# Seneca Foods Corp (SENEA) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Seneca Foods Corp's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/88948/000143774922014782/senea20220331_10k.htm
Accession: 0001437749-22-014782
Filing date: 2022-06-10
Report date: 2022-03-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Source document followed from filing index: ex_381518.htm.
Confidence: high

Company profile: /company/SENEA/
All MD&A years: /company/SENEA/mda/
Next year: /company/SENEA/mda/fy2023/ (FY 2023)

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations 

Our Business

Seneca is a leading provider of packaged fruits and vegetables, with facilities located throughout the United States. Its high quality products are primarily sourced from approximately 1,400 American farms. 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 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, restaurants chains, industrial markets, other food processors, export customers in over 90 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.

The Company’s business strategies are designed to grow its market share and enhance sales and margins. These strategies include: 1) expand the Company’s leadership in the packaged fruit and vegetable industry; 2) provide low cost, high quality vegetable products to consumers through the elimination of costs from the Company’s supply chain and investment in state-of-the-art production and logistical technology; 3) focus on growth opportunities to capitalize on higher expected returns; and 4) pursue strategic acquisitions that leverage the Company’s core competencies.

All references to years are fiscal years ended March 31 unless otherwise indicated.

Smaller Reporting Company Status

Management performed the annual public float test as of the last business day of the Company's second fiscal quarter ended October 2, 2021, and determined that the Company no longer qualifies as a smaller reporting company due to its public float exceeeding $250 million. The Company has continued to use the scaled disclosures permitted for a smaller reporting company through this Annual Report on Form 10-K for the fiscal year ended March 31, 2022. Beginning with the first quarterly report on Form 10-Q in fiscal year 2023, the Company will no longer be eligible to rely on the scaled disclosure exemptions applicable to smaller reporting companies. The Company's status as an accelerated filer was not impacted.

Fluctuations in Commodity, Production, Distribution and Labor Costs

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 experienced material net cost increases for raw materials and other input costs during fiscal year 2022. 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.

Impact of the COVID-19 Pandemic

Business Impact – Commencing at the onset of the COVID-19 pandemic, we 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 and our customers 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. Thanks to the tremendous efforts of our employees, especially those throughout our supply chain, our ability to serve our customers has not been materially impacted.

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.

The COVID-19 pandemic continues to pose the risk that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities, partially or completely, for an indefinite period of time, including due to shutdowns that may be requested or required by governmental authorities or imposed by management, or that the pandemic may otherwise interrupt or impair business activities.

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations

Financial Impact to Date – The COVID-19 pandemic has to date had a positive impact on our operating results, and significantly improved our net sales, net income, and net cash provided by operating activities in fiscal year 2021. During fiscal year 2022, our sales volume decreased when compared to fiscal year 2021 due to the extraordinary demand for our products that began in March 2020 and carried into fiscal year 2021 as the COVID-19 pandemic reached the United States and consumers began pantry loading and increasing their at-home consumption as a result of increased social distancing and stay-at-home and work-from home mandates and recommendations. However, demand for our retail products remained strong in fiscal year 2022 and base business net sales were in line with pre-pandemic levels, prior to the extraordinary demand and pantry loading at the height of the pandemic. Foodservice volumes have not yet recovered back to pre-pandemic levels.

Expectations and Risk Factors in Light of a Pandemic – The ultimate impact of a pandemic on our business will depend on many factors, including, among others: how long social distancing and stay-at-home and work-from home policies and recommendations are in effect; our 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, procure ingredients, packaging and other raw materials when needed despite unprecedented demand in the food industry; the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and shopping habits; and the extent to which consumers continue to work remotely even after the pandemic subsides and how that may impact consumer 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 - Fiscal Year 2022 versus Fiscal Year 2021

Net Sales:

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

[[GREPCENT_TABLE]]
[["","","Fiscal Year"],["","","2022","","","2021"],["Canned vegetables","","$","1,135,983","","","$","1,172,635"],["Frozen vegetables","","","123,895","","","","102,197"],["Fruit products","","","84,708","","","","88,431"],["Snack products","","","12,332","","","","10,999"],["Prepared foods","","","-","","","","71,866"],["Other","","","28,362","","","","21,516"],["","","$","1,385,280","","","$","1,467,644"]]
[[/GREPCENT_TABLE]]

Net sales for fiscal year 2022 totaled $1,385.3 million as compared to $1,467.6 million for fiscal year 2021. The overall net sales decrease was $82.3 million, or 5.6%. Of the $82.3 million decrease in net sales, $71.9 million of the decrease resulted from the divestiture of the prepared foods business in fiscal year 2021. Excluding this divestiture, net sales decreased by $10.4 million year over year. This decrease was primarily due to lower sales volumes, which equated to a $93.0 million decrease in net sales that was partially offset by higher selling prices/improved sales mix generating a favorable impact to net sales of $82.6 million compared to the prior fiscal year.

