EX-13 3 ex_145543.htm EXHIBIT 13 ex_145543.htm

Exhibit 13

 

 

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

 

OVERVIEW 

 

Our Business 

 

Seneca Foods is one of North America’s leading providers of packaged fruits and vegetables, with facilities located throughout the United States. Its high quality products are primarily sourced from over 2,000 American farms.

 

Seneca holds a large share of the retail private label, food service, and export canned vegetable markets, distributing to over 90 countries. Products are also sold under the highly regarded brands of Libby’s®, Aunt Nellie’s®, Green Valley®, READ®, Cherryman® and Seneca labels, including Seneca snack chips.  In addition, Seneca provides vegetable products under a contract packing agreement with B&G Foods North America, under the Green Giant label.

 

On February 16, 2018, the Company announced production at its fruit (primarily peaches) processing plant in Modesto, California will cease prior to the 2018 production season. During the second fiscal quarter of 2019, the Company sold and transferred most of the remaining inventory in the facility and completed most of the labeling and casing required to PCP for the fruit inventory sold to them in the first quarter. The Company continued to ready the building and equipment for sale during the second quarter and into the third quarter. The Modesto operations have met the requirements (approximately a 15% reduction in revenue and a strategic shift away from producing peaches) for discontinued operations and those operations have been presented as such in these financial statements. During October 2018, the building and the land was sold to an unrelated third party for net proceeds of $63,326,000 and the Company auctioned off the remaining equipment in the third quarter. See Note 3 Discontinued Operations in the Consolidated Financial Statements for more details.

 

During 2014, the Company acquired a 50% equity interest in Truitt Bros., Inc. (“Truitt”) which was accounted for as an equity interest. During 2018, the Company purchased the remaining 50% equity interest in Truitt. Truitt is known for its industry innovation related to packing shelf stable foods in trays, pouches and bowls. The business, based in Salem, Oregon, has two state-of-the-art plants located in Oregon and Kentucky.

 

The Company’s business strategies are designed to grow the Company’s market share and enhance the Company’s sales and margins and include: 1) expand the Company’s leadership in the packaged fruit and vegetable industry; 2) provide low cost, high quality fruit and 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.

 

Restructuring 

 

During 2019, the Company recorded an impairment and restructuring charges totaling $11.7 million. Of this amount, $2.3 relates to the partial closure of a plant in the Midwest ($1.8 million is equipment moves and $0.5 is severance), $1.3 million related to the sale of a plant in the Northeast ($0.5 million is equipment moves and $0.8 million is severance), and $0.3 million for the partial sale of a plant in the Northwest ($0.2 million is severance, $0.1 million is mostly equipment moves). In addition, the Company recorded a charge for an impairment of long-lived assets of $7.8 million for a Northwest plant that will be ceasing production after this growing season.

 

During 2018, the Company recorded a restructuring credit of $0.3 related to the closing of a plant in the Midwest and Northwest.

 

These charges are included under Plant Restructuring in the Consolidated Statements of Net Earnings (Loss).

 

Divestitures, Other Charges and Credits

 

Other operating income in 2019 includes a gain of the sale of a plant in the Northwest of $4.1 million, a gain on the sale of a plant in the Northeast $2.0 million and a gain on the partial closure of a plant of $0.8 million. The Company also recorded a loss on the sale of an Eastern plant of $0.6 million. The Company also recorded a gain for interest rate swap of $0.3 million.

 

Other operating income in 2018 includes an acquisition gain of $1.8 million, a gain on the sale of a plant of $1.1 million and a gain on the partial sale of a plant of $0.4 million. The Company also recorded a gain of $0.4 million on the sale of fixed assets.

 

1

 

 

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

 

Liquidity and Capital Resources 

 

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 

 

The Company completed the closing of a five-year revolving credit facility (“Revolver”) on July 5, 2016. Maximum borrowings under the Revolver total $400.0 million from April through July and $500.0 million from August through March.  The Revolver balance as of March 31, 2019 was $155.3 million and is included in Long-Term Debt in the accompanying Consolidated Balance Sheets due to the Revolver’s July 5, 2021 maturity date. 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 the Company’s accounts receivable and inventories and contains a financial covenant and borrowing base requirements. 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 packages. 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 believes that cash flows from operations and availability under its Revolver will provide adequate funds for the Company’s working capital needs, planned capital expenditures and debt service obligations for at least the next 12 months.

 

Seasonality 

 

The Company’s revenues typically are higher in the second and third fiscal quarters. This is due, in part, because the Company sells, on a bill and hold basis, Green Giant canned and frozen vegetables to B&G Foods at the end of each pack cycle, which typically occurs during these quarters. B&G Foods buys the product from the Company at cost plus an equivalent case tolling fee. See the Critical Accounting Policies section for further details. The Company’s non-Green Giant sales also exhibit seasonality with the third fiscal quarter generating the highest sales due to increased retail sales during the holiday season.  The table below excludes the Modesto discontinued operations.  

 

   

First

Quarter

   

Second

Quarter

   

Third

Quarter

   

Fourth

Quarter

 
   

(In thousands)

 

Year ended March 31, 2019:

                               

Net sales

  $ 244,093     $ 320,660     $ 372,238     $ 262,590  

Gross margin

    16,788       11,008       (2,096 )   $ 13,796  

(Loss) earnings from continuing operations

    (2,160 )     (5,634 )     (20,040 )     (8,649 )

Revolver outstanding (at quarter end)

    207,610       242,947       214,161       155,278  
                                 

Year ended March 31, 2018:

                               

Net sales

  $ 241,175     $ 327,664     $ 354,894     $ 239,161  

Gross margin

    13,501       21,671       28,778     $ 17,053  

(Loss) earnings from continuing operations

    (633 )     1,443       8,886       353  

Revolver outstanding (at quarter end)

    226,010       272,609       290,196       293,459  

 

2

 

 

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

 

Short-Term Borrowings

 

The maximum level of short-term borrowings during 2019 was affected by the disposal of Modesto for $65.0 million and the lower inventory by $45.3 million due to the sale of certain facilities in the Northeast, Northwest and Modesto. The maximum level of short-term borrowings during 2018 was affected by the acquisition of Truitt using $14.4 million partially offset by higher inventory due to the large pack totaling $25.8 million. Details of the sales of facilities are outlined in Note 12 of the Notes to Consolidated Financial Statements.

 

General terms of the Revolver include payment of interest at LIBOR plus an agreed upon spread.

 

The following table documents the quantitative data for Short-Term Borrowings during 2019 and 2018:

 

   

Fourth Quarter

   

Year Ended

 
   

2019

   

2018

   

2019

   

2018

 
              (In Thousands)                  

Reported end of period:

                               

Revolver outstanding

  $ 155,278     $ 293,459     $ 155,278     $ 293,459  

Weighted average interest rate

    4.00 %     3.35 %     4.00 %     3.35 %

Reported during period:

                               

Maximum Revolver

  $ 218,037     $ 312,917     $ 294,062     $ 312,917  

Average Revolver outstanding

  $ 185,127     $ 300,075     $ 215,208     $ 259,792  

Weighted average interest rate

    4.10 %     3.16 %     3.73 %     2.76 %

 

Long-Term Debt

 

On December 9, 2016, the Company entered into a $100.0 million unsecured term loan payable to Farm Credit East, ACA, with a variable interest rate. The maturity date for this term loan is December 9, 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 interest coverage ratio. On May 9, 2019, the Company entered into an amendment with waiver to the agreement to replace the interest coverage ratio financial covenant with a minimum EBITDA covenant. The first measurement of the minimum EBITDA covenant will be for the quarter ending on September 28, 2019 at which time the interest coverage ratio will no longer apply. In the meantime, the Company needs to maintain at least $175.0 million of excess undrawn availability from its revolver facility at March 31, 2019 and June 29, 2019 to be in compliance with the agreement. As of March 31, 2019, the Company has maintained at least $175.0 million of excess undrawn availability from its revolver facility.

 

The Company assumed a tax-exempt bond with the Truitt acquisition on April 3, 2017. At March 31, 2019, the total outstanding of this bond is $10.0 million. The bond has a variable interest rate with a maturity date of October 1, 2032.

