Seneca Foods Corp - Quarter Report: 2023 September (Form 10-Q)

Seneca Foods Corporation (the “Company”) is a leading provider of packaged fruits and vegetables with 26 facilities in eight states in support of its operations. The Company’s principal products include canned vegetables, frozen vegetables, jarred fruit, and other food products. The products are sold nationwide by major grocery outlets, including supermarkets, mass merchandisers, limited assortment stores, club stores and dollar stores. Additionally, products are sold to food service distributors, restaurant chains, industrial markets, other food packagers, export customers in approximately 60 countries, and federal, state and local governments for school and other food programs.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. While these statements reflect all adjustments (consisting of items of a normal recurring nature) that are, in the opinion of management, necessary for a fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“U.S. GAAP”) for complete financial statement presentation. The condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended March 31, 2023.

Due to the seasonal nature of the business, quarterly operating results and cash flows are not necessarily indicative of the results that may be expected for other interim periods or the full year. All references to years are fiscal years ended or ending March 31 unless otherwise indicated. Certain percentage tables may not foot due to rounding. 

The preparation of financial statements in accordance with U.S. GAAP requires management to make certain estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Actual results could differ materially from those estimates.

The Company uses the same accounting policies in preparing quarterly and annual financial statements. A summary of significant accounting policies followed by the Company are set forth in Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended March 31, 2023.

Reclassifications—Certain previously reported amounts have been reclassified to conform to the current period classification, notably that plant restructuring is shown as a separate line item in the statements of net earnings and was previously condensed. Additionally, on the statements of cash flows, the change in accounts payable is presented separately from accrued expenses and other after previously being condensed into the same line item within net cash used in operating activities. There was no impact to any totals or subtotals on the condensed consolidated balance sheets, statements of net earnings, or statements of cash flows as a result of the reclassifications. In addition, the Company’s balance sheet for the six-month period ended October 1, 2022 has been adjusted to reflect the beginning balance of certain items in accordance with the restated March 31, 2022 balance sheet shown on the Company’s Annual Report on Form 10-K/A (Amendment No. 1) that was filed with SEC on July 31, 2023.

New Accounting Pronouncements and Policies

Effective April 1, 2022, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was subsequently amended in November 2018 through ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2016-13”). The amended guidance requires entities to estimate lifetime expected credit losses for trade and other receivables, including those that are current with respect to payment terms, along with other financial instruments which may result in earlier recognition of credit losses. The Company evaluated its existing methodology for estimating an allowance for doubtful accounts and the risk profile of its receivables portfolio and developed a model that includes the qualitative and forecasting aspects of the “expected loss” model under the amended guidance. In determining the Company’s reserve for credit losses, receivables are assigned an expected loss based on historical information adjusted for forward-looking economic factors. The adoption of ASU 2016-13 did not have a material impact to the Company’s condensed consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates such as the London Interbank Offered Rate (“LIBOR”). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 that extends the period of time preparers can utilize the reference rate reform relief guidance, so the FASB has deferred the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The interest rates associated with the Company’s previous borrowings under its senior revolving credit facility (as defined in Note 7, “Long-term Debt”) were tied to LIBOR. Subsequent to the amendment of the senior revolving credit facility agreement on September 14, 2022, the Company’s borrowings are tied to the Secured Overnight Financing Rate (“SOFR”) plus a spread adjustment (see Note 7, “Long-term Debt”). The adoption of ASU 2020-04 as a result of this amendment did not have a material impact on the Company’s condensed consolidated financial statements.

Revenue recognition is completed for most customers at a point in time 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. The Company does sell certain finished goods inventory for cash on a bill and hold basis. The terms of the bill and hold agreement provide that title to the specified inventory is transferred to the customer prior to shipment and the Company has the right to payment (prior to physical delivery) which results in recorded revenue as determined under the revenue recognition standard.

In the following table, revenue is disaggregated by product category groups (in thousands):

As a result of certain contracts with customers, the Company has contract asset balances of $0.5 million, $0.5 million, and $0.6 million as of September 30, 2023, October 1, 2022, and March 31, 2023, respectively, which are included in other current assets on the condensed consolidated balance sheets. The Company records deferred revenue for prepaid case and labeling and storage services which have been collected from bill and hold sales. Amounts are recognized in revenue as the associated performance obligation is satisfied and control has transferred to the customer.