When comparing net sales for fiscal year 2022 to fiscal year 2021, canned vegetable sales decreased $36.7 million, as there was extraordinary sales demand during fiscal year 2021, particularly the first nine months, due to consumer pantry loading that was experienced at the onset of the pandemic and continued throughout fiscal year 2021. Prepared foods decreased $71.9 million due to exiting the business in fiscal year 2021 after the sale of the prepared foods business. Additionally, there was a $3.7 million decrease in fruit product sales. The noted decreases to net sales were partially offset by a $21.7 million increase in frozen vegetable sales driven by increased sales volumes, a $1.3 million increase in snack product sales, and a $6.8 million increase in other sales.

2

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations

Operating Income:

The following table sets forth the percentages of net sales represented by selected items for fiscal year 2022 and fiscal year 2021 reflected in our consolidated statements of net earnings:

[[GREPCENT_TABLE]]
[["","","Fiscal Year"],["","","2022","","","2021"],["Gross margin","","","10.7","%","","","15.8","%"],["Selling, general, and administrative expense","","","5.5","%","","","5.4","%"],["Other operating expense (income), net","","","0.1","%","","","-2.0","%"],["Operating income","","","5.1","%","","","12.3","%"],["Loss from equity investment","","","0.6","%","","","0.8","%"],["Other non-operating (income) expense","","","-0.7","%","","","0.2","%"],["Interest expense, net","","","0.4","%","","","0.4","%"],["Income taxes","","","1.1","%","","","2.3","%"]]
[[/GREPCENT_TABLE]]

Gross Margin – Gross margin is equal to net sales less cost of products sold. As a percentage of net sales, gross margin was 10.7% for fiscal year 2022 as compared to 15.8% for fiscal year 2021. This decrease in gross margin was due primarily to a LIFO charge of $35.8 million in fiscal year 2022 versus a LIFO credit of $15.6 million in fiscal year 2021, a year over year negative impact to gross margin of $51.4 million. Fiscal year 2022’s large LIFO charge was driven by cost inflation for various inputs, including steel, commodities, labor, ingredients, packaging, fuel and transportation.

Selling, General and Administrative Expense – Selling, general and administrative expense was 5.5% of net sales in fiscal year 2022 and 5.4% of net sales in fiscal year 2021. The increase as a percentage of net sales is primarily due to lower sales and the fixed nature of certain expenses.

Other Operating Expense (Income), net – The Company had net other operating expense of $1.2 million in fiscal year 2022, which was driven by charges for supplemental early retirement plans of $2.5 million and $1.1 million of charges to maintain non-operating facilities classified as held for sale. These charges were offset by a net gain on the sale of assets of $1.6 million, a gain from debt forgiveness on an economic development loan of $0.5 million, and income from land rental of $0.3 million.

The Company had net other operating income of $29.0 million in fiscal year 2021, which was primarily comprised of a net gain on the sale of assets of $31.9 million, including the gain realized upon the divestiture of the prepared foods business. The gain was partially offset by charges to maintain non-operational plants acquired in the Midwest of $1.5 million, a charge for a supplemental early retirement plan of $1.2 million, and a charge for severance of $0.2 million.

Restructuring – The Company did not incur significant restructuring charges during fiscal years 2022 or 2021.

Non-Operating Income:

Loss from Equity Investment – The Company’s loss from equity investment was $7.8 million and $11.5 million for fiscal years 2022 and 2021, respectively. Management assesses the potential for an other-than-temporary impairment of its equity method investment when impairment indicators are identified by considering all available information, including the recoverability of the investment, the earnings and near-term prospects of the investment, factors related to the industry, amongst others relevant information. If an investment is considered to be impaired and the decline in value is other than temporary, an impairment charge is recorded. During fiscal year 2022, the Company recorded an impairment charge of $6.3 million to reduce the carrying value of the equity method investment to $0, as the value of the investment was determined to not be recoverable. During fiscal year 2021, the Company had recorded an other-than-temporary impairment charge of $9.7 million to its equity method investment representing the difference between the carrying value of the Company’s investment and its proportionate share of the investment’s fair value.

Interest Expense, Net – Interest expense, net, was $5.6 million in fiscal year 2022 as compared to $6.1 million in fiscal year 2021. The decrease of $0.5 million was due mostly to lower average outstanding borrowings on the Company’s revolving credit facility and lower average interest rates during fiscal year 2022 versus fiscal year 2021.

