Seaboard Corp: Form 10-Q for the period ended Jul 1, 2023

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 this quarterly report on Form 10-Q and within Seaboard’s annual report on Form 10-K filed for the year ended December 31, 2022 (the “2022 Annual Report”). Certain statements in this report contain forward-looking statements. See the section 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.

RECENT DEVELOPMENTS

As previously disclosed, on July 8, 2023, Seaboard received a proposal from entities affiliated with Ellen S. Bresky, the Chairwoman of Seaboard’s Board of Directors, and other members of the Bresky family, including Seaboard Flour LLC, SFC Preferred, LLC, SJB SEB LLC, trusts created for the benefit of members of the Bresky family and The Wally Foundation (collectively, the “Bresky Group”), that Seaboard repurchase, directly or indirectly, at least $600 million in shares of common stock, $1.00 par value per share, of Seaboard (“Common Stock”) currently held by the Bresky Group, at a price per share of Common Stock to be mutually agreed (the “Proposal”).

The Board of Directors of Seaboard has formed a special committee (the “Special Committee”) comprised of two independent directors to evaluate the Proposal and any other form of return of capital that may be proposed by the Bresky Group. The Special Committee has also retained independent legal counsel and has retained an independent financial advisor to assist in its review of the Proposal. The Special Committee's grant of authority provides that no repurchase or alternative proposed capital return transaction involving Seaboard and the Bresky Group may be consummated without the prior favorable recommendation of the Special Committee. The Proposal does not constitute a binding commitment with respect to a repurchase or any other transaction. No agreement, arrangement or understanding between Seaboard and the Bresky Group relating to any proposed capital return transaction will be created unless definitive documentation is executed and delivered by the appropriate parties. There can be no assurance that the Proposal or any related or alternative transaction will be completed or, if completed, what the terms of such transaction will be.

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 July 1, 2023, Seaboard had cash and short-term investments of nearly $1.3 billion and additional total net working capital of $1.1 billion. The following table presents a summary of Seaboard’s available borrowing capacity under lines of credit.

Seaboard’s available borrowing capacity increased $206 million from December 31, 2022. Seaboard’s committed line of credit agreement was amended and restated during the first quarter of 2023, increasing the committed borrowing capacity from $250 million to $450 million.

As of July 1, 2023, $109 million of the $1.3 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. During 2022, Seaboard reversed its indefinite reinvestment assertion in connection with previously-taxed undistributed earnings of its Seaboard Marine subsidiary due to the operational efficiencies of repatriating and recorded a deferred tax liability. For all other foreign subsidiaries, Seaboard intends to continue permanently reinvesting their funds outside the U.S. as they continue to demonstrate no need to repatriate them to fund Seaboard’s U.S. operations for the foreseeable future. Seaboard has not recorded deferred taxes for state or foreign withholding taxes that would result upon repatriation of these funds to the U.S. Determination of the tax that might be paid on unremitted earnings if eventually remitted is not practical due to the complexity of the multi-jurisdictional tax environment in which Seaboard operates.

As discussed above, subsequent to period end, Seaboard received the Proposal from the Bresky Group to repurchase at least $600 million of Common Stock currently held by the Bresky Group. The Special Committee is currently evaluating the Proposal with the assistance of its independent advisors. If Seaboard accepts the Proposal or a similar return of capital or alternative transaction, Seaboard may need to fund the repurchases through a combination of cash on hand, cash generated from the sale of marketable securities, third-party debt financing, debt security offerings, or any combination thereof, which would impact Seaboard’s liquidity position.

Cash Flows

Cash provided by operating activities increased $87 million for the six months ended July 1, 2023, compared to the same period in 2022. Seaboard’s net earnings, adjusted for non-cash items, decreased $349 million, but Seaboard had positive cash flow from working capital changes of $410 million. The working capital changes reflected a decrease in accounts receivable due to lower revenues, a decrease in inventories due to lower inventory prices, and a decrease in accounts payable due to timing of payments on purchases.

