Seaboard Corporation — Q2 2013 Form 10-Q
Business context and period. Seaboard is a diversified company with Pork, Commodity Trading and Milling, Marine, Sugar, Power and other operations; its Turkey segment is its equity-method investment in Butterball. This unaudited quarterly report covers the three and six months ended June 29, 2013, compared with the periods ended June 30, 2012. Dollar figures below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,684.0 | $1,510.6 | $3,266.3 | $2,981.7 |
| Gross income | $115.4 | $120.6 | $242.3 | $275.2 |
| Operating income | $53.5 | $60.7 | $117.0 | $154.1 |
| Net earnings attributable to Seaboard | $39.5 | $50.1 | $97.0 | $132.3 |
| Earnings per common share | $33.07 | $41.58 | $81.06 | $109.63 |
| Operating cash flow | Not separately reported | Not separately reported | $46.4 | $143.3 |
Margins. Calculated from reported figures, gross margin was approximately 6.9% in Q2 (8.0% in 2012) and 7.4% for the first half (9.2% in 2012). Operating margin was approximately 3.2% in Q2 (4.0%) and 3.6% for the first half (5.2%).
Liquidity and debt at June 29, 2013. Cash and cash equivalents were $39.0 million and short-term investments were $358.5 million, totaling $397.5 million. Current assets were $1,837.0 million and current liabilities $625.4 million; management reported net working capital of $814.1 million. Debt comprised $65.4 million of bank notes payable, $12.0 million of current long-term debt and $104.2 million of long-term debt. The $200 million committed credit line had no borrowings; uncommitted-line borrowings were $65.4 million. About $213.2 million of cash and short-term investments was held by foreign subsidiaries and could incur tax if repatriated.
Cash flow and investment. First-half operating cash flow was $46.4 million, down $96.8 million year over year, which management primarily attributed to inventory changes in Commodity Trading and Milling. Investing activities used $47.9 million, including $82.1 million of capital expenditures, partly offset by $81.3 million of affiliate-note repayments. Financing activities used $7.3 million; Seaboard repurchased $13.7 million of stock and made $29.8 million of long-term debt principal payments. Cash and cash equivalents declined $8.6 million from year-end.
Material changes and drivers
- Sales rose 11.5% in Q2 and 9.5% for the first half, primarily on higher Commodity Trading and Milling volumes and prices for wheat and soybean meal. First-half sales also benefited from Power operating its new facility throughout Q1.
- Operating income fell $7.2 million in Q2 and $37.1 million for the first half. First-half declines reflected weaker Pork results and lower commodity-trading margins; higher Sugar and Marine performance did not offset these pressures.
- Q2 income from affiliates was a $4.5 million loss versus $9.8 million of income a year earlier; first-half affiliate results were a $7.4 million loss versus $19.4 million of income. Butterball contributed to the decline, with Seaboard’s share of its Longmont facility impairment charges of $2.7 million in Q1.
- Segment operating income for the first half: Pork $55.9 million (down from $73.7 million); Commodity Trading and Milling $20.9 million (down from $37.2 million); Marine a $7.4 million loss (versus $1.6 million income); Sugar $28.1 million (down from $37.7 million); and Power $28.0 million (up from $16.5 million).
Outlook, risks and unusual items
- Management anticipated positive operating income for the rest of 2013 in Pork, Commodity Trading and Milling, Sugar, Power and Turkey, subject to stated qualifications. Marine profitability for the remainder of 2013 was uncertain. The filing provides no consolidated earnings or revenue guidance.
- Management budgeted $102.7 million of capital expenditures for the remainder of 2013 and said available cash, short-term investments and borrowing capacity should fund known operating and expansion plans. The committed $200 million credit line matures February 20, 2018.
- Commodity results are exposed to volatile prices, inventory positions, political and economic conditions, and mark-to-market accounting. Derivatives are generally not designated as accounting hedges, so derivative and underlying contract results may affect earnings in different periods. Management expected positive but lower 2013 Commodity Trading and Milling operating income than 2012, excluding potential mark-to-market effects.
- Management cited uncertainty around pork prices, feed costs and the porcine epidemic diarrhea virus; Argentine peso weakness and related Sugar-segment translation losses; Marine cargo rates and volumes; and Power fuel costs and spot-market rates. It expected the Argentine peso may weaken further.
- First-half results included a $7.9 million one-time tax benefit related to 2012 tax credits and an approximately $11.3 million biodiesel blender’s credit recorded as Pork revenue. A $3.2 million pretax pension-agreement termination gain also benefited Q2 earnings; an associated $2.1 million gain was recorded in other comprehensive income.
- An ICE investigation involving employment-related records and other materials remained ongoing; no civil or criminal charges had been filed, and potential fines or liabilities could not be determined. The company said other ordinary-course legal matters were not expected to have a material adverse effect.
- A July 2013 amendment to Seaboard Marine’s Miami terminal agreement increased minimum payments over the initial term through 2028 by approximately $75.6 million, with potential further increases. The filing also reported a 50% investment in a Gambian flour mill after quarter-end.
- The board’s existing repurchase authorization had $19.5 million remaining at quarter-end. Seaboard said it did not currently intend to declare further dividends for 2013–2016, following the December 2012 payment that prepaid those years’ historically scheduled dividends.
Important facts for investors to verify
- Whether the sharp year-over-year first-half declines in operating income, attributable earnings and operating cash flow persist beyond the reported period.
- Commodity Trading and Milling margins, derivative mark-to-market reversals, inventory positions and affiliate results.
- Developments in pork feed costs and disease exposure, Marine profitability, Sugar’s currency exposure, and Butterball’s performance.
- Liquidity availability after considering foreign-held funds, letters of credit, planned capital spending, and the expanded Miami terminal commitments.
- Updates on the ICE investigation, tax-credit effects and any material legal or contingent liabilities.