Seneca Foods Corporation — Form 10-Q Summary
Period: Fiscal second quarter and six months ended September 29, 2018 (fiscal 2019); filed November 9, 2018. The request metadata says “2017 Q2,” but the filing covers 2018 Q2. Financial amounts below are in U.S. dollars; unless noted, figures are in millions.
Business context and reporting period
Seneca manufactures and sells canned, frozen and other packaged fruits and vegetables, snack chips, and contract-packed products. Its harvest and production are seasonal, with revenues typically higher in the second and third fiscal quarters. The company classified its Modesto, California peach operations as discontinued operations after deciding to exit peach production.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Continuing net sales | $320.7 | $327.7 | $564.8 | $568.8 |
| Operating income (loss), continuing | $(4.8) | $3.7 | $(4.9) | $3.0 |
| Continuing net earnings (loss) | $(5.6) | $1.4 | $(7.8) | $0.8 |
| Net earnings (loss), including discontinued operations | $9.1 | $(1.1) | $0.4 | $(1.9) |
| Basic earnings (loss) per share, total | $0.93 | $(0.11) | $0.03 | $(0.20) |
- Margins: Continuing gross margin fell to 3.4% from 6.6% in Q2 and to 4.9% from 6.2% for the six-month period. Continuing operating margin was (1.5)% and (0.9)%, respectively, versus 1.1% and 0.5% a year earlier.
- Cash flow: Operating activities provided $66.7 million in the first half, versus $17.8 million used in the prior-year period. Investing activities used $0.3 million; financing activities used $68.8 million. Cash declined $2.3 million to $12.8 million. Capital expenditures were $20.3 million.
- Liquidity: Working capital was $554.8 million and the current ratio was 2.88 at September 29, 2018. Management 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.
- Debt: Long-term debt including its current portion totaled approximately $360.2 million; capital lease obligations totaled approximately $37.4 million. Revolver borrowings were $242.9 million, with $243.5 million unused availability. Its reported rate was 3.73%; the facility matures July 5, 2021. The company reported compliance with financial covenants.
- Balance sheet: Total assets were $1.122 billion and stockholders’ equity was $409.8 million. Inventory was $683.9 million.
Material changes and unusual items
- First-half continuing sales decreased 0.7% year over year; Q2 sales declined 2.1%. Lower B&G sales were the main drag: down $40.9 million for the half and $37.1 million for Q2. Canned vegetable and frozen sales partly offset the decline.
- Lower volumes and higher costs weakened continuing gross margin. Management cited higher steel costs and lower pea yields; the Q2 continuing-operations LIFO charge was $14.7 million, versus $10.8 million. First-half charges were $14.2 million versus $18.5 million.
- Q2 discontinued-operations earnings of $14.8 million included a $24.2 million LIFO-related gain from disposal of remaining Modesto inventory, partly offset by operating losses, restructuring costs and tax expense. The first-half discontinued-operations result was $8.2 million of earnings.
- On October 9, 2018, after quarter-end, Seneca sold the Modesto facility’s land and buildings for net proceeds of $63.3 million and expected a pretax gain of approximately $53.9 million. Equipment was expected to be auctioned later. Modesto represented approximately 15% of company revenue, and its exit is a significant strategic change.
- Continuing restructuring charges were $0.9 million for the first half. Other operating income included a $4.1 million gain on sale of a closed Midwest plant.
- Seneca adopted ASC 606 using full retrospective application. The filing says the principal effect was accounting for certain Green Giant bill-and-hold sales to B&G, with labeling and storage services recognized separately. Prior-period figures presented were restated.
- Interest expense rose as a percentage of sales, reflecting higher borrowings and rates. On November 5, 2018, the Farm Credit term loan was amended to reduce its variable rate by 0.10%.
Outlook, risks and controls
No specific earnings or sales guidance is provided. Management’s liquidity statement is qualified by seasonal working-capital needs. Risks highlighted include commodity and packaging costs, crop yields and weather, transportation costs, interest rates and leverage, competition, consumer preferences, trade-promotion effectiveness, and loss or reduced orders from significant customers. Management reported that disclosure controls were effective at period-end and that it completed remediation of a previously reported material weakness related to bill-and-hold revenue recognition.
Important facts for investors to verify
- Confirm the period: the filing is for fiscal Q2 2019, ended September 29, 2018, notwithstanding the “2017 Q2” request metadata.
- Assess continuing-operations profitability separately from reported net income, which benefited from discontinued-operation gains.
- Review the final Modesto sale proceeds, gain, equipment auction outcome and continuing effects of exiting peach production.
- Track B&G sales, inventory and LIFO costs, including exposure to steel prices and crop yields.
- Monitor seasonal revolver use, interest expense, debt reduction and covenant compliance.
- Review the effects of ASC 606 restatement and the company’s completed bill-and-hold control remediation.