Seaboard Corporation — Q1 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended April 2, 2016, compared with the three months ended April 4, 2015. Seaboard operates across Pork, Commodity Trading and Milling (CT&M), Marine, Sugar, Power and Turkey; Turkey results primarily reflect its equity-method investment in Butterball. Dollar amounts are in millions except per-share figures.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Net sales | $1,319 | $1,452 |
| Gross income | $100 | $93 |
| Operating income | $36 | $28 |
| Earnings before income taxes | $69 | $48 |
| Net earnings attributable to Seaboard | $54 | $33 |
| Earnings per common share | $45.91 | $28.11 |
| Operating cash flow | $117 | $123 |
Revenue declined about 9%, while operating income rose about 29% and Seaboard-attributable earnings rose about 64%. Gross margin was approximately 7.6% versus 6.4%; operating margin approximately 2.7% versus 1.9%. Higher affiliate income ($22 versus $11), including Butterball, and foreign currency gains ($7 versus $1) contributed to earnings growth. Interest expense increased to $8 from $5; income tax expense was $14 versus $15.
Operating cash flow was $117, down $6 year over year. Investing cash outflow was $131, including $63 of capital expenditures and the $148 hog-related asset acquisition; financing provided $18, principally net bank borrowings. Cash and cash equivalents were $53 at quarter-end.
At April 2, cash and short-term investments totaled $1,238, down $66 from year-end. Total current assets were $2,482 and current liabilities $719. Management reported additional net working capital of $525 and considered liquidity and borrowing resources adequate for 2016 plans. Debt comprised $146 of short-term bank notes, $8 of current long-term maturities and $506 of long-term debt, or approximately $660 in total. The $500 term loan is due in 2022; its rate was 2.06%. The company had $371 of uncommitted bank lines, with $146 drawn and $3 of letters of credit reducing availability. Debt covenants were met. $341 of cash and short-term investments were held by foreign subsidiaries, which Seaboard intends to permanently reinvest abroad.
Material changes and segment results
- CT&M sales fell to $709 from $820, but operating income rose to $9 from $4. Excluding derivative mark-to-market adjustments, operating income was $14 versus zero. Management noted that these adjustments may reverse as transactions are realized.
- Pork sales rose to $328 from $321 and operating income to $29 from $16, mainly on lower internally grown hog feed costs and higher volumes. In February, Seaboard acquired hog inventory and related assets for $148 to support supply commitments to its new processing joint venture.
- Marine sales declined to $227 from $237 and operating income to $3 from $7, mainly due to lower cargo rates. Sugar sales fell to $33 from $45 and operating income was zero versus $4. Power sales fell to $17 from $25 and operating income was zero versus $3.
- Income from affiliates increased to $22 from $11; Turkey segment affiliate income, largely Butterball, rose to $20 from $17.
- Seaboard Triumph Foods’ total contribution commitment was reduced from $207 to $150 after third-party financing was secured. $36 was expected to be contributed during the remainder of 2016 and $73 in 2017; the facility was expected to be completed by mid-2017.
- Quarter-end accumulated other comprehensive loss increased to $303 from $278, largely reflecting foreign currency translation. Seaboard recognized $23 of after-tax translation loss related to the Argentine peso and said further weakening could cause additional losses.
Outlook, risks and unusual items
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 affiliate income. It could not predict whether Sugar would be profitable. No consolidated earnings or revenue guidance was provided. Management budgeted $147 of additional 2016 capital expenditures.
Key uncertainties include commodity and product prices, feed and fuel costs, cargo rates, currency movements, and political and economic conditions in operating markets. Derivatives are generally not designated for hedge accounting, so mark-to-market changes can affect reported earnings before related transactions are realized. Management said market-risk exposure had not materially changed since year-end.
Seaboard disclosed a $35 long-term note receivable from a loss-making DRC bakery affiliate; no impairment was recorded, but management warned that missed forecast cash flows could result in a material charge. The company also had material exposure to affiliates in the DRC and a Brazilian flour business whose investment, advances and note receivable were fully reserved; Seaboard was pursuing a possible debt-to-equity conversion, with no assurance it would gain control.
Other contingencies include a DOJ inquiry for which the company said it was not a target, an ongoing matter involving ICE and Oklahoma authorities where settlement discussions continued, and an EPA information request concerning ammonia releases at a pork plant. The filing said potential outcomes or liabilities could not currently be determined. Seaboard had no material changes to previously disclosed risk factors. It did not repurchase shares in the quarter and did not intend to declare a dividend for 2016.
Important facts for investors to verify
- Whether improved Pork and CT&M operating performance persists, particularly given market-price and derivative mark-to-market volatility.
- Progress, remaining funding needs and hog-supply commitments for the Seaboard Triumph Foods facility, including the planned mid-2017 completion.
- Collection prospects and valuation of affiliate notes and investments, especially the DRC bakery and Brazilian flour business exposures.
- Further Argentine peso weakness, its effect on Sugar results and accumulated other comprehensive loss, and potential foreign-currency earnings volatility.
- Liquidity available for planned capital spending and commitments, including the amount held abroad and the terms of uncommitted bank facilities.
- Developments in the DOJ, ICE/Oklahoma and EPA matters, for which the filing provides no clear estimate of potential loss.