Seneca Foods Corp 10-Q

ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS January 1, 2022     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.   Smaller Reporting Company Status:   Management performed the annual public float test as of the last business day of the Company’s second fiscal quarter ended October 2, 2021, and determined that the Company no longer qualifies as a smaller reporting company due to its public float exceeding $250 million. The Company will continue to use the scaled disclosures permitted for a smaller reporting company through its annual report on Form 10-K for the fiscal year ending March 31, 2022. Beginning with the first quarterly report on Form 10-Q in fiscal 2023, the Company will no longer be eligible to rely on the scaled disclosure exemptions applicable to smaller reporting companies. The Company’s status as an accelerated filer was not impacted.   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.   We continue to monitor the latest guidance from the CDC, FDA and other federal, state and local authorities regarding COVID-19 to ensure our safety protocols remain current to protect our employees, customers, suppliers and other business partners.   The COVID-19 pandemic continues to pose the risk that our employees, contractors, suppliers, customers and other business partners may be prevented from conducting business activities, partially or completely, for an indefinite period of time, including due to shutdowns that may be requested or required by governmental authorities or imposed by management, or that the pandemic may otherwise interrupt or impair business activities. The Company is actively encouraging employees to be vaccinated against COVID-19 and has achieved some success in these efforts. If a vaccination mandate is established by the government, management cannot currently predict the impact that requiring vaccination would have on our workforce, our ability to secure skilled labor in the future, or the cost of implementation and compliance with such rule, if put into effect.   Financial Impact to Date –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 nine months ended January 1, 2022, our net sales decreased when compared to the nine months ended December 26, 2020 due to the extraordinary demand for our products that began in March 2020 and carried into 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 variants 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.   12 Table of Contents ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS January 1, 2022   Internal controls over financial reporting have not been impacted by COVID-19. Management is continuously monitoring to ensure controls are effective and properly maintained.   Results of Operations:   Net Sales:   The following table presents net sales by product category (in thousands):       Three Months Ended     Nine Months Ended       January 1,     December 26,     January 1,     December 26,       2022     2020     2022     2020   Canned vegetables   $ 373,205     $ 394,492     $ 860,737     $ 917,801   Frozen vegetables     32,305       27,281       95,739       76,137   Fruit products     30,192       30,722       68,351       73,536   Snack products     2,550       2,778       9,647       8,194   Prepared foods     -       23,496       -       71,866   Other     7,341       5,623       18,417       15,317       $ 445,593     $ 484,392     $ 1,052,891     $ 1,162,851     Three Months Ended January 1, 2022 and December 26, 2020   Net sales amounted to $445.6 million for the three months ended January 1, 2022 as compared with $484.4 million for the three months ended December 26, 2020. The overall net sales decrease of $38.8 million, or 8.0%, was primarily due to lower sales volumes, which equated to a $63.5 million decrease partially offset by higher selling prices/improved sales mix generating a favorable impact of $24.7 million over the prior year quarter.   Prepared foods decreased $23.5 million, all due to volume, as the segment was exited in the third quarter of fiscal 2021 after the sale of the prepared foods business. Canned vegetable sales decreased $21.3 million on reduced sales volumes during the three months ended January 1, 2022 given the extraordinary level of demand in fiscal 2021 due to consumer pantry loading resulting from the COVID-19 pandemic. The canned vegetable sales volume decrease was partially offset by higher selling prices. Additionally, there were slight decreases of $0.5 million and $0.2 million in fruit and snack product sales, respectively. Frozen vegetables partially offset the aforementioned categorical decreases, increasing by $5.0 million, primarily due to higher sales volumes partially offset by lower selling prices/unfavorable sales mix, and other sales also increased by $1.7 million.   Nine Months Ended January 1, 2022 and December 26, 2020   Net sales amounted to $1,052.9 million for the nine months ended January 1, 2022 as compared with $1,162.9 million for the nine months ended December 26, 2020. The overall net sales decrease of $110.0 million, or 9.5%, was primarily due to lower sales volumes, which equated to a $155.1 million decrease partially offset by higher selling prices/improved sales mix generating a favorable impact of $45.1 million over the prior year interim period.   