Earnings per share for the three and six months ended September 30, 2023 and October 1, 2022 are as follows (in thousands, except per share amounts):

The Company uses the last-in, first-out (“LIFO”) method of valuing inventory. An actual valuation of inventory under the LIFO method is made at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels, production pack yields, sales and the expected rate of inflation or deflation for the year. The interim LIFO calculations are subject to adjustment in the final year-end LIFO inventory valuation.

As of September 30, 2023, October 1, 2022, and March 31, 2023, first-in, first-out (“FIFO”) based inventory costs exceeded LIFO based inventory costs, resulting in a LIFO reserve of $310.1 million, $219.3 million, and $302.4 million, respectively. In order to state inventories at LIFO, the Company recorded an increase to cost of products sold of $9.3 million and $29.2 million for the three months ended September 30, 2023 and October 1, 2022, respectively, and an increase to cost of products sold of $7.6 million and $48.4 million for the six months ended September 30, 2023 and October 1, 2022, respectively.

The following table shows inventory by category and the related LIFO reserve (in thousands):

Property, plant and equipment is comprised of the following (in thousands): 

Depreciation expense totaled $9.3 million and $8.3 million for the three months ended September 30, 2023 and October 1, 2022, respectively. For the six months ended September 30, 2023 and October 1, 2022, depreciation expense totaled $18.1 million and $16.4 million, respectively.

The Company classifies its assets as held for sale at the time management commits to a plan to sell the asset, the asset is actively marketed and available for immediate sale, and the sale is expected to be completed within one year. Due to market conditions, certain assets may be classified as held for sale for more than one year as the Company continues to actively market the assets. The Company has non-operating facilities and equipment that meet the criteria to be classified as held for sale and are recorded 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 that were classified as held for sale in the condensed consolidated balance sheets (in thousands): 

The decrease in assets held for sale during the six months ended September 30, 2023 was due to a reduction of $1.6 million for write-downs to properly reflect the lower of carrying value or fair value less costs to sell and a reduction of $2.5 million in connection with the sale of non-operational assets in the Pacific Northwest. The Company received proceeds of $4.4 million, resulting in a net gain of $1.9 million which is recorded in other operating income, net in the condensed consolidated statement of net earnings.

Long-term debt is comprised of the following (in thousands):

Revolving Credit Facility

On March 24, 2021, the Company entered into a Fourth Amended and Restated Loan and Security Agreement that provides for a senior revolving credit facility of up to $400.0 million that is seasonally adjusted (the “Revolver”). Maximum borrowings under the Revolver total $300.0 million from April through July and $400.0 million from August through March. The Revolver balance is included in Long-Term Debt in the accompanying condensed consolidated balance sheets due to the Revolver’s March 24, 2026 maturity. In order to maintain availability of funds under the facility, the Company pays a commitment fee on the unused portion of the Revolver. The Revolver is secured by substantially all of the Company’s accounts receivable and inventories and contains borrowing base requirements as well as a financial covenant, if certain circumstances apply. 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 the Company packages. The majority of vegetable inventories are produced during the months of June through November and are then sold over the following year. Payment terms for vegetable 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.

On September 14, 2022, the Company entered into a First Amendment to the Fourth Amended and Restated Loan and Security Agreement (the “Revolver Amendment”) which amended several provisions to replace LIBOR with SOFR plus a spread adjustment as the interest rate benchmark on the Revolver. The transition to SOFR did not materially impact the interest rates applied to the Company’s borrowings. No other material changes were made to the terms of the Company’s Revolver as a result of the Revolver Amendment.

The following table illustrates certain quantitative data for Revolver borrowings during fiscal year 2024 and fiscal year 2023 (in thousands): 

Term Loans

On May 28, 2020, the Company entered into an Amended and Restated Loan and Guaranty Agreement with Farm Credit East, ACA that provides for a $100.0 million unsecured term loan. The amended and restated agreement has a maturity date of June 1, 2025 and converted the term loan to a fixed interest rate of 3.3012% until maturity in addition to requiring quarterly principal payments of $1.0 million, which commenced during fiscal year 2021. This agreement contains certain covenants, including maintaining a minimum EBITDA and minimum tangible net worth.

