Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 in Item 8. Certain statements in this report contain forward-looking statements. See the introduction in Item 1 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.
OVERVIEW
Sales and costs of Seaboard’s segments are significantly influenced by worldwide fluctuations of commodity prices and changes in global political and economic conditions. Accordingly, sales, operating income and cash flows can fluctuate significantly from year to year. As each segment operates in a distinct industry and a different geographic location, management evaluates their operations separately. Seaboard’s reporting segments are based on information used by Seaboard’s CEO in his capacity as chief operating decision maker to determine allocation of resources and assess performance.
Pork Segment
The Pork segment primarily produces hogs to process and sells pork products throughout the U.S. and to foreign markets. Sales prices are directly affected by both domestic and worldwide supply and demand for pork products and other proteins. Feed accounts for the largest input cost in raising hogs and is materially affected by price changes for corn and soybean meal. Market prices for hogs purchased from third parties for processing at the plant also represent a major cost factor. As a result, commodity price fluctuations can affect profitability and cash flows. This segment is Seaboard’s most capital-intensive segment, representing approximately 63% of Seaboard’s total fixed assets and approximately 52% of total inventories as of December 31, 2023. With the plant generally operating near capacity, Seaboard is continually looking for ways to enhance the plant’s operational efficiency, while also looking to increase margins by introducing new, higher margin value-added products. This segment produces biodiesel and renewable diesel and related credits for sale to third parties. Sales prices are affected by the supply and demand of diesel and environmental credit initiatives. This segment also produces renewable natural gas, but Seaboard does not expect its sales to be significant in 2024 as just a few sites are operational and production is dependent upon maturity of the lagoons.
19
CT&M Segment
The CT&M segment provides integrated agricultural commodity trading, processing and logistics services. The majority of its sales are derived from sourcing agricultural commodities from multiple origins and delivering them to third-party and affiliate customers in various international locations. This segment’s sales are significantly affected by fluctuating prices of various commodities, such as wheat, corn and soybean meal. Exports from various countries can exacerbate volatile market conditions. Profit margins are sometimes protected through commodity derivatives and other risk management practices, but the execution of these purchase and delivery transactions has long cycles of completion, which may extend for several months with a high degree of price volatility. As a result, these factors can significantly affect sales volumes, operating income, working capital and related cash flows from period to period. This segment represents approximately 41% of Seaboard’s total inventories as of December 31, 2023. Consolidated subsidiaries and non-consolidated affiliates operate the grain processing facilities in foreign countries that are, in most cases, lesser developed and can be significantly impacted by changes in local crop production, political instability and local government policies, as well as fluctuations in economic and industry conditions and foreign currency exchange rates.
Marine Segment
The Marine segment provides cargo shipping services in the U.S., the Caribbean and Central and South America. Fluctuations in economic conditions and political instability in the regions or countries in which this segment operates may affect trade volumes and operating profits. In addition, freight rates can fluctuate depending on regional supply and demand for shipping services. Since this segment time-charters ocean cargo vessels, it is affected by fluctuations in charter hire rates as well as fuel costs.
Sugar and Alcohol Segment
The Sugar and Alcohol segment produces and processes sugar and alcohol in Argentina, primarily to be marketed locally. This segment’s sales and operating income are significantly affected by local sugar and alcohol prices, domestic sugar production levels and government regulations on local prices. The currency exchange rate can have an impact on reported U.S. dollar sales, operating income and cash flows.
Power Segment
The Power segment is an independent power producer in the Dominican Republic. Spot market rates are impacted by fuel prices and the various producers supplying power to the grid. While fuel is this segment’s largest cost component and is subject to price fluctuations, higher fuel costs generally have been passed on to customers.
Turkey Segment
The Turkey segment, accounted for using the equity method, produces turkeys to process and sells turkey products. Sales prices are directly affected by both domestic and worldwide supply and demand for turkey products and other proteins. Feed accounts for the largest input cost in raising turkeys and is materially affected by price changes for corn and soybean meal. As a result, commodity price fluctuations can affect profitability and cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Management believes Seaboard’s combination of internally generated cash, liquidity, 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 line of credit facilities. As of December 31, 2023, Seaboard had cash and short-term investments of nearly $1.0 billion and additional total working capital of $1.0 billion. 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 $ 1,326
Amounts drawn against lines (255)
Available borrowing capacity as of December 31, 2023 $ 1,071
Seaboard’s available borrowing capacity increased $403 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.
20
Seaboard’s liquidity was not significantly impacted by the common stock repurchase transaction that occurred during the fourth quarter of 2023, which is further discussed in the Financing Activities section below. On the day of closing, Seaboard incrementally borrowed less than $50 million under its existing credit facilities to fund the repurchase and working capital. The remaining repurchase amount was funded by cash on hand and cash from the sale of short-term investments. Cash and short-term investments as of December 31, 2023 decreased $256 million from December 31, 2022.
