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

senea20180930_10q.htm
 

 

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

 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Data)

 

 

   

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  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS (LOSS)

(Unaudited)

(In Thousands, Except Per Share Data)

 

   

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 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In Thousands)

 

   

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 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

   

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  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

(In Thousands)

 

                                   

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  

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

SENECA FOODS CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 29, 2018

 

 

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):

 

Inventories

  $ 13,619  

Property, Plant and Equipment (net)

    9,529  
         

Current Assets Held For Sale

  $ 23,148  
         

Capital Lease Obligations Current Portion

  $ 141  

Current Liabilities Held For Sale

  $ 141  
         

Capital Lease Obligations

  $ 616  

Noncurrent Liabilities Held For Sale

  $ 616  

 

 

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):

 

   

September 29,

   

September 30,

   

March 31,

 
   

2018

   

2017

   

2018

 

Accounts Receivable

  $ 5,058     $ 14,813     $ 12,586  

Inventories

    18,632       150,021       96,996  

Other Current Assets

    -       -       288  
                         

Current Assets Held For Sale-Discontinued Operations

  $ 23,690     $ 164,834     $ 109,870  
                         

Other Assets

  $ 1,674     $ 1,517     $ 1,616  

Property, Plant and Equipment (net)

    18,967       18,494       18,482  
                         

Noncurrent Assets Held For Sale-Discontinued Operations

  $ 20,641     $ 20,011     $ 20,098  
                         

Accounts Payable and Accrued Expenses

  $ 16,178     $ 31,157     $ 26,226  

Long-Term Debt and Capital Leases Current Portion

    122       2,242       2,347  

Current Liabilities Held For Sale-Discontinued Operations

  $ 16,300     $ 33,399     $ 28,573  
                         

Long-Term Debt and Capital Lease Obligations

  $ 552     $ 8,943     $ 7,964  

Noncurrent Liabilities Held For Sale-Discontinued Operations

  $ 552     $ 8,943     $ 7,964  

 

 

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:

 

 

   

Three Months Ended

   

Six Months Ended

 
   

September 29,

   

September 30,

   

September 29,

   

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net Sales

  $ 10,750     $ 46,595     $ 110,049     $ 86,082  
                                 

Costs and Expenses:

                               
                                 

Cost of Product Sold

    13,887       49,319       124,076       88,017  

Selling, General and Administrative

    218       848       998       1,536  

Plant Restructuring Charge (a)

    1,714       -       3,496       -  

Interest Expense (b)

    453       533       1,077       1,072  
      Total cost and expenses     16,272       50,700       129,647       90,625  

Loss From Discontinued Operations Before Income Taxes

    (5,522 )     (4,105 )     (19,598 )     (4,543 )

Gain on the Sale of Assets and Other Income Before Income Taxes (c) (d)

    (24,628 )     -       (30,266 )     -  

Income Tax Expense (Benefit)

    4,356       (1,562 )     2,513       (1,791 )

Net Earnings (Loss) From Discontinued Operations, Net of Tax

  $ 14,750     $ (2,543 )   $ 8,155     $ (2,752 )

 

(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.

                                 

Supplemental Information on Discontinued Operations:

                               

Capital Expenditures

    -       542       3,937       1,268  

Depreciation

    618       499       1,295       1,092  

 

 

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.

 

    Three Months Ended    

Six Months Ended

 
   

September 29,

2018

   

September 30,

2017

   

September 29,

2018

   

September 30,

2017

 

Canned Vegetables

  $ 209.7     $ 184.9     $ 371.6     $ 338.7  

B&G*

    31.7       68.8       39.0       79.9  

Frozen

    29.7       24.2       57.8       51.2  

Fruit Products

    22.3       24.1       43.5       44.5  

Chip Products

    3.2       3.3       5.2       5.5  

Prepared Foods

  19.9     19.4       37.3       41.1  

Other

    4.2       3.0       10.4       7.9  
    $ 320.7     $ 327.7     $ 564.8     $ 568.8  
                                 

*B&G includes both canned and frozen vegetable sales exclusively for B&G under the Green Giant label.

