Seneca Foods Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended June 30, 2012; comparisons are with the three months ended July 2, 2011. Amounts are in U.S. dollars.
Business context and results
Seneca produces and distributes processed fruits and vegetables, snack chips, and products sold under its own, licensed, and private-label brands. It also packs products for General Mills Operations, LLC (GMOL). Results are seasonal, and the filing cautions that the quarter is not necessarily indicative of full-year results.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $231.1 million | $257.8 million |
| Operating income (loss) | $14.3 million | $(10.2) million |
| Net earnings (loss) | $8.2 million | $(8.0) million |
| Basic / diluted EPS | $0.68 / $0.67 | $(0.66) / $(0.66) |
| Gross margin | 12.6% | 2.3% |
| Operating margin | 6.2% | (3.9)% |
| Net cash from operations | $58.6 million | $31.4 million |
Financial position and liquidity
- At June 30, 2012, cash was $12.2 million, working capital was $384.9 million, and the current ratio was 3.48. Working capital was $398.9 million at July 2, 2011 and $425.1 million at March 31, 2012.
- Total debt, including current maturities, was $188.3 million, compared with $210.5 million at July 2, 2011 and $234.2 million at March 31, 2012. The June balance included $100.0 million outstanding on the revolving facility.
- The five-year revolver matures July 20, 2016; its borrowing capacity was $250 million from April through July and $350 million from August through March. Seneca reported covenant compliance and said cash flows, revolver availability, and other financing sources should fund needs for at least the next 12 months.
- Capital expenditures were $9.5 million. Operating cash flow less capital expenditures was approximately $49.1 million; financing activities used $46.3 million, including $76.6 million of debt repayments and $30.7 million of borrowings. Cash increased $2.8 million during the quarter.
Material changes and management commentary
- Sales fell $26.8 million, or 10.4%. Management attributed this to a $57.3 million reduction in volume, partly offset by $30.5 million from higher selling prices and sales mix. Lower sales reflected, in part, prior-year sales of excess inventory.
- Gross margin improved to 12.6% from 2.3%, which management attributed primarily to higher net selling prices, lower unit costs, and a smaller LIFO charge. The LIFO charge was $1.3 million versus $6.5 million.
- Management reported that high temperatures and uneven moisture adversely affected crop yields and plant recovery, causing unfavorable manufacturing variances.
- Inventory was $458.4 million, up $26.5 million year over year, mainly due to higher finished goods. Management cited lower sales volume and timing of the fiscal-year pack. Cash flow also benefited from changes in receivables, payables, accrued expenses, and other working-capital accounts.
- The company received repayment of the remaining $6.3 million of a loan to a potential acquisition target in June, after receiving $3.7 million in April; the contemplated acquisition was no longer being pursued.
Risks, contingencies, and other items
- Seneca is defending a California Proposition 65 lawsuit concerning alleged failure to warn about lead in certain fruit products. Discovery was ongoing; the company said it could not predict the outcome or estimate any loss. It also cited other ordinary-course product-liability and monetary-damages proceedings.
- Principal stated risks include weather and crop yields, commodity and packaging costs and availability, transportation costs, interest rates and financing, leverage, competition, consumer preferences, customer concentration, regulation, and product liability.
- The quarter included $18,000 in gains from sales of unused fixed assets. Seneca repurchased 17,695 Class A shares for $445,000. The filing reports no material change in market-risk exposure and no material change in risk factors from the fiscal 2012 Form 10-K.
- No specific earnings or sales guidance was provided. Management’s liquidity outlook was that available cash generation and financing would cover needs for at least 12 months.
Important facts for investors to verify
- Whether improved gross margin and profitability persist despite lower sales volume and the reported adverse growing conditions.
- How seasonal inventory levels convert into sales and cash, and whether working-capital movements support operating cash flow in subsequent quarters.
- Revolver availability, seasonal borrowings, debt repayments, interest costs, and continued compliance with financial covenants.
- Developments in the Proposition 65 litigation and whether a loss estimate becomes possible.
- Assumptions behind bill-and-hold revenue recognition for GMOL sales and the expected impact of LIFO costs.