SENECA FOODS CORPORATION OF FINANCIAL CONDITION AND RESULTS OPERATIONS
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 COVID-19 pandemic, the war in
There still remains uncertainty around the COVID-19 pandemic. The ultimate impact depends on the severity and duration of the pandemic, including the emergence and spread of new COVID-19 variants and resurgences, the continued availability and effectiveness of vaccines and actions taken by government authorities and other third parties in response to the pandemic. We will continue to evaluate the extent to which the COVID-19 pandemic will impact our business, results of operations and financial condition.
Results of OperationsNet Sales :
The following table presents net sales by product category (in thousands):
Three Months Ended
July 2, July 3,
2022 2021
Canned vegetables $ 218,335 $ 187,944
Frozen vegetables 19,711 22,584
Fruit products 18,332 15,873
Snack products 2,980 3,412
Other 5,835 5,229
$ 265,193 $ 235,042 Net sales totaled
Canned vegetables were the main driver of the overall increase in net sales,
increasing
12
--------------------------------------------------------------------------------
Table of Contents
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
Operating and Non-Operating Income:
The following table presents components of operating and non-operating income as a percentage of net sales (percentages are shown on an absolute basis):
Three Months Ended
July 2, July 3,
2022 2021
Gross margin 8.6 % 14.3 %
Selling, general, and administative expense 6.9 % 7.3 %
Other operating income, net 0.8 % 0.6 %
Loss from equity investment 0.0 % 0.1 %
Other non-operating income 0.6 % 1.0 %
Interest expense, net 0.5 % 0.6 %
Income taxes 0.6 % 1.7 %
Gross margin: Gross margin for the three months ended
Selling, General, and Administrative: Selling, general, and administrative costs
as a percentage of net sales for the three months ended
Other Operating Income, net: The Company had net other operating income of
Loss from
Other Non-Operating Income: Other non-operating income totaled
Interest Expense: Interest expense as a percentage of net sales was 0.5% for the
three months ended
Income Taxes: The Company's effective tax rate was 24.2% and 24.0% for the three
months ended
13
--------------------------------------------------------------------------------
Table of Contents
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
Earnings per Share:
A summary of the Company's earnings per common share is as follows:
Three Months Ended
July 2 , July 3,
2022 2021
Basic earnings per common share
For details of the calculation of these amounts, refer to footnote 3 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 (dollar amounts in thousands, except per share data):
July 2, July 3, March 31, March 31,
2022 2021 2022 2021
Working capital:
Balance $ 417,898 $ 358,253 $ 382,287 $ 358,169
Change in quarter $ 35,611 $ 84
Current portion of long-term debt
$ 167,089 $ 93,092 $ 109,624 $ 94,085 Operating lease obligations, less current portion$ 19,452 $ 30,035 $ 22,533 $ 27,769 Financing lease obligations, less current portion$ 18,422 $ 23,046 $ 19,942 $ 19,232 Total stockholders' equity per equivalent common share (1)$ 70.40 $ 64.72 $ 69.23 $ 63.05 Stockholders' equity per common share$ 71.20 $ 65.38 $ 69.98 $ 63.68 Current ratio 2.94 2.78 3.21 3.27
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 11 of the Notes to Consolidated Financial Statements of the Company's 2021 Annual Report on Form 10-K for conversion details.
As shown in the condensed consolidated statements of cash flows, net cash used
in operating activities was
Cash used in investing activities was
Cash provided by financing activities was
14
--------------------------------------------------------------------------------
Table of Contents
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
On
The Company's credit facilities contain standard representations and warranties,
events of default, and certain affirmative and negative covenants, including
various financial covenants. At
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
The Company's fruit and vegetable sales exhibit seasonal increases in the third
and fourth fiscal quarters 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 third
and fourth fiscal quarters, while typically being the lowest at the end of the
first quarter. One of the ways we attempt to offset material cost increases
incurred is to increase selling prices, which resulted in a higher accounts
receivable balance as compared to the prior year as of
15
--------------------------------------------------------------------------------
Table of Contents
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
Non-GAAP Financial Measures:
Certain disclosures in this report include non-GAAP financial measures. 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.