Cash flows from investing activities for short-term investments are part of Seaboard’s overall liquidity management strategy. Short-term investment purchases are a result of the investment of excess cash, asset allocation from the active management of the portfolio and re-investment of matured securities. Proceeds from the sale of short-term investments may be used to fund working capital needs and capital expenditure purchases. During the six months ended July 1, 2023, Seaboard invested $219 million in property, plant and equipment, of which $151 million was invested in the Pork segment for biogas recovery projects, normal replacement of breeding herd and other investments, and $58 million was invested in the Marine segment to purchase a used vessel, installment payments on vessels under construction and other investments. During the second quarter of 2023, Seaboard’s Marine segment executed contracts to build two smaller twenty-foot equivalent unit dual-fueled vessels that are estimated to cost $49 million each for a total cash outlay of approximately $98 million. These vessels are expected to be complete in late 2025. For the remainder of 2023, management has budgeted capital expenditures totaling approximately $390 million. Planned expenditures in the Pork segment are primarily for biogas recovery projects, normal replacement of breeding herd, further investment in hog production assets 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 renewable natural gas into the local pipeline infrastructure. Planned expenditures in the Marine segment include installment payments on vessels under construction. 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.

Cash flows from financing activities primarily include draws and repayments on lines of credit. Seaboard’s lines of credit are used to fund working capital and investments in capital expenditures, as needed. The primary debt outstanding is a Term Loan due in 2028 with a balance of $667 million as of July 1, 2023.

RESULTS OF OPERATIONS

Overall, Seaboard’s businesses were impacted by the volatility in the commodity grain, hog and fuel markets and a general softening of global demand. As Seaboard’s operations are heavily commodity-driven, financial performance for certain subsidiaries is very cyclical based on respective commodity markets.

Net Sales

Net sales for the three- and six-month periods of 2023 decreased $580 million and $790 million, respectively, compared to the same periods in 2022. The decrease primarily reflected a decline of $376 million and $602 million, respectively, in sales in the CT&M segment due to a decrease in volumes and sales prices of commodities sold, a decline of $167 million and $185 million, respectively, in sales in the Marine segment due to a decline in cargo volumes, and a decrease in sales in the Pork segment of $68 million and $74 million, respectively, primarily as a result of lower pork sales prices. The decreases were partially offset by an increase in the Power segment sales of $16 million and $50 million, respectively, as a result of an increase in EDM III power generation. See the net sales discussion by reportable segment below for more details.

Operating Income (Loss)

Operating income decreased $196 million and $405 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. The decrease primarily reflected a decline of $105 million and $344 million, respectively, in operating income in the Pork segment due to lower selling prices on pork products and higher hog costs and a decline of $95 million and $112 million, respectively, in operating income in the Marine segment due to a decline in voyage revenue. See the operating income discussion by reportable segment below for more details.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $11 million and $18 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022, primarily due to higher personnel costs.

Interest Expense

Interest expense increased $8 million and $22 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022, primarily due to higher interest rates on outstanding debt.

Interest Income

Interest income increased $7 million and $15 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022, primarily due to higher interest earned on debt securities.

Other Investment Income (Loss), Net

Other investment income, net increased $185 million and $277 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022, primarily due to unrealized mark-to-market gains on short-term investments. Also in the second quarter of 2022, there was a $46 million charge recorded related to a long-term solar energy investment. The charge on this long-term investment was offset with the benefit of the investment tax credits recorded in income tax benefit (expense).

Income Tax Benefit (Expense)

The effective tax rate for the three- and six-month periods of 2023 decreased compared to the three- and six-month periods of 2022, primarily due to lower forecasted earnings compared to prior year.

Segment Results

See Note 7 to the condensed consolidated financial statements for a reconciliation of net sales and operating income (loss) by reportable segment to consolidated net sales and consolidated operating income (loss), respectively.