 

 

 

 

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)

 

For the Three Months Ended

 
         

September 30,

2017

       
 

As Reported

(1)

   

606 Adjustments

  Less Discontinued Operations

As Adjusted

 

Net sales

$ 338,470     $ 35,789   $ ( 46,595 ) $ 327,664  

Cost of products sold

  321,059       34,253     ( 49,319 )   305,993  

Gross profit (loss)

  17,411       1,536       2,724     21,671  

Operating (loss) income

  (1,409

)

    1,536       3,572     3,699

 

Loss (earnings) before income taxes

  (4,842

)

    3,005       4,105     2,268

 

Net loss (earnings) from continuing operations

  (2,958

)

    1,858       2,543     1,443

 

 

 

For the Six Months Ended

 
         

September 30,

2017

       
 

As Reported

(1)

   

606 Adjustments

  Less Discontinued Operations

As Adjusted

 

Net sales

$ 627,397     $ 27,524   $ ( 86,082 ) $ 568,839  

Cost of products sold

  594,451       27,233     ( 88,017 )   533,667  

Gross profit (loss)

  32,946       291       1,935     35,172  

Operating (loss) income

  (796

)

    291       3,471     2,966

 

Loss (earnings) before income taxes

  (7,425

)

    3,227       4,543     345

 

Net loss (earnings) from continuing operations

  (3,938

)

    1,996       2,752     810

 

 

(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:

 

   

Second Quarter

   

Year-to-Date

 
   

2019

   

2018

   

2019

   

2018

 
   

(In thousands)

   

(In thousands)

 

Reported end of period:

                               

Outstanding borrowings

  $ 242,947     $ 272,609     $ 242,947     $ 272,609  

Weighted average interest rate

    3.73

%

    2.75

%

    3.73

%

    2.75

%

Reported during the period:

                               

Maximum amount of borrowings

  $ 242,947     $ 274,117     $ 294,062     $ 274,117  

Average outstanding borrowings

  $ 220,917     $ 244,160     $ 241,855     $ 229,235  

Weighted average interest rate

    3.64

%

    2.58

%

    3.56

%

    2.45

%

 

 

 

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:

 

   

Three Months Ended

    Six Months Ended  
   

September 29,

2018

   

September 30,

2017

   

September 29,

2018

   

September 30,

2017

 
   

(In thousands)

 

Service Cost

  $ 2,442     $ 1,981     $ 4,885     $ 3,963  

Interest Cost

    2,243       1,985       4,486       3,971  

Expected Return on Plan Assets

    (3,596 )     (3,482 )     (7,192 )     (6,967 )

Amortization of Prior Service Cost

    30       0       60       0  

Amortization of Net Gain

    303       30       605       60  

Net Periodic Benefit Cost

  $ 1,422     $ 514     $ 2,844     $ 1,027  

 

 

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:

 

   

Restructuring Payable

 
   

Severance

   

Other Costs

   

Total

 
   

(In thousands)

 
                         

Balance March 31, 2018

  $ -     $ -     $ -  

First quarter charge

    110       -       110  

Second quarter charge

    841       -       841  

Cash payments/write offs

    (173 )     -       (173 )

Balance September 29, 2018

  $ 778     $ -     $ 778  

 

 

   

Severance

   

Other Costs

   

Total

 
   

(In thousands)

 
                         

Balance March 31, 2017

  $ 37     $ 305     $ 342  

First quarter charge

    36       36       72  

Second quarter credit

    -       (33 )     (33 )

Cash payments/write offs

    (73 )     (308 )     (381 )

Balance September 30, 2017

  $ -     $ -     $ -  

 

 

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:

 

   

Q U A R T E R

   

Y E A R T O D A T E

 

(Thousands, except share amounts)

 

Fiscal 2019

   

Fiscal 2018

   

Fiscal 2019

   

Fiscal 2018

 

Basic

                               
                                 

(Loss) earnings from continuing operations

  $ (5,634 )   $ 1,443     $ (7,794 )   $ 810  

Deduct preferred stock dividends paid

    6       6       12       12  
                                 

Undistributed (loss) earnings from continuing operations

    (5,640 )     1,437       (7,806 )     798  

(Loss) earnings from continuing operations attributable to participating preferred

