Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended September 26, 2015 (fiscal 2016). Seneca processes and sells packaged fruits and vegetables, snack products, and products packed for General Mills Operations, LLC (GMOL). Results are seasonal; harvesting and production are concentrated mainly from June through November. Figures below are in millions unless noted.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $313.2 | $312.2 | $539.5 | $552.2 |
| Operating income | $11.4 | $0.7 | $17.4 | $1.7 |
| Net earnings (loss) | $6.5 | $(0.6) | $9.5 | $(0.7) |
| Diluted EPS | $0.65 | $(0.05) | $0.94 | $(0.06) |
| Gross margin | 9.2% | 5.4% | 9.1% | 6.1% |
| Operating margin | 3.6% | 0.2% | 3.2% | 0.3% |
- Q2 sales rose 0.3%; higher pricing and sales mix of $4.0 million more than offset a $2.9 million volume decline. Six-month sales fell 2.3%, as a $19.5 million volume decrease outweighed $6.8 million of favorable pricing and mix.
- Six-month sales declines were concentrated in GMOL ($7.1 million), fruit ($6.0 million), and frozen products ($3.2 million); canned vegetables increased $4.5 million.
- Management attributed improved gross margin principally to higher net selling prices and a more favorable LIFO impact. The six-month LIFO credit was $1.6 million, versus a $5.6 million charge a year earlier.
- Interest expense was $3.0 million for the first six months, compared with $2.5 million. The effective tax rate was 33.7% versus (32.8%) in the prior-year period; the comparison was affected by discrete prior-year tax items.
Cash flow, liquidity, and debt
- Operating cash flow was negative $56.9 million for the six months, improving from negative $73.9 million. Seasonal inventory investment used $289.3 million of cash; accounts payable, accrued expenses, and other liabilities provided $211.7 million.
- Investing cash outflow was $3.0 million, compared with $35.3 million, including the prior-year $16.3 million Truitt Bros. investment. Capital expenditures were $3.1 million versus $19.3 million.
- Financing provided $58.6 million. Cash declined $1.2 million to $9.4 million. At September 26, current assets were $874.3 million and current liabilities $627.2 million; working capital was $247.1 million and the current ratio 1.39.
- Total debt carrying value, including current maturities, was $344.4 million. The $304.5 million revolving-credit balance was classified as current because the revolver matures July 20, 2016; its rate was 1.99%. Long-term debt excluding current maturities was $37.3 million.
- The revolver borrowing limit was $400 million from August through March. Management stated that operating cash flow, revolver availability, and other financing sources should cover working capital, planned capital expenditures, and debt obligations for at least 12 months. The company reported compliance with its financial covenants.
Material changes, outlook, and notable items
- Inventory was $761.7 million, up $30.2 million year over year, mainly reflecting higher finished-goods quantities and pack timing. The filing notes that seasonal inventory needs can cause substantial fluctuations in revolver borrowings.
- On October 30, 2015, Seneca agreed to transfer the GMOL relationship and related agreements to B&G Foods in connection with B&G’s purchase of Green Giant and Le Sueur. GMOL agreed to pay Seneca $24.275 million at the transaction closing; the assignment was expected to take effect November 2. Seneca and B&G agreed to negotiate replacement or supplemental agreements.
- Also on October 30, Seneca completed its acquisition of Gray & Company for approximately $24.5 million plus assumed liabilities, and paid $12.0 million of acquired liabilities. The business processes maraschino cherries and glace or candied fruit.
- The company reported a $0.2 million reversal of a Proposition 65 litigation provision and a $0.06 million reduction in an environmental accrual in the first quarter. The Proposition 65 appeal and petition for review had been rejected, effectively ending the action subject to procedural matters. Other ordinary-course legal claims remain difficult to predict.
- No specific earnings or sales guidance was provided. Management cited risks including crop and weather conditions, commodity and packaging costs, transportation, competition, customer demand and concentration, financing and leverage, interest rates, and regulatory or product-liability matters. Management said results for the interim periods are not necessarily indicative of full-year results.
Important facts for investors to verify
- Closing, payment timing, and continuing commercial terms under the GMOL-to-B&G relationship transfer, including whether replacement agreements were completed.
- Gray & Company’s final purchase accounting, assumed liabilities, integration, and contribution to results.
- Seasonal inventory conversion, operating cash generation, and the ability to refinance or repay the revolver before its July 2016 maturity.
- Whether margin improvement and the favorable LIFO effect persist as costs, prices, product mix, and sales volumes change.
- Developments in remaining legal, environmental, and product-liability matters and any changes in covenant compliance or liquidity.