Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018 (first quarter of fiscal 2019; unaudited). The request metadata says “2017 Q1,” but the filing itself covers 2018 Q1. Comparisons are to the three months ended July 1, 2017, restated for ASC 606 adoption. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Quarter ended June 30, 2018 | Comparable 2017 quarter |
|---|---|---|
| Net sales | $343.4 million | $280.7 million |
| Gross margin | 1.7% | 5.1% |
| Operating loss | $7.8 million | $0.6 million |
| Net loss | $8.8 million | $0.8 million |
| Loss per common share, basic and diluted | $0.90 | $0.09 |
| Cash provided by operating activities | $87.0 million | $20.4 million |
Sales rose 22.4%, but the increase included a non-routine $55.8 million fruit-inventory sale to Pacific Coast Producers (PCP), which Seneca said was part of its Modesto facility exit strategy and not normal quarterly operations. Fruit Products revenue was $120.4 million versus $59.9 million; canned vegetables were $161.9 million versus $153.8 million. The PCP inventory was sold at cost, contributing to the lower gross margin.
Operating results also reflected a $6.4 million gain on sales of unused fixed assets, compared with $1.6 million a year earlier, and $1.8 million of plant restructuring charges, compared with $0.1 million. Net interest expense increased to $4.4 million from $3.2 million. The quarter included an income-tax benefit of $2.5 million.
Operating cash flow improved substantially, principally reflecting inventory-related cash inflows and the PCP transaction; cash flow is seasonal and should be viewed in that context. Capital expenditures were $10.5 million. Cash declined $2.5 million to $12.6 million after financing outflows, including $178.8 million of debt and lease payments and $89.5 million of borrowings.
At June 30, 2018, working capital was $499.0 million and the current ratio was 3.77, down from 5.35 at March 31, 2018. Cash was $12.6 million and inventory was $569.3 million. Long-term debt including current maturities had a reported carrying amount of $331.1 million; capital lease obligations including current maturities were $39.4 million. Revolver borrowings were $207.6 million, at a 3.62% period-end rate. The $400 million revolver limit applied from April through July; the filing does not state a single clear figure for unused availability.
Material changes and unusual items
- Seneca adopted ASC 606 on April 1, 2018 using full retrospective application. The prior-year comparison was restated; adoption reduced reported July 2017-quarter sales by $8.3 million and cost of product sold by $7.0 million. Management said there was no material cash-flow impact.
- The $55.8 million PCP fruit sale related to the planned closure of the Modesto, California fruit-processing plant. Production there was to cease before the 2018 season; the company expected to continue storage, casing and labeling temporarily.
- Seneca recorded $1.8 million of restructuring charges, mainly severance, related to plant closures in the West and Northwest. Assets held for sale totaled $3.9 million; the company expected to sell a Northwest processing facility within 12 months.
- Inventory was $569.3 million, down $68.4 million year over year, including the PCP sale. The LIFO reserve was $144.5 million; the quarter included a $0.5 million LIFO credit versus a $7.4 million LIFO charge in the prior-year quarter.
Outlook, risks and controls
Management said operating cash flows, 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. It provided no specific sales or earnings guidance. Results are seasonal, typically higher in the second and third fiscal quarters, and the filing cautions that first-quarter results are not necessarily indicative of the full year.
Risks highlighted include commodity and packaging costs, crop yields and weather, transportation costs, interest rates, leverage and debt service, competition, customer concentration, trade-promotion effectiveness, consumer preferences, regulation and product liability. The company reported compliance with its financial covenants at June 30, 2018.
A material weakness in internal control over financial reporting relating to revenue recognition for bill-and-hold transactions remained under remediation. Management concluded disclosure controls and procedures were not effective at quarter-end because remediation testing was not yet sufficient to establish that enhanced controls operated effectively. The filing reported no material change in market-risk exposure since March 31, 2018.
Most important facts for investors to verify
- How much of the revenue and operating-cash-flow increase reflects the one-time PCP inventory sale, and how results compare excluding it.
- Whether gross margins recover from 1.7%, given lower selling prices, input costs and LIFO effects.
- Progress and timing of the Modesto and Northwest plant exits, asset sale proceeds and related restructuring costs.
- Revolver availability, seasonal borrowing needs, interest-rate exposure and the company’s ability to service and reduce debt.
- Remediation and testing of bill-and-hold revenue controls, including any subsequent SEC filings or disclosures.