For the Quarter Ended December 29, 2018

Commission File Number 0-01989

New York

16-0733425

(State or other jurisdiction of

(I. R. S. Employer

incorporation or organization)

Identification No.)

3736 South Main Street, Marion, New York

14505 

(Address of principal executive offices)

(Zip Code)

Class

Shares Outstanding at January 25, 2019

Common Stock Class A, $.25 Par

7,700,102

Common Stock Class B, $.25 Par

1,874,901

Seneca Foods Corporation

Quarterly Report on Form 10-Q

Table of Contents

Page

PART 1

FINANCIAL INFORMATION

Item 1

Financial Statements:

Condensed Consolidated Balance Sheets-December 29, 2018, December 30, 2017 and March 31, 2018

Condensed Consolidated Statements of Net Earnings-Three and Nine Months Ended  December 29, 2018 and December 30, 2017

   2

Condensed Consolidated Statements of Comprehensive Income-Three and Nine Months Ended  December 29, 2018 and December 30, 2017

 3

Condensed Consolidated Statements of Cash Flows-Nine Months Ended  December 29, 2018 and December 30, 2017

 4

Condensed Consolidated Statement of Stockholders' Equity-Nine Months Ended  December 29, 2018

 5

Notes to Condensed Consolidated Financial Statements

 6

Management's Discussion and Analysis of Financial Condition  and Results of Operations

   19

Item 3 

Quantitative and Qualitative Disclosures about Market Risk

   26

Item 4 

Controls and Procedures

   27

PART II

OTHER INFORMATION

Item 1

Legal Proceedings

   28

Item 1A

Risk Factors

   28

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

   28

Item 3

Defaults Upon Senior Securities

   28

Item 4

Mine Safety Disclosures

   28

Item 5

Other Information

   28

Item 6 

Exhibits

   29

SIGNATURES

   30

1.

Unaudited Condensed Consolidated Financial Statements

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are normal and recurring in nature, necessary to present fairly the financial position of Seneca Foods Corporation (the “Company”) as of December 29, 2018 and results of its operations and its cash flows for the interim periods presented. All significant intercompany transactions and accounts have been eliminated in consolidation. The March 31, 2018 balance sheet was derived from the audited consolidated financial statements.

The results of operations for the three and nine month periods ended December 29, 2018 are not necessarily indicative of the results to be expected for the full year.

During the nine months ended December 29, 2018, the Company sold on a gross basis including case and labeling and future warehousing of $65,741,000 of Green Giant finished goods inventory to B&G Foods, Inc. for cash, on a bill and hold basis, as compared to $112,768,000 for the nine months ended December 30, 2017. Under the terms of the bill and hold agreement, title to the specified inventory transferred to B&G. Under the new revenue recognition standard discussed in Note 4 below, this contract qualifies for bill and hold accounting treatment as the Company has concluded that control of the unlabeled products transfers to the customer at the time title transfers and the Company has the right to payment (prior to physical delivery), which results in earlier revenue recognition. Labeling and storage services that are provided after control of the goods has transferred to the customer are accounted for as separate performance obligations for which revenue is deferred until the services are performed.

The accounting policies followed by the Company are set forth in Note 1 to the Company's Consolidated Financial Statements in the Company’s 2018 Annual Report on Form 10-K.

Other footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company's 2018 Annual Report on Form 10-K.

All references to years are fiscal years ended or ending March 31 unless otherwise indicated. Certain percentage tables may not foot due to rounding.

Reclassifications—Certain previously reported amounts have been reclassified to conform to the current period classification.

2.

Assets Held For Sale

As of December 29, 2018, the Company has certain operating units in the East that met the criteria to be classifed as held for sale, which requires the Company to present the related assets and liabilities as separate line items in our Condensed Consolidated Balance Sheet. The Company is required to record the assets held for sale at the lower of carrying value or fair value less costs to sell. The following table presents information related to the major classes of assets and liabilities that were held for sale in our Condensed Consolidated Balance sheets (in thousands):

3.

Discontinued Operations

On July 13, 2018, the Company executed a nonbinding letter of intent with a perspective buyer of the Modesto facility. On October 9, 2018, the Company closed on the sale of the facility to this outside buyer with net proceeds of $63,326,000. Based on its magnitude of revenue to the Company (approximately 15%) and because the Company was exiting the production of peaches, this sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for this sale as required by Accounting Standards Codification 210-05—Discontinued Operations. This business we are exiting is part of the Fruit and Vegetable segment.

The following table presents information related to the major classes of assets and liabilities of Modesto that are classified as Held For Sale-Discontinued Operations in the Company's Consolidated Condensed balance sheets (in thousands):

Includes $278,000 and $3,579,000 of Modesto severance in the three and nine month periods of fiscal 2019, respectively.

