Seaboard Corp: Form 10-Q for the period ended Oct 1, 2022

This Management Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, Seaboard’s consolidated financial statements and the accompanying notes included in Part I, Item 1 of this quarterly report on Form 10-Q and within Seaboard’s annual report on Form 10-K filed for the year ended December 31, 2021. Certain statements in this report contain forward-looking statements. See the section below entitled “Forward-looking Statements” for more information on these forward-looking statements, including a discussion of the most significant factors that could cause actual results to differ materially from those in the forward-looking statements.

LIQUIDITY AND CAPITAL RESOURCES

Management believes Seaboard’s combination of internally generated cash, liquidity, capital resources and borrowing capabilities are adequate for its existing operations and any currently known potential plans for expansion in both the short-term and long-term. It is management’s intent to continue seeking expansion opportunities in the industries in which Seaboard operates, and to utilize existing liquidity, available borrowing capacity and other financing alternatives for such opportunities. The terms and availability of such financing may be impacted by economic and financial market conditions, as well as Seaboard’s financial condition and results of operations at the time Seaboard seeks such financing, and there can be no assurances that Seaboard will be able to obtain such financing on terms that will be acceptable or advantageous.

Liquidity includes cash and cash equivalents, short-term investments and availability under line of credit facilities. As of October 1, 2022, Seaboard had cash and short-term investments of nearly $1.1 billion and additional total net working capital of $1.3 billion. The following table presents a summary of Seaboard’s available borrowing capacity under lines of credit.

As of October 1, 2022, $65 million of the $1.1 billion of cash and short-term investments were held by Seaboard’s foreign subsidiaries. Historically, Seaboard has considered substantially all foreign profits as being permanently invested in its foreign operations, including all cash and short-term investments held by foreign subsidiaries. Seaboard intends to continue permanently reinvesting these funds outside the United States (“U.S.”) as current plans do not demonstrate a need to repatriate them to fund Seaboard’s U.S. operations. For any planned repatriation to the U.S., Seaboard would record applicable deferred taxes for state or foreign withholding taxes.

Cash Flows

Cash and short-term investments as of October 1, 2022 decreased $398 million from December 31, 2021. The decrease was primarily due to liquidation of short-term investments for working capital and capital expenditure needs and the valuation of short-term investments due to the volatility in the capital markets. Cash from operating activities increased $281 million for the nine months ended October 1, 2022, compared to the same period in 2021, primarily due to higher cash earnings.

During the nine months ended October 1, 2022, Seaboard invested $367 million in property, plant and equipment, of which $223 million was invested in the Pork segment for biogas recovery projects, normal replacement of breeding herd and other investments, and $128 million was invested in the Marine segment primarily to purchase two used vessels and fund installment payments on vessels under construction.

For the remainder of 2022, management has budgeted capital expenditures totaling approximately $245 million. Planned expenditures in the Pork segment are primarily for biogas recovery projects, a 15-megawatt solar field in Hugoton, Kansas, and other investments. At certain hog farms, the Pork segment is constructing biogas recovery facilities to capture methane from its hog lagoons and inject it as natural renewable gas into the local pipeline infrastructure. Planned expenditures for the Marine segment include installment payments on vessels under construction. During the third quarter of 2022, Seaboard’s Marine segment executed contracts to build three additional dual-fueled ships that are estimated to cost $62 million each for a total cash outlay of approximately $186 million. The payments for all six vessels under construction are made in accordance with milestones achieved over the course of construction. The three initial vessels are expected to be complete in 2024 and the three additional vessels are expected to be complete in 2025. Management anticipates paying for these capital expenditures from a combination of available cash, the use of available short-term investments and Seaboard’s available borrowing capacity.

Seaboard’s Pork segment purchased a hog farm operation during the third quarter of 2022 for $58 million of cash consideration. Future investments are expected to accommodate this growth. Also, Seaboard continues to make long-term investments in renewable energy facilities and real estate with $113 million in contributions for the nine months ended October 1, 2022.

Seaboard’s line of credit balances are used to fund working capital and investment in capital expenditures, as needed. Seaboard’s primary debt outstanding is a Term Loan due in 2028 with a balance of $672 million as of October 1, 2022. See Note 4 to the condensed consolidated financial statements for further discussion of lines of credit and long-term debt.