Canned vegetable sales decreased $57.1 million, as there was extraordinary sales demand during the nine months ended December 26, 2020 due to consumer pantry loading that was experienced at the onset of the pandemic and continued throughout fiscal 2021. Prepared foods decreased $71.2 million due to exiting the segment in fiscal 2021 after the sale of the prepared foods business. Additionally, there was a $5.2 million decrease in fruit product sales. The noted decreases to net sales were partially offset by a $19.6 million increase in frozen vegetable sales driven by increased sales volumes, a $1.5 million increase in snack product sales, and a $3.1 million increase in other sales.   13 Table of Contents ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS January 1, 2022   Operating Income : The following table presents components of operating income as a percentage of net sales:       Three Months Ended     Nine Months Ended       January 1,     December 26,     January 1,     December 26,       2022     2020     2022     2020   Gross margin     10.1 %     16.0 %     11.5 %     15.1 % Selling     2.3 %     2.2 %     2.5 %     2.2 % Administrative     2.4 %     2.5 %     3.0 %     3.0 % Other operating loss/(income)     0.1 %     -7.3 %     0.1 %     -2.9 % Operating income     5.3 %     18.7 %     6.0 %     12.8 % Interest expense, net     0.3 %     0.3 %     0.4 %     0.4 %   Three Months Ended January 1, 2022 and December 26, 2020   Gross margin : Gross margin for the three months ended January 1, 2022 was 10.1% as compared with 16.0% for the three months ended December 26, 2020. The decrease in gross margin for the three months ended January 1, 2022 was due primarily to cost inflation for various inputs, including steel, commodities, ingredients, packaging and transportation as well as a large LIFO charge in fiscal 2022 as compared to a LIFO credit in fiscal 2021 LIFO. The Company’s LIFO charge for the three months ended January 1, 2022 was $19.0 million as compared to a credit of $4.7 million for the three months ended December 26, 2020. The increase in the LIFO reserve over the three months ended January 1, 2022 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 $14.3 million for the three months ended January 1, 2022 and increased net earnings by $3.5 million for the three months ended December 26, 2020, based on the historical statutory federal income tax rate.   Selling : Selling costs as a percentage of net sales for the three months ended January 1, 2022 were 2.3% as compared with 2.2% for the prior year quarter. Selling costs as a percentage of net sales increased in part due to the decrease in net sales and the fixed nature of certain selling expenses.   Administrative : Administrative costs as a percentage of net sales for the three months ended January 1, 2022 were 2.4% as compared with 2.5% for the prior year quarter. The decrease in administrative costs as a percentage of net sales was due to the sale of the prepared foods business, and the Company no longer incurring the related administrative expenses for that business.   Other Operating Loss : During the three months ended January 1, 2022, the Company recorded a charge of $0.5 million for various miscellaneous expenses related to properties that are held for sale. The Company also recorded miscellaneous income of $0.1 million. During the three months ended December 26, 2020, the Company completed the sale of its prepared foods business to an unaffiliated buyer who was not a previous customer. The Company recorded a gain on the sale of the prepared food business of $35.7 million. Additionally, the Company recorded a loss on the sale of unused fixed assets of $0.3 million.   Interest Expense : Interest expense as a percentage of net sales was 0.3% for the three months ended January 1, 2022 and December 26, 2020. During the three months ended January 1, 2022, the weighted average interest rate was lower than the previous year, however average borrowings were slightly higher in fiscal year 2022. The net impact resulted in interest expense being down slightly in fiscal 2022. 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.   14 Table of Contents ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS January 1, 2022   Nine Months Ended January 1, 2022 and December 26, 2020   Gross margin : Gross margin for the nine months ended January 1, 2022 was 11.5% as compared with 15.1% for the nine months ended December 26, 2020. The decrease in gross margin for the nine months ended January 1, 2022 was due primarily to cost inflation for various inputs, including steel, commodities, ingredients, packaging and transportation as well as a large LIFO charge in fiscal 2022 as compared to a LIFO credit in fiscal 2021 LIFO. The Company’s LIFO charge for the nine months ended January 1, 2022 was $30.7 million as compared to a credit of $4.3 million for the nine months ended December 26, 2020. The increase in the LIFO reserve over the nine months ended January 1, 2022 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 $23.0 million for the nine months ended January 1, 2022 and increased net earnings by $3.2 million for the nine months ended December 26, 2020, based on the historical statutory federal income tax rate.   