Seaboard Corp: Form 10-Q for the period ended Jun 29, 2024

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, 2023. 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.

LIQUIDITY AND CAPITAL RESOURCES

Management believes Seaboard’s combination of internally generated capital resources and borrowing capabilities will be adequate for its existing operations and any currently known potential plans for expansion of existing operations in both the short-term and long-term.

Liquidity includes cash and cash equivalents, short-term investments and available borrowing capacity under lines of credit facilities. As of June 29, 2024, Seaboard had cash and short-term investments of nearly $1.2 billion and total net working capital of $924 million. The following table presents a summary of Seaboard’s available borrowing capacity under lines of credit.

As of June 29, 2024, $60 million of the $1.2 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 certain previously-taxed undistributed earnings of its Seaboard Marine subsidiary due to the tax effectiveness of repatriating. 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. As a result, 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.

Cash Flows

Cash provided by operating activities decreased $179 million for the six months ended June 29, 2024, compared to the same period in 2023. Less cash generated from working capital of $252 million and less dividends received from affiliates of $25 million were partially offset by an increase in net earnings, adjusted for non-cash items, of $101 million. The working capital changes primarily reflected a decrease in cash flows from receivables due to lower revenue and timing of collections and an increase in cash flows related to payments of other liabilities.

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 June 29, 2024, Seaboard invested $237 million in property, plant and equipment, including biogas recovery projects in the Pork segment and installment payments on vessels under construction in the Marine segment 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. The payments for vessels are made in accordance with milestones achieved throughout construction and two vessels are expected to be completed in 2024. For the remainder of 2024, management has budgeted capital expenditures totaling approximately $320 million. Management anticipates paying for these capital expenditures from a combination of available cash, proceeds from the sale 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 long-term debt outstanding is a Term Loan due in 2033 with a balance of $968 million as of June 29, 2024.

RESULTS OF OPERATIONS

As Seaboard’s operations are heavily commodity-driven, financial performance for certain subsidiaries is very cyclical based on respective commodity markets. Beginning in the second quarter of 2024, Liquid Fuels is a separate reportable segment and the former Sugar and Alcohol segment is no longer a separate reportable segment. The historical periods presented have been recast to reflect these changes. See Note 7 to the condensed consolidated financial statements for further discussion.

Net Sales

Net sales decreased $184 million and $492 million for the three- and six-month periods of 2024, respectively, compared to the same periods in 2023. The decrease for the three-month period reflected a decline of $204 million in CT&M segment sales primarily due to lower prices of commodities sold. The decrease for the six-month period primarily reflected a decline of $358 million in CT&M segment sales due to lower prices of commodities sold, partially offset by higher volumes sold, a decline in Marine segment sales of $147 million due to lower freight rates, and a decline in Liquid Fuels segment sales of $117 million due to lower volumes of fuel and environmental credits sold. The decreases were partially offset by an increase in Pork segment sales of $152 million due to higher selling prices and more pork products and market hogs sold. See the net sales discussion by reportable segment below for more details.

Operating Income (Loss)

Operating income increased $34 million and $77 million for the three- and six-month periods of 2024, respectively, compared to the same periods in 2023. The increase primarily reflected less Pork segment operating loss of $101 million and $282 million due to higher margins on the sale of pork products and market hogs, respectively, partially offset by a $42 million and $123 million decrease in Marine segment operating income due to lower voyage revenue, and a $28 million and $45 million decrease in Liquid Fuels segment operating income due to lower margins on fuel sales for the three- and six-month periods, respectively. See the operating income discussion by reportable segment below for more details.

Other Investment Income, Net

Other investment income, net decreased $18 million and $27 million for the three- and six-month periods of 2024, respectively, compared to the same periods in 2023, primarily due to unrealized mark-to-market losses on short-term investments.

Foreign Currency Gains (Losses), Net

Foreign currency gains, net decreased $18 million and $15 million for the three- and six-month periods of 2024, respectively, compared to the same periods in 2023, primarily due to fluctuations in the South African rand.

Income Tax Expense

The effective tax rate for the three- and six-month periods of 2024 was lower as compared to the same periods of 2023 due to increased federal and state tax credits. In 2021, the Organisation for Economic Co-operation and Development released Pillar Two Model Rules (“Pillar Two”). The model is designed to ensure large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate. The rules include transitional safe harbors that provide temporary exemption of operations in some jurisdictions if certain criteria are met. Some foreign jurisdictions in which Seaboard operates enacted Pillar Two legislation effective in 2024, but the impact will not be material to Seaboard in 2024. Seaboard is continuing to monitor legislative developments across relevant jurisdictions and the potential impact on future results.

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

The increase in sales for the three- and six-month periods was primarily a result of higher prices due to commodity markets and higher volumes of pork products and market hogs sold due to more production. Higher prices contributed sales of $51 million and $66 million, and higher volumes contributed sales of $27 million and $63 million for the three- and six-month periods, respectively. This segment also produces renewable natural gas, but sales are currently not significant as production is dependent upon maturity of the lagoons.

The decrease in operating loss for the three- and six-month periods reflected higher margins on pork products and market hogs sold, primarily due to higher selling prices and lower hog production costs, including lower feed costs of $63 million and $100 million, respectively. Also, inventory adjustments to the lower of cost and net realizable value (“LCNRV”) reserve resulted in an increase of $40 million in operating loss for the three-month period and a $53 million decrease in operating loss for the six-month period based on a comparison of changes to the reserve per market prices at each respective period end. Inventory adjustments to the LCNRV reserve have been necessary since the third quarter of 2022 to properly state the hog inventory balances at quoted future market prices for pork products and grain costs. With the more favorable pork prices and lower grain commodity costs, the LCNRV reserve was not needed as of June 29, 2024. Management is unable to predict market prices for pork products, the cost of feed or third-party hogs for future periods; however, based on current conditions, management anticipates this segment to be near break-even for the remainder of 2024.

