Seneca Foods Corporation — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended October 1, 2016. Fiscal Q2 results are seasonal; the company processes much of its produce from June through November. Seneca sells packaged fruits and vegetables, snacks, and contract-packed products, including Green Giant products for B&G Foods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $357.2 | $313.2 | $609.9 | $539.5 |
| Operating income | $11.2 | $11.7 | $12.8 | $18.0 |
| Net earnings | $6.1 | $6.5 | $6.1 | $9.5 |
| Basic EPS | $0.62 | $0.65 | $0.61 | $0.95 |
| Gross margin | 8.5% | 9.3% | 8.2% | 9.3% |
| Operating margin | 3.2% | 3.7% | 2.1% | 3.4% |
- Six-month operating cash flow was negative $28.4 million, versus negative $56.9 million a year earlier. Inventory growth used $204.3 million of cash, partly offset by $183.0 million from accounts payable, accrued expenses, and other liabilities.
- Cash was $10.1 million at October 1. Working capital was $592.6 million and the current ratio was 2.90.
- Revolver borrowings were $342.9 million; total long-term debt, including current maturities, was $362.6 million. Capital lease obligations, including current maturities, were $20.7 million. The new five-year revolver has a $500 million maximum from August through March and matures July 5, 2021. The reported quarter-end revolver rate was 1.88%.
- Capital expenditures were $14.5 million; the company also entered into $15.4 million of equipment capital leases. Financing activities provided $44.4 million.
Changes and drivers
- Sales increased 14.1% in Q2 and 13.1% year to date, primarily from higher volume, including acquired fruit businesses and increased B&G sales. Lower selling prices and sales mix partly offset the volume gains.
- Despite higher revenue, gross and operating margins declined. Management attributed lower gross margin mainly to lower net selling prices and higher LIFO costs. The six-month LIFO charge was $4.4 million, compared with a $1.6 million credit in the prior-year period; management estimated the current-period after-tax earnings impact at negative $2.8 million.
- Gray & Company and Diana Fruit, acquired in October 2015 and February 2016, respectively, contributed to fruit sales growth. The company reported $54.1 million of Green Giant bill-and-hold sales to B&G in the six-month period, versus $32.8 million a year earlier.
- At October 1, inventory was $772.0 million, up $10.3 million year over year. The company cited pack timing and higher finished-goods quantities. Receivables were $102.7 million, compared with $83.3 million a year earlier.
- Plant restructuring charges were $1.5 million for the six months. The remaining restructuring balance was $7.2 million, primarily asset-related and other costs, after payments and write-offs.
Outlook, risks, and other notable items
- No specific earnings or sales guidance was provided. Management said cash flows, revolver availability, and other financing sources should cover working capital, planned capital expenditures, and debt obligations for at least the next 12 months. The company reported compliance with its financial covenants at October 1.
- Management noted expected fiscal 2017 cost increases, including the impact on LIFO, and identified commodity and packaging costs, transportation, crop yields and weather, competition, customer concentration, interest rates, leverage, and financing availability as risks.
- Because expected annual pretax earnings were near breakeven, management used a year-to-date method for the interim tax provision rather than the annual effective tax rate method. The six-month effective tax rate was 29.9%, compared with 33.7% a year earlier; tax credits were a key contributor to the decrease.
- The company stated that there were no material changes to the risk factors in its prior Form 10-K. It also said there were no material changes in market-risk exposure since March 31, 2016. Adoption of new lease accounting rules was expected to result in potentially material right-of-use assets and lease liabilities; the impact was still under evaluation.
Important facts for investors to verify
- Whether seasonal inventory is sold as planned and converts into cash, and how working-capital needs affect revolver utilization.
- Whether pricing and mix, LIFO charges, and expected production-cost increases continue to pressure margins.
- How the Gray and Diana acquisitions contribute to results and whether integration or financing costs change.
- Revolver availability and covenant headroom, given borrowings of $342.9 million and the company’s seasonal funding needs.
- The assumptions supporting bill-and-hold revenue recognition, the remaining restructuring balance, and the potential balance-sheet effect of the new lease standard.