Business context and reporting period
Seneca Foods Corporation produces and sells packaged fruits and vegetables, snack chips, and contract-packed products. This unaudited Form 10-Q covers the three months ended June 29, 2019 (fiscal 2020 first quarter), compared with the three months ended June 30, 2018. The filing date is August 7, 2019. The supplied request labels the period “2018 Q1,” but that does not match the filing’s reporting period.
Key financial metrics
| Metric | Quarter ended June 29, 2019 | Comparable 2018 quarter |
|---|---|---|
| Net sales | $264.9 million | $244.1 million |
| Gross margin | 7.2% | 6.9% |
| Operating income (loss) | $2.9 million | $(0.02) million |
| Continuing-operations earnings (loss) | $1.1 million | $(2.2) million |
| Net earnings (loss) | $1.1 million | $(8.8) million |
| Basic and diluted EPS | $0.12 | $(0.90) |
| Cash provided by operating activities | $37.8 million | $87.0 million |
Sales rose 8.5%, reflecting $10.4 million of volume growth and $10.4 million from higher prices and sales mix. Canned vegetables increased $18.8 million and prepared foods increased $12.4 million; frozen sales declined $10.4 million. The company reported $4.8 million of plant restructuring charges and $4.8 million of other operating income, principally gains on a partial plant sale and unused fixed assets.
At June 29, 2019, cash was $16.9 million, working capital was $441.8 million, and the current ratio was 3.91. Inventory was $493.5 million, down $74.1 million from June 30, 2018. Long-term debt, including its current portion, was $246.7 million; the revolving-credit balance was $136.0 million. The balance sheet also reported $87.6 million of operating lease liabilities and $36.5 million of financing lease liabilities after adoption of the new lease standard. Stockholders’ equity was $413.8 million.
Material changes versus the prior comparable period
- Revenue and continuing-operations earnings improved; the prior-year quarter included a $6.6 million after-tax discontinued-operations loss.
- Operating cash flow fell by $49.1 million, primarily because inventory contributed substantially less cash than in the prior-year quarter.
- Average revolving borrowings decreased to $134.1 million from $262.8 million, which management attributed largely to facility sales, while the quarter-end revolver balance was $136.0 million versus $207.6 million.
- The company adopted ASC 842 on April 1, 2019, recording operating lease assets and liabilities and a $2.0 million after-tax retained-earnings adjustment. Prior periods were not restated.
- Management reported $2.7 million of Class A share repurchases during the quarter.
Outlook, commentary, risks and unusual items
Management said it expects cash from operations, revolver availability, and other financing sources to cover working capital, planned capital expenditures, and debt obligations for at least the next 12 months. No quantified earnings or revenue guidance was provided. Results are seasonal, typically stronger in the second and third fiscal quarters, and the filing cautions that this quarter is not necessarily indicative of full-year results.
The company announced that production at its Sunnyside, Washington fruit plant would cease after the 2019 production season; storage, casing, and labeling would continue temporarily. The quarter included $4.8 million of restructuring charges related to Midwest and Northwest plant closures, including accelerated lease-asset amortization tied to Sunnyside. The company also recorded a $4.1 million gain on a partial Midwest plant sale and a $0.8 million gain on unused assets. The Modesto facility, associated with peach production, was sold in October 2018 for net proceeds of $63.3 million and is treated as discontinued operations.
Key disclosed risks include commodity and packaging costs and availability, crop and weather conditions, transportation costs, leverage and debt service, interest-rate and currency fluctuations, competition, customer concentration, changing consumer preferences, and regulatory, product-liability, and environmental matters. Management reported compliance with financial covenants and no material change in market-risk exposure since March 31, 2019. It stated that ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the requested period: this filing reports fiscal 2020 Q1, ended June 29, 2019, not 2018 Q1.
- Assess how much of the operating improvement reflects recurring operations versus asset-sale gains and restructuring costs.
- Review the sustainability of working-capital cash generation, seasonal revolver needs, and the decline in operating cash flow.
- Evaluate the planned Sunnyside closure, related costs, and effect on production capacity and future results.
- Consider the impact of LIFO: the quarter included a $3.2 million LIFO charge, versus a $0.7 million credit in the comparable quarter.