Seaboard Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019. Amounts are in millions of dollars, except per-share data. Seaboard operates across pork, commodity trading and milling, marine, sugar and alcohol, power, and turkey (equity-method investment). Management reported that all segments were considered essential businesses and continued operating during the quarter.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1,683 | $1,543 |
| Gross income | $135 | $50 |
| Operating income (loss) | $63 | $(34) |
| Other investment income (loss), net | $(225) | $113 |
| Net earnings (loss) | $(103) | $57 |
| Earnings (loss) per share | $(88.43) | $48.79 |
| Cash from operating activities | $(106) | $(107) |
- Gross margin was approximately 8.0% versus 3.2%; operating margin was approximately 3.7% versus negative 2.2%. The net loss reflected a $225 million net loss on other investments, principally market-value fluctuations in short-term trading investments; the filing reports $236 million of unrealized losses on trading securities still held at quarter-end and approximately $60 million of realized gains on sales.
- Sales rose $140 million year over year. Gross income improved $85 million, and operating income improved $97 million. Interest expense was $5 million; income tax benefit was $71 million.
- At March 28, cash and short-term investments totaled $1.226 billion, down $333 million from year-end, primarily due to capital-market volatility in short-term investments. Management reported $654 million of additional net working capital and said liquidity, capital resources, and borrowing capacity were adequate for existing operations and known expansion plans. Cash and short-term investments included $153 million held by foreign subsidiaries, which Seaboard generally intends to reinvest abroad.
- Current assets were $3.154 billion and current liabilities $1.274 billion. Lines of credit totaled $339 million; long-term debt was $791 million on the balance-sheet carrying basis ($105 million current and $686 million long-term). Debt and line-of-credit balances together were approximately $1.130 billion. Seaboard reported compliance with restrictive debt covenants.
- Operating cash use was $106 million, including cash uses from higher receivables, inventories, and other liabilities. Investing activities provided $6 million net, including short-term investment sales and maturities, while capital expenditures were $55 million. Financing activities provided $77 million, including a $96 million net increase in lines of credit.
Material changes and segment performance
- Pork: Sales increased to $455 million from $403 million; operating income improved to $32 million from a $34 million loss. Drivers included stronger pork margins, $14 million of federal biodiesel blender’s credits, and no comparable derivative contract losses. Management could not predict whether the segment would be profitable for the remainder of 2020.
- Commodity Trading and Milling: Sales increased to $914 million from $829 million; operating income rose to $30 million from $7 million. Higher third-party sales margins and the 2019 acquisition contributed. Reported operating income included a $5 million loss from mark-to-market adjustments; excluding those adjustments, income was $25 million versus $10 million in 2019.
- Marine: Sales increased to $269 million from $254 million, but the segment recorded a $6 million operating loss versus break-even. Higher fuel, charter-hire, and terminal costs weighed on results.
- Sugar and Alcohol: Sales were $22 million versus $25 million; operating loss narrowed to $1 million from $4 million.
- Power: Sales declined to $17 million from $29 million and operating income to $2 million from $4 million, reflecting lower spot rates and production.
- Turkey investment: Seaboard’s equity-method loss from Butterball narrowed to $7 million from $11 million. Butterball reported a $13 million net loss versus $21 million.
Outlook, risks, and unusual items
- Management said COVID-19 had not significantly affected consolidated or segment results in Q1 apart from capital-market volatility, but subsequent effects included weaker food-service volumes and prices, reduced maritime demand, lower fuel prices, and supply-chain pressures. The duration and financial impact were uncertain; management cautioned Q1 results were not indicative of the remainder of 2020 and could not predict segment profitability for the rest of the year.
- Management budgeted $241 million of capital expenditures for the remainder of 2020, primarily including $172 million for pork-segment projects. These include converting the Hugoton, Kansas facility to renewable-diesel production, with operations expected in 2022, and completing a pork-processing-plant expansion. The company was also evaluating strategic alternatives for its existing power barge; costs could vary with the option selected.
- Seaboard repurchased 4,069 shares for $13 million during the quarter; $65 million remained authorized. The quarterly dividend was $2.25 per share. The company adopted the CECL credit-loss standard on January 1, 2020, reducing retained earnings by $3 million.
- Material contingencies include pork-antitrust litigation, for which management said probability and potential loss could not be estimated; Cereoil proceedings with stated potential claims of $22 million and $23 million that offset against one another; and a Nolston proceeding with a stated net-indebtedness estimate of $14 million, potentially higher with fees, interest, or other expenses. Outcomes were uncertain, and Seaboard said it would defend the matters.
- Other significant risks include commodity, foreign-exchange, interest-rate, and equity-price volatility; the impact of mark-to-market accounting on earnings; possible interruptions at the Oklahoma pork-processing or STF plants; and uncertainty in financing availability and costs. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the large portfolio mark-to-market loss and the value and composition of short-term investments evolve after quarter-end.
- The extent of COVID-19 effects on food-service demand, shipping, supply chains, plant operations, and full-year segment performance.
- Execution, funding, and expected returns of the $241 million remaining-2020 capital program, including the renewable-diesel conversion and power-barge plans.
- Debt maturities and borrowing capacity, including the $44 million seller-financed note due January 5, 2021 and the committed credit line secured by short-term investments.
- Developments in the antitrust and Uruguay legal matters, for which potential outcomes remain uncertain.