Seaboard Corporation — Q1 2018 Form 10-Q
Business context and period. Seaboard is a diversified company with Pork, Commodity Trading and Milling (CT&M), Marine, Sugar, Power and Turkey operations. This unaudited report covers the three months ended March 31, 2018; the comparison period ended April 1, 2017. Amounts are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,579 | $1,399 |
| Gross income | $172 | $138 |
| Operating income | $97 | $68 |
| Earnings before income taxes | $54 | $112 |
| Net earnings attributable to Seaboard | $32 | $85 |
| Earnings per common share | $26.75 | $71.84 |
| Cash from operating activities | $8 | $(6) |
| Capital expenditures | $36 | $36 |
- Sales increased 13%; gross margin was approximately 10.9%, versus 9.9%, and operating margin approximately 6.1%, versus 4.9%.
- Net earnings fell despite improved operating income, principally as other investment income swung to a $37 loss from $37 income. Interest expense also rose $5 to $8.
- At March 31, cash and short-term investments totaled $1,364, down $328 from year-end. Current assets were $2,903 and current liabilities $787. Management reported an additional $752 of net working capital.
- Debt comprised $198 of bank notes, $23 of current long-term debt and $522 of long-term debt, or about $743 in total. The company was in compliance with debt covenants. Outstanding bank-note rates averaged 9.57%.
- Operating cash flow improved by $14 year over year, but receivables used $88 of cash and current liabilities (excluding debt) used $67.
Material changes and significant items
- Pork sales rose to $466 from $370 and operating income to $92 from $50. The $42 retroactive federal biodiesel blender’s credit was recorded as revenue and was the primary driver of the operating-income increase.
- CT&M sales increased to $786 from $727, while operating income fell to $11 from $17, reflecting lower margins and higher SG&A. Excluding mark-to-market adjustments, segment operating income was $5 versus $13.
- Marine sales rose to $249 from $234, but the segment moved to a $4 operating loss from $3 income, mainly due to higher fuel and other voyage costs. Sugar operating income was $2 versus $3; it included $7 of workforce restructuring costs. Power operating income was approximately break-even versus $2.
- Seaboard acquired Groupe Mimran, a flour-milling and grain-trading business, for stated consideration of $330, including $270 cash paid net of cash acquired, a seller note and contingent consideration. The preliminary allocation included $161 of goodwill and $100 of intangible assets. Certain acquired entities’ results will be reported on a three-month lag. The company also recorded $44 of sales and $5 of net income from acquired entities not on that lag.
- CT&M invested $18 for a 50% interest in a Mauritanian grain-trading and milling business. Its results are also reported on a three-month lag.
- Other investment income included significant mark-to-market exposure: unrealized losses on trading securities still held at quarter-end were $22, compared with $38 of gains in the prior-year quarter. The company notes that derivatives are not designated as accounting hedges, potentially creating earnings volatility.
Outlook, risks and contingencies
- Management budgeted $202 of capital expenditures for the remainder of 2018, with major spending planned for Pork, Marine, CT&M and Sugar. It expects to fund this with available cash, short-term investments and borrowing capacity, and considers liquidity adequate for existing operations and currently known expansion plans.
- Management anticipated positive operating income for the remainder of 2018 in Pork, CT&M (excluding derivative mark-to-market effects), Marine and Power, and positive affiliate income from Turkey. It could not predict Sugar’s profitability or several segments’ market conditions. These are segment expectations, not consolidated earnings guidance.
- Risks highlighted include commodity prices and margins, feed and fuel costs, marine cargo volumes and rates, foreign exchange volatility, and potential effects of tariffs on pork exports to China. The Argentine peso weakened; Seaboard reported $11 of foreign-currency translation loss in other comprehensive income, principally related to Sugar.
- A DOJ inquiry concerning money transfers and accounts in the DRC and other African countries remains ongoing; Seaboard is cooperating, but cannot estimate the probability of an outcome or potential loss. A separate Oklahoma investigation may result in a settlement; its outcome and any liability are also uncertain.
- The company recorded $22 of additional tax expense after changing a subsidiary’s tax status, partly offset by a $4 one-time tax benefit from the retroactive blender-credit extension. Its accounting for the 2017 Tax Act remained provisional.
- Seaboard expects adoption of the lease accounting standard in 2019 to materially increase reported assets and liabilities. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of the reported Pork improvement is attributable to the one-time $42 blender’s credit, and whether Pork’s underlying margins remain positive.
- The quality and sustainability of investment results, including short-term investment exposure and unhedged mark-to-market volatility.
- Final purchase-price allocation, contingent consideration and integration performance for Groupe Mimran, including the impact of entities reported on a lag.
- Developments and potential financial exposure from the DOJ inquiry and the Oklahoma matter; the filing provides no clear estimate of potential losses.
- Whether planned capital spending, working-capital needs and foreign-subsidiary cash availability affect liquidity or borrowing needs during 2018.