Seaboard Corp: Form 10-Q for the period ended Sep 28, 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 September 28, 2024, Seaboard had cash and short-term investments of nearly $1.2 billion and total net working capital of $874 million. The following table presents a summary of Seaboard’s available borrowing capacity under lines of credit.

As of September 28, 2024, $87 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 $362 million for the nine months ended September 28, 2024, compared to the same period in 2023. The decrease in cash generated from working capital was $361 million on a net basis. The working capital changes primarily reflected a decrease in cash flows from receivables of $267 million due to timing of collections, a decrease in cash flows for inventories due to lower commodity prices of $48 million and an increase in cash flows related to payments of other liabilities of $35 million. The change in earnings, adjusted for non-cash items, including the valuation allowance adjustment of $176 million to offset U.S. deferred tax assets for the nine-months ended September 28, 2024, was not significant period-over-period.

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 nine months ended September 28, 2024, Seaboard invested $373 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. One dual-fueled vessel was completed and delivered during the third quarter of 2024, and another vessel is expected to be completed during the fourth quarter of 2024. For the remainder of 2024, management has budgeted capital expenditures totaling approximately $165 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 September 28, 2024.

RESULTS OF OPERATIONS

Beginning in the second quarter of 2024, Liquid Fuels became a separate reportable segment and the former Sugar and Alcohol segment became part of All Other. 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 $170 million and $662 million for the three- and nine-month periods of 2024, respectively, compared to the same periods in 2023. The decrease for the three-month period primarily reflected a decline of $138 million in CT&M segment sales due to lower prices of commodities sold. The decrease for the nine-month period primarily reflected a decline of $496 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 $156 million due to lower freight rates, and a decline in Liquid Fuels segment sales of $143 million due to lower prices of environmental credits sold. The decreases were partially offset by an increase in Pork segment sales of $162 million due primarily to higher volumes of pork products and market hogs sold. See the net sales discussion by reportable segment below for more details.

Operating Income (Loss)

Operating income decreased $35 million and increased $42 million for the three- and nine-month periods of 2024, respectively, compared to the same periods in 2023. The decrease for the three-month period primarily reflected a decline in operating income in the Liquid Fuels and Marine segments of $30 million and $41 million, respectively, partially offset by an increase in Pork segment operating income of $52 million. The increase in operating income for the nine-month period primarily reflected an increase in Pork segment operating income of $334 million due to higher margins on the sale of pork products and market hogs, partially offset by a $164 million decrease in Marine segment operating income due to lower voyage revenue, and a $75 million decrease in Liquid Fuels segment operating income. See the operating income discussion by reportable segment below for more details.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $7 million and $16 million for the three- and nine-month periods of 2024, respectively, compared to the same periods in 2023, primarily due to higher personnel costs, partially offset by the final adjustment to the contingent consideration liability recognized and paid during the third quarter of 2023.

Interest Expense

Interest expense increased $12 million and $9 million for the three- and nine-month periods of 2024, respectively, compared to the same periods in 2023. The increase for the three-month period was primarily due to higher interest rates on more outstanding debt and a decrease in capitalized interest on construction in progress. In November 2023, Seaboard amended its Term Loan Credit Agreement and increased the principal amount from $700 million to $975 million. The increase for the nine-month period primarily related to higher interest rates on more outstanding debt, partially offset by an increase in capitalized interest on construction in progress.

Foreign Currency Gains (Losses), Net

Foreign currency gains, net decreased $9 million and $24 million for the three- and nine-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 nine-month periods of 2024 was higher as compared to the same periods of 2023 primarily due to a valuation allowance on U.S. deferred tax assets recorded during the third quarter of 2024, partially offset by increased federal and state tax credits. As a result of establishing the valuation allowance against the U.S. deferred tax asset balances, Seaboard was unable to recognize a benefit of its year-to-date domestic losses and certain tax credits. See Note 8 to the condensed consolidated financial statements for additional information on factors that contributed to the valuation allowance during the third quarter of 2024. Seaboard has a history of using tax credits before they expire, and although U.S. GAAP required Seaboard to record a valuation allowance based on past results, management currently believes that these deferred tax assets will be realized in the future over time, although there can be no assurance as to the timing or if these will be realized at all. Seaboard’s federal tax credits have long carryforward periods that expire between 2042 and 2044. Despite recent pre-tax book losses in the U.S. operations as a result of challenging commodity conditions, Seaboard has no federal net operating loss carryforwards.

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

For the three-month period of 2024, higher volumes of pork products and market hogs sold contributed sales of $31 million and were offset by a decrease in the market price, reducing sales $32 million. Renewable natural gas sales increased, but sales are currently not significant. For the nine-month period of 2024, higher volumes of pork products and market hogs sold contributed sales of $102 million and higher market prices contributed to an increase in sales of $34 million.

