Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 30, 2017; comparisons are to periods ended December 31, 2016. Amounts are in millions unless stated otherwise. Seneca produces and packs canned, frozen and other food products, including its own brands and products packed for B&G Foods. Results are seasonal, with sales typically higher in the second and third fiscal quarters.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $392.7, up 6.2% | $1,049.2, up 7.1% |
| Operating income | $11.5 vs. $13.9 | $13.9 vs. $26.7 |
| Net earnings | $7.7 vs. $8.2 | $5.8 vs. $14.3 |
| Basic EPS | $0.79 vs. $0.83 | $0.59 vs. $1.44 |
| Gross margin | 8.1% vs. 10.1% | 6.5% vs. 8.9% |
| Net interest expense | $4.0 vs. $2.4 | $10.7 vs. $6.7 |
Sales growth reflected higher prices and mix and the April 2017 acquisition of the remaining 50% of Truitt Bros. Truitt contributed $28.2 million of quarterly sales and $69.4 million year to date. For the quarter, higher prices/mix contributed $34.6 million, partly offset by a $11.5 million volume decline. For the nine months, prices/mix contributed $36.7 million and volume $32.9 million.
Margins and earnings weakened despite higher sales. Management attributed lower gross margin principally to increased LIFO expense: the nine-month LIFO reserve increased $18.8 million, compared with $0.4 million in the prior-year period. Selling and administrative costs declined as a percentage of sales. Higher borrowing levels and interest rates increased interest expense.
Cash flow, liquidity and debt
- Operating cash flow was negative $26.7 million for the nine months, versus negative $9.7 million. The company cited the $96.0 million inventory cash use, lower earnings and reduced cash provided by income taxes.
- Investing cash use was $33.7 million, including $21.1 million of property and equipment additions and $14.4 million paid for the Truitt acquisition, net of cash acquired. Financing provided $61.6 million. Cash ended at $13.1 million.
- At December 30, working capital was $632.1 million and the current ratio was 4.89. Inventories were $710.1 million, up $53.8 million from December 2016; the comparison includes $16.1 million from Truitt.
- Long-term debt, including current maturities, was $415.4 million; capital lease obligations, including current maturities, were $43.5 million. The Revolver balance was $290.2 million, versus $232.6 million a year earlier. The Revolver’s reported period-end weighted-average rate was 3.04%; management separately reported an approximate current rate of 2.90%.
- The company repurchased $3.4 million of common stock during the nine months. It reported compliance with financial covenants and said cash flows, Revolver availability and other financing sources should cover working capital, planned capital expenditures and debt obligations for at least 12 months.
Material changes, outlook and risks
- The Truitt acquisition was financed with the Revolver. The company recorded a $1.1 million bargain purchase gain; the purchase-price allocation remained preliminary. The acquisition also contributed to reported sales and inventory.
- The Tax Cuts and Jobs Act reduced the federal corporate rate from 35% to 21%. Revaluation of beginning deferred tax balances reduced the tax provision by $3.0 million; the reported nine-month effective tax rate was negative 77.6%. This tax benefit materially affects comparison of reported earnings.
- Other unusual items included a $1.6 million gain on asset sales, including $1.1 million from a closed Midwest plant, and $0.2 million of restructuring charges year to date. The prior-year quarter included a $1.1 million long-lived asset impairment charge.
- No numerical earnings or sales guidance was provided. Management cited possible exposure to raw-material and packaging costs, transportation costs, weather and crop yields, interest rates, leverage, competition, consumer preferences and significant-customer demand. It also cautioned that actual results may differ from forward-looking statements.
- The company was evaluating Truitt’s internal controls following the acquisition. It expected the forthcoming lease standard to result in potentially material right-of-use assets and lease liabilities; the financial-statement impact of the new revenue standard was still under evaluation, including certain co-pack arrangements.
Investor verification points
- Assess whether sales growth and Truitt’s contribution translate into sustained operating earnings, given lower margins and higher interest expense.
- Review inventory levels, seasonal working-capital needs and the resulting negative operating cash flow.
- Track Revolver borrowings, interest rates, debt service and compliance with financial covenants.
- Separate underlying performance from LIFO effects, the tax-law benefit, the bargain purchase gain and asset-sale gains.
- Follow the final Truitt purchase-price allocation and integration, as well as adoption impacts from revenue-recognition and lease accounting changes.