RESULTS OF OPERATIONS

Net sales for the three and nine month periods of 2022 increased $619 million and $1.8 billion, respectively, compared to the same periods in 2021. The increase for the three and nine month periods primarily reflected higher sales prices and volumes of certain commodities in the CT&M segment, higher freight rates in the Marine segment, the commencement of operations of a second barge in the Power segment, and higher biodiesel credit sales, partially offset by lower volumes of market hogs and pork products sold in the Pork segment.

Operating income increased $43 million and $124 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three and nine month periods primarily reflected higher voyage revenue in the Marine segment, higher margins on certain commodities in the CT&M segment and more power generation in the Power segment, partially offset by lower margins on pork product and market hog sales in the Pork segment.

Pork Segment

Net sales for the Pork segment increased $58 million and $83 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three month period primarily reflected higher sales of biofuel credits, and to a lesser extent, higher biodiesel and pork product prices, partially offset by lower volumes and prices of market hogs and lower volumes for pork products sold. The increase for the nine month period primarily reflected increased sales of biofuel credits and higher biodiesel and pork product prices, largely offset by a decrease in volumes of biodiesel and pork products sold and lower volumes and prices of market hogs sold.

Operating income for the Pork segment decreased $103 million and $265 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The decrease for the three month period primarily reflected lower margins on pork product and market hog sales due to higher costs of hogs, including an inventory adjustment, and higher feed and plant processing costs. During the third quarter of 2022, the Pork segment recorded a lower of cost or market inventory valuation adjustment associated with a combination of factors, including the decline in quoted market hog prices and higher grain costs during the period. The decrease for the nine month period primarily reflected lower margins on pork product and market hog sales due to higher costs of hogs, including an inventory adjustment, and higher feed and plant processing costs, biodiesel-related mark-to-market derivative contract losses, higher feedstock costs for biofuel operations and higher start-up costs for renewable diesel operations. During the third quarter of 2022, the renewable diesel plant in Hugoton, Kansas, began commercial operations. Management is unable to predict market prices for pork products or biodiesel or the costs of feed or third-party hogs for future periods. Based on current conditions, management predicts this segment will not be profitable for the remainder of 2022.

Income from affiliates increased $5 million and $14 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase primarily reflected improved operations at the Pork segment’s pork processing plant affiliate.

CT&M Segment

Net sales for the CT&M segment increased $336 million and $1.1 billion for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three and nine month periods primarily reflected higher sales prices, and to a lesser extent, higher volumes of certain commodities to third-party customers, offset by lower volumes to affiliates.

Operating income for this segment increased $24 million and $34 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three and nine month periods primarily reflected higher margins on certain commodities and costs associated with operational changes recorded in the third quarter of 2021 not repeated in the current year, partially offset by derivative contract losses related to mark-to-market adjustments. Due to worldwide commodity price fluctuations, the uncertain political and economic conditions in the countries in which this segment operates and the volatility in the commodity markets, management is unable to predict sales and operating results for this segment for future periods. However, management anticipates positive operating income for this segment for the remainder of 2022, excluding the effects of marking to market derivative contracts.

Had Seaboard not applied mark-to-market accounting to its derivative instruments, operating income for this segment would have been lower by $1 million and higher by $26 million for the three and nine month periods of 2022, respectively, and lower by $13 million and higher by $8 million for the three and nine month periods of 2021, respectively. While management believes its commodity futures, options and foreign exchange contracts are primarily economic hedges of its firm purchase and sales contracts and anticipated sales contracts, Seaboard does not perform the extensive record-keeping required to account for these transactions as hedges for accounting purposes. Accordingly, while the changes in value of the derivative instruments were marked to market, the changes in value of the firm purchase or sales contracts were not. As commodities are delivered to customers, these existing mark-to-market adjustments should be primarily offset by realized margins or losses as revenue is recognized over time, and these mark-to-market adjustments could reverse in 2022. Management believes eliminating these mark-to-market adjustments provides a more reasonable presentation to compare and evaluate period-to-period financial results for this segment.

Marine Segment

Net sales for the Marine segment increased $182 million and $552 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three month period of 2022 primarily reflected higher freight rates, partially offset by lower cargo volumes. The increase for the nine month period of 2022 primarily reflected higher freight rates, and to a lesser extent, higher cargo volumes.