3

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations

Other Non-Operating (Income) Expense – Other non-operating (income) expense totaled ($9.3 million) and $3.5 million in fiscal years 2022 and 2021, respectively, and is comprised of the non-service related pension amounts that are actuarially determined. The amounts can either be income or expense depending on the results of the actuarial calculations. For details of the calculation of these amounts, refer to Note 10 of the Notes to Consolidated Financial Statements.

Income Taxes – As a result of the aforementioned factors, pre-tax earnings decreased from $160.0 million in fiscal year 2021 to $66.2 million in fiscal year 2022. Income tax expense totaled $15.2 million and $33.9 million in fiscal years 2022 and 2021, respectively. The effective tax rate was 23.0% and 21.2% in fiscal years 2022 and 2021, respectively. In fiscal year 2021, the Company was able to carryback the net operating loss (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 NOL carryback had a 2.8% decrease on the fiscal year 2021 rate and without this impact in fiscal year 2022, the tax rate effectively increased by 2.8%. The increase in the effective tax rate was partially offset by a decrease of 0.5% due to the federal income tax credits having a larger impact on the effective tax rate in fiscal year 2022, amongst other decreases. Refer to Note 9 of the Notes to Consolidated Financial Statements for the full tax reconciliation.

Earnings per Share:

[[GREPCENT_TABLE]]
[["","","Fiscal Year"],["","","2022","","","2021"],["Basic earnings per common share","","$","5.83","","","$","13.82"],["Diluted earnings per common share:","","$","5.79","","","$","13.72"]]
[[/GREPCENT_TABLE]]

For details of the calculation of these amounts, refer to Note 3 of the Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

Debt:

The Company’s primary cash requirements are to make payments on the Company’s debt, finance seasonal working capital needs and to make capital expenditures. Internally generated funds and amounts available under the revolving credit facility are the Company’s primary sources of liquidity, although the Company believes it has the ability to raise additional capital by issuing additional stock, if it desires.

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. 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 fruits and 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.

As of March 31, 2022 and 2021, the Revolver balance was $20.5 million and $1.0 million, respectively, and is included in Long-Term Debt in the accompanying Consolidated Balance Sheet due to the Revolver’s March 24, 2026 maturity.

4

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations

The following table documents the quantitative data for short-term borrowings on the Revolver during fiscal years 2022 and 2021 (in thousands, except for percentages):

[[GREPCENT_TABLE]]
[["","","As of:"],["","","March 31,","","","March 31,"],["","","2022","","","2021"],["Outstanding borrowings","","$","20,508","","","$","1,000"],["Interest rate","","","1.71","%","","","1.38","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Fiscal Year"],["","","2022","","","2021"],["Maximum amount of borrowings","","$","58,323","","","$","107,967"],["Average outstanding borrowings","","$","22,357","","","$","33,453"],["Weighted average interest rate","","","1.37","%","","","1.95","%"]]
[[/GREPCENT_TABLE]]

As of March 31, 2021, the Company had $59.8 million of cash and cash equivalents, which was due to the Company paying off substantially all of the Revolver balance in fiscal year 2021 with the proceeds from increased sales volumes resulting from the COVID-19 pandemic. At the onset of fiscal year 2022, the Company utilized this excess cash on hand generated in the previous fiscal year in place of the traditional use of the Revolver until the cash and cash equivalents was liquidated to $10.9 million as of March 31, 2022.

Long-Term Debt – On May 28, 2020 the Company entered into an Amended and Restated Loan and Guaranty Agreement that provides for a $100.0 million unsecured term loan (the “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 rather than a variable interest rate in addition to requiring quarterly principal payments of $1.0 million, which commenced during fiscal year 2021. The Company incurred financing costs totaling $0.2 million which have been classified as a discount to the debt. This agreement contains certain covenants, including maintaining a minimum EBITDA and minimum tangible net worth.

As of March 31, 2022, scheduled maturities of long-term debt in each of the five succeeding fiscal years and thereafter are presented below. The March 31, 2022 Revolver balance of $20.5 million is presented as being due in fiscal year 2026, based upon the Revolver’s March 24, 2026 maturity date (in thousands):

[[GREPCENT_TABLE]]
[["2023","","$","4,000"],["2024","","","4,000"],["2025","","","4,000"],["2026","","","101,408"],["2027","","","-"],["Thereafter","","","216"],["Total","","$","113,624"]]
[[/GREPCENT_TABLE]]

The Company believes that its cash flows from operations, availability under its Revolver, and cash and cash equivalents on hand will provide adequate funds for the Company’s working capital needs, planned capital expenditures, operating and administrative expenses, and debt service obligations for at least the next 12 months and the foreseeable future.

