Seaboard Corporation — Q2 2018 Form 10-Q
Business context and period. Seaboard reported the three and six months ended June 30, 2018, compared with periods ended July 1, 2017. Its operations span Pork, Commodity Trading and Milling (CT&M), Marine, Sugar, Power and Turkey. Financial amounts below are in millions of dollars, except per-share data.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,691 | $1,422 | $3,270 | $2,821 |
| Gross income | $116 | $129 | $288 | $267 |
| Operating income | $32 | $55 | $129 | $123 |
| Net earnings attributable to Seaboard | $7 | $58 | $39 | $143 |
| Earnings per common share | $6.28 | $50.51 | $33.03 | $122.35 |
| Operating cash flow | Not provided separately | Not provided separately | $64 | $177 |
- Q2 gross, operating and net margins were approximately 6.9%, 1.9% and 0.4%, respectively, versus 9.1%, 3.9% and 4.1% in Q2 2017. First-half margins were approximately 8.8%, 3.9% and 1.2%, versus 9.5%, 4.4% and 5.1%.
- Six-month operating cash flow was $64, down $113 year over year. Inventory absorbed $89 of cash, compared with a $41 source in the prior-year period. Capital expenditures were $58; cash paid for acquisitions was $270.
- At June 30, cash and short-term investments totaled $1,343, down $349 from year-end. Current assets were $2,866 and current liabilities $742. Debt comprised $141 of bank notes, $24 of current maturities and $508 of long-term debt (approximately $673 total). The company reported $781 of net working capital and said it was in compliance with debt covenants.
- Dividends declared were $1.50 per share for Q2 and $3.00 per share for the first half, unchanged from comparable 2017 periods.
Material changes versus prior periods
- Sales increased 19% in Q2 and 16% in the first half. Higher CT&M volumes, including acquired Mimran operations, Marine volumes and rates, and biodiesel sales contributed to growth.
- Q2 operating income fell $23; first-half operating income rose $6. Q2 weakness reflected lower Pork margins and CT&M derivative mark-to-market losses. First-half results included $42 of retroactive 2017 federal blender’s credits recorded as Pork-segment revenue.
- Net earnings fell sharply: Q2 to $7 from $58 and first half to $39 from $143. Other investment income (loss) shifted to a $25 loss in the first half from $65 of income a year earlier; the company also reported higher affiliate losses and interest expense. The first-quarter tax-status change for a subsidiary added an estimated $22 of tax expense.
- In January, CT&M acquired Groupe Mimran for consideration valued at $330, including $270 cash net of acquired cash, a seller note and contingent consideration. Preliminary goodwill was $161; the purchase price allocation remains subject to refinement. Mimran contributed $153 of sales and $9 of net earnings from acquisition through the reported period.
Outlook, risks and unusual items
- Management expects positive operating income for the remainder of 2018 in Pork, CT&M excluding derivative mark-to-market effects, Marine and Power. It could not predict Sugar or Turkey profitability for the remainder of the year. Management said overall liquidity and borrowing resources were adequate for existing operations and currently known 2018 expansion plans.
- Management budgeted $184 of capital spending for the remainder of 2018. Seaboard Triumph Foods targeted a second shift for Q4; Seaboard expects to supply some hogs. The Power segment was exploring strategic alternatives, including another power barge.
- Argentina’s peso devaluation and inflation led Seaboard to adopt highly inflationary accounting for Sugar effective July 1, 2018. The segment had $79 of net assets denominated in pesos at June 30; first-half foreign-currency translation loss was $29. Currency volatility and local prices remain risks.
- Commodity derivative changes are marked to market without hedge accounting, which can make reported earnings volatile. Management said CT&M’s Q2 and first-half operating income would have been $18 and $12 higher, respectively, excluding mark-to-market adjustments; it expects some adjustments to reverse as products are delivered.
- Other risks include pork tariffs affecting exports, feed and fuel costs, commodity and foreign-exchange volatility, and affiliate exposures. The filing describes pork antitrust class actions and Uruguay bankruptcy-related suits; outcomes and potential losses could not be estimated. A government inquiry concerning foreign transactions also remained unresolved, with no loss estimate available.
- Seaboard expects the lease-accounting standard effective in 2019 to materially increase reported assets and liabilities. It reported effective disclosure controls; assessment of acquired Mimran internal controls was ongoing.
Important facts for investors to verify
- Whether Pork margins recover despite tariffs, higher feed costs and lower pork-product prices, and whether the planned second shift affects results.
- How Mimran performs, how its preliminary purchase accounting changes, and whether contingent consideration becomes payable.
- How Argentine currency and highly inflationary accounting affect Sugar earnings, assets and reported currency results.
- Whether investment-market losses, derivative mark-to-market volatility, or affiliate impairments continue to weigh on earnings and cash flow.
- Developments and potential financial exposure in the pork antitrust and Uruguay cases, which the filing says cannot yet be estimated.
- Execution and funding of the $184 remaining-2018 capital budget and any additional expansion or power-barge plans.