SENECA FOODS CORPORATION OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020
fruits and vegetables, with facilities located throughout
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® and READ®. 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 canned vegetables as well as frozen vegetables
under contract packing agreements.
The Company's raw product is harvested mainly between June through November.
Impact of the COVID-19 Pandemic:
The continued spread of COVID-19 throughout
Business Impact - We have implemented a wide range of precautionary measures at our manufacturing facilities and other work locations in response to COVID-19. We have also been working closely with our supply chain partners to ensure that we can continue to provide uninterrupted service. To date, there has been minimal disruption in our supply chain network, including the supply of fruits and vegetables, packaging or other sourced materials. We also continue to work closely with our customers and have implemented measures to allocate order volumes to ensure a consistent supply across our retail partners during this period of high demand. We continue to monitor the latest guidance from the CDC, FDA and other federal, state and local authorities regarding COVID-19 to ensure our safety protocols remain current to protect our employees, customers, suppliers and other business partners. Financial Impact to Date - We began to see a significant increase in net sales in the second half ofMarch 2020 as the COVID-19 pandemic reachedthe United States and consumers began pantry loading and increasing their at-home consumption as a result of increased social distancing and stay-at-home mandates. The overall increase in net sales has continued for the first three quarters of 2021. Growth in the retail channel has remained strong and exceeded declines in the foodservice and chain channels experienced due to the pandemic. We have incurred incremental costs to take the precautionary health and safety measures described above, which partially offsets the net sales favorability in our operating results, however gross margin has increased through nine months of 2021 as compared to the same time period of 2020. Most of the incremental costs impact our costs of goods sold and the remaining portion impacts our selling, general and administrative expenses. As reflected above, the pandemic has to date overall had a positive impact on our operating results and our net cash provided by operating activities. As a result, during the third quarter of 2020 we repaid all outstanding borrowings under our revolving credit facility. 18
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020
Expectations and Risk Factors in Light of the COVID-19 Pandemic - As discussed
above, increased customer and consumer demand resulting from the COVID-19
pandemic, social distancing and stay-at-home mandates has had a material
positive impact on our company's net sales, net cash provided by operating
activities and net leverage in the first three quarters of 2021. However, the
ultimate impact of the COVID-19 pandemic on our business will depend on many
factors, including, among others, the duration of social distancing and
stay-at-home mandates and whether an additional wave of COVID-19 will affect the
United States and the rest of North America , our company's ability to continue
to operate our manufacturing facilities, retain a sufficient seasonal workforce,
fill open full time positions, maintain our supply chain without material
disruption, and procure ingredients, packaging and other raw materials when
needed despite unprecedented demand in the food industry, and the extent to
which macroeconomic conditions resulting from the pandemic and the pace of the
subsequent recovery may impact consumer eating habits.
Internal controls over financial reporting have not been impacted by COVID-19. Management is continuously monitoring to ensure controls are effective and properly maintained.
Results of Operations: Sales: Net sales were$484,392,000 for the three months endedDecember 26, 2020 as compared with$392,971,000 for the three months endedDecember 28, 2019 . The net sales increase of$91,421,000 , or 23.3%, was due to a sales volume increase of$71,265,000 and by higher selling prices/sales mix of$20,156,000 . The increase in sales is primarily from a$97,198,000 increase in Canned Vegetable sales and a$1,114,000 increase in Other sales partially offset by a$3,298,000 decrease in Frozen sales, a$1,515,000 decrease in Fruit Product sales, a$1,964,000 decrease in Prepared Food sales, and a$114,000 decrease in Chip Product sales. Net sales were$1,162,851,000 for the nine months endedDecember 26, 2020 as compared with$1,027,898,000 for the nine months endedDecember 28, 2019 . The net sales increase of$134,953,000 , or 13.1%, was due to a sales volume increase of$76,735,000 and by higher selling prices/sales mix of$58,218,000 . The increase in sales is primarily from a$160,381,000 increase in Canned Vegetable sales and a$4,097,000 increase in Other sales, partially offset by a$13,443,000 decrease in Frozen sales, a$8,344,000 decrease in Fruit Product sales, a$7,045,000 decrease in Prepared Food sales, and a$693,000 decrease in Chip Product sales. 19
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020 The following table presents net sales by product category (in millions):
Three Months Ended Nine Months Ended
December 26, December 28, December 26, December 28,
2020 2019 2020 2019
Canned Vegetables $ 394.5 $ 297.3 $ 917.8 $ 757.4
Frozen 27.3 30.6 76.3 89.7
Fruit Products 30.7 32.2 73.4 81.8
Chip Products 2.8 2.9 8.2 8.9
Prepared Foods 23.5 25.5 71.9 78.9
Other 5.6 4.5 15.3 11.2
$ 484.4 $ 393.0 $ 1,162.9 $ 1,027.9
Operating Income:
The following table presents components of operating income as a percentage of
net sales:
Three Months Ended Nine Months Ended
December 28,