 

The Company’s debt agreements, including the Revolver and term loan, contain covenants that restrict the Company’s ability to incur additional indebtedness, pay dividends on the Company’s capital stock, make other restricted payments, including investments, sell the Company’s assets, incur liens, transfer all or substantially all of the Company’s assets and enter into consolidations or mergers. The Company’s debt agreements also require the Company to meet certain financial covenants, including a minimum fixed charge coverage ratio, a minimum EBITDA and minimum tangible net worth. The Revolver also contains borrowing base requirements related to accounts receivable and inventories. These financial requirements and ratios generally become more restrictive over time and are subject to allowances for seasonal fluctuations. The most restrictive financial covenant in the debt agreements is the EBITDA within the Farm Credit term loan which for fiscal year end 2020 will need to be greater than $45 million. The Company computes its financial covenants as if the Company were on the FIFO method of inventory accounting. The Company has met all such financial covenants as of March 31, 2019.

 

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.

 

As of March 31, 2019, scheduled maturities of long-term debt in each of the five succeeding fiscal years and thereafter are presented below. The March 31, 2019 Revolver balance of $155.3 million is presented as being due in fiscal 2022, based upon the Revolver’s July 20, 2021 maturity date (in thousands):

 

2020

  $ 345  

2021

    500  

2022

    255,184  

2023

    -  

2024

    -  

Thereafter

    10,216  

Total

  $ 266,245  

 

3

 

 

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

 

Restrictive Covenants 

 

The Company’s debt agreements, including the Revolver and term loan, contain covenants that restrict the Company’s ability to incur additional indebtedness, pay dividends on the Company’s capital stock, make other restricted payments, including investments, sell the Company’s assets, incur liens, transfer all or substantially all of the Company’s assets and enter into consolidations or mergers. The Company’s debt agreements also require the Company to meet certain financial covenants, including a minimum fixed charge coverage ratio, a minimum EBITDA and minimum tangible net worth. The Revolver also contains borrowing base requirements related to accounts receivable and inventories. These financial requirements and ratios generally become more restrictive over time and are subject to allowances for seasonal fluctuations. The most restrictive financial covenant in the debt agreements is the minimum EBITDA within the Farm Credit term loan which for fiscal 2020 year end will be greater than $45 million. The Company computes its financial covenants as if the Company were on the FIFO method of inventory accounting. The Company has met all such financial covenants as of March 31, 2019.

 

Capital Expenditures 

 

Capital expenditures in 2019 totaled $33.8 million and there were three major projects in 2019 as follows: 1) $1.6 million to purchase land in Montgomery, Minnesota, 2) $4.1 million for a warehouse in Hart, Michigan, and 3) $2.0 for a production line in Janesville, Wisconsin. Capital expenditures in 2018 totaled $30.5 million and there were two major projects in 2018 as follows: 1) $2.8 million for the expansion of a production line in Princeville, Illinois, and 2) $3.4 million for a warehouse in Payette, Idaho. In addition, there were lease buyouts, equipment replacements and other improvements in 2019 and 2018.

 

Accounts Receivable

 

In 2019, accounts receivable increased by $17.9 million or 27.1% versus 2018 due to higher sales volume in the fourth quarter of 2019 compared to 2018 and a $6.3 million increase in the true-up receivable from B&G Foods. In 2018, accounts receivable increased by $6.7 million or 9.3% versus 2017, due to higher sales volume in the fourth quarter of 2018 compared to 2017 and the Truitt business we added in 2018.

 

Inventories 

 

In 2019, inventories decreased by $45.3 million primarily reflecting the effect of lower finished goods quantities from lower yields during the 2018 pack season and by the $16.3 million LIFO reserve increase, partially offset by higher raw material quantities. The LIFO reserve balance was $161.3 million at March 31, 2019 versus $145.0 million at the prior year end.

 

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

 

Critical Accounting Policies

 

During the year ended March 31, 2019, the Company sold $60.0 million of Green Giant finished goods inventory to B&G Foods North America (“B&G”) for cash, on a bill and hold basis, as compared to $112.8 million for the year ended March 31, 2018. Under the terms of the bill and hold agreement, title to the specified inventory transferred to B&G. Under the new revenue recognition standard, 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.

 

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.

 

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.

 

4

 

 

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

 

Obligations and Commitments

 

As of March 31, 2019, the Company was obligated to make cash payments in connection with its debt, operating and capital leases, and purchase commitments. 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.

 

In addition, the Company’s defined benefit plan has an unfunded pension liability of $17.3 million which is subject to certain actuarial assumptions. The unfunded status decreased by $5.9 million during 2019 reflecting the actual fair value of plan assets and the projected benefit obligation as of March 31, 2019. This unfunded status decrease was recognized via the actual gain on plan assets and the decrease in accumulated other comprehensive loss of $6.8 million after the income tax expense of $2.3 million. The increase in projected benefit obligation was a function of using the full yield curve approach and the change to using an updated mortality table. There was no change in the discount rate as it remained at 4.14%. During 2018, the Company converted to the 2006 base rates from the RP-2016 mortality study with the Blue Collar adjustment, with a generational projection of future mortality improvements from 2006 using Scale MP-2018 for calculating the pension obligation in 2018 and the related pension expense in 2019. The Company utilizes a full yield curve approach in the estimation of the service and interest cost components by applying the specific spot rates along the yield curve used in determination of the benefit obligation to their underlying projected cash flows. 

 

Plan assets increased from $212.8 million as of March 31, 2018 to $233.1 million as of March 31, 2019 due to a gain on plan assets of $26.7 million from a continued recovery in market conditions and a $2.1 million contribution by the Company. The Company made this contribution to maintain its funding status at an acceptable level.

 

During 2019, the Company entered into new capital and operating leases of approximately $8.3 million, based on the if-purchased value, which was primarily for agricultural and packaging equipment.

 

Purchase commitments represent estimated payments to growers for crops that will be grown during the calendar 2019 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 operating lease obligations and purchase commitments noted above.

 

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, 2019, the Company had $11.4 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 

 

In 2019, the Company’s cash and cash equivalents decreased by $3.6 million, which is due to the net impact of $97.1 million provided by operating activities, $67.0 million provided by investing activities, and $167.7 million used in financing activities.

 

5

 

 

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

 

Operating Activities 

 

Cash provided by operating activities increased to $97.1 million in 2019 from $13.2 million of cash used in operating activities in 2018. The increase is primarily attributable to net earnings in 2019 versus a net loss in 2018 which was a $14.2 million swing.  In addition, a significant decrease in inventories in 2019 primarily due to exiting the products in Modesto versus 2018 of $168.0 million contributed to cash provided by operating activities.  The reversal of the gains on the sale of assets reduced cash provided by operating activities by $63.4 million in 2019 versus $1.9 million in 2018.  The 2019 earnings reflect a LIFO charge of $16.3 million resulting in an increase in the tax payment deferral of $4.1 million. During 2019, the Company made a $2.1 million contribution to its pension plan compared to a $2.7 million contribution in the previous year.  

 

The cash requirements of the business fluctuate significantly throughout the year to coincide with the seasonal growing cycles of vegetables and fruits. 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.

 

Investing Activities 

 

Cash provided by investing activities was $67.0 million for 2019, principally reflecting proceeds from the sales of assets of $104.4 million, partially offset by capital expenditures. Capital expenditures aggregated $37.7 million in 2019 versus $32.7 million in 2018. There were three major projects in 2019 as follows: 1) $1.6 million purchase of land in Montgomery, Minnesota, 2) $4.1 million for a warehouse in Hart, Michigan and 3) $2.0 million for a production line in Janesville, Wisconsin.

 

Financing Activities 

 

Cash used in financing activities was $167.7 million in 2019 representing a net decrease in the debt (primarily the Revolver) of $159.7 million and by the purchase of $8.0 million of treasury stock during 2019.  Cash provided by financing activities was $61.3 million in 2018 representing a net increase in the debt of $66.3 million which was partially offset by the purchase of $4.6 million of treasury stock.

 

6

 

 

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

 

RESULTS OF CONTINUING OPERATIONS 

 

Classes of similar products/services:

 

2019

   

2018

 
   

(In thousands)

 

Net Sales:

               
Green Giant *   $ 71,161     $ 124,811  
Canned vegetables     815,780       721,121  
Frozen     113,115       105,857  
Fruit     91,941       91,019  
Prepared foods     79,593       92,826  
Snack     9,684       10,110  
Other     18,307       17,150  
Total   $ 1,199,581     $ 1,162,894  

 

* Green Giant includes canned and frozen vegetables exclusively for B&G Foods.

