Seneca Foods Corporation — Form 10-Q
Business context and period. Seneca processes and distributes canned, frozen and bottled fruits and vegetables and snack chips, including products sold under its own, licensed and private-label brands. This report covers the first quarter of fiscal 2014, the three months ended June 29, 2013; comparisons are with the three months ended June 30, 2012 unless noted. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Key financial results
| Metric | Quarter ended June 29, 2013 | Prior-year quarter |
|---|---|---|
| Net sales | $232.1 million | $231.1 million |
| Gross margin | 8.5% | 12.6% |
| Operating income | $3.8 million (1.7% margin) | $14.3 million (6.2% margin) |
| Net earnings | $1.3 million | $8.2 million |
| Basic / diluted EPS | $0.12 / $0.12 | $0.68 / $0.67 |
| Operating cash flow | $34.5 million | $48.6 million |
Net sales increased 0.4%: higher volume contributed $12.4 million, partly offset by $11.4 million of lower selling prices and sales mix. The effective tax rate was 31.3%, versus 35.9%.
At June 29, 2013, cash was $6.1 million, working capital was $413.1 million and the current ratio was 3.39. Total debt, including current maturities, was $231.3 million; the revolving credit facility balance was $151.0 million at a 1.74% rate. Total debt was $270.2 million at March 31, 2013. The company reported compliance with its financial covenants. Operating cash flow less $4.3 million of capital expenditures was approximately $30.2 million; cash declined $8.0 million during the quarter.
Material changes and notable items
- Profitability fell substantially despite nearly flat sales. Management attributed lower gross margin to lower selling prices after promotions, higher unit costs and a higher LIFO charge. The LIFO charge was $5.8 million, compared with $1.3 million a year earlier; management estimated its after-tax impact on earnings at $3.8 million versus $0.8 million.
- Pea harvest conditions were unfavorable due to high temperatures and uneven moisture, reducing yields and plant recovery rates and causing unfavorable manufacturing variances.
- Sales by category shifted: canned vegetables declined $8.1 million, while frozen rose $3.9 million, GMOL sales rose $3.2 million and fruit products rose $3.0 million.
- Inventory was $484.7 million, up $26.3 million year over year. Finished goods increased $13.2 million and raw materials and supplies increased $15.2 million; management cited lower sales volume and higher can and raw-steel quantities.
- The January 2013 acquisition of Independent Foods (Sunnyside), a processor of canned pears, apples and cherries, extended the product portfolio. In this quarter, the company reduced its previously recorded bargain-purchase gain by $0.6 million, to $1.4 million.
- Other operating items included a $0.7 million gain on asset sales and a $0.2 million restructuring charge. Interest expense rose to $1.8 million from $1.5 million, reflecting higher average seasonal borrowings.
Outlook, risks and contingencies
Management gave no specific earnings or sales guidance. It expected operating cash flow, revolver availability and other financing sources to cover working capital, planned capital expenditures and debt obligations for at least the next 12 months. Revolver capacity was $300 million from April through July and $400 million from August through March; availability and borrowings fluctuate with seasonal production and working-capital needs. The company said revenues are typically higher in the second and third fiscal quarters.
Risks highlighted include crop and weather conditions, commodity and packaging costs, transportation costs, competition, customer concentration, consumer preferences, financing and leverage, interest and foreign-exchange rates, regulation and product liability. The company reported no material changes to the risk factors in its prior Form 10-K and no material changes in market-risk exposure since March 31, 2013.
In a Proposition 65 case concerning lead warnings on certain fruit products, a judge issued a tentative proposed decision on July 15, 2013 agreeing that the defendants met the safe-harbor defense; the company said no warning label would be required if the decision became final. The decision remained subject to finalization and possible appeal, whose likelihood and outcome the company could not assess. The company also described ordinary-course legal matters with outcomes and potential losses it could not predict. It reported that defense fees to date had not materially affected financial position, results or cash flows.
Investor verification points
- Track whether selling prices, product mix, unit costs and inflation-driven LIFO charges continue to pressure gross margin and earnings.
- Verify crop yields and manufacturing recovery following the reported pea-harvest difficulties, and assess their effect on inventory and costs.
- Monitor seasonal cash needs, revolver usage, interest expense, debt maturities and compliance with credit-facility covenants.
- Assess inventory levels and sell-through, particularly finished goods and raw materials, as the seasonal pack progresses.
- Check the final status and any appeal of the Proposition 65 decision, as well as the final accounting for the Sunnyside acquisition.