Seaboard Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparative periods ended July 2, 2011. Amounts below are in millions of dollars unless stated otherwise. The interim statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $1,510.6 | $1,398.6 | $2,981.7 | $2,866.8 |
| Operating income | $60.7 | $137.0 | $154.1 | $267.2 |
| Net earnings attributable to Seaboard | $50.1 | $113.5 | $132.3 | $230.4 |
| Earnings per share | $41.58 | $93.34 | $109.63 | $189.45 |
| Operating margin | 4.0% | 9.8% | 5.2% | 9.3% |
First-half operating cash flow was $143.3 million, versus $3.5 million a year earlier. The improvement mainly reflected lower working-capital requirements, partly offset by lower earnings. Capital expenditures were $68.1 million; investing cash outflow was $191.2 million, including substantial purchases of short-term investments. Cash and cash equivalents ended at $48.1 million.
Cash and short-term investments totaled $488.2 million at June 30, up $93.4 million from year-end. Working capital was $1,157.1 million. Current assets were $1,690.1 million and current liabilities $533.0 million. Total debt, including bank notes and current maturities, was approximately $214.4 million, up from $173.5 million at December 31, 2011. Seaboard reported no borrowings on its $200 million committed credit line; $30.4 million was outstanding on uncommitted lines. The company reported $188.8 million of cash and short-term investments at foreign subsidiaries, which it intends to reinvest abroad.
Material changes and business developments
- Revenue rose 8.0% in Q2 and 4.0% in the first half, mainly from higher Commodity Trading and Milling sales and the new Dominican Republic power facility, partly offset by lower domestic pork prices.
- Operating income declined $76.2 million in Q2 and $113.2 million in the first half. A major comparison factor was the $51.4 million gain on the sale of power facilities recorded in Q2 2011; weaker pork prices and higher feed costs also weighed on results.
- Pork segment operating income fell to $20.8 million in Q2 from $62.5 million; first-half income fell to $73.7 million from $142.1 million. Lower pork selling prices and higher feed costs were the main factors.
- Commodity Trading and Milling revenue increased, including the effect of consolidating PS International (PSI) from January 1, 2012 after Seaboard raised its interest from 50% to 70%. Reported segment operating income was affected by derivative mark-to-market losses; excluding those adjustments, income increased year over year in both periods.
- Marine returned to operating income of $1.1 million in Q2, compared with an $11.1 million loss, mainly on lower trucking costs and, in Q2, lower fuel and charter-hire costs per unit.
- The new 106-megawatt Dominican Republic power facility began operations in March 2012. Power segment sales increased, while reported operating income fell against the prior-year sale gain.
- Butterball, Seaboard’s equity-method Turkey affiliate, contributed $5.6 million of income in Q2 and $14.4 million in the first half, compared with $0.9 million in each 2011 period.
Outlook, risks and unusual items
- Management expected positive operating income for the remainder of 2012 in Pork and Sugar, but at lower levels than 2011; it also expected positive Power segment income, at a higher level than the second half of 2011. Marine profitability and Commodity Trading and Milling results remained difficult to predict. No consolidated earnings guidance was provided.
- Management budgeted $103.2 million of capital expenditures for the remainder of 2012. It also contracted to build four dry-bulk vessels for approximately $83 million, mostly payable in 2014; an $8.3 million down payment was made in July.
- Other planned investment included up to approximately $14.2 million of further advances to a central African bakery affiliate, bringing anticipated total investment and advances to about $43 million, and $2.4 million of additional low-income housing partnership investments in 2012.
- Commodity, foreign-exchange and interest-rate derivatives are not designated for hedge accounting. Mark-to-market movements can therefore affect earnings before related purchase or sales contracts are recognized; management said such adjustments may reverse as products are delivered. The company also acknowledged that it may sometimes enter into speculative derivatives.
- Management cited unpredictable pork and feed prices, commodity-market volatility, political and economic conditions in operating countries, foreign-exchange movements, cargo volumes and rates, and power fuel costs and rates as risks to results.
- A $1.8 million pension settlement loss was recorded in Q2. Seaboard repurchased 8,125 shares for $15.9 million in the first half; $44.1 million remained under the repurchase authorization. The company did not intend to pay dividends in 2012.
- Legal proceedings, including environmental matters, were not expected by management to have a material adverse effect. Third-party guarantees had maximum exposure of $1.1 million and were considered remotely likely to result in loss. Letters of credit reduced available borrowing capacity by $87.5 million in total.
- Management reported effective disclosure controls. PSI control documentation and evaluation were in progress, with the company planning to include PSI in its Section 404 compliance program effective January 1, 2013. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the sharp year-over-year decline in operating income is understood in context: the prior period included the $51.4 million power-asset sale gain, while Pork also faced weaker prices and higher feed costs.
- How commodity derivative mark-to-market results compare with realized margins as the related contracts settle, and how much reported segment performance depends on these timing effects.
- Whether Pork, Sugar and Power meet management’s remainder-of-2012 expectations, and whether Marine and Commodity Trading and Milling results improve or weaken.
- Funding and execution of the $103.2 million remaining-2012 capital budget, the $83 million vessel commitment, and planned affiliate investments; also monitor debt, credit-line availability and foreign-held liquidity.
- PSI consolidation and internal-control integration, as well as Butterball’s results and the collectability and terms of affiliate notes receivable.