 

 

Fiscal 2019 versus Fiscal 2018

 

Net sales for 2019 increased $36.7 million, from $1,162.9 million to $1,199.6 million. The increase primarily reflects, a $94.7 million increase in canned vegetables sales, a $7.3 million increase in frozen sales, a $1.1 million increase in other sales, a $0.9 million increase in fruit sales, a $0.4 million decrease in snack sales, and a $53.7 million decrease in Green Giant sales, a $13.2 million decrease in prepared food sales. The increase in sales is attributable to increased sales volume of $2.4 million and higher selling prices/more favorable sales mix of $34.3 million. The increased selling prices/more favorable sales mix is primarily due to canned vegetables.

 

Cost of product sold as a percentage of sales increased from 93.0% in 2018 to 96.7% in 2019 primarily as a result of a $40.5 million LIFO charge increase in 2019, due to higher commodity and steel costs, a short pack and lower selling prices in 2019 versus 2018.

 

Selling, general and administrative expense was unchanged at 6.0% of sales in 2019 and 2018.

 

Other operating income in 2019 includes a gain of the sale of a plant in the Northwest of $4.1 million, a gain on the sale of a plant in the Northeast $2.0 million and a gain on the partial closure of a plant of $0.8 million. The Company also recorded a loss on the sale of an Eastern plant of $0.6 million. The Company also recorded a gain for interest rate swap of $0.3 million. Other operating income in 2018 includes an acquisition gain of $1.8 million, a gain on the sale of a plant of $1.1 million and a gain on the partial sale of a plant of $0.4 million. The Company also recorded a gain of $0.4 million on the sale of fixed assets.

 

Plant impairment and restructuring costs, which are described in detail in the Restructuring section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, increased from a benefit of $(0.3) million in 2018 to a charge of $11.7 million in 2019.

 

Interest expense, net, increased from $12.8 million in 2018 to $15.4 million in 2019 due in part to the higher interest rates on variable rate borrowings in 2019 versus 2018. Approximately $3.0 million of this interest expense increase was as a result of rising interest rates. This was partially offset by lower average Revolver borrows which is net of certain long-term debt paid off during the year.

 

As a result of the aforementioned factors, continuing pre-tax earnings decreased from $8.7 million in 2018 to pre-tax loss of $(49.3) million in 2019. The effective tax rate was 25.9% in 2019 and (15.1)% in 2018.  The increase of 41.0 percentage points in the effective tax rate for the year is the result of the change in income tax rate resulting from the Tax Cuts and Jobs Act in December 2017. The change in income tax rate resulted in a 42.1 percentage point decrease in the 2018 tax rate and it did not impact the 2019 income tax rate.

 

7

 

 

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

 

Recently Issued Accounting Standards 

 

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 retrospectively at the beginning of the period of adoption, 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, using the optional transition method provided by ASU 2018-11.  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 over of Financial Reporting (ICFR) is Q1 of fiscal year 2020. 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.

 

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 to the Consolidated Financial Statements for more information. 

 

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.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This amendment is intended to allow a reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting only from the December 2017 enacted United States Tax Cuts and Jobs Act (TCJA) and is not intended to impact underlying accounting guidance that requires that the effect of a change in tax laws or tax rates be included in income from operations. This update is effective for fiscal years beginning after December 31, 2018 with earlier adoption permitted. The Company has early adopted this update in its fourth quarter ended March 31, 2018 resulting in a $2.4 million reclassification from accumulated other comprehensive loss and a corresponding $2.4 million increase to retained earnings. This reclassification from accumulated other comprehensive loss relates to the deferred income tax stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the TCJA.  The pension and post-retirement benefits adjustment is the Company’s only component of accumulated other comprehensive loss.

 

8

 

 

 

 

Consolidated Statements of Net Earnings (Loss)

 

Seneca Foods Corporation and Subsidiaries

(In thousands of dollars, except per share amounts)

Years ended March 31,

 

2019

   

2018

 
                 
                 

Net sales

  $ 1,199,581     $ 1,162,894  
                 

Costs and expenses:

               

Cost of products sold

    1,160,085       1,081,891  

Selling, general, and administrative expense

    72,549       70,185  

Other operating income, net

    (6,631 )     (3,671 )

Plant restructuring charge (credit)

    11,657       (342 )

Total costs and expenses

    1,237,660       1,148,063  
                 

Operating (loss) income

    (38,079 )     14,831  

Earnings from equity investment

    -       (21 )

Other income

    (4,257 )     (6,700 )

Interest expense, net of interest income of $28 and $9, respectively

    15,437       12,818  
                 

(Loss) Earnings From Continuing Operations Before Income Taxes

    (49,259 )     8,734  

Income Taxes Benefit From Continuing Operations

    (12,776 )     (1,315 )

(Loss) Earnings From Continuing Operations

    (36,483 )     10,049  

Earnings (Loss) From Discontinued Operations (net of income taxes)

    42,230       (18,529 )

Net Earnings (loss)

  $ 5,747     $ (8,480 )
                 

Basic Earnings (Loss) per Common Share:

               

Continuing Operations

  $ (3.77 )   $ 1.02  

Discontinued Operations

  $ 4.36     $ (1.89 )

Net Basic Earnings (Loss) per Common Share

  $ 0.59     $ (0.87 )
                 

Diluted Earnings (Loss) per Common Share:

               

Continuing Operations

  $ (3.77 )   $ 1.02  

Discontinued Operations

  $ 4.33     $ (1.89 )

Net Diluted Earnings (Loss) per Common Share

  $ 0.59     $ (0.87 )

 

See notes to consolidated financial statements. 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

Seneca Foods Corporation and Subsidiaries

(In thousands of dollars)

 

Years ended March 31,

 

2019

   

2018

 
                 

Comprehensive income (loss) :

               
Net earnings (loss)   $ 5,747     $ (8,480 )
Change in pension and postretirement benefits (net of income tax of $2,249 and $3,774, respectively)     6,782       (11,483 )
                 
Total   $ 12,529     $ (19,963 )

 

See notes to consolidated financial statements. 

 

9

 
 

 

Consolidated Balance Sheets

 

Seneca Foods Corporation and Subsidiaries

(In thousands)

 

March 31,

 

2019

   

2018

 
                 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 11,480     $ 15,102  

Accounts receivable, less allowance for doubtful accounts of $57 and $56, respectively

    84,122       66,210  

Assets held for sale-discontinued operations

    98       109,870  

Inventories

    501,684       546,959  

Assets held for sale

    1,568       -  

Refundable income taxes

    1,221       1,142  

Other current assets

    3,075       1,856  

Total Current Assets

    603,248       741,139  

Deferred income tax asset, net

    2,417       5,576  

Noncurrent assets held for sale-discontinued operations

    1,143       20,098  

Other assets

    2,801       3,489  

Property, plant, and equipment:

               

Land

    25,832       25,603  

Buildings and improvements

    190,102       216,188  

Equipment

    421,639       430,445  

Total

    637,573       672,236  

Less accumulated depreciation and amortization

    398,300       413,693  

Net property, plant, and equipment

    239,273       258,543  

Total Assets

  $ 848,882     $ 1,028,845  
                 

Liabilities and Stockholders’ Equity

               

Current Liabilities:

               

Accounts payable

  $ 61,024     $ 56,752  

Deferred revenue

    4,098       8,362  

Accrued vacation

    11,678       11,691  

Accrued payroll

    5,105       4,955  

Other accrued expenses

    19,363       20,834  

Current liabilities held for sale-discontinued operations

    4,285       28,573  

Current liabilities held for sale

    61       -  

Current portion of long-term debt and capital lease obligations

    6,763       7,468  

Total Current Liabilities

    112,377       138,635  

Long-term debt, less current portion

    265,900       407,733  

Pension liabilities

    17,349       23,290  

Other liabilities

    4,180       5,829  

Noncurrent liabilities held for sale

    305       -  

Noncurrent liabilities held for sale-discontinued operations

    -       7,964  

Capital lease obligations, less current portion

    31,286       34,331  

Total Liabilities

    431,397       617,782  

Commitments and contingencies

               

Stockholders’ Equity:

               

Preferred stock

    707       707  

Common stock

    3,039       3,038  

Additional paid-in capital

    98,260       98,161  

Treasury stock, at cost

    (75,740 )     (69,556 )

Accumulated other comprehensive loss

    (18,285 )     (25,067 )

Retained earnings

    409,504       403,780  

Total Stockholders’ Equity

    417,485       411,063  

Total Liabilities and Stockholders’ Equity

  $ 848,882     $ 1,028,845  

 

See notes to consolidated financial statements. 