    (22 )     6       (30 )     4  
                                 

(Loss) earnings from continuing operations attributable to common shareholders

  $ (5,618 )   $ 1,431     $ (7,776 )   $ 794  
                                 

Weighted average common shares outstanding

    9,729       9,803       9,729       9,803  
                                 

Basic (loss) earnings per common share from continuing operations

  $ (0.58 )   $ 0.15     $ (0.80 )   $ 0.08  
                                 

Diluted

                               
                                 

(Loss) earnings from continuing operations attributable to common shareholders

  $ (5,618 )   $ 1,431     $ (7,776 )   $ 794  

Add dividends on convertible preferred stock

    -       5       -       10  
                                 

(Loss) earnings from continuing operations attributable to common stock on a diluted basis

  $ (5,618 )   $ 1,436     $ (7,776 )   $ 804  
                                 

Weighted average common shares outstanding-basic

    9,729       9,803       9,729       9,803  

Additional shares issued related to the equity compensation plan

    -       2       -       2  

Additional shares to be issued under full conversion of preferred stock

    -       67       -       67  
                                 

Total shares for diluted

    9,729       9,872       9,729       9,872  
                                 

Diluted (loss) earnings per common share from continuing operations

  $ (0.58 )   $ 0.15     $ (0.80 )   $ 0.08  

 

 

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%. 

 

 

 

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

September 29, 2018

 

Seneca Foods Corporation (the “Company”) is a leading provider of packaged fruits and vegetables, with facilities located throughout the United States. The Company’s product offerings include canned, frozen and bottled produce and snack chips. Its products are sold under private label as well as national and regional brands that the Company owns or licenses, including Seneca®, Libby’s®, Aunt Nellie’s®, Cherryman®, Green Valley®, READ® and Seneca Farms®. The Company’s canned fruits and vegetables are sold nationwide by major grocery outlets, including supermarkets, mass merchandisers, limited assortment stores, club stores and dollar stores. The Company also sells its products to foodservice distributors, industrial markets, other food processors, export customers in over 90 countries and federal, state and local governments for school and other food programs. The Company packs Green Giant®, Le Sueur® and other brands of canned vegetables as well as select Green Giant® frozen vegetables for B&G Foods North America (“B&G”) under a contract packing agreement. In addition, Seneca provides contract packing services mostly through its wholly owned subsidiary Truitt Bros., Inc.

 

On February 16, 2018, the Company announced production at its fruit (primarily peaches) processing plant in Modesto, California will cease prior to the 2018 production season.  During the second fiscal quarter of 2019, the Company sold and transferred most of the remaining inventory in the facility and completed most of the labeling and casing required to PCP for the fruit inventory sold to them in the first quarter.  The Company continued to ready the building and equipment for sale.  The Modesto operations have met the requirements (approximately a 15% reduction in revenue and a strategic shift away from producing peaches) for discontinued operations and those operations have been presented as such in these financial statements.   Subsequent to the date of these financial statements, the building and the land was sold to an unrelated third party for net proceeds of $63,326,000 and the Company is expecting to auction off the equipment in the third quarter. See note 3 Discontinued Operations for more details. 

The Company’s raw product is harvested mainly between June through November.

 

Results of Operations

 

Sales:

 

The second fiscal quarter 2019 results include net continuing sales of $320,660,000, which represents a 2.1% decrease, or $7,004,000, from the second quarter of fiscal 2017.  The net decrease in sales is a sales volume decrease of $9,950,000 partially offset by higher selling prices/sales mix of $2,946,000. The decrease in sales is primarily from a $37,088,000 decrease in B&G Foods, Inc. sales, a $1,844,000 decrease in other Canned Fruit sales partially offset by a $24,797,000 increase in Canned Vegetable sales, a $5,548,000 increase in Frozen sales a $1,214,000 increase in Other sales and a $433,000 increase in Prepared Food sales.

 

The first half of fiscal 2019 results include net continuing sales of $564,753,000, which represents a 0.7% decrease, or $4,086,000, from the first half of fiscal 2018.  The net decrease in sales is a sales volume decrease of $18,824,000 partially offset by higher selling prices/sales mix of $14,738,000. The decrease in sales is primarily from a $40,901,000 decrease in B&G Foods, Inc. sales, a $3,894,000 decrease in Prepared Food sales, a $1,136,000 decrease in other Canned Fruit sales, partially offset by a $32,947,000 increase in Canned Vegetable sales, a $6,656,000 increase in Frozen sales and a $2,567,000 increase in Other sales.

