Seaboard Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 26, 2020; comparable periods ended September 28, 2019. Unless noted otherwise, amounts are in millions of dollars. Seaboard operates in pork, commodity trading and milling (CT&M), marine, sugar and alcohol, power, and turkey through an equity-method investment.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,645 | $1,663 | $5,136 | $5,028 |
| Gross income | $118 | $74 | $344 | $260 |
| Operating income (loss) | $29 | $(6) | $103 | $13 |
| Income (loss) before taxes | $75 | $(18) | $17 | $116 |
| Net earnings (loss) | $147 | $(7) | $18 | $108 |
| Earnings (loss) per share | $126.17 | $(6.00) | $15.14 | $92.97 |
| Operating cash flow | Not separately provided for quarter | $34 | $70 |
Gross margin was approximately 7.2% for Q3 and 6.7% year to date, versus 4.4% and 5.2%, respectively, in 2019. Operating margin was approximately 1.8% for Q3 and 2.0% year to date, compared with negative 0.4% and 0.3%. Q3 net earnings included a $72 million income tax benefit and $56 million of other investment income; these materially lifted reported quarterly earnings. For the first nine months, other investment expense was $41 million versus $152 million of other investment income in 2019.
Material changes and segment results
- Q3 sales declined $18 million year over year; nine-month sales rose $108 million. Management attributed the quarterly decrease mainly to lower CT&M commodity sales, Marine cargo volumes, Power spot rates and production, and alcohol sales, partly offset by Pork growth. Year-to-date growth primarily reflected CT&M and Pork.
- Operating income improved by $35 million in Q3 and $90 million year to date. Drivers included federal biodiesel blender’s credits, improved CT&M margins and, in Q3, lower Marine fuel and voyage costs.
- Pork operating income was $4 million in Q3 and $47 million year to date, versus losses of $22 million and $31 million. Results included $22 million of Q3 and $55 million of year-to-date federal blender’s credits; no such credits were recognized in the first nine months of 2019.
- CT&M operating income was $28 million in Q3 and $82 million year to date, up $14 million and $32 million. Marine earned $14 million in Q3 but recorded a $3 million year-to-date operating loss. Power operating income fell to $3 million for Q3 and $4 million year to date; Sugar and Alcohol recorded losses of $1 million and $4 million, respectively.
- Loss from affiliates narrowed to $6 million in Q3 and $27 million year to date, from $15 million and $49 million. Turkey affiliate Butterball’s reported net loss was $7 million for Q3 and $47 million year to date, compared with $22 million and $59 million.
Cash, liquidity and debt
- At September 26, cash and cash equivalents were $92 million and short-term investments were $1.245 billion, totaling about $1.337 billion. Management reported additional net working capital of $668 million. Cash and short-term investments declined $222 million from year-end 2019.
- Nine-month operating cash flow was $34 million, down from $70 million. Investing cash flow was negative $13 million, including $160 million of capital expenditures; financing cash flow was negative $53 million. Cash ended the period at $92 million, down $33 million from year-end.
- Current assets were $3.015 billion and current liabilities $1.010 billion. Lines of credit totaled $271 million drawn; long-term debt was $683 million, with $56 million of current maturities. Long-term debt at face value was $740 million. The Term Loan due 2028 had a 1.78% rate at quarter-end; the company reported compliance with restrictive debt covenants.
- Seaboard had $643 million of uncommitted and $350 million of committed short-term credit lines. A new $250 million committed revolving facility, with a $100 million accordion option, matures May 2021. Management believes liquidity and borrowing capacity are adequate for existing operations and currently known expansion plans, while noting future financing terms and availability are not assured.
Outlook, risks and unusual items
- No consolidated earnings guidance was provided. Management expected Pork, CT&M and Marine to be profitable for the remainder of 2020; it could not predict whether Sugar and Alcohol, Power or Turkey would be profitable.
- Management budgeted $91 million of capital expenditures for the remainder of 2020, including $70 million primarily to convert the Hugoton, Kansas plant to renewable diesel production, with operations expected to begin in 2022.
- COVID-19 continued to create uncertainty, including staffing constraints, lockdowns or curfews in some regions, commodity volatility and disrupted customer demand. Seaboard said all operations continued as essential businesses; some recovered in Q3, but challenges remained.
- A $32 million lump-sum pension distribution related to the passing of Steve Bresky resulted in a $9 million pension settlement charge in Q3. Seaboard also paid $32 million of related deferred compensation.
- Seaboard faces pork antitrust litigation; an amended-complaint dismissal motion was denied on October 16, 2020. The company said outcome and potential loss could not be reasonably estimated. Separate Uruguay proceedings related to Cereoil include a claimed $22 million reimbursement and a claim based on scheduled net liabilities of $23 million, with potential overlap between the cases; a creditor also threatened U.S. litigation. A Nolston proceeding cites scheduled net liabilities of $14 million. Seaboard intends to defend these matters.
- Risk disclosures highlight COVID-19 and economic disruption, reliance on key pork processing plants, and California Proposition 12. If upheld and not met, the rule could restrict uncooked pork sales in California, which represented approximately 10% of direct sales in 2019, plus indirect sales through further processors.
- Commodity derivatives are marked to market through earnings rather than hedge accounting, which can cause period-to-period volatility. Q3 gains on short-term investments and year-to-date investment losses illustrate investment-market sensitivity.
Investor verification priorities
- Assess how much Q3 net income depended on the $72 million tax benefit and $56 million investment income, and the sustainability of underlying operating results.
- Verify the continuation and earnings contribution of federal biodiesel blender’s credits, including the reported $55 million recognized year to date.
- Monitor operating cash generation against capital spending, liquidity needs and debt maturities; distinguish short-term investments from cash available for operations.
- Track COVID-19 effects, commodity and currency volatility, Marine demand, and segment-level outlook—particularly the segments for which management could not predict profitability.
- Review developments in antitrust and Uruguay litigation, including potential overlap and the fact that loss estimates were not determinable, and follow Proposition 12 compliance costs and legal status.