Restrictive Covenants – The Company’s debt agreements, including the Revolver and Term Loan, contain customary affirmative and negative covenants that restrict, with specified exceptions, the Company’s ability to incur additional indebtedness, incur liens, pay dividends on the Company’s capital stock, make other restricted payments, including investments, transfer all or substantially all of the Company’s assets, enter into consolidations or mergers, and enter into transactions with affiliates. The Company’s debt agreements also require the Company to meet certain financial covenants including a minimum EBITDA and minimum tangible net worth. The Revolver contains borrowing base requirements related to accounts receivable and inventories and also requires the Company to meet a financial covenant related to a minimum fixed charge coverage ratio if (a) an event of default has occurred or (b) availability on the Revolver is less than the greater of (i) 10% of the commitments then in effect and (ii) $25,000,000. The most restrictive financial covenant in the debt agreements is the minimum EBITDA within the Term Loan which for fiscal year 2022 was greater than $50 million in EBITDA. The Company computes its financial covenants as if the Company were on the first-in, first out (FIFO) method of inventory accounting. The Company has met all such financial covenants as of March 31, 2022.

5

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations

The Company's debt agreements limit the payment of dividends and other distributions. There is an annual total distribution limitation of $50,000, less aggregate annual dividend payments totaling $23,000 that the Company presently pays on two outstanding classes of preferred stock.

Standby Letters of Credit – The Company has standby letters of credit for certain insurance-related requirements. The majority of the Company’s standby letters of credit are automatically renewed annually, unless the issuer gives cancellation notice in advance. On March 31, 2022, the Company had $7.5 million in outstanding standby letters of credit. These standby letters of credit are supported by the Company’s Revolver and reduce borrowings available under the Revolver.

Cash Flows:

Net Cash Provided by Operating Activities – Net cash provided by operating activities totaled $30.2 million in fiscal year 2022 as compared to $183.2 million in fiscal year 2021, a decrease of $153.0 million. During fiscal year 2022, there was a planned effort to raise inventory levels after the increased sales demand stemming from the COVID-19 pandemic significantly reduced inventory levels in fiscal year 2021. In addition to planning a larger seasonal pack to replenish depleted inventory, input cost inflation was higher in fiscal year 2022, making the seasonal pack more costly to the Company. The reduction in cash provided by operating activities is primarily comprised of decreases in cash provided by inventories, $135.7 million, accounts receivable, $51.3 million, and net earnings, $75.1, which included a one-time gain of $35.8 million for the sale of the prepared foods business in the prior fiscal year. These reductions were partially offset by an increase in cash provided by accounts payable, accrued expenses and other, $85.4 million.

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) Provided by Investing Activities – Net cash used in investing activities was $45.2 million for fiscal year 2022 as compared to $2.3 million of net cash provided by investing activities in fiscal year 2021, a change of $47.4 million. Proceeds from the sale of assets in the prior fiscal year included the sale of the Company’s prepared food business. There was not a sale of comparable size in the current fiscal year, which reduced cash provided by the sale of assets by $65.5 million. Additions to property, plant and equipment partially offset the reduction in cash provided by investing activities as they totaled $53.4 million in fiscal year 2022 as compared to $71.4 million in fiscal year 2021, a decrease of $18.1 million. Fiscal year 2021’s additions to property, plant and equipment included the acquisition of two manufacturing facilities and the related equipment therein, and there were no similar acquisitions in fiscal year 2022.

Net Cash Used in Financing Activities – Net cash used in financing activities was $33.9 million for fiscal year 2022, a decrease of $102.4 million compared to net cash used in financing activities for fiscal year 2021 of $136.3 million. In fiscal year 2021, the Company paid down substantially all of its Revolver given the additional sales as a result of pantry loading due to the COVID-19 pandemic. During fiscal year 2021, the Company paid down $597.1 million of debt, primarily the Revolver, and borrowed $478.1 million resulting in a net use of cash totaling $119.0 million. During fiscal year 2022, the Company borrowed $398.6 million and paid down $383.0 million, providing net cash of $15.5 million, which was a change of $134.5 million compared to fiscal year 2021. Other than borrowings under the Revolver, there was no new long-term debt during fiscal year 2022. Additionally, during fiscal year 2022 the Company repurchased $38.8 million of its common stock. By comparison, the Company repurchased $4.4 million during fiscal year 2021, an increase in cash used in financing activities of $34.4 million.