Pork Segment

Net sales for the Pork segment decreased $68 million and $74 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. The decrease was primarily the result of lower sales prices of pork products and market hogs due to declines in commodity market pricing reducing net sales by $107 million and $165 million, respectively, and lower biodiesel sales of $52 million and $53 million, respectively, primarily related to the timing of sales of related credits. The decrease was partially offset by an increase in sales from the renewable diesel plant in Hugoton, Kansas of $62 million and $116 million, respectively, that began operations during the third quarter of 2022. Additionally, higher volumes of pork products sold contributed to higher sales of $29 million and $28 million, respectively.

Operating income for the Pork segment decreased $105 million and $344 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. The decrease for the three-month period primarily reflected $127 million in lower margins on pork products and market hogs due to lower sales prices and higher hog costs, including an increase in feed costs of $55 million offset by a decrease of $43 million to the lower of cost and net realizable value (“LCNRV”) inventory reserve. An inventory adjustment has been necessary in recent periods to properly state the hog inventory balances at quoted future market prices for pork products and grain costs. Biodiesel and renewable diesel margins were higher due to no mark-to-market derivative contract losses in the three-month period of 2023 compared to $20 million of such losses in the same period during 2022 and the commencement of operations in Hugoton, Kansas, partially offset by lower biodiesel margins related to lower sales prices and higher costs. The decrease for the six-month period primarily reflected $340 million in lower margins on pork products and market hogs due to lower sales prices and higher hog costs, including an increase in feed costs of $129 million and a total net increase to the LCNRV inventory reserve of $10 million. Lower biodiesel and renewable diesel margins due to lower sales prices and higher raw material costs were offset with no mark-to-market derivative contracts losses for the period compared to $36 million for the six months ended July 2, 2022. Management is unable to predict market prices for pork products, biodiesel, renewable diesel or the cost of feed or third-party hogs for future periods; however, based on current conditions management anticipates this segment will not be profitable for the remainder of 2023.

CT&M Segment

Net sales for the CT&M segment decreased $376 million and $602 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. For the three-month period, sales decreased $204 million due to lower volumes of certain commodities sold related to increased competition and market dynamics and $172 million due to lower average sales prices as a result of commodity price fluctuations. For the six-month period, sales decreased $540 million due to lower volumes as a result of increased competition and market dynamics and $62 million due to lower average sales prices. Sales prices for many of Seaboard’s products are directly affected by both domestic and worldwide supply and demand for commodities and competing products, all of which are determined by constantly changing market forces.

Operating income for the CT&M segment decreased $13 million for the three-month period and increased $18 million for the six-month period of 2023 compared to the same periods in 2022. The decrease for the three-month period was primarily due to lower margins resulting from lower volumes and sales prices. The increase for the six-month period primarily reflected the change of $20 million in mark-to-market adjustments on derivative contracts. 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 2023, excluding the effects of mark-to-market adjustments on derivative contracts.

Had Seaboard not applied mark-to-market accounting to its derivative instruments, operating income for this segment would have been higher by $14 million and $7 million for the three- and six-month periods of 2023, respectively, and higher by $9 million and $27 million for the three- and six-month periods of 2022, 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 products 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 2023. Management believes that 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

21

Net sales for the Marine segment decreased $167 million and $185 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. Cargo volumes decreased approximately 26% and 21% for the three- and six-month periods, respectively. Freight rates began declining during the first quarter of 2023 and continued to decline through the second quarter of 2023. The decline in cargo volumes and freight rates is primarily a result of a general decrease in demand for ocean transportation services.

Operating income for the Marine segment decreased $95 million and $112 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. The decrease for the three- and six-month periods was primarily the result of lower voyage revenue, partially offset by lower voyage-related costs, such as slot costs, terminal services and intermodal trucking costs, due to the lower cargo volumes. Management cannot predict changes in fuel costs or other voyage-related costs, cargo volumes or cargo rates for future periods; however, management anticipates this segment will be profitable for the remainder of 2023, though operating income is expected to be lower than the prior year.

