Seaboard Corporation — Form 10-Q Summary
Reporting period: Quarter ended October 1, 2011; nine-month results compared with the periods ended October 2, 2010. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,476.7 | $1,111.8 | $4,343.5 | $3,180.6 |
| Operating income | $67.0 | $41.6 | $334.2 | $210.4 |
| Net earnings attributable to Seaboard | $36.6 | $39.9 | $266.9 | $180.3 |
| Operating margin | 4.5% | 3.7% | 7.7% | 6.6% |
| Earnings per common share | $30.07 | $32.74 | $219.52 | $146.93 |
| Cash from operating activities | — | — | $31.7 | $252.0 |
Quarterly sales rose 32.8% and nine-month sales rose 36.6%. Nine-month operating income increased 58.9%, aided by a $52.9 million gain on the sale of power facilities. Despite higher quarterly operating income, Seaboard-attributable earnings fell 8.3% in Q3, reflecting weaker other income, including investment and foreign-currency losses. Nine-month attributable earnings increased 48.1%.
Nine-month cash from operations fell $220.3 million year over year, primarily because of working-capital demands in Commodity Trading and Milling, including higher receivables and inventories and the timing of liability payments. Capital expenditures were $150.3 million.
Balance sheet and liquidity
At October 1, 2011, cash and short-term investments totaled $351.1 million, current assets were $1,627.2 million, and current liabilities were $598.0 million; working capital was $1,029.2 million. The current ratio was approximately 2.7. Total debt, including bank notes and current maturities, was approximately $259.1 million, compared with $171.8 million at December 31, 2010. Debt increased in part to finance construction of the new Dominican Republic power facility. Seaboard reported $300 million of committed credit lines, with no committed-line borrowings outstanding, and $59 million borrowed under uncommitted lines. $139.5 million of cash and short-term investments was held by foreign subsidiaries and was intended to remain invested outside the U.S.
Material changes and segment results
- Pork: Nine-month operating income increased to $195.8 million from $139.3 million, largely on higher selling prices and volumes. Higher feed and purchased-hog costs weighed on results; management expected positive but lower operating income for the rest of 2011.
- Commodity Trading and Milling: Nine-month sales increased to $2,050.4 million from $1,272.0 million. Reported operating income was $45.4 million, but $22.3 million of favorable mark-to-market adjustments affected the period; excluding those adjustments, income was $23.1 million versus $32.1 million. Customer contract issues led to $14.0 million of inventory write-downs. Management said it could not predict the segment’s remaining-2011 results.
- Marine: Nine-month operating results swung to a $12.2 million loss from $31.9 million income, as higher fuel, trucking and charter costs outpaced improved rates. Management anticipated further losses for the remainder of 2011.
- Sugar: Nine-month operating income rose to $54.6 million from $24.5 million on higher sugar prices. Management expected positive, but lower, remaining-2011 income. A labor strike was resolved without material impact.
- Power: Nine-month operating income included a $51.4 million gain from the April sale of two Dominican Republic facilities and a further $1.5 million escrow-related gain in Q3. Reduced operating capacity was expected to constrain sales until a replacement 106-megawatt facility was expected to begin operations in early 2012.
- Turkey affiliate: Seaboard recorded a $3.2 million nine-month loss from affiliates, including its share of Butterball facility-closure and severance charges and derivative-related losses.
Outlook, risks and unusual items
- Management budgeted $52.8 million of additional capital expenditures for the remainder of 2011. The Dominican Republic replacement power project was estimated at approximately $125 million; management expected to fund spending through cash, investments or borrowing capacity.
- Management believed available liquidity, internally generated cash and borrowing capacity would be adequate for current operations and known 2011 expansion plans. No company-wide earnings guidance was provided.
- Key uncertainties include commodity prices and derivative accounting volatility, customer performance on grain contracts, feed and hog costs, Marine fuel and transportation costs, foreign exchange and interest rates, and political and economic conditions in markets where the company operates. Derivatives generally were not designated as accounting hedges, so fair-value changes could affect earnings before related transactions settle.
- Q3 included a $5.6 million impairment charge for a Mexico pork-processing plant; the after-tax impact attributable to Seaboard was $2.3 million. Grain inventory write-downs were $10.7 million in Q3 and $14.0 million for nine months.
- Butterball repaid a $20 million short-term loan on November 3, 2011. Subsequent to quarter-end, Seaboard provided a $35 million credit line to affiliate PS International; $22.8 million was drawn by October 29.
- Seaboard said it did not intend to declare dividends in 2011 or 2012 because those annual dividends had been prepaid in December 2010. The share-repurchase authorization was extended through October 31, 2012.
- Management reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective. A new financial reporting system was introduced at most foreign commodity-trading locations; the changes were not expected to materially affect internal control over financial reporting.
Key facts for investors to verify
- Whether Commodity Trading and Milling’s customer contract exposures and inventory write-downs generate further losses or cash-flow pressure.
- Underlying segment profitability after separating derivative mark-to-market effects and the one-time power-asset sale gains.
- Execution, final cost and expected early-2012 start-up of the Dominican Republic power project, and the effect of reduced capacity before commissioning.
- Marine segment cost trends and the sustainability of Pork and Sugar margins amid volatile input and selling prices.
- Credit quality and repayment prospects for affiliate loans and the PS International credit line, alongside foreign-held liquidity and total debt.