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. 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 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 April 1, 2023, Seaboard had
cash and short-term investments of nearly $1.3 billion, an increase of
$12 million from December 31, 2022. Also, additional total net working capital
was $1.1 billion as of April 1, 2023. The following table presents a summary of
Seaboard's available borrowing capacity under lines of credit.
Total amount
(Millions of dollars) available
Short-term uncommitted and committed lines $ 1,323
Amounts drawn against lines (459)
Available borrowing capacity as of April 1, 2023 $ 864
Seaboard's available borrowing capacity increased $196 million from December 31,
2022. Seaboard's committed line of credit agreement was amended and restated
during the first quarter of 2023, increasing the borrowing capacity from
$250 million to $450 million.
As of April 1, 2023, $128 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.
Cash Flows
Cash provided by operating activities decreased $13 million for the three-month
period of 2023 compared to the same period in 2022. Net earnings, adjusted for
non-cash items, were down $198 million, partially offset by positive cash flow
from working capital changes of $185 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 three months ended
April 1, 2023, Seaboard invested $111 million in property, plant and equipment,
of which $81 million was in the Pork segment for biogas recovery projects and
other investments, and $28 million in the Marine segment to purchase a used
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vessel and other investments. For the remainder of 2023, management has budgeted
capital expenditures totaling approximately $595 million. The Pork segment
planned expenditures are primarily for biogas recovery projects, normal
replacement of breeding herd 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 Marine segment planned expenditures 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.
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 $668 million as of April 1, 2023.
RESULTS OF OPERATIONS
Overall, Seaboard's businesses were impacted with 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-month period of 2023 decreased $210 million compared to
the same period in 2022. The decrease primarily reflected a decline of $226
million in sales in the CT&M segment largely due to lower volumes of commodities
sold. See the net sales discussion by reportable segment below for more details.
Operating Income (Loss)
Operating income decreased $209 million for the three-month period of 2023
compared to the same period in 2022. The decrease primarily reflected a decline
of $239 million in operating income in the Pork segment primarily due to lower
selling prices on pork products and higher hog costs. See the operating income
discussion by reportable segment below for more details.
Interest Expense
Interest expense increased $14 million for the three-month period of 2023
compared to the same period in 2022 primarily due to higher interest rates on
outstanding debt. During each of the first quarters of 2023 and 2022, Seaboard
received its annual patronage dividend on the Term Loan due 2028.
Other Investment Income (Loss), Net
Other investment income, net increased $92 million for the three-month period of
2023 compared to the same period in 2022 primarily due to unrealized
mark-to-market gains on short-term investments.
Income Tax Benefit (Expense)
The effective tax rate for the three-month period of 2023 decreased compared to
the three-month period 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 by reportable segment to
consolidated net sales and consolidated operating income (loss), respectively.
Pork Segment
Three Months Ended
April 1, April 2,
(Millions of dollars) 2023 2022
Net sales $ 614 $ 620
Operating income (loss) $ (212) $ 27
Income from affiliates $ 10 $ -
Net sales for the Pork segment decreased $6 million for the three-month period
of 2023 compared to the same period 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 $58 million. This decrease was
partially offset by $54 million of sales from the renewable diesel plant in
Hugoton, Kansas that began operations during the third quarter of 2022. An
increase in biodiesel gallons sold of $18 million was offset by lower prices
for, and the timing of, sales of related credits of $19 million.
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Operating income for the Pork segment decreased $239 million for the three-month
period of 2023 compared to the same period in 2022. The decrease was primarily
due to $215 million in lower margins on pork products and market hogs due to
lower sales prices, higher hog costs primarily due to an increase in feed costs
of $74 million and a $53 million non-cash adjustment to record this segment's
inventory as of April 1, 2023, at the lower of cost and net realizable value.
