Seaboard Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter ended September 29, 2012; comparisons are with the quarter ended October 1, 2011. Unless stated otherwise, amounts are in millions of dollars.
Business context and results
Seaboard operates in pork, commodity trading and milling, marine, sugar, power and other businesses; its Turkey segment reflects its equity-method investment in Butterball. Third-quarter sales were nearly flat, while operating income and earnings attributable to Seaboard increased. For the first nine months, sales rose modestly but operating income and earnings declined, principally reflecting the prior-year power-asset sale gain and weaker pork results.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,479.4 | $1,476.7 | $4,461.1 | $4,343.5 |
| Operating income | $85.1 | $67.0 | $239.1 | $334.2 |
| Net earnings attributable to Seaboard | $74.4 | $36.6 | $206.7 | $266.9 |
| Earnings per common share | $61.92 | $30.07 | $171.52 | $219.52 |
| Gross margin, calculated | 9.8% | 7.9% | 9.4% | 11.3% |
| Operating margin, calculated | 5.7% | 4.5% | 5.4% | 7.7% |
Cash flow, balance sheet and liquidity
- Cash from operations for the first nine months was $133.0 million, versus $31.7 million in 2011. Management attributed much of the increase to timing of Commodity Trading and Milling current-liability payments; lower earnings partly offset it.
- Investing cash use was $165.1 million, including $112.2 million of capital expenditures. Financing provided $16.5 million; Seaboard repurchased $18.2 million of stock. Cash and cash equivalents ended at $54.5 million, down from $71.5 million at year-end.
- Cash plus short-term investments totaled $431.7 million, compared with $394.8 million at December 31, 2011. Working capital was $1,211.5 million. Current assets were $1,917.8 million and current liabilities $706.3 million.
- Debt comprised $23.9 million of bank notes, $44.2 million of current long-term debt and $139.7 million of long-term debt, approximately $207.8 million in total. Long-term debt fair value was estimated at $187.9 million versus $183.9 million amortized cost.
- The committed credit line was reduced to $200 million; no committed-line borrowings were outstanding. Uncommitted lines totaled $195.4 million, with $23.9 million borrowed. Letters of credit reduced available capacity. The committed line matures July 10, 2013.
Material changes and segment performance
- Pork: Nine-month sales fell $97.1 million and operating income fell $92.2 million. Lower domestic pork prices drove the decline, with higher feed costs also weighing on the nine-month result. Management said it could not predict whether the segment would be profitable for the rest of 2012.
- Commodity Trading and Milling: Nine-month sales increased $74.9 million and operating income increased $8.5 million. Higher third-party commodity margins and consolidation of PS International contributed; derivative mark-to-market movements were volatile. The prior-year period included $101.1 million of sales from previously deferred contract amounts.
- Marine: Nine-month sales rose $20.3 million and the segment moved from a $12.2 million operating loss to $14.6 million of operating income, mainly from lower per-unit charter, fuel and trucking costs and improved rates. Management anticipated positive fourth-quarter operating income.
- Sugar: Nine-month sales rose $25.1 million, while operating income declined $3.3 million to $51.3 million. Management expected positive, but lower-than-2011, operating income for the rest of 2012.
- Power: The new 106-megawatt Dominican Republic facility began operating in March 2012, lifting nine-month sales by $93.0 million year over year. Nine-month operating income fell $25.2 million, largely because 2011 included a $52.9 million gain on the sale of power facilities. Management expected higher sales volume and positive operating income for the remainder of 2012.
- Turkey / Butterball: Seaboard’s nine-month affiliate income was $14.7 million, versus a $3.2 million loss, reflecting lower production costs, higher sale prices and reduced mark-to-market losses. Butterball anticipated positive income for the balance of 2012.
Outlook, risks and unusual items
- Management said liquidity and borrowing capacity were adequate for existing operations and known 2012 expansion plans. It budgeted $57.2 million of capital spending for the rest of 2012. Four dry-bulk vessels were contracted for approximately $83 million, with delivery expected in 2014; most of the cost is due then.
- No consolidated earnings guidance was provided. Management highlighted uncertainty in pork prices and feed costs; commodity markets and political and economic conditions; marine cargo volumes, rates and costs; sugar and alcohol prices; power fuel costs and rates; and foreign exchange movements.
- Derivatives are generally not designated as accounting hedges, so mark-to-market movements can affect reported earnings before related transactions are realized. Seaboard also enters into some speculative derivatives. It terminated a $25 million-notional interest-rate swap in September and paid $3.9 million to unwind it.
- The nine-month comparison is affected by the $52.9 million 2011 power-sale gain. Other notable items include a $1.8 million pension settlement loss recorded in 2012 and the 2011 $5.6 million impairment charge at the Mexico pork-processing plant.
- Seaboard disclosed ordinary-course legal and environmental proceedings that management did not expect to have a material adverse effect, and $1.1 million maximum exposure on guarantees for third parties. The 2010 U.S. tax return was under IRS examination. Management reported no material change in previously disclosed risk factors.
- On October 19, 2012, the board extended the $100 million share-repurchase authorization through October 31, 2015. At quarter-end, approximately $41.8 million remained available. The company was evaluating whether to declare and prepay a dividend, with no assurance one would be declared.
Important facts for investors to verify
- Whether pork pricing and feed-cost trends materially affect fourth-quarter profitability.
- How much of the nine-month operating-income decline reflects the nonrecurring 2011 power-sale gain versus ongoing segment performance.
- Commodity derivative exposures, mark-to-market effects and the timing of any reversals as contracts settle.
- Funding and timing for planned capital spending, vessel commitments, remaining 2012 debt maturities and the July 2013 credit-line renewal.
- Whether management declares a dividend and continues repurchases, and whether any foreign-held cash needs to be repatriated.