On January 20, 2023, the Company entered into a Second Amended and Restated Loan and Guaranty Agreement with Farm Credit East, ACA (the “Agreement”) which governs two term loans, as summarized below:

Term Loan A-1: The Agreement continues certain aspects of the existing $100.0 million term loan described above, namely Term Loan A-1 will continue to bear interest at a fixed interest rate of 3.3012%, mature on June 1, 2025, require quarterly principal payments of $1.0 million, and remain unsecured.

Term Loan A-2: The Agreement adds an additional term loan in the amount of $175.0 million that will mature on January 20, 2028, and is secured by a portion of the Company’s property, plant and equipment. Term Loan A-2 bears interest at a variable interest rate based upon SOFR plus an additional margin determined by the Company’s leverage ratio. Quarterly payments of principal outstanding on Term Loan A-2 in the amount of $1.5 million commenced on March 1, 2023.

On May 23, 2023, the Agreement was amended by the Second Amended and Restated Loan and Guaranty Agreement Amendment 1 which amends, restates and replaces in its entirety Term Loan A-2 (the “Amendment”). The Amendment provides a single advance term facility in the principal amount of $125.0 million to be combined with the outstanding principal balance of $173.5 million on Term Loan A-2 into one single $298.5 million term loan (“Amended Term Loan A-2”). Amended Loan Term A-2 is secured by a portion of the Company’s property, plant and equipment and bears interest at a variable interest rate based upon SOFR plus an additional margin determined by the Company’s leverage ratio. Quarterly payments of principal outstanding on Amended Term Loan A-2 in the amount of $3.75 million commenced on June 1, 2023. The Amendment continues all aspects of Term Loan A-1 as defined in the Agreement.

The Amendment contains restrictive covenants usual and customary for loans of its type, in addition to financial covenants including minimum EBITDA and minimum tangible net worth. In connection with Amended Term Loan A-2, the Company incurred $1.1 million of financing costs which will be deferred and amortized over the life of the term loan.

The Company determines whether an arrangement is a lease at inception of the agreement. Presently, the Company leases land, machinery and equipment under various operating and financing leases.

Right-of-Use (“ROU”) assets represent the Company’s right to use the underlying assets for the lease term, and lease obligations represent the net present value of the Company’s obligation to make payments arising from these leases. ROU assets and lease obligations are recognized at commencement date based on the present value of lease payments over the lease term using the implicit lease interest rate or, when unknown, an incremental borrowing rate based on the information available at commencement date or April 1, 2019 for leases that commenced prior to that date.

Lease terms may include options to extend or terminate the lease, and the impact of these options are included in the calculation of the ROU asset and lease obligation only when the exercise of the option is at the Company’s sole discretion and it is reasonably certain that the Company will exercise that option. The Company will not separate lease and non-lease components for its leases when it is impractical to separate the two. In addition, the Company may have certain leases that have variable payments based solely on output or usage of the leased asset. These variable operating lease assets are excluded from the Company’s balance sheet presentation and expensed as incurred. Leases with an initial term of 12 months or less, or short-term leases, are not recorded on the accompanying condensed consolidated balance sheets.

ROU assets and lease obligations for the Company’s operating and financing leases are disclosed separately in the Company’s condensed consolidated balance sheets. The components of lease cost were as follows (in thousands):

Undiscounted future lease payments under non-cancelable operating and financing leases, along with a reconciliation of undiscounted cash flows to operating and financing lease obligations, respectively, as of September 30, 2023 were as follows (in thousands):

The Company’s effective tax rate was 23.8% and 23.4% for the six months ended September 30, 2023 and October 1, 2022, respectively. The effective tax rate increased in the current six-month interim period primarily due to generating fewer federal credits in fiscal year 2024, which increased the current year’s effective tax rate by 1.0%. This increase was partially offset by permanent differences and state rate changes having a favorable impact on the effective rate, reducing the rate by a combined 0.6%.

The net periodic benefit cost for the Company’s pension plan consisted of (in thousands):

There were no pension contributions made during the six months ended September 30, 2023 and October 1, 2022.

During the six months ended September 30, 2023, the Company repurchased 386,681 shares of its Class A Common Stock at a cost of $19.6 million, which are included in Treasury Stock. During the six months ended October 1, 2022, the Company repurchased 689,926 shares of its Class A Common Stock at a cost of $37.0 million. The Company did not repurchase any of its Class B Common Stock in either six-month interim period. As of September 30, 2023, there are 4,952,923 shares or $188.2 million of repurchased stock being held as Treasury Stock. These shares are not considered outstanding.

Cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the short-term maturity of these instruments.

On a quarterly basis, the Company estimates the fair values for financial instruments that are recorded at carrying value on the condensed consolidated balance sheets. 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. The fair value and carrying value of the Company’s long-term debt are as follows (in thousands):

The Company had net other operating income of $1.3 million and $1.5 million during the three and six months ended September 30, 2023, respectively, which was driven primarily by the sale of non-operational assets in the Pacific Northwest. During the three months ended October 1, 2022, the Company had net other operating income of $0.6 million, driven primarily by a true-up of the supplemental early retirement plan accrual partially offset by a loss on the sale of various fixed assets. During the six months ended October 1, 2022, the Company had net other operating income of $2.6 million, which was driven primarily by a gain on the sale of the Company’s western trucking fleet amongst other fixed assets and a true-up of the supplemental early retirement plan accrual.

The following table summarizes the rollforward of restructuring charges recorded and the accruals established (in thousands):

During the three and six months ended September 30, 2023, respectively, the Company incurred restructuring charges primarily due to equipment moves from ceasing production of green beans at a plant in the Northeast in the previous fiscal year. During the three and six months ended October 1, 2022, respectively, the Company incurred restructuring charges primarily related to plants that were closed in previous periods.

In the ordinary course of its business, the Company is made a party to certain legal proceedings seeking monetary damages, including proceedings involving product liability claims, workers’ compensation along with other employee claims, tort and other general liability claims, for which it carries insurance, as well as patent infringement and related litigation. The Company is in a highly regulated industry and is also periodically involved in government actions for regulatory violations and other matters surrounding the manufacturing of its products, including, but not limited to, environmental, employee, and product safety issues. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company does not believe that an adverse decision in any of these legal proceedings would have a material adverse impact on its financial position, results of operations, or cash flows.

On November 8, 2023, the Company executed an Asset Purchase Agreement and associated License Agreement with B&G Foods, Inc., (“the Seller”) to acquire certain assets from the Seller relating to its Green Giant® shelf-stable vegetable product line. The acquired assets include inventory and an associated license which allows the Company to manufacture, market, distribute, and sell Green Giant® shelf-stable vegetable products within the United States in perpetuity. The initial purchase price was approximately $55.6 million in cash that was funded from borrowings under the Company’s Revolver. The initial purchase price is subject to certain post-closing adjustments which are expected to be finalized prior to the Company’s fiscal year ending on March 31, 2024.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Seneca Foods Corporation is a leading provider of packaged fruits and vegetables, with facilities located throughout the United States. Our product offerings include canned, frozen and jarred produce and snack chips that are sold under private label as well as national and regional brands that the Company owns or licenses, including Seneca®, Libby’s®, Aunt Nellie’s®, Cherryman®, Green Valley® and READ®. Canned fruits and vegetables are sold nationwide by major grocery outlets, including supermarkets, mass merchandisers, limited assortment stores, club stores and dollar stores. We also sell products to foodservice distributors, restaurant chains, industrial markets, other food processors, export customers in approximately 60 countries and federal, state and local governments for school and other food programs. Additionally, the Company packs canned and frozen vegetables under contract packing agreements.

Business Trends

We purchase raw materials, including raw produce, steel, ingredients and packaging materials from growers, commodity processors, steel producers and packaging suppliers. Raw materials and other input costs, such as labor, fuel, utilities and transportation, are subject to fluctuations in price attributable to a number of factors. Fluctuations in commodity prices can lead to retail price volatility and can influence consumer and trade buying patterns. The cost of raw materials, fuel, labor, distribution and other costs related to our operations can increase from time to time significantly and unexpectedly.

We continue to experience material cost inflation for many of our raw materials and other input costs attributable to a number of factors, including but not limited to, the war in Ukraine, supply chain disruptions (including raw material shortages) and labor shortages. While we have no direct exposure to Russia and Ukraine, we have experienced increased costs for transportation, energy and raw materials due in part to the negative impact of the Russia-Ukraine conflict on the global economy. We attempt to manage cost inflation risks by locking in prices through short-term supply contracts, advance grower purchase agreements, and by implementing cost saving measures. We also attempt to offset rising input costs by raising sales prices to our customers. However, increases in the prices we charge our customers may lag behind rising input costs. Competitive pressures also may limit our ability to quickly raise prices in response to rising costs. To the extent we are unable to avoid or offset any present or future cost increases our operating results could be materially adversely affected.

