Seaboard Corporation — Q1 2019 Form 10-Q
Business context and period: Seaboard reported the three months ended March 30, 2019, compared with the three months ended March 31, 2018. Its businesses include pork, commodity trading and milling (CT&M), marine, sugar and alcohol, power, and an equity-method investment in Butterball (Turkey segment). Amounts below are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1,543 | $1,579 |
| Gross income | $50 | $172 |
| Operating income (loss) | $(34) | $97 |
| Net earnings attributable to Seaboard | $57 | $32 |
| Earnings per common share | $48.79 | $26.75 |
| Cash from operating activities | $(107) | $8 |
- Sales fell 2.3%. Gross margin was approximately 3.2%, versus 10.9% a year earlier; operating margin was approximately negative 2.2%, versus positive 6.1%.
- Net earnings rose despite the operating loss, principally because other investment income was $113, compared with a $37 loss in Q1 2018. The 2019 figure included $104 of unrealized gains on trading securities still held at quarter-end. Interest expense was $6 and income tax expense was $8.
- Operating cash outflow of $107 reflected, among other items, a $170 increase in inventories. Cash and cash equivalents decreased to $59 from $194 at year-end; short-term investments increased to $1,488 from $1,336. Together, cash and short-term investments were $1,547, up $17 from year-end. Investing cash outflow was $127, including $83 of capital expenditures; financing provided $99.
- At March 30, current assets were $3,182 and current liabilities $1,036, with management reporting net working capital of $599. Notes payable to banks were $252; long-term debt, including current maturities, was approximately $788 at carrying value. The term loan due 2028 had a $696 balance. Seaboard was in compliance with restrictive debt covenants.
- Operating lease liabilities totaled $504 following adoption of the lease standard on January 1, 2019; the adoption added $460 of right-of-use assets and $498 of lease liabilities at transition. This accounting change had no material income-statement or cash-flow impact.
Material changes and segment results
- Pork: Sales declined to $403 from $466 and operating income fell to a $34 loss from $92 income. The main factors were no federal blender’s credits in 2019 (versus $42 of revenue recognized in Q1 2018), lower pork prices, and mark-to-market losses on strategic hog positions. Higher market-hog volume partly offset the sales decline.
- CT&M: Sales increased to $829 from $786; operating income was $7 versus $11. Higher third-party sales and margins were offset by derivative mark-to-market losses and higher selling and administrative costs. Excluding reported mark-to-market adjustments, operating income was $10 versus $5.
- Marine: Sales rose to $254 from $249, and operating results improved to break-even from a $4 loss, reflecting higher cargo rates in some markets and lower stevedoring and cargo costs.
- Sugar and Alcohol: Sales decreased to $25 from $51 and the segment recorded a $4 operating loss versus $2 income, primarily due to lower sales volumes and prices and lower margins. Argentine peso weakness and market volatility remain relevant.
- Power: Sales were $29 versus $23 and operating income was $4 versus break-even, mainly on higher spot-market rates, partly offset by higher fuel costs.
- Turkey/Butterball affiliate: Seaboard recorded an $11 affiliate loss versus $1 income. Butterball reported a $21 net loss versus $2 net income, with higher production and logistics costs and lower turkey-product volumes cited.
Outlook, risks and unusual items
- Management anticipated positive operating income for the remainder of 2019 in Pork, CT&M excluding derivative mark-to-market effects, Marine, and Power. It could not predict profitability for Sugar and Alcohol or Turkey. Pork prices, feed and hog costs, and whether blender’s credits might be renewed or extended were uncertain.
- Management budgeted $372 of capital expenditures for the remainder of 2019, including $143 for Pork and $100 for the new Power barge. The barge project is expected to exceed $160 in total and begin operations in the Dominican Republic in Q1 2021. Seaboard also described a possible conversion of the recently acquired idle ethanol plant to renewable-diesel production.
- Management said existing liquidity, borrowing capacity, and internally generated cash should be adequate for current operations and known 2019 expansion plans. It disclosed a subsequent $10 contribution to Seaboard Triumph Foods for working capital and said further contributions may be necessary.
- Key contingencies include consolidated U.S. pork-price-fixing class actions seeking damages and other relief; Uruguay bankruptcy-trustee claims involving Cereoil and Nolston; and a U.S. Department of Justice inquiry concerning money transfers and accounts in the Democratic Republic of Congo and other African countries. Seaboard intends to defend the cases and cooperate with the inquiry; the filing says outcomes and potential losses cannot presently be estimated. The Uruguay claims identify potential amounts of $22, $23, and $14, respectively, subject to possible offsets between two Cereoil cases and additional expenses.
- Commodity and currency derivatives are not designated for hedge accounting, so mark-to-market movements can affect reported earnings before related transactions are realized. Management said market-risk exposure had not materially changed from year-end. The filing reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the $113 investment gain, including $104 of unrealized gains, is sustained or reverses, and how much of reported net earnings reflects recurring operations.
- Whether Pork operating performance improves without federal blender’s credits, and the effects of pork prices, feed costs, hog positions, and any future credit legislation.
- Inventory growth, operating cash usage, and the funding and execution of the planned capital program and affiliate contributions.
- The composition, valuation volatility, and liquidity of the $1,488 portfolio of short-term trading investments, alongside bank borrowings and lease obligations.
- Developments, potential exposure, and any material accruals related to the pork antitrust litigation, Uruguay claims, and government inquiry; the filing does not provide a clear estimate of likely losses.