Seneca Foods Corporation — Form 10-Q Summary
Period clarification: The filing is for the three months ended July 2, 2022, Seneca’s first quarter of fiscal 2023—not 2021 Q1 as specified in the request metadata. Comparative results are for the three months ended July 3, 2021. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless stated otherwise.
Business context and reporting period
Seneca produces and sells packaged fruits and vegetables, including canned and frozen vegetables, fruit products, and snack products. It reported 26 facilities in eight states and sales in the United States and export markets. Results are seasonal, and the company cautions that interim results and cash flows may not indicate full-year performance. The financial statements are unaudited.
Financial results and liquidity
| Metric | Quarter ended July 2, 2022 | Prior-year quarter |
|---|---|---|
| Net sales | $265.2 million | $235.0 million |
| Gross profit / gross margin | $22.8 million / 8.6% | $33.6 million / 14.3% |
| Operating income / operating margin | $6.6 million / 2.5% | $17.7 million / 7.5% |
| Net earnings | $5.1 million | $14.1 million |
| Diluted EPS | $0.62 | $1.55 |
| Cash from operating activities | $(22.8) million | $21.6 million |
| Cash used in investing activities | $(15.3) million | $(11.8) million |
- Sales increased 12.9%, with management attributing $21.2 million of the increase to higher prices and $9.0 million to higher volumes. Canned vegetable sales rose $30.4 million; frozen vegetable sales fell $2.9 million.
- Profitability weakened despite higher sales. Management attributed the gross-margin decline primarily to a $19.2 million interim LIFO charge, compared with $2.8 million a year earlier. The company says interim LIFO estimates depend on projected year-end inventory, production, sales, and inflation and may be adjusted at year-end.
- Management presented adjusted net earnings, a non-GAAP FIFO-based measure excluding the equity-investment loss: $19.7 million versus $16.4 million. This measure is not a substitute for GAAP net earnings.
- Operating cash use reflected a $113.1 million increase in inventories in the cash-flow statement, partly offset by cash generated from lower accounts receivable and higher accounts payable and accrued expenses.
- Capital expenditures were $19.2 million, compared with $13.2 million in the prior-year quarter. Cash and cash equivalents were $12.2 million at quarter-end.
- Working capital was $417.9 million and the current ratio was 2.94 at July 2, 2022. Long-term debt was $171.1 million, including $79.0 million outstanding on the revolving facility and a $91.9 million term loan. Long-term debt was $113.6 million at March 31, 2022 and $97.1 million a year earlier.
- The revolving facility allows up to $300 million of borrowings from April through July and $400 million from August through March; it matures in 2026. The term loan carries a fixed 3.30% rate and matures in 2025. The company reported compliance with debt covenants at quarter-end.
- The company repurchased $15.9 million of Class A shares during the quarter. Stockholders’ equity was $573.1 million at July 2, 2022.
Material changes, outlook, and risks
- Higher selling prices and volumes lifted sales, but inflation and the substantially larger LIFO charge contributed to lower reported earnings and margins. Management reported increased costs for raw materials, packaging, labor, transportation, and energy, citing supply-chain and labor constraints, the COVID-19 pandemic, and the war in Ukraine. It reported no direct exposure to Russia or Ukraine.
- Management seeks to manage inflation through supply contracts, grower agreements, cost savings, and price increases, but warned that pricing may lag cost increases and competitive pressures may limit pass-through.
- The filing gives no quantified earnings or sales guidance. Management cited uncertainty around the pandemic and identified risks including crop and weather impacts, input availability and costs, labor shortages, customer demand and concentration, competition, financing and leverage, interest rates, food safety, and cybersecurity.
- Other operating income was $2.0 million, primarily from sales of fixed assets, versus $1.4 million in the prior-year quarter. The effective tax rate was 24.2%, compared with 24.0%.
- The company adopted the expected-credit-loss accounting standard effective April 1, 2022 and reported no material impact. It was evaluating optional accounting guidance related to the transition from LIBOR.
- Management concluded disclosure controls were effective as of July 2, 2022 and reported no material change in internal control over financial reporting during the quarter. The filing reports no material change to previously disclosed risk factors and refers to the fiscal 2022 Form 10-K for legal proceedings.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal Q1 2023, ended July 2, 2022, rather than 2021 Q1.
- Review how much of the margin and earnings decline reflects the interim LIFO estimate, and how the year-end LIFO calculation may change it.
- Monitor whether price increases and cost-saving actions keep pace with input-cost inflation, and whether sales volumes hold up.
- Assess seasonal inventory funding needs, revolver borrowings, debt levels, and covenant compliance as the packing season progresses.
- Reconcile the cash-flow statement’s financing cash provided of $39.4 million with MD&A text that states $49.4 million; the filing text does not clearly explain this discrepancy.