Selling : Selling costs as a percentage of net sales for the nine month period ended January 1, 2022 were 2.5% as compared with 2.2% for the same period of the prior year. Selling costs as a percentage of net sales increased in part due to the decrease in net sales and the fixed nature of certain selling expenses. Additionally, the Company incurred increased charges for certain shipping supplies in an effort to mitigate any potential future supply chain interruptions.   Administrative : Administrative costs as a percentage of net sales were 3.0% for the nine month periods ended January 1, 2022 and December 26, 2020. The sale of the Company’s prepared foods business reduced administrative costs for the first nine months of fiscal 2022 when compared to the same period in fiscal 2021. However, net sales also decreased over the same time period and caused administrative expenses as a percentage of net sales to remain flat year over year.   Other Operating Loss : During the nine months ended January 1, 2022, the Company recorded a charge of $2.4 million for supplemental early retirement plans and a charge $0.5 million for various expenses related to properties that are held for sale. These expenses were partially offset by a gain from the sale of an aircraft of $1.2 million, a gain of $0.8 million from the sale of a plant in the Midwest, and a gain from debt forgiveness of $0.5 million on an economic development loan in which the Company met all required milestones. The Company also recorded miscellaneous expenses of $0.3 million. On December 18, 2020, the Company completed the sale of its prepared foods business to an unaffiliated buyer who was not a previous customer. The Company recorded a gain on the sale of the prepared food business of $35.7 million. Additionally during the nine months ended December 26, 2020, the Company recorded a loss of $0.4 million on the disposal of equipment from a sold Northwest plant and a loss on the sale of unused fixed assets of $0.4 million. The Company also recorded a charge of $1.2 million for a supplemental early retirement plan.   Interest Expense : Interest expense as a percentage of net sales was 0.4% for the nine months ended January 1, 2022 and December 26, 2020. During the nine months ended January 1, 2022, the weighted average interest rate and average borrowings were lower than the previous year resulting in lower interest expense in fiscal 2022. 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 for continuing operations was 23.6% and 20.9% for the nine months ended January 1, 2022 and December 26, 2020, respectively. The effective tax rate was reduced in fiscal 2021 by 3.2% as a result of the receipt of interest related to a federal NOL carryback claim. Because a similar amount of interest has not been received in fiscal 2022, the rate is effectively increased by 3.2% when compared to the prior year period. The overall effective tax rate increase was offset primarily by a 0.4% decrease in the tax rate resulting from federal credits and incentives.  The dollar amount of the credits and incentives did not change significantly, however, the projected pre-tax income decreased in fiscal 2022 as compared to fiscal 2021 resulting in the credits and incentives having a larger impact on the tax rate in fiscal 2022.    15 Table of Contents ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS January 1, 2022   Earnings per Share :   A summary of the Company’s earnings per common share is as follows:       Three Months Ended     Nine Months Ended       January 1,     December 26,     January 1,     December 26,       2022     2020     2022     2020   Basic earnings per common share   $ 2.16     $ 7.96     $ 5.02     $ 12.18   Diluted earnings per common share:   $ 2.14     $ 7.90     $ 4.98     $ 12.09     For details of the calculation of these amounts, refer to footnote 12 of the Notes to Condensed Consolidated Financial Statements.   Liquidity and Capital Resources:   The financial condition of the Company is summarized in the following table and explanatory review (dollar amounts in thousands, except per share data):       As of:     January 1,     December 26,     March 31,     March 31,       2022     2020     2021     2020   Working capital:                                 Balance   $ 405,236     $ 347,709     $ 358,169     $ 401,946   Change in quarter   $ (5,875 )   $ 13,791                   Current portion of long-term debt   $ 4,000     $ 4,500     $ 4,500     $ 500   Long-term debt, less current portion   $ 123,808     $ 94,077     $ 94,085     $ 217,081   Operating lease obligations, less current portion   $ 24,533     $ 30,436     $ 27,769     $ 42,760   Financing lease obligations, less current portion   $ 21,587     $ 20,546     $ 19,232     $ 24,366   Total stockholders' equity per equivalent common share (1)   $ 69.04     $ 54.90     $ 63.05     $ 42.77   Stockholders' equity per common share   $ 69.78     $ 55.45     $ 63.68     $ 43.17   Current ratio     3.03       2.85       3.27       3.69     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 used in operating activities was $11.1 million for the nine months ended January 1, 2022, compared to $103.1 million provided by operating activities for the same period of the prior year, a decrease of $114.2 million. For the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021, the reduction in cash provided by operating activities is primarily comprised of decreases in cash provided by inventories, $139.5 million, accounts receivable, $8.9 million, income taxes, $14.3 million, and net earnings, $66.8 million. The increase in cash provided by accounts payable, accrued expenses and other of $89.7 million for the first nine months of fiscal 2022 as compared to the first nine months of fiscal 2021 partially offset the aforementioned decreases to operating cash flows.   