 

 

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

September 29, 2018

 

The following table presents continuing sales by product category (in millions):

 

   

Three Months Ended

    Six Months Ended  
   

September 29,

2018

   

September 30,

2017

   

September 29,

2018

   

September 30,

2017

 

Canned Vegetables

  $ 209.7     $ 184.9     $ 371.6     $ 338.7  

B&G*

    31.7       68.8       39.0       79.9  

Frozen

    29.7       24.2       57.8       51.2  

Fruit Products

    22.3       24.1       43.5       44.6  

Chip Products

    3.2       3.3       5.2       5.4  

Prepared Foods

 

19.9

   

19.4

      37.3       41.1  

Other

    4.2       3.0       10.4       7.9  
    $ 320.7     $ 327.7     $ 564.8     $ 568.8  

 

*B&G includes canned and frozen vegetable sales exclusively for B&G.

 

 

Operating Income:

The following table presents components of continuing operating income as a percentage of net sales:

 

   

Three Months Ended

    Six Months Ended   
   

September 29, 2018

   

September 30, 2017

   

September 29, 2018

   

September 30, 2017

 

Gross Margin

    3.4 %     6.6 %     4.9 %     6.2 %
                                 

Selling

    2.7 %     2.6 %     2.9 %     2.9 %

Administrative

    3.0 %     2.9 %     3.4 %     3.2 %

Plant Restructuring

    0.3 %     0.0 %     0.2 %     0.0 %

Other Operating (Income) Expense

    -1.0 %     0.0 %     -0.8 %     -0.5 %
                                 

Operating (Loss) Income

    -1.5 %     1.1 %     -0.9 %     0.5 %
                                 

Interest Expense, Net

    1.2 %     0.9 %     1.4 %     1.0 %

 

 

For the three month period ended September 29, 2018, the gross margin decreased from the prior year quarter from 6.6% to 3.4% due primarily to lower volume and cost increases in the second quarter of 2019 and a higher LIFO charge. The LIFO charge for continuing operations for the second quarter ended September 29, 2018 was $14,661,000 as compared to a charge of $10,759,000 for the second quarter ended September 30, 2017 and reflects the impact on the quarter of higher cost increases for steel and lower yields with peas incurred in fiscal 2019, compared with smaller cost increases to fiscal 2018. On an after-tax basis, LIFO net earnings decreased by $10,996,000 for the quarter ended September 29, 2018 and decreased LIFO net earnings by $6,993,000 for the quarter ended September 30, 2017, based on the historical statutory federal income tax rate.

For the six month period ended September 29, 2018, the gross margin decreased from the prior year period from 6.2% to 4.9% due primarily to lower volume and cost increases, partially offset by a lower LIFO charge in the current year. The LIFO charge for from continuing operations for the first half ended September 29, 2018 which was $14,157,000 as compared to a charge of $18,495,000 for the first half ended September 30, 2017 and reflects the impact on the quarter of lower cost increases incurred in fiscal 2019, compared with smaller cost increases to fiscal 2018. On an after-tax basis, LIFO net earnings increased by $10,618,000 for the first half ended September 29, 2018 and decreased LIFO net earnings by $12,022,000 for the first half ended September 30, 2017, based on the historical statutory federal income tax rate.

 

 

 

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

September 29, 2018

 

 

For the three month period ended September 29, 2018, selling costs as a percentage of sales increased from 2.6% to 2.7% compared to the prior year. For the six month period ended September 29, 2018, selling costs as a percentage of sales remained the same at 2.9% compared to the prior year.

 

For the three month period ended September 29, 2018, administrative expense as a percentage of sales increased from 2.9% to 3.0%. For the six month period ended September 29, 2018, administrative expense as a percentage of sales increased from 3.2% to 3.4%. This is primarily due to lower sales during the quarter and six months compared to same periods in the prior year and the fixed nature of these administrative costs.

 

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 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.

