Seneca Foods Corporation (10-Q): Fiscal 2015 Third Quarter
Reporting period: Three and nine months ended December 27, 2014. Seneca produces and sells packaged fruits and vegetables, snack products, and products packed for General Mills Operations, LLC (GMOL). Results are unaudited and seasonal; the company notes interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Three months ended Dec. 27, 2014 | Prior-year quarter | Nine months ended Dec. 27, 2014 | Prior-year period |
|---|---|---|---|---|
| Net sales | $456.2 million | $477.7 million | $1,008.4 million | $1,046.4 million |
| Operating income | $11.5 million | $10.5 million | $13.2 million | $21.1 million |
| Net earnings | $7.8 million | $6.8 million | $7.1 million | $14.8 million |
| Diluted EPS | $0.71 | $0.61 | $0.65 | $1.32 |
| Gross margin | 5.7% | 6.5% | 5.9% | 7.0% |
| Operating margin | 2.5% | 2.2% | 1.3% | 2.1% |
Quarterly sales fell 4.5%, as volume declined $32.3 million, partly offset by $10.8 million of higher prices and sales mix. Year-to-date sales fell 3.6%, reflecting a $70.5 million volume decline partly offset by $32.5 million from prices and mix. Management attributed weaker gross margins mainly to lower net selling prices, after promotions. Unfavorable growing conditions reduced pea and green bean yields and plant recovery rates, creating unfavorable manufacturing variances.
Quarterly net earnings rose despite lower sales and gross margin, with operating income benefiting from a $5.0 million contractual payment associated with a Midwest plant closing. Year-to-date earnings were lower, including the effect of weaker operating results and a higher effective tax rate. The nine-month effective tax rate was 24.6%, versus 9.3%; the increase included a New York investment tax credit valuation allowance and expiration of California tax credits.
Cash flow, debt and liquidity
- Operating cash flow was negative $18.5 million for the first nine months, versus positive $12.6 million a year earlier. The company cited a larger inventory cash use, lower cash provided by payables and accrued liabilities, and lower earnings.
- Investing cash use was $35.2 million, including $19.2 million of capital expenditures and the $16.3 million purchase of a 50% interest in Truitt Bros. Financing provided $62.9 million; cash ended at $23.0 million.
- At December 27, 2014, total debt including current maturities was $296.8 million, including $255.0 million drawn on the revolver. The revolver's seasonal maximum was $400 million from August through March; its balance carried an approximately 1.91% rate and the facility matured July 20, 2016.
- Current assets were $673.2 million and current liabilities were $163.4 million; working capital was $509.8 million and the current ratio was 4.12. 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 financial covenants.
Material changes, outlook and risks
- Quarterly sales declined across canned fruit, canned vegetables and frozen products; canned fruit weakness was attributed in part to a second consecutive short pack. The nine-month sales decline was led by canned fruit, GMOL and frozen products.
- In April 2014, Seneca acquired a 50% equity interest in Truitt Bros. for $16.3 million, with a conditional right to acquire the remaining interest. It recorded a $231,000 equity-method gain for the nine-month period.
- A Midwest plant closing generated $889,000 of restructuring charges in the quarter, including severance, equipment and relocation costs. The related $5.0 million contractual payment was recorded as other operating income. The company also recorded $250,000 of environmental costs for a New York plant during the nine-month period.
- The nine-month LIFO charge was $10.9 million, down from $22.1 million a year earlier, reflecting lower expected cost inflation. LIFO reduced nine-month earnings after tax by $7.1 million.
- No specific earnings or sales guidance was provided. The company identified crop and weather conditions, commodity and packaging costs, transportation costs, competition, customer concentration, financing and leverage, and regulatory and product-liability matters as risks.
- An appeal remained pending in a California Proposition 65 case involving alleged lead in certain products. A trial-level decision favored the company; appeal oral argument was scheduled for February 3, 2015. The company said it could not determine the appeal's likelihood of success. It reported that defense costs had not materially harmed its financial position, results or cash flows.
Important facts for investors to verify
- How much of quarterly earnings and operating income depended on the one-time $5.0 million plant-closing payment, and how recurring performance compares without it.
- Whether crop-yield and manufacturing challenges, lower sales volumes and margin pressure continue beyond this seasonal period.
- Inventory levels, operating cash generation and seasonal revolver usage, particularly given negative nine-month operating cash flow and higher debt than at fiscal year-end.
- The durability of the tax-rate increase and the timing and effect of the Truitt investment and any decision to acquire its remaining interest.
- The outcome of the Proposition 65 appeal and any material developments in environmental or other legal proceedings.