxes			(324	)			2,126
Accounts Payable, Accrued Expenses and Other Liabilities			157,812				196,904
Net Cash Provided By (Used In) Operations			66,719				(17,790	)
Cash Flows from Investing Activities:
Additions to Property, Plant and Equipment			(20,318	)			(13,743	)
Cash Paid for Acquisition (Net of Cash Acquired)			-				(14,420	)
Proceeds from the Sale of Assets			20,055				1,790
Net Cash Used In Investing Activities			(263	)			(26,373	)
Cash Flow from Financing Activities:
Long-Term Borrowing			237,304				282,862
Payments on Long-Term Debt and Capital Lease Obligations			(304,777	)			(232,706	)
Payments on Notes Payable			-				(166	)
Other Assets			301				(171	)
Purchase of Treasury Stock			(1,579	)			(2,696	)
Dividends			(12	)			(12	)
Net Cash (Used In) Provided By Financing Activities			(68,763	)			47,111
Net (Decrease) Increase in Cash and Cash Equivalents			(2,307	)			2,948
Cash and Cash Equivalents, Beginning of the Period			15,102				11,992
Cash and Cash Equivalents, End of the Period		$	12,795			$	14,940
Supplemental Disclosures of Cash Flow Information:
Noncash Transactions:
Property, Plant and Equipment Purchased Under Capital Lease Obligations		$	-			$	7,155

---

 

																		Accumulated
										Additional								Other
		Preferred				Common				Paid-In				Treasury				Comprehensive				Retained
		Stock				Stock				Capital				Stock				Loss				Earnings
Balance March 31, 2018		$	707			$	3,038			$	98,161			$	(69,556	)		$	(25,067	)		$	403,780
First Quarter FY 2019:
Net loss			-				-				-				-				-				(8,755	)
Cash dividends paid on preferred stock			-				-				-				-				-				(12	)
Equity incentive program			-				-				25				-				-				-
Change in pension, post retirement benefits, other adjustment (net of tax)			-				-				-				-				(51	)			-
Second Quarter FY 2019:
Net earnings			-				-				-				-				-				9,116
Equity incentive program			-				-				25				-				-				-
Preferred stock conversion			-				-				-				-				-				-
Purchase treasury stock			-				-				-				(1,579	)			-				-
Change in pension, post retirement benefits, other adjustment (net of tax)			-				-				-				-				(51	)			-
Balance September 29, 2018		$	707			$	3,038			$	98,211			$	(71,135	)		$	(25,169	)		$	404,129

Preferred Stock

Common Stock

6

%

10

%

Cumulative Par

Cumulative Par

2003 Series

Value $.25

Value $.025

Participating

Participating

Class A

Class B

Callable at Par

Convertible

Convertible Par

Convertible Par

Common Stock

Common Stock

Voting

Voting

Value $.025

Value $.025

Par Value $.25

Par Value $.25

Shares authorized and designated:

September 29, 2018

200,000

1,400,000

37,529

500

20,000,000

10,000,000

Shares outstanding:

September 29, 2018

200,000

807,240

37,529

500

7,808,414

1,884,191

---

 

1.          Unaudited Condensed Consolidated Financial Statements

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of Seneca Foods Corporation (the “Company”) as of September 29, 2018 and results of its operations and its cash flows for the interim periods presented. All significant intercompany transactions and accounts have been eliminated in consolidation. The March 31, 2018 balance sheet was derived from the audited consolidated financial statements.

 

The results of operations for the three and six month periods ended September 29, 2018 are not necessarily indicative of the results to be expected for the full year.

During the six months ended September 29, 2018, the Company sold $38,302,000 of Green Giant finished goods inventory to B&G Foods, Inc. for cash, on a bill and hold basis, as compared to $73,096,000 for the six months ended September 30, 2017. Under the terms of the bill and hold agreement, title to the specified inventory transferred to B&G. Under the new revenue recognition standard discussed in Note 4 below, this contract qualifies for bill and hold accounting treatment as the Company has concluded that control of the unlabeled products transfers to the customer at the time title transfers and the Company has the right to payment (prior to physical delivery), which results in earlier revenue recognition. Labeling and storage services that are provided after control of the goods has transferred to the customer are accounted for as separate performance obligations for which revenue is deferred until the services are performed.