6

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations

Seasonality

The Company’s revenues typically are highest in the second and third fiscal quarters. This is due, in part, because the Company’s fruit and vegetable sales exhibit seasonal increases in the third fiscal quarter due to increased retail demand during the holiday season. 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 these quarters. The following table shows quarterly information for selected financial statements items during fiscal years 2022 and 2021 to illustrate the Company’s seasonal business (in thousands):

[[GREPCENT_TABLE]]
[["","","First Quarter","","","Second Quarter","","","Third Quarter","","","Fourth Quarter"],["Fiscal Year 2022:"],["Net sales","","$","235,042","","","$","372,256","","","$","445,593","","","$","332,389"],["Gross margin","","","33,623","","","","42,728","","","","44,985","","","","26,596"],["Net earnings","","","14,136","","","","11,654","","","","18,664","","","","6,553"],["Revolver outstanding (at quarter end)","","","1,000","","","","51,679","","","","33,711","","","","20,508"],["Fiscal Year 2021:"],["Net sales","","$","288,165","","","$","390,294","","","$","484,392","","","$","304,793"],["Gross margin","","","48,562","","","","48,943","","","","77,704","","","","56,976"],["Net earnings","","","20,706","","","","18,105","","","","72,460","","","","14,829"],["Revolver outstanding (at quarter end)","","","34,406","","","","62,611","","","","-","","","","1,000"]]
[[/GREPCENT_TABLE]]

Accounts Receivable

In fiscal year 2022, accounts receivable increased by $26.9 million or 29.2% versus fiscal year 2021 due to higher sales in the fourth quarter of fiscal year 2022 as compared to the prior fiscal year’s quarter. The increased sales during this time period were driven by higher selling prices and a more favorable selling mix, which was partially offset by lower sales volumes.

Inventories

In fiscal year 2022, inventories increased by $67.2 million or 19.6% primarily reflecting the impact of higher input costs and a planned effort to increase overall inventory levels that were depleted by significant sales in fiscal year 2021. The LIFO reserve balance was $164.5 million at March 31, 2022 versus $128.7 million at the prior year end, an increase of $35.8 million reflecting the inflationary impact on the Company’s input costs.

The Company believes that the use of the LIFO method better matches current costs with current revenues.

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. During fiscal years 2022 and 2021, 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 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.

7

Management’s Discussion and Analysis of 

Financial Condition and Results of Operations

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 a high inflation environment that the Company is experiencing, the Company believes that the LIFO method was preferable over the FIFO (first-in, first-out) 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.

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. Refer to Note 9 of the Notes to Consolidated Financial Statements for the full tax reconciliation.

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.  The penson plan's funded status decreased by $10.0 million during fiscal year 2022 reflecting the actual fair value of plan assets and the projected benefit obligation as of March 31, 2022. This funded status decrease was primarily driven by an increase in the plan’s projected benefit obligation due to service cost and interest cost exceeding the actual return on plan assets, partially offset by an actuarial gain on the projected benefit obligation described below.

During fiscal year 2022, the actuarial gain in the pension plan’s projected benefit obligation was primarily driven by an increase in discount rates. The gain was partially offset by actuarial losses due to a combination of data revisions resulting in the demographic losses, a change in near-term assumed salary increases, and an update to the most recently released mortality projection scale by the Society of Actuaries (SOA). During fiscal year 2021, the actuarial loss in the pension plan’s projected benefit obligation was primarily driven by data revisions resulting in demographic losses as well as a decline in discount rates. Additionally, the SOA released an updated mortality projection scale for fiscal year 2021 which partially offset the actuarial loss. Plan assets decreased from $348.9 million as of March 31, 2021 to $327.9 million as of March 31, 2022 primarily due to normal payments of benefits, payments for an annuity lift-out during fiscal year 2022, and expenses, partially offset by an increase in the fair value of plan assets.

The pension plan was amended to freeze accruals to new hires and rehires effective January 1, 2020. This amendment triggered a curtailment event under ASC 715. The curtailment accelerated statement of earnings recognition of the unrecognized prior service cost resulting in $0.1 million curtailment charge in fiscal year 2020. Refer to Note 10 of the Notes to Consolidated Financial Statements for the full pension plan disclosures.

Obligations and Commitments

As of March 31, 2022, the Company was obligated to make cash payments in connection with its debt, operating and finance leases, and purchase commitments. The effect of these obligations and commitments on the Company’s liquidity and cash flows in future periods are listed below. All of these arrangements require cash payments over varying periods of time. Certain of these arrangements are cancelable on short notice and others require additional payments as part of any early termination.

During fiscal year 2022, the Company entered into new finance and operating leases of approximately $18.7 million, based on the if-purchased value, which was primarily for agricultural and packaging equipment and farm land.

Purchase commitments represent estimated payments to growers for crops that will be grown during the calendar 2022 season.

Due to uncertainties related to uncertain tax positions, the Company is not able to reasonably estimate the cash settlements required in future periods.

The Company has no off-balance sheet debt or other unrecorded obligations other than purchase commitments noted above.