December 26, 2020 December 28, 2019 December 26, 2020 2019Gross Margin 16.0 % 13.3 % 15.1 % 9.3 % Selling 2.2 % 2.4 % 2.2 % 2.5 % Administrative 2.5 % 2.7 % 3.0 % 2.8 % Plant Restructuring 0.0 % 0.2 % 0.0 % 0.7 % Other Operating Loss/(Income) -7.3 % -0.4 % -2.9 % -0.8 % Operating Income 18.7 % 8.4 % 12.8 % 4.2 % Interest Expense, Net 0.3 % 0.7 % 0.4 % 0.9 % Gross margin for the three months endedDecember 26, 2020 was 16.0% as compared with 13.3% for the three months endedDecember 28, 2019 . The increase in gross margin for the three months endedDecember 26, 2020 was due primarily to higher selling prices/mix partially offset by a less favorable LIFO adjustment. The Company's LIFO credit for the three months endedDecember 26, 2020 was$4,656,000 or as compared to a credit of$11,337,000 for the three months endedDecember 28, 2019 . This reflects the impact of lower inventory levels as a result of the increased sales volumes and lower than planned pack quantities for certain commodities. On an after-tax basis, LIFO increased net earnings by$3,492,000 for the three months endedDecember 26, 2020 and increased net earnings by$8,503,000 for the three months endedDecember 28, 2019 , based on the historical statutory federal income tax rate. Gross margin for the nine months endedDecember 26, 2020 was 15.1% as compared with 9.3% for the nine months endedDecember 28, 2019 . The increase in gross margin for the nine months endedDecember 26, 2020 was due primarily to higher selling prices/mix partially offset by a less favorable LIFO adjustment. The Company's LIFO credit for the nine months endedDecember 26, 2020 was$4,268,000 as compared to a credit of$7,457,000 for the nine months endedDecember 28, 2019 , reflecting the impact of lower inventory levels as a result of the increased sales volumes and lower than planned pack quantities for certain commodities. On an after-tax basis, LIFO increased net earnings by$3,201,000 for the nine months endedDecember 26, 2020 and increased net earnings by$5,593,000 for the nine months endedDecember 28, 2019 , based on the historical statutory federal income tax rate. 20
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020
Selling costs as a percentage of net sales for the three months ended December
26, 2020 were 2.2% as compared with 2.4% for the prior year quarter. For the
nine months ended December 26, 2020 , selling costs as a percentage of net sales
were 2.2% as compared with 2.5% for the same period of the prior year. The
decreases in selling costs as a percentage of net sales for the three and nine
months ended December 26, 2020 are primarily due to higher sales and the fixed
nature of certain expenses.
Administrative costs as a percentage of net sales for the three months ended
December 26, 2020 were 2.5% as compared with 2.7% for the prior year quarter,
which was driven by higher sales in the quarter. For the nine month period ended
December 26, 2020 , administrative costs as a percentage of net sales were 3.0%
as compared with 2.8% for the same period of the prior year. The increase in
administrative costs as a percentage of net sales for the nine months ended
December 26, 2020 is primarily due to higher employment costs.
On December 18, 2020 , the Company completed the sale of its prepared foods
business to an unaffiliated buyer who was not a previous customer. The Company
recorded a gain on the sale of the prepared food business of $35,660,000 .
Additionally during the nine months ended December 26, 2020 , the Company
recorded a loss of $405,000 on the disposal of equipment from a sold Northwest
plant and a loss on the sale of unused fixed assets of $365,000 . The Company
also recorded a charge of $1,174,000 for a supplemental early retirement plan.
During the nine months ended December 28, 2019 the Company recorded a gain on
the partial sale of a plant in the Midwest of $3,742,000 and a gain on the
partial sale of a plant in the Northwest of $1,737,000 . The Company also
recorded a gain of on the sale of unused fixed assets of $3,139,000 . These items
are included in Other Operating Income in the Unaudited Condensed Consolidated
Statements of Net Earnings.
Interest expense as a percentage of net sales for the three months ended
December 26, 2020 was 0.3% as compared with 0.7% for the prior year quarter. For
the nine months ended December 26, 2020 , interest expense as a percentage of net
sales was 0.4% as compared with 0.9% for the same period of the prior year.
During fiscal 2021, overall borrowings and interest rates were lower than the
previous year resulting in lower interest expense for the three and nine months
ended December 26, 2020 .
Income Taxes:
The effective tax rate for continuing operations was 20.9% and 23.7% for the
nine month periods ended December 26, 2020 and December 28, 2019 , respectively.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), among other
things, allows NOLs incurred in taxable years beginning after December 31, 2017
and before January 01, 2021 to be carried back to each of the five preceding
taxable years to generate a refund of previously paid income taxes. The Company
was able to carryback the NOL generated in the 2019 tax year at a 21% corporate
tax rate to the 2015 tax year at a 35% corporate tax rate. The tax rate
difference realized for the NOL carryback decreased the Company's effective tax
rate by 3.2%. The effective tax rate was also decreased 0.5% by the receipt of
interest from the previously filed federal NOL carryback and the reversal of
interest and penalties from the removal of the uncertain tax benefits for 163(j)
interest limitations due to changes in regulations. The overall effective tax
rate decrease was offset primarily by a 0.7% increase in the tax rate resulting
from federal credits and incentives and a 0.5% increase from state credits and
incentives. The dollar amount of the credits and incentives did not change
significantly. Projected pre-tax income increased from 2020 to 2021, resulting
in the credits and incentives having a smaller impact on the tax rate in 2021.
