Seneca Foods Corporation — Q3 FY2014 Form 10-Q
Reporting period: Quarter ended December 28, 2013; comparisons are with the quarter ended December 29, 2012. Year-to-date figures cover the nine months ended on those dates. Financial statement amounts below are in millions of dollars unless stated otherwise; interim results are unaudited.
Business context
Seneca processes and distributes canned, frozen and bottled fruits and vegetables, snack chips, and related products. It sells branded and private-label products and packs Green Giant products for General Mills Operations, LLC (GMOL). Its harvest and production cycle is seasonal, with most produce harvested from June through November and sales typically higher in the second and third fiscal quarters.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $477.7 | $452.7 | $1,046.4 | $1,001.4 |
| Operating income | $10.5 | $24.0 | $21.1 | $63.2 |
| Net earnings | $6.8 | $14.8 | $14.8 | $37.5 |
| Basic EPS | $0.62 | $1.32 | $1.33 | $3.21 |
| Diluted EPS | $0.61 | $1.32 | $1.32 | $3.19 |
- Quarterly sales rose 5.5%; higher selling prices/mix contributed $18.3 million and volume $6.6 million. Nine-month sales rose 4.5%, driven by $46.0 million higher volume, partly offset by $1.0 million lower prices/mix.
- Gross margin fell to 6.5% from 9.9% for the quarter and to 7.0% from 11.5% year to date. Operating margin declined to 2.2% from 5.2% and to 2.1% from 6.3%, respectively.
- The principal margin pressure was LIFO: the quarter had a $7.7 million charge versus $1.3 million; year to date, a $22.1 million charge versus a $1.2 million credit. Management attributed this to greater expected inflation in fiscal 2014. The company estimated the after-tax LIFO impact on earnings at negative $5.0 million for the quarter and negative $14.4 million year to date.
- Interest expense was $1.4 million for the quarter and $4.8 million year to date, down from $1.9 million and $5.3 million, respectively. The nine-month effective tax rate was 9.3%, versus 35.2%, reflecting lower pretax earnings, the manufacturers deduction, reversal of certain New York State tax reserves, and tax credits and other items.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $12.6 million, compared with cash used of $0.6 million in the prior-year period. The filing attributes the improvement mainly to a smaller inventory-related cash outflow, partly offset by lower earnings and higher cash taxes.
- Investing cash use was $11.1 million, including $12.1 million of capital expenditures. Financing provided $2.3 million. Cash increased $3.8 million from fiscal-year-end to $17.9 million.
- At December 28, 2013, working capital was $502.7 million and the current ratio was 3.89. Cash was $17.9 million and inventory was $550.7 million, up $23.1 million from December 2012.
- Total long-term debt, including current maturities, was $268.6 million; the revolving-credit balance was $226.0 million at a 1.42% rate. The company also reported $4.4 million of interim equipment lease notes payable. Long-term debt was $40.6 million higher than a year earlier, principally reflecting greater revolver borrowings; the final $36.7 million payment on an insurance-company note was funded through the revolver.
- The revolver provides commitments of $400 million from August through March and matures July 20, 2016. Management said operating cash flow, revolver availability and other financing sources should cover working capital, planned capital expenditures and debt obligations for at least 12 months. The company reported compliance with financial covenants at quarter-end.
Material changes, outlook and risks
- Sales growth was led by fruit products, frozen products and, year to date, GMOL sales; quarterly GMOL sales declined because certain commodity maturities accelerated into the prior quarter. The Sunnyside fruit processor acquisition, completed January 15, 2013, also contributed to fruit sales.
- Management reported unfavorable pea-growing conditions, including high temperatures and uneven moisture, which reduced crop yields and plant recovery and caused unfavorable manufacturing variances.
- On December 16, 2013, Seneca signed an agreement to act as stalking-horse bidder for certain Allens, Inc. canning assets for approximately $148 million, subject to working-capital adjustment, plus assumed liabilities. The bankruptcy auction was scheduled for February 3, 2014; the acquisition was not certain. Seneca had deposited $7.5 million in escrow and expected to fund any remaining price with cash and revolver borrowings. Lenders had provided commitment letters to increase revolver availability if Seneca won the bid.
- Seneca sold $150.3 million of Green Giant finished-goods inventory to GMOL on a cash, bill-and-hold basis during the nine months, compared with $151.2 million a year earlier. The company stated it believed the revenue-recognition criteria were met.
- A Proposition 65 case concerning lead in certain fruit products had been decided in defendants’ favor at trial; the plaintiff appealed. Seneca said the appeal’s likelihood and scope could not be determined. Other ordinary-course legal matters may also arise; potential losses were not estimable from the filing.
- Key disclosed risks include crop yields and weather, commodity and packaging costs and availability, transportation costs, financing and leverage, interest rates, competition, customer concentration, consumer preferences, regulation and product-liability claims. The filing reported no material change in risk factors from the prior annual report and no material change in market-risk exposure.
- No quantified earnings or sales guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the Allens auction resulted in an acquisition, its final price and liabilities assumed, and the resulting financing and integration effects.
- Whether LIFO-driven cost pressure, crop conditions and manufacturing variances persist, and how inventory and gross margins develop.
- The sustainability and quality of operating cash flow given seasonal inventory requirements and the increase in revolver borrowings.
- The disposition of the Proposition 65 appeal and any material change in related legal costs or exposure.
- The assumptions and revenue-recognition support for GMOL bill-and-hold sales and the ongoing terms of the alliance.