Liquid Fuels Segment

The decrease in sales for the three- and six-month periods was due to lower fuel and environmental credit sales. Lower volumes of fuel sold decreased sales $19 million and $72 million for the three- and six-month periods, respectively, as the renewable diesel plant was not operational for approximately four months during the first half of 2024 due to maintenance and repairs and less biodiesel was sold due to the timing of sales. Management expects consistent production at the renewable diesel plant throughout the remainder of 2024. Lower market values of environmental credits decreased sales $12 million and $53 million for three- and six-month periods, respectively.

Operating income decreased for the three- and six-month periods primarily due to a decrease in margins of $27 million and $44 million, respectively. Margins decreased for the three- and six-month periods due to lower volumes produced and sold and higher maintenance and repair costs incurred at the renewable diesel plant, partially offset by a decrease in variable production costs, with a larger impact for the six-month period due to maintenance performed. Management is unable to predict market prices for biodiesel, renewable diesel, environmental credits, or the cost of feedstocks for future periods; however, based on current market conditions with lower renewable diesel and biodiesel prices and higher animal fat feedstock costs, management is uncertain whether this segment will be profitable for the remainder of 2024. Commodity markets are volatile, and management believes that current industry economic conditions are temporary.

CT&M Segment

The decrease in sales for the three- and six-month periods was primarily due to lower average sales prices of commodities sold which decreased sales $239 million and $541 million, respectively. The decrease was partially offset by higher volumes sold, which increased sales $34 million and $183 million for the three- and six-month periods, respectively. 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.

The increase in operating income for the three-month period primarily reflected the decrease of $13 million in mark-to-market losses on derivative contracts. The decrease in operating income for the six-month period reflected an increase of $22 million in mark-to-market losses on derivatives contracts, partially offset by higher margins due to lower commodity costs. 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 this segment will be profitable for the remainder of 2024, without the effects of mark-to-market adjustments on derivative contracts that cannot be predicted.

Had Seaboard not applied mark-to-market accounting to its derivative instruments, operating income for this segment would have been higher by $1 million and $29 million for the three- and six-month periods of 2024, respectively, and higher by $14 million and $7 million for the three- and six-month periods of 2023, 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 2024. Eliminating these mark-to-market adjustments provides another presentation to compare and evaluate period-to-period financial results for this segment.

CT&M’s investments in affiliates are represented by numerous milling, feed and protein affiliates, with no individual investment representing a material fluctuation. The increase in income from affiliates for the three- and six-month periods was primarily due to higher margins with lower commodity costs.

Marine Segment

The decrease in sales for the three- and six-month periods was due to an overall decline in average freight rates due to competitive pressures. The decrease was partially offset by an increase in cargo volumes, which increased 10% and 3% for the three- and six-month periods of 2024, respectively, compared to the same periods in 2023.

The decrease in operating income for the three-month period was primarily the result of lower voyage revenue and an increase in terminal services and trucking costs due to higher cargo volumes, partially offset by lower charter-hire costs. The decrease in operating income for the six-month period was primarily the result of lower voyage revenue, partially offset by lower voyage-related costs, primarily charter-hire costs. More recently, charter-hire rates are rising due to increased global demand for vessels. 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 2024.

Power Segment

The decrease in sales primarily reflected less power generation, impacting sales $4 million and $12 million for the three- and six-month periods, respectively, due to power generation from lower variable-cost producers and maintenance conducted primarily in the first quarter, partially offset by an increase in spot market rates due to higher fuel prices.

The decrease in operating income for the three- and six-month periods primarily reflected lower revenue. During the three-month period of 2024, lower fuel costs due to less consumption were offset by higher fuel prices. During the six-month period of 2024, lower fuel costs due primarily to less consumption were partially offset by maintenance costs incurred in the first quarter of 2024. 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 2024. While EDM II, the barge that began operations in 2012, remains in operation in the Dominican Republic, Seaboard continues to explore strategic alternatives for this barge, including a sale or relocation.

Turkey Segment

The Turkey segment represents Seaboard’s 52.5% investment in Butterball, which is accounted for using the equity method. Butterball’s net income decreased $17 million and $50 million for the three- and six-month periods of 2024, compared to the same periods in 2023, respectively. The decrease in net income was primarily due to lower margins on turkey products sold. The decrease in sales of $51 million and $89 million for the three- and six-month periods, respectively, were partially offset by a decrease in production costs primarily related to lower feed costs. The average selling price decreased 7% for each period due to a decline in commodity pricing, and volumes sold decreased 5% and 4% for the three- and six-month periods, respectively. 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 2024.

CRITICAL ACCOUNTING ESTIMATE

The preparation of Seaboard’s condensed consolidated financial statements requires Seaboard to make estimates, judgments, and assumptions. A summary of significant accounting policies and the critical accounting estimate is included in Seaboard’s annual report on Form 10-K for the year ended December 31, 2023. There were no changes to significant accounting policies or the critical accounting estimate during the six months ended June 29, 2024.

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, 2023. 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 June 29, 2024. 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 June 29, 2024 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, 2023.