Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 29, 2012. Financial statement amounts are unaudited; dollar amounts below are in millions unless stated otherwise. Seneca produces and distributes processed fruits and vegetables, including products under its own and licensed brands, and packs products for General Mills Operations, LLC (GMOL).
Financial performance
| Metric | Three months ended Dec. 29, 2012 | Prior-year quarter | Nine months ended Dec. 29, 2012 | Prior-year period |
|---|---|---|---|---|
| Net sales | $452.7 | $446.9 | $1,001.4 | $987.4 |
| Operating income | $24.0 | $31.5 | $63.2 | $27.4 |
| Net earnings | $14.8 | $18.5 | $37.5 | $13.4 |
| Basic EPS | $1.32 | $1.53 | $3.21 | $1.10 |
- Sales increased 1.3% for the quarter and 1.4% year to date. Quarterly volume added $28.1 million, partly offset by $22.3 million from lower prices and less favorable mix. Year-to-date, higher prices and mix added $32.0 million, partly offset by an $18.0 million volume decline.
- Quarterly gross margin was 9.9%, down from 11.2%; operating margin was 5.2%, down from 7.1%. Lower selling prices were the primary gross-margin pressure, partly offset by a smaller LIFO charge.
- Year-to-date gross margin was 11.5%, up from 7.8%, and operating margin was 6.3%, up from 2.8%. The improvement primarily reflects a $1.2 million LIFO credit versus a $30.1 million charge in the prior-year period, along with higher net selling prices.
- Quarterly operating income and earnings declined despite higher sales, including a $2.5 million restructuring charge. Year-to-date results also benefited from lower selling and administrative costs and lower interest expense.
Cash flow, balance sheet and capital
- For the nine months, operating cash flow was negative $0.6 million, compared with negative $48.0 million in the prior-year period. Inventory consumed $95.2 million of cash; accounts payable, accrued expenses and other liabilities provided $36.4 million.
- Investing cash outflow was $3.8 million, including $14.1 million of capital expenditures and $10.0 million repayment of a loan receivable. Financing provided $7.5 million. Cash increased $3.1 million to $12.5 million.
- At December 29, working capital was $443.3 million and the current ratio was 3.33. Current assets were $633.5 million, including $527.6 million of inventory; current liabilities were $190.2 million.
- Total debt, including current maturities, was $269.9 million ($41.5 million current and $228.4 million long-term), versus $234.2 million at March 31, 2012. The revolving facility balance was $185.9 million at a weighted-average rate of 1.48%. Its seasonal availability was $350 million from August through March. The company reported compliance with financial covenants and believed available cash, operating cash flow and financing would meet needs for at least 12 months.
- Seneca repurchased $28.4 million of stock during the nine-month period, including a board-approved $25.9 million purchase of 864,334 Class A shares outside the repurchase program.
Outlook, changes and notable items
- No specific earnings or sales guidance was provided. Management described seasonality in sales and significant seasonal working-capital needs. It cited difficult pea-growing conditions—high temperatures and uneven moisture—as reducing yields and plant recovery and causing unfavorable manufacturing variances.
- On January 15, 2013, after quarter-end, Seneca acquired Independent Foods, LLC, a processor of canned pears, apples and cherries. The stated purchase price was approximately $5.3 million plus assumed liabilities; Seneca also paid $19.5 million of acquired liabilities. Further acquisition details were deferred to future filings.
- The company recorded a $2.5 million third-quarter product-rationalization restructuring charge for equipment, lease impairment and inventory costs. Year-to-date LIFO treatment shifted substantially versus the prior year; management attributed this to reduced expected inflationary cost increases.
- Seneca sold $151.2 million of Green Giant finished-goods inventory to GMOL on a cash, bill-and-hold basis during the nine months, similar to $151.0 million in the prior-year period. The company stated it met the revenue-recognition criteria.
- A California Proposition 65 lawsuit alleging failure to warn about lead in certain packaged fruit products remained in discovery. The company was defending the case and said it could not estimate the probability of outcome or loss. It also noted other ordinary-course claims for which outcomes and losses could not be estimated.
- Management identified risks including weather and crop yields, commodity and packaging costs, transportation, financing and leverage, interest rates, competition, customer concentration, consumer preferences, regulation and product liability. Disclosure controls were assessed as effective; no material changes to internal control over financial reporting or disclosed risk factors were reported.
Important facts for investors to verify
- Whether improved year-to-date earnings are sustainable without the unusually favorable year-over-year LIFO comparison.
- Inventory levels, seasonal cash requirements and revolver utilization, given negative operating cash flow and the large inventory balance.
- The effect of lower quarterly margins, pea-crop disruptions and the product-rationalization program on subsequent results.
- Independent Foods’ final purchase accounting, assumed liabilities, integration costs and contribution to results.
- Developments and potential financial exposure in the Proposition 65 litigation and other claims.