Summary of Sources and Uses of Cash
Seaboard’s principal funding source is cash from operating activities and its principal cash requirements primarily include operating expenses and capital expenditures. 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 reinvestment of matured securities.
As of December 31, 2023, $49 million of the $1.0 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 these earnings and recorded a deferred tax liability for federal and state incremental tax costs associated with the repatriation. 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. because 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.
In 2021, the OECD released Pillar Two Model Rules (“Pillar Two”) to address the tax challenges of the digitalization of the economy. The rules under the model are designed to ensure large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate. The rules also include transitional safe harbors which provide temporary exemption of operations in some jurisdictions if certain criteria are met. Some jurisdictions in which Seaboard operates enacted Pillar Two legislation effective in 2024, but the impact will not be material to Seaboard in 2024. Seaboard will continue to monitor legislative developments across relevant jurisdictions and the potential impact on future results.
Cash Flows from Operating Activities
Cash provided by operating activities increased $34 million for the year ended December 31, 2023, compared to the same period in 2022. Seaboard’s net earnings, adjusted for non-cash items, decreased $642 million, but Seaboard had positive cash flow from changes in certain assets and liabilities of $615 million including positive working capital cash flow changes of $526 million. The working capital changes primarily reflected a decrease in accounts receivable due to lower revenues, a decrease in inventories due to lower commodity prices, and a decrease in accounts payable due to timing of payments on purchases. Cash flows from dividends received from affiliates increased $77 million primarily related to distributions received from Butterball.
During 2023, Seaboard paid $30 million to settle a contingent consideration liability related to a 2018 acquisition; cash flows from financing activities include $14 million recognized at the 2018 acquisition date and cash flows from operating activities include $16 million, which is the settlement amount in excess of the liability amount recognized at the acquisition date.
Capital Expenditures, Acquisitions and Other Investing Activities
During 2023, Seaboard invested $506 million in property, plant and equipment, of which $361 million was in the Pork segment and $121 million was in the Marine segment. The Pork segment expenditures were primarily to fund renewable biogas recovery projects and maintenance and investment of the renewable diesel plant. At certain hog farms, the Pork segment is constructing renewable 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 expenditures primarily related to the purchase of a used vessel, deposits and installment payments on dual-fuel vessels under construction and the funding of other investments.
The total budget for 2024 capital expenditures is approximately $555 million, with $293 million planned in the Pork segment and $206 million in the Marine segment. The Pork segment’s budget primarily includes normal replacement of breeding herd, completion of certain renewable biogas recovery projects, and other investments. The Marine segment’s budget primarily includes continued installment payments on eight vessels under construction. The payments for these vessels are made in accordance with milestones achieved throughout construction. Three vessels are expected to be
21
complete in 2024 and five vessels are expected to be complete in 2025. As of December 31, 2023, long-term capital expenditure cash requirements for these vessels are approximated to be $173 million in 2024 and $169 million in 2025. Management anticipates funding the capital expenditures from a combination of available cash, the use of available short-term investments and Seaboard’s available borrowing capacity.
Seaboard acquired businesses in 2022 and 2021 and intends to continue to look for opportunities to further grow and diversify its operations, but there are no definitive plans for additional acquisitions at this time. Management intends to utilize existing liquidity, available borrowing capacity and other financing alternatives to fund these 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.
From time to time, proceeds from the sale of short-term investments may be used to fund capital expenditure purchases, working capital needs or other requirements.For the stock repurchase transaction in 2023, Seaboard sold equity securities and purchased money market funds held in trading accounts. Included in the $2 billion of gross cash flows related to the sale and purchase of short-term investments for 2021 was asset reallocation intended to reduce equity exposure.
Seaboard continues to make long-term investments with $16 million, $117 million and $98 million invested during the years ended December 31, 2023, 2022 and 2021, respectively. As of December 31, 2023, Seaboard is committed to invest approximately $11 million in certain long-term investments in 2024, primarily real-estate related.Seaboard may also fund capital calls and issue borrowings for its equity method investments based on specific facts and circumstances.
Financing Activities
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. During 2023 and 2022, there was a high volume of draws and repayment activity under lines of credit with the draws used to fund working capital and greater investments in capital expenditures. Seaboard had long-term debt of $1.0 billion as of December 31, 2023, which includes a Term Loan due 2033 of $973 million. Current maturities of long-term debt were $11 million as of December 31, 2023. During the fourth quarter of 2023, Seaboard refinanced its long-term debt to increase the principal amount and extend the maturity date. Seaboard received proceeds of $307 million, net of fees, upon closing of the refinancing. See Note 7 to the consolidated financial statements for further discussion of debt.
