Seaboard Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; unaudited. Comparisons are with the three months ended March 30, 2013. Seaboard operates across pork, commodity trading and milling, marine, sugar, power, and turkey (through its equity-method investment in Butterball).
Financial performance and position
- Revenue: Net sales were $1,479.6 million, down 6.5% from $1,582.3 million. Lower marine volumes, pork sales and government biodiesel payments, power spot rates, and sugar prices drove the decline.
- Profit: Operating income rose to $65.2 million from $63.5 million. Net earnings attributable to Seaboard fell to $48.2 million from $57.5 million; earnings per share were $40.55 versus $47.98.
- Margins: Gross margin was approximately 8.5% versus 8.0%; operating margin was approximately 4.4% versus 4.0%. Net margin attributable to Seaboard was approximately 3.3% versus 3.6%.
- Cash flow: Operating cash flow was $144.0 million, compared with an outflow of $21.1 million. The improvement mainly reflected lower receivables and inventories, including collection of past-due Power segment receivables. Investing cash outflow was $139.5 million, including $38.0 million of capital expenditures; financing cash outflow was $20.5 million.
- Liquidity: Cash and short-term investments totaled $431.1 million at March 29, up $85.4 million from year-end. Working capital was $824.9 million. Of cash and short-term investments, $213.5 million was held by foreign subsidiaries and could incur tax if repatriated.
- Debt: Total debt was approximately $137.9 million, comprising $46.0 million of bank notes, $11.4 million of current maturities, and $80.5 million of long-term debt. No borrowings were outstanding under the $200 million committed line; $46.0 million was drawn on uncommitted lines. Management said liquidity and borrowing resources were adequate for current operations and known 2014 plans.
Material changes and segment results
- Pork: Sales decreased to $382.1 million from $409.3 million, while operating income increased to $60.5 million from $32.3 million, reflecting stronger pork prices and lower feed costs. The 2013 comparison included an $11.3 million one-time federal biodiesel blender’s credit, not renewed for 2014.
- Commodity Trading and Milling: Sales were $789.4 million versus $800.8 million; operating income was $11.9 million versus $12.3 million. Excluding derivative mark-to-market adjustments, operating income was $14.2 million versus $4.0 million.
- Marine: Sales fell to $200.5 million from $230.2 million and operating loss widened to $7.4 million from $3.3 million, mainly due to lower volumes, including in Venezuela, and higher per-unit costs.
- Sugar: Sales fell to $50.4 million from $66.2 million and operating income to $6.8 million from $16.5 million, primarily due to lower U.S.-dollar sugar prices amid Argentine peso weakness.
- Power: Sales fell to $53.8 million from $73.0 million and the segment reported a $1.7 million operating loss versus $12.9 million income, mainly reflecting lower spot rates. Seaboard gave notice to cancel a short-term leased generating facility.
- Turkey/Butterball: Seaboard’s equity-method income was $6.4 million versus a $5.0 million loss, reflecting lower feed costs and prior-year impairment charges at Butterball.
Outlook, risks, and unusual items
- Management anticipated positive operating income for the remainder of 2014 in Pork, Commodity Trading and Milling (excluding mark-to-market effects), Sugar, and Turkey. It expected Marine to remain unprofitable; it could not predict whether Power would be profitable.
- Management budgeted $184.1 million of capital expenditures for the remainder of 2014, including vessel construction and spending in Pork and Marine. It anticipated selling and leasing back four vessels as completed; final lease terms were pending.
- Seaboard anticipated approximately $4.5 million of gain in late 2014 from final settlement concerning a previously sold power facility, subject to dry-dock costs.
- Key uncertainties include pork and feed prices, porcine epidemic diarrhea virus, expiration of the federal biodiesel credit and proposed biofuel mandate changes, commodity volatility and derivative accounting, marine volumes and rates, power spot rates and fuel costs, and foreign-exchange movements. Management expected the Argentine peso to weaken further, potentially increasing translation losses.
- Q1 2014 income tax expense was $27.0 million versus $12.6 million. The 2013 quarter included a $7.9 million one-time tax benefit, as well as the $11.3 million biodiesel credit recorded as revenue. Foreign-currency losses increased to $5.7 million from $1.1 million.
- A federal investigation following 2012 search warrants concerning employment-related records and health-plan matters remained ongoing; no civil or criminal charges had been filed, and potential liability could not be determined. Management said ordinary-course legal matters were not expected to have a material adverse effect. No material risk-factor changes from the 2013 Form 10-K were reported.
- The company repurchased 1,667 shares for $4.4 million. It stated it did not intend to declare further dividends for 2014–2016, following a 2012 prepayment of those years’ dividends.
Investor verification points
- Assess whether the strong operating cash flow is repeatable, given its reliance on working-capital movements and collections.
- Compare underlying segment performance after separating prior-year one-time tax and biodiesel credits and derivative mark-to-market effects.
- Monitor foreign-exchange exposure, particularly the Argentine peso, and the resulting translation and earnings impacts.
- Track Marine and Power segment performance, the leased facility cancellation and settlement, and delivery and financing terms for the four vessels.
- Review developments in the federal investigation, tax examinations, and the potential impact of unrenewed tax or biofuel provisions.