Seneca Foods Corporation — Form 10-Q
Reporting period: Quarter ended December 29, 2018 (third quarter of fiscal 2019; nine-month year-to-date period). The request metadata says “2017 Q3,” but the filing covers fiscal 2019 Q3. Comparative figures are for the period ended December 30, 2017; prior-period results were retrospectively adjusted for ASC 606 revenue recognition.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Continuing net sales | $372.2 million, up 4.9% | $937.0 million, up 1.4% |
| Operating income (loss), continuing | $(23.7) million | $(28.5) million |
| Continuing net earnings (loss) | $(20.0) million | $(27.8) million |
| Net earnings, including discontinued operations | $14.0 million | $14.4 million |
| Basic earnings (loss) per share, continuing operations | $(2.07) | $(2.86) |
Continuing gross margin was negative 0.4% for the quarter versus 8.1% a year earlier, and 2.8% for nine months versus 6.9%. Management attributed the deterioration primarily to higher LIFO charges, reflecting higher steel costs and lower pea and corn yields. The quarter’s continuing LIFO charge was $25.8 million; the nine-month charge was $39.9 million. Net interest expense was $3.9 million for the quarter and $11.6 million year to date, higher than the comparable periods.
Cash flow and liquidity: Nine-month operating cash flow was $46.4 million, compared with cash used of $26.7 million a year earlier. Investing activities provided $54.5 million, including $85.0 million of asset-sale proceeds, while financing activities used $103.2 million, principally reflecting debt repayments. Cash ended at $12.8 million. Working capital was $241.2 million versus $631.8 million a year earlier, and the current ratio was 1.52 versus 4.79; the substantial decline reflects, in part, debt reclassified as current following covenant and cross-default issues.
Debt: The balance sheet classified $320.6 million of long-term debt and capital lease obligations as current; reported long-term debt excluding the current portion was $10.7 million, with $29.7 million of noncurrent capital leases. Revolver borrowings were $214.2 million, at a 4.02% period-end weighted-average rate, and the facility matures July 5, 2021. The $100 million Farm Credit term loan was also classified as current. Total debt and capital lease obligations should not be conflated with the current-debt reclassification.
Material changes and unusual items
- Sales growth reflected higher selling prices and mix, partly offset by lower volume. Quarterly price/mix added $45.4 million and volume reduced sales by $28.1 million. Canned vegetable sales increased, while B&G and prepared-food sales declined.
- The company sold its Modesto facility in October 2018 for net proceeds of $63.3 million and exited peach production. Modesto represented approximately 15% of company revenue and was presented as discontinued operations. The nine-month discontinued-operations result included a $42.2 million after-tax gain-driven profit; the reported pretax asset-sale gain included LIFO-layer liquidation effects.
- Net earnings therefore mask losses in continuing operations. The quarter’s discontinued-operations earnings were $34.1 million, versus a $1.2 million loss in the prior-year quarter.
- Other items included $2.3 million of continuing plant restructuring charges year to date and $3.9 million of gains on sales of unused fixed assets. A separate East operating-unit asset group was classified as held for sale. The Marion Can plant sale for approximately $3.5 million closed January 23, 2019.
- ASC 606 adoption changed bill-and-hold accounting for Green Giant sales to B&G; labeling and storage services are recognized separately as performed. The company reported $65.7 million of such inventory sales to B&G during the nine months, versus $112.8 million in the comparable period.
Outlook, risks and contingencies
Management said cash flows, revolver availability and other financing sources were expected to fund working capital, planned capital expenditures and debt obligations for at least 12 months. However, the company was in violation of a Farm Credit interest-ratio covenant at quarter end and had obtained a waiver. Management considered failure to meet a more restrictive March 31, 2019 covenant probable absent another waiver or amendment. The Farm Credit default triggered the Revolver’s cross-default provision; a temporary waiver was obtained, but management considered a March 31 Revolver default probable absent further relief. These matters create material liquidity and refinancing uncertainty.
No quantified sales or earnings guidance was provided. Risks cited include commodity, packaging and transportation costs; weather and crop yields; interest rates and financing access; leverage and debt service; customer concentration or order reductions; competition; changing consumer preferences; and product liability and regulatory matters. The company noted seasonality, with sales typically higher in the second and third fiscal quarters. It expected the new lease standard to materially increase balance-sheet assets and liabilities, but not materially affect operating results or liquidity. Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether Farm Credit covenant terms were amended or waived, and whether the Revolver cross-default was resolved before March 31, 2019.
- Available borrowing capacity and liquidity under the seasonal revolver, including the effect of current classification and working-capital needs.
- How much reported earnings and cash generation depended on Modesto and other asset-sale proceeds, LIFO effects, and discontinued operations rather than recurring continuing operations.
- Whether higher production and packaging costs, poor crop yields, and lower sales volumes persist or can be offset by pricing and mix.
- The filing-period discrepancy in the request: this is the quarter ended December 29, 2018, not 2017 Q3.