Seneca Foods Corporation — Q2 FY2015 Form 10-Q
Business and period: Seneca produces and sells packaged fruits and vegetables, snacks, and products under owned, licensed, private-label, and customer brands. This unaudited report covers the three and six months ended September 27, 2014; the comparable periods ended September 28, 2013. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $312.2 | $336.6 | $552.2 | $568.8 |
| Operating income | $0.7 | $6.8 | $1.7 | $10.6 |
| Net earnings (loss) | $(0.6) | $6.6 | $(0.7) | $8.0 |
| Basic and diluted EPS | $(0.05) | $0.59 | $(0.06) | $0.71 |
| Gross margin | 5.4% | 6.6% | 6.1% | 7.4% |
| Operating margin | 0.2% | 2.0% | 0.3% | 1.8% |
Cash flow, six months: Operating activities used $76.7 million, versus $48.4 million used a year earlier. Investing activities used $32.7 million (including $16.3 million for the Truitt investment and $16.7 million of capital expenditures). Financing activities provided $109.6 million. Cash increased $0.2 million to $14.0 million.
Liquidity and debt at September 27, 2014: Current assets were $857.9 million and current liabilities $308.2 million; working capital was $549.8 million and the current ratio was 2.78. Long-term debt, including current maturities, was $344.6 million; this excludes $4.9 million in notes payable. Revolver borrowings were $302.2 million at a 1.45% period-end rate. The company reported compliance with its financial covenants.
Changes and operating drivers
- Quarterly sales fell 7.3% year over year, mainly from lower volume ($36.0 million), partly offset by higher selling prices and mix ($11.6 million). For the half year, sales declined 2.9%: lower volume of $38.2 million was partly offset by $21.6 million from price and mix.
- Quarterly Green Giant/GMOL sales declined $15.6 million, primarily because some prior-year Alliance sales occurred earlier than comparable current-year sales. Canned fruit sales also declined. For the half year, canned vegetable sales increased but did not offset declines in GMOL and fruit products.
- Management cited unfavorable high temperatures and uneven moisture during the pea and green bean harvest, which reduced yields and plant recovery rates and caused unfavorable manufacturing variances.
- Margins weakened despite lower LIFO charges: the quarter’s LIFO charge was $5.9 million versus $8.6 million, and the six-month charge was $5.6 million versus $14.4 million. Management attributed lower gross margins primarily to lower net selling prices after promotions. Higher administrative expense as a percentage of sales also weighed on results.
- Inventory was $731.5 million, down $27.1 million from the prior-year quarter but up from $451.3 million at fiscal year-end, reflecting seasonal production and working-capital requirements. Operating cash use largely reflected the seasonal inventory build.
Outlook, risks and notable items
- Management said operating cash flows, Revolver availability, and other financing sources should provide adequate funding for working capital, planned capital expenditures, and debt obligations for at least the next 12 months. The Revolver matures July 20, 2016; borrowing capacity varies seasonally.
- In April 2014, Seneca acquired a 50% interest in Truitt Bros. for $16.3 million, with a conditional right to acquire the remaining interest.
- After quarter-end, the company announced a Midwest plant closure and stated it would have no material impact on financial position or results of operations.
- The six-month effective tax rate was affected by a $384,000 charge to re-establish a valuation allowance for a New York State investment tax credit following a change in law. The six-month period reported a pretax loss and a net tax expense.
- A $250,000 environmental remediation charge was recorded in the first half. The company is defending an appeal in a California Proposition 65 case; the trial court had ruled in defendants’ favor, and the company said it could not assess the appeal’s likelihood or outcome. It also faces other ordinary-course legal matters for which outcomes or losses could not be estimated.
- Key risks include crop and weather conditions, commodity and packaging costs, transportation costs, leverage and debt service, financing availability, competition, customer concentration or reduced orders, and product liability. Management reported no material changes to previously disclosed risk factors.
- The company is evaluating the effect and transition method for the revenue-recognition standard effective for it beginning fiscal 2018. No earnings guidance was provided in the filing.
Important facts for investors to verify
- Whether the current harvest’s weather-related yield and manufacturing impacts persist, and how they affect production costs and margins.
- The timing and magnitude of GMOL sales, including the seasonal bill-and-hold arrangements; the filing reports $36.8 million of such sales in the first half, versus $52.2 million a year earlier.
- Seasonal inventory needs, operating cash use, Revolver utilization, and continued covenant compliance.
- Progress and financial contribution from the Truitt investment, and any conditions affecting the option to acquire the remaining interest.
- Developments in the Proposition 65 appeal and other legal or environmental matters.