Cash used in investing activities was $31.7 million for the nine months ended January 1, 2022 as compared to $32.6 million of cash provided by investing activities for the nine months ended December 26, 2020, a change of $64.3 million. Proceeds from the sale of assets in the prior year period included the sale of the Company’s prepared food business. There was not a sale of comparable size in the current year, which reduced cash provided by the sale of assets by $68.0 million. Additions to property, plant and equipment decreased $3.7 million during the first nine months of fiscal 2022 compared to the same period of fiscal 2021 to partially offset the overall decrease in cash used in investing activities.   16 Table of Contents ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS January 1, 2022   Cash used in financing activities was $6.1 million for the nine months ended January 1, 2022, a decrease of $126.2 million compared to cash used in financing activities for the nine months ended December 26, 2020 of $132.3 million. In fiscal 2021, the Company paid down substantially all of its Revolver given the additional sales as a result of pantry loading due to the COVID-19 pandemic. During 2021, the Company paid down $587.2 million of debt, primarily the Revolver, and borrowed $468.2 million resulting in a net use of cash totaling $119.0 million. As sales began to normalize in 2022 after the height of the pandemic, the Company borrowed on the Revolver in support of seasonal working capital needs. During fiscal 2022, the Company borrowed $278.1 million and paid down $248.4 million, providing net cash of $29.7 million, which was a swing of $148.7 million compared to fiscal 2021. Other than borrowings under the Revolver, there was no new long-term debt during the first nine months of fiscal 2022. Additionally, during fiscal 2022 the Company repurchased $27.8 million of its common stock under a stock repurchase program that was authorized in the first quarter of fiscal 2022. By comparison, the Company repurchased $2.2 million during the nine months ended December 26, 2020, an increase in cash used in financing activities of $25.6 million.   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 Condensed 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 January 1, 2022, the Company was in compliance with all such 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, and (vi) the impact of competition.   17 Table of Contents ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OPERATIONS January 1, 2022   Because such statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Investors are cautioned not to place undue reliance on such statements, which speak only to events as of the date the statements were made. Among the factors that could cause actual results to differ materially are:     ● general economic and business conditions;   ● cost and availability of commodities and other raw materials such as vegetables, steel and packaging materials;   ● transportation costs;   ● climate and weather affecting growing conditions and crop yields;   ● the availability of financing;   ● leverage and the Company’s ability to service and reduce its debt;   ● potential impact of COVID-19 related issues at our facilities;   ● an overall labor shortage, lack of skilled labor, labor inflation or increased turnover impacting the Company’s ability to recruit and retain employees;   ● foreign currency exchange and interest rate fluctuations;   ● effectiveness of the Company’s marketing and trade promotion programs;   ● changing consumer preferences;   ● competition;   ● product liability claims;   ● the loss of significant customers or a substantial reduction in orders from these customers;   ● the ability to protect information systems against, or effectively respond to, a cybersecurity incident or other disruption;   ● changes in, or the failure or inability to comply with, U.S., foreign and local governmental regulations, including environmental and health and safety regulations; and   ● other risks discussed elsewhere in this report and the Company’s other public filings with the Securities and Exchange Commission.   Except for ongoing obligations to disclose material information as required by the federal securities laws, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of the filing of this report or to reflect the occurrence of unanticipated events.   Critical Accounting Policies   For the nine months ended January 1, 2022 and December 26, 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 (first-in, first-out) 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.     18 Table of Contents