Seaboard Corporation — Q2 2016 Form 10-Q
Business context and reporting period
Seaboard reported its unaudited results for the quarter and six months ended July 2, 2016, compared with periods ended July 4, 2015. Its six reportable segments are Pork, Commodity Trading and Milling (CT&M), Marine, Sugar, Power and Turkey. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,357 | $1,428 | $2,676 | $2,880 |
| Gross income | $151 | $100 | $251 | $193 |
| Operating income | $76 | $32 | $112 | $60 |
| Net earnings attributable to Seaboard | $80 | $32 | $134 | $65 |
| Earnings per common share | $68.34 | $27.04 | $114.25 | $55.15 |
| Operating cash flow | — | $246 | $264 |
Calculated from reported figures, gross margin was about 11.1% in Q2 and 9.4% for the first half, versus 7.0% and 6.7% in the comparable 2015 periods. Operating margin was about 5.6% and 4.2%, versus 2.2% and 2.1%. First-half sales declined 7.1%, while operating income rose 86.7% and Seaboard-attributable earnings more than doubled.
First-half operating cash flow declined $18 million year over year, primarily due to working-capital changes, partly offset by higher earnings. Investing cash outflow was $114 million, including $148 million for the Pork acquisition and $96 million of capital expenditures; financing cash outflow was $31 million. Cash and cash equivalents ended at $151 million, compared with $50 million at year-end 2015.
Liquidity, debt and balance sheet
Cash and short-term investments totaled $1,294 million at July 2, 2016, down $10 million from year-end. Management reported an additional $539 million of net working capital excluding cash and short-term investments, and said available liquidity, internally generated cash and borrowing capacity should cover existing operations and currently known 2016 expansion plans. Of cash and short-term investments, $353 million was held by foreign subsidiaries and intended to remain permanently invested abroad; repatriation could entail taxes.
Debt comprised $104 million of bank notes payable, $13 million of current long-term debt and $507 million of long-term debt, totaling approximately $624 million. Total debt was approximately $663 million at year-end 2015. The $500 million term loan is due in 2022 and bore a 2.07% rate; the company reported compliance with debt covenants. Foreign subsidiary notes payable had a weighted-average rate of 14.53%. Uncommitted bank lines totaled $379 million, with $104 million drawn and $4 million of letters of credit reducing availability.
Material changes and unusual items
- Sales fell in CT&M, Marine, Sugar and Power, mainly due to lower commodity prices/product mix, cargo rates, sugar and alcohol prices, and power spot rates. Higher Pork sales partly offset those declines.
- Operating income improved primarily because of lower Pork feed costs and stronger CT&M trading margins. Pork operating income rose to $50 million in Q2 from $19 million; CT&M rose to $19 million from $8 million. CT&M’s reported results included mark-to-market gains of $18 million in Q2 and $13 million in the first half; excluding those adjustments, CT&M operating income was $1 million for Q2 and $15 million for the first half.
- Seaboard recorded an $11 million SG&A bad-debt reserve on a note receivable from a Democratic Republic of Congo bakery affiliate after revised forecasts and a debt restructuring. The note’s recorded balance was $24 million; further losses are possible if forecasts are not met.
- In February, Pork acquired hog inventory and related assets for $148 million to support hog supply for the planned Sioux City processing facility. Seaboard also expects further related asset purchases in 2016.
- First-half interest expense rose $8 million year over year, primarily due to debt issued in December 2015 and higher rates on foreign subsidiary borrowings. Foreign currency translation produced $16 million of first-half OCI loss, including $18 million after tax related to Argentine peso devaluation.
Outlook, risks and contingencies
Management anticipated positive operating income for the remainder of 2016 in Pork, CT&M (excluding derivative mark-to-market effects), Marine and Power, and positive Turkey-segment affiliate income. It could not predict Sugar’s profitability, commodity prices, pork/feed markets, marine rates and fuel costs, or power spot rates. Management also noted that CT&M mark-to-market adjustments could reverse as related contracts are delivered and recognized over time.
Seaboard’s 2016 capital expenditure budget for the remainder of the year was $118 million. Its contribution commitment to the 50%-owned Seaboard Triumph Foods joint venture was reduced from $207 million to $150 million after third-party financing; $33 million remained due in 2016 and $73 million in 2017. The facility was expected to be completed by mid-2017.
Key risks include commodity, currency and interest-rate volatility; derivatives not qualifying for hedge accounting, which may cause earnings volatility; affiliate credit and operating risks, particularly in the DRC and Brazil; and the possible continued weakening of the Argentine peso. The filing disclosed ongoing government inquiries concerning foreign-company records, a prior ICE investigation with possible settlement discussions, and an EPA information request regarding ammonia releases at a pork plant. Outcomes and potential losses could not be estimated for these matters. Management said other proceedings were not expected to have a material adverse effect; no material risk-factor changes from the 2015 Form 10-K were reported.
The company did not repurchase shares in the first half; authorization remained $100 million. It did not currently intend to declare a dividend for 2016.
Important facts for investors to verify
- Whether stronger Pork and CT&M operating results persist, separating underlying performance from derivative mark-to-market gains.
- Recoverability of the $24 million DRC bakery note and the status of affiliate exposures, including the Brazil business and receivable reserves.
- Progress, costs and funding needs for the Sioux City facility, remaining $150 million joint-venture commitment and planned additional hog-asset purchases.
- Cash-flow conversion, foreign-held liquidity and debt costs, including high-rate foreign subsidiary borrowings.
- Developments in the government inquiries, EPA matter and potential Argentine-peso-related translation losses.