 

Interest expense for the first quarter ended September 29, 2018, as a percentage of sales, increased to 1.2% from 0.9% in second quarter ended September 30, 2017. Interest expense for the six months ended September 29, 2018, as a percentage of sales, increased to 1.4% from 1.0% in second quarter ended September 30, 2017. During fiscal 2019, overall borrowings and interest rates were higher than the previous year.

 

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. 

  (Loss) per Share:

Continuing basic and diluted (loss) earnings per share were $(0.58) and $0.15 for the three months ended September 29, 2018 and September 30, 2017, respectively. Continuing basic and diluted (loss) earnings per share were $(0.80) and $0.08 for the six months ended September 29, 2018 and September 30, 2017, respectively. For details of the calculation of these amounts, refer to footnote 12 of the Notes to Condensed Consolidated Financial Statements.

 

 

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

September 29, 2018

 

Liquidity and Capital Resources:

 

The financial condition of the Company is summarized in the following table and explanatory review:

 

   

September 29,

   

September 30,

   

March 31,

   

March 31,

 
   

2018

   

2017

   

2018

   

2017

 

Working Capital:

                               

Balance

  $ 554,759     $ 609,295     $ 602,504     $ 555,993  

Change in Quarter

    55,783       41,981                  

Long-Term Debt, Less Current Portion

    353,549       387,693       407,733       329,138  

Capital Lease Obligations, Less Current Portion

    30,757       36,371       34,331       34,194  

Total Stockholders' Equity Per Equivalent

                               

Common Share (see Note below)

    41.82       43.53       41.66       43.63  

Stockholders' Equity Per Common Share

    42.20       43.94       42.05       44.20  

Current Ratio

    2.88       2.86       5.35       5.20  

 

Note: 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 8 of the Notes to Consolidated Financial Statements of the Company’s 2018 Annual Report on Form 10-K for conversion details.

 

As shown in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $66,719,000 in the first six months of fiscal 2019, compared to net cash used by operating activities of $17,790,000 in the first six months of fiscal 2018. The $84,509,000 increase in cash provided is primarily attributable to a $119,885,000 decrease in cash used for inventory in the first six months of fiscal 2019 as compared to the first six months of fiscal 2018, which includes a $55,800,000 sale of Fruit inventory to PCP, in the first quarter partially offset by a $4,332,000 decrease in cash provided by other current assets, a $2,450,000 decrease in cash provided by income taxes, and a $39,092,000 decrease in cash provided by accounts payable, accrued expenses and other liabilities a $8,376,000 decrease in cash used by accounts receivable, and an increased net earnings of $2,303,000.

 

As compared to September 30, 2017, inventory increased $27,635,000 to $683,897,000 at September 29, 2018 (including a $55,800,000 decrease from the Pacific Coast Producers inventory sale). The components of the inventory increase reflect a $9,692,000 increase in finished goods, a $8,071,000 increase in work in process and a $9,872,000 increase in raw materials and supplies. The finished goods increase reflects higher inventory quantities attributable to the higher calendar year 2018 pack versus the calendar year 2017 pack partially offset by the $55,800,000 inventory sale to PCP. The raw materials and supplies increase is primarily due to an increase in cans and raw steel quantities compared to the prior year. FIFO based inventory costs exceeded LIFO based inventory costs by $134,953,000 as of the end of the second quarter of 2019 as compared to $151,096,000 as of the end of the second quarter of 2018.

 

Cash used in investing activities was $263,000 in the first six months of fiscal 2019 compared to cash used in investing activities of $26,373,000 in the first six months of fiscal 2018. Additions to property, plant and equipment were $20,318,000 in the first six months of fiscal 2019 as compared to $13,743,000 in first six months of fiscal 2018. The Company received proceeds from the sale of assets of $20,055,000 in the first six months of fiscal 2019 as compared to $1,790,000 in the first six months of fiscal 2018. In April 2017, the Company acquired the other 50% of Truitt Bros., Inc. for $14,420,000 (net of cash acquired).

