Seneca Foods Corporation — Form 10-Q
Period: The supplied filing is for the quarter ended December 31, 2022, Seneca’s fiscal third quarter of fiscal 2023, and the nine months then ended. This does not match the request metadata of “2021 Q3.” Comparatives are the quarter and nine months ended January 1, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Business context
Seneca produces and sells canned and frozen vegetables, fruit products, snack products and other foods through retail, foodservice, industrial, export and government channels. Its business is seasonal: inventory and borrowing needs rise during the harvest and production cycle, while sales typically increase during the holiday period.
Financial results and key metrics
| Metric | Quarter ended Dec. 31, 2022 | Prior-year quarter | Nine months ended Dec. 31, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $473.3m | $445.6m | $1,178.3m | $1,052.9m |
| Operating income | $29.8m | $23.7m | $58.2m | $63.2m |
| Net earnings | $21.1m | $18.7m | $42.3m | $44.5m |
| Diluted EPS | $2.74 | $2.14 | $5.31 | $4.98 |
| Gross margin | 11.4% | 10.1% | 10.0% | 11.5% |
- Quarterly sales rose 6.2%; management attributed $73.7m of favorable impact to higher prices, partly offset by a $46.0m unfavorable volume impact. Operating income increased about 26%, and net earnings increased about 13% year over year.
- Nine-month sales rose 11.9%, driven by a $160.7m favorable pricing impact, partly offset by a $35.3m unfavorable volume impact. Operating income declined about 8% and net earnings about 5% year over year.
- Gross profit was approximately $53.8m for the quarter and $118.4m for the nine months. The nine-month margin decline primarily reflected higher LIFO expense: $79.3m versus $30.7m a year earlier. The quarterly LIFO charge was $30.9m versus $19.0m.
- Interest expense rose to $4.3m for the quarter from $1.5m and to $8.0m for the nine months from $4.2m, reflecting higher rates and average borrowings. The nine-month effective tax rate was 23.5%, versus 23.6%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was a use of $189.5m, versus a use of $11.1m in the prior-year period. The principal driver was seasonal working capital, including a $370.1m cash-flow use from inventory.
- Investing cash flow used $51.5m, including $56.5m of capital expenditures, compared with $31.7m used in the prior-year period.
- Financing cash flow provided $242.6m. The company borrowed $783.3m and repaid $493.0m of long-term debt; it also repurchased $41.2m of stock. Cash ended the period at $12.5m.
- At December 31, 2022, working capital was $646.9m and the current ratio was 3.62. Current assets included $780.5m of LIFO-valued inventory. Accounts payable was $156.1m.
- Long-term debt was $403.9m, including $313.8m outstanding on the revolving facility, versus total long-term debt of $127.8m at January 1, 2022. The revolver provides for seasonal capacity up to $400m from August through March and is secured by substantially all accounts receivable and inventory. Its reported weighted-average interest rate at December 31 was 5.85%.
- Operating and financing lease obligations, including current portions, were also recorded; the filing reports $26.1m of operating and $25.8m of financing lease obligations on a present-value basis.
Material changes, outlook and risks
- Management reported ongoing material cost inflation in raw materials and other inputs, citing factors including the pandemic, the war in Ukraine, supply-chain disruptions and labor shortages. Seneca said it seeks to mitigate cost increases through supply arrangements, cost savings and price increases, but pricing may lag costs or be constrained by competition.
- Volume declined in major product categories despite higher selling prices. Management noted that higher prices were the predominant reason for sales growth.
- During the quarter, Seneca ceased green-bean production at a New York facility, recording $1.8m of restructuring charges, including severance and equipment-related costs. Idle production equipment was also written down; the filing states that it was to be sold within 12 months.
- Nine-month other operating income of $2.4m included gains, primarily from the sale of the western trucking fleet and other fixed assets, partly offset by the equipment write-down. The prior-year nine-month period included a $7.8m impairment loss on an equity investment.
- On January 20, 2023, after quarter-end, Seneca amended its term-loan arrangements, adding a $175m variable-rate, SOFR-based loan maturing in 2028 and secured by a portion of property, plant and equipment. The agreement includes minimum EBITDA and minimum tangible net worth covenants. The company reported compliance with its credit-facility covenants at December 31, 2022.
- The filing provides no specific earnings, sales or cash-flow guidance. Management emphasized seasonality and identified risks including input-cost and labor availability, crop and weather conditions, ability to pass through price increases, customer concentration, demand, financing and debt service, interest rates, product safety and regulatory matters.
- Disclosure controls and procedures were judged effective as of December 31, 2022. The filing reports no material change in internal control over financial reporting during the period and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing covers fiscal Q3 2023 ended December 31, 2022, not 2021 Q3.
- Track whether pricing continues to offset lower volumes and inflation, and how input costs affect margins and the year-end LIFO valuation.
- Assess seasonal liquidity and borrowing needs, including revolver availability, variable interest costs, and the added $175m term loan and its covenants.
- Monitor inventory levels and operating cash flow, given the substantial inventory-related cash use and low period-end cash balance.
- Review the financial impact and execution of the green-bean facility closure, asset sales, capital spending and share repurchases.