As previously disclosed, on October 9, 2023, Seaboard entered into three Stock Repurchase Agreements (the “Repurchase Agreements”) with the following three separate counterparties: Seaboard Flour LLC, SFC Preferred, LLC and REP23 LLC (collectively, the “Sellers”). The Sellers are entities affiliated with Ellen S. Bresky, the Chairwoman of Seaboard’s Board of Directors, or other members of the Bresky family (collectively, the “Bresky Group”). The repurchases were proposed by the Sellers in July 2023 to facilitate certain internal family planning and structuring objectives. On October 10, 2023, the closings under the Repurchase Agreements occurred pursuant to which Seaboard repurchased an aggregate of 189,724 shares (the “Shares”) of its common stock, $1.00 par value per share (“Common Stock”), from the Sellers at a purchase price of $3,162.50 per share, representing a 15.7% discount to the 180-day volume, weighted-average trading price of the Common Stock as of October 6, 2023, a 14.9% discount to the 30-day volume, weighted- average trading price of the Common Stock as of October 6, 2023 and a 13.5% discount to closing price of the Common Stock as of October 6, 2023. Seaboard paid an aggregate purchase price of $600 million for the Shares. The Repurchase Agreements were negotiated and approved by a special committee of Seaboard’s Board of Directors (the “Special Committee”), comprised solely of disinterested, independent directors, including the lead independent director. The Special Committee was advised by independent legal counsel and an independent financial advisor. The Special Committee received an opinion from its independent financial advisor as to the fairness of the consideration paid for the Shares from a financial point of view to Seaboard and stockholders unaffiliated with the Bresky Group. The Special Committee’s grant of authority provided that no repurchase or alternative proposed capital return transaction involving Seaboard and the Bresky Group could be consummated without the prior favorable recommendation of the Special Committee.
Future Contractual Obligations
Other than those obligations discussed above, future obligations mostly include normal operating expenses. For operating and finance leases, Seaboard had a current undiscounted obligation of $192 million and a long-term undiscounted obligation of $492 million as of December 31, 2023, see Note 5 to the consolidated financial statements. The majority of Seaboard’s purchase commitments for materials or supplies are related to hog, grain, feedstock and fuel procurement contracts with a current obligation of approximately $1.5 billion and a long-term obligation of approximately $800 million as of December 31, 2023, see Note 8 to the consolidated financial statements. Also, Seaboard is subject to obligations
22
under its existing defined benefit pension plans. As of December 31, 2023, the unfunded status of all plans was $78 million. Anticipated employer payments related to the pension and supplemental executive plans in 2024 are $23 million. For additional information about Seaboard’s pension plans, see Note 9 to the consolidated financial statements.
RESULTS OF OPERATIONS
Net sales for the years ended December 31, 2023, 2022 and 2021 were $9.6 billion, $11.2 billion and $9.2 billion, respectively. The decrease of $1.6 billion for 2023 compared to 2022 primarily reflected a sales decline of $1.2 billion in the CT&M segment due to lower prices and volumes of commodities sold and a sales decline of $544 million in the Marine segment due to lower cargo volumes and freight rates. The increase in net sales of $2 billion for 2022 compared to 2021 primarily reflected higher prices of commodities sold in the CT&M segment of $1.1 billion, and higher freight rates in the Marine segment of $647 million. See the net sales discussion by reportable segment below for more details.
Operating income (loss) for the years ended December 31, 2023, 2022 and 2021 was ($87) million, $657 million and $458 million, respectively. The decrease of $744 million for 2023 compared to 2022 primarily reflected a decline in operating income of $392 million in the Pork segment due to lower margins on the sale of pork products and market hogs, and a decline in operating income of $363 million in the Marine segment due to lower voyage revenue. The increase in operating income of $199 million for 2022 compared to 2021 primarily reflected an increase of $394 million in the Marine segment due to higher voyage revenue, an increase of $90 million in the CT&M segment due to higher margins on certain commodities, partially offset by lower margins on pork product, market hog and biodiesel sales in the Pork segment which decreased operating income by $323 million. See the operating income discussion by reportable segment below for more details.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased $30 million for the year ended December 31, 2023 compared to 2022. The increase was primarily due to higher personnel costs including $7 million for the deferred compensation program and an adjustment of the contingent consideration liability discussed above of $10 million. SG&A expenses for the year ended December 31, 2022 increased $13 million compared to 2021. The increase was primarily the result of higher SG&A with no individually significant items, partially offset by lower costs associated with Seaboard’s deferred compensation program of $7 million. The deferred compensation program costs are offset by the effect of the mark-to-market on investments recorded in other investment income (loss), net.
Interest Expense
Interest expense increased $18 million for the year ended December 31, 2023 compared to 2022. The increase in interest expense was primarily due to higher interest rates on outstanding debt, partially offset by an increase of $13 million in capitalized interest on construction in progress. Interest expense increased $27 million for the year ended December 31, 2022 compared to 2021. The increase primarily related to higher interest rates on outstanding debt.