 

10

 
 

 

Consolidated Statements of Cash Flows

 

Seneca Foods Corporation and Subsidiaries

(In thousands)

 

Years ended March 31,

 

2019

   

2018

 
                 

Cash flows from operating activities:

               

Net (loss) earnings

  $ 5,747     $ (8,480 )

Adjustments to reconcile net earnings to net cash provided by operations:

               

Depreciation and amortization

    31,235       31,547  

Deferred income tax (benefit) expense

    909       (5,677 )

Gain on the sale of assets

    (63,394 )     (1,855 )

Impairment and Restructuring provision

    16,080       10,011  

Earnings from equity investment

    -       (21 )

Bargain purchase gain

    -       (1,786 )

401(k) match stock contribution

    1,773       1,501  

Changes in operating assets and liabilities (net of acquisitions):

               

Accounts receivable

    (5,326 )     (672 )

Inventories

    142,271       (25,681 )

Other current assets

    (1,029 )     1,527  

Accounts payable, accrued expenses, and other liabilities

    (31,071 )     (14,920 )

Income taxes

    (79 )     1,319  

Net cash provided by (used in) operating activities

    97,116       (13,187 )
                 

Cash flows from investing activities:

               

Additions to property, plant, and equipment

    (37,728 )     (32,665 )
    Proceeds from life insurance     343       -  
    Cash paid for acquisitions (net of cash acquired)     -       (14,420 )

Proceeds from the sale of assets

    104,387       2,075  

Net cash provided by (used in) investing activities

    67,002       (45,010 )
                 

Cash flows from financing activities:

               

Proceeds from issuance of long-term debt

    504,381       532,374  

Payments of long-term debt and capital lease obligations

    (664,108 )     (466,048 )

Payments on notes payable

    -       (166 )

Change in other assets

    (33 )     (272 )

Purchase of treasury stock

    (7,957 )     (4,558 )

Preferred stock dividends paid

    (23 )     (23 )

Net cash (used in) provided by financing activities

    (167,740 )     61,307  
                 

Net increase (decrease) in cash and cash equivalents

    (3,622 )     3,110  

Cash and cash equivalents, beginning of year

    15,102       11,992  

Cash and cash equivalents, end of year

  $ 11,480     $ 15,102  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the year for:

               

Interest

  $ 15,424     $ 13,475  

Income taxes paid (refunded)

    173       (3,082 )

Noncash transactions:

               

Property, plant and equipment issued under capital lease

    4,199       8,381  

 

See notes to consolidated financial statements.

 

11

 
 

 

Consolidated Statements of Stockholders' Equity

 

Seneca Foods Corporation and Subsidiaries

(In thousands, except share amounts)

 

                                   

Accumulated

         
                   

Additional

           

Other

         
   

Preferred

   

Common

   

Paid-In

   

Treasury

   

Comprehensive

   

Retained

 
   

Stock

   

Stock

   

Capital

   

Stock

   

Loss

   

Earnings

 
                                                 
                                                 

Balance March 31, 2017

  $ 1,324     $ 3,024     $ 97,458     $ (66,499 )   $ (11,175 )   $ 409,874  
Net loss     -       -       -       -       -       (8,480 )

Cash dividends paid on preferred stock

    -       -       -       -       -       (23 )

Equity incentive program

    -       -       100       -       -       -  

Contribution of 401(k) match

    -       -       -       1,501       -       -  

Purchase of treasury stock

    -       -       -       (4,558 )     -       -  

Preferred stock conversion

    (617 )     14       603       -       -       -  

Reclassification of certain tax effects

    -       -       -       -       (2,409 )     2,409  

Change in pension and postretirement benefits adjustment (net of tax $3,774)

    -       -       -       -       (11,483 )     -  
Balance March 31, 2018     707       3,038       98,161       (69,556 )     (25,067 )     403,780  
Net earnings     -       -       -       -       -       5,747  

Cash dividends paid on preferred stock

    -       -       -       -       -       (23 )

Equity incentive program

    -       -       100       -       -       -  

Common stock issuance

            1       (1 )                

Contribution of 401(k) match

    -       -       -       1,773       -       -  

Purchase of treasury stock

    -       -       -       (7,957 )     -       -  

Change in pension and postretirement benefits adjustment (net of tax $2,249)

    -       -       -       -       6,782       -  
Balance March 31, 2019   $ 707     $ 3,039     $ 98,260     $ (75,740 )   $ (18,285 )   $ 409,504  

 

   

Preferred Stock

   

Common Stock

 
      6%       10%                                  
   

Cumulative Par

   

Cumulative Par

           

2003 Series

                 
   

Value $.25

   

Value $.025

   

Participating

   

Participating

   

Class A

   

Class B

 
   

Callable at Par

   

Convertible

   

Convertible Par

   

Convertible Par

   

Common Stock

   

Common Stock

 
   

Voting

   

Voting

   

Value $.025

   

Value $.025

   

Par Value $.25

   

Par Value $.25

 

Shares authorized and designated:

                                               

March 31, 2019

    200,000       1,400,000       37,529       500       20,000,000       10,000,000  

Shares outstanding:

                                               

March 31, 2018

    200,000       807,240       37,529       500       7,860,033       1,884,439  

March 31, 2019

    200,000       807,240       37,529       500       7,667,913       1,874,861  

Stock amount

  $ 50     $ 202     $ 447     $ 8     $ 2,535     $ 504  

 

See notes to consolidated financial statements

12

 

 

Notes to Consolidated Financial Statements

 

Seneca Foods Corporation and Subsidiaries 

 

 

1. Summary of Significant Accounting Policies

 

Nature of Operations — Seneca Foods Corporation (the “Parent Company”) and subsidiaries (the “Company”) conducts its business almost entirely in food packaging, operating 27 plants and 31 warehouses in nine states. The Company markets private label and branded packaged foods to retailers and institutional food distributors.

 

Principles of Consolidation — The consolidated financial statements include the accounts for the Parent Company and all of its wholly-owned subsidiaries after elimination of intercompany transactions, profits, and balances.

 

Revenue Recognition — 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.  See Note 4, Revenue Recognition, for further discussion of the policy.

 

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.

 

Concentration of Credit Risk — Financial instruments that potentially subject the Company to credit risk consist of trade receivables and interest-bearing investments. Wholesale and retail food distributors comprise a significant portion of the trade receivables; collateral is generally not required. A relatively limited number of customers account for a large percentage of the Company’s total sales. Green Giant sales to B & G Foods represented 6%, and 11% of net sales in each of 2019 and 2018, respectively. The top ten customers, including B & G Foods, represented approximately 47%, and 45% of net sales for 2019 and 2018, respectively. The Company closely monitors the credit risk associated with its customers. The Company places substantially all of its interest-bearing investments with financial institutions and monitors credit exposure. Cash and short-term investments in certain accounts exceed the federal insured limit; however, the Company has not experienced any losses in such accounts.

 

Cash Equivalents — The Company considers all highly liquid instruments purchased with an original maturity of three months or less as cash equivalents.

 

Fair Value of Financial Instruments The carrying values of cash and cash equivalents (Level 1), accounts receivable, short-term debt (Level 2) and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. See Note 11, Fair Value of Financial Instruments, for a discussion of the fair value of long-term debt.

 

The three-tier value hierarchy is utilized to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobserved inputs (Level 3). The three levels are defined as follows:

 

 

Level 1- Quoted prices for identical instruments in active markets.

 

 

Level 2- Quoted prices for similar instruments; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.

 

 

Level 3- Model-derived valuations in which one or more inputs or value-drivers are both significant to the fair value measurement and unobservable.

 

13

 

 

Notes to Consolidated Financial Statements

 

Deferred Financing Costs — Deferred financing costs incurred in obtaining debt are amortized on a straight-line basis over the term of the debt, which is not materially different than using the effective interest rate method. As of March 31, 2019, there were $0.5 million of unamortized financing cost included in other current assets and $0.1 million of unamortized financing costs included as a contra to long-term debt and current portion of long-term debt on the Consolidated Balance Sheets.

 

Inventories — Substantially all inventories are stated at the lower of cost; determined under the last-in, first-out (“LIFO”) method; or market.

 

Income Taxes — The provision for income taxes includes federal and state income taxes currently payable and those deferred because of temporary differences between the financial statement and tax basis of assets and liabilities and tax credit carryforwards. The Company uses the flow-through method to account for its investment tax credits.

 

The Company evaluates the likelihood of realization of its net deferred income tax assets by assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income, the projected reversal of temporary differences and available tax planning strategies that could be implemented to realize the net deferred income tax assets.

