Seaboard Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 30, 2013; unaudited. Comparisons are with the three months ended March 31, 2012, unless noted. Seaboard operates across pork, commodity trading and milling, marine, sugar, power and other businesses.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1,582.3 million | $1,471.1 million |
| Gross income | $126.9 million | $154.6 million |
| Operating income | $63.5 million | $93.4 million |
| Net earnings attributable to Seaboard | $57.5 million | $82.2 million |
| Earnings per common share | $47.98 | $68.00 |
| Cash from operating activities | $(21.1) million | $26.9 million |
Sales increased 7.6%, while operating income declined 32.0% and Seaboard-attributable earnings declined 30.1%. Gross margin was approximately 8.0% versus 10.5%; operating margin was approximately 4.0% versus 6.3%. Higher commodity-trading sales and increased power-generation revenue lifted sales, but lower pork prices, higher feed costs and weaker commodity-trading margins pressured earnings.
Q1 2013 included a one-time $11.3 million biodiesel blender’s credit recorded as revenue and a $7.9 million one-time tax benefit relating to 2012 tax credits. Management said the biodiesel credit’s contribution for the rest of 2013 was not expected to be as significant.
Balance sheet and liquidity
At March 30, 2013, cash and cash equivalents were $43.3 million and short-term investments were $350.8 million, totaling $394.1 million. Current assets were $1.879 billion and current liabilities were $658.0 million, or working capital of approximately $1.221 billion. Total assets were $3.368 billion and total equity was $2.361 billion.
Reported debt comprised $51.6 million of bank notes payable, $22.9 million of current maturities and $109.9 million of long-term debt, totaling approximately $184.4 million. The company reported a $200 million committed credit line, extended to February 20, 2018, and $195.1 million in uncommitted lines. Borrowings were $30.0 million under the committed line and $21.6 million under uncommitted lines; letters of credit reduced borrowing capacity. Cash and short-term investments increased $33.1 million from year-end, primarily reflecting an $81.2 million affiliate-loan repayment and increased bank borrowings.
Operating cash flow turned negative, primarily due to an $89.6 million inventory increase, notably in Commodity Trading and Milling. Investing cash flow was $7.8 million, including $81.2 million received on the affiliate loan and $34.9 million of capital expenditures. Financing cash flow was $8.7 million, including $22.9 million of net bank borrowing and $13.1 million of long-term debt payments.
Segments and material changes
| Segment | Sales, Q1 2013 | Operating income (loss), Q1 2013 | Notable comparison or driver |
|---|---|---|---|
| Pork | $409.3 million | $32.3 million | Operating income fell from $52.9 million; lower pork prices and higher feed costs outweighed the one-time biodiesel credit. |
| Commodity Trading and Milling | $800.8 million | $12.3 million | Operating income fell from $25.7 million; higher wheat and soybean-meal prices raised sales, while trading margins weakened. |
| Marine | $230.2 million | $(3.3) million | Operating income declined from $0.5 million, primarily due to lower rates in certain markets. |
| Sugar | $66.2 million | $16.5 million | Lower U.S.-dollar sales prices and volumes; management cited Argentine-peso weakness. |
| Power | $73.0 million | $12.9 million | Sales rose with a new facility operating for the full quarter and higher spot rates. |
| Turkey affiliate | Not consolidated | $(5.0) million affiliate loss | Compared with $8.9 million affiliate income; Butterball recorded impairment charges and faced higher feed costs. |
Outlook, risks and unusual items
- Management expected positive operating income for the remainder of 2013 in Pork, Commodity Trading and Milling, Marine, Sugar and Power, and positive Turkey-segment income excluding potential mark-to-market effects. It cautioned that commodity, product-price, fuel, cargo-rate and currency uncertainty limited forecasting.
- Management budgeted $154.9 million of remaining-2013 capital expenditures and said liquidity, internal cash generation and borrowing capacity should support operations and currently known expansion plans. It was evaluating potential vessel purchases.
- Of cash and short-term investments, $148.3 million was held by foreign subsidiaries; repatriation could result in tax, and the company intended to keep these funds permanently invested abroad. Management said European sovereign-debt exposure was not material.
- Commodity and currency derivatives are not generally designated as accounting hedges; mark-to-market changes can affect reported earnings before related transactions are realized. The company also undertakes some speculative derivatives. Foreign-exchange, interest-rate and commodity risks remain relevant.
- Management anticipated further foreign-currency translation losses if the Argentine peso weakened. The quarter recorded a $6.1 million foreign-currency translation loss in other comprehensive income.
- An ICE investigation involving seized employment-related records remained ongoing. Seaboard said it was cooperating; no civil or criminal proceedings or charges had been filed, and potential fines or liabilities could not then be determined.
- In April, Seaboard gave notice to redeem $10.8 million of industrial development revenue bonds effective May 13, 2013; the amount was classified as current at quarter-end. The company had also repaid $13.0 million of bonds during Q1.
- The board’s prior dividend was described as a prepayment of annual dividends for 2013–2016; Seaboard did not then intend to declare additional dividends for those years. The share-repurchase authorization had $32.8 million remaining; 147 shares were repurchased for $0.4 million in Q1.
Investor verification priorities
- Assess how much reported earnings depended on the one-time biodiesel revenue credit and tax benefit, and the likely effect of their expiration or reduced contribution.
- Review inventory growth and the negative operating cash flow, including whether working-capital demands in commodity trading persist.
- Track Pork and Commodity Trading and Milling margins, commodity-price movements, and the timing and earnings effects of derivative mark-to-market reversals.
- Monitor Butterball’s operating performance, impairment charges, affiliate exposure and repayment of Seaboard loans.
- Follow marine rates, Dominican Republic power economics, Argentine-peso exposure and any developments in the ICE investigation.
- Confirm available borrowing capacity after letters of credit, planned capital spending, and any tax implications if foreign-held funds are repatriated.