Operating income increased $113 million and $328 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three and nine month periods primarily reflected higher revenues, partially offset by higher voyage related costs, including charter hire costs, fuel costs, and other operational costs primarily due to increased prices. Management cannot predict changes in fuel costs or other voyage costs, cargo volumes or cargo rates for future periods; however, management anticipates this segment will be profitable for the remainder of 2022.

Sugar and Alcohol Segment

Net sales for the Sugar and Alcohol segment increased $1 million and $4 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three and nine month periods primarily reflected higher prices of alcohol and sugar sold, partially offset by lower volumes of alcohol, sugar and energy sold as a result of low inventory levels from recent harvests. Sugar and alcohol sales are denominated in Argentine pesos, and an increase in local sales prices may be offset by exchange rate changes in the Argentine peso against the U.S. dollar.

Operating income for the Sugar and Alcohol segment increased $1 million and $3 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. For the three and nine month periods, the increase primarily reflected higher margins on sugar and alcohol sales and lower selling, general and administrative expenses, partially offset by lower volumes sold. Management cannot predict local sugar and alcohol prices or the volatility in the currency exchange rate for future periods. Based on these conditions, management cannot predict if this segment will be profitable for the remainder of 2022.

Power Segment

Net sales for the Power segment increased $42 million and $83 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three month period primarily reflected more power generation from the operation of both power barges, EDM II and EDM III, partially offset by lower spot market rates. The increase for the nine month period primarily reflected more power generation from the operation of both power barges and higher spot market rates as a result of higher fuel prices. During the second quarter of 2022, EDM III, the new barge, was placed in service with capacity to generate 148 megawatts of electricity.

Operating income for the Power segment increased $10 million and $18 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three and nine month periods primarily reflected higher revenues, partially offset by higher operational costs, including fuel costs. Management cannot predict fuel costs or the extent that spot market rates will fluctuate compared to fuel costs or other power producers for future periods; however, management anticipates this segment will be profitable for the remainder of 2022. Management continues to explore strategic alternatives, including a sale or relocation, for EDM II, the barge that began operations in 2012.

Turkey Segment

The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball, LLC. The increase in income from affiliates for the three month period of 2022 compared to the same period in 2021 was primarily the result of higher selling prices due to product mix and grain-related mark-to-market derivative contract gains, partially offset by lower volumes of turkey products sold and higher feed costs. The increase in income from affiliates for the nine month period of 2022 compared to the same period in 2021 was primarily the result of higher selling prices and Seaboard’s portion of a gain on the sale of a business, partially offset by lower volumes of turkey products sold and higher feed, plant production and transportation costs. Management is unable to predict market prices for turkey products or the cost of feed for future periods; however, management anticipates this segment will be profitable for the remainder of 2022.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased $4 million and $9 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three and nine month periods was primarily the result of higher personnel costs related to wages and other benefits and higher consulting costs, partially offset by lower pension settlements and costs associated with Seaboard’s deferred compensation program. The deferred compensation program costs are offset by the effect of the mark-to-market on investments recorded in other investment income (loss), net.

Interest Expense

Interest expense increased $2 million and $16 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The increase for the three month period was primarily related to higher interest rates on more outstanding debt, partially offset by adjustments to a contingent consideration liability discussed further in Note 6 to the condensed consolidated financial statements. The increase for the nine month period was primarily related to higher interest rates on more outstanding debt and mark-to-market gains on interest rate swap agreements in the prior year. During the third quarter of 2021, Seaboard early terminated all of its interest rate swap agreements.

Other Investment Income (Loss), Net

Other investment income (loss), net, decreased $55 million and $399 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021. The decrease for the three-month period was primarily due to mark-to-market fluctuations on investments. The decrease for the nine-month period was primarily due to mark-to-market fluctuations on investments, lesser amounts of realized gains and a $46 million charge recorded during the second quarter of 2022 related to a long-term solar energy investment discussed further in Note 2 to the condensed consolidated financial statements. The charge on this long-term investment is offset with the benefit of the investment tax credits recorded in income tax benefit (expense).

Foreign Currency Gains (Losses), Net

Foreign currency gains (losses), net, increased $4 million and $14 million for the three and nine month periods of 2022, respectively, compared to the same periods in 2021 primarily due to fluctuations in the South African rand and fluctuations of other currency exchange rates in several foreign countries.