Results of Operations

Net Sales:

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

Three Months Ended September 30, 2023 and October 1, 2022

Net sales totaled $407.5 million for the three months ended September 30, 2023 as compared with $439.8 million for the three months ended October 1, 2022. The overall net sales decrease of $32.3 million, or 7.4%, was predominantly due to lower sales volumes having an unfavorable impact of $43.7 million to net sales partially offset by $11.4 million of favorability due to higher selling prices and a favorable mix impact, as compared to the prior year three-month interim period.

Net sales for canned vegetables decreased $36.2 million over the prior year quarter driven by lower volume and was slightly offset by a $3.0 million increase in net sales for frozen vegetables. Higher pricing in each of these categories, which was necessitated by the material cost increases that the Company is experiencing, partially offset the unfavorable impact to net sales that was generated by the lower volume. While the Company’s fruit products category increased pricing in response to material cost pressures, decreased sales volumes had a larger impact on net sales for the quarter resulting in a $1.2 million decrease to net sales compared to the prior year quarter. Net sales in the snack products category remained relatively consistent quarter over quarter with a $0.6 million increase. The remaining net sales increase of $1.5 million was contributed by non-food packaging sales related to the sale of cans and ends, and outside revenue from trucking and aircraft operations.

Six Months Ended September 30, 2023 and October 1, 2022

Net sales totaled $706.1 million for the six months ended September 30, 2023 as compared with $705.0 million for the six months ended October 1, 2022. The overall net sales increase of $1.1 million, or 0.2%, was predominantly due to higher selling prices contributing favorability of $52.6 million offset by lower sales volumes having an unfavorable impact of $51.5 million to net sales, as compared to the prior year six-month interim period.

Net sales of canned vegetables decreased $3.5 million over the prior year six-month interim period as increased pricing did not offset lower sales volume for this category. Net sales of frozen vegetables contributed an increase of $4.8 million driven primarily by higher sales volumes which outpaced selling prices for this category. Fruit products decreased over the prior year six-month interim period by $2.8 million, primarily due to lower sales volume. Net sales in the snack products category remained relatively consistent year over year with a $0.7 million increase. The remaining net sales increase of $1.9 million as compared to the prior year six-month period was contributed by non-food packaging sales related to the sale of cans and ends, and outside revenue from trucking and aircraft operations.

Operating and Non-Operating Income:

The following table presents components of operating and non-operating income as a percentage of net sales:

Three Months Ended September 30, 2023 and October 1, 2022

Gross margin: Gross margin for the three months ended September 30, 2023 was 14.3% as compared with 9.5% for the three months ended October 1, 2022. The increase in gross margin for the three months ended September 30, 2023 was due primarily to the Company incurring a decrease in the LIFO charge for the current quarter as compared to the prior year quarter. The Company’s LIFO charge for the three months ended September 30, 2023 was $9.3 million as compared to a LIFO charge of $29.2 million for the three months ended October 1, 2022.

Selling, General, and Administrative: Selling, general, and administrative costs as a percentage of net sales for the three months ended September 30, 2023, were 5.2% as compared with 4.7% for the prior year quarter. The increase in selling, general, and administrative costs as a percentage of net sales was largely driven by the decrease in net sales and the fixed nature of certain other expenses. Also, there were routine increases to other expenses within the category, such as cost of living wage adjustments.

Other Operating Income, net: The Company had net other operating income of $1.3 million during the three months ended September 30, 2023, which was driven primarily by the sale of non-operational assets in the Pacific Northwest which were previously classified as held for sale. During the three months ended October 1, 2022, the Company had net other operating income of $0.6 million, driven primarily by a true-up of the supplemental early retirement plan accrual partially offset by a gain on the sale of various fixed assets.

Restructuring: During the three months ended September 30, 2023, the Company incurred restructuring charges primarily due to equipment moves from ceasing production of green beans at a plant in the Northeast in the previous fiscal year. During the three months ended October 1, 2022, the Company incurred restructuring charges primarily related to plants that were closed in previous periods.

Other Non-Operating Income: Other non-operating income totaled $1.3 million and $1.5 million for the three months ended September 30, 2023, and October 1, 2022, respectively, and is comprised of the non-service related pension amounts that are actuarially determined.