 

Current rules on the accounting for uncertainty on income taxes prescribe a minimum recognition threshold for a tax position taken or expected to be taken in a tax return that is required to be met before being recognized in the financial statements. Those rules also provide guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable settlements within income tax expense.

 

Assets Held for Sale—The Company classifies property and equipment as held for sale when certain criteria are met.  At such time, the properties, including significant assets that are expected to be transferred as part of a sale transaction, are presented separately on the consolidated balance sheet at the lower of carrying value or estimated fair value less costs to sell and depreciation is no longer recognized. Assets classified as held for sale included buildings, land and equipment.

 

Discontinued Operations — Discontinued operations comprise those activities that have been disposed of during the period or that have been classified as held for sale at the end of the period, and represent a separate major line of business or geographical area that can be clearly distinguished for operational and financial reporting purposes. In fiscal 2019, the Company sold its Modesto fruit operations and began reporting the results of operations, cash flows and the balance sheet amounts pertaining to this as a component of discontinued operations in the consolidated financial statements.

 

Unless otherwise indicated, information in the notes to the consolidated financial statements relates to continuing operations.

 

Advertising Costs — Advertising costs are expensed as incurred. Advertising costs charged to continuing operations were $2.1 million and $2.4 million in 2019 and 2018, respectively.

 

Accounts Receivable and Doubtful Accounts — Accounts receivable is stated at invoice value, which is net of any off invoice promotions.  A provision for doubtful accounts is recorded based upon an assessment of credit risk within the accounts receivable portfolio, experience of delinquencies (accounts over 15 days past due) and charge-offs (accounts removed from accounts receivable for expectation of non-payment), and current market conditions. Management believes these provisions are adequate based upon the relevant information presently available.

 

14

 

 

Notes to Consolidated Financial Statements

 

Earnings (Loss) per Common Share — The Company has three series of convertible preferred stock, which are deemed to be participating securities that are entitled to participate in any dividend on Class A common stock as if the preferred stock had been converted into common stock immediately prior to the record date for such dividend. Basic earnings per share for common stock is calculated using the “two-class” method by dividing the earnings attributable to common stockholders by the weighted average of common shares outstanding during the period. Restricted stock is included in all earnings (loss) per share calculations.

 

Diluted earnings per share is calculated by dividing earnings attributable to common stockholders by the sum of the weighted average common shares outstanding plus the dilutive effect of convertible preferred stock using the “if-converted” method, which treats the contingently-issuable shares of convertible preferred stock as common stock.

 

Years ended March 31,

 

2019

   

2018

 
Continuing Operations     (In thousands, except per share amounts)  

Basic

               
Continuing operations (loss) earnings   $ (36,483 )   $ 10,049  

Deduct preferred stock dividends

    23       23  
Undistributed (loss) earnings     (36,506 )     10,026  

(Loss) earnings attributable to participating preferred shareholders

    (143 )     48  
(Loss) earnings attributable to common shareholders   $ (36,363 )   $ 9,978  

Weighted average common shares outstanding

    9,652       9,769  
Basic (loss) earnings from continuing operations per common share   $ (3.77 )   $ 1.02  

Diluted

               
(Loss) earnings attributable to common shareholders   $ (36,363 )   $ 9,978  

Add dividends on convertible preferred stock

    -       20  
(Loss) earnings attributable to common stock on a diluted basis   $ (36,363 )   $ 9,998  

Weighted average common shares outstanding-basic

    9,652       9,769  

Additional shares to be issued related to the equity compensation plan

    -       3  

Additional shares to be issued under full conversion of preferred stock

    -       67  

Total shares for diluted

    9,652       9,839  
Diluted (loss) earnings from continuing operations per share   $ (3.77 )   $ 1.02  

 

Years ended March 31,

 

2019

   

2018

 

Discontinued Operations

 

(In thousands, except per share amounts)

 

Basic

               

Discontinued operations earnings (loss)

  $ 42,230     $ (18,529 )

Deduct preferred stock dividends

    23       23  

Undistributed earnings (loss)

    42,207       (18,552 )

Earnings (loss) attributable to participating preferred shareholders

    166       (88 )

Earnings (loss) attributable to common shareholders

  $ 42,041     $ (18,464 )

Weighted average common shares outstanding

    9,652       9,769  

Basic earnings (loss) from discontinued operations per common share

  $ 4.36     $ (1.89 )

Diluted

               

Earnings (loss) attributable to common shareholders

  $ 42,041     $ (18,464 )

Add dividends on convertible preferred stock

    20       -  

Earnings (loss) attributable to common stock on a diluted basis

  $ 42,061     $ (18,464 )

Weighted average common shares outstanding-basic

    9,652       9,769  

Additional shares to be issued related to the equity compensation plan

    3       -  

Additional shares to be issued under full conversion of preferred stock

    67       -  

Total shares for diluted

    9,722       9,769  

Diluted earnings (loss) from discontinued operations per share

  $ 4.33     $ (1.89 )

 

Note: For fiscal 2019 addbacks for equity compensation and additional shares that were anti-dilutive were excluded from diluted earnings per share from continuing operations calculations.

 

Depreciation and Valuation — Property, plant, and equipment are stated at cost. Interest incurred during the construction of major projects is capitalized. For financial reporting, the Company provides for depreciation on the straight-line method at rates based upon the estimated useful lives of the various assets. Depreciation was $29.5 million and $29.0 million, in 2019, and 2018, respectively. The estimated useful lives are as follows: buildings and improvements — 30 years; machinery and equipment — 10-15 years; computer software — 3-5 years; vehicles — 3-7 years; and land improvements — 10-20 years.

 

The Company assesses its long-lived assets for impairment whenever there is an indicator of impairment. Impairment losses are evaluated if the estimated undiscounted cash flows from using the assets are less than carrying value. A loss is recognized when the carrying value of an asset exceeds its fair value. Appraisals were used to help determine fair value. There was a $7.8 million impairment loss recorded in 2019 related to a Northwest plant. There were no significant impairment losses in 2018.

 

Use of Estimates in the Preparation of Financial Statements — The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the related revenues and expenses during the reporting period. Actual amounts could differ from those estimates.

 

15

 

 

Notes to Consolidated Financial Statements

 

Recently Issued Accounting Standards — 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 retrospectively at the beginning of the period of adoption, 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, using the optional transition method provided by ASU 2018-11.  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 over of Financial Reporting (ICFR) is Q1 of fiscal year 2020. 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. 

 

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 to the Consolidated Financial Statements for more information. 

 

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.

 

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This amendment is intended to allow a reclassification from accumulated other comprehensive loss to retained earnings for stranded tax effects resulting only from the December 2017 enacted United States Tax Cuts and Jobs Act (TCJA) and is not intended to impact underlying accounting guidance that requires that the effect of a change in tax laws or tax rates be included in income from operations. This update is effective for fiscal years beginning after December 31, 2018 with earlier adoption permitted. The Company has early adopted this update in its fourth quarter ended March 31, 2018 resulting in a $2.4 million reclassification from accumulated other comprehensive loss and a corresponding $2.4 million increase to retained earnings. This reclassification from accumulated other comprehensive loss relates to the deferred income tax stranded tax effects resulting from the change in the U.S. federal corporate income tax rate under the TCJA.  The pension and post-retirement benefits adjustment is the Company’s only component of accumulated other comprehensive loss.

