Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 29, 2012 (fiscal 2013 second quarter); comparative periods ended October 1, 2011. Financial amounts below are in U.S. dollars; statement amounts are converted from thousands to millions where shown.
Business context and results
Seneca produces and sells processed fruits and vegetables, snack chips, and related products under its own, licensed, and private-label brands. It also packs products for General Mills Operations, LLC (GMOL) under a long-term alliance. Operations are seasonal, with most crops harvested June through November and higher revenue generally in the second and third fiscal quarters.
| Metric | Three months ended Sep. 29, 2012 | Three months ended Oct. 1, 2011 | Six months ended Sep. 29, 2012 | Six months ended Oct. 1, 2011 |
|---|---|---|---|---|
| Net sales | $317.6m | $282.7m | $548.6m | $540.5m |
| Operating income (loss) | $24.9m | $6.0m | $39.2m | ($4.2m) |
| Net earnings (loss) | $14.5m | $2.9m | $22.7m | ($5.1m) |
| Diluted EPS | $1.22 | $0.24 | $1.89 | ($0.42) |
| Gross margin | 12.9% | 7.6% | 12.8% | 5.0% |
| Operating margin | 7.8% | 2.1% | 7.2% | (0.9%) |
Financial position and cash flow
- At September 29, cash was $18.8m; inventory was $726.9m; total assets were $1.047bn; and stockholders’ equity was $349.6m.
- Total debt, including current maturities, was $319.5m ($42.9m current and $276.5m long-term). The revolving facility balance was $233.0m, at a reported 1.47% rate. Facility capacity was $350m from August through March; maturity is July 20, 2016.
- Working capital was $475.8m and the current ratio was 2.25. The company reported compliance with its financial covenants.
- Six-month operating cash flow was a use of $46.1m, versus a use of $85.2m a year earlier. Investing cash flow used $2.0m, including $12.3m of capital expenditures and $10.0m of loan repayment proceeds. Financing cash flow provided $57.5m. Cash increased $9.4m to $18.8m.
- Six-month interest expense, net, was $3.3m. The effective tax rate was 36.7%, versus 35.1% in the prior-year period.
Material changes and drivers
- Second-quarter sales rose 12.3% year over year, reflecting $23.7m from higher selling prices and favorable mix and $11.2m from volume. Stronger promotional activity also contributed. Six-month sales increased 1.5%, as price and mix gains of $54.3m were partly offset by a $46.2m volume decline.
- Quarterly gross margin improved primarily from higher net selling prices and a $3.7m LIFO credit, compared with a $12.8m LIFO charge in the prior-year quarter. The six-month LIFO credit was $2.4m, versus a $19.3m charge in the prior-year period. Thus, the earnings comparison benefited materially from the LIFO swing.
- Management cited unfavorable pea-growing conditions—high temperatures and uneven moisture—which reduced yields and plant recovery rates and caused unfavorable manufacturing variances.
- Inventory was $6.2m lower than at October 1, 2011, but finished goods were up $18.5m, reflecting an early pack; raw materials and supplies were down $20.4m. Seasonal inventory build contributed to negative operating cash flow.
- The company repurchased $27.9m of stock during the six months, including an August 30 board-approved purchase of 864,334 Class A shares for $25.9m outside the standing repurchase program.
Outlook, risks, and contingencies
- No specific earnings or revenue guidance was provided. Management said operating cash flows, revolver availability, and other financing sources were expected to fund working capital, planned capital expenditures, and debt obligations for at least the next 12 months.
- Management identified risks including crop and weather conditions, availability and cost of produce, steel and packaging, transportation costs, financing and leverage, interest and foreign-exchange rates, promotions, competition, changing consumer preferences, and loss of significant customers. The filing says there were no material changes to risk factors disclosed in the prior Form 10-K.
- A California Proposition 65 case alleging inadequate warnings for lead in certain fruit products remained in discovery. The company was defending the claim and said it could not predict the outcome or estimate any loss. Other ordinary-course legal and product-liability matters also had no estimable outcome or loss disclosed.
- A gain on sale of unused Cambria, Wisconsin land contributed to other operating income; a portion of the tax gain was expected to be deferred through a like-kind exchange within six months of the sale.
- The financial statements are unaudited interim results and management cautioned that they are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether improved margins and profitability persist after the favorable LIFO comparison and seasonal sales effects.
- Crop yields, especially peas, and the effects of harvest conditions on production costs and inventory.
- Seasonal cash requirements, inventory conversion, revolver utilization, and the company’s capacity to service debt.
- The economics and share-count impact of the substantial August repurchase, including its funding and effects on liquidity.
- Developments in the Proposition 65 litigation and any other contingencies, including whether potential losses become estimable.