SEABOARD CORP quarterly report, Q1 FY2015

Business context and reporting period

Seaboard Corporation filed this unaudited Form 10-Q for the 13-week first quarter ended April 4, 2015, compared with the quarter ended March 29, 2014. Its businesses include pork, commodity trading and milling, marine, sugar, power and an equity-method investment in Butterball (Turkey segment). Unless stated otherwise, amounts below are in millions of dollars.

Key financial metrics

Gross margin was approximately 6.4% versus 8.5%; operating margin was 1.9% versus 4.4%. Operating cash flow declined mainly because of lower earnings. Capital expenditures were $28.5 million.

At April 4, 2015, cash and cash equivalents were $47.9 million and short-term investments were $597.6 million, totaling $645.5 million. Current assets were $2,054.5 million and current liabilities were $650.7 million. Bank notes payable were $123.3 million, up from $75.5 million at year-end; no borrowings were outstanding under committed credit lines. Total assets were $3,714.7 million and total equity was $2,749.7 million. Management reported $758.3 million of net working capital and said liquidity and borrowing capacity were adequate for current operations and known 2015 plans. Foreign subsidiaries held $272.4 million of cash and short-term investments, which Seaboard intends to keep permanently invested abroad.

Material changes versus prior period

• Sales fell 1.8%, while operating income fell 57.3% and Seaboard-attributable earnings fell 30.8%. Management cited lower pork prices, weaker commodity-trading margins and the deconsolidation of Daily’s, now accounted for under the equity method.
• Pork operating income decreased to $16.4 million from $60.5 million, primarily on lower pork prices and Daily’s deconsolidation, partly offset by lower feed and third-party hog costs.
• Commodity Trading and Milling operating income was $4.5 million versus $11.9 million; excluding derivative mark-to-market effects, it was a $0.3 million loss versus income of $14.2 million. Marine returned to operating profit of $6.8 million from a $7.4 million loss, while Power also returned to profit, at $2.6 million versus a $1.7 million loss.
• Other income included $6.5 million of other investment income versus $0.6 million, and a $1.4 million foreign currency gain versus a $5.7 million loss. These items partly offset lower operating income.
• Cash and short-term investments increased $118.5 million from year-end, supported by operating cash flow and increased bank borrowings; investments in affiliates and capital expenditures were uses of cash.

Outlook, risks and unusual items

• Management anticipated positive operating income for the remainder of 2015 in Pork, Commodity Trading and Milling (excluding derivatives mark-to-market), Marine, Sugar and Power, generally at lower levels than 2014 where specified. It anticipated continuing losses from the Brazilian affiliate. The company cautioned that commodity prices, feed costs, cargo rates and volumes, fuel costs, currencies and market conditions are difficult to predict.
• Remaining-2015 capital expenditure budget was $191.8 million. It included four dry-bulk vessels under construction, expected to be sold and leased back as delivered, and planned Marine equipment and vessel spending.
• Commodity derivatives and interest-rate agreements are not designated for hedge accounting; mark-to-market changes can create earnings volatility and may reverse as underlying transactions occur. The company also enters some speculative derivative transactions.
• Affiliate exposures merit attention: a Brazilian flour business continued to incur significant losses; Seaboard recorded $11.7 million of affiliate losses in the quarter, including a $5.8 million share of deferred-tax-asset allowances. The DRC bakery note receivable was $34.6 million and could face impairment if cash flows do not improve; Seaboard reported $56.9 million of total DRC affiliate investments, advances and notes receivable.
• After quarter-end, Seaboard invested $10 million in a Dominican Republic power business, increasing ownership to 29.9%; it expects to use equity-method accounting from Q2 and retroactively adjust prior periods. It also invested $8 million in a Botswana flour mill. In March, it invested $10 million for a 25% interest in a Turkish oilseed-crushing business.
• Seaboard disclosed a new DOJ grand-jury subpoena concerning foreign companies and individuals not affiliated with Seaboard; the government advised that Seaboard is not a target. It is cooperating, but potential loss, if any, cannot be estimated. A separate prior ICE/USAO investigation remained unresolved, with no proceedings filed as of the report date.
• Management anticipated possible further foreign-currency translation losses from Argentine peso weakness. Avian influenza affecting the turkey industry could affect Butterball; Seaboard could not predict the impact.

Important facts for investors to verify

• Whether pork prices, feed costs and segment margins support management’s 2015 outlook, particularly after the steep year-over-year Pork decline.
• How derivative mark-to-market movements compare with realized margins, and the potential earnings volatility from instruments not qualifying for hedge accounting.
• Recoverability of affiliate notes and investments, especially the Brazilian and DRC exposures, and the scale or timing of any further funding.
• Delivery, sale-leaseback terms and total costs for the four dry-bulk vessels, alongside the $191.8 million remaining capital budget.
• Developments in the DOJ and ICE/USAO matters, and any resulting financial or operational consequences.
• Availability and potential tax cost of foreign-held liquidity if U.S. funding needs change; the company reported no intention to repatriate those funds.