Adjusted net earnings is calculated on a FIFO basis and excludes the impact of the Company's loss on equity investment. The Company believes this non-GAAP financial measure provides for a better comparison of year over year operating performance. 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. Set forth below is a reconciliation of reported net earnings to adjusted net earnings (in thousands):
Three Months Ended
July 2, 2022 July 3, 2021
(In thousands)
Earnings before income taxes, as reported
19,223 2,837
Loss on equity investment - 156
Adjusted earnings before income taxes 25,955 21,598
Income taxes at effective tax rates 6,281 5,184
Adjusted net earnings $ 19,674 $ 16,414
New Accounting Standards
Refer to footnote 1 of the Notes to Condensed Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Revenue Recognition and Trade Promotion Expenses: Revenue recognition is completed for most customers at 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. The Company sells 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.
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 the Company's products to consumers, amounts paid to obtain favorable display positions in retail 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 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 for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time.
Inventories: 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 the high inflation environment that the Company is experiencing, the Company believes that the LIFO method was preferable over the FIFO method because it better matches the cost of current production to current revenue. 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. In contrast, 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.
16
--------------------------------------------------------------------------------
Table of Contents
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
Long-Lived Assets: 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.
Income Taxes: As part of the income tax provision process of preparing the consolidated financial statements, the Company estimates income taxes. This process involves estimating current tax expenses together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. The Company then assesses the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent it is believed the recovery is not likely, a valuation allowance is established.
Pension Expense: The Company has a defined benefit plan which is subject to certain actuarial assumptions. The funded status of the pension plan is dependent upon many factors, including returns on invested assets and the level of certain market interest rates, employee-related demographic factors, such as turnover, retirement age and mortality, and the rate of salary increases. Certain assumptions reflect the Company's historical experience and management's best judgment regarding future expectations.
17
--------------------------------------------------------------------------------
Table of Contents
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
Forward-Looking Information
This Quarterly Report on Form 10-Q contains "forward-looking statements" as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments, and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words "will," "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "seeks," "should," "likely," "targets," "may", "can" and variations thereof and similar expressions. Forward-looking statements are subject to known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed. We believe important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following:
? the effects of rising costs and availability of raw fruit and vegetables,
steel, ingredients, packaging, other raw materials, distribution and labor;
? crude oil prices and their impact on distribution, packaging and energy costs;
? an overall labor shortage, ability to retain a sufficient seasonal workforce,
lack of skilled labor, labor inflation or increased turnover impacting our
ability to recruit and retain employees;
? climate and weather affecting growing conditions and crop yields;
? our ability to successfully implement sales price increases and cost saving
measures to offset cost increases;
? the loss of significant customers or a substantial reduction in orders from
these customers;
? effectiveness of our marketing and trade promotion programs;
? competition, changes in consumer preferences, demand for our products and
local economic and market conditions;
? the impact of a pandemic on our business, suppliers, customers, consumers and
employees;
? unanticipated expenses, including, without limitation, litigation or legal
settlement expenses;
? product liability claims;
? the anticipated needs for, and the availability of, cash;
? the availability of financing;
? leverage and the ability to service and reduce debt;
? foreign currency exchange and interest rate fluctuations;
? the risks associated with the expansion of our business;
? the ability to successfully integrate acquisitions into our operations;
? our ability to protect information systems against, or effectively respond to,
a cybersecurity incident or other disruption;
? other factors that affect the food industry generally, including:
o recalls if products become adulterated or misbranded, liability if product
consumption causes injury, ingredient disclosure and labeling laws and
regulations and the possibility that consumers could lose confidence in the
safety and quality of certain food products;
o competitors' pricing practices and promotional spending levels;
o fluctuations in the level of our customers' inventories and credit and other
business risks related to our customers operating in a challenging economic
and competitive environment; and
o the risks associated with third-party suppliers, including the risk that any
failure by one or more of our third-party suppliers to comply with food safety
or other laws and regulations may disrupt our supply of raw materials or
certain finished goods products or injure our reputation; and
? changes in, or the failure or inability to comply with, U.S. , foreign and
local governmental regulations, including health, environmental, and safety
regulations.
Any of these factors, as well as such other factors as discussed in our other
periodic filings with the
18
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
