Seneca Foods Corporation — Q2 FY2014 Form 10-Q
Reporting period: Three and six months ended September 28, 2013; comparative periods ended September 29, 2012. Statements are unaudited. Seneca processes and sells canned, frozen and bottled fruits and vegetables, snack chips, and products packed for General Mills Operations, LLC (GMOL).
Key financial results
| Metric | Three months ended Sept. 28, 2013 | Six months ended Sept. 28, 2013 | Prior-year comparable |
|---|---|---|---|
| Net sales | $336.6 million | $568.8 million | $317.6 million / $548.6 million |
| Operating income | $6.8 million | $10.6 million | $24.9 million / $39.2 million |
| Net earnings | $6.6 million | $8.0 million | $14.5 million / $22.7 million |
| Basic EPS | $0.59 | $0.71 | $1.23 / $1.90 |
| Gross margin | 6.6% | 7.4% | 12.9% / 12.8% |
Quarterly sales rose 6.0% and six-month sales rose 3.7% year over year, while operating income and net earnings fell substantially. Management attributed the margin decline mainly to higher LIFO charges versus prior-year LIFO credits and lower net selling prices after promotions. The LIFO charge was $8.6 million for the quarter and $14.4 million for six months; management estimated it reduced six-month net earnings by $9.4 million after tax. Pea-crop yields and plant recovery were also adversely affected by high temperatures and uneven moisture, creating unfavorable manufacturing variances.
Six-month interest expense was $3.4 million versus $3.3 million. Income tax was a benefit of $0.8 million for the six months, and the effective tax rate was (10.5%), compared with 36.7% in the prior period. Management cited lower pretax earnings, tax credits and deductions, and reversal of certain New York State tax reserves among the factors.
Cash, liquidity and debt
- Cash was $18.1 million at September 28, 2013. Current assets were $920.2 million and current liabilities $368.8 million; working capital was $551.3 million and the current ratio 2.49.
- Operating cash flow was negative $47.4 million for six months, versus negative $46.1 million. Seasonal inventory build was a major use of cash; inventory was $758.7 million, up $31.8 million from a year earlier.
- Investing cash outflow was $7.4 million, including $8.4 million of capital expenditures. Financing cash inflow was $58.8 million per the cash flow statement, primarily reflecting revolving-credit borrowings and repayments.
- Long-term debt, including its current portion, was $325.1 million; the company also reported $4.4 million in notes payable for equipment-order down payments. Revolver borrowings were $282.0 million at a weighted average rate of 1.68%. The revolver matures July 20, 2016, with stated availability limits of $400 million from August through March and $300 million from April through July.
- Seneca said it was in compliance with financial covenants and expected cash flows, revolver availability and other financing sources to fund working capital, planned capital expenditures and debt obligations for at least 12 months.
Material changes and notable items
- Sales gains included higher GMOL, frozen and fruit-product sales; canned vegetable sales declined. GMOL sales benefited from earlier commodity maturities. Six-month Green Giant finished goods sales to GMOL on a bill-and-hold basis were $52.2 million, versus $38.6 million a year earlier.
- The company acquired Independent Foods, LLC (Sunnyside), a processor of canned pears, apples and cherries, in January 2013. The filing reports an $81,000 reduction to the previously recorded bargain-purchase gain, to $1.89 million.
- Six-month restructuring charges were $501,000, associated with a product-rationalization program. Gains on sales of unused fixed assets were $869,000, compared with $292,000.
- The company paid the final $36.7 million principal on its secured note to John Hancock in August 2013, using revolver borrowings. Six-month share repurchases were $560,000; the cash-flow statement reports $27.9 million of treasury-stock purchases in the prior-year period.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management notes that results are seasonal, with revenues typically higher in the second and third fiscal quarters, and cautions that interim results are not necessarily indicative of full-year results. Principal risks identified include crop and weather conditions, raw-material and packaging costs and availability, transportation costs, leverage and financing availability, interest rates, competition, customer concentration, consumer preferences, regulation and product-liability claims.
In a California Proposition 65 case concerning lead warnings on certain fruit products, the trial judge issued a favorable decision finding the defendants’ safe-harbor defense met; the decision was finalized, but the plaintiff appealed on October 3, 2013. Seneca said it could not assess the appeal’s scope or likelihood of success and intended to defend it. The filing also notes other ordinary-course legal matters whose outcomes and potential losses could not be predicted or estimated.
Important facts for investors to verify
- Whether the unusually large seasonal inventory build converts to sales and cash in subsequent quarters, and whether crop conditions affect production costs.
- How LIFO costs, inflation, selling prices and promotional spending affect margins and earnings through the remainder of the fiscal year.
- Revolver utilization, seasonal borrowing capacity, covenant compliance and the company’s ability to service and reduce debt.
- The outcome and potential costs of the Proposition 65 appeal, and the financial effects of integrating Sunnyside.
- The MD&A states financing cash inflow of $58.531 million, while the cash-flow statement reports $58.831 million; verify the correct amount.