 

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

 

16

 

 

Notes to Consolidated Financial Statements

 

 

2. Asset Held For Sale

 

As of March 31, 2019, the Company has certain operating units in the Midwest that met the criteria to be classified as held for sale, which requires the Company to present the related assets and liabilities as separate line items in our Consolidated Balance Sheets.  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 March  31, 2019 Consolidated Balance Sheet (in thousands):

 

 

Property, Plant and Equipment (net)

  $ 1,568  

Current Assets Held For Sale

  $ 1,568  
         

Capital Lease Obligations Current Portion

  $ 61  

Current Liabilities Held For Sale

  $ 61  
         

Capital Lease Obligations

  $ 305  

Noncurrent Liabilities Held For Sale

  $ 305  

 

17

 

 

Notes to Consolidated Financial Statements

 

 

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. During the second quarter of fiscal 2019, the Company ceased use of the Modesto facility. 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 Balance Sheets (in thousands):

 

   

March 31

   

March 31

 
   

2019

   

2018

 

Accounts Receivable

  $ -     $ 12,586  

Inventories

    -       96,996  

Other Current Assets

    98       288  
                 

Current Assets Held For Sale-Discontinued Operations

  $ 98     $ 109,870  
                 

Other Assets

  $ 1,143     $ 1,616  

Property, Plant and Equipment (net)

    -       18,482  
                 

Noncurrent Assets Held For Sale-Discontinued Operations

  $ 1,143     $ 20,098  
                 

Accounts Payable and Accrued Expenses

  $ 4,285     $ 26,226  

Long-Term Debt and Capital Leases Current Portion

    -       2,347  

Current Liabilities Held For Sale-Discontinued Operations

  $ 4,285     $ 28,573  
                 

Long-Term Debt and Capital Lease Obligations

  $ -     $ 7,964  

Noncurrent Liabilities Held For Sale Discontinued Operations

  $ -     $ 7,964  

 

 

The operating results of the discontinued operations that are reflected in the Consolidated Statements of Net Earnings (Loss) from discontinued operations are as follows:

 

   

Twelve Months Ended

 
   

March 31,

   

March 31,

 
   

2019

   

2018

 
                 

Net Sales

  $ 111,693     $ 165,668  
                 

Costs and Expenses:

               
                 

Cost of Product Sold

    129,872       174,207  

Selling, General and Administrative

    1,135       3,329  

Plant Restructuring Charge (a)

    4,515       10,353  

Interest Expense (b)

    1,077       2,219  

Total cost and expenses

    136,599       190,108  

Loss From Discontinued Operations Before Income Taxes

    (24,906 )     (24,440 )

Gain on the Sale of Assets Before Income Taxes (c) (d) (e)

    (80,632 )     -  

Income Tax Expense (Benefit)

    13,496       (5,911 )

Net Earnings (Loss) From Discontinued Operations, Net of Tax

  $ 42,230     $ (18,529 )

 

(a)

Includes $3,746,000 of Modesto severance in fiscal 2019.

(b)

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.

(c)

Includes a $24,211,000 gain as a result of  LIFO layer liquidations from the disposal of the inventory for fiscal 2019.

(d)

Includes $51,446,000 gain on the sale of Modesto plant and equipment in fiscal 2019.

(e)

Includes a $4,975,000 gain on the sale of bins in fiscal 2019.

 

Supplemental Information on Discontinued Operations:

               

Capital Expenditures

    3,937       2,274  

Depreciation

    1,302       2,095  

 

18

 

 

Notes to Consolidated Financial Statements

 

 

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, revenue is disaggregated by product category groups (in millions):

 

   

Year Ended

 
   

March 31,

   

March 31,

 
   

2019

   

2018

 

Canned Vegetables

  $ 815.8     $ 721.1  

B&G*

    71.2       124.8  

Frozen

    113.1       105.9  

Fruit Products

    91.9       91.0  

Chip Products

    9.7       10.1  

Prepared Foods

    79.6       92.8  

Other

    18.3       17.2  
    $ 1,199.6     $ 1,162.9  

 

*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 March 31, 2019 which is included in deferred revenue.

 

19

 

 

Notes to Consolidated Financial Statements

 

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 March 31, 2019 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 March 31, 2018 inventory decreased $36.9 million and deferred revenue decreased $52.3 million. There were no material impacts to the Consolidated Statement of Cash Flows.  The following table summarizes the impact of our adoption of ASC 606 on a full retrospective basis less discontinued operations on selected Consolidated Statement of Net Earnings (Loss) items. 

 

   

For the Twelve Months Ended

 
   

March 31, 2018

 
   

As Reported

    606    

Less Discontinued

   

As

 
   

(1)

   

Adjustments

   

Operations

   

Adjusted

 

Net sales

  $ 1,314,765     $ 13,797     $ (165,668 )   $ 1,162,894  

Cost of products sold

    1,240,178       15,920       (174,207 )     1,081,891  

Gross profit (loss)

    74,587       (2,123 )     8,539       81,003  

Operating (loss) income

    (5,267 )     (2,123 )     22,221       14,831  

(Loss) earnings before income taxes

    (20,283 )     4,577       24,440       8,734  
Net (loss) earnings from continuing operations     (13,811 )     5,331       18,529       10,049  

 

(1) These reported amounts for the twelve months ended March 31, 2018 are restated amounts. See the Company's Annual Report on Form 10-K for the year ended March 31, 2018 which was filed on June 29, 2018.

 

20

 

 

Notes to Consolidated Financial Statements

 

 

5. Revolving Credit Facility 

 

The Company completed the closing of a five-year revolving credit facility (“Revolver”) on July 5, 2016. Maximum borrowings under the Revolver total $400.0 million from April through July and $500.0 million from August through March.  The Revolver balance as of March 31, 2019 was $155.3 million, with a weighted average interest rate of 4.00% (LIBOR plus a spread) and is included in Long-Term Debt in the accompanying Consolidated Balance Sheet. The Revolver is secured by accounts receivable and inventories with a carrying value of $585.9 million. The Company had $11.4 million and $10.4 million of outstanding standby letters of credit as of March 31, 2019 and 2018, respectively, which reduces borrowing availability under the Revolver. See Note 6, Long-Term Debt, for additional comments related to the Revolver.

 

 

6. Long-Term Debt

 

   

2019

   

2018

 
   

(In thousands)

 

Revolving credit facility, 4.00% and 3.35%, due through 2022

  $ 155,278     $ 293,459  

Farm Credit term loan, 4.77% and 4.48%, due 2022

    99,906       99,871  

Bluegrass tax exempt bonds, 3.19% and 3.11%, due 2033

    10,000       9,983  

Lease financing obligations, 2.62%, due through 2020

    -       4,028  

Secured promissory note, 6.35%, due through 2020

    262       1,046  

Economic development note, 2.00%, due through 2021

    583       793  

Other

    216       216  
Total     266,245       409,396  

Less current portion

    345       1,663  
Long-term debt   $ 265,900     $ 407,733  

 

See Note 5, Revolving Credit Facility, for discussion of the Revolver.

 

On December 9, 2016, the Company entered into a $100.0 million unsecured term loan payable to Farm Credit East, ACA, with a variable interest rate. The maturity date for this term loan is December 9, 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 interest coverage ratio. On May 9, 2019, the Company entered into an amendment with waiver to the agreement to replace the interest coverage ratio financial covenant with a minimum EBITDA covenant. The first measurement of the minimum EBITDA covenant will be for the quarter ending on September 28, 2019 at which time the interest coverage ratio will no longer apply. In the meantime, the Company needs to maintain at least $175.0 million of excess undrawn availability from its revolver facility at March 31, 2019 and June 29, 2019 to be in compliance with the agreement. As of March 31, 2019, the Company has maintained at least $175.0 million of excess undrawn availability from its revolver facility.

 

The Company assumed a tax-exempt bond with the Truitt acquisition on April 3, 2017. At March 31, 2019, the total outstanding of this bond is $10.0 million. The bond has a variable interest rate with a maturity date of October 1, 2032.

 

The Company’s debt agreements, including the Revolver and term loan, contain covenants that restrict the Company’s ability to incur additional indebtedness, pay dividends on the Company’s capital stock, make other restricted payments, including investments, sell the Company’s assets, incur liens, transfer all or substantially all of the Company’s assets and enter into consolidations or mergers. The Company’s debt agreements also require the Company to meet certain financial covenants, including a minimum fixed charge coverage ratio, a minimum EBITDA and minimum tangible net worth. The Revolver also contains borrowing base requirements related to accounts receivable and inventories. These financial requirements and ratios generally become more restrictive over time and are subject to allowances for seasonal fluctuations. The most restrictive financial covenant in the debt agreements is the EBITDA within the Farm Credit term loan which for fiscal year end 2020 will need to be greater than $45 million. The Company computes its financial covenants as if the Company were on the FIFO method of inventory accounting. The Company has met all such financial covenants as of March 31, 2019.

 

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.

 

The carrying value of assets pledged for secured debt, including the Revolver, is $633.2 million.

 

Debt repayment requirements for the next five fiscal years are (in thousands):

 

Years ending March 31:

       

2020

  $ 345  

2021

    500  

2022

    255,184  

2023

    -  

2024

    -  

Thereafter

    10,216  

Total

  $ 266,245  

 

21

 

 

Notes to Consolidated Financial Statements

 

 

7. Leases

 

The Company had capital leases of $50.5 million as of March 31, 2019 and $47.0 million as of March 31, 2018. The leases consist of a building lease expiring in 2030 with an interest rate of 5.15% and several equipment leases all with 7 year terms and various interest rates between 3.37% and 4.52%.

