Seaboard Corporation — Q3 2019 Form 10-Q
Business context and period. Seaboard is a diversified food, agriculture, transportation and energy company. This unaudited report covers the quarter ended September 28, 2019 and the first nine months of 2019; amounts are in millions of dollars except per-share data. Comparisons are with the quarter and nine months ended September 29, 2018.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $1,663 | $1,651 | $5,028 | $4,921 |
| Gross income | $74 | $122 | $260 | $410 |
| Operating income (loss) | $(6) | $37 | $13 | $166 |
| Net earnings (loss) attributable to Seaboard | $(7) | $35 | $108 | $74 |
| EPS | $(6.00) | $29.93 | $92.97 | $62.96 |
| Cash from operating activities | Not separately stated for quarter | $70 | $166 |
- Gross margin was approximately 4.5% in Q3 versus 7.4% a year earlier, and 5.2% for 9M versus 8.3%. Operating income fell sharply despite higher sales.
- Q3 pretax loss was $18; an $11 income tax benefit reduced the net loss to $7. Nine-month earnings included $152 of other investment income, versus $15 in 2018; the filing attributes much of the change to mark-to-market movements in short-term investments. Unrealized gains on trading securities still held at period end were $124 for 9M 2019.
- Cash and short-term investments totaled $1,539 at September 28, up $9 from year-end. Cash alone was $121, down from $194. Current assets were $3,096 and current liabilities $959.
- Debt comprised $210 of credit-line borrowings, $58 of current long-term debt maturities and $733 of long-term debt, net of current maturities. The $695 term loan due 2028 carried a 3.74% rate. The company reported compliance with debt covenants. Operating lease liabilities were $479; finance lease liabilities were $34.
- Capital expenditures were $261 for 9M; management budgeted a further $108 for the remainder of 2019. Operating cash flow was $70, investing cash flow $(195), and financing cash flow $52 for 9M.
Material changes and segment results
- Management cited the absence of federal biodiesel blenders’ credits, lower biodiesel margins, derivative losses and a $14 pension withdrawal charge as principal drivers of the operating-income decline. The credits had not been extended for 2018–2019 production, and renewal or retroactive extension was uncertain.
- Pork: Q3 operating loss was $22 versus income of $2; 9M operating loss was $31 versus income of $111. Management said it could not predict whether the segment would be profitable for the remainder of 2019.
- Commodity Trading and Milling: Q3 operating income was $14 versus $21; 9M was $50 versus $30. Management anticipated positive operating income for the rest of 2019 excluding derivative mark-to-market effects, while warning that commodity markets and operating conditions were volatile.
- Marine: Q3 operating loss was $2 versus income of $9; 9M income was $2 versus $9. Higher charter rates, terminal costs and fuel costs weighed on results. Management expected positive operating income for the rest of 2019.
- Sugar & Alcohol: Q3 operating loss was $1 versus income of $5; 9M loss was $9 versus income of $17. Lower sales volumes and prices, margins and Argentine currency weakness affected results; remainder-of-year profitability was uncertain.
- Power: Q3 operating income was $9 versus $7; 9M was $21 versus $13. Management expected positive operating income for the rest of 2019. Seaboard sold its 29.9% interest in a Dominican Republic generation facility for $23 cash net of selling expenses and taxes, plus a $6 note receivable; no gain or loss was recorded. Income from affiliates is expected to be lower as a result.
- Turkey/Butterball: Seaboard’s equity-method loss was $30 for 9M versus $18. Seaboard provided Butterball an approximately $8 loan in August. Butterball reported a $59 nine-month net loss versus $36.
Outlook, risks and unusual items
- Management said available cash, short-term investments, internally generated cash and borrowing capacity should fund existing operations and known expansion plans for the next 12 months. It cautioned that future financing availability and terms are not assured. Of cash and investments, $173 was held by foreign subsidiaries and the majority was intended to remain invested abroad.
- Major investment programs include the Guymon pork plant expansion and conversion of the Hugoton ethanol plant toward renewable diesel, and a new floating power barge expected to begin operations in 2021; the barge project is expected to exceed $160. Management continued to explore strategic alternatives for the existing power barge.
- Seaboard recorded an estimated $14 multi-employer pension-fund withdrawal liability, payable quarterly over 20 years, after ceasing contributions in July 2019.
- Material unresolved matters include pork-industry antitrust litigation (class cases dismissed with leave to amend; an individual action and a Puerto Rico case remain pending), claims concerning Cereoil and Nolston in Uruguay, and a U.S. government investigation involving money transfers and bank accounts in the DRC and other African countries. The company said it could not assess the likelihood or estimate potential losses in these matters.
- Commodity derivatives are marked to market in earnings and are not designated as accounting hedges; management warned that price, currency and investment-market volatility can materially affect reported results. Other exposures include feed and hog prices, fuel and charter rates, foreign exchange and equity prices.
- The company adopted lease accounting guidance in 2019, recognizing operating lease assets and liabilities; prior periods were not restated. It was evaluating the credit-loss standard scheduled to take effect January 1, 2020. Management reported no material change in previously disclosed risk factors and that disclosure controls were effective.
Important facts for investors to verify
- Whether biodiesel tax credits are extended or restored, and the effect on Pork segment margins and profitability.
- How much nine-month earnings depended on unrealized investment gains, and the sensitivity of earnings to future investment and derivative mark-to-market changes.
- Progress, remaining cost and expected returns for the pork-facility, renewable-diesel and power-barge projects, alongside planned capital spending.
- Developments and potential exposure in the antitrust, Uruguay bankruptcy-related and government-investigation matters; loss estimates were not available in the filing.
- Butterball’s continuing losses and Seaboard’s affiliate advances, and the expected effect of the Power investment sale on future affiliate income.