Sugar and Alcohol Segment

Net sales for the Sugar and Alcohol segment increased $16 million and $23 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. The increase in sugar sales of $7 million and $11 million for the three- and six-month periods, respectively, primarily reflected higher prices of sugar as a result of a decrease in market supply. The increase in alcohol sales of $9 million and $12 million for the three- and six-month periods, respectively, primarily reflected higher volumes and prices of alcohol sold due to governmental price adjustments.

Operating income for the Sugar and Alcohol segment increased $3 million and $7 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. The increase primarily reflected higher margins on sugar sales. Management cannot predict local sugar and alcohol prices or the volatility in the currency exchange rate for future periods; however, management anticipates this segment will be profitable for the remainder of 2023.

Power Segment

Net sales for the Power segment increased $16 million and $50 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. More power generation from EDM III, which began operations in June of 2022, contributed to an increase in sales of $21 million and $55 million for the three- and six-month periods, respectively. More power generation from EDM II, which began operations in 2012, was offset by lower spot market rates primarily due to lower fuel prices.

Operating income for the Power segment increased $16 million and $31 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. The increase was primarily due to more income generated from EDM III’s operations. 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 2023. While EDM II remains in operation in the Dominican Republic, Seaboard continues to explore strategic alternatives for this barge, including a sale or relocation.

Turkey Segment

22

The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball, LLC. Income from affiliates increased $5 million and $14 million for the three- and six-month periods of 2023, respectively, compared to the same periods in 2022. Butterball’s net income improved in both periods primarily due to an increase in sales, partially offset by higher production costs. The increase in sales for the three- and six-month periods of 2023 primarily reflected an increase in average selling price of 7% and 12%, respectively, as a result of a stronger mix of valued-added products. Seaboard’s income from affiliates for the six-month period was partially offset by a $13 million gain on the sale of a business that was recorded in the first quarter of 2022. Management is unable to predict market prices for turkey products and the cost of feed for future periods; however, management anticipates this segment will be profitable for the remainder of 2023.

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, 2022. See Note 5 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 July 1, 2023. 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 July 1, 2023 that has materially affected, or is reasonably likely to materially affect, Seaboard’s internal control over financial reporting.​

Except for the additional risk factor and update to the risk factor set forth below, there have been no material changes in the risk factors as previously disclosed in the 2022 Annual Report. The first risk factor supplements the risk factors set forth in the 2022 Annual Report. The second risk factor replaces and supersedes the risk factor with the same title set forth in the 2022 Annual Report.

Business and Operational Risks

(8) A group of stockholders owns approximately 78% of the outstanding shares of Seaboard common stock and has proposed that Seaboard repurchase, directly or indirectly, at least $600 million in shares of common stock held by the stockholders at a price per share to be mutually agreed by the parties. The consummation of any future transaction by the parties may adversely affect Seaboard's liquidity and any future sales of stock by such stockholders to third parties in the open market or in privately negotiated transactions may adversely impact the market price of Seaboard’s common stock. Seaboard has received a proposal from entities affiliated with Ellen S. Bresky, the Chairwoman of Seaboard's Board of Directors, and other members of the Bresky family, including Seaboard Flour LLC, SFC Preferred, LLC, SJB SEB LLC, trusts created for the benefit of members of the Bresky family and The Wally Foundation (collectively, the “Bresky Group”) that Seaboard repurchase, directly or indirectly, at least $600 million in shares of common stock currently held by the Bresky Group, at a price per share of common stock to be mutually agreed (the “Proposal”). The Board of Directors of Seaboard has formed a special committee (the “Special Committee”) comprised of two independent directors to evaluate the Proposal and any other form of return of capital that may be proposed by the Bresky Group. The Special Committee’s grant of authority provides that no repurchase or alternative proposed capital return transaction involving Seaboard and the Bresky Group may be consummated without the prior favorable recommendation of the Special Committee. The Proposal does not constitute a binding commitment with respect to a repurchase or any other transaction. No agreement, arrangement or understanding between Seaboard and the Bresky Group relating to any proposed capital return transaction will be created unless definitive documentation is executed and delivered by the appropriate parties.

