Seneca Foods Corporation — Form 10-Q Summary
Period clarification: The filing is for the quarter ended December 26, 2020 (fiscal 2021 third quarter), not 2019 Q3 as indicated in the request metadata. Comparatives are for the quarter ended December 28, 2019. Amounts below are in millions unless stated otherwise.
Business context and reporting period
Seneca Foods produces and sells packaged fruits and vegetables, including canned and frozen products, as well as snack chips. Its raw produce is harvested mainly from June through November. The filing was signed February 3, 2021 and presents unaudited quarterly and nine-month results.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $484.4, up 23.3% year over year | $1,162.9, up 13.1% |
| Operating income | $90.6 | $148.5 |
| Net earnings | $72.5, versus $25.4 | $111.3, versus $31.1 |
| Diluted EPS | $7.90, versus $2.73 | $12.09, versus $3.31 |
| Gross margin | 16.0%, versus 13.3% | 15.1%, versus 9.3% |
| Operating margin | 18.7%, versus 8.4% | 12.8%, versus 4.2% |
Sales gains were driven primarily by canned vegetables. Management attributed growth to higher volume and higher selling prices/product mix. Canned vegetable sales rose $97.2 million in the quarter and $160.4 million year to date; several other product categories declined.
Other operating income included a $35.66 million gain on the December 18 sale of the prepared foods business. Therefore, reported operating income and earnings include a material disposal gain and should not be viewed as solely reflecting recurring operations. Interest expense was $1.5 million for the quarter and $4.6 million year to date; the nine-month effective tax rate was 20.9%, compared with 23.7%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $103.1 million, compared with $90.0 million in the prior-year period. Investing activities provided $32.6 million, including $72.8 million of asset-sale proceeds, while capital expenditures were $40.2 million.
- Financing activities used $132.3 million, including $587.2 million of debt repayments and $468.2 million of borrowings, principally revolving-facility activity. Cash increased $3.4 million to $14.1 million.
- At December 26, 2020, long-term debt including its current portion was $98.6 million; the revolving credit facility had no outstanding balance. The facility’s stated maturity date was July 5, 2021. Operating and finance lease obligations were additional liabilities.
- Working capital was $347.7 million and the current ratio was 2.85, compared with $427.0 million and 3.47 at December 28, 2019. Inventory was $410.9 million, down $82.1 million year over year.
- The company contributed $73.0 million to its pension plan in December 2020. Management said cash from operations, revolver availability and other financing sources were expected to 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 risks
- Management said COVID-19-related pantry loading and increased at-home consumption supported strong retail demand and higher sales through the first three quarters of fiscal 2021. Foodservice and chain-channel declines were more than offset by retail growth. Supply-chain disruption had been minimal to date, although safety measures added costs.
- The company sold its prepared foods business on December 18, 2020 and recognized the gain noted above. Certain non-operating Midwest units were classified as held for sale, with $11.4 million of assets reported.
- Management provided no specific numerical earnings or sales guidance. It cautioned that pandemic duration, demand patterns, facility operations, seasonal labor and supply availability could affect results.
- Other stated risks include crop yields and weather, commodity and packaging costs, transportation costs, customer concentration or order reductions, competition, consumer preferences, leverage, financing availability, interest and foreign-exchange rates, and product liability or regulatory matters. Management reported no material change to the risk factors in its latest annual report.
- The filing reports no material changes in internal control over financial reporting and states that disclosure controls were effective as of the period end.
Important facts for investors to verify
- How much of the reported earnings improvement is attributable to ongoing operations versus the $35.66 million prepared-foods sale gain and other asset-sale items.
- Whether elevated pandemic-era retail demand persists, and how any reversal in at-home consumption affects volumes, mix and inventory.
- The refinancing or replacement status of the revolving credit facility ahead of its July 5, 2021 stated maturity.
- The effects of the $73.0 million pension contribution, future pension funding needs and pension-related expenses.
- Progress and proceeds from the held-for-sale Midwest assets, and any operational or cash-flow effects of the prepared foods divestiture.