Seaboard Corporation — Q2 2014 Form 10-Q
Business context and period: Seaboard Corporation is a diversified agribusiness with Pork, Commodity Trading and Milling, Marine, Sugar, Power and Turkey interests. This unaudited report covers the quarter and six months ended June 28, 2014; comparisons are with periods ended June 29, 2013. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,694.6 | $1,684.0 | $3,174.2 | $3,266.3 |
| Gross income | $197.4 | $115.4 | $323.0 | $242.3 |
| Operating income | $134.3 | $53.5 | $199.5 | $117.0 |
| Net earnings attributable to Seaboard | $93.7 | $39.5 | $141.8 | $97.0 |
| Earnings per common share | $79.01 | $33.07 | $119.53 | $81.06 |
| Operating margin | 7.9% | 3.2% | 6.3% | 3.6% |
For the six months, operating cash flow was $202.9 million, versus $46.4 million a year earlier. Capital expenditures were $68.2 million; cash and cash equivalents increased to $73.7 million from $55.1 million at year-end 2013.
At June 28, 2014, cash and short-term investments totaled $398.8 million. Current assets were $1,857.1 million and current liabilities $641.6 million. Total debt, including bank notes payable and current and long-term debt, was approximately $124.1 million, versus $159.9 million at December 31, 2013. Seaboard reported $200 million available under its committed credit line, with no borrowings under that line; $38.0 million was outstanding on uncommitted lines. The filing reports total net working capital of $816.6 million.
Material changes and drivers
- Q2 sales rose 0.6%, while first-half sales declined 2.8%. First-half declines in Marine, Sugar and Power, as well as lower Pork biodiesel-related receipts and pork volumes, outweighed higher pork prices.
- Operating income increased $80.8 million in Q2 and $82.5 million in the first half. Higher pork product prices were the main driver, with lower hog feed costs also helping Pork; lower biodiesel margins and Power segment rates were offsets.
- Pork operating income was $110.2 million in Q2 and $170.7 million for the half, versus $23.6 million and $55.9 million. Commodity Trading and Milling operating income was $18.3 million and $30.2 million, respectively. Turkey affiliate income improved to $9.5 million in Q2 and $15.9 million for the half, compared with losses in 2013.
- Marine remained loss-making: operating losses were $3.1 million for Q2 and $10.4 million for the half. Sugar and Power operating income fell year over year in the first half, to $16.4 million and $4.4 million, respectively.
- First-half net earnings benefited from stronger operating results and improved affiliate income. The comparison also reflects a $7.9 million one-time tax benefit and approximately $11.3 million of Federal biodiesel blender’s credit revenue in Q1 2013; the credit was not renewed for 2014.
Outlook, risks and unusual items
- Management expected positive Pork operating income in the remainder of 2014, but below first-half levels; positive Commodity Trading and Milling income excluding mark-to-market effects; and positive Sugar and Power income. Management anticipated Marine would not be profitable for the rest of 2014. These are expectations, not guarantees.
- Management budgeted $138.8 million of capital expenditures for the remainder of 2014, including $53.0 million of planned payments toward four dry-bulk vessels. Seaboard anticipated selling and leasing back the vessels as delivered; final lease terms were still being negotiated. It was also evaluating possible additional container vessels.
- In July, Seaboard gave notice to prepay debt. The expected August 29, 2014 principal payment was $85.5 million, including $74.1 million reclassified to current debt, plus an approximately $3.8 million early-payment fee expected to be expensed in Q3.
- The Sugar segment recorded a $4.3 million insurance settlement gain in Q2. Seaboard anticipated an approximately $4.5 million gain in Q4 from finalizing the transfer and settlement for a leased Power facility, which it planned to stop operating after September 30.
- Key exposures include volatile commodity prices, feed costs, derivative mark-to-market accounting, foreign exchange movements and political and economic conditions in operating markets. Management cited the porcine epidemic diarrhea virus, uncertainty over biofuel mandates and the expired blender’s credit, weakening Argentine peso, and reduced cargo volumes in markets including Venezuela. Seaboard anticipated further foreign-currency translation losses if the Argentine peso continued weakening.
- Commodity and currency derivatives are generally not designated as accounting hedges, so reported earnings can fluctuate before related sales or purchases occur. Management stated that underlying realized margins may offset some mark-to-market changes over time.
- The U.S. Attorney’s Office said it intended to close its investigation related to employment and health-plan records and would bring no charges against Seaboard. Possible proceedings by ICE or the Oklahoma Attorney General remained; the filing said the potential material impact could not be determined.
- About $115 million of cash and short-term investments was held by foreign subsidiaries and intended to remain permanently invested abroad; repatriation for U.S. use could incur taxes. No dividends were currently intended for 2014–2016 following a prior advance dividend.
- Seaboard was evaluating the revenue-recognition standard issued in May 2014, required to be adopted January 1, 2017. Management said it believed liquidity and borrowing capacity would be adequate for 2014 needs. No material changes to previously reported risk factors or internal controls were reported.
Important facts for investors to verify
- Whether Pork profitability moderates as expected, given pork prices, feed costs, PEDv developments and the status of biofuel incentives and mandates.
- How much Commodity Trading and Milling results reflect derivative mark-to-market movements versus realized margins, and whether those adjustments reverse as contracts are settled.
- Whether Marine, Sugar and Power performance and foreign-exchange exposure develop in line with management’s outlook, particularly in Venezuela and Argentina.
- Completion and final economics of the debt prepayment, dry-bulk vessel sale-leasebacks, planned capital spending and Power facility settlement.
- Any developments in the remaining ICE or Oklahoma Attorney General matters, and the financial implications of foreign cash repatriation if U.S. funding needs change.