Income Tax Benefit (Expense)

The effective tax rate for the three and nine month periods of 2022 decreased compared to the same respective periods in 2021 primarily due to an increase in federal investment tax credits available for the nine month period of 2022. See Note 2 to the condensed consolidated financial statements for further discussion of these credits.

Seaboard is exposed to various types of market risks in its day-to-day operations. Primary market risk exposures result from changing commodity prices, foreign currency exchange rates, interest rates and equity prices. Occasionally, Seaboard utilizes derivative instruments to manage these overall market risks. The nature of Seaboard’s market risk exposure related to these items has not changed materially since December 31, 2021. See Note 6 to the condensed consolidated financial statements for further discussion of market risk exposure.​

Evaluation of Disclosure Controls and Procedures — Seaboard’s management evaluated, under the direction of the Chief Executive and Chief Financial Officers, the effectiveness of Seaboard’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of October 1, 2022. Based upon and as of the date of that evaluation, Seaboard’s Chief Executive and Chief Financial Officers concluded that Seaboard’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Due to these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all potential future conditions.

Change in Internal Control Over Financial Reporting — There have been no changes in Seaboard’s internal control over financial reporting required by Exchange Act Rule 13a-15(f) that occurred during the fiscal quarter ended October 1, 2022 that has materially affected, or is reasonably likely to materially affect, Seaboard’s internal control over financial reporting.​

There have been no material changes in the risk factors as previously disclosed in Seaboard’s annual report on Form 10-K for the year ended December 31, 2021.

23

Forward-looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, including with respect to the financial condition, results of operations, plans, objectives, future performance and business of Seaboard. Forward-looking statements generally may be identified as statements that are not historical in nature and statements preceded by, followed by or that include the words “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends,” or similar expressions. In more specific terms, forward-looking statements, include without limitation: statements concerning projection of revenues, income or loss, adequate liquidity levels, capital expenditures, capital structure or other financial items, including the impact of mark-to-market accounting on operating income; statements regarding the plans and objectives of management for future operations; statements of future economic performance; statements regarding the intent, belief or current expectations of Seaboard and its management with respect to: (i) Seaboard’s ability to obtain adequate financing and liquidity; (ii) the price of feed stocks and other materials used by Seaboard; (iii) the sales price or market conditions for pork, agricultural commodities, biodiesel, sugar, alcohol, turkey and other products and services; (iv) the recorded tax effects under certain circumstances and changes in tax laws; (v) the volume of business and working capital requirements associated with the competitive trading environment for the CT&M segment; (vi) the charter hire rates and fuel prices for vessels; (vii) the fuel costs and related spot market prices for electricity in the Dominican Republic; (viii) the effect of the fluctuation in foreign currency exchange rates, (ix) the profitability or sales volume of any of Seaboard’s segments; (x) the anticipated costs and completion timetables for Seaboard’s scheduled capital improvements, acquisitions and dispositions; (xi) the productive capacity of facilities that are planned or under construction, and the timing of the commencement of operations at such facilities; (xii) the impact of pandemics or other public health emergencies, such as the COVID-19 pandemic or any resurgence thereof; (xiii) potential future impact on Seaboard’s business of new legislation, rules or policies; (xiv) adverse results in pending litigation matters; or (xv) other trends affecting Seaboard’s financial condition or results of operations, and statements of the assumptions underlying or relating to any of the foregoing statements.

This list of forward-looking statements is not exclusive. Forward-looking statements are based only on Seaboard’s current beliefs, expectations and assumptions regarding its future financial condition, results of operations, plans, objectives, performance and business. Seaboard undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions or otherwise, except as required by law. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to a variety of factors. Such factors include risks associated with international operations, deterioration of economic conditions, interest rate fluctuations, inflation, supply chain and labor market disruptions, stock price fluctuations, decentralization of operations, investments in non-consolidated affiliates, cyber-attacks and cybersecurity breaches, the food industry, fluctuations in commodity prices, difficulties in obtaining and retaining appropriate personnel, disruptions of operations of suppliers and co-packers, ocean transportation, fluctuations in fuel costs, general risks of litigation, compliance with complex rules and regulations, including stringent environmental regulation, and specific risks relating to Seaboard's segments. The information contained in this report, including without limitation the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the information included under the caption “Risk Factors” in Seaboard’s latest annual report on Form 10-K, as supplemented in this Form 10-Q, describes these factors and identifies other important factors that could cause such differences.​

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

25