Seneca Foods Corporation — Q1 FY2017 Form 10-Q
Reporting period: Three months ended July 2, 2016; comparisons are with the three months ended June 27, 2015 unless otherwise noted. Amounts below are in millions of dollars unless stated. Seneca processes and sells packaged fruits and vegetables, snack chips, and contract-packed products. Results are seasonal, with revenues typically higher in the second and third fiscal quarters.
Financial results and liquidity
- Sales: $252.6 million, up 11.6% ($26.4 million). Volume contributed $29.9 million, partly offset by $3.5 million from lower prices or unfavorable mix. Fruit product sales rose $24.4 million, including $19.7 million from recent acquisitions; canned vegetable sales fell $5.2 million.
- Profitability: Gross margin was 7.9%, down from 9.2%; operating income was $1.6 million versus $6.3 million, and operating margin was 0.6% versus 2.7%. The company reported a net loss of $0.1 million, or $0.01 per share, compared with net earnings of $3.0 million, or $0.30 per share. Net interest expense was $2.1 million versus $1.7 million.
- Cash flow and investment: Operating cash flow was $19.7 million, compared with $45.8 million. Investing used $6.4 million, including $6.4 million of capital expenditures. Financing used $9.5 million; cash increased $3.9 million to $12.5 million.
- Balance sheet and liquidity: At July 2, current assets were $693.6 million and current liabilities $179.6 million; working capital was $514.1 million and the current ratio 3.86. Inventory was $586.8 million, up $104.3 million year over year. The company reported $264.0 million outstanding on its revolving facility at a weighted average rate of 1.95%. Long-term debt, less current portion, was $276.6 million; capital lease obligations were $8.6 million. The company said cash flows, revolver availability, and other financing sources should meet needs for at least 12 months and reported compliance with financial covenants.
Material changes and notable items
- Gross margin declined mainly because of lower selling prices after promotions and a larger LIFO charge, partly offset by lower unit costs. The quarter included a $1.9 million LIFO charge versus a $1.6 million LIFO credit in the prior-year quarter.
- Gray & Company and Diana Fruit Co. were acquired in October 2015 and February 2016, respectively, for approximately $23.8 million and $15.0 million, net of cash acquired, plus certain assumed liabilities. Their combined contribution to the sales increase included $19.7 million of canned fruit sales.
- The company recorded a $1.2 million plant restructuring charge related to a Northwest plant closure, including $1.0 million of equipment relocation costs. The restructuring accrual was $9.0 million at quarter-end.
- Sales included $8.7 million of Green Giant finished-goods inventory sold to B&G on a bill-and-hold basis, versus $3.5 million in the prior-year quarter. Management stated that it believed the accounting criteria were met.
- A new five-year revolving credit facility was closed July 5, 2016. Seasonal working-capital needs are significant because most produce inventory is made from June through November and sold over the following year.
Outlook, risks, and contingencies
The filing provides no quantitative earnings or sales guidance. Management cited anticipated higher production, fuel, and transportation costs among factors that could affect results, and noted the company’s ability to integrate acquisitions, service debt, and manage financing needs. Other disclosed risks include commodity and packaging costs and availability, weather and crop yields, interest rates, competition, customer demand, and regulatory matters. Management said results for the quarter are not necessarily indicative of full-year results. The company reported no material changes to the risk factors in its prior Form 10-K. Prior-year other operating income included reversals of a $0.2 million Prop 65 litigation provision and a $0.06 million environmental accrual; this quarter recorded a $0.006 million loss on asset sales.
Important facts for investors to verify
- How much of sales growth and future earnings is attributable to the Gray and Diana acquisitions, and how integration is progressing.
- Whether weaker gross margin, promotional pricing, and the expected cost inflation reflected in the LIFO charge persist.
- Inventory levels, seasonal borrowing needs, and the company’s capacity to service debt as the new revolver is used.
- The filing’s MD&A describes the new facility as having a maturity date of July 20, 2016, despite also calling it a five-year facility closed July 5, 2016. Verify the actual maturity date against the credit agreement.
- The potential remaining costs and timing of the Northwest plant closure and any material developments in legal or environmental matters referenced in the filing.