Seaboard Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended July 1, 2017; comparisons are with the periods ended July 2, 2016. Dollar amounts are in millions, except per-share data.
Business context and financial results
Seaboard operates across Pork, Commodity Trading and Milling (CT&M), Marine, Sugar, Power and Turkey. Q2 net sales rose 5% to $1,422 from $1,357, while six-month sales increased 5% to $2,821 from $2,676.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross income | $129 | $151 | $267 | $251 |
| Operating income | $54 | $76 | $120 | $112 |
| Income from affiliates | $(8) | $11 | $(7) | $33 |
| Other investment income, net | $28 | $8 | $65 | $13 |
| Net earnings attributable to Seaboard | $58 | $80 | $143 | $134 |
| Earnings per share | $50.51 | $68.34 | $122.35 | $114.25 |
Q2 gross margin was approximately 9.1% versus 11.1% a year earlier; operating margin was 3.8% versus 5.6%. For the first half, gross margin was approximately 9.5% versus 9.4%, and operating margin was 4.3% versus 4.2%. Q2 earnings declined despite higher sales, reflecting lower operating income, affiliate losses and higher income tax expense; higher investment income partly offset these items. First-half net earnings increased, supported by higher investment income and operating income.
Cash flow, liquidity and debt
- Six-month operating cash flow was $177, down from $246 in 2016, primarily due to working-capital changes, including prior-year collections of past-due Power-segment receivables.
- Investing cash outflow was $201, including $78 of capital expenditures, $64 of net investments in and advances to affiliates, and $14 for a Canadian grain and pulse elevator acquisition. Financing cash flow was $15. Cash ended the period at $70, compared with $77 at year-end 2016.
- Cash and short-term investments totaled $1,461, up $107 from year-end. Total current assets were $2,907 and current liabilities $741; management reported net working capital of $705. The current ratio was approximately 3.9.
- Debt carrying amounts included $142 of bank notes payable, $18 of current long-term debt and $495 of long-term debt, totaling approximately $655. The $491 term loan matures in 2022. Seaboard reported compliance with debt covenants.
- Seaboard had $382 of uncommitted credit lines and a $100 committed facility with no balance drawn; capacity was reduced by $142 of borrowings and $7 of letters of credit. Of cash and short-term investments, $438 was held by foreign subsidiaries and management intends to reinvest those funds abroad.
- Dividends of $1.50 per share were declared and paid in each of Q1 and Q2. A further $1.50 quarterly dividend was declared August 2, payable August 24, 2017. No shares were repurchased in the first half; the remaining authorization was $100.
Changes, outlook and management commentary
- Pork: First-half operating income increased to $100 from $79, on improved meat prices and lower feed costs, partly offset by lower biodiesel margins after federal blender tax credits expired. Management anticipated positive operating income for the remainder of 2017 but could not predict product prices or input costs.
- CT&M: Reported operating income fell to $1 in Q2 from $19, mainly due to lower derivative mark-to-market gains. Excluding those adjustments, Q2 segment operating income was $1 in both years; first-half adjusted income was $14 versus $15. Management expected positive remainder-of-year operating income excluding mark-to-market effects, but cited commodity-market and country risks.
- Marine: Q2 operating income fell to $1 from $7, primarily due to lower cargo rates and higher fuel costs. Management anticipated positive operating income for the remainder of 2017, while noting uncertainty in rates, volumes and fuel costs.
- Sugar and Power: First-half sales and operating income improved in both segments. Sugar’s outlook remained uncertain; management anticipated positive Power-segment operating income for the balance of 2017.
- Turkey / Butterball: Seaboard recorded an $11 share of Butterball’s charge for a planned plant closure. Butterball reported first-half net loss of $22, versus net income of $72 in 2016; Seaboard’s Turkey affiliate result was a loss of $11 versus income of $38. Profitability for the rest of 2017 was not predictable.
- Management budgeted $125 of additional 2017 capital expenditures. Seaboard contributed $53 to its Seaboard Triumph Foods joint venture in the first half and had a further 2017 commitment of $20 as of July 1. It also expected additional hog-inventory and related-asset purchases.
- Other investment income rose substantially, principally from mark-to-market fluctuations in short-term investments. Trading securities had $65 of unrealized gains for the first half. Derivatives are not designated for hedge accounting, so valuation changes may create earnings volatility and may reverse as transactions are realized.
Risks, contingencies and unusual items
- The Department of Justice is investigating money transfers and bank accounts in the Democratic Republic of Congo and other African countries; Seaboard has received subpoenas and interview requests and is cooperating. The company said outcome and potential loss could not be estimated.
- The EPA alleged Clean Air Act violations at the Guymon, Oklahoma pork plant and proposed a civil penalty of less than $1 million, plus a Supplemental Environmental Project whose scope and cost were not specified.
- Seaboard continued discussions with government agencies concerning a prior ICE investigation; a possible settlement remained unresolved, with potential liability not estimable.
- A Dominican Republic ministry declined to renew the environmental license for Seaboard’s power barge. If unresolved, relocation would be required by Q3 2018; any resulting earnings charge could not be estimated.
- Impairment and credit concerns include the Marine segment’s start-up terminal affiliate (charges totaling $9 in Q1 for investment and receivables) and a $19 long-term note receivable from a DRC bakery affiliate, for which further losses may be possible.
- Management said there were no material changes to previously disclosed risk factors. It expects the 2019 lease-accounting adoption to increase balance-sheet assets and liabilities, likely materially; other accounting standards scheduled for adoption were not expected to have a material impact.
Most important facts for investors to verify
- Whether the substantial investment-income contribution and trading-security gains persist, and how market movements affect reported earnings.
- Whether Pork, CT&M and other segments meet management’s remainder-of-2017 expectations, particularly given commodity, feed, freight, fuel and currency volatility.
- Butterball’s operating recovery and the effect of its plant closure and related charge on Seaboard’s equity-method earnings.
- Progress and potential cost of the DOJ, EPA and Dominican Republic matters, including the unspecified environmental project and possible power-barge relocation.
- Recoverability of affiliate investments and receivables, including the DRC bakery note and Marine terminal exposure, alongside planned capital spending and joint-venture funding.
- Liquidity available for U.S. needs given foreign-held funds, and the company’s ability to sustain dividends while funding expansion and capital commitments.