 

The accounting policies followed by the Company are set forth in Note 1 to the Company's Consolidated Financial Statements in the Company’s 2018 Annual Report on Form 10-K.

 

Other footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company's 2018 Annual Report on Form 10-K.

 

All references to years are fiscal years ended or ending March 31 unless otherwise indicated. Certain percentage tables may not foot due to rounding.

 

Reclassifications—Certain previously reported amounts have been reclassified to conform to the current period classification.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

 

2.            Assets Held For Sale

 

As of September 29, 2018, the Company has certain operating units in the East that met the criteria to be classifed as held for sale, which requires the Company to present the related assets and liabilities as separate line items in our Condensed Consolidated Balance Sheet.  The Company is required to record the assets held for sale at the lower of carrying value or fair value less costs to sell.  The following table presents information related to the major classes of assets and liabilities that were held for sale in our Condensed Consolidated Balance sheets (in thousands):

 

 

 

3.            Assets and Liabilities Held For Sale Discontinued Operations

 

On July 13, 2018, the Company executed a nonbinding letter of intent with a perspective buyer of the Modesto facility. On October 9, 2018, the Company closed on the sale of the facility (buildings and land only) to this outside buyer with net proceeds of $63,326,000. Based on its magnitude of revenue to the Company (approximately 15%) and because the Company was exiting the production of canned peaches, this sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for this sale as required by Accounting Standards Codification 210-05—Discontinued Operations. This business we are exiting is part of the Fruit and Vegetable segment.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

The following table presents information related to the major classes of assets and liabilities of Modesto that are classified as Held For Sale Discontinued Operations in the Company's Consolidated Condensed balance sheets (in thousands):

 

 

 

The operating results of the discontinued operations that are reflected in the Unaudited Condensed Consolidated Statements of Net Earnings (Loss) from discontinued operations are as follows:

 

 

 

(a) Includes $1,653,000 and $1,648,000 of Modesto severance in the three and six month periods of fiscal 2019, respectively.

(b) Includes interest on debt directly related to Modesto including the building mortgage and equipment capital leases and an allocation of the Company's line of credit facility. (c) Includes a $24,211,000 gain as a result of  LIFO layer liquidations from the disposal of the remaining inventory in the second quarter of 2019.

 (d) Includes $4,975,000 gain on the sale of bins for the six months period.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

 

 

4.	Revenue Recognition

 

The Company adopted Accounting Standard Codification Topic 606, Revenue from Contracts with Customer (“ASC 606”) as of April 1, 2018, utilizing the full retrospective method of transition, which requires a restatement of each prior reporting period presented. The Company implemented new policies, processes and systems to enable both the preparation of financial information and internal controls over financial reporting in connection with its adoption of ASC 606. The updated accounting policy for revenue recognition follows:

 

Nature of products

 

We manufacture and sell the following:

•

private label products to retailers, such as supermarkets, mass merchandisers, and specialty retailers, for resale under the retailers’ own or controlled labels;

 

•

private label and branded products to the foodservice industry, including foodservice distributors and national restaurant operators;

 

•

branded products under our own proprietary brands, primarily on a national basis to retailers;

 

•

branded products under co-pack agreements to other major branded companies for their distribution; and

 

•

products to our industrial customer base for repackaging in portion control packages and for use as ingredients by other food manufacturers.

 

Disaggregation of revenue

 

In the following table, segment revenue is disaggregated by product category groups.

 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

When Performance Obligations Are Satisfied

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  The Company’s primary performance obligation is the production of food products and secondarily case and labeling services and storage services for certain bill and hold sales.

