Seaboard Corporation — Q3 2013 Form 10-Q
Business context and period. Seaboard operates across pork, commodity trading and milling, marine transportation, sugar, power and other businesses; its Turkey segment reflects its equity-method investment in Butterball. This unaudited report covers the quarter ended September 28, 2013, and the first nine months of 2013, compared with the corresponding 2012 periods. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,648.1m | $1,479.4m | $4,914.4m | $4,461.1m |
| Operating income | $33.8m | $85.1m | $150.8m | $239.1m |
| Net earnings attributable to Seaboard | $31.0m | $74.4m | $128.0m | $206.7m |
| Earnings per common share | $25.99 | $61.92 | $107.09 | $171.52 |
| Operating cash flow | Not separately stated | Not separately stated | $5.0m | $133.0m |
Q3 gross margin was approximately 6.1% versus 9.8% a year earlier; operating margin was 2.0% versus 5.7%, and net margin attributable to Seaboard was 1.9% versus 5.0%. For the first nine months, gross margin was 7.0% versus 9.4%, and operating margin was 3.1% versus 5.4%.
At September 28, cash and cash equivalents were $31.8m and short-term investments were $245.0m, totaling $276.7m, down $84.3m from year-end 2012. Current assets were $1,788.4m and current liabilities $586.3m. Debt comprised $54.9m of bank notes, $11.9m of current long-term debt and $104.2m of long-term debt. The $200m committed credit line had no borrowings; $54.9m was drawn on uncommitted lines. Management said liquidity and borrowing resources were adequate for existing operations and known 2013 plans.
Nine-month operating cash flow fell to $5.0m from $133.0m, principally because current liabilities declined in 2013 while they increased in the comparable 2012 period. Investing cash flow was $0.6m; capital expenditures were $110.9m. Financing cash outflow was $21.3m. Cash declined by $15.9m over the period.
Material changes and business drivers
- Revenue rose 11.4% in Q3 and 10.2% year to date, led by higher commodity-trading volumes and, for the nine-month period, higher wheat and soybean-meal prices. Operating income declined 60.3% in Q3 and 37.0% year to date.
- Marine: shifted to operating losses of $15.0m in Q3 and $22.4m year to date, versus profits of $13.0m and $14.6m. Lower volumes, particularly in Venezuela, reduced sales; trucking and terminal costs per unit increased. Management expected the segment to remain unprofitable for the rest of 2013.
- Sugar: operating income declined to $0.2m in Q3 and $28.3m year to date, principally reflecting lower sugar prices in U.S. dollars amid Argentine peso weakness. Management said further currency weakening was possible and could not predict whether the segment would be profitable for the remainder of 2013.
- Commodity Trading and Milling: operating income fell to $8.8m in Q3 and $29.7m year to date, reflecting weaker wheat margins and unfavorable conditions at an African affiliate. Management anticipated positive, but lower-than-2012, operating income for the rest of 2013, excluding potential derivative mark-to-market effects.
- Pork: Q3 operating income increased to $34.1m, but nine-month income declined to $90.0m, mainly due to higher hog and feed costs. Management anticipated positive income for the remainder of 2013 but could not predict pork prices, feed costs or the impact of porcine epidemic diarrhea virus.
- Turkey/Butterball: Seaboard recorded affiliate losses of $4.0m in Q3 and $11.4m year to date, compared with income in 2012. Higher feed costs and Seaboard’s share of impairment charges for Butterball’s planned Longmont facility sale were factors. Management anticipated positive affiliate income for the remaining 2013 period and the full year.
- Power: nine-month operating income increased to $41.4m from $35.1m, supported by higher spot-market rates and operation of a new facility; management expected positive but lower-than-2012 income for the rest of 2013.
Outlook, unusual items and risks
There was no consolidated earnings or revenue guidance. Management budgeted $60.7m of capital expenditures for the remainder of 2013. It also anticipated a final $72.6m payment in 2014 for four dry-bulk vessels under construction, bringing their total cost to $83.0m. The amended Miami port terminal agreement increased minimum operating-lease payments by approximately $75.6m through September 2028; payments could increase further under specified conditions.
- The 2013 results include a $11.3m one-time Pork revenue credit for 2012 biodiesel production under renewed federal blender’s credits, plus a $7.9m one-time tax benefit related to 2012 tax credits. Management did not expect the blender’s credit to have a significant remaining-2013 impact.
- A $3.2m pension agreement termination gain benefited nine-month earnings (approximately $2.0m after tax); a related $2.1m after-tax gain was recorded in other comprehensive income. Seaboard contributed $10.0m to its domestic pension plans in September.
- Derivative fair-value changes are not accounted for as hedge accounting. Management said mark-to-market movements may materially affect period earnings and may reverse as related transactions are completed. Commodity prices, foreign currencies and interest rates remain key market exposures.
- Foreign-currency translation losses were significant, primarily relating to Argentine-peso net assets. Management anticipated further translation losses if the peso weakened.
- ICE executed search warrants in 2012 concerning employment, health-plan and related records. Seaboard said it was cooperating; no civil or criminal charges had been filed, and potential fines or liabilities could not then be determined.
- Management reported no material change in previously disclosed risk factors. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
On November 1, 2013, the Board authorized an additional $75m for share repurchases; $15.9m remained under prior authorization at September 28. Seaboard had repurchased $17.3m of shares during the first nine months. A $12-per-share dividend paid in December 2012 represented prepayment of annual dividends through 2016; the company said it did not then intend further dividends for 2013–2016.
Important facts for investors to verify
- Whether the sharp decline in operating cash flow reflects mainly timing of working-capital payments or a more sustained deterioration.
- Whether Marine losses and weaker Sugar and commodity-trading margins persist, and how management’s segment outlook develops.
- Butterball’s operating recovery, feed-cost exposure and the outcome of the planned Longmont facility sale and related impairment charges.
- Exposure to Argentine-peso depreciation, commodity and derivative volatility, and the potential earnings effects of non-hedge-accounted mark-to-market changes.
- Potential outcome of the ICE investigation, and the financial implications of the expanded Miami terminal lease and planned vessel expenditures.
- Availability and location of liquidity: $78.1m of cash and investments was held by foreign subsidiaries and might incur tax if repatriated to the United States.