Includes interest on debt directly related to Modesto including the building mortgage and equipment leases and an allocation of the Company's line of credit facility.

Includes a $24,211,000 gain as a result of LIFO layer liquidations from the disposal of the inventory for nine months.

Includes $50,411,000 and $51,491,000 gain on the sale of Modesto plant and equipment in the three and nine month periods of fiscal 2019, respectively.

Includes a $4,975,000 gain on the sale of bins for the nine months period.

4.

Revenue Recognition

The Company adopted Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”) as of April 1, 2018, utilizing the full retrospective method of transition, which requires a restatement of each prior reporting period presented. The Company implemented new policies, processes and systems to enable both the preparation of financial information and internal controls over financial reporting in connection with its adoption of ASC 606. The updated accounting policy for revenue recognition follows:

Nature of products

We manufacture and sell the following:

•

private label products to retailers, such as supermarkets, mass merchandisers, and specialty retailers, for resale under the retailers’ own or controlled labels;

•

private label and branded products to the foodservice industry, including foodservice distributors and national restaurant operators;

•

branded products under our own proprietary brands, primarily on a national basis to retailers;

•

branded products under co-pack agreements to other major branded companies for their distribution; and

•

products to our industrial customer base for repackaging in portion control packages and for use as ingredients by other food manufacturers.

Disaggregation of revenue

In the following table, segment revenue is disaggregated by product category groups (in millions).

*B&G includes both canned and frozen vegetable sales exclusively for B&G under the Green Giant label.

When Performance Obligations Are Satisfied

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account for revenue recognition. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s primary performance obligation is the production of food products and secondarily case and labeling services and storage services for certain bill and hold sales.

Revenue recognition is completed primarily 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.

Customer contracts generally do not include more than one performance obligation. When a contract does contain more than one performance obligation, we allocate the contract’s transaction price to each performance obligation based on its relative standalone selling price. The standalone selling price for each distinct good is generally determined by directly observable data.

The performance obligations in our contracts are generally satisfied within one year. As such, we have not disclosed the transaction price allocated to remaining performance obligations for labeling and storage as of December 29, 2018 which is included in deferred revenue.

Significant Payment Terms

Our customer contracts identify the product, quantity, price, payment and final delivery terms. Payment terms usually include early pay discounts. We grant payment terms consistent with industry standards. Although some payment terms may be more extended, no terms beyond one year are granted at contract inception. As a result, we do not adjust the promised amount of consideration for the effects of a significant financing component because the period between our transfer of a promised good or service to a customer and the customer’s payment for that good or service will be generally 30 days or less.

Shipping

All shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in the cost of sales; this includes shipping and handling costs after control over a product has transferred to a customer.

Variable Consideration

In addition to fixed contract consideration, some contracts include some form of variable consideration. 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 sales, include amounts paid to retailers for shelf space, to obtain favorable display positions and to offer temporary price reductions for the sale of our products to consumers. Accruals for trade promotions are recorded primarily at the time of sale 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. Final determination of the permissible deductions may take extended periods of time.

Contract balances

Contract asset and liability balances as of December 29, 2018 are immaterial. The Company does not have significant deferred revenue or unbilled receivable balances because of transactions with customers. The Company does have deferred revenue for prepaid case and labeling and storage services which have been collected from B&G for Green Giant bill and hold sales.

Contract Costs

We have identified certain incremental costs to obtain a contract, primarily sales commissions, requiring capitalization under the new standard. The Company continues to expense these costs as incurred because the amortization period for the costs would have been one year or less. The Company does not incur significant fulfillment costs requiring capitalization.

Impact of Adoption

Due to the changes in ASC 606, the December 30, 2017 inventory decreased $3.9 million and deferred revenue decreased $4.2 million. There were no material impacts to the Condensed Consolidated Statement of Cash Flows. The following table summarizes the impact of our adoption of ASC 606 on a full retrospective basis on selected Condensed Consolidated Statement of Net Earnings items.

Condensed Consolidated Statements of Net Earnings (Loss) (in thousands)

5.

Inventories

First-In, First-Out (“FIFO”) based inventory costs exceeded LIFO based inventory costs by $160,727,000 as of the end of the third quarter of fiscal 2019 as compared to $152,091,000 as of the end of the third quarter of fiscal 2018. The change in the LIFO Reserve for the three months ended December 29, 2018 was an increase of $25,776,000 as compared to an increase of $994,000 (including a decrease of $274,000 related to discontinued operations) for the three months ended December 30, 2017.