 

Revenue recognition is completed primarily on 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.  

 

Customer contracts generally do not include more than one performance obligation.  When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its relative standalone selling price.  The standalone selling price for each distinct good is generally determined by directly observable data.  

 

The performance obligations in our contracts are satisfied within one year. As such, we have not disclosed the transaction price allocated to remaining performance obligations as of September 29, 2018.

 

Significant Payment Terms

 

Our customer contracts identify the product, quantity, price, payment and final delivery terms.  Payment terms usually include early pay discounts.  We grant payment terms consistent with industry standards. Although some payment terms may be extended, no terms beyond one year are granted at contract inception.  As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be generally 30 days or less.  

 

Shipping

 

All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales; this includes shipping and handling costs after control over a product has transferred to a customer.

 

Variable Consideration

 

In addition to fixed contract consideration, some contracts include some form of variable consideration.  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 sales, include amounts paid to retailers for shelf space, to obtain favorable display positions and to offer temporary price reductions for the sale of our products to consumers. Accruals for trade promotions are recorded primarily at the time of sale 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. Final determination of the permissible deductions may take extended periods of time.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

Contract balances

 

Contract asset and liability balances as of September 29, 2018 are immaterial.  The Company does not have significant deferred revenue or unbilled receivable balances because of transactions with customers.  The Company does have deferred revenue for prepaid case and labeling and storage services which have been collected from B&G for Green Giant bill and hold sales.

 

Contract Costs

 

We have identified certain incremental costs to obtain a contract, primarily sales commissions, requiring capitalization under the new standard.  The Company continues to expense these costs as incurred because the amortization period for the costs would have been one year or less.  The Company does not incur significant fulfillment costs requiring capitalization.

 

Impact of Adoption

 

Due to the changes in ASC 606, the September 30, 2017 inventory increased $3.9 million and deferred revenue increased $4.2 million. There were no material impacts to the Condensed Consolidated Statement of Cash Flows.  The following table summarizes the impact of our adoption of ASC 606 on a full retrospective basis on selected Condensed Consolidated Statement of Net Earnings (Loss) items. 

 

Condensed Consolidated Statements of Net Earnings (Loss) (in thousands)

 

 

(1) These reported amounts for the three and six months ended September 30, 2017 are restated amounts.  See the Company's Annual Report on Form 10-K for the year ended March 31, 2018 which was filed on June 29, 2018 and the amended 10-Q filed September 7, 2018 for more information on the restatement.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

 

5.	Inventories

 

First-In, First-Out (“FIFO”) based inventory costs exceeded LIFO based inventory costs by $134,953,000 as of the end of the second quarter of fiscal 2019 as compared to $151,096,000 as of the end of the second quarter of fiscal 2018. The change in the LIFO Reserve for the three months ended September 29, 2018 was a net decrease of $9,550,000 as compared to an increase of $10,398,000 (including a decrease of $361,000 related to Discontinued Operations)  for the three months ended September 30, 2017. The current quarter net decrease includes a decrease of $24,211,000 related to the LIFO impact of a gain related to the disposition of Modesto Fruit (reduction in inventory units) which is included in Earnings from Discontinued Operations and is partially offset by an increase of $14,661,000 related to Continuing Operations included in Cost of Product Sold which is primarily due to higher steel costs for the Company's cans and higher pack costs for peas due to reduced yields in the fields.

 

The change in the LIFO Reserve for the six months ended September 29, 2018 was a net decrease of $10,054,000 as compared to an increase of $17,841,000 (including a decrease of $654,000 related to Discontinued Operations)  for the six months ended September 30, 2017. The year-to-date net decrease includes a decrease of $24,211,000 related to the LIFO impact of gain on sale of Modesto Fruit which is included in Earnings From Discontinued Operations and includes an increase of $14,157,000 related to Continuing Operations included in Cost of Product Sold. This reflects the projected impact of the disposal of Modesto Fruit partially offset by an overall cost increase expected in fiscal 2019 versus fiscal 2018.