Interest Expense: Interest expense as a percentage of net sales was 1.8% for the three months ended September 30, 2023, as compared to 0.5% for the three months ended October 1, 2022. Interest expense increased from $2.4 million in the prior year quarter to $7.2 million for the current quarter as a result of higher interest rates and increased borrowings under the Amended Term Loan A-2. 

Six Months Ended September 30, 2023 and October 1, 2022

Gross margin: Gross margin for the six months ended September 30, 2023 was 16.1% as compared with 9.2% for the six months ended October 1, 2022. The increase in gross margin for the six months ended September 30, 2023 was due primarily to the Company incurring a decrease to the LIFO charge for the current six-month interim period as compared the prior year six-month interim period. The Company’s LIFO charge for the six months ended September 30, 2023 was $7.6 million as compared to a LIFO charge of $48.4 million for the six months ended October 1, 2022.

Selling, General, and Administrative: Selling, general, and administrative costs as a percentage of net sales for the six months ended September 30, 2023, were 5.8% as compared with 5.5% for the prior year six-month interim period. The increase in selling, general, and administrative costs as a percentage of net sales was primarily due to net sales remaining relatively flat year over year and routine increases to labor costs due to annual cost of living wage adjustments. This impact was partially offset by the fixed nature of certain other expenses within the category.

Other Operating Income, net: The Company had net other operating income of $1.5 million during the six months ended September 30, 2023, which was driven primarily by the sale of non-operational assets in the Pacific Northwest which were previously classified as held for sale. During the six months ended October 1, 2022, the Company had net other operating income of $2.6 million which was driven primarily by a gain on the sale of the Company’s western trucking fleet amongst other fixed assets and a true-up of the supplemental early retirement plan accrual.

Restructuring: During the six months ended September 30, 2023, the Company incurred restructuring charges primarily due to equipment moves from ceasing production of green beans at a plant in the Northeast in the previous fiscal year. During the six months ended October 1, 2022, the Company incurred restructuring charges primarily related to plants that were closed in previous periods.

Other Non-Operating Income: Other non-operating income totaled $2.7 million and $3.1 million for the six months ended September 30, 2023, and October 1, 2022, respectively, and is comprised of the non-service related pension amounts that are actuarially determined.

Interest Expense: Interest expense as a percentage of net sales was 1.9% for the six months ended September 30, 2023, as compared to 0.5% for the six months ended October 1, 2022. Interest expense increased from $3.8 million in the prior year six-month interim period to $13.8 million for the current six-month interim period as a result of higher interest rates and increased borrowings under the Amended Term Loan A-2.

Income Taxes:

The Company’s effective tax rate was 23.8% and 23.4% for the six months ended September 30, 2023 and October 1, 2022, respectively. The effective tax rate increased in the current six-month interim period primarily due to generating fewer federal credits in fiscal year 2024, which increased the current year’s effective tax rate by 1.0%. This increase was partially offset by permanent differences and state rate changes having a favorable impact on the effective rate, reducing the rate by a combined 0.6%.

Earnings per Share:

A summary of the Company’s earnings per common share is as follows:

For details of the calculation of these amounts, refer to Note 3 “Earnings per Common Share.”

Liquidity and Capital Resources

The financial condition of the Company is summarized in the following table and explanatory review (dollar amounts in thousands, except per share data):

Note (1): Equivalent common shares are either common shares or, for convertible preferred shares, the number of common shares that the preferred shares are convertible into. See Note 12 of the Notes to Consolidated Financial Statements of the Company’s 2023 Annual Report on Form 10-K/A (Amendment No. 1) for conversion details.

Material Cash Requirements: The Company’s primary liquidity requirements include debt service, capital expenditures and working capital needs. Liquidity requirements are funded primarily through cash generated from operations and external sources of financing, including the revolving credit facility. The Company does not have any off-balance sheet financing arrangements. Refer to Note 16 of the Notes to Condensed Consolidated Statements contained herein for additional discussion of material cash requirements. 

Summary of Cash Flows: The following table presents a summary of the Company’s cash flows from operating, investing, and financing activities (in thousands):

Net Cash Used in Operating Activities: For the six months ended September 30, 2023, cash used in operating activities was $26.3 million, which consisted of net earnings of $47.9 million, adjusted by non-cash charges of $20.0 million, partially offset by operating assets and liabilities using cash of $94.2 million. The non-cash charges were largely driven by $21.8 million of depreciation and amortization. The change in operating assets and liabilities was due to inventories being a principal use of cash as the six-month period covered the primary seasonal pack harvest months.

