Seneca Foods Corporation — Form 10-Q Summary
Period note: The request identifies “2018 Q3,” but the filing is for the quarter ended December 28, 2019 (fiscal 2020 third quarter), with year-to-date results for the nine months ended that date. Comparisons are to the periods ended December 29, 2018. Amounts below are in millions unless stated otherwise.
Business context and reporting period
Seneca produces and sells canned, frozen and bottled fruits and vegetables, snack chips, and prepared foods, including contract-packed products for B&G Foods. Sales are seasonal, with higher revenue typically in the second and third fiscal quarters. The filing reports continuing operations separately from the exited Modesto fruit business, which was sold in October 2018.
Financial performance
| Metric | Quarter ended Dec. 28, 2019 | Nine months ended Dec. 28, 2019 |
|---|---|---|
| Net sales, continuing operations | $393.0; up 5.6% | $1,027.9; up 9.7% |
| Operating income | $33.1; versus loss of $23.7 | $43.4; versus loss of $28.5 |
| Operating margin | 8.4%; versus (6.4)% | 4.2%; versus (3.0)% |
| Continuing-operations earnings | $24.4; versus loss of $20.0 | $30.2; versus loss of $27.8 |
| Net earnings, including discontinued operations | $25.4; versus $14.0 | $31.1; versus $14.4 |
| Continuing diluted EPS | $2.63; versus loss of $2.07 | $3.20; versus loss of $2.86 |
| Net diluted EPS | $2.73; versus $1.43 | $3.31; versus $1.45 |
Quarterly sales growth reflected higher prices and mix (+$23.9 million), partly offset by lower volume (−$3.2 million). Year-to-date growth reflected higher prices and mix (+$58.0 million) and higher volume (+$32.9 million). B&G sales rose $21.0 million for the quarter and $50.9 million year to date; frozen sales declined in both periods.
Gross margin was 13.3% for the quarter and 9.3% year to date, compared with (0.6)% and 2.7%. Management attributed much of the improvement to the LIFO effect: continuing-operations LIFO was a $11.3 million benefit for the quarter and a $7.5 million benefit year to date, versus charges of $25.8 million and $39.9 million in the comparable prior-year periods. Other operating income included asset-sale gains; year-to-date gains included $3.7 million from a partial Midwest plant sale, $1.7 million from a partial Northwest plant sale, and $3.1 million from unused fixed assets.
Cash flow, liquidity and debt
- Operating cash flow was $115.3 million for the nine months, versus $46.4 million a year earlier. The increase reflected improved continuing earnings and changes in payables, accrued liabilities and taxes, partly offset by a smaller inventory-related cash benefit.
- Investing cash outflow was $25.5 million, including $47.7 million of capital expenditures and $22.2 million of asset-sale proceeds. Financing cash outflow was $87.4 million, including $465.1 million of debt and lease repayments, $401.1 million of borrowings, and $11.5 million of share repurchases.
- Cash was $13.9 million at period end. Working capital was $427.0 million and the current ratio was 3.47. Inventory was $493.1 million, down $82.9 million from December 2018.
- Revolver borrowings were $114.7 million at 3.27%; the facility’s stated maximum was $500 million from August through March and it matures July 5, 2021. Long-term debt, less current portion, was $225.3 million. The balance sheet also recorded $72.4 million of operating lease obligations and $33.6 million of financing lease obligations.
- Management said operating cash flow, 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. The filing does not provide numerical earnings or sales guidance.
Material changes, outlook and risks
- Results improved sharply against a prior-year period burdened by substantial LIFO charges. Prior-year discontinued-operations earnings also included significant Modesto sale-related gains; discontinued-operations earnings were only $1.0 million in the current nine-month period versus $42.2 million a year earlier. Thus, net earnings comparisons include different discontinued-operation and disposal effects.
- During the nine months, Seneca recognized $116.5 million of Green Giant finished-goods sales to B&G under bill-and-hold arrangements, versus $65.7 million a year earlier. The filing says title and control transfer before physical delivery; subsequent labeling and storage services are recognized separately as performed.
- The company announced that production at its Sunnyside, Washington fruit plant would cease after the 2019 production season. Nine-month plant restructuring charges were $6.7 million, primarily related to lease-asset amortization, equipment moves and severance, partly offset by a lease-liability credit.
- Adoption of the new lease standard in April 2019 recognized $88.3 million of operating lease assets and $91.0 million of net operating lease liabilities, with a $2.0 million after-tax reduction to opening retained earnings. The filing says the standard did not materially affect income or cash flows.
- Risks cited include crop yields and weather, commodity and packaging costs, transportation costs, financing and debt service, interest rates, competition, customer concentration or lost orders, consumer preferences, regulation and product liability. The company’s credit facilities include financial covenants. Management reported no material change in market-risk exposure since March 31, 2019 and no material change in risk factors from its prior Form 10-K.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is fiscal 2020 Q3, not 2018 Q3.
- Assess how much earnings improvement reflects LIFO movements and asset-sale gains, and how comparable results are after excluding discontinued operations and prior-year Modesto disposal effects.
- Review the sustainability and accounting implications of B&G bill-and-hold revenue, including deferred labeling and storage obligations.
- Monitor Revolver availability, covenant compliance, debt service and lease obligations, as well as the financial effects of plant closures and restructuring.