Seaboard Corporation — Q1 2022 Form 10-Q
Business context and reporting period
Quarter ended April 2, 2022; comparable period ended April 3, 2021. Seaboard operates across Pork, Commodity Trading & Milling (CT&M), Marine, Sugar and Alcohol, Power, and Turkey (through its equity-method investment in Butterball). Financial amounts below are in millions of dollars except per-share data.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $2,709 | $2,059 |
| Gross income / gross margin | $236 / 8.7% | $178 / 8.6% |
| Operating income / operating margin | $146 / 5.4% | $92 / 4.5% |
| Net earnings attributable to Seaboard | $103 | $179 |
| Earnings per common share | $89.28 | $154.03 |
| Cash from operating activities | $106 | $(150) |
| Capital expenditures | $161 | $96 |
Revenue rose 32%, while operating income rose 59%; Seaboard-attributable net earnings fell 42%. The lower bottom line chiefly reflected a $65 investment loss versus $71 of investment income a year earlier, largely from mark-to-market changes in short-term investments and fewer realized gains. The filing reports $42 of unrealized losses on trading securities still held at quarter-end, compared with $65 of unrealized gains in the prior-year quarter. Other contributors to earnings included $23 of income from affiliates versus $6.
Operating cash flow improved by $256 year over year, primarily because of the timing of inventory purchases. After $161 of capital expenditures, operating cash flow less capital expenditures was negative $55. Cash and short-term investments totaled approximately $1.389 billion at April 2, down $102 from year-end. Current assets were $4.069 billion and current liabilities $1.632 billion. Lines of credit totaled $531 drawn, with $541 of borrowing capacity available. Long-term debt was $705 carrying value ($714 face value); total debt including lines of credit was approximately $1.245 billion at face value. The company reported compliance with debt covenants.
Material changes and segment performance
- Marine sales increased to $466 from $300 and operating income to $113 from $21, primarily on higher freight rates and voyage revenue. Higher charter hire and fuel costs partly offset the benefit.
- CT&M sales increased to $1,570 from $1,151, but reported operating income declined to $12 from $16. Excluding mark-to-market adjustments, segment operating income was $30 versus $27; the company cautions this is a non-GAAP comparison measure.
- Pork sales increased to $620 from $565, but operating income fell to $27 from $61 because of derivative losses, higher hog and feed costs, and lower pork margins.
- Butterball contributed $16 of affiliate income versus a $5 loss, reflecting higher selling prices and a gain on sale, partly offset by higher costs. Seaboard exercised warrants on April 19, 2022, acquiring an additional 5% interest for nominal consideration, with no financial-statement impact reported.
- Power recorded an operating loss of $5 versus $2. Sugar and Alcohol operating income was $2 versus $1.
Outlook, risks, contingencies, and unusual items
- Management budgeted approximately $595 of capital expenditures for the remainder of 2022, including Pork biogas projects and Marine vessel investments. Three Marine vessels under construction are expected to be completed in 2024. Management expects to fund spending from cash, short-term investments, and borrowing capacity.
- Management anticipated Pork and Marine would be profitable for the remainder of 2022, and CT&M would have positive operating income excluding derivative mark-to-market effects. It could not predict full-year outcomes for Sugar and Alcohol, Power, or Turkey, and cited uncertainty around commodity prices, feed, freight, fuel, exchange rates, and market conditions.
- Derivative instruments are not designated for hedge accounting; their fair-value changes can cause earnings volatility and may not coincide in timing with the related physical transactions. Commodity derivative losses were a significant operating factor in Pork and CT&M.
- Pending litigation includes Helms-Burton Act claims concerning the Port of Mariel, pork antitrust matters, and claims relating to Cereoil and Nolston in Uruguay, as well as a related HSBC suit. The company says it intends to defend the claims; outcomes and potential losses cannot presently be estimated. Potential amounts described include $22 for one Cereoil claim, approximately $23 based on scheduled net liabilities for another, approximately $8 for Nolston, and HSBC claims seeking $10 plus interest and other relief exceeding $3.2. These amounts are not stated as probable losses.
- On January 1, 2022, Pork sold a 50% interest in its Mexican ham-boning operation, recognizing a $6 gain and retaining a 50% equity-method interest. Management reported no material changes in previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether Marine’s unusually strong operating results and freight rates persist, and how fuel and charter costs evolve.
- Whether Pork margins recover despite feed and hog-cost pressure, and whether derivative mark-to-market losses reverse or are realized.
- Performance and valuation of the $1.295 billion short-term investment portfolio, given the quarter’s substantial investment loss.
- Execution, funding, and returns on the planned $595 million of remaining-2022 capital expenditures.
- Developments in the disclosed litigation and any change in the company’s ability to estimate potential exposure.