Seaboard Corporation — Q3 2018 Form 10-Q
Business context and reporting period. Seaboard is a diversified food, commodity trading and milling, marine transportation, sugar and power company, with an equity-method investment in Butterball. The quarter ended September 29, 2018; comparisons are with the quarter ended September 30, 2017. Amounts are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,651 | $1,402 | $4,921 | $4,223 |
| Gross income | $122 | $148 | $410 | $415 |
| Operating income | $37 | $73 | $166 | $196 |
| Net earnings attributable to Seaboard | $35 | $81 | $74 | $224 |
| Earnings per share | $29.93 | $69.28 | $62.96 | $191.63 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $166 | $198 |
- Q3 gross margin was approximately 7.4% versus 10.6%; operating margin was 2.2% versus 5.2%. For the nine months, gross margin was 8.3% versus 9.8%, and operating margin was 3.4% versus 4.6%.
- Q3 sales rose about 18% and nine-month sales rose about 17%, primarily from higher CT&M sales, higher Marine volumes and rates, and increased biodiesel sales. Growth included the Mimran acquisition and, for the nine-month comparison, $42 million of retroactive federal blender’s credits.
- Operating income fell $36 million in Q3 and $30 million for the nine-month period. Management attributed the declines mainly to weaker Pork segment margins; CT&M improved, while the nine-month comparison also benefited from blender’s credits.
- Other investment income was $40 million in Q3 versus $54 million, but $15 million for nine months versus $119 million. Affiliate losses were $18 million in Q3 and $40 million for nine months, compared with $3 million and $10 million, respectively, in 2017. These items contributed to lower earnings.
- Nine-month operating cash flow decreased $32 million year over year, principally because of lower earnings. Inventories used $106 million of cash.
Liquidity, debt and capital
- At September 29, cash and cash equivalents were $78 million and short-term investments were $1.590 billion, together $1.668 billion. Total current assets were $3.172 billion and current liabilities $769 million; management reported additional net working capital of $735 million.
- Debt comprised $162 million of bank notes payable and $741 million of long-term debt net of current maturities and unamortized costs. Seaboard had $582 million in uncommitted credit lines, with $162 million drawn and $23 million of letters of credit reducing availability, plus a $100 million committed line with no balance outstanding.
- In September, Seaboard replaced a $500 million Seaboard Foods term loan with a $700 million unsecured facility, extended maturity from 2022 to 2028, and received $220 million net proceeds. The loan rate was 3.84% at quarter-end. The company reported compliance with debt covenants.
- Cash and short-term investments declined $24 million from year-end. Investing cash outflow was $386 million, including $270 million paid for acquisitions; financing provided $185 million. Capital expenditures were $95 million for the nine months, and management budgeted a further $103 million for the rest of 2018.
- Dividends declared were $1.50 per share for Q3 and $4.50 per share for nine months, unchanged year over year. No shares were repurchased; $100 million remained authorized under the repurchase program.
Material changes and segment results
- Pork: Q3 operating income was $2 million versus $59 million; nine-month income was $111 million versus $162 million. Lower pork prices and higher feed costs were key pressures. Management expected negative Pork operating income for the remainder of 2018. Tariffs on exports, including to China and Mexico, were an additional headwind.
- Commodity Trading and Milling: Sales increased to $898 million in Q3 and $2.574 billion for nine months, including Mimran. Operating income was $21 million and $30 million, respectively. Management expected positive remainder-of-year operating income excluding derivative mark-to-market effects; actual results remain exposed to commodity prices and political and economic conditions.
- Marine: Q3 sales were $259 million and operating income $9 million; higher volumes and rates were partly offset by fuel and voyage costs. Management expected positive operating income for the remainder of 2018.
- Sugar: Q3 sales were $43 million and operating income $5 million. Argentina’s peso devaluation and inflation led Seaboard to adopt highly inflationary accounting effective July 1; Q3 included an $8 million foreign-currency gain from the change. Management could not predict whether Sugar would be profitable for the rest of 2018.
- Power: Q3 sales were $34 million and operating income $7 million, supported by higher spot-market rates. Management expected positive operating income for the remainder of 2018 and was exploring strategic alternatives for its power barge.
- Turkey/Butterball: Seaboard recorded an $11 million Q3 affiliate loss and an $18 million nine-month loss. Butterball reported nine-month net loss of $36 million, compared with $21 million in 2017; management cited lower turkey volumes and higher logistics and production costs.
Seaboard acquired Groupe Mimran in January for estimated total consideration of $330 million, including $270 million cash net of cash acquired, a $46 million seller note and $14 million contingent consideration. Purchase accounting remained preliminary. Mimran contributed $272 million of sales and $14 million of earnings from acquisition through the nine-month period.
Outlook, risks and unusual items
- Management said liquidity and borrowing capacity were adequate for current operations and known 2018 expansion plans. The company planned a $103 million Pork plant expansion contract in Guymon during 2019–2020; Seaboard’s joint venture began a second shift at its Sioux City plant in October 2018.
- The 2017 Tax Act’s provisional tax effects were increased by $13 million in Q3, with final accounting expected in Q4 2018. A first-quarter change in a subsidiary’s tax status generated an estimated $22 million additional tax expense. The filing also reported a $4 million tax benefit related to retroactive blender’s credits and $42 million of blender’s credits recognized as non-taxable revenue.
- Seaboard reported that adoption of lease accounting on January 1, 2019 was expected to materially increase balance-sheet assets and liabilities, particularly for port and contract-grower operating leases.
- Legal exposures include pork-industry antitrust class actions for which potential loss could not be estimated; Uruguay proceedings involving Cereoil (including a claimed $22 million reimbursement and potential net liabilities of $23 million) and Nolston (potential net liabilities of $14 million); and a continuing U.S. government inquiry concerning money transfers and bank accounts in African countries. Outcomes and potential losses were not determinable. A separate older investigation involving ICE/Medicaid-related records remained under discussion, with no proceeding filed as of the report date.
- Other key uncertainties include commodity, feed, pork and turkey prices; fuel costs and marine rates; foreign-exchange movements; derivative mark-to-market volatility; and possible further losses or impairment at affiliates. Seaboard stated there were no material changes to the risk factors in its 2017 Form 10-K.
Important facts for investors to verify
- Whether Pork margins stabilize, given management’s expectation of negative segment operating income for the remainder of 2018.
- How much of reported earnings reflects recurring operations versus investment gains, foreign-exchange effects, tax items and derivative mark-to-market adjustments.
- Final purchase-price allocation and contingent consideration for Mimran, and the acquired business’s ongoing contribution to earnings and cash flow.
- Potential financial exposure from the antitrust, Uruguay and government-investigation matters, which the filing says cannot presently be estimated.
- The effects of Argentine currency and inflation conditions, and the expected balance-sheet impact of lease-accounting adoption.