Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2016; comparatives ended December 26, 2015. Fiscal year ends March 31. Financial amounts below are in millions unless noted.
Business context and results
Seneca processes and sells packaged fruits and vegetables, snack chips, and products under owned, licensed, and private-label brands. It also packs Green Giant products for B&G Foods. Harvesting and sales are seasonal, with much of the raw product harvested June through November.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $369.7 vs. $432.2 | $979.6 vs. $971.7 |
| Gross margin | 10.1% vs. 12.4% | 8.9% vs. 10.6% |
| Operating income | $13.9 vs. $48.5 | $26.7 vs. $66.4 |
| Net earnings | $8.2 vs. $31.1 | $14.3 vs. $40.6 |
| Diluted EPS | $0.82 vs. $3.10 | $1.43 vs. $4.04 |
Quarterly sales fell 14.4%, mainly on a $48.6 million decline in B&G sales, lower sales volume, and lower selling prices/product mix. Nine-month sales rose 0.8% as higher volume and acquired fruit businesses offset lower prices/mix and declines in B&G and canned vegetables. Management attributed lower gross margins primarily to lower net selling prices and reduced LIFO credits; the nine-month LIFO effect shifted from a $13.2 million credit in the prior year to a $0.4 million charge.
Cash flow, liquidity, and debt
- Operating cash flow used $9.7 million in the nine months, compared with $12.5 million used in the prior-year period. Inventory growth remained a significant use of cash.
- Investing cash flow used $23.3 million, including $23.4 million of property and equipment additions. The filing also reports $23.1 million of equipment acquired under capital leases.
- Financing cash flow provided $34.6 million. Cash increased $1.7 million to $10.3 million.
- At December 31, current assets were $750.2 million and current liabilities $178.7 million; working capital was $571.4 million and the current ratio was 4.20. Inventory was $656.4 million.
- The balance sheet reported $343.6 million of long-term debt excluding current maturities and $26.0 million of long-term capital lease obligations. The revolving credit balance was $232.6 million; the company also entered a $100 million unsecured term loan in December. The new revolver matures July 2021, and the term loan matures December 2021.
- Management said cash flows, revolver availability, and other financing sources should cover working capital, planned capital expenditures, and debt obligations for at least 12 months. The company reported compliance with its financial covenants at quarter-end.
Material changes, outlook, and risks
- Quarterly operating results were affected by the absence of a $24.3 million General Mills contractual payment recorded as other operating income in the prior-year quarter. The current quarter included a $1.1 million long-lived asset impairment charge and $1.3 million of restructuring costs; prior-year-quarter restructuring costs were $9.6 million.
- Restructuring relates to Northwest plant closures; the remaining restructuring balance was $6.7 million. The company recorded an additional $1.3 million charge in the quarter, primarily severance.
- On January 19, 2017, heavy snow caused roof collapses at a Northwestern U.S. plant. Repair costs were still being estimated; management expected losses not to exceed the $5 million property-insurance deductible.
- No numerical earnings or sales guidance was provided. Risks highlighted include commodity and packaging costs and availability, crop and weather conditions, transportation costs, competition, customer concentration, financing and debt-service needs, interest rates, and consumer preferences. The company said there were no material changes to previously disclosed risk factors or market-risk exposure.
- Adoption of the new leases standard is expected to result in recognition of right-of-use assets and lease liabilities that could be material; the company was still evaluating the impact. Revenue-standard adoption was also under evaluation.
Important facts for investors to verify
- Whether sales volume, pricing, product mix, and B&G demand improve after the pronounced quarterly sales decline.
- Inventory levels, seasonal working-capital requirements, and continued operating cash outflows.
- Debt, interest expense, revolver availability, and compliance with financing covenants.
- Final repair costs, insurance recovery, and operational effects of the January plant roof damage.
- Future restructuring charges and the effect of inflation, LIFO accounting, and trade-promotion accruals on margins.