Seneca Foods Corporation — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2011; comparisons are to the periods ended January 1, 2011. Amounts are in U.S. dollars unless noted. Seneca produces and distributes processed fruits and vegetables, including private-label and owned brands, and packs Green Giant products for General Mills Operations, LLC (GMOL).
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $447.9 million; up 0.4% | $990.6 million; up 5.2% |
| Operating income | $31.5 million, versus $19.2 million | $27.4 million, versus $33.4 million |
| Net earnings | $18.5 million, versus $11.5 million | $13.4 million, versus $19.5 million |
| Basic / diluted EPS | $1.53 / $1.52, versus $0.94 / $0.94 | $1.10 / $1.10, versus $1.61 / $1.60 |
| Gross margin | 11.2%, versus 7.7% | 7.8%, versus 8.4% |
| Operating margin | 7.1%, versus 4.4% | 2.8%, versus 3.7% |
Quarterly sales gains from higher prices and favorable mix ($60.4 million) were largely offset by lower volume ($58.8 million). Canned vegetable sales increased, while Green Giant Alliance and frozen sales declined. Year-to-date sales gains likewise reflected pricing and mix, partly offset by lower volume. The filing attributes the year-to-date earnings decline in part to increased LIFO charges and a higher effective tax rate.
Cash flow, liquidity and debt
- Operating cash use was $48.0 million for the nine months, compared with $33.5 million used a year earlier; the filing cites working-capital movements and lower earnings.
- Investing cash use was $12.8 million, including $13.7 million of capital expenditures. Prior-year investing cash use included the $20.3 million Lebanon acquisition.
- Financing provided $67.3 million. Cash increased to $11.2 million from $4.8 million at fiscal year-end.
- At December 31, cash was $11.2 million, current assets were $650.0 million, current liabilities were $153.9 million, and working capital was $496.0 million. The current ratio was 4.22.
- Total long-term debt, including current maturities, was $298.2 million; the Revolver balance was $206.3 million. A new five-year facility provides capacity of $350 million from August through March and matures July 20, 2016. The company reported covenant compliance.
- Management said cash flows, Revolver availability and other financing sources should adequately fund working capital, planned capital spending and debt obligations for at least 12 months.
Material changes, outlook and risks
- Crop yields and plant recovery were hurt by high temperatures and uneven moisture, causing unfavorable manufacturing variances. Management identified weather, crop yields, commodity and packaging costs, transportation, competition, customer demand and leverage as risks. The business is seasonal, with harvest largely June through November and typically higher sales in the second and third fiscal quarters.
- Inflation drove a $30.1 million year-to-date LIFO charge, versus a $6.9 million credit in the prior comparable period. Management said the charge reflected projected fiscal 2012 inflationary cost increases. The filing reports a $119.9 million excess of FIFO over LIFO inventory costs at quarter-end.
- The nine-month effective tax rate was 37.6%, versus 27.1%. The prior-year comparison benefited from a $1.5 million tax-expense reduction and $5.2 million reduction in unrecognized tax benefits following an IRS settlement.
- The company made a $15.4 million pension contribution in the quarter. It also recorded a $665,000 book gain from selling an unused Minnesota facility; a portion of the tax gain was expected to be deferred through a like-kind exchange.
- Seneca became a $10 million co-lender to Allens while exploring a possible acquisition; the parties are no longer pursuing that acquisition. Allens’ obligations were due March 30, 2012. Seneca reported no indication of impairment, but the filing does not provide a subsequent repayment outcome.
- A private Proposition 65 lawsuit concerning alleged lead in certain packaged fruit products was filed against Seneca and others. The company said the case was at an early stage and it could not estimate the likelihood or amount of loss. The filing’s separate “Legal Proceedings” item says “None,” despite this detailed disclosure.
- No specific financial guidance was provided. The filing cautions that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Subsequent status and repayment of the Allens loan due March 30, 2012, and any effect on liquidity.
- Revolver borrowings, availability, covenants and debt-service capacity, particularly as seasonal working-capital needs fluctuate.
- Crop recovery, production costs and the effect of further inflation or LIFO charges on margins and earnings.
- Resolution or potential exposure from the Proposition 65 case and other product-liability matters.
- Revenue recognition and collection for Green Giant bill-and-hold sales to GMOL; nine-month sales under this arrangement were $151.0 million, versus $179.2 million.