Seneca Foods Corp - Quarter Report: 2018 June (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

Seneca Foods Corporation

(Exact name of Company as specified in its charter)

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 and posted on its corporate Web site, if any, 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 and post 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:

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

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

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

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)

June 30, 2018

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 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 processing plant in Modesto, California will cease prior to the 2018 production season. The Company will continue to store, case and label products at this facility until sometime later this fiscal year. Therefore, this facility will not be available for immediate sale until sometime later this year. The Company sold $55,800,000 of fruit inventory from this facility to Pacific Cost Producers, Inc. ("PCP") on June 28, 2018 as part of the Company's exit strategy in connection with the eventual closing of this facility.   This sale was not part of our normal operations for the quarter. 

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

Results of Operations:

Sales:

The first fiscal quarter 2019 results include net sales of $343,392,000, which represents a 22.4% increase, or $62,730,000, from the first quarter of fiscal 2017.  The net increase in sales is due to a sales volume increase of $56,833,000 and to higher selling prices/sales mix of $5,897,000. The increase in sales volume is primarily from the sale of $55,800,000 sale of Fruit to PCP during the current quarter, a $8,150,000 increase in Canned Vegetable sales, a $4,720,000 increase in other Canned Fruit sales, a $1,108,000 increase in Frozen sales a $1,353,000 increase in Other sales partially offset by a $4,327,000 decrease in Prepared Food sales, and a $3,813,000 decrease in B&G Foods, Inc. sales.

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

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2018

Operating Income (Loss):

The following table presents components of operating income (loss) as a percentage of net sales:

For the three month period ended June 30, 2018, the gross margin decreased from the prior year quarter from 5.1% to 1.7% due to selling the fruit to PCP at cost and overall to lower selling prices in the first quarter of 2019. The LIFO credit for the first quarter ended June 30, 2018 was $504,000 as compared to a charge of $7,443,000 for the first quarter ended July 1, 2017 and reflects the impact on the quarter from inventory layer reductions partially offset by price increases incurred in fiscal 2019, compared to overall cost increases in fiscal 2018. On an after-tax basis, LIFO net earnings increased by $378,000 for the quarter ended June 30, 2018 and decreased LIFO net earnings by $4,838,000 for the quarter ended July 1, 2017, based on the historical statutory federal income tax rate.

For the three month period ended June 30, 2018, selling costs as a percentage of sales decreased to 2.5% from 3.1% for the same period in the prior year. This decrease is primarily as a result of the $55,800,000 fruit sale to PCP which didn't incur selling costs.

For the three month period ended June 30, 2018, administrative expense as a percentage of sales decreased from 3.1% to 2.9% primarily due to higher sales (including the PCP fruit sale) during the quarter and the fixed nature of these administrative costs.

During the three months ended June 30, 2018, the Company sold unused fixed assets which resulted in a gain of $6,444,000 as compared to a gain of $1,598,000 during the three months ended July 1, 2017. $1,081,000 of the current year gain was related to the sale of a closed plant in the Midwest. In addition, the Company recorded a bargain purchase gain of $1,096,000 during the three months ended July 1, 2017. These items are included in other operating income (loss) in the Unaudited Condensed Consolidated Statements of Net Loss.

Interest expense for the first quarter ended June 30, 2018, as a percentage of sales, increased to 1.3% from 1.1% in first quarter ended July 1, 2017. During fiscal 2019, overall borrowings and interest rates were higher than the previous year.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2018

Income Taxes:

The effective tax rate was 22.3% and 64.3% for the three month periods ended June 30, 2018 and July 1, 2017, respectively. Of the 42.0 percentage point decrease in the effective tax rate, the change in the income tax rate resulting from the Tax Cuts and Jobs Act accounts for 14% of this decrease.  Another significant change is in the federal and state credits and incentives which accounts for 10.6% of the decrease.  The dollar amount of these credits and incentives did not change significantly from 2018 to 2019.  However, because an annual loss occurred in 2018 and annual income is expected in 2019, the credits and incentives have an inverse impact on the tax rate in 2019 compared to 2018.  The other significant difference is that the effective tax rate for 2018 included the effect of the bargain purchase gain and the outside basis difference write-off for the purchase of Truitt Brothers.  These items account for 24.6% of the difference in tax rate. 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant change in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from the rate of 35% down to 21% for FY 2019.

