Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 28, 2019 (fiscal 2020 Q2), filed November 6, 2019. The request metadata says “2018 Q2,” but the filing itself covers 2019. Financial amounts below are in U.S. dollars; millions are used unless noted.
Business context and results
Seneca produces and sells canned, frozen and other packaged fruits and vegetables, snack chips, and contract-packed products. The business is seasonal: much of its produce is harvested and processed from June through November, and the company says revenue is typically higher in fiscal Q2 and Q3.
| Metric | Three months ended Sept. 28, 2019 | Three months ended Sept. 29, 2018 | Six months ended Sept. 28, 2019 | Six months ended Sept. 29, 2018 |
|---|---|---|---|---|
| Net sales | $370.0M | $320.7M | $634.9M | $564.8M |
| Gross margin | 6.5% | 3.4% | 6.8% | 4.9% |
| Operating income (loss) | $7.4M | $(4.8)M | $10.3M | $(4.9)M |
| Continuing-operations earnings (loss) | $4.6M | $(5.6)M | $5.7M | $(7.8)M |
| Net earnings, including discontinued operations | $4.6M | $9.1M | $5.7M | $0.4M |
| Diluted EPS from continuing operations | $0.49 | $(0.58) | $0.61 | $(0.80) |
Cash flow, liquidity and debt
- Six-month operating cash flow was $64.6M, versus $66.7M in the prior-year period. Investing used $6.0M and financing used $52.4M; cash increased $6.2M to $17.6M.
- Capital expenditures were $16.5M, compared with $20.3M. The company repurchased $8.6M of treasury stock, versus $1.6M in the prior-year period.
- At September 28, 2019, working capital was $437.3M and the current ratio was 2.53, compared with $554.8M and 2.88 a year earlier. Inventories were $575.2M, down $108.7M year over year.
- Long-term debt was $244.0M, down from $353.5M a year earlier. Revolver borrowings were $133.3M, with a 3.64% period-end weighted-average rate; the facility matures July 5, 2021. The company also reported $78.8M of operating lease liabilities and $32.9M of financing lease liabilities following adoption of the new lease standard.
- Management said operating cash flow, Revolver availability and other financing sources should be adequate for working capital, planned capital expenditures and debt obligations for at least the next 12 months. It reported compliance with all financial covenants at quarter-end.
Material changes and notable items
- Sales rose 15.4% in the quarter and 12.4% year to date. Management attributed the increases to higher volume and prices/mix. B&G sales and canned vegetables were major contributors; frozen sales declined.
- Gross margin improved primarily due to higher selling prices and lower LIFO charges. The continuing-operations LIFO charge was $0.7M for the quarter and $3.9M for the six months, versus $14.7M and $14.2M, respectively, in the prior-year periods.
- Prior-year net earnings included gains and results from the Modesto fruit facility, classified as discontinued operations. The facility was sold in October 2018; its sale represented a strategic exit from peach production. Accordingly, total net earnings are not directly comparable: prior-year Q2 included $14.8M of discontinued-operations earnings, while current-period discontinued operations had no earnings.
- Current-period operating results included restructuring charges of $1.1M for the quarter and $6.0M for the six months, related to Midwest and Northwest plant closures. The company also recorded $3.7M from a partial plant sale and $3.3M from sales of unused fixed assets during the six-month period.
- The company announced that production at its Sunnyside, Washington fruit plant would cease after the 2019 production season; storage, casing and labeling were expected to continue temporarily. The filing describes accelerated lease-asset amortization and a lease-asset impairment associated with plant closures.
- Adoption of the lease accounting standard on April 1, 2019 added operating right-of-use assets and lease liabilities to the balance sheet and reduced opening retained earnings by $2.0M net of tax. The filing says the standard did not materially affect income or cash flow statements.
- For the six months, $68.1M of Green Giant finished-goods sales to B&G were recognized under bill-and-hold accounting, compared with $38.3M a year earlier. Revenue is recognized when control transfers; subsequent labeling and storage services are recognized separately as performed.
Outlook, risks and contingencies
The filing provides no specific earnings or sales guidance. Management cautions that interim results are not necessarily indicative of full-year results and highlights seasonality. Risks identified include commodity and packaging costs and availability, weather and crop yields, transportation costs, financing and debt service, interest and foreign-exchange fluctuations, competition, changing consumer preferences, product liability, regulation, and the loss of significant customers. The company said risk factors were not materially changed from its fiscal 2019 Form 10-K. Legal proceedings are referenced to that annual report, without further detail in the provided filing text.
Important facts for investors to verify
- How sustainable the improved gross margin is, especially given LIFO cost assumptions and expected production-cost increases.
- Whether B&G bill-and-hold sales, customer concentration and seasonal inventory patterns affect revenue timing or working-capital needs.
- The expected costs, timing and operational impact of the Sunnyside and other plant closures, including asset sales and restructuring charges.
- Revolver availability, debt repayment capacity and covenant headroom as seasonal borrowing needs fluctuate.
- The full-year impact of discontinued operations and prior-period asset-sale gains when comparing reported net earnings.