Seaboard Corporation — Q2 2015 Form 10-Q
Reporting period: Unaudited quarter and six months ended July 4, 2015, compared with the periods ended June 28, 2014. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,427.9 | $1,694.6 | $2,880.2 | $3,174.2 |
| Gross income | $99.5 | $197.4 | $192.7 | $323.0 |
| Operating income | $31.7 | $134.3 | $59.5 | $199.5 |
| Net earnings attributable to Seaboard | $31.7 | $94.0 | $64.6 | $142.8 |
| Earnings per share | $27.04 | $79.28 | $55.15 | $120.34 |
| Cash from operating activities | — | $263.9 | $202.9 | |
| Capital expenditures | — | $68.0 | $68.2 |
Q2 sales fell 15.7% and operating income fell 76.4% year over year; six-month sales declined 9.3% and operating income declined 70.2%. Gross margin was approximately 7.0% in Q2 versus 11.7% a year earlier. Lower pork-product prices were the principal stated driver of the operating-income decline. Lower commodity prices and Power segment sales also weighed on revenue; higher Marine cargo volumes partly offset these declines.
Six-month operating cash flow increased $61.0 million, mainly from lower receivables and inventories, principally in Commodity Trading and Milling, partly offset by lower earnings. Investing cash outflow was $250.6 million, including purchases of short-term investments, $49.8 million of net investments and advances to affiliates, and $68.0 million of capital expenditures. Financing cash inflow was $30.5 million, mainly from higher bank borrowings.
Liquidity, debt and balance sheet
- At July 4, cash and cash equivalents were $80.1 million and short-term investments were $626.5 million, totaling $706.6 million, up $179.6 million from year-end 2014. Current assets were $2,031.7 million and current liabilities $640.3 million.
- Notes payable to banks were $103.3 million, all under uncommitted lines and related to foreign subsidiaries. No borrowings were outstanding under committed lines; available committed facilities included a $200 million long-term line maturing February 20, 2018. Total assets were $3,738.3 million and equity $2,787.9 million.
- Management said liquidity and borrowing capacity were adequate for existing operations and currently known expansion plans. $269.4 million of cash and short-term investments was held by foreign subsidiaries and management intended to permanently reinvest those funds abroad.
- Management budgeted a further $148 million of capital expenditures for the rest of 2015. The company also agreed to contribute up to $207.4 million toward a jointly developed Sioux City pork-processing facility, with about $25.7 million expected in 2015 and the balance through 2019.
Segments and material changes
- Pork: Q2 operating income was $18.5 million versus $110.2 million; six-month income was $34.9 million versus $170.7 million. Lower pork prices and the deconsolidation of Daily’s were key factors, partly offset by lower feed and third-party hog costs. Daily’s is now an equity-method investment.
- Commodity Trading and Milling: Q2 operating income was $7.4 million versus $18.3 million; six-month income was $11.9 million versus $30.2 million. Lower trading margins, bad-debt expense and derivative mark-to-market effects contributed. Affiliate losses increased to $15.9 million in Q2 and $25.2 million for six months, principally reflecting Brazil-related operating and currency losses and write-downs.
- Marine: Q2 operating income improved to $5.5 million from a $3.1 million loss; six-month income was $12.2 million versus a $10.4 million loss, supported by higher cargo volumes and lower fuel costs per unit shipped.
- Sugar: Operating income declined to $1.0 million in Q2 and $5.0 million for six months. Management expected the segment not to be profitable during the rest of 2015; it cited lower volumes, costs and Argentine-peso weakness. Prior-year results included a $4.3 million insurance settlement gain.
- Power: Q2 operating income was $4.3 million versus $6.1 million; six-month income increased to $7.0 million from $4.4 million. Sales declined after the company ended a short-term power-facility lease in 2014.
- Turkey: Equity-method income, principally from Butterball, rose to $23.3 million in Q2 and $40.0 million for six months. Management cited lower feed costs and, for the six-month period, higher turkey prices.
In Brazil, Seaboard recognized substantial affiliate losses, reserved the remaining $9.3 million of advances and long-term loans, and recorded a $3.0 million reserve against a trade receivable. The affiliate’s operations and funding outlook remained uncertain, and further reserves were possible. Separately, a Dominican Republic power investment increased Seaboard’s ownership to 29.9%, prompting a change to equity-method accounting and a $12.7 million prior-period retained-earnings adjustment.
Outlook, risks and contingencies
- Management expected positive operating income for the remainder of 2015 in Pork, Commodity Trading and Milling (excluding derivative mark-to-market effects), Marine, Power and Turkey; it expected Sugar not to be profitable. These expectations were subject to commodity prices, feed and fuel costs, cargo rates and volumes, currencies, and local political and economic conditions.
- Management anticipated continuing losses from the Brazil affiliate. It also noted uncertainty regarding the effect of avian influenza on Butterball and possible further weakening of the Argentine peso.
- Commodity and foreign-exchange derivatives are not designated for hedge accounting; fair-value changes may create earnings volatility, and the company also enters some speculative derivative transactions. Management said market-risk exposure had not materially changed since year-end.
- The Department of Justice requested records concerning specified foreign companies and individuals. Seaboard said it was not a target and was cooperating; potential outcome or loss could not be estimated. A separate 2012 investigation involving records seized by ICE remained unresolved, with no proceedings filed as of the report date.
- A pension fund dispute could result in an estimated $11 million withdrawal liability for Seaboard Foods, payable over time. No liability was accrued because management did not consider it probable.
- Seaboard did not repurchase shares during the first six months of 2015; $50.8 million remained authorized. The company said it did not currently intend to declare further dividends for 2015 or 2016, following a 2012 prepayment of those annual dividends.
Important facts for investors to verify
- Whether weak pork prices and lower segment earnings persist, and how much the year-over-year comparison reflects Daily’s deconsolidation.
- The recoverability of Brazil affiliate balances and trade receivables, and whether additional losses or reserves are recorded.
- Execution, funding and hog-supply requirements for the Sioux City facility and the planned capital-spending program.
- Developments in the pension-fund dispute and the DOJ and ICE inquiries, including any changes to estimated exposure.
- Performance and valuation volatility of the company’s short-term investments, derivatives and foreign-currency exposures.