For the six months ended October 1, 2022, cash used in operating activities was $133.6 million, which consisted of a use of cash of $173.4 million by operating assets and liabilities partially offset by net earnings of $21.2 million, adjusted by non-cash charges of $18.6 million. The non-cash charges were largely driven by $19.8 million of depreciation and amortization. The change in operating assets and liabilities was largely due to inventories being a use of cash driven by the material cost inflation to various production inputs. The increase in inventories was partially offset by an associated increase in accounts payable.

The cash requirements of the business fluctuate significantly throughout the year to coincide with the seasonal growing cycles of vegetables. The majority of the inventories are produced during the packing months, from June through November, and are then sold over the following year. Cash flow from operating activities is one of the Company’s main sources of liquidity.

Net Cash Used in Investing Activities: Net cash used in investing activities was $18.9 million for the six months ended September 30, 2023, and consisted of cash used for capital expenditures of $26.5 million partially offset by proceeds from the sale of assets totaling $7.6 million. Net cash used in investing activities was $29.8 million for the six months ended October 1, 2022, and consisted of cash used for capital expenditures of $33.8 million partially offset by proceeds from the sale of assets totaling $4.0 million.

Net Cash Provided by Financing Activities: Net cash provided by financing activities was $45.0 million for the six months ended September 30, 2023, driven primarily by a net increase in the Company’s borrowings of $69.2 million during the six-month interim period. Additionally, the Company used cash of $19.6 million to purchase treasury stock and $4.6 million to make payments on financing leases, which partially offset the increased cash provided.

Net cash provided by financing activities was $165.4 million for the six months ended October 1, 2022, driven by a net increase in debt borrowings of $206.7 million. These cash proceeds were partially offset by purchasing treasury stock of $37.0 million and by making payments of $4.3 million on financing leases.

Revolving Credit Facility: On March 24, 2021, the Company entered into a Fourth Amended and Restated Loan and Security Agreement that provides for a senior revolving credit facility of up to $400.0 million that is seasonally adjusted (the “Revolver”). Maximum borrowings under the Revolver total $300.0 million from April through July and $400.0 million from August through March. The Revolver balance is included in Long-Term Debt in the accompanying condensed consolidated balance sheets due to the Revolver’s March 24, 2026 maturity. In order to maintain availability of funds under the facility, the Company pays a commitment fee on the unused portion of the Revolver. The Revolver is secured by substantially all of the Company’s accounts receivable and inventories and contains borrowing base requirements as well as a financial covenant, if certain circumstances apply. 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 the Company packages. The majority of vegetable inventories are produced during the months of June through November and are then sold over the following year. Payment terms for vegetable 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.

On September 14, 2022, the Company entered into a First Amendment to the Fourth Amended and Restated Loan and Security Agreement (the “Revolver Amendment”) which amended several provisions to replace LIBOR with SOFR plus a spread adjustment as the interest rate benchmark on the Revolver. The transition to SOFR did not materially impact the interest rates applied to the Company’s borrowings. No other material changes were made to the terms of the Company’s Revolver as a result of the Revolver Amendment.

Term Loans: On May 28, 2020, the Company entered into an Amended and Restated Loan and Guaranty Agreement with Farm Credit East, ACA that provides for a $100.0 million unsecured term loan. The amended and restated agreement has a maturity date of June 1, 2025 and converted the term loan to a fixed interest rate of 3.3012% until maturity in addition to requiring quarterly principal payments of $1.0 million, which commenced during fiscal year 2021. This agreement contains certain covenants, including maintaining a minimum EBITDA and minimum tangible net worth.

On January 20, 2023, the Company entered into a Second Amended and Restated Loan and Guaranty Agreement with Farm Credit East, ACA (the “Agreement”) which governs two term loans, as summarized below:

Term Loan A-1: The Agreement continues certain aspects of the existing $100.0 million term loan described above, namely Term Loan A-1 will continue to bear interest at a fixed interest rate of 3.3012%, mature on June 1, 2025, require quarterly principal payments of $1.0 million, and remain unsecured.

