Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 1, 2011. Comparatives are the periods ended October 2, 2010 unless noted. Amounts are in U.S. dollars; financial statement amounts below are converted from thousands to millions.
Business context and results
Seneca produces and distributes processed fruits and vegetables, snack chips, and private-label and branded products. It also packs products for General Mills Operations, LLC (GMOL). Harvesting and production are seasonal, with most raw product harvested from June through November.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $283.6 million, up 3.0% from $275.4 million | $542.7 million, up 9.5% from $495.4 million |
| Operating income (loss) | $6.0 million, versus $4.1 million | $(4.2) million, versus $14.2 million |
| Net earnings (loss) | $2.9 million, versus $2.8 million | $(5.1) million, versus $8.1 million |
| Common EPS, basic and diluted | $0.24, versus $0.23 | $(0.42), versus $0.66 |
| Gross margin | 7.5%, versus 6.9% | 5.0%, versus 9.0% |
Financial position, cash flow and liquidity
- At October 1, 2011, cash was $10.1 million, inventory $733.1 million, total assets $1,053.1 million, and working capital $522.6 million. The current ratio was 2.53.
- Total debt, including current maturities, was $330.9 million; long-term debt less current portion was $318.8 million. The new five-year revolving facility had $237.4 million drawn at quarter-end, at a weighted average rate of 1.73%.
- Operating cash flow was a use of $85.2 million in the first half, compared with a use of $50.9 million a year earlier. Investing activities used $9.1 million; financing activities provided $99.6 million. Cash increased $5.3 million from the fiscal-year opening balance to $10.1 million.
- Capital expenditures were $9.2 million. The company said cash from operations, revolver availability and other financing sources should cover working capital, planned capital spending and debt obligations for at least 12 months; it reported compliance with financial covenants at October 1.
Material changes and management commentary
- Quarter sales growth reflected $24.5 million from higher selling prices and more favorable mix, partly offset by a $16.4 million volume decline. First-half sales growth reflected $23.9 million from price and mix and $23.4 million from volume.
- First-half profitability deteriorated largely because of LIFO cost effects: the LIFO reserve increased $19.3 million, versus a $4.8 million decrease in the prior-year half. Management attributed this to expected higher inflationary costs. The LIFO charge reduced first-half net earnings by $12.5 million after tax; it also reduced second-quarter earnings by $8.3 million after tax.
- Management reported unfavorable summer growing conditions, including high temperatures and uneven moisture, which hurt crop yields and plant recovery and led to unfavorable manufacturing variances. It also cited higher production, fuel and transportation costs among risks to results.
- Seneca closed a new $250 million/$350 million seasonal-availability revolver on July 20, 2011, maturing July 20, 2016. The balance was $187.1 million at October 21, compared with $237.4 million at quarter-end.
- The company acquired a $10 million lending commitment under Allens, Inc.’s credit facility while discussing a possible Allens acquisition. The parties are no longer pursuing the acquisition; Seneca remains a co-lender, with Allens’ obligations due March 30, 2012. Seneca reported no indication of impairment.
- No quantitative earnings guidance was provided. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Risks, contingencies and unusual items
- A private plaintiff filed a California Proposition 65 action on September 28, 2011, alleging lead-related warning violations involving certain fruit products. Seneca said it would defend the case, but could not assess the likelihood of an outcome or estimate a loss. The filing also describes ordinary-course product-liability and other legal matters with losses not estimable.
- The company’s $10 million Allens loan receivable and its March 2012 maturity warrant monitoring. The filing gives no clear estimate of recovery timing beyond the stated maturity.
- Seneca recognized a $169,000 gain on sales of unused fixed assets in the first half. Remaining restructuring accruals were $304,000 at October 1.
- The company’s $32.9 million of Green Giant finished-goods sales to GMOL in the first half were made for cash on a bill-and-hold basis; management stated it believed the accounting criteria were met.
Key facts for investors to verify
- Whether crop yields, recovery rates, and manufacturing costs improve, and how inflation and LIFO accounting affect margins.
- Seasonal inventory levels, operating cash use, and revolver borrowing and availability through the selling cycle.
- Collection and credit quality of the Allens receivable, including payment at the March 30, 2012 maturity.
- Developments in the Proposition 65 litigation and any change in the company’s ability to estimate a potential loss.
- GMOL bill-and-hold sales and the extent to which reported revenue, product mix, and volumes remain sustainable.