8

Management’s Discussion and Analysis of 

Financial Condition and Results of 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 consolidated balance sheets and related consolidated statements of net earnings, comprehensive income (loss), 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 and gain on the sale of its prepared foods business. 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):

[[GREPCENT_TABLE]]
[["","","Fiscal Year"],["","","2022","","","2021"],["Earnings before taxes, as reported","","$","66,231","","","$","160,016"],["LIFO charge (credit)","","","35,821","","","","(15,595",")"],["Loss on equity investment","","","7,775","","","","11,453"],["Gain on sale of the prepared food business","","","-","","","","(34,793",")"],["Adjusted earnings before taxes","","","109,827","","","","121,081"],["Income tax at effective tax rates","","","25,251","","","","25,662"],["Adjusted net earnings","","$","84,576","","","$","95,419"]]
[[/GREPCENT_TABLE]]

Recently Issued Accounting Standards

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 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 No. 2016-13 will require entities to estimate lifetime expected credit losses for trade and other receivables along with other financial instruments which will result in earlier recognition of credit losses. Further, the new credit loss model will affect how entities in all industries estimate their allowance for losses for receivables that are current with respect to their payment terms. In November 2019, the FASB issued ASU No. 2019-10, which, among other things, deferred the application of the new guidance on credit losses for smaller reporting companies to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This guidance will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., a modified-retrospective approach). Effective as of April 1, 2022, the Company will no longer qualify as a smaller reporting company and is therefore no longer eligible for the above-mentioned deferral. The Company expects to adopt ASU No. 2016-03, and the related ASU No. 2018-19 amendments, beginning as of April 1, 2022 and is in the process of assessing the impact, if any, that this new guidance is expected to have on the Company’s results of operations, financial condition and/or financial statement disclosures.

In December 2019, the FASB issued Accounting Standard Update (ASU) No. 2019-12 to simplify the accounting for income taxes by removing certain exceptions to the general principles and simplify areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enacted tax laws or rate changes. The new standard became effective for the Company during the first quarter of fiscal year 2022. The adoption of this ASU did not impact to the Company’s consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform" on Financial Reporting which provides optional guidance for a limited time to ease the potential accounting burden associated with the expected market transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. LIBOR is used to determine interest expense related to the Company’s Revolver, which matures in 2026. This update was effective starting March 12, 2020 and the Company may elect to apply the amendments prospectively through December 31, 2022. We are currently evaluating the effect that ASU 2020-04 will have on our consolidated financial statements and related disclosures.

There were no other recently issued accounting pronouncements that impacted the Company’s consolidated financial statements. In addition, the Company did not adopt any other new accounting pronouncements during fiscal year 2022.

9

Consolidated Statements of Net Earnings

[[GREPCENT_TABLE]]
[["Seneca Foods Corporation and Subsidiaries"],["(In thousands, except per share amounts)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Fiscal Year:"],["","","2022","","","2021"],["Net sales","","$","1,385,280","","","$","1,467,644"],["Costs and expenses:"],["Cost of products sold","","","1,237,348","","","","1,235,459"],["Selling, general, and administrative expense","","","76,343","","","","79,950"],["Other operating expense (income), net","","","1,174","","","","(29,014",")"],["Plant restructuring","","","70","","","","182"],["Total costs and expenses","","","1,314,935","","","","1,286,577"],["Operating income","","","70,345","","","","181,067"],["Other income and expenses:"],["Interest expense, net of interest income of $63 and $42, respectively","","","5,641","","","","6,125"],["Loss from equity investment","","","7,775","","","","11,453"],["Other non-operating (income) expense","","","(9,302",")","","","3,473"],["Earnings before income taxes","","","66,231","","","","160,016"],["Income taxes","","","15,224","","","","33,916"],["Net earnings","","$","51,007","","","$","126,100"],["Earnings per share:"],["Basic","","$","5.83","","","$","13.82"],["Diluted","","$","5.79","","","$","13.72"],["Weighted average common shares outstanding:"],["Basic","","","8,707","","","","9,088"],["Diluted","","","8,778","","","","9,158"]]
[[/GREPCENT_TABLE]]

See notes to consolidated financial statements.

10

Consolidated Statements of Comprehensive Income (Loss)

[[GREPCENT_TABLE]]
[["Seneca Foods Corporation and Subsidiaries"],["(In thousands)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Fiscal Year:"],["","","2022","","","2021"],["Comprehensive income (loss):"],["Net earnings","","$","51,007","","","$","126,100"],["Change in pension and postretirement benefits (net of income tax of $2,423 and ($19,528), respectively)","","","(7,401",")","","","60,153"],["Total","","$","43,606","","","$","186,253"]]
[[/GREPCENT_TABLE]]

See notes to consolidated financial statements.

