Seaboard Corporation — Q3 2014 Form 10-Q
Business context and reporting period. Seaboard reported the quarter and nine months ended September 27, 2014. Its diversified businesses include pork, commodity trading and milling, marine, sugar, power, and an equity-method investment in Butterball (Turkey). Amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,622.6 | $1,648.1 | $4,796.9 | $4,914.4 |
| Gross income | $160.9 | $101.0 | $484.0 | $343.3 |
| Operating income | $96.1 | $33.8 | $295.6 | $150.8 |
| Net earnings attributable to Seaboard | $104.7 | $31.0 | $246.6 | $128.0 |
| Earnings per common share | $89.49 | $25.99 | $208.76 | $107.09 |
- Gross margin was approximately 9.9% in Q3 and 10.1% for the first nine months, compared with 6.1% and 7.0% in the respective 2013 periods. Operating margin was approximately 5.9% and 6.2%, versus 2.0% and 3.1%.
- Q3 other income included a $64.4 million pretax gain from selling a 50% interest in Daily’s Premium Meats. The gain was $39.3 million after tax, or $33.56 per share. Excluding this gain, reported net earnings would have been materially lower.
- Cash from operating activities was $283.3 million for nine months, versus $5.0 million in 2013; management attributed the increase mainly to working-capital movements, including lower receivables and higher current liabilities.
- Capital expenditures were $94.7 million. Investing activities used $108.3 million and financing activities used $177.0 million. Cash and cash equivalents increased $1.0 million to $56.0 million; cash plus short-term investments totaled $419.0 million.
- At September 27, total assets were $3,470.1 million and total equity was $2,642.6 million. Bank notes payable were $28.8 million; no long-term debt was reported after an $85.5 million principal repayment in August. The repayment also incurred a $3.8 million early-payment fee recorded in Q3 interest expense.
Material changes and segment results
- Sales declined 1.5% in Q3 and 2.4% for nine months. Higher pork prices partly offset lower pork, power, marine, and sugar volumes and lower service and other revenue.
- Operating income rose $62.3 million in Q3 and $144.9 million for nine months. Higher pork prices were the principal driver; lower marine voyage costs also contributed. Pork segment operating income was $70.4 million in Q3 and $241.1 million for nine months, versus $34.1 million and $90.0 million.
- Commodity Trading and Milling reported operating income of $13.3 million in Q3 and $43.5 million year to date. Results were affected by derivative mark-to-market accounting; excluding those adjustments, segment operating income was $4.1 million and $29.7 million, respectively.
- Marine remained loss-making: operating losses were $4.6 million in Q3 and $15.0 million year to date, though improved from 2013. Sugar operating income was $6.3 million in Q3 and $22.7 million year to date; Power reported $15.0 million and $19.5 million. Turkey affiliate income improved to $14.3 million in Q3 and $30.2 million year to date, from losses in 2013.
- Seaboard sold half of Daily’s to Triumph Foods for $72.5 million cash, plus a receivable for preliminary working-capital adjustments, and retained a 50% equity-method investment. It also invested $17.3 million for a 21% interest in a Jamaican cargo-terminal business.
Outlook, risks, and unusual items
- Management expected positive Pork, Commodity Trading and Milling (excluding mark-to-market effects), Sugar, and Turkey results for the remainder of 2014. Pork earnings were expected below the first nine months as pork prices had begun to ease. Management expected Marine to remain unprofitable; it could not predict Power segment profitability.
- Key uncertainties include pork and feed prices, porcine epidemic diarrhea virus, biofuel policy and the expired federal blender’s credit, volatile commodities and foreign exchange rates, and political and economic conditions in operating markets. Management anticipated further Argentine-peso weakening and potential additional translation losses.
- Commodity and currency derivatives are generally not designated as accounting hedges; mark-to-market changes can cause earnings volatility and may reverse as related transactions are completed. The company also undertakes some speculative derivative transactions.
- Seaboard reported $71.6 million of investments, advances, and notes receivable involving affiliates in the Democratic Republic of Congo. A bakery there continued to incur operating losses; if performance does not improve, some note or investment value could be impaired, potentially resulting in a material charge.
- An ICE investigation relating to employment, health-plan, and other records remained unresolved. No proceedings had been filed, and the company said it could not determine whether agencies would pursue the matter or whether material liabilities would result. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Management said available liquidity and borrowing capacity were adequate for current operations and known 2014 plans. It budgeted $52.7 million of additional 2014 capital expenditures and anticipated selling and leasing back four dry-bulk vessels as they are completed.
Important facts for investors to verify
- How much of the earnings increase is sustainable after excluding the Daily’s sale gain, power-asset gain, derivative mark-to-market effects, and other unusual items?
- Whether pork prices, feed costs, disease impacts, and biofuel regulation support the company’s forecast of positive but lower remaining-year Pork results.
- Progress and credit quality of the loss-making Congo bakery affiliate, including collectability of its $34.6 million note and valuation of Seaboard’s equity investment.
- Exposure to currency movements, especially the Argentine peso, and the potential earnings and equity effects of derivatives not treated as accounting hedges.
- Execution, financing, and lease terms for planned vessel deliveries, along with marine and power segment performance against management’s outlook.