The change in the LIFO Reserve for the nine months ended December 29, 2018 was an increase of $15,722,000 as compared to an increase of $18,835,000 for the nine months ended December 30, 2017 (including a decrease of $928,000 related to discontinued operations). The year-to-date increase includes a decrease of $24,211,000 related to the LIFO impact for the gain on sale of Modesto Fruit which is included in Other Operating Income under Discontinued Operations and it includes an increase of $39,933,000 related to Continuing Operations included in Cost of Product Sold. This reflects the projected impact of the disposal of Modesto Fruit which was entirely offset by an overall cost increase expected for continuing operations in fiscal 2019 versus fiscal 2018.

6.

Revolving Credit Facility

The Company has a five-year revolving credit facility (“Revolver”) with maximum borrowings totaling $400,000,000 from April through July and $500,000,000 from August through March and the Revolver matures on July 5, 2021. The Revolver balance as of December 29, 2018 was $214,161,000 and is included in Current Portion of Long-Term Debt in the accompanying Condensed Consolidated Balance Sheet . The Company utilizes its Revolver for general corporate purposes, including seasonal working capital needs, to pay debt principal and interest obligations, and to fund capital expenditures and acquisitions. Seasonal working capital needs are affected by the growing cycles of the vegetables and fruits the Company processes. The majority of vegetable and fruit inventories are produced during the months of June through November and are then sold over the following year. Payment terms for vegetable and fruit 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.

The Company also has a $100 million unsecured term loan with Farm Credit which was in violation of an interest ratio covenant requirement at the balance sheet date, but the Company obtained a waiver for the quarter ended December 29, 2018. A more restrictive covenant must be met at March 31, 2019 and it is probable that the Company will fail to meet that requirement at that date as well unless an additional waiver or amendment is obtained. Therefore, the Company concluded that the Farm Credit term loan, as of December 29, 2018, should be classified as a current liability.  In addition, the Revolver agreement contains a cross-default provision. The Revolver agreement has triggered an event of default as of December 29, 2018, due to the Farm Credit loan default. A waiver was obtained from the lender to provide temporary relief of default as of this measurement date. However, the Company believes that it is probable that the Revolver will be in default as of March 31, 2019 given the likelihood of a Farm Credit default again thus triggering a cross-default. Therefore, the Company concluded that the Revolver should be classified as a current liability as of December 29, 2018.

The decrease in the reported end of period amount of Revolver borrowings during the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018 was attributable to Working Capital which is $390,538,000 ($181,953,000 excluding the Revolver reclassification to current) lower than the same period last year due to the Modesto disposal, partially offset by a net loss in the last twelve months ended December 29, 2018.

General terms of the Revolver include payment of interest at LIBOR plus a defined spread.

The following table documents the quantitative data for Revolver borrowings during the third quarter and year-to-date of fiscal 2019 and fiscal 2018:

7.

Stockholders’ Equity

During the nine-month period ended December 29, 2018, the Company repurchased 160,179 shares of its Class A Common Stock and 9,290 of Class B Common Stock as Treasury Stock. As of December 29, 2018, there are 2,578,565 shares or $74,896,000 of repurchased stock. These shares are not considered outstanding.

8.

Retirement Plans

The net periodic benefit cost for the Company’s pension plan consisted of:

9.

Plant Restructuring

The following table summarizes the rollforward of continuing restructuring charges and the accruals established:

During the nine months ended December 29, 2018, the Company recorded a restructuring charge of $2,279,000 related to the closing and sale of plants in the East and Northwest of which $1,329,000 was related to severance cost, and $950,000 which was related to other costs (mostly equipment moves).

During the nine months ended December 30, 2017, the Company recorded a restructuring charge of $140,000 related to the previous closing of a Northwest plant and the Company also incurred a long-lived asset impairment charge of $17,000.

10.

Other Operating Income and Expense

During the nine months ended December 29, 2018, the Company sold unused fixed assets which resulted in a gain of $3,920,000 as compared to a gain of $1,590,000 during the nine months ended December 30, 2017. The current year gain was mostly related to the sale of a closed plant in the Midwest. $1,081,000 of the prior year gain was related to the sale of a closed plant in the Midwest.   In addition, the Company recorded a bargain purchase gain of $1,078,000 during the nine months ended December 30, 2017. These items are included in other operating income (loss) in the Unaudited Condensed Consolidated Statements of Net Earnings.

11.

Recently Issued Accounting Standards

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with customers, now commonly referred to as Accounting Standards Codification Topic 606 (“ASC 606”). The FASB issued ASC 606 to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. ASC 606 requires the recognition of revenue when control of performance obligations as stipulated in the contracts, is transferred to a customer for an amount that reflects the consideration the entity expects to receive in exchange for promised goods and services.

