Seaboard Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019; year-to-date figures cover the six months ended that date. Dollar amounts are in millions except per-share data.
Business context and financial performance
Seaboard operates in pork, commodity trading and milling (CT&M), marine transportation, sugar and alcohol, power, and turkey through its equity-method investment in Butterball.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,822 | $1,691 | $3,365 | $3,270 |
| Gross income | $136 | $116 | $186 | $288 |
| Operating income | $53 | $32 | $19 | $129 |
| Other investment income (loss), net | $37 | $12 | $150 | $(25) |
| Net earnings attributable to Seaboard | $58 | $7 | $115 | $39 |
| Earnings per share | $50.13 | $6.28 | $98.92 | $33.03 |
Q2 gross margin was approximately 7.5% (6.9% prior year); operating margin was 2.9% (1.9%). For the first half, gross margin was 5.5% (8.8%) and operating margin was 0.6% (3.9%). First-half net income benefited substantially from $150 million of other investment income, primarily unrealized gains on short-term investments; operating income fell sharply year over year.
Cash flow, balance sheet and debt
- First-half operating cash flow was $39 million, versus $64 million in 2018. Capital expenditures were $156 million, compared with $58 million; investing cash outflow was $126 million.
- Cash and cash equivalents were $110 million and short-term investments were $1.440 billion at June 29, 2019, totaling $1.550 billion, up $20 million from year-end. Cash alone declined from $194 million at year-end.
- Total assets were $5.901 billion. Current assets of $3.074 billion and current liabilities of $905 million imply a current ratio of approximately 3.4.
- Debt included $160 million of short-term bank notes and $789 million of long-term debt at face value, of which $54 million was current. The $695 million term loan matures in 2028. The company reported compliance with debt covenants.
- Operating lease liabilities totaled $489 million at June 29, 2019, following adoption of lease accounting guidance. Seaboard had $100 million of committed credit capacity, with no balance outstanding on that line; borrowing capacity was subject to existing borrowings and letters of credit.
Material changes and segment performance
- Q2: Sales rose $131 million and operating income rose $21 million. Higher CT&M commodity volumes, stronger pork prices and favorable derivative mark-to-market results contributed. Net earnings also reflected investment gains.
- First half: Sales increased $95 million, but operating income declined $110 million. Pork operating results fell from $109 million to a $9 million loss, mainly reflecting the absence of federal blender’s credits received in 2018, weaker biodiesel margins and mark-to-market losses on strategic hog positions.
- CT&M first-half operating income increased to $36 million from $9 million, including derivative mark-to-market effects. Excluding those adjustments, management reported $32 million versus $21 million.
- Sugar and Alcohol recorded an $8 million first-half operating loss, versus $12 million income, as sales volumes, prices and margins declined. Marine operating income was $4 million versus zero; Power operating income was $12 million versus $6 million.
- Butterball, Seaboard’s equity-method Turkey investment, reported a $37 million first-half net loss versus $13 million. Seaboard’s first-half loss from affiliates was $34 million versus $22 million.
Outlook, risks and unusual items
- Management budgeted $261 million of capital expenditures for the rest of 2019, including pork-plant and renewable-diesel facility work and the new power barge. The power barge project is expected to exceed $160 million and is anticipated to begin operations in 2021. Seaboard said it was exploring strategic alternatives for its existing power barge.
- Management expected positive operating income for the remainder of 2019 in CT&M excluding derivative mark-to-market effects, Marine and Power. It could not predict whether Pork, Sugar and Alcohol, or Turkey would be profitable for the remainder of the year.
- The federal blender’s credits had not been extended; management said renewal or retroactive extension was uncertain. Commodity prices, feed costs, fuel, foreign exchange, Argentine conditions and market demand remain significant sources of earnings volatility.
- Effective July 22, 2019, Seaboard ceased contributions to a multi-employer pension fund and expects to record an estimated $14 million withdrawal liability in Q3 2019, payable over 20 years beginning in the second half of 2020.
- Legal matters include pork-industry price-fixing class actions, including a Puerto Rico case filed July 9, 2019; two Cereoil-related claims with stated potential amounts of $22 million and $23 million, subject to offsets; and a Nolston claim with a stated potential amount of $14 million. The company said outcomes and potential losses could not be determined. A Department of Justice inquiry concerning money transfers and bank accounts in the DRC and other African countries is ongoing; Seaboard is cooperating and cannot estimate potential loss.
- Seaboard repurchased $14 million of stock in the first half; $81 million remained authorized. It reported no material changes to previously disclosed risk factors and no material adverse effect expected from other ordinary-course legal matters.
Important facts for investors to verify
- How much of reported earnings, especially first-half net income, reflects unrealized investment gains and derivative mark-to-market accounting rather than operating performance.
- Whether pork margins recover and whether federal blender’s credits are extended or retroactively reinstated.
- Progress, remaining costs and returns expected from the renewable-diesel conversion, Guymon expansion and power-barge project.
- Developments in the antitrust, Uruguay insolvency and DOJ matters, including any change in the company’s ability to estimate exposure.
- The timing and accounting impact of the expected $14 million pension withdrawal liability, and the effect of planned capital spending on liquidity.