 

 

6.	Revolving Credit Facility

 

The Company completed the closing of a new five-year revolving credit facility (“Revolver”) on July 5, 2016. Maximum borrowings under the Revolver total $400,000,000 from April through July and $500,000,000 from August through March.   The Revolver balance as of September 29, 2018 was $242,947,000 and is included in Long-Term Debt in the accompanying Condensed Consolidated Balance Sheet since the Revolver matures on July 5, 2021. The total unused credit availability was $243,500,000 as of September 29, 2018. 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 and fruits the Company processes. The majority of vegetable and fruit inventories are produced during the months of June through November and are then sold over the following year. Payment terms for vegetable and fruit 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.

 

The decrease in the reported end of period amount of Revolver borrowings during the first six months of fiscal 2019 compared to the first six months of fiscal 2018 was attributable to Working Capital which is $54,536,000 lower than the same period last year primarily due to the Modesto disposal.

 

General terms of the Revolver include payment of interest at LIBOR plus a defined spread.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

The following table documents the quantitative data for Revolver borrowings during the second quarter and year-to-date of fiscal 2019 and fiscal 2018:

 

 

 

 

7.	Stockholders’ Equity
	During the six-month period ended September 29, 2018, the Company repurchased 51,867 shares of its Class A Common Stock as Treasury Stock. As of September 29, 2018, there are 2,460,963 shares or $71,135,000 of repurchased stock. These shares are not considered outstanding.

 

 

8.	Retirement Plans
	The net periodic benefit cost for the Company’s pension plan consisted of:

 

 

 

There was no contribution to the pension plan in the three or six month periods ended September 29, 2018 or September 30, 2017.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

 

9.	Plant Restructuring

 

The following table summarizes the rollforward of continuing restructuring charges and related asset impairment charges recorded and the accruals established:

 

 

 

 

 

During the quarter ended September 29, 2018, the Company recorded a restructuring charge of $845,000 related to the closing and sale of plants in the East and Northwest of which $841,000 was related to severance cost, and $4,000 which was related to other costs (mostly equipment moves). During the quarter ended June 30, 2018, the Company recorded a restructuring charge of $38,000, related to the closing of plants in the Northwest of which $110,000 was related to severance cost and $20,000 was related to other costs (mostly equipment moves), which was partially offset by an asset impairment correction of $(92,000).

 

During the six months ended September 30, 2017, the Company recorded a restructuring charge of $56,000 related to the previous closing of a Northwest plant of which $36,000 was related to severance costs..

 

 

10.	Other Operating Income and Expense

 

During the six months ended September 29, 2018, the Company sold unused fixed assets which resulted in a gain of $4,060,000 as compared to a gain of $1,591,000 during the six months ended September 30, 2017. The current year gain was related to the sale of a closed plant in the Midwest. The Company also recorded a bargain purchase gain of $1,096,000 during the six months ended September 30, 2017. These items are included in other operating income in the Unaudited Condensed Consolidated Statements of Net Earnings.

 

 

11.	Recently Issued Accounting Standard

 

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, now commonly referred to as Accounting Standards Codification Topic 606 (“ASC 606”). The FASB issued ASC 606 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. ASC 606 requires the recognition of revenue when control of performance obligations as stipulated in the contracts, is transferred to a customer for an amount that reflects the consideration the entity expects to receive in exchange for promised goods and services. 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

The Company adopted ASC 606 as of April 1, 2018, utilizing the full retrospective method of transition, which requires a restatement of each prior reporting period presented. In adopting ASC 606, the Company used the practical expedient where the transaction price allocated to the remaining performance obligations before the date of the initial application is not disclosed. The Company implemented new policies, processes and systems to enable both the preparation of financial information and internal controls over financial reporting in connection with its adoption of ASC 606. The primary impact of adopting ASC 606 on the Company’s 2019 and 2018 revenue was to report the product sales to B&G as bill and hold sales, but deferring a small portion of the sale for future case and labeling services along with storage services.  See Note 4 for more information.

