SENEB Seneca Foods Corp

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OPERATIONS

July 3, 2021

Seneca Foods Corporation (the “Company”) is a leading provider of packaged fruits and vegetables, with facilities located throughout the United States. The Company’s product offerings include canned, frozen and bottled produce and snack chips. Its products are sold under private label as well as national and regional brands that the Company owns or licenses, including Seneca®, Libby’s®, Aunt Nellie’s®, Cherryman®, Green Valley® and READ®. The Company’s canned fruits and vegetables are sold nationwide by major grocery outlets, including supermarkets, mass merchandisers, limited assortment stores, club stores and dollar stores. The Company also sells its products to foodservice distributors, industrial markets, other food processors, export customers in over 90 countries and federal, state and local governments for school and other food programs. The Company also packs canned and frozen vegetables under contract packing agreements.

The Company’s raw product is harvested mainly between June through November.

Impact of the COVID-19 Pandemic:

Business Impact – Commencing at the onset of the pandemic, we implemented a wide range of precautionary measures at our manufacturing facilities and other work locations in response to COVID-19. We have also been working closely with our supply chain partners to ensure that we can continue to provide uninterrupted service. To date, there has been minimal disruption in our supply chain network, including the supply of fruits and vegetables, packaging or other sourced materials. We also continue to work closely with our customers to meet their needs and ensure a consistent supply across our retail partners during this period of high demand.

We continue to monitor the latest guidance from the CDC, FDA and other federal, state and local authorities regarding COVID-19 to ensure our safety protocols remain current to protect our employees, customers, suppliers and other business partners.

Financial Impact to Date – As previously disclosed, the pandemic has to date had a positive impact on our operating results, and significantly improved our net sales, net income, and net cash provided by operating activities in fiscal 2021. For the three months ended July 3, 2021, our net sales decreased when compared to the three months ended June 27, 2020 due to the extraordinary demand for our products that began in March 2020 and carried into the first quarter of fiscal 2021 as the COVID-19 pandemic reached the United States and consumers began pantry loading and increasing their at-home consumption as a result of increased social distancing and stay-at-home and work-from-home mandates and recommendations. However, demand for our products remains strong and base business net sales are expected to be in line with pre-pandemic levels, prior to the extraordinary demand and pantry loading at the height of the pandemic.

We continue to incur incremental costs to take the precautionary health and safety measures described above. Most of the incremental costs impact our costs of goods sold and the remaining portion impacts our selling, general and administrative expenses.

Expectations and Risk Factors in Light of the COVID-19 Pandemic –The ultimate impact of the COVID-19 pandemic on our business will depend on many factors, including, among others: how long social distancing and stay-at-home and work-from home policies and recommendations remain in effect; whether additional waves of COVID-19 will affect the United States and the rest of North America; our ability to continue to operate our manufacturing facilities, retain a sufficient seasonal workforce, fill open full time positions, maintain our supply chain without material disruption, procure ingredients, packaging and other raw materials when needed despite unprecedented demand in the food industry; the extent to which macroeconomic conditions resulting from the pandemic and the pace of the subsequent recovery may impact consumer eating and shopping habits; and the extent to which consumers continue to work remotely even after the pandemic subsides and how that may impact consumer habits. We have also seen and expect to continue to see cost inflation for various inputs, including steel, commodities, ingredients, packaging and transportation.

Internal controls over financial reporting have not been impacted by COVID-19. Management is continuously monitoring to ensure controls are effective and properly maintained.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OPERATIONS

July 3, 2021

Net sales amounted to $235.0 million for the three months ended July 3, 2021 as compared with $288.2 million for the three months ended June 27, 2020. The overall net sales decrease of $53.2 million, or 18.5%, was primarily due to lower sales volumes, which equated to a $52.7 million decrease and lower selling prices/sales mix representing the remaining $0.5 million of the total decrease.

Canned vegetable sales decreased $33.1 million, as there was extraordinary sales demand during the three months ended June 27, 2020 due to consumer pantry loading that was experienced at the onset of the pandemic. Prepared foods decreased $24.2 million due to exiting the segment in fiscal 2021 after the sale of the prepared foods business. Additionally, there was a $3.0 million decrease in fruit product sales. The decreases to net sales were partially offset by a $4.8 million increase in frozen vegetable sales, a $1.0 million increase in snack product sales, and a $1.3 million increase in other sales.