This adjustment was based on a combination of factors, including the decline in
quoted future market prices for pork products and higher incurred and quoted
future grain costs. Biodiesel and renewable diesel sales further contributed to
$23 million of lower operating income primarily due to lower margins and
additional costs related to the operation of the renewable diesel plant,
partially offset by no mark-to-market derivative contract losses in the
three-month period of 2023 compared to $16 million of such losses in the same
period in 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.
Income from affiliates increased $10 million primarily due to improved volumes
and margins on further-processed pork products, and to a lesser extent, improved
margins and volumes on fresh pork products processed from third-party and
affiliate hogs.
CT&M Segment
Three Months Ended
April 1, April 2,
(Millions of dollars) 2023 2022
Net sales $ 1,344 $ 1,570
Operating income as reported $ 43 $ 12
Mark-to-market adjustments (7) 18
Operating income excluding mark-to-market adjustments $ 36 $ 30
Income (loss) from affiliates
$ (8) $ 5
Net sales for the CT&M segment decreased $226 million for the three-month period
of 2023 compared to the same period in 2022. The decrease primarily reflected
lower volumes of certain commodities sold due to increased competition that
reduced net sales by $321 million. This decrease was partially offset by higher
sales prices on certain commodities due to commodity price fluctuations that
increased net sales by $95 million.
Operating income for this segment increased $31 million for the three-month
period of 2023 compared to the same period in 2022. The increase primarily
reflected the change of $25 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 lower by $7
million and higher by $18 million for the three-month period of 2023 and 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 eliminating these
mark-to-market adjustments provides a more reasonable presentation to compare
and evaluate period-to-period financial results for this segment.
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Marine Segment
Three Months Ended
April 1, April 2,
(Millions of dollars) 2023 2022
Net sales $ 448 $ 466
Operating income $ 96 $ 113Net sales for the Marine segment decreased $18 million for the three-month
period of 2023 compared to the same period in 2022. The decrease was primarily
the result of a decline of approximately 17% in cargo volumes, partially offset
by higher average freight rates. While freight rates were higher in the first
quarter of 2023 as compared to the first quarter of 2022, freight rates have
begun declining during the first quarter of 2023.
Operating income for this segment decreased $17 million for the three-month
period of 2023 compared to the same period in 2022. The decrease was primarily
the result of lower voyage revenue. 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 2023, though operating income is expected to be lower than the
prior year.
Sugar and Alcohol Segment
Three Months Ended
April 1, April 2,
(Millions of dollars) 2023 2022
Net sales $ 38 $ 31
Operating income $ 6 $ 2Net sales for the Sugar and Alcohol segment increased $7 million for the
three-month period of 2023 compared to the same period in 2022. The increase
primarily reflected higher prices of sugar as a result of lower supply from last
year's harvest and higher prices of alcohol sold due to governmental price
adjustments.
Operating income for the Sugar and Alcohol segment increased $4 million for the
three-month period of 2023 compared to the same period 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
Three Months Ended
April 1, April 2,
(Millions of dollars) 2023 2022
Net sales $ 52 $ 18
Operating income (loss) $ 10 $ (5)Net sales for the Power segment increased $34 million for the three-month period
of 2023 compared to the same period in 2022. The increase primarily reflected
more power generation from EDM III ($34 million), which began operations in June
of 2022. More power generation from EDM II, the power-generating barge that
began operations in 2012, was offset by lower spot market rates as a result of
lower fuel prices.
Operating income for the Power segment increased $15 million for the three-month
period of 2023 compared to the same period in 2022. The increase was primarily
due to income generated from EDM III's operations ($12 million). 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.
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Turkey Segment
Three Months Ended
April 1, April 2,
(Millions of dollars) 2023 2022
Income from affiliates $ 25 $ 16The 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 2023 compared to the same period in 2022 was primarily the
result of higher margins, partially offset by lower volumes of pounds sold and
$19 million in other non-operating income recorded in the first quarter of 2022.
The higher margins were primarily due to a 17% increase in sales prices due to
general commodity pricing and a stronger mix of value-added products. The other
non-operating income recorded in the first quarter of 2022 primarily included a
gain on the sale of business. 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 2023.
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