Seaboard Corporation — Q2 2020 Form 10-Q
Business context and period. Seaboard reported the quarter and six months ended June 27, 2020. Its businesses include pork, commodity trading and milling (CT&M), marine transportation, sugar and alcohol, power, and an equity-method investment in Turkey producer Butterball. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,808 | $1,822 | $3,491 | $3,365 |
| Gross income | $91 | $136 | $226 | $186 |
| Operating income | $11 | $53 | $74 | $19 |
| Net earnings (loss) | $(26) | $58 | $(129) | $115 |
| EPS | $(22.35) | $50.13 | $(110.88) | $98.92 |
- Gross margin was approximately 5.0% in Q2 2020 versus 7.5% a year earlier; operating margin was approximately 0.6% versus 2.9%. For the six-month periods, operating margin was approximately 2.1% versus 0.6%.
- Q2 other investment income was $128, primarily reflecting unrealized gains on short-term investments, partly offset by $26 of realized losses on investment sales. Six-month other investment loss was $97, compared with $150 of income in 2019. This volatility materially affected reported earnings.
- Q2 income tax expense was $142 despite $116 of pretax earnings. For the six months, the company recorded a $58 pretax loss and $71 of tax expense. Management cited changes in forecast annual results and tax credits as factors in period tax rates.
- Six-month operating cash flow was zero, compared with $39 provided in 2019. Investing activities provided $23, financing activities used $68, and cash declined $46 to $79. Capital expenditures were $108.
Liquidity, debt, and balance sheet
- At June 27, cash and cash equivalents were $79 and short-term investments were $1,178, totaling approximately $1.26 billion. Management also reported $635 of additional net working capital and considered liquidity adequate for existing operations and currently known expansion plans.
- Total current assets were $2,914 and current liabilities were $1,022. Total debt consisted of $220 drawn on uncommitted credit lines, $82 of current long-term debt, and $687 of long-term debt, or approximately $989 in total. The $690 term loan matures in 2028; the company reported compliance with debt covenants.
- Seaboard entered into new committed revolving facilities totaling $325 during Q2. At quarter-end, it reported $425 of committed lines overall, with none drawn, alongside $596 of uncommitted lines. Cash and short-term investments were down $302 from year-end, primarily due to investment sales for working capital purposes.
Material changes and segment performance
- Q2 sales fell $14 year over year, while six-month sales rose $126. Operating income declined $42 in Q2 but increased $55 for the first half.
- Pork: Q2 operating income declined to $11 from $25, but first-half income improved to $43 from a $9 loss. The first-half comparison benefited from $33 of federal biodiesel blender’s credits, with none recognized in the first half of 2019. Management expected the segment to be profitable for the rest of 2020.
- CT&M: Sales grew on higher third-party commodity volumes, including the acquired business, and prices. Operating income was $24 in Q2 and $54 for six months. Management expected the segment to remain profitable for the rest of 2020, while noting commodity, political, economic, and pandemic uncertainty.
- Marine: Q2 sales were $192 versus $259 and the segment recorded an $11 operating loss. Lower cargo volumes amid COVID-19-related customer shutdowns drove the decline. Management anticipated the segment would not be profitable for the rest of 2020.
- Sugar and Alcohol and Power: Both had lower sales year over year in Q2 and the first half. Management could not predict whether either segment would be profitable for the remainder of 2020.
- Turkey/Butterball: Seaboard’s equity-method loss was $14 in Q2 and $21 for six months. Butterball reported a $27 Q2 net loss; management anticipated Seaboard’s Turkey segment would not be profitable for the rest of 2020.
Outlook, risks, and unusual items
- COVID-19 affected all segments: food businesses experienced a shift from food-service to retail demand, Marine cargo volumes fell significantly, and energy demand and pricing weakened. Management said the duration and financial impact remained uncertain; operations continued as essential businesses.
- Management budgeted $174 of capital expenditures for the remainder of 2020, including $128 for Pork, primarily to convert the Hugoton, Kansas plant to renewable diesel production, with operations expected to begin in 2022. A power barge under construction was expected to be completed in 2021.
- The company’s substantial short-term investment portfolio is exposed to market-price fluctuations. Investment and derivative marks are recognized in earnings; management noted that derivatives are not designated for hedge accounting, which can create period-to-period earnings volatility.
- Material unresolved legal matters include pork antitrust class actions, for which loss probability and amount could not be estimated, and Uruguay bankruptcy-related claims involving Cereoil and Nolston. Disclosed potential amounts include $22 for one Cereoil claim, approximately $23 of net Cereoil indebtedness in another claim, and approximately $14 of Nolston net indebtedness; certain Cereoil awards would offset one another. A creditor also threatened a separate U.S. claim.
- Management identified pandemic-driven economic disruption and the continued operation of its Oklahoma pork plant and the STF plant as significant risks. It gave no consolidated earnings or revenue guidance; outlook statements were segment-specific.
Most important facts for investors to verify
- Whether the major Q2 investment gain and six-month investment loss reverse or recur, and how portfolio performance affects earnings and liquidity.
- Whether COVID-19-related Marine weakness, food-service demand changes, labor costs, and commodity and energy market conditions persist.
- Whether Pork and CT&M meet management’s profitability expectations, and whether the remaining segments perform in line with their cautious outlooks.
- Progress, cost, and timing of the renewable diesel conversion and power barge projects, alongside planned capital spending and available borrowing capacity.
- Developments in the antitrust and Uruguay litigation, including potential exposure that management currently cannot estimate.