Gross margin for the three months ended July 3, 2021 was 14.3% as compared with 16.9% for the three months ended June 27, 2020. The decrease in gross margin for the three months ended July 3, 2021 was due primarily to cost inflation for various inputs, including steel, commodities, ingredients, packaging and transportation as well as a LIFO charge in fiscal 2022 as compared to a LIFO credit in fiscal 2021. The Company’s LIFO charge for the three months ended July 3, 2021 was $2.8 million as compared to a credit of $2.1 million for the three months ended June 27, 2020. The increase in the LIFO reserve over the three months ended July 3, 2021 reflects the projected impact of expected cost increases and an overall inventory quantity increase as compared to fiscal 2021. On an after-tax basis, LIFO decreased net earnings by $2.1 million for the three months ended July 3, 2021 and increased net earnings by $1.6 million for the three months ended June 27, 2020, based on the historical statutory federal income tax rate.

Selling costs as a percentage of net sales for the three months ended July 3, 2021 were 3.0% as compared with 2.8% for the three months ended June 27, 2020. Despite an 18.4% decrease in net sales, selling costs as a percentage of net sales remained relatively consistent given the direct correlation of most of the selling costs with net sales.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OPERATIONS

July 3, 2021

Administrative costs as a percentage of net sales for the three months ended July 3, 2021 were 4.4% as compared with 3.5% for the three months ended June 27, 2020. The increase in administrative costs as a percentage of net sales for the three months ended July 3, 2021 is primarily due to decreased sales and the fixed nature of certain administrative expenses.

During the three months ended July 3, 2021 the Company recorded a gain from the sale of an aircraft of $1.2 million, a gain from debt forgiveness of $0.5 million on an economic development loan in which the Company met all required milestones and a charge of $0.3 million for a supplemental early retirement plan. The Company also recorded miscellaneous income $0.5 million, partially offset by miscellaneous expenses of $0.4 million. During the three months ended June 27, 2020 the Company recorded a gain on the sale of unused fixed assets of $0.5 million. The Company also recorded a loss of $0.4 million on the disposal of equipment from a sold Northwest plant. These items are included in Other Operating Income in the Unaudited Condensed Consolidated Statements of Net Earnings.

Interest expense as a percentage of net sales was 0.6% for the three months ended July 3, 2021 and June 27, 2020. During the three months ended July 3, 2021, overall borrowings and interest rates were lower than the previous year’s resulting in lower interest expense, however, net sales also decreased year over year which contributed to interest expenses as a percentage of net sales remaining flat when comparing fiscal 2022 to fiscal 2021.

Income Taxes:

The effective tax rate was 24.0% and 23.4% for the three month period ended July 3, 2021 and June 27, 2020 respectively. In fiscal 2021, the effective tax rate was decreased by 1.0% as a result of the accrual of interest income related to a federal refund for the NOL carryback claim filed as a result of the CARES Act. Because a similar amount of interest has not been accrued for in the current year, the rate is effectively increased by 1.0% in fiscal 2022 when compared to the same period of the prior year.  This increase was offset by various insignificant decreases including 0.2% from permanent differences and 0.2% from state income tax rate changes.

Earnings per Share:

Basic earnings per share were $1.56 and $2.26 for the three months ended July 3, 2021 and June 27, 2020, respectively. Diluted earnings per share were $1.55 and $2.24 for the three months ended July 3, 2021 and June 27, 2020, respectively. For details of the calculation of these amounts, refer to footnote 12 of the Notes to Condensed Consolidated Financial Statements.

Note: Equivalent common shares are either common shares or, for convertible preferred shares, the number of common shares that the preferred shares are convertible into. See Note 9 of the Notes to Consolidated Financial Statements of the Company’s 2021 Annual Report on Form 10-K for conversion details.

As shown in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $21.6 million for the three months ended July 3, 2021, compared to $100.3 million for the same period of the prior year, a decrease of $78.7 million. For the first three months of fiscal 2022 as compared to the first three months of fiscal 2021, the reduction in cash provided by operating activities is primarily comprised of decreases in cash provided by inventories, $59.3 million, accounts receivable, $22.8 million, income taxes, $9.0 million, and net earnings, $6.6 million. The increase in cash provided by accounts payable, accrued expenses and other of $18.6 million for the first three months of fiscal 2022 as compared to the first three months of fiscal 2021 partially offset the decreases to cash provided by operating activities.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OPERATIONS

July 3, 2021

Cash used in investing activities was $11.8 million for the three months ended July 3, 2021 as compared to $18.3 million for the three months ended June 27, 2020. Additions to property, plant and equipment decreased $6.0 million from $19.2 million during the first quarter of fiscal 2021 to $13.2 million during the first quarter of fiscal 2022. Proceeds from the sale of assets increased $0.5 million from $0.9 million during the first three months of fiscal 2021 to $1.4 million during the first quarter of fiscal 2022.

