Business context and reporting period
Seaboard Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2012, compared with the three months ended April 2, 2011. The company operates in pork, commodity trading and milling, marine, sugar, and power; it also reports income from its equity-method investment in Butterball.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2012 | Comparable 2011 |
|---|---|---|
| Net sales | $1,471.1 | $1,468.2 |
| Gross income / margin | $154.6 / 10.5% | $185.1 / 12.6% |
| Operating income / margin | $93.4 / 6.3% | $130.3 / 8.9% |
| Net earnings attributable to Seaboard | $82.2 | $116.9 |
| Earnings per common share | $68.00 | $96.11 |
| Cash from operating activities | $26.9 | $(54.9) |
| Capital expenditures | $29.0 | $39.0 |
At March 31, 2012, cash and short-term investments totaled $412.9 million, up $18.1 million from year-end. Current assets were $1,720.6 million and current liabilities $577.6 million (current ratio about 3.0). Debt, including bank notes and current maturities, was $202.2 million; cash and short-term investments exceeded debt by about $210.7 million. Total net working capital was $1,143.0 million. The company had $300 million of committed and $202.6 million of uncommitted credit lines; committed-line borrowings were nil and uncommitted-line borrowings were $39.6 million. Remaining 2012 scheduled long-term debt maturities were $41.4 million.
Material changes versus the prior comparable period
- Sales were nearly flat, up $2.9 million (0.2%), while operating income fell $36.9 million (28%) and Seaboard-attributable earnings fell $34.7 million (30%).
- Lower pork segment results were the main operating-income pressure: pork operating income declined $26.7 million, primarily from higher feed costs and lower pork prices. Marine income fell $6.5 million amid higher fuel and charter costs; sugar income fell $5.4 million, largely due to higher third-party sugar costs.
- Commodity Trading and Milling operating income rose to $25.7 million from $23.1 million; excluding mark-to-market adjustments, it was $19.4 million versus $11.1 million. Affiliate income in that segment declined to $0.7 million from $5.8 million.
- Butterball contributed $8.9 million of affiliate income versus $0.03 million in Q1 2011, reflecting improved prices and lower production costs.
- Operating cash flow improved by $81.7 million, mainly because working-capital movements were less adverse, particularly in commodity trading and milling. Cash used for investing was $67.8 million, including net purchases of short-term investments; financing provided $22.5 million.
- Effective January 1, 2012, Seaboard raised its ownership of PS International from 50% to 70% and began consolidating it. Management said the consolidation’s effect on results was not material.
Outlook, management commentary, risks, and unusual items
- Management budgeted $126.2 million of additional capital expenditures for the remainder of 2012. The new 106-megawatt Dominican Republic power facility began operations in March; total project cost was estimated at $136 million. Management expected higher power sales volumes, but said future fuel costs and rates were uncertain.
- Management anticipated positive operating income for the remainder of 2012 in pork and sugar, but at lower levels than 2011. It could not predict whether marine would be profitable for the rest of the year. Commodity Trading and Milling outlook was uncertain due to political, economic, and commodity-market volatility.
- In Q1 2012, power operating income included $2.2 million of contractor delay-liquidated damages. In Q1 2011, commodity trading and milling included $101.1 million of revenue recognized from contracts whose final prices became determinable in that quarter, and a $1.7 million inventory write-down. A $51.4 million gain on sale of power facilities was recognized in Q2 2011, affecting full-year comparisons, not this Q1 comparison.
- Commodity, foreign-currency, and interest-rate derivatives are not designated for hedge accounting; mark-to-market changes can materially affect reported earnings and may reverse as transactions settle. Seaboard reported Q1 commodity derivative losses of $2.4 million and foreign-currency-related losses across cost of sales and currency results.
- Management believed liquidity and borrowing capacity would support operations and currently known 2012 expansion plans. However, $114 million of cash and investments were held by foreign subsidiaries and could incur tax if repatriated; the company intended to keep these funds abroad.
- Legal proceedings, including environmental matters, were not expected by management to have a material adverse effect. Guarantees to third parties had maximum exposure of $1.2 million, with no liability accrued because loss was considered remote. Letters of credit reduced available credit capacity. The company reported no material change in its previously disclosed risk factors.
- Seaboard repurchased 3,250 shares for $6.3 million during the quarter; $53.7 million remained under its $100 million authorization. It did not intend to pay dividends in 2012.
Important facts for investors to verify
- Whether feed costs, pork prices, marine fuel and charter costs, and sugar sourcing costs continue to pressure segment margins.
- How commodity and currency mark-to-market adjustments affect reported results and subsequent realized margins.
- Completion cost, financing, and operating performance of the Dominican Republic power facility, including the April 2012 borrowing of the remaining $27.2 million under its facility.
- Cash availability and any tax consequences associated with foreign-held funds, alongside planned capital spending and debt maturities.
- Final investment amount and ongoing consolidation accounting for PS International, and performance of affiliates including Butterball.