Seaboard Corporation — First Quarter 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparison is the three months ended April 2, 2016. Dollar amounts are in millions, except per-share data.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,399 | $1,319 | +6% |
| Gross income | $138 | $100 | +$38 |
| Operating income | $66 | $36 | +$30 |
| Net earnings attributable to Seaboard | $85 | $54 | +$31 |
| Earnings per common share | $71.84 | $45.91 | +$25.93 |
| Net cash from operating activities | $(6) | $117 | $(123) |
- Gross margin was approximately 9.9%, up from 7.6%; operating margin was approximately 4.7%, up from 2.7%. SG&A rose to $72 from $64, while remaining 5% of sales.
- Other income included $37 of other investment income, versus $5 a year earlier. Seaboard reported $38 of unrealized gains on trading securities still held at quarter-end, versus $5 in the prior-year quarter; investment-market movements therefore materially affected reported earnings.
- Cash and short-term investments totaled $1,329 at April 1, down $25 from year-end. Cash alone was $43. Management reported net working capital of $803.
- Total reported debt was approximately $659: $142 of bank notes payable, $18 of current long-term maturities, and $499 of long-term debt. Long-term debt included a $494 term loan due 2022. The company was in compliance with debt covenants and had no borrowings on its $100 committed credit line.
- Operating cash flow fell primarily because of working-capital movements, including a $78 increase in inventories and a $53 reduction in current liabilities, partly offset by higher earnings. Investing cash outflow was $45; financing cash inflow was $19.
- Seaboard declared and paid a $1.50-per-share quarterly dividend. A further $1.50 dividend was declared May 3, payable May 25, 2017.
Material changes and business drivers
- Pork: Sales increased to $370 from $328 and operating income to $49 from $29. Higher pork prices and lower feed costs improved margins; lower domestic pork volumes and weaker biodiesel margins partly offset gains. The federal biodiesel blender’s credits had not been renewed for 2017.
- Commodity Trading and Milling: Sales were $727 versus $709; reported operating income was $17 versus $9. Excluding mark-to-market adjustments, operating income was $13 versus $14. The segment’s reported comparison included a $9 favorable year-over-year swing in derivative mark-to-market effects.
- Marine: Sales rose to $234 from $227, while operating income remained $3. A $6 impairment of an investment in a start-up terminal contributed to a $6 loss from affiliates, compared with $1 affiliate income a year earlier.
- Sugar and Power: Sales and operating income improved in both segments. Sugar operating income was $3 versus breakeven; Power operating income was $2 versus breakeven.
- Turkey: Affiliate income, reflecting Seaboard’s Butterball investment, fell to $3 from $20. Butterball’s quarterly sales were $350 versus $385, and net income was $5 versus $38, primarily reflecting lower turkey prices.
- Interest expense declined to $3 from $8, primarily due to a patronage dividend related to the term loan. The effective tax rate was higher, mainly because U.S. biodiesel tax provisions expired and projected tax credits were lower.
Outlook, risks, contingencies, and unusual items
- Management expects positive operating income for the remainder of 2017 in Pork, CT&M (excluding derivative mark-to-market effects), Marine, Power, and positive affiliate income from Turkey. It could not predict Sugar’s profitability for the rest of the year. Commodity prices, feed costs, freight rates, fuel costs, exchange rates, and market conditions remain uncertain.
- Management budgeted $198 of capital expenditures for the remainder of 2017, in addition to $36 spent in Q1. Seaboard also contributed $25 to its Seaboard Triumph Foods joint venture in Q1 and had a further $48 commitment for 2017. The company acquired a Canadian pulse and grain elevator for $14.
- Management believes liquidity and borrowing capacity will support existing operations and currently known 2017 expansion plans. Of cash and short-term investments, $404 was held by foreign subsidiaries; Seaboard intends to permanently reinvest those funds outside the U.S.
- A Dominican Republic environmental license for the company’s power barge was not expected to be renewed by the relevant ministry. If not renewed, Seaboard may have to relocate the barge by Q3 2018; the outcome and potential earnings impact were not estimable.
- Seaboard is cooperating with a U.S. Department of Justice inquiry involving money transfers and bank accounts in the DRC and other African countries, including requests concerning an affiliate. The company said it could not estimate the probability or amount of any loss. Other unresolved matters include an Oklahoma employment/health-plan investigation and an EPA inquiry into ammonia releases at a pork plant; potential liabilities were not estimable.
- The Marine terminal affiliate’s customer loss, debt default, and unexpected construction needs led to $9 of recorded impairment and allowance charges across its investment and related receivables. Additional charges are possible if cash flows do not improve. A separate DRC bakery affiliate note had about $19 outstanding after $16 of prior reserves; further impairment is possible if cash flows weaken.
- CT&M derivatives are not accounted for using hedge accounting, so mark-to-market changes may cause earnings volatility and may reverse as related transactions are completed. Seaboard also disclosed speculative derivative activity. The company’s market-risk exposure was not materially changed from year-end.
- Seaboard had an authorization to repurchase up to $100 of common stock through October 31, 2017, but made no repurchases in Q1. Management reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- How much of the quarter’s earnings growth is sustainable operating improvement versus volatile gains on investments and derivative mark-to-market accounting.
- Whether operating cash flow recovers as inventory and other working-capital movements normalize.
- Progress, cash needs, and potential further impairment at the Marine terminal and DRC bakery affiliates.
- The outcome and potential financial effects of the DOJ inquiry, Oklahoma matter, EPA inquiry, and Dominican Republic power-barge licensing issue.
- Execution and funding of the remaining 2017 capital budget and Seaboard Triumph Foods commitment, alongside dividends and debt obligations.
- Whether segment-level outlook assumptions hold, particularly for Pork margins, CT&M commodity exposure, Butterball earnings, Sugar profitability, and Power fuel and spot-market economics.