 

In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." This update provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. If elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance is effective for annual periods beginning after December 15, 2018. We currently expect to adopt ASU 2016-02 as of April 1, 2019, under the modified prospective method.  Our evaluation of ASU 2016-02 is ongoing and not complete.  The Company believes that the new standard will have a material impact on its consolidated balance sheet due to the recognition of ROU assets and liabilities for the Company’s operating leases but it will not have a material impact on its statement of operations or liquidity.  We expect our accounting for capital leases to remain substantially unchanged. The ASU also will require disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. Our leasing activity is primarily related to buildings and equipment.  The Company is continuing to evaluate potential impacts to its consolidated financial statements

 

In January 2017, the FASB issued ASU No. 2017-01 ("ASU 2017-01"), Business Combinations (Topic 805): Clarifying the Definition of a Business which clarifies the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted for transactions which occur before the issuance or effective date of the amendments, only when the transaction has not been reported in the financial statements that have been issued or made available for issuance. ASU 2017-01 is to be applied on a prospective basis. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

 

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”  ASU 2017-07 requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same statement of earnings captions as other compensation costs arising from services rendered by the covered employees during the period.  The other components of net benefit cost will be presented in the statement of earnings separately from service costs.  ASU 2017-07 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for the Company).  Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice.  The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories.  The Company adopted the new guidance in first quarter of fiscal year 2019, and the changes to earnings before income taxes were immaterial in the year of adoption.

 

There were no other recently issued accounting pronouncements that impacted the Company’s condensed consolidated financial statements. In addition, the Company did not adopt any other new accounting pronouncements during the quarter ended September 29, 2018.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

 

12.	(Loss) Earnings per Common Share From Continuing Operations

 

(Loss) earnings per share for the quarters ended September 29, 2018 and September 30, 2017 are as follows:

 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

 

13.	Fair Value of Financial Instruments

 

As required by Accounting Standards Codification ("ASC") 825, “Financial Instruments,” the Company estimates the fair values of financial instruments on a quarterly basis. The estimated fair value for long-term debt (classified as Level 2 in the fair value hierarchy) is determined by the quoted market prices for similar debt (comparable to the Company’s financial strength) or current rates offered to the Company for debt with the same maturities. Long-term debt, including current portion had a carrying amount of $354,397,000 and an estimated fair value of $354,304,000 as of September 29, 2018. As of March 31, 2018, the carrying amount was $409,396,000 and the estimated fair value was $408,942,000. Capital lease obligations, including current portion had a carrying amount of $37,300,000 and an estimated fair value of $34,095,000 as of September 29, 2018. As of March 31, 2018, the carrying amount was $40,137,000 and the estimated fair value was $37,287,000. The fair values of all the other financial instruments approximate their carrying value due to their short-term nature.

 

 

14.	Income Taxes

 

The effective tax rate from continuing operations was 26.0% and (134.8)% for the six month periods ended September 29, 2018 and September 30, 2017, respectively. Of the 160.8 percentage point increase in the effective tax rate, the change in the income tax rate resulting from the Tax Cuts and Jobs Act accounts for a 14% decrease.  The significant increases in the effective tax rate for 2018 include the following.  The effect of the bargain purchase gain and the outside basis difference write-off for the purchase of Truitt Brothers.  These items account for a 167.1% increase in the tax rate in 2019 compared to 2018. 

 

 

15.	Subsequent Events

 

On October 9, 2018, the Company completed the sale of its Modesto facility with net proceeds of $63,326,000 and is expecting a gain on the transaction of approximately $53,864,000 before income taxes.

 

On November 5, 2018, the Company amended the Farm Credit term loan.  The amendment lowered the variable interest rate for this loan by 0.10%. 

 

 

 

---

---

---

---

---

---

---

---

---

---