 

Leased assets under capital leases consist of the following: 

 

   

2019

   

2018

 
                 

Buildings

  $ 5,313     $ 5,313  

Equipment

    45,273       41,687  
Total     50,586       47,000  

Less accumulated amortization

    10,265       5,795  
Net   $ 40,321     $ 41,205  

 

The Company has operating leases expiring at various dates through fiscal 2031. Operating leases generally provide for early purchase options one year prior to expiration.

 

The following is a schedule, by year, of minimum operating and capital lease payments due as of March 31, 2019 (in thousands):

 

Years ending March 31:

 

Operating

   

Capital

 

2020

  $ 28,689     $ 7,827  

2021

    24,938       7,827  

2022

    17,526       7,827  

2023

    12,062       7,827  

2024

    5,950       6,102  
2025-2031     6,927       5,267  

Total minimum payment required

  $ 96,092     $ 42,677  

Less interest

            4,973  

Present value of minimum lease payments

            37,704  

Amount due within one year

            6,418  

Long-term capital lease obligation

          $ 31,286  

 

Continuing lease expense in fiscal 2019 and 2018 was $39.2 million and $39.7 million, respectively.

 

22

 

 

Notes to Consolidated Financial Statements

 

 

8. Income Taxes

 

The Company files a consolidated federal and various state income tax returns.  The provision for income taxes is as follows:

 

   

2019

   

2018

 
   

(In thousands)

 

Current:

               

Federal

  $ (283 )   $ (1,901 )

State

    93       352  
Total     (190 )     (1,549 )
                 

Deferred:

               

Federal

  $ 1,220     $ (5,560 )

State

    (310 )     (117 )
Total     910       (5,677 )

Total income taxes (1)

  $ 720     $ (7,226 )

(1) Income tax expense (benefit) included in the financial statements is comprised of ($12.8) million  and ($1.3) million from continuing operations and $13.5 million and ($5.9) million from discontinued operations in 2019 and 2018, respectively.

 

A reconciliation for continuing operations of the expected U.S. statutory rate to the effective rate follows:

 

   

2019

   

2018

 

Computed (expected tax rate)

    21.0 %     31.5 %

State income taxes (net of federal tax benefit)

    3.2       2.9  

State tax credits

    0.7       (4.8 )

Federal credits

    1.0       (6.8 )

Manufacturer’s deduction

    -       0.4  

Addition to uncertain tax positions

    1.0       2.0  

Difference between statutory and actual rate

    -       (10.5 )

Other permanent differences not deductible

    (0.2 )     (3.7 )

Change in valuation allowance

    (0.2 )     22.6  

Return to provision federal

    (0.1 )     (4.5 )

Tax rate change

    -       (42.1 )

Other

    (0.5 )     (2.1 )

Effective income tax rate

    25.9 %     (15.1 )%

 

The effective tax rate for continuing operations was 25.9% in 2019 and (15.1)% in 2018.  The increase of 41.0 percentage points in the effective tax rate for the year is the result of the change in income tax rate resulting from the Tax Cuts and Jobs Act. The change in income tax rate resulted in a 42.1 percentage point decrease in the 2018 tax rate and it did not impact the 2019 income tax rate.

 

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act tax reform legislation. This legislation makes significant changes in U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The legislation reduced the U.S. corporate tax rate from 31.5% for the Company's fiscal 2018 and then down to 21% starting in fiscal 2019. As a result of the enacted law, the Company was required to revalue deferred tax assets and liabilities at the rate in effect during their scheduled reversal. This revaluation resulted in a benefit of $3.3 million to income tax expense and a corresponding reduction in the net deferred tax liability as of March 31, 2018.  The other provisions of the Tax Cuts and Jobs Act did not have a material impact on the fiscal 2018 consolidated financial statements.

 

23

 

 

Notes to Consolidated Financial Statements

 

The following is a summary of the significant components of the Company's deferred income tax assets and liabilities as of March 31:

 

   

2019

   

2018

 
   

(In thousands)

 

Deferred income tax assets:

               

Future tax credits

  $ 5,124     $ 5,030  

Restructuring reserve

    1,071       2,374  

Employee benefits

    2,030       2,440  

Insurance

    312       361  

Other comprehensive loss

    6,250       8,500  

Interest

    12       31  

Future federal tax credits

    654       443  

Prepaid revenue

    528       403  

Other

    298       714  

Net operating loss and other tax attribute carryovers

    5,628       4,512  
Total assets     21,907       24,808  

Deferred income tax liabilities:

               

Property basis and depreciation difference

    13,049       11,750  

Inventory valuation

    534       964  

Intangibles

    286       325  

Pension

    1,633       2,328  
Total liabilities     15,502       15,367  

Valuation allowance - non-current

    3,988       3,865  

Net deferred income tax asset

  $ 2,417     $ 5,576  

 

Net non-current deferred income tax assets of $2.4 million as of March 31, 2019 and $5.6 million as of March 31, 2018 are recognized in the Consolidated Balance Sheets.

 

The Company has State tax credit carryforwards amounting to $1.5 million (California, net of Federal impact), $1.5 million (New York, net of Federal impact), and $2.2 million (Wisconsin, net of Federal impact), which are available to reduce future taxes payable in each respective state through 2034 (Wisconsin), through 2034 (New York), and through 2028 (California). The Company has performed the required assessment regarding the realization of deferred tax assets and at March 31, 2019, the Company has recorded a valuation allowance amounting to $4.0 million, which relates primarily to tax credit carryforwards which management has concluded it is more likely than not they will not all be realized in the ordinary course of operations. Although realization is not assured, management has concluded that it is more likely than not that the deferred tax assets for which a valuation allowance was determined to be unnecessary, will be realized in the ordinary course of operations. The amount of net deferred tax assets considered realizable, however, could be reduced if actual future income or income taxes rates are lower than estimated or if there are differences in the timing or amount of future reversals of existing taxable or deductible temporary differences.

 

Current rules on the accounting for uncertainty on income taxes prescribe a minimum recognition threshold for a tax position taken or expected to be taken in a tax return that is required to be met before being recognized in the financial statements. Those rules also provide guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company classifies the liability for uncertain tax positions in other accrued expenses or other long-term liabilities depending on their expected settlement. The change in the liability for the years ended March 31, 2019 and 2018 consists of the following:

 

   

2019

   

2018

 
   

(In thousands)

 

Beginning balance

  $ 855     $ 715  
                 

Tax positions related to current year:

               

Additions

    26       9  
                 

Tax positions related to prior years:

               

Additions

    -       154  

Reductions

    (2 )     (23 )

Lapses in statues of limitations

    (483 )     -  

Balance as of March 31,

  $ 396     $ 855  

 

24

 

 

Notes to Consolidated Financial Statements

 

Neither balances at March 31, 2019 nor 2018 include tax positions that are highly certain but for which there is uncertainty about the timing. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of these positions would not impact the annual effective tax rate but would accelerate the payment of cash to the tax authority to an earlier period.

 

The Company recognizes interest and penalties accrued on unrecognized tax benefits as well as interest received from favorable settlements within income tax expense. During the years ended March 31, 2019 and 2018, the Company recognized approximately $0.1 million decrease and $0.0 million, respectively, in interest and penalties. As of March 31, 2019 and 2018, the Company had approximately $0.0 million and $0.1 million, respectively, of interest and penalties accrued associated with unrecognized tax benefits.

 

Although management believes that an adequate provision has been made for uncertain tax positions, there is the possibility that the ultimate resolution could have an adverse effect on the earnings of the Company. Conversely, if resolved favorably in the future, the related provisions would be reduced, thus having a positive impact on earnings. During 2019, the statute of limitations lapsed on a number of uncertain tax positions and the lapse results in the positions no longer being uncertain.  Therefore, in accordance with its accounting policies, the Company recorded a decrease to the liability and a decrease to tax expense of $0.5 million.

 

The federal income tax returns for years after March 31, 2015 are subject to examination.

 

 

9. Stockholders’ Equity

 

Preferred Stock — The Company has authorized three classes of preferred stock consisting of 200,000 shares of Six Percent (6%) Voting Cumulative Preferred Stock, par value $0.25 (“6% Preferred”); 30,000 shares of Preferred Stock Without Par Value to be issued in series by the Board of Directors, none of which are currently designated or outstanding; and 8,200,000 shares of Preferred Stock with $.025 par value, Class A, to be issued in series by the Board of Directors (“Class A Preferred”). The Board of Directors has designated four series of Class A Preferred including 10% Cumulative Convertible Voting Preferred Stock—Series A (“Series A Preferred”); 10% Cumulative Convertible Voting Preferred Stock—Series B (“Series B Preferred”); Convertible Participating Preferred Stock; and Convertible Participating Preferred Stock, Series 2003.