Variations in the market price of Seaboard common stock may occur as a result of changing assumptions regarding the transaction proposed in the Proposal, independent of changes in Seaboard's business, financial condition or prospects or changes in general market or economic conditions. As a result, a definitive agreement regarding the Proposal, or a failure to reach a definitive agreement regarding the Proposal, could result in a significant change in the market price of Seaboard common stock. In the event that Seaboard agrees to a repurchase or alternative proposed capital return transaction with the Bresky Group or any other return of capital transaction, Seaboard's liquidity may be adversely affected. Seaboard expects to incur costs in connection with the consideration of the Proposal, including costs of financial and legal advisors to the Special Committee and legal advisors to Seaboard. In addition, members of the Bresky Group may sell shares to third parties in open market or privately negotiated transactions. No prediction can be made as to the effect, if any, such future sales may have on the market price of the shares of Seaboard common stock prevailing from time to time. However, the future sale of a substantial number of shares by members of the Bresky Group to third parties, or the perception that such sales could occur, could adversely affect prevailing market prices for shares of Seaboard common stock.

Legal and Regulatory Risks

(2) Operations Are Subject to Complex Laws and Regulations. Federal, state and local laws, and domestic and international regulations governing worker health and safety, food safety and animal health and welfare, port and terminal security and the operation of vessels, including fuel regulations, significantly affect revenues, costs and the manner or feasibility of doing business. Some requirements applicable to Seaboard may also be enforced by citizen groups.

• In the Pork segment, select states have implemented varying standards related to the required living conditions for breeding sows. Some laws apply to animals grown in the state of enactment while, more recently, several states have enacted laws that prohibit the sale of meat from non-compliant animals grown in any of the fifty states or foreign countries. Diversity of standards for housing sows requires each producer to implement separate record keeping to track compliant animals through the growing process to the processing plant, and finished products from the processing plant to third party purchasers. Such laws can also impose civil and criminal penalties for failing to comply. Animal production assets have long expected useful lives. The enactment of more stringent standards can impair the value of existing assets, increase the cost of production and distribution, lower the value of non-compliant products and/or disrupt the market for pork which could result in a reduction in the sales prices of pork products. Incrementally, strict growing standards could cause the creation of regional markets of compliant products or require the industry to build compliant assets for each market. For example, the state of California enacted the Farm Animal Confinement Initiative (“Proposition 12”) which became enforceable on July 1, 2023. Proposition 12 prohibits the sale within the state of certain uncooked pork produced from breeding sows or their offspring unless certain conditions are met. Similarly, Massachusetts Question 3 prohibits the sale of certain pork products within the state of Massachusetts, as well as the shipment of certain pork products through the state. The volume of such pork sold into California and Massachusetts accounted for approximately 5% of Seaboard’s direct sales for the year ended December 31, 2022, in addition to indirect sales through further processor customers.
• In the Marine segment, many aspects of the shipping industry, including rate agreements and vessel cost sharing agreements, are subject to extensive governmental regulation by the Federal Maritime Commission, the U.S. Coast Guard, and U.S. Customs and Border Protection, as well as regulation by private industry organizations. Compliance with applicable laws, regulations and standards may require capital investments or operational changes. As an example, this segment may be adversely impacted by

changes in vessel fuel consumption efficiency requirements. Certain ships, based on their capacity and other factors, may have to meet certain energy usage standards while sailing. The net effect could be that ships, particularly small ones which are less efficient on a twenty-foot equivalent unit basis, might need to reduce speed to consume less fuel. Failure to comply may result in administrative and civil penalties, criminal sanctions, the suspension or termination of Seaboard’s operations or detention of its vessels.

• In the Sugar and Alcohol segment, Seaboard’s alcohol production facility is affected by Argentine government regulations regarding production quotas, fuel blends and sales prices in the bioethanol market.

Failure to comply with these laws and regulations and any future changes to them could result in significant consequences to Seaboard, including civil and criminal penalties, liability for damages, negative publicity and the inability to do business in certain locales. In addition, future changes in laws, regulations and standards may result in additional costs or a reduction in revenues.