Cash used in financing activities was $9.8 million for the three months ended July 3, 2021, a decrease of $71.3 million compared to cash used in financing activities for the three months ended June 27, 2020 of $81.1 million. The decrease in cash used in financing activities was primarily driven by the Company paying down substantially all of its Revolver during fiscal 2021. The Company borrowed $21.5 million and paid down $22.5 million of long-term debt during the three months ended July 3, 2021, a net use of cash in financing activities of $1.0 million. By comparison, the Company borrowed $91.9 million and paid down $164.5 million of long-term debt during the three months ended June 27, 2020, a net use of cash in financing activities of $72.6 million. Other than borrowings under the Revolver, there was no new long-term debt during the first three months of fiscal 2022.

On March 24, 2021, the Company entered into a Fourth Amended and Restated Loan and Security Agreement that provides for a senior revolving credit facility of up to $400.0 million that is seasonally adjusted (the “Revolver”). Maximum borrowings under the Revolver total $300.0 million from April through July and $400.0 million from August through March. The Revolver balance is included in Long-Term Debt in the accompanying Consolidated Balance Sheet due to the Revolver’s March 24, 2026 maturity. In order to maintain availability of funds under the facility, the Company pays a commitment fee on the unused portion of the Revolver. The Revolver is secured by substantially all of the Company’s accounts receivable and inventories and contains borrowing base requirements as well as a financial covenant, if certain circumstances apply. The Company utilizes its Revolver for general corporate purposes, including seasonal working capital needs, to pay debt principal and interest obligations, and to fund capital expenditures and acquisitions. Seasonal working capital needs are affected by the growing cycles of the vegetables the Company packages. The majority of vegetable inventories are produced during the months of June through November and are then sold over the following year. Payment terms for vegetable produce are generally three months but can vary from a few days to seven months. Accordingly, the Company’s need to draw on the Revolver may fluctuate significantly throughout the year.

The Company’s credit facilities contain standard representations and warranties, events of default, and certain affirmative and negative covenants, including various financial covenants. At July 3, 2021, the Company was in compliance with all such financial covenants.

New Accounting Standards

Refer to footnote 11 of the Notes to Condensed Consolidated Financial Statements.

Seasonality

The Company’s revenues typically are highest in the second and third fiscal quarters. This is due, in part, because the Company sells canned and frozen vegetables to a co-pack customer on a bill and hold basis at the end of each pack cycle, which typically occurs during these quarters. In addition, the Company’s other fruit and vegetable sales exhibit seasonal increases in the third fiscal quarter due to increased retail demand during the holiday season.

Forward-Looking Information

The information contained in this report contains, or may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company or its officers (including statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates” or similar expressions) with respect to various matters, including (i) the Company’s anticipated needs for, and the availability of, cash, (ii) the Company’s liquidity and financing plans, (iii) the Company’s ability to successfully integrate acquisitions into its operations, (iv) trends affecting the Company’s financial condition or results of operations, including anticipated sales price levels and anticipated expense levels, in particular higher production, fuel and transportation costs, (v) the Company’s plans for expansion of its business (including through acquisitions) and cost savings, (vi) the impact of competition, and (vii) the potential impact of COVID-19 on our facilities.

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OPERATIONS

July 3, 2021

Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Investors are cautioned not to place undue reliance on such statements, which speak only to events as of the date the statements were made. Among the factors that could cause actual results to differ materially are:

Except for ongoing obligations to disclose material information as required by the federal securities laws, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of the filing of this report or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

For the three months ended July 3, 2021 and June 27, 2020 the Company sold certain finished goods inventory for cash on a bill and hold basis. The terms of the bill and hold agreement(s) provide that title to the specified inventory is transferred to the customer(s) prior to shipment and the Company has the right to payment (prior to physical delivery) which results in recorded revenue as determined under the revenue recognition standard.

Trade promotions are an important component of the sales and marketing of the Company’s branded products, and are critical to the support of the business. Trade promotion costs, which are recorded as a reduction of net sales, include amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, amounts paid to obtain favorable display positions in retailers’ stores, and amounts paid to retailers for shelf space in retail stores. Accruals for trade promotions are recorded primarily at the time of sale of product to the retailer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a retailer from amounts otherwise due to us. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by retailers for amounts they consider due to them. Final determination of the permissible deductions may take extended periods of time.

The Company uses the lower of cost, determined under the LIFO (last-in, first out) method, or market, to value substantially all of its inventories. In a high inflation environment that the Company is experiencing, the Company believes that the LIFO method was preferable over the FIFO method because it better compares the cost of current production to current revenue.

The Company assesses its long-lived assets for impairment whenever there is an indicator of impairment. Property, plant, and equipment are depreciated over their assigned lives. The assigned lives and the projected cash flows used to test impairment are subjective. If actual lives are shorter than anticipated or if future cash flows are less than anticipated, a future impairment charge or a loss on disposal of the assets could be incurred. Impairment losses are evaluated if the estimated undiscounted value of the cash flows is less than the carrying value. If such is the case, a loss is recognized when the carrying value of an asset exceeds its fair value.