11

Consolidated Balance Sheets

[[GREPCENT_TABLE]]
[["Seneca Foods Corporation and Subsidiaries"],["(In thousands)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","As of:"],["","","March 31,","","","March 31,"],["","","2022","","","2021"],["Assets"],["Current assets:"],["Cash and cash equivalents","","$","10,904","","","$","59,837"],["Accounts receivable, less allowance for doubtful accounts of $54 and $339, respectively","","","119,169","","","","92,221"],["Contracts receivable","","","939","","","","911"],["Inventories","","","410,331","","","","343,144"],["Assets held for sale","","","5,979","","","","8,656"],["Refundable income taxes","","","3,866","","","","8,385"],["Other current assets","","","4,254","","","","3,145"],["Total current assets","","","555,442","","","","516,299"],["Pension assets","","","52,866","","","","62,851"],["Right-of-use assets operating, net","","","34,008","","","","42,193"],["Right-of-use assets financing, net","","","34,867","","","","30,611"],["Property, plant, and equipment, net","","","268,043","","","","248,583"],["Other assets","","","1,804","","","","8,811"],["Total assets","","$","947,030","","","$","909,348"],["Liabilities and Stockholders\u2019 Equity"],["Current liabilities:"],["Accounts payable","","$","87,602","","","$","74,089"],["Deferred revenue","","","7,655","","","","4,287"],["Accrued vacation","","","11,611","","","","11,660"],["Accrued payroll","","","16,998","","","","15,366"],["Other accrued expenses","","","23,269","","","","24,403"],["Current portion of long-term debt and lease obligations","","","26,020","","","","28,325"],["Total current liabilities","","","173,155","","","","158,130"],["Long-term debt, less current portion","","","109,624","","","","94,085"],["Operating lease obligations, less current portion","","","22,533","","","","27,769"],["Financing lease obligations, less current portion","","","19,942","","","","19,232"],["Deferred income tax liability, net","","","32,944","","","","28,306"],["Other liabilities","","","4,995","","","","4,011"],["Total liabilities","","","363,193","","","","331,533"],["Commitments and contingencies"],["Stockholders\u2019 equity:"],["Preferred stock","","","644","","","","663"],["Common stock","","","3,041","","","","3,041"],["Additional paid-in capital","","","98,641","","","","98,502"],["Treasury stock, at cost","","","(128,879",")","","","(91,198",")"],["Accumulated other comprehensive loss","","","(26,468",")","","","(19,067",")"],["Retained earnings","","","636,858","","","","585,874"],["Total stockholders\u2019 equity","","","583,837","","","","577,815"],["Total liabilities and stockholders\u2019 equity","","$","947,030","","","$","909,348"]]
[[/GREPCENT_TABLE]]

See notes to consolidated financial statements.

12

Consolidated Statements of Cash Flows

[[GREPCENT_TABLE]]
[["Seneca Foods Corporation and Subsidiaries"],["(In thousands)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Fiscal Year:"],["","","2022","","","2021"],["Cash flows from operating activities:"],["Net earnings","","$","51,007","","","$","126,100"],["Adjustments to reconcile net earnings to net cash provided by operations:"],["Depreciation and amortization","","","36,523","","","","32,375"],["Deferred income tax expense","","","7,061","","","","16,650"],["Gain on the sale of assets","","","(1,861",")","","","(31,938",")"],["Provision for restructuring and impairment","","","284","","","","182"],["Gain on debt forgiveness","","","(500",")","","","0"],["Loss from equity investment","","","7,775","","","","11,453"],["401(k) match stock contribution","","","1,107","","","","1,479"],["Changes in operating assets and liabilities (net of acquisitions):"],["Accounts and contracts receivable","","","(26,976",")","","","24,280"],["Inventories","","","(67,187",")","","","68,487"],["Other current assets","","","(1,109",")","","","4,083"],["Accounts payable, accrued expenses, and other liabilities","","","19,509","","","","(65,936",")"],["Income taxes","","","4,519","","","","(4,035",")"],["Net cash provided by operating activities","","","30,152","","","","183,180"],["Cash flows from investing activities:"],["Additions to property, plant, and equipment","","","(53,367",")","","","(71,431",")"],["Proceeds from the sale of assets","","","8,180","","","","73,688"],["Net cash (used in) provided by investing activities","","","(45,187",")","","","2,257"],["Cash flows from financing activities:"],["Proceeds from issuance of long-term debt","","","398,550","","","","478,059"],["Payments of long-term debt","","","(383,011",")","","","(597,055",")"],["Payments on financing leases","","","(7,868",")","","","(6,321",")"],["Change in other assets","","","(2,758",")","","","(6,604",")"],["Purchase of treasury stock","","","(38,788",")","","","(4,358",")"],["Preferred stock dividends paid","","","(23",")","","","(23",")"],["Net cash used in financing activities","","","(33,898",")","","","(136,302",")"],["Net (decrease) increase in cash and cash equivalents","","","(48,933",")","","","49,135"],["Cash and cash equivalents, beginning of year","","","59,837","","","","10,702"],["Cash and cash equivalents, end of year","","$","10,904","","","$","59,837"],["Supplemental disclosures of cash flow information:"],["Cash paid during the year for:"],["Interest","","$","4,481","","","$","5,094"],["Income taxes paid","","$","2,971","","","$","22,692"],["Noncash transactions:"],["Property, plant and equipment issued under finance and operating leases","","$","18,734","","","$","3,749"],["Property, plant and equipment purchased on account","","$","1,267","","","$","19"]]
[[/GREPCENT_TABLE]]

