SEABOARD CORP quarterly report, Q2 FY2011

Seaboard Corporation — Q2 2011 Form 10-Q

Business context and period: The quarter and first six months ended July 2, 2011. Seaboard operates across pork, commodity trading and milling, marine, sugar and power, among other businesses. Results are unaudited; interim results are not necessarily indicative of full-year performance.

Financial results and position

Q2 operating income included a $51.4m gain on the sale of Dominican Republic power facilities. Six-month operating cash flow fell $205.5m year over year, mainly from working-capital needs in commodity trading and milling, including higher receivables and inventories and payment timing. Capital expenditures were $76.5m.

At July 2, cash and short-term investments totaled $384.7m; working capital was $1,031.2m. Current assets were $1,580.6m and current liabilities $549.4m. Debt comprised $92.0m of bank notes payable, $3.3m of current long-term maturities and $105.6m of long-term debt. Equity was $2,008.5m. Management said liquidity and borrowing capacity were adequate for existing operations and currently known expansion plans.

Material changes and segment performance

Six-month sales rose $798.0m and operating income rose $98.5m versus 2010. Sales growth primarily reflected higher commodity prices and volumes and higher pork selling prices. Operating-income improvement included the power-asset sale gain, higher sugar margins and improved pork results; marine performance weakened.

• Pork: Six-month operating income increased to $142.1m from $85.0m on stronger selling prices and volume. Higher feed costs, especially corn, and purchased-hog costs partly offset gains.
• Commodity Trading and Milling: Sales rose to $1,333.2m from $813.7m, while reported operating income declined to $38.3m from $42.2m. Results included derivative mark-to-market effects and $3.3m of inventory write-downs for customer contract concerns.
• Marine: Six-month operating loss was $4.0m versus $19.3m operating income a year earlier, as higher fuel, trucking and charter costs outweighed improved rates and volumes.
• Sugar: Six-month operating income increased to $44.0m from $20.8m, mainly from higher sugar prices.
• Power: Six-month operating income was $56.6m versus $7.7m, primarily due to the $51.4m disposal gain. The company sold two facilities and leased one back temporarily.

Outlook, risks and unusual items

• Management expected positive pork income for the rest of 2011, but below first-half levels; positive commodity trading and milling income excluding derivative mark-to-market effects; continuing marine losses; and positive but lower sugar and power income.
• Power sales were expected to be significantly lower for the remainder of 2011 pending startup of a new 106-megawatt Dominican Republic facility, anticipated by year-end 2011 or early 2012. The project’s estimated total cost is about $125m; $35.1m had been spent in the first half and $60.2m was budgeted for the rest of 2011.
• A labor strike at the sugar mill began in late July; an extended strike could shorten the harvest and materially affect results. The Turkey segment was evaluating plant-utilization initiatives that could cause unquantified one-time charges in the second half of 2011 or 2012.
• The Mexico ham-boning plant had a $9.7m net book value and no impairment was recorded, but future impairment remained possible if results failed to meet projections. Commodity-market volatility, foreign exchange, fuel costs and customer performance were also risks.
• Derivatives are generally viewed by management as economic hedges but are not designated for hedge accounting; mark-to-market movements can materially affect period earnings. The filing reports derivative fair-value assets of $9.4m and liabilities of $32.1m, before the disclosed commodity-option proceeds adjustment.
• The company did not repurchase shares in the first half; $70.0m remained under its repurchase authorization. It did not intend to declare dividends in 2011 or 2012, citing prior prepayment of those annual dividends.
• Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to the previously disclosed risk factors were reported.

Important facts for investors to verify

• How much of earnings growth reflects recurring operations versus the $51.4m power-asset sale gain.
• Whether working-capital consumption in commodity trading and milling reverses, and whether operating cash flow recovers.
• Marine cost trends, the sugar-mill strike’s duration and impact, and delivery/startup timing and remaining cost of the new power facility.
• Whether commodity-trading customer issues, derivative mark-to-market changes or the Mexico plant create further losses or impairment charges.
• Potential Turkey-segment restructuring charges and the company’s debt, liquidity and capital-spending needs as expansion projects proceed.