The increase in operating income for the three- and nine-month periods of 2024 reflected higher margins on pork products and market hogs sold, primarily due to higher sales and lower hog production costs, including lower feed costs of $41 million and $141 million, respectively, and mark-to-market gains on derivative contracts. Also, inventory adjustments to the lower of cost and net realizable value (“LCNRV”) reserve resulted in a decrease of $9 million and an increase of $44 million in operating income for the three- and nine-month periods of 2024, respectively, based on a comparison of changes to the reserve per market prices at each respective period end. Inventory adjustments to the LCNRV reserve were 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 more favorable pork prices and lower grain commodity costs, the LCNRV reserve was not needed for the second and third quarter of 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 profitable for the remainder of 2024.

Liquid Fuels Segment

The decrease in sales for the three-month period of 2024 was due to lower market prices and volumes of environmental credits sold of $36 million and $9 million, respectively, partially offset by an increase in fuel sales of $19 million. Higher volumes of fuel sold increased sales $49 million, partially offset by lower prices which decreased sales $29 million. The increase in fuel volumes sold was primarily a result of consistent production at the renewable diesel plant during the third quarter of 2024. The decrease in sales for the nine-month period of 2024 was due to lower environmental credits sales and fuel sales of $94 million and $49 million, respectively. The decrease in environmental credit sales was primarily the result of lower market prices which decreased sales $88 million. As the renewable diesel plant was not operational for approximately four months during the first half of 2024 due to maintenance and repairs, fuel sales were impacted. Lower volumes of fuel sold decreased sales $30 million.

Operating income decreased for the three- and nine-month periods of 2024 primarily due to a decrease in margins of $28 million and $71 million, respectively. Margins decreased for the three-month period due to lower sales prices and higher production costs on fuel gallons sold. The decrease for the nine-month period primarily reflected lower sales, partially offset by a decrease in production costs. 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.

With the passing of the Inflation Reduction Act of 2022, the federal blender’s credits are expected to expire after December 31, 2024. A new clean fuel production credit will replace the federal blender’s credits starting in 2025 with value based on the greenhouse gas emissions factor of fuel produced and sold. This clean fuel production credit is expected to be less than the federal blender’s credit; however regulatory guidance is pending in order to implement this new credit. For the nine-month periods of 2024 and 2023, the federal blender’s credits included in sales was $88 million and $82 million, respectively.

CT&M Segment

The decrease in sales for the three- and nine-month periods of 2024 was primarily due to lower average sales prices of commodities sold which decreased sales $212 million and $753 million, respectively. The decrease was partially offset by higher volumes sold, which increased sales $74 million and $257 million for the three- and nine-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 slight decrease in operating income for the three-month period of 2024 primarily reflected lower margins related to the decline in sales prices. The decrease in operating income for the nine-month period of 2024 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.

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 nine-month periods of 2024 was primarily due to higher margins with lower commodity costs.

Marine Segment

The decrease in sales for the three- and nine-month periods of 2024 was due to an overall decline in average freight rates due to competitive pressures, partially offset by an increase in cargo volumes. Cargo volumes increased 9% and 5% for the three- and nine-month periods of 2024, respectively, compared to the same periods in 2023.

The decrease in operating income for the three-month period of 2024 was primarily the result of lower voyage revenue and an increase in voyage-related costs primarily due to the increase in cargo volumes and rates of some services received, such as stevedoring. The decrease in operating income for the nine-month period of 2024 was primarily the result of lower voyage revenue. An increase in stevedoring and terminal costs was offset by lower charter-hire costs. 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 for the three-month period of 2024 primarily reflected lower spot market rates due to lower fuel prices. The decrease in sales for the nine-month period of 2024 primarily reflected less power generation due to repairs and maintenance conducted during 2024.

The decrease in operating income for the three- and nine-month periods of 2024 primarily reflected lower revenue. During the nine-month period of 2024, lower fuel costs were offset by an increase in maintenance 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 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 $28 million and $78 million for the three- and nine-month periods of 2024, compared to the same periods in 2023, respectively. The decrease in net income was primarily due to a decrease in sales of $50 million and $139 million for the three- and nine-month periods of 2024, respectively, due to weaker pricing, partially offset by lower production costs. The average selling price decreased 10% and 8% for the three- and nine-month periods of 2024, respectively, primarily due to lower market prices. Sales volumes did not have a significant impact on the results of the three-and nine-month periods. 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 nine months ended September 28, 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 September 28, 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 September 28, 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.