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020
Earnings per Share:
Continuing basic earnings per share were $7.96 and $2.65 for the three months
ended December 26, 2020 and December 28, 2019 , respectively. Continuing diluted
earnings per share were $7.90 and $2.63 for the three months ended December 26,
2020 and December 28, 2019 , respectively. Continuing basic earnings per share
were $12.18 and $3.23 for the nine months ended December 26, 2020 and December
28, 2019 , respectively. Continuing diluted earnings per share were $12.09 and
$3.20 for the nine months ended December 26, 2020 and December 28, 2019 ,
respectively. For details of the calculation of these amounts, refer to footnote
13 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):
December 26, December 28, March 31, March 31,
2020 2019 2020 2019
Working Capital:
Balance $ 347,709 $ 426,968 $ 401,946 $ 490,871
Change in Quarter 13,791 (10,305 )
Current Portion of Long-Term Debt 4,500 - 500 345
Long-Term Debt, Less Current Portion 94,077 225,337 217,081 265,900
Operating Lease Obligations, Less
Current Portion 30,436 47,965 42,760 -
Financing Lease Obligations, Less
Current Portion 20,546 27,007 24,366 -
Capital Lease Obligations, Less Current
Portion - - - 31,286
Total Stockholders' Equity Per
Equivalent
Common Share (see Note below) 54.90 47.01 42.77 43.27
Stockholders' Equity Per Common Share 55.45 47.47 43.18 43.67
Current Ratio 2.85 3.47 3.69 5.37
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 9 of the Notes to Consolidated Financial Statements of the Company's 2020 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$103,090,000 for the nine months endedDecember 26, 2020 , compared to$90,024,000 for the same period of the prior year. The increase in cash provided by operating activities is primarily comprised of increases in cash provided by net earnings,$81,105,000 , accounts receivable,$23,304,000 , other current assets$7,855,000 and income taxes,$1,861,000 partially offset by cash used for accounts payable, accrued expenses and other,$71,856,000 and inventory,$7,915,000 . As compared toDecember 28, 2019 , inventory decreased$82,138,000 to$410,927,000 atDecember 26, 2020 . The components of the inventory decrease (excluding LIFO) reflect a$43,319,000 decrease in finished goods, and a$56,571,000 decrease in raw materials and supplies partially offset by a$3,867,000 increase in work in process. The finished goods decrease primarily reflects increased sales partially offset by higher pack inventory quantities attributable to the larger calendar year 2020 pack versus the calendar year 2019 pack. The raw materials and supplies decrease is primarily due to a decrease in cans and raw steel quantities compared to the prior year. FIFO based inventory costs exceeded LIFO based inventory costs by$139,999,000 as of the end of the third quarter of 2020 as compared to$153,884,000 as of the end of the third quarter of 2019. 22
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020
Cash provided by investing activities was $32,615,000 in the first nine months
of fiscal 2021 compared to cash used in investing activities of $25,506,000 in
the first nine months of fiscal 2020. Additions to property, plant and equipment
were $40,167,000 in the first nine months of fiscal 2021 as compared to
$47,681,000 in first nine months of fiscal 2020. Proceeds from the sale of
assets were $72,782,000 for the first nine months of fiscal 2021 as compared to
$22,175,000 in first nine months of fiscal 2020.
Cash used in financing activities was $132,258,000 in the first nine months of
fiscal 2021, which included borrowings of $468,181,000 and the repayment of
$587,185,000 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 nine months
of fiscal 2021. The Company repurchased treasury stock of $2,154,000 in the
first nine months of fiscal 2021 and repurchased $11,454,000 of its stock during
the first nine months of fiscal year 2020.
The Company entered into a five-year revolving credit facility on July 5, 2016 .
Available borrowings on the Revolver total $300,000,000 from April through July
and $400,000,000 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 December 26, 2020 , there were no outstanding borrowings on the Revolver. 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 December 26, 2020 , the Company was in compliance
with all such financial covenants.
New Accounting Standards
Refer to footnote 12 of the Notes to Condensed Consolidated Financial Statements.
Seasonality The Company's revenues are typically higher in the second and third fiscal quarters. The Company's sales also exhibit seasonality with the third fiscal quarter generating the highest retail sales due to holidays that occur during that quarter. See the Critical Accounting Policies section below for further details.
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.
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020
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;
? Potential impact of COVID-19 related issues at our facilities;
? 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,
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
For the nine months ended December 26, 2020 and December 28, 2019 the Company
sold certain finished goods inventory for cash on a bill and hold basis. The
terms of the bill and hold agreement(s) provide that title to the specified
inventory is transferred to the customer(s) 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 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.
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OPERATIONS
December 26, 2020
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 is 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.
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