 

The Convertible Participating Preferred Stock and Convertible Participating Preferred Stock, Series 2003 are convertible at the holders’ option on a one-for-one basis into shares of Class A Common Stock, subject to antidilution adjustments. These series of preferred stock have the right to receive dividends and distributions at a rate equal to the amount of any dividends and distributions declared or made on the Class A Common Stock. No dividends were declared or paid on this preferred stock in fiscal 2019 or 2018. In addition, these series of preferred stock have certain distribution rights upon liquidation. Upon conversion, shares of these series of preferred stock become authorized but unissued shares of Class A Preferred and may be reissued as part of another series of Class A Preferred. As of March 31, 2019, the Company has an aggregate of 6,761,971 shares of non-designated Class A Preferred authorized for issuance.

 

The Convertible Participating Preferred Stock has a liquidation preference of $12 per share and a stated value of $11.931 per share. There were 37,529 shares outstanding as of March 31, 2019 and no conversions during the year. The Convertible Participating Preferred Stock, Series 2003 was issued as partial consideration of the purchase price in the Chiquita Processed Foods acquisition. The 967,742 shares issued in that 2003 acquisition were valued at $16.60 per share which represented the then market value of the Class A Common Stock into which the preferred shares were immediately convertible. This series has a liquidation preference of $15.50 per share and has 500 shares outstanding as of March 31, 2019.

 

There are 407,240 shares of Series A 10% Preferred outstanding as of March 31, 2019 which are convertible into one share of Class A Common Stock and one share of Class B Common stock for every 20 shares of Series A Preferred. There are 400,000 shares of Series B 10% Preferred outstanding as of March 31, 2019 which are convertible into one share of Class A Common Stock and one share of Class B Common Stock for every 30 shares of Series B 10% Preferred. There are 200,000 shares of 6% Preferred outstanding as of March 31, 2019 which are callable at their par value at any time at the option of the Company. The Company paid dividends of $20,000 on the Series A and Series B Preferred and $3,000 on the 6% Preferred during each of fiscal 2019 and 2018.

 

Common Stock — The Class A Common Stock and the Class B Common Stock have substantially identical rights with respect to any dividends or distributions of cash or property declared on shares of common stock, and rank equally as to the right to receive proceeds on liquidation or dissolution of the Company after payment of the Company’s indebtedness and liquidation right to the holders of preferred shares. However, holders of Class B Common Stock retain a full vote per share, whereas the holders of Class A Common Stock have voting rights of 1/20th of one vote per share on all matters as to which shareholders of the Company are entitled to vote. During 2019, there were no shares of Class B Common Stock issued in lieu of cash compensation under the Company's Profit Sharing Bonus Plan.

 

Unissued shares of common stock reserved for conversion privileges of designated non-participating preferred stock were 33,695 of both Class A and Class B as of March 31, 2019 and 2018. Additionally, there were 38,029 shares of Class A reserved for conversion of the Participating Preferred Stock as of March 31, 2019 and 2018.

 

Treasury Stock — During 2019, the Company repurchased $7.7 million, or 250,624 shares of its Class A Common Stock and $0.3 million or 9,330 shares of its Class B Common Stock. As of March 31, 2019, there is a total of $75.7 million, or 2,613,921 shares, of repurchased stock. These shares are not considered outstanding. The Company contributed $1.8 million or 55,129 treasury shares for the 401(k) match in 2019 as described in Note 10, Retirement Plans.

 

25

 

 

Notes to Consolidated Financial Statements

 

 

10. Retirement Plans

 

The Company has a noncontributory defined benefit pension plan (the “Plan”) covering all employees who meet certain age-entry requirements and work a stated minimum number of hours per year. Annual contributions are made to the Plan sufficient to satisfy legal funding requirements.

 

The following tables provide a reconciliation of the changes in the Plan’s benefit obligation and fair value of plan assets over the two-year period ended March 31, 2019 and a statement of the unfunded status as of March 31, 2019 and 2018:

 

   

2019

   

2018

 
   

(In thousands)

 

Change in Benefit Obligation

               
                 

Benefit obligation at beginning of year

  $ 236,134     $ 216,022  

Merge the Gray Plan into the Seneca Plan

    -       3,796  

Service cost

    9,646       8,457  

Interest cost

    9,131       8,125  

Actuarial loss (gain)

    4,113       7,714  

Benefit payments and expenses

    (8,563 )     (7,980 )

Benefit obligation at end of year

  $ 250,461     $ 236,134  
                 

Change in Plan Assets

               
                 

Fair value of plan assets at beginning of year

  $ 212,844     $ 207,829  

Merge the Gray Plan into the Seneca Plan

    -       3,300  

Actual gain on plan assets

    26,731       6,963  

Employer contributions

    2,100       2,732  

Benefit payments and expenses

    (8,563 )     (7,980 )

Fair value of plan assets at end of year

  $ 233,112     $ 212,844  
                 

Unfunded Status

  $ (17,349 )   $ (23,290 )

 

The unfunded status decreased by $5.9 million during 2019 reflecting the actual fair value of plan assets and the projected benefit obligation as of March 31, 2019. This unfunded status decrease was recognized via the actual gain on plan assets and the decrease in accumulated other comprehensive loss of $6.8 million after the income tax expense of $2.3 million. The increase in projected benefit obligation was a function of using the full yield curve approach and the change to using an updated mortality table. There was no change in the discount rate as it remained at 4.14%. During 2018, the Company converted to the 2006 base rates from the RP-2016 mortality study with the Blue Collar adjustment, with a generational projection of future mortality improvements from 2006 using Scale MP-2018 for calculating the pension obligation in 2018 and the related pension expense in 2019. The Company utilizes a full yield curve approach in the estimation of the service and interest cost components by applying the specific spot rates along the yield curve used in determination of the benefit obligation to their underlying projected cash flows. 

 

Plan assets increased from $212.8 million as of March 31, 2018 to $233.1 million as of March 31, 2019 due to a gain on plan assets of $26.7 million from a continued recovery in market conditions and the $2.1 million contribution by the Company. The Company made this contribution to maintain its funding status at an acceptable level.

 

26

 

 

Notes to Consolidated Financial Statements

 

   

2019

   

2018

 
   

(In thousands)

 

Amounts Recognized in Accumulated Other Comprehensive Pre-Tax Loss

               
                 

Prior service cost

  $ (587 )   $ (707 )

Net loss

    (24,305 )     (33,415 )

Accumulated other comprehensive pre-tax loss

  $ (24,892 )   $ (34,122 )

 

   

Pension and

 
   

post retirement plan

 
   

adjustments, net

 
   

of tax

 
   

(In thousands)

 

Accumulated Other Comprehensive Loss

       
         

Balance at March 31, 2018

  $ (25,067 )

Other comprehensive gain

    6,782  

Balance at March 31, 2019

  $ (18,285 )

 

The following table provides the components of net periodic benefit cost  for the Plan for fiscal years 2019 and 2018: 

 

   

2019

   

2018

 
   

(In thousands)

 

Service cost

  $ 9,646     $ 8,457  

Interest cost

    9,131       8,125  

Expected return on plan assets

    (15,104 )     (15,050 )

Amortization of net loss

    1,597       106  

Prior service cost

    119       119  

Net periodic benefit cost

  $ 5,389     $ 1,757  

 

The Plan’s accumulated benefit obligation was $231.2 million at March 31, 2019 and $217.3 million at March 31, 2018.

 

Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets are amortized over the average remaining service period of active participants.

 

The assumptions used to measure the Company’s benefit obligation and pension expense are shown in the following table:

 

   

2019

   

2018

 
                 

Weighted Average Assumptions for Balance Sheet Liability at End of Year:

               
                 

Discount rate - projected benefit obligation

    4.14 %     4.14 %

Expected return on plan assets

    7.25 %     7.25 %

Rate of compensation increase

    3.00 %     3.00 %
                 

Weighted Average Assumptions for Benefit Cost at Beginning of Year:

               
                 

Discount rate - pension expense

    4.15 %     4.35 %

Discount rate - service cost

    4.25 %     4.58 %

Discount rate - interest cost

    3.87 %     3.74 %

Expected return on plan assets

    7.25 %     7.25 %

Rate of compensation increase

    3.00