The Company adopted ASC 606 as of April 1, 2018, utilizing the full retrospective method of transition, which requires a restatement of each prior reporting period presented. In adopting ASC 606, the Company used the practical expedient where the transaction price allocated to the remaining performance obligations before the date of the initial application is not disclosed. The Company implemented new policies, processes and systems to enable both the preparation of financial information and internal controls over financial reporting in connection with its adoption of ASC 606. The primary impact of adopting ASC 606 on the Company’s 2019 and 2018 revenue was to report the product sales to B&G as bill and hold sales, but deferring a small portion of the sale for future case and labeling services along with storage services. See Note 4 for more information.

In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842)." This update provides an optional transition method that allows entities to elect to apply the standard prospectively at its effective date, versus recasting the prior periods presented. If elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance is effective for annual periods beginning after December 15, 2018. We currently expect to adopt ASU 2016-02 as of April 1, 2019, under the modified prospective method. Our evaluation of ASU 2016-02 is ongoing and not complete. Our estimated date of completion of FASB ASC 842 technical assessment of applying the new standard to the Company’s lease contracts is between Q4 of Fiscal Year 2019 and Q1 of Fiscal Year 2020. The estimated date of revised Internal Control of Financial Reporting (ICFR) is Q4 of Fiscal Year 2019. The estimated date of draft footnote disclosures is Q1 of Fiscal Year 2020. The Company believes that the new standard will have a material impact on its consolidated balance sheet due to the recognition of ROU assets and liabilities for the Company’s operating leases but it will not have a material impact on its statement of operations or liquidity. We expect our accounting for capital leases to remain substantially unchanged. The ASU also will require disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. Our leasing activity is primarily related to buildings and equipment. The Company is continuing to evaluate potential impacts to its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01 ("ASU 2017-01"), which clarifies the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted for transactions which occur before the issuance or effective date of the amendments, only when the transaction has not been reported in the financial statements that have been issued or made available for issuance. ASU 2017-01 is to be applied on a prospective basis. The Company adopted ASU 2017-01 in the first quarter of fiscal 2019 and it did not have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same statement of earnings captions as other compensation costs arising from services rendered by the covered employees during the period. The other components of net benefit cost will be presented in the statement of earnings separately from service costs. ASU 2017-07 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for the Company). Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice. The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories. The Company adopted the new guidance in first quarter of fiscal year 2019, and the changes to earnings before income taxes were immaterial in the year of adoption.

There were no other recently issued accounting pronouncements that impacted the Company’s condensed consolidated financial statements. In addition, the Company did not adopt any other new accounting pronouncements during the quarter ended December 29, 2018.

12.

Earnings (Loss) per Common Share From Continuing Operations

Earnings (loss) per share for the three and nine months ended December 29, 2018 and December 30, 2017 are as follows:

13.

Fair Value of Financial Instruments

As required by Accounting Standards Codification ("ASC") 825, “Financial Instruments,” the Company estimates the fair values of financial instruments on a quarterly basis. The estimated fair value for long-term debt (classified as Level 2 in the fair value hierarchy) is determined by the quoted market prices for similar debt (comparable to the Company’s financial strength) or current rates offered to the Company for debt with the same maturities. Long-term debt, including current portion had a carrying amount of $325,373,000 and an estimated fair value of $325,276,000 as of December 29, 2018. As of March 31, 2018, the carrying amount was $409,396,000 and the estimated fair value was $408,942,000. Capital lease obligations, including current portion had a carrying amount of $36,387,000 and an estimated fair value of $32,994,000 as of December 29, 2018. As of March 31, 2018, the carrying amount was $40,137,000 and the estimated fair value was $37,287,000. The fair values of all the other financial instruments approximate their carrying value due to their short-term nature.

14.

Income Taxes

The effective tax rate from continuing operations was 25.7% and (21.4)% for the nine month periods ended December 29, 2018 and December 30, 2017, respectively. The 47.1 percentage point increase in the effective tax rate is the result of a 38.1% increase due to the Tax Cuts and Jobs Act and a 8.6% increase due to federal and state income tax credits. The amount of federal and state income tax credits has remained consistent with the prior year. However, the percentage of federal and state income tax credits in relation to the 2019 pre-tax loss versus the percentage of state credits in relation to the 2018 pre-tax income has resulted in a significant increase.

15.

Subsequent Event

On January 23, 2019, the sale of the Marion Can plant (land and buildings) was completed for approximately $3.5 million. This was included in Assets Held For Sale on the Condensed Consolidated Balance Sheet as of December 29, 2018.