Seneca Foods Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, three months ended July 2, 2011; comparisons are with the three months ended July 3, 2010 unless stated otherwise. Seneca processes and distributes canned, frozen and bottled produce and snack foods. The interim financial statements are unaudited; management cautions that quarterly results are not necessarily indicative of full-year results.
Financial results
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $259.1 million | $219.9 million |
| Operating income (loss) | $(10.2) million | $10.1 million |
| Net earnings (loss) | $(8.0) million | $5.3 million |
| Basic and diluted EPS | $(0.66) | $0.43 |
| Cash provided by operations | $31.4 million | $26.2 million |
- Sales rose 17.8% ($39.1 million), mainly from higher volume (+$42.8 million), partly offset by lower selling prices and sales mix (−$3.7 million). Frozen sales increased $19.2 million, canned vegetables $9.3 million and fruit products $9.6 million; GMOL sales declined $1.6 million.
- Gross margin fell to 2.3% from 11.5%; operating margin fell to −3.9% from 4.6%. Management cited lower net selling prices after promotions, higher unit costs and a $6.5 million LIFO charge, versus a $4.1 million LIFO credit a year earlier. The current-period LIFO charge increased the after-tax loss by approximately $4.2 million.
- Net interest expense was $1.8 million, down from $1.9 million; the expense was 0.7% of sales versus 0.9%. The effective tax rate was 33.2% versus 35.6%; the company recorded a $4.0 million income tax benefit in the quarter.
Liquidity, cash flow and debt
- Cash was $8.7 million at July 2, 2011. Working capital was $398.9 million and the current ratio was 3.96.
- Operating cash flow was $31.4 million; capital expenditures were $5.6 million. Financing used $22.0 million, including $61.5 million of borrowings and $83.6 million of debt repayments. Cash increased $4.0 million during the quarter.
- Total debt, including current maturities, was $210.5 million at July 2, 2011, compared with $193.7 million a year earlier and $232.6 million at March 31, 2011. The revolver balance was $115.5 million. Cash and operating cash flow should be viewed alongside substantial seasonal working-capital needs.
- On July 20, 2011, after quarter-end, the company closed a new five-year revolving credit facility maturing July 20, 2016. Availability is $250 million from April through July and $350 million from August through March. Management said cash flow, revolver availability and other financing sources should cover working capital, planned capital spending and debt obligations for at least 12 months. The company reported compliance with financial covenants at July 2.
Changes, outlook and risks
- Crop conditions during the summer were unfavorable: high temperatures and uneven moisture affected yields and plant recovery, contributing to unfavorable manufacturing variances. Management provided no specific earnings or sales guidance.
- Inventory was $431.9 million, down $35.7 million from July 2010. Finished goods, including off-season inventory, declined $71.3 million, while raw materials and supplies increased $35.0 million. Off-season inventory was $83.8 million, reflecting seasonal production timing and weather-related delays.
- The August 2010 acquisition of Lebanon Valley Cold Storage and Unilink expanded frozen-food offerings and was intended to improve distribution efficiencies; the $20.3 million purchase was financed through the revolving facility.
- Sales and production are seasonal, with revenues typically higher in the second and third fiscal quarters. The company identified commodity and packaging costs, weather and crop yields, transportation expenses, competition, customer demand, financing and leverage among factors that could affect results.
- A California Proposition 65 notice alleged that certain fruit products contained lead without required warnings. No action had been initiated against the company as of the filing; Seneca said it could not estimate the likelihood or amount of any loss. The filing also notes ordinary-course product-liability and other legal matters with outcomes not estimable. Part II reports no legal proceedings.
- Green Giant finished goods sales to General Mills Operations on a bill-and-hold basis were $4.3 million, compared with $5.6 million a year earlier. Management stated that it believed the required accounting criteria were met.
Important facts for investors to verify
- Whether crop yields, plant recovery and production timing improve, and how they affect costs and inventory.
- Whether pricing, promotions and input-cost inflation allow gross margins to recover; monitor the LIFO impact.
- Seasonal revolver usage, borrowing costs, covenant headroom and debt repayment needs under the new facility.
- Sales and integration benefits from the Lebanon acquisition, and the continuation and accounting of bill-and-hold sales to GMOL.
- Developments in the Proposition 65 matter and other product-liability contingencies.