 

Cash provided used in financing activities was $68,763,000 in the first six months of fiscal 2019, which included borrowings of $237,304,000 and the repayment of $304,777,000 of long-term debt, principally consisting of borrowings and repayments on the revolving credit facility (“Revolver”). Other than borrowings under the Revolver, there was no new long-term debt during the first six months of fiscal 2018 other than the $13,470,000 acquired via the acquisition of Truitt Bros., Inc. of which $3,515,000 was paid off immediately. The Company repurchased $1,579,000 and $2,696,000 of stock during the second quarter of fiscal year 2019 and 2018, respectively.

 

 

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

September 29, 2018

 

The Company entered into a five-year revolving credit facility on July 5, 2016. Available borrowings on the Revolver total $400,000,000 from April through July and $500,000,000 from August through March with a maturity date of July 5, 2021. The total unused credit availability was $243,500,000 as of September 29, 2018. The interest rate on the Revolver is based on LIBOR plus an applicable margin based on excess availability and the Company's fixed charge coverage ratio. As of September 29, 2018, the interest rate was approximately 3.73% on a balance of $242,947,000. We believe that cash flows from operations, availability under our Revolver and other financing sources will provide adequate funds for our working capital needs, planned capital expenditures, and debt obligations for at least the next 12 months.

 

The Company’s credit facilities contain standard representations and warranties, events of default, and certain affirmative and negative covenants, including various financial covenants. At September 29, 2018, the Company was in compliance with all such financial covenants.

 

New Accounting Standards

 

Refer to footnote 11 of the Notes to Condensed Consolidated Financial Statements.

 

Seasonality

 

The Company's revenues are typically higher in the second and third fiscal quarters. This is due in part because the Company sells, on a bill and hold basis, Green Giant canned and frozen vegetables to B&G either weekly during production for specialty items, or at the end of each pack cycle, which typically occurs during these quarters. B&G buys the product from the Company at cost plus a specified fee for each equivalent case. See the Critical Accounting Policies section below for further details. The Company’s non-Green Giant sales also exhibit seasonality with the third fiscal quarter generating the highest retail sales due to holidays that occur during that quarter.

 

Forward-Looking Information

 

The information contained in this report contains, or may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company or its officers (including statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates” or similar expressions) with respect to various matters, including (i) the Company’s anticipated needs for, and the availability of, cash, (ii) the Company’s liquidity and financing plans, (iii) the Company’s ability to successfully integrate acquisitions into its operations, (iv) trends affecting the Company’s financial condition or results of operations, including anticipated sales price levels and anticipated expense levels, in particular higher production, fuel and transportation costs, (v) the Company’s plans for expansion of its business (including through acquisitions) and cost savings, and (vi) the impact of competition.

 

 

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Unaudited)

September 29, 2018

 

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Investors are cautioned not to place undue reliance on such statements, which speak only to events as of the date the statements were made. Among the factors that could cause actual results to differ materially are:

 

 

general economic and business conditions;

 

cost and availability of commodities and other raw materials such as vegetables, steel and packaging materials;

 

transportation costs;

 

climate and weather affecting growing conditions and crop yields;

 

the availability of financing;

 

leverage and the Company’s ability to service and reduce its debt;

 

foreign currency exchange and interest rate fluctuations;

 

effectiveness of the Company’s marketing and trade promotion programs;

 

changing consumer preferences;

 

competition;

 

product liability claims;

 

the loss of significant customers or a substantial reduction in orders from these customers;

 

changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including environmental and health and safety regulations; and

 

other risks detailed from time to time in the reports filed by the Company with the SEC.

 

Except for ongoing obligations to disclose material information as required by the federal securities laws, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of the filing of this report or to reflect the occurrence of unanticipated events.

 

Critical Accounting Policies

 

During the six months ended September 29, 2018, the Company sold $38,302,000 of Green Giant finished goods inventory to B&G Foods North America (“B&G”) 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, 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.

 

Trade promotions are an important component of the sales and marketing of the Company’s branded products, and are critical to the support of the business. Trade promotion costs, which are recorded as a reduction of net sales, include amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, amounts paid to obtain favorable display positions in retailers’ stores, and amounts paid to retailers for shelf space in retail stores. Accruals for trade promotions are recorded primarily at the time of sale of product 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 us. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by retailers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time.

