Seaboard Corporation — Q3 2016 Form 10-Q
Business context and period: Seaboard operates across Pork, Commodity Trading and Milling (CT&M), Marine, Sugar, Power and Turkey. This unaudited quarterly report covers the three and nine months ended October 1, 2016; comparisons are with periods ended October 3, 2015. Dollar amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,330 | $1,411 | $4,006 | $4,291 |
| Gross income | $108 | $90 | $359 | $283 |
| Operating income | $42 | $23 | $154 | $83 |
| Net earnings attributable to Seaboard | $75 | $3 | $209 | $68 |
| Earnings per common share | $64.42 | $2.59 | $178.67 | $57.73 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $299 | $366 |
- Gross margin was approximately 8.1% in Q3 and 9.0% for the first nine months, compared with 6.4% and 6.6%, respectively, in 2015. Operating margin was approximately 3.2% and 3.8%, versus 1.6% and 1.9%.
- For the nine months, investing cash outflow was $235 (including $214 for acquisitions and $128 in capital expenditures); financing cash outflow was $1. Cash and cash equivalents rose to $113 from $50 at year-end.
- At October 1, cash and short-term investments totaled $1,293, down $11 from year-end. Working capital was $541. Current assets were $2,627 and current liabilities $793.
- Reported debt comprised $129 of notes payable to banks, $17 of current maturities and $503 of long-term debt, or approximately $649 in total. The $500 term loan is due in 2022; the company reported compliance with debt covenants. The $100 committed credit line was undrawn at quarter-end.
Material changes and drivers
- Sales fell 5.7% in Q3 and 6.6% for the first nine months. Management attributed the declines mainly to lower prices and product mix in CT&M, lower Marine cargo rates, lower Sugar prices, and lower Power spot rates. Higher Pork market-hog sales partly offset the declines.
- Operating income improved by $19 in Q3 and $71 for the nine months, principally on lower Pork feed costs and Marine voyage costs. Pork operating income rose to $54 in Q3 and $133 year to date, compared with $26 and $61 in 2015.
- Q3 net earnings included $29 of other investment income, versus a $26 loss in Q3 2015; this substantially contributed to the year-over-year earnings increase. The filing associates the change with investment mark-to-market fluctuations and dividends, partly offset by refined-coal investment losses.
- CT&M reported Q3 operating loss of $13, including $23 of mark-to-market losses; excluding those adjustments, reported operating income was $10. Sugar recorded a $6 inventory charge related to a labor strike and revised production forecast. Butterball affiliate income fell to $11 in Q3 from $30.
Outlook, risks and unusual items
- Management expected positive operating income for the remainder of 2016 in Pork, CT&M excluding derivative mark-to-market effects, Marine and Power; it could not predict whether Sugar would be profitable. It also expected positive Turkey affiliate income. These are segment expectations, not consolidated earnings guidance.
- Management budgeted $58 of remaining-2016 capital expenditures. Seaboard expected to contribute $15 to its 50%-owned Seaboard Triumph Foods joint venture during the remainder of 2016 and $73 in 2017; the new Sioux City pork facility was expected to be completed by mid-2017. The company also anticipated further hog-related acquisitions during 2016 and 2017.
- Market and operating risks include commodity and feed prices, pork and turkey selling prices, cargo rates and fuel costs, power spot rates, foreign exchange movements and political and economic conditions in countries where the company operates. Derivatives are not designated for hedge accounting, so mark-to-market changes may cause earnings volatility.
- The Argentine peso’s devaluation generated $22 of nine-month foreign-currency translation loss in other comprehensive income. Management anticipated possible further peso weakness and additional translation losses.
- Seaboard reserved $11 in Q2 against a note receivable from a struggling DRC bakery affiliate; the recorded note balance was $24 at October 1. Further deterioration or missed payments could cause additional charges. Separately, Seaboard disclosed that on October 28 it obtained control of a Brazilian affiliate through a restructuring; accounting and any remeasurement gain or loss were to be recorded in Q4.
- Government inquiries include a DOJ investigation involving records relating to foreign companies and individuals, an ongoing Oklahoma employment/health-related investigation with possible settlement discussions, and an EPA inquiry concerning ammonia releases at a pork plant. Outcomes and potential losses were not estimable from the filing. Management said other legal matters were not expected to have a material adverse effect.
- Seaboard said liquidity and borrowing capacity were adequate for existing operations and known expansion plans. Of its $1,293 in cash and short-term investments, $351 was held by foreign subsidiaries and intended to remain invested abroad; repatriation could trigger taxes. The company was evaluating a 2017 dividend, with no assurance one would be declared. A $100 million repurchase authorization remained, with no shares repurchased in the first nine months.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring operating performance versus investment gains and other market-sensitive items.
- Whether Pork margins and the expected hog supply for the new Seaboard Triumph Foods plant are sustainable, and the remaining joint-venture funding and acquisition requirements.
- The performance and collectability of affiliate exposures, particularly the DRC bakery note and the Brazilian affiliate after Seaboard’s subsequent acquisition of control.
- Exposure to Argentine peso weakness, commodity derivative volatility, and the potential outcomes of disclosed government inquiries.
- The availability and effective use of liquidity, including foreign-held funds, and any decision on a 2017 dividend or share repurchases.