Seaboard Corporation — Q3 2015 Form 10-Q
Business context and reporting period: The quarter ended October 3, 2015; comparative figures are for the quarter and nine months ended September 27, 2014. Seaboard operates across pork, commodity trading and milling, marine, sugar, power, and equity-method investments, including Butterball. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $1,410.8 | $1,622.6 | $4,291.0 | $4,796.9 |
| Gross income | $89.8 | $160.9 | $282.5 | $484.0 |
| Operating income | $23.0 | $96.1 | $82.5 | $295.6 |
| Net earnings attributable to Seaboard | $3.0 | $105.1 | $67.6 | $247.9 |
| Earnings per share | $2.59 | $89.83 | $57.73 | $209.91 |
- Gross margin fell to 6.4% from 9.9% in Q3 and to 6.6% from 10.1% for the first nine months. Operating margin was 1.6% versus 5.9% in Q3 and 1.9% versus 6.2% year to date.
- Operating cash flow was $365.9 for the first nine months, up from $283.3. Capital expenditures were $96.0. Cash and short-term investments totaled $738.7 at October 3, 2015, up $211.6 from year-end 2014.
- Seaboard reported $104.5 of short-term bank borrowings, all related to foreign subsidiaries, and no long-term debt. Management reported $608.8 of additional net working capital and considered liquidity adequate for known 2015 needs.
- Current assets were $2,060.9 and current liabilities $713.5. Short-term investments were $689.4; $270.3 of cash and short-term investments were held by foreign subsidiaries and intended to remain invested abroad.
Material changes versus the prior comparable period
- Sales declined 13% in Q3 and 11% for the first nine months; operating income fell $73.1 and $213.2, respectively. Management cited lower pork prices, Daily’s deconsolidation, lower commodity prices, and reduced power sales volumes. Higher Marine cargo volumes partly offset the sales decline.
- Pork operating income fell to $25.9 from $70.4 in Q3 and to $60.8 from $241.1 year to date, mainly from lower pork product prices. Seaboard expected positive but significantly lower-than-2014 Pork operating income for the rest of 2015.
- Commodity Trading and Milling reported a Q3 operating loss of $4.5 and a nine-month profit of $7.4, versus profits of $13.3 and $43.5. Losses from affiliates widened to $18.7 in Q3 and $43.9 year to date, principally reflecting the Brazilian flour business and related reserves.
- Marine improved: nine-month operating income was $9.9 versus a $15.0 loss, reflecting lower voyage costs, particularly fuel. Management expected positive operating income for the remainder of 2015 based on recent market conditions.
- Income from the Turkey segment, representing Seaboard’s Butterball investment, rose to $30.1 in Q3 and $70.1 year to date, compared with $14.3 and $30.2. Seaboard cited lower feed costs and higher turkey product prices.
Outlook, risks, contingencies, and unusual items
- Management forecast positive, but lower, Pork and Power operating income for the remainder of 2015; positive Marine operating income; and positive Turkey affiliate income. It could not predict Commodity Trading and Milling results and anticipated further losses from the Brazilian affiliate. Sugar profitability was uncertain.
- Other investment income was a loss of $26.2 in Q3 and $22.4 for the first nine months, primarily reflecting mark-to-market investment fluctuations. Trading securities had $22.4 of unrealized losses in Q3. Seaboard cautioned that investment and derivative fair-value changes can create earnings volatility.
- Seaboard reserved $22.3 during the first nine months against its Brazilian affiliate investments, advances, and note receivable, reducing those balances to zero; it also recorded an $8.7 total reserve against a related trade receivable. Further reserves may be needed. The affiliate’s operating outlook and Seaboard’s effort to convert debt to equity remain uncertain.
- A separate Democratic Republic of Congo bakery affiliate had a $34.6 long-term note receivable, including accrued interest, after missing a payment. Seaboard waived the default temporarily; repayment depends on improved cash flows, and some or all of the note could become uncollectible.
- Seaboard agreed to contribute up to $207.4 toward a Sioux City pork-processing facility; $14.9 had been contributed by October 3, with about $10.8 expected in Q4 2015 and further contributions through 2019. It budgeted $83.0 of capital expenditures for the remainder of 2015.
- After quarter-end, a $50.0 foreign committed credit line expired and Seaboard canceled its $200.0 long-term committed facility effective October 28. The company said it was considering long-term financing alternatives.
- The DOJ had issued subpoenas seeking records concerning unaffiliated foreign companies and individuals. Seaboard said it was not a target and was cooperating; the potential outcome or loss could not be estimated. A separate ICE/USAO-related investigation remained unresolved, although the USAO had previously indicated it intended to close its investigation and bring no charges. No proceedings had been filed as of the report.
- The 2014 comparison includes a $64.4 pretax gain on the sale of a 50% interest in Daily’s. Seaboard’s Q3 2015 results also included the investment-market loss noted above. In 2015, Seaboard recorded no share repurchases; the board later extended the repurchase program and increased its authorization to $100.0. The company did not intend to declare further dividends for 2015 or 2016, following a 2012 dividend that prepaid those years’ dividends.
Important facts for investors to verify
- Whether pork prices and margins stabilize, and how feed and third-party hog costs affect Pork results.
- The recoverability of the Brazilian and DRC affiliate exposures, including receivables and notes, and the status of Seaboard’s attempted Brazilian debt-to-equity conversion.
- Terms and availability of replacement long-term financing after the $200.0 facility cancellation, and the funding needs for planned projects and capital expenditures.
- Future investment and derivative mark-to-market volatility, along with currency exposure, particularly the Argentine peso and South African rand.
- Developments in the DOJ and ICE/USAO inquiries and whether any proceedings, liabilities, or additional disclosures result.