Seaboard Corporation (NYSE American: SEB) — FY2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019, with comparisons to 2018 and 2017. Seaboard is a diversified agribusiness and transportation company operating in pork, commodity trading and milling (CT&M), marine shipping, sugar and alcohol, power, and other businesses. It also accounts for its 50% interest in Butterball as an equity-method investment.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change / context |
|---|---|---|---|
| Net sales | $6.840 billion | $6.583 billion | Up 3.9% |
| Gross income / margin | $440 million / 6.4% | $523 million / 7.9% | Margin narrowed |
| Operating income / margin | $104 million / 1.5% | $209 million / 3.2% | Down 50%; costs and segment margins weighed |
| Net earnings attributable to Seaboard | $283 million | $(17) million | 2019 included $225 million of other investment income, including $176 million of noncash unrealized gains on short-term investments |
| Operating cash flow | $171 million | $238 million | Down $67 million |
| Capital expenditures | $349 million | $162 million | Cash flow after capex was approximately $(178) million |
| Cash and short-term investments | $1.559 billion | $1.530 billion | Management reported total working capital of $602 million |
| Long-term debt at face value | $793 million | $779 million | Plus $246 million drawn on credit lines; $424 million of available borrowing capacity |
| Total assets / equity | $6.285 billion / $3.554 billion | $5.307 billion / $3.329 billion | Asset increase included adoption of lease accounting |
Interest expense was $36 million, versus $44 million in 2018. Operating lease liabilities were $483 million and finance lease liabilities were $45 million at year-end. The company reported compliance with debt covenants. Its financial statements received an unqualified audit opinion; the auditor also reported effective internal control over financial reporting.
Material changes and segment results
- Pork: Sales rose to $1.851 billion from $1.774 billion, while operating income fell to $54 million from $117 million. Derivative losses, lower biodiesel margins, and a $14 million multi-employer pension withdrawal liability offset stronger pork-product margins and biodiesel credits. Tariffs affecting pork exports to China continued to pressure earnings.
- CT&M: Sales increased to $3.672 billion from $3.428 billion and operating income rose to $62 million from $46 million. Higher third-party sales margins contributed; the segment expanded through the acquisition of control of a Peruvian grain trader in October 2019.
- Marine: Sales were broadly flat at $1.061 billion, but operating income declined to $4 million from $25 million, mainly due to higher charter, terminal, and fuel costs.
- Sugar and Alcohol: Sales fell to $121 million from $184 million and the segment recorded a $16 million operating loss, compared with $9 million of income. Lower volumes and alcohol margins, together with peso weakness, were key factors. Argentina was treated as highly inflationary; the U.S. dollar became the segment’s GAAP functional currency in 2018.
- Power: Sales declined to $117 million from $122 million, while operating income increased to $27 million from $21 million as lower fuel costs more than offset lower spot-market revenue.
- Butterball / Turkey: Seaboard’s equity-method loss increased to $21 million from $16 million, reflecting higher production and other costs, including interest. Butterball reported a $40 million net loss.
Seaboard’s total loss from affiliates was $41 million, compared with $44 million in 2018. The 2019 results also included a $60 million Pork-segment recognition of federal biodiesel blender’s credits in the segment and quarterly disclosures; the tax note describes $136 million of nontaxable revenue related to the retroactive credits for 2018 and 2019, making the presentation worth reconciling.
Outlook, investment plans, and risks
- Management anticipated positive 2020 operating income in Pork, CT&M (excluding derivative mark-to-market effects), and Power. It could not predict whether Marine, Sugar and Alcohol, or Turkey would be profitable in 2020.
- Management budgeted $313 million of 2020 capital expenditures. Major projects include the Oklahoma pork plant expansion and conversion of the Hugoton, Kansas, facility to renewable diesel, expected to begin operating in 2022. Estimated conversion cost was $220 million to $270 million. A new Dominican Republic power barge, estimated at $185 million to $210 million depending on the selected alternative, was expected to begin operations in mid-2021.
- Management said existing liquidity, internally generated cash, and borrowing capacity should fund operations and currently known expansion plans for the next 12 months. It intended to continue quarterly dividends; 2019 dividends totaled $9.00 per share, up from $6.00 in 2018. Up to $78 million remained authorized for repurchases at year-end.
- Key exposures include volatile commodity prices and derivatives, feed and fuel costs, foreign exchange and political conditions, trade barriers and tariffs, disease and food-safety events, shipping disruptions, and dependence on certain facilities, suppliers, and customers. The 2020 low-sulfur marine fuel rules were expected to increase costs.
- Material legal matters include pork antitrust class actions and litigation in Uruguay involving Cereoil and Nolston. The company said outcomes and potential losses could not be estimated; it intends to defend the matters. Management did not expect other ordinary-course legal matters to materially affect consolidated financial statements.
Important facts for investors to verify
- How much of 2019 net earnings depended on unrealized investment gains, and how the short-term investment portfolio’s value may fluctuate.
- Why the filing reports $60 million of blender-credit revenue in segment and quarterly disclosures but $136 million of related nontaxable revenue in the tax note, including the timing and accounting treatment.
- Whether Pork and CT&M margins recover, and whether the Marine, Sugar and Alcohol, and Butterball businesses improve from 2019 results.
- Final project costs, schedules, funding, and expected returns for the renewable-diesel conversion and Dominican Republic power barge.
- Developments and potential exposure in the antitrust and Uruguay litigation, along with collection risk on foreign and affiliate receivables.