Seaboard Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Seaboard is a diversified food, commodity trading and milling, marine transportation, sugar and alcohol, and power company, with an equity-method investment in Butterball. The quarter ended July 3, 2021; comparisons are to the quarter ended June 27, 2020. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,430 | $1,808 | $4,489 | $3,491 |
| Gross income | $253 | $89 | $431 | $224 |
| Operating income | $165 | $9 | $257 | $72 |
| Net earnings (loss) | $176 | $(27) | $355 | $(130) |
| Diluted earnings (loss) per share | $151.56 | $(23.51) | $305.59 | $(112.33) |
Calculated gross margin was 10.4% for Q2 2021 versus 4.9% in Q2 2020; operating margin was 6.8% versus 0.5%. For the first half, gross margin was 9.6% versus 6.4%, and operating margin was 5.7% versus 2.1%.
- Cash flow: Operating activities used $68 in the first half, compared with approximately break-even in 2020. Higher inventories (up $319 in cash-flow movements) and receivables (up $109) were key uses of cash. Capital expenditures were $223 versus $108.
- Liquidity: Cash and short-term investments totaled $1,575 at July 3, 2021, including $1,483 in short-term investments. Management reported $890 of additional net working capital, $599 of available uncommitted credit lines, and $150 of available committed credit lines.
- Debt: Lines of credit were $474; long-term debt, including current maturities, was approximately $720 at face value. The principal borrowing was a $681 term loan due 2028. The company reported compliance with restrictive debt covenants.
- Balance sheet: Total assets were $7,070, up from $6,399 at year-end 2020; stockholders’ equity was $4,183, up from $3,828. Inventory rose to $1,497 from $1,178.
- Investment income: Other investment income was $46 in Q2 and $117 for the first half, versus $128 and a loss of $97, respectively, in the prior-year periods. This volatile item materially affected reported earnings.
Material changes and segment results
- Consolidated sales rose $622 in Q2 and $998 in the first half, mainly from higher commodity and pork prices and increased Marine cargo volumes. Operating income rose $156 and $185, respectively.
- Pork: Q2 operating income was $129 versus $9; first-half income was $190 versus $41. Higher pork-product and hog margins drove improvement, partly offset by higher feed costs.
- Commodity Trading and Milling (CT&M): Sales increased, but reported operating income fell to $16 from $24 in Q2 and to $32 from $54 for the first half. Derivative mark-to-market losses and lower volumes weighed on reported results. Excluding mark-to-market adjustments, operating income was $26 for Q2 and $53 for the first half.
- Marine: Q2 operating income improved to $32 from a loss of $11; first-half income was $53 versus a loss of $17, primarily on higher cargo volumes and freight rates.
- Power: Q2 operating loss was $5 versus $1; first-half operating loss was $7 versus income of $1. Lower generation and higher costs contributed.
- Butterball/Turkey: Seaboard’s equity-method loss narrowed to $4 in Q2 from $14 and to $9 for the first half from $21. Butterball nevertheless reported a first-half net loss of $18.
Outlook, risks and contingencies
- Management expected Pork and Marine to remain profitable for the rest of 2021. It anticipated positive CT&M operating income excluding derivative mark-to-market effects, but could not predict segment results including those effects. Management expected Power to be unprofitable for the remainder of 2021 and could not predict Sugar and Alcohol or Turkey profitability.
- Management budgeted approximately $350 of capital expenditures for the rest of 2021, including about $275 for Pork. The principal project is converting the Hugoton, Kansas facility to renewable diesel, with operations expected to begin in 2022. Management expected to fund investment from cash, short-term investments and borrowing capacity.
- COVID-19 impacts remained uncertain, including labor constraints, commodity volatility and some sales below pre-pandemic levels. Other risks include feed and commodity prices, freight and fuel costs, foreign exchange, interest rates and equity-market movements. Derivatives are not designated for hedge accounting, so fair-value changes can affect earnings unevenly.
- Seaboard disclosed ongoing pork antitrust litigation and Uruguay proceedings involving Cereoil and Nolston. Management said the likelihood and potential loss for these matters could not be determined. The disclosed Uruguay claims include potential amounts of $22, $23 and $14, subject to possible offsets between two Cereoil cases; a separate creditor threatened a U.S. claim of approximately $10 plus interest. The company intends to defend the cases.
- Management stated that liquidity and borrowing capacity were adequate for existing operations and currently known expansion plans, while noting future financing availability and terms are not assured. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of first-half earnings came from operating performance versus short-term investment gains, and how investment volatility may affect future results.
- Whether working-capital needs, especially inventory and receivables, continue to consume operating cash, and whether planned capital spending remains on budget.
- Progress, cost and expected start-up timing for the Hugoton renewable diesel project and the new power barge.
- Whether Pork, Marine and CT&M outlooks hold amid feed, commodity, freight and derivative volatility; monitor Butterball’s results and Power’s expected losses.
- Developments in the disclosed litigation and any changes to the company’s assessment of potential exposure.