 

The Company uses the lower of cost, determined under the LIFO (last-in, first out) method, or market, to value substantially all of its inventories. In a high inflation environment that the Company was experiencing, the Company believes that the LIFO method was preferable over the FIFO method because it better compares the cost of current production to current revenue.

 

The Company assesses its long-lived assets for impairment whenever there is an indicator of impairment. Property, plant, and equipment are depreciated over their assigned lives. The assigned lives and the projected cash flows used to test impairment are subjective. If actual lives are shorter than anticipated or if future cash flows are less than anticipated, a future impairment charge or a loss on disposal of the assets could be incurred. Impairment losses are evaluated if the estimated undiscounted value of the cash flows is less than the carrying value. If such is the case, a loss is recognized when the carrying value of an asset exceeds its fair value.

 

 

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

 

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. In addition, the Company is exposed to fluctuations in interest rates, primarily related to its revolving credit facility and the $100,000,000 term loan. To manage interest rate risk, the Company uses both fixed and variable interest rate debt plus fixed interest rate capital lease obligations. There have been no material changes to the Company’s exposure to market risk since March 31, 2018.

 

 

ITEM 4 Controls and Procedures

 

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 29, 2018, 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.

 

During the three months ended September 29, 2018, management completed it remediation plan related to the previously reported material weakness in the Company's internal control over financial reporting related to revenue recognition with respect to bill and hold transactions.  Management completed its testing of the additional controls instituted during the second fiscal quarter.  There were no other 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.

 

 

PART II – OTHER INFORMATION
 

Item 1. Legal Proceedings
   
  Refer to footnote 14 to the Consolidated Financial Statements included in Part II Item 8 of the Annual Report on Form 10-K.
   
Item 1A.  Risk Factors
   
  There have been no material changes to the risk factors disclosed in the Company’s Form 10-K for the period ended March 31, 2018 except to the extent factual information disclosed elsewhere in this Form 10-Q relates to such risk factors.

         

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

   

Total Number of

   

Average Price Paid

   

Total Number

   

Maximum Number

 
   

Shares Purchased

   

per Share

   

of Shares

   

(or Approximate

 
                                   

Purchased as

   

Dollar Value) or

 
                                   

Part of Publicly

   

Shares that May

 
                                   

Announced

   

Yet Be Purchased

 
   

Class A

   

Class B

   

Class A

   

Class B

   

Plans or

   

Under the Plans or

 

Period

 

Common

   

Common

   

Common

   

Common

   

Programs

   

Programs

 

7/01/2018 –

                                               

7/31/2018

    15,400 (1)     -     $ 28.93     $ -       -          

8/01/2018 –

                                               

8/31/2018

    13,501       -     $ 29.28     $ -       13,501          

9/01/2018 –

                                               

9/30/2018

    22,966       -     $ 32.17     $ -       22,966          

Total

    51,867       -     $ 30.45     $ -       36,467       1,029,691  

 

Note 1: These shares were purchased by the Company in open market transactions for the intended use by the trustees of Seneca Foods Corporation Employees' Savings Plan 401(k) Retirement Savings Plan to provide employee matching contributions under the plan.

 

 

Item 3. Defaults Upon Senior Securities
   
  None.
   
Item 4. Mine Safety Disclosures
   
  None.
   
Item 5. Other Information
   
  None.

 

 

Item 6. Exhibits

 

31.1

Certification of Kraig H. Kayser pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

   

31.2

Certification of Timothy J. Benjamin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

   

32

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

   

101

The following materials from Seneca Foods Corporation’s Quarterly Report on Form 10-Q for the three months ended September 29, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of net loss, (iii) condensed consolidated statements of comprehensive loss, (iv) condensed consolidated statements of cash flows, (v) condensed consolidated statement of stockholders’ equity and (vi) the notes to condensed consolidated financial statements.

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

Seneca Foods Corporation

 

    (Company)  
       
       
       

 

 

/s/Kraig H. Kayser     

 

November 9, 2018

 

 

 

 

 

Kraig H. Kayser

 

    President and  
    Chief Executive Officer  
       
       
    /s/Timothy J. Benjamin       
November 9, 2018      
    Timothy J. Benjamin  
    Chief Financial Officer  

  

28