Loss per Share:

Basic and diluted loss per share were $(0.90) and $(0.09) for the three months ended June 30, 2018 and July 1, 2017, respectively. For details of the calculation of these amounts, refer to footnote 10 of the Notes to Condensed Consolidated Financial Statements.

Liquidity and Capital Resources:

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

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 7 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 $86,950,000 in the first three months of fiscal 2019, compared to $20,416,000 in the first three months of fiscal 2018. The $66,534,000 increase in cash provided is primarily attributable to the $55,800,000 sale of Fruit inventory to PCP, partially offset by a $2,705,000 decrease in cash provided by other current assets, a $1,748,000 decrease in cash provided by income taxes, and a $7,442,000 decrease in cash provided by accounts payable, accrued expenses and other liabilities, a $98,211,000 increase in cash provided for inventory in the first three months of fiscal 2019 as compared to the first three months of fiscal 2018, a $9,332,000 decrease in cash provided by accounts receivable, and an increased net loss of $7,913,000.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2018

As compared to July 1, 2017, inventory decreased $68,388,000 to $569,333,000 at June 30, 2018 (including $55,800,000 decrease from the PCP inventory sale). The components of the inventory decrease reflect a $44,197,000 decrease in finished goods, a $10,872,000 increase in work in process and a $35,063,000 decrease in raw materials and supplies. The finished goods decrease reflects lower inventory quantities attributable to the calendar year 2017 pack versus the calendar year 2016 pack and due to the $55,800,000 inventory sale to PCP. The raw materials and supplies decrease is primarily due to a decrease in cans and raw steel quantities compared to the prior year primarily due to the Modesto closure. FIFO based inventory costs exceeded LIFO based inventory costs by $144,501,000 as of the end of the first quarter of 2019 as compared to $140,698,000 as of the end of the first quarter of 2018.

Cash used in investing activities was $75,000 in the first three months of fiscal 2019 compared to cash used in investing activities of $21,361,000 in the first three months of fiscal 2018.  During the first quarter ended June 30, 2018, the Company received $10,387,000 from proceeds from various sales of unused fixed assets created by the plant closings in the west and northwest. Additions to property, plant and equipment were $10,462,000 in the first three months of fiscal 2019 as compared to $8,680,000 in first three 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 used in financing activities was $89,351,000 in the first three months of fiscal 2019, which included borrowings of $89,546,000 and the repayment of $178,845,000 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 three 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 did not repurchase any stock during the first quarter of fiscal year 2019 and 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 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 June 30, 2018, the interest rate was approximately 3.62% on a balance of $207,610,000. 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 June 30, 2018, the Company was in compliance with all such financial covenants.

New Accounting Standards

Refer to footnote 9 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.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2018

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.

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:

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 three months ended June 30, 2018, the Company sold $6,885,000 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 $6,438,000 for the three months ended July 1, 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.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

June 30, 2018

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 June 30, 2018, our disclosure controls and procedures were not effective due to the material weakness in the Company’s internal control over financial reporting reported in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018. The Company continues to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments related to bill and hold and other revenue controls.

As reported in the Company’s Annual Report on Form 10-K for the year ended March 31, 2018, management identified a material weakness in the Company’s internal control over financial reporting relating to revenue recognition with respect to bill and hold transactions.  The Company has begun its remediation process but there have not been sufficient opportunities to conclude, through testing, that the enhanced control is operating effectively.  Except for the implementation of the previously disclosed remediation plan, there have been no changes during the period covered by this report to the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

PART II – OTHER INFORMATION

Refer to footnote 13 to the Consolidated Financial Statements included in Part II Item 8 of the Annual Report on Form 10-K.

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.

None.          

None.

None.

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.

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