Term Loan A-2: The Agreement adds an additional term loan in the amount of $175.0 million that will mature on January 20, 2028, and is secured by a portion of the Company’s property, plant and equipment. Term Loan A-2 bears interest at a variable interest rate based upon SOFR plus an additional margin determined by the Company’s leverage ratio. Quarterly payments of principal outstanding on Term Loan A-2 in the amount of $1.5 million commenced on March 1, 2023.

On May 23, 2023, the Agreement was amended by the Second Amended and Restated Loan and Guaranty Agreement Amendment 1 which amends, restates and replaces in its entirety Term Loan A-2 (the “Amendment”). The Amendment provides a single advance term facility in the principal amount of $125.0 million to be combined with the outstanding principal balance of $173.5 million on Term Loan A-2 into one single $298.5 million term loan (“Amended Term Loan A-2”). Amended Loan Term A-2 is secured by a portion of the Company’s property, plant and equipment and bears interest at a variable interest rate based upon SOFR plus an additional margin determined by the Company’s leverage ratio. Quarterly payments of principal outstanding on Amended Term Loan A-2 in the amount of $3.75 million commenced on June 1, 2023. The Amendment continues all aspects of Term Loan A-1 as defined in the Agreement.

The Amendment contains restrictive covenants usual and customary for loans of its type, in addition to financial covenants including minimum EBITDA and minimum tangible net worth. In connection with Amended Term Loan A-2, the Company incurred $1.1 million of financing costs which will be deferred and amortized over the life of the term loan.

As of September 30, 2023, the Company was in compliance with all covenants for its revolving credit facility and term loan agreements.

Impact of Seasonality on Financial Position and Results of Operations:

While individual vegetables have seasonal cycles of peak production and sales, the different cycles are somewhat offsetting. Minimal food packaging occurs in the Company's last fiscal quarter ending March 31, which is the optimal time for maintenance, repairs and equipment changes in its packaging plants. The supply of commodities, current pricing, and expected new crop quantity and quality affect the timing and amount of the Company’s sales and earnings. When the seasonal harvesting periods of the Company's major vegetables are newly completed, inventories for these packaged vegetables are at their highest levels. For peas, the peak inventory time is mid-summer and for corn and green beans, the Company's highest volume vegetables, the peak inventory is in mid-autumn. The seasonal nature of the Company’s production cycle results in inventory and accounts payable reaching their lowest point late in the fourth quarter/early in the first quarter prior to the new seasonal pack commencing. As the seasonal pack progresses, these components of working capital both increase until the pack is complete.

The Company’s fruit and vegetable sales exhibit seasonal increases in the third fiscal quarter due to increased retail demand during the holiday seasons. In addition, the Company sells canned and frozen vegetables to a co-pack customer on a bill and hold basis at the end of each pack cycle, which typically occurs during the second and third quarters. The seasonal nature of the Company’s sales, particularly holiday driven retail sales, result in the accounts receivable balance reaching its highest point at the end of the second and third fiscal quarters, while typically being the lowest at the end of the first quarter.

Non-GAAP Financial Measures:

Adjusted net earnings, EBITDA, and FIFO EBITDA are non-GAAP financial measures and are provided for information purposes only. A non-GAAP financial measure is defined as a numerical measure of our financial performance that excludes or includes amounts so as to be different from the most directly comparable measure calculated and presented in accordance with GAAP in our condensed consolidated balance sheets and related condensed consolidated statements of net earnings, comprehensive income, stockholders’ equity and cash flows. The Company does not intend for this information to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.

Adjusted net earnings is calculated on a FIFO basis. The Company believes excluding the impact from the application of LIFO improves the comparability of the Company's financial performance from period to period and with the Company's peers. Set forth below is a reconciliation of reported earnings before income taxes to adjusted net earnings (in thousands):

The Company believes EBITDA is often a useful measure of a Company’s operating performance because EBITDA excludes charges for depreciation, amortization and interest expense as well as the Company’s provision for income tax expense. EBITDA is frequently used as one of the bases for comparing businesses in the Company’s industry. FIFO EBITDA also excludes non-cash charges related to the LIFO inventory valuation method. The Company believes FIFO EBITDA improves comparability of the Company’s financial performance from period to period and with the Company’s peers. The Company’s revolving credit facility and term loan agreements use FIFO EBITDA in the financial covenants thereunder. Set forth below is a reconciliation of reported net earnings to EBITDA and FIFO EBITDA (in thousands):