See notes to consolidated financial statements.

13

Consolidated Statements of Stockholders' Equity

[[GREPCENT_TABLE]]
[["Seneca Foods Corporation and Subsidiaries"],["(In thousands, except share amounts)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","","","","","Accumulated"],["","","","","","","","","","","Additional","","","","","","","Other"],["","","Preferred","","","Common","","","Paid-In","","","Treasury","","","Comprehensive","","","Retained"],["","","Stock","","","Stock","","","Capital","","","Stock","","","Loss","","","Earnings"],["Balance March 31, 2020","","$","681","","","$","3,041","","","$","98,384","","","$","(88,319",")","","$","(79,220",")","","$","459,797"],["Net earnings","","","-","","","","-","","","","-","","","","-","","","","-","","","","126,100"],["Cash dividends paid on preferred stock","","","-","","","","-","","","","-","","","","-","","","","-","","","","(23",")"],["Equity incentive program","","","-","","","","-","","","","100","","","","-","","","","-","","","","-"],["Contribution of 401(k) match","","","-","","","","-","","","","-","","","","1,479","","","","-","","","","-"],["Purchase of treasury stock","","","-","","","","-","","","","-","","","","(4,358",")","","","-","","","","-"],["Preferred stock conversion","","","(18",")","","","-","","","","18","","","","-","","","","-","","","","-"],["Change in pension and postretirement benefits adjustment (net of tax $19,528)","","","-","","","","-","","","","-","","","","-","","","","60,153","","","","-"],["Balance March 31, 2021","","","663","","","","3,041","","","","98,502","","","","(91,198",")","","","(19,067",")","","","585,874"],["Net earnings","","","-","","","","-","","","","-","","","","-","","","","-","","","","51,007"],["Cash dividends paid on preferred stock","","","-","","","","-","","","","-","","","","-","","","","-","","","","(23",")"],["Equity incentive program","","","-","","","","-","","","","120","","","","-","","","","-","","","","-"],["Contribution of 401(k) match","","","-","","","","-","","","","-","","","","1,107","","","","-","","","","-"],["Purchase of treasury stock","","","-","","","","-","","","","-","","","","(38,788",")","","","-","","","","-"],["Preferred stock conversion","","","(19",")","","","-","","","","19","","","","-","","","","-","","","","-"],["Change in pension and postretirement benefits adjustment (net of tax $2,423)","","","-","","","","-","","","","-","","","","-","","","","(7,401",")","","","-"],["Balance March 31, 2022","","$","644","","","$","3,041","","","$","98,641","","","$","(128,879",")","","$","(26,468",")","","$","636,858"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Preferred Stock","","","Common Stock"],["","","6% Voting","","","10% Voting","","","","","","","2003 Series"],["","","Cumulative","","","Cumulative","","","Participating","","","Participating","","","Class A","","","Class B"],["","","Callable","","","Convertible","","","Convertible","","","Convertible","","","Common","","","Common"],["","","Par $0.25","","","Par $0.025","","","Par $0.025","","","Par $0.025","","","Par $0.25","","","Par $0.25"],["Shares authorized and designated:"],["March 31, 2022","","","200,000","","","","1,400,000","","","","32,256","","","","500","","","","20,000,000","","","","10,000,000"],["Shares outstanding:"],["March 31, 2021","","","200,000","","","","807,240","","","","33,855","","","","500","","","","7,353,545","","","","1,709,638"],["March 31, 2022","","","200,000","","","","807,240","","","","32,256","","","","500","","","","6,627,318","","","","1,705,930"],["Stock amount","","$","50","","","$","202","","","$","385","","","$","7","","","$","2,546","","","$","495"]]
[[/GREPCENT_TABLE]]

See notes to consolidated financial statements.

14