Seneca Foods Corporation — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended December 26, 2015; comparative periods ended December 27, 2014. Seneca processes and sells packaged fruits and vegetables, including branded and private-label products, and packs certain Green Giant products under contract. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and position
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $432.2m | $456.2m | $971.7m | $1,008.4m |
| Operating income | $48.2m | $11.5m | $65.6m | $13.2m |
| Net earnings | $31.1m | $7.8m | $40.6m | $7.1m |
| Diluted EPS | $3.10 | $0.71 | $4.04 | $0.65 |
| Gross margin | 12.3% | 5.7% | 10.5% | 5.9% |
- Cash flow: Operating activities used $12.5m in the first nine months, versus $15.8m used a year earlier. Investing activities used $30.0m; financing activities provided $50.9m. Cash ended at $19.0m, up from $10.6m at fiscal year-end.
- Liquidity and debt: Working capital was $256.9m and the current ratio 1.53, compared with $509.8m and 4.12 at the prior-year date. Total debt was $348.5m, including $309.2m outstanding under the revolving facility; the revolver was classified as current because it matures July 20, 2016. Long-term debt excluding its current portion was $36.7m.
- Balance sheet: Inventory was $631.2m, up $84.0m year over year, principally reflecting higher finished-goods quantities and lower sales volume. Pension liabilities were $40.6m; the company contributed $23.1m to its pension plan during the nine-month period.
Changes and drivers versus comparable periods
- Sales declined 5.3% in the quarter and 3.6% year to date. Management attributed the reductions mainly to lower sales volume, partly offset by higher selling prices and sales mix. Year-to-date volume was down $63.6m and price/mix added $26.8m.
- Operating income and earnings increased substantially, but comparisons include a $24.3m General Mills relationship-transfer payment in the current quarter (versus a $5.0m plant-closing payment in the prior-year quarter), higher restructuring charges, and favorable LIFO adjustments. The current-year LIFO credit raised after-tax earnings by $7.6m for the quarter and $8.6m year to date; the prior-year LIFO charge reduced them by $3.5m and $7.1m, respectively.
- Q3 FY2016 included $9.6m of restructuring charges related to a Northwest plant closure, primarily operating-lease costs and asset impairments. The prior-year quarter included $0.9m of restructuring charges.
- Seneca acquired Gray & Company, a maraschino cherry and glace fruit processor, on October 30, 2015, for approximately $23.8m net of cash acquired, plus assumed liabilities. The acquisition was financed through the revolver; purchase price allocations were preliminary.
- The revolving credit facility balance and average borrowings were higher than in the prior-year period. Management cited the acquisition, pension contribution, and increased inventory, partly offset by the General Mills payment and stronger operating results.
Outlook, risks and other matters
- No specific earnings or sales guidance is provided. Management said operating cash flows, revolver availability, and other financing sources should cover working capital, planned capital expenditures, and debt obligations for at least the next 12 months. The company reported compliance with its financial covenants at December 26, 2015.
- The company expanded its revolver borrowing capacity in December 2015. Maximum availability is $475m from August through March and $400m from April through July; the facility is seasonal, and availability and refinancing at its July 2016 maturity warrant attention.
- Management identified risks including crop yields and weather, commodity and packaging costs, transportation costs, financing and leverage, interest rates, competition, consumer preferences, customer concentration, regulation, and product-liability claims. Revenues are seasonal, typically higher in the second and third fiscal quarters.
- The General Mills Green Giant and Le Sueur relationship was transferred to B&G Foods effective November 2, 2015. Seneca and B&G agreed to negotiate replacement or supplemental agreements; the filing does not specify final terms for those future agreements.
- The company prevailed in the Proposition 65 litigation, with the California Supreme Court denying review in July 2015; only procedural matters remained. Seneca noted that other ordinary-course legal matters may have uncertain outcomes.
Key facts for investors to verify
- How much of the earnings improvement is sustainable after separating the General Mills payment, LIFO effects, and restructuring charges.
- Inventory levels, sell-through, and working-capital needs, particularly given lower sales volumes and the seasonal production cycle.
- Revolver renewal or refinancing arrangements before the July 20, 2016 maturity, together with borrowing availability and covenant compliance.
- Progress on replacement agreements with B&G and the acquired Gray & Company business’s integration and performance.
- Potential future costs from plant closure obligations, pension funding, and other contingencies; the filing does not provide a clear quantified estimate for all such exposures.