Seneca Foods Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended September 30, 2017 (fiscal 2018). Comparisons are to the quarter and six months ended October 1, 2016. Unaudited results; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $376.3, up 5.3% | $656.5, up 7.6% |
| Gross margin | 5.4%, versus 8.5% | 5.5%, versus 8.2% |
| Operating income | $1.6, versus $11.2 | $2.4, versus $12.8 |
| Net income (loss) | $(1.1), versus $6.1 | $(2.0), versus $6.1 |
| Basic and diluted EPS | $(0.11), versus $0.62 | $(0.20), versus $0.61 |
| Interest expense, net | $3.4, versus $2.2 | $6.7, versus $4.3 |
Revenue growth was primarily acquisition-related, led by Truitt, and higher B&G sales; lower fruit-product and snack sales partly offset increases. Six-month sales included $41.1 from Truitt, acquired in April 2017. The filing attributes lower margins chiefly to a larger LIFO charge, reflecting expected cost increases: $10.4 for the quarter and $17.8 for the six months, versus $2.5 and $4.4 in the comparable periods. Selling and administrative costs as a share of sales were generally lower or unchanged.
Cash flow, liquidity and debt
- Six-month operating cash flow was a use of $17.8, compared with a use of $28.4. Investing cash use was $26.4, including $14.4 net cash paid for Truitt and $13.7 of capital expenditures. Financing provided $47.1.
- Cash was $14.9 at September 30. Working capital was $609.6 and the current ratio was 2.89.
- Long-term debt, including current maturities, was approximately $404.6; capital lease obligations totaled $47.3. The revolving facility balance was $272.6, at an approximately 2.75% rate. Total debt and lease obligations were higher than at March 31, 2017.
- The company reported $802.4 of inventory, a substantial seasonal working-capital requirement. Management said cash flows, revolver availability and other financing sources should fund needs, planned capital spending and debt obligations for at least 12 months. The company reported compliance with financial covenants.
Material changes, outlook and risks
- Seneca acquired the remaining 50% of Truitt Bros. for $14.4 net of acquired cash, assuming control of the business. The preliminary purchase-price allocation included a $1.1 bargain-purchase gain; allocation estimates remained under evaluation. Truitt contributed $19.5 of quarterly sales and $41.1 for the six months.
- Six-month results also included a $1.6 gain on asset sales, including $1.1 from a closed Midwest plant. These items benefited operating results; the filing does not provide a quantified adjusted earnings measure.
- Management gave no specific earnings or sales guidance. It noted seasonal sales and production patterns, with revenues typically higher in the second and third fiscal quarters. Raw produce is mainly harvested June through November.
- Key stated risks include commodity and packaging costs and availability, weather and crop yields, transportation costs, leverage and financing availability, interest rates, competition, consumer preferences, significant-customer concentration, product liability, and regulatory compliance. Management said risk factors had not materially changed from the prior annual report.
- The company was evaluating the impact of the upcoming revenue-recognition standard. It expected the lease standard to result in potentially material right-of-use assets and lease liabilities upon adoption. Disclosure controls were deemed effective; evaluation of Truitt’s internal controls was ongoing.
Investor verification priorities
- Assess the sustainability of margins and earnings after the elevated LIFO charge and expected input-cost increases.
- Verify Truitt’s integration, final purchase accounting, contribution to operating results, and effects on debt and cash generation.
- Review seasonal inventory build, working-capital needs, revolver availability, interest-rate exposure, and covenant headroom.
- Evaluate the extent to which asset-sale and bargain-purchase gains affected reported operating performance.
- Check the conversion of bill-and-hold Green Giant sales to B&G: the company reported $73.1 of such sales in the six months and stated it met the accounting criteria.