Seaboard Corporation — Q3 2023 Form 10-Q
Business context and period: Seaboard is a diversified, commodity-exposed company with Pork, Commodity Trading and Milling (CT&M), Marine, Sugar and Alcohol, Power, and Turkey (equity-method investment in Butterball) segments. This unaudited report covers the quarter and nine months ended September 30, 2023; comparisons are with periods ended October 1, 2022. Dollar amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $2,388 | $2,895 | $7,280 | $8,577 |
| Gross income | $165 | $247 | $295 | $764 |
| Operating income (loss) | $67 | $155 | $0 | $493 |
| Net earnings attributable to Seaboard | $126 | $146 | $162 | $357 |
| EPS | $108.55 | $125.78 | $139.56 | $307.55 |
| Operating cash flow | — | — | $581 | $377 |
Gross margin was approximately 6.9% in Q3 and 4.1% year to date, versus 8.5% and 8.9%, respectively, in the comparable periods. Nine-month operating income was zero: segment operating income of $15 million was offset by $15 million of corporate costs.
- Cash, debt and liquidity: At September 30, cash and cash equivalents were $100 million and short-term investments were $1.134 billion. Available borrowing capacity was $1.15 billion, with $170 million drawn on lines of credit. Long-term debt was $696 million net of current maturities and costs ($704 million at face value); the $665 million term loan is due 2028. Total equity was $5.183 billion.
- Cash flows and investment: Nine-month operating cash flow rose by $204 million year over year, despite lower adjusted earnings, as working-capital changes provided $586 million, principally from lower receivables and inventories. Investing cash flow was an outflow of $322 million; capital expenditures were $344 million. Financing cash flow was an outflow of $356 million. Cash declined $99 million from year-end.
- Other notable items: Interest expense was $41 million year to date versus $23 million; interest income was $45 million versus $21 million. Other investment income was $43 million versus a $291 million loss, with the comparison reflecting mark-to-market movements and a prior-year solar-investment charge. The company recorded a $34 million income-tax benefit year to date.
Material changes and segment results
Year-to-date sales fell $1.297 billion and operating income fell $493 million. Management attributed the sales decline mainly to lower CT&M commodity volumes and prices and weaker Marine cargo volumes and freight rates. The operating-income decline was principally due to Pork and Marine.
| Segment | Q3 2023 operating result | Nine-month 2023 operating result | Key comparison or context |
|---|---|---|---|
| Pork | $(34) million | $(350) million | Year-to-date loss widened from $23 million; lower pork and hog margins and higher production/feed costs were key factors. |
| CT&M | $33 million | $93 million | Year-to-date result was broadly stable versus $91 million; sales fell on lower commodity volumes and prices. |
| Marine | $40 million | $196 million | Down from $155 million and $423 million, respectively, as cargo volumes and freight rates weakened. |
| Sugar and Alcohol | $7 million | $16 million | Improved on higher sugar margins. |
| Power | $27 million | $59 million | Improved mainly with increased generation from EDM III. |
| Turkey affiliate income | $20 million | $61 million | Q3 declined from $33 million; year-to-date increased from $60 million. |
Outlook, risks and unusual items
- Management outlook: Management expects Pork to remain unprofitable for the rest of 2023; planned fourth-quarter renewable-diesel-plant maintenance will affect sales and operating income. CT&M is expected to generate positive operating income excluding derivative mark-to-market effects. Marine is expected to remain profitable, but sales and operating income are expected below the prior year. Power and Turkey are expected to be profitable; Sugar and Alcohol profitability is uncertain. The filing gives no consolidated earnings guidance.
- Capital plans and liquidity outlook: Approximately $240 million of capital expenditures were budgeted for the remainder of 2023, primarily for Pork projects and Marine vessels. Management said liquidity and borrowing resources were adequate for operations and known expansion plans, while noting financing availability and terms could be affected by markets and company performance.
- Share repurchase after quarter-end: On October 10, Seaboard repurchased and retired 189,724 shares from entities affiliated with the board chair/family for $600 million, or $3,162.50 per share. The price was 13.5% below the October 6 closing price and 15.7% below the 180-day VWAP. The transaction was approved by a special committee of independent directors; it was funded with cash, investment sales and a credit-facility draw. The repurchase materially reduces cash and equity after the balance-sheet date.
- Other unusual items: The company paid $30 million in Q3 to settle contingent consideration from a 2018 acquisition, including $16 million above the amount initially recognized. Trading-security unrealized losses were $45 million in Q3 2023, compared with $65 million in Q3 2022; nine-month unrealized losses were $37 million versus $220 million.
- Risks and contingencies: Results remain exposed to commodity prices, feed and fuel costs, foreign exchange, interest rates, equity-market movements, demand and regulatory changes. Derivatives are not designated for hedge accounting, so fair-value movements can affect reported earnings. Pork-price antitrust cases remain unresolved after a roughly $10 million direct-purchaser class settlement, subject to court approval; other claims remain. Helms-Burton litigation continues after a settlement became ineffective, and Seaboard warns an adverse outcome could be material. Uruguay Cereoil/Nolston claims and other ordinary-course legal matters also remain uncertain. Management reports no impairment in its Q3 test of a Pork reporting unit with $22 million of goodwill, despite continued Pork losses.
- Regulatory exposure: California Proposition 12 became enforceable July 1, 2023. Seaboard said California and Massachusetts pork sales represented about 5% of 2022 direct sales, in addition to indirect sales through further processors; differing animal-housing requirements could raise costs or affect market access.
Important facts for investors to verify
- Whether Pork margins improve, and the impact of Q4 renewable-diesel maintenance and feed costs.
- Marine demand, cargo volumes and freight rates, and whether the expected below-prior-year results persist.
- Post-repurchase cash, investment balances, debt and borrowing capacity; the $600 million transaction occurred after quarter-end.
- How much of the $581 million year-to-date operating cash flow reflects repeatable operations versus working-capital releases.
- Progress and potential exposure from antitrust, Helms-Burton and Uruguay litigation, including whether any losses become estimable.
- Reported earnings’ sensitivity to trading-portfolio and derivative mark-to-market movements.