Business context and reporting period
Seneca Foods Corporation produces and sells packaged fruits and vegetables, snack chips, and contract-packed products. This Form 10-Q covers the quarter and six months ended September 26, 2020 (fiscal 2021 Q2). The request labels the period “2019 Q2,” but the filing is for 2020 Q2; prior-year comparisons are for periods ended September 28, 2019. Financial statements are unaudited; amounts below are in millions unless noted.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $390.3 | $370.0 | $678.5 | $634.9 |
| Operating income | $27.7 | $7.4 | $58.0 | $10.3 |
| Net earnings | $18.1 | $4.6 | $38.8 | $5.7 |
| Diluted EPS | $1.97 | $0.49 | $4.21 | $0.61 |
| Gross margin | 12.5% | 6.5% | 14.4% | 6.8% |
| Operating margin | 7.1% | 2.0% | 8.5% | 1.6% |
| Net interest expense | $1.4 | $3.1 | $3.1 | $6.5 |
Quarterly sales increased 5.5%; management attributed the increase to $7.7 million of higher volume and $12.6 million from pricing and sales mix. Six-month sales rose 6.9%, including $5.5 million from volume and $38.1 million from pricing and mix. Canned vegetables led growth; frozen and fruit products declined. Higher prices drove improved gross margin, partly offset by LIFO charges. Administrative expense increased, primarily from higher employment costs, while lower borrowing levels and interest rates reduced interest expense.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $87.0 million, versus $46.5 million a year earlier. Inventory used $139.1 million of cash, partly offset by a $177.8 million contribution from accounts payable, accrued expenses and other items. Capital expenditures were $27.3 million, up from $16.5 million; operating cash flow less capital expenditures was approximately $59.7 million.
- Cash was $14.8 million at September 26, 2020. Current assets were $714.5 million and current liabilities $380.6 million; working capital was $333.9 million and the current ratio 1.88, compared with 2.53 a year earlier.
- Long-term debt including its current portion was $172.2 million. The revolving facility balance was $62.6 million, classified as current because the facility matures July 5, 2021. Capacity is $400 million from August through March and $300 million from April through July. The company said it complied with financial covenants and expected operating cash flow, revolver availability and other financing sources to cover needs for at least 12 months.
- Operating and finance lease obligations totaled $73.8 million. The pension liability was $85.0 million, versus $18.7 million at September 28, 2019.
Outlook, risks and unusual items
No numerical earnings or sales guidance is provided. Management reported continued elevated orders related to pandemic pantry loading and at-home consumption, with minimal supply-chain disruption to date and measures to allocate products across retail customers. It cautioned that demand could slow as purchasing behavior, restrictions and macroeconomic conditions change. The business is seasonal: revenues are typically higher in the second and third fiscal quarters, and raw-product harvesting is concentrated from June through November.
Key risks cited include COVID-19 impacts at facilities, crop yields and weather, commodity and packaging costs, transportation, financing and debt service, interest and currency fluctuations, competition, customer concentration, changing preferences, regulation and product liability. The revolver’s July 2021 maturity is a near-term financing consideration. Other notable items include a $1.2 million supplemental early-retirement-plan charge during the first six months, $1.5 million loss from an equity investment, and $0.3 million of restructuring charges. Certain Midwest non-operating units, with $11.9 million of assets, were classified as held for sale. The former Modesto peach operation remains presented as discontinued operations. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the requested “2019 Q2” period against the actual filing period: quarter ended September 26, 2020.
- Assess whether pandemic-related demand and favorable pricing/mix persist, and whether volume trends in frozen, fruit and prepared foods recover.
- Review seasonal inventory and working-capital needs, including the large inventory cash use and the current ratio decline.
- Track renewal or refinancing of the revolver before its July 5, 2021 maturity, and confirm continuing covenant compliance and available capacity.
- Investigate the pension liability increase, early-retirement charge, and valuation/proceeds risks for assets held for sale.