Interest Income
Interest income increased $30 million for the year ended December 31, 2023 compared to 2022 and $10 million for the year ended December 31, 2022 compared to 2021. The increase was primarily due to higher interest rates on debt securities.
Other Investment Income (Loss), Net
Other investment income, net increased $324 million for the year ended December 31, 2023 compared to 2022. The increase was primarily due to unrealized mark-to-market gains on short-term investments and a $46 million charge recorded during 2022 related to a long-term solar energy investment. Other investment income, net decreased $372 million for the year ended December 31, 2022 compared to 2021. The decrease primarily reflected mark-to-market losses on short-term investments and the $46 million charge noted above. The charge on this long-term investment was offset with the benefit of the investment tax credits recorded in income tax benefit (expense).
Foreign Currency Gains (Losses), Net
Foreign currency gains, net decreased $9 million for the year ended December 31, 2023 compared to 2022. The decrease was primarily due to fluctuations in the Zambian kwacha, among fluctuations of other currency exchange rates in several foreign countries. Foreign currency gains, net decreased $11 million for the year ended December 31, 2022 compared to 2021. The decrease primarily reflected fluctuations in the euro, among fluctuations of other currency exchange rates in several foreign countries.
Income Tax Benefit (Expense)
The 2023 effective tax rate was lower than the 2022 effective tax rate primarily due to lower earnings, more federal tax credits and a larger state tax benefit due to higher domestic losses. The 2022 effective tax rate was lower than the 2021
23
effective tax rate primarily due to an increase in federal investment tax credits available in 2022 and a change in the mix of foreign and domestic earnings, with foreign earnings generally taxed at lower rates. See Note 12 to the consolidated financial statements for further information on Seaboard’s income taxes.
Segment Results
See Note 13 to the consolidated financial statements for a reconciliation of net sales and operating income by reportable segment to consolidated net sales and consolidated operating income, respectively.
Pork Segment
Operating income (loss) $ (528) $ (96) $ 227
Income from affiliates $ 33 $ 24 $ 3
Net sales for the Pork segment decreased $89 million for the year ended December 31, 2023 compared to 2022. The change was due to a decrease in sales of $228 million for pork products and market hogs due primarily to lower market prices, partially offset by higher volumes of pork products sold that increased sales $37 million. The decrease was partially offset by a $91 million increase in biodiesel and renewable diesel sales and related credits due primarily to a $276 million increase in volumes sold from the renewable diesel plant in Hugoton, Kansas which began operations in the third quarter of 2022, partially offset by a decrease in prices of $116 million and timing of sales of associated credits of $69 million.
Operating income for the Pork segment decreased $432 million for the year ended December 31, 2023 compared to 2022. The decrease primarily reflected $392 million in lower margins on pork products and market hogs due to lower sales prices and higher hog production costs, including higher feed costs of $98 million, and to a lesser extent, an increase in legal expense, partially offset by a decrease in adjustments to the lower of cost and net realizable value (“LCNRV”) inventory reserve of $41 million. An inventory adjustment has 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. Lower biodiesel and renewable diesel margins related to lower sales prices were partially offset with no mark-to-market derivative contract losses for the period compared to $35 million in 2022. Management is unable to predict market prices for pork products, biodiesel, renewable diesel, or related credits, or the costs of feed, third-party hogs or feedstock for future periods, but based on current market conditions, management anticipates the segment's profitability will be near break-even for 2024. Scheduled maintenance and repairs on the renewable diesel plant began in the fourth quarter of 2023 and will not be completed until early 2024, and as a result, renewable diesel operating income for the first quarter of 2024 will be impacted.
Net sales for the Pork segment increased $124 million for the year ended December 31, 2022 compared to 2021. The increase was primarily the result of an increase in biodiesel sales of $146 million related to higher prices and an increase in the sales of associated credits of $107 million. The increases were partially offset by a decrease in volumes of pork products and market hogs sold resulting in a decrease in sales of $113 million.
Operating income for the Pork segment decreased $323 million for the year ended December 31, 2022 compared to 2021. The decrease was primarily due to lower margins on pork product and market hog sales due to higher costs of hogs, including inventory adjustments of $41 million, and higher feed costs of $130 million, biodiesel-related mark-to-market derivative contract losses of $35 million and higher biodiesel and renewable diesel operational costs of $26 million due to feedstock costs and start-up costs at the Hugoton renewable diesel plant.
Income from affiliates increased $21 million for the year ended December 31, 2022 compared to 2021 due to improved results at STF.
24
CT&M Segment
Operating income as reported $ 145 $ 151 $ 61
Marked-to-market adjustments (6) (7) 7
Income (loss) from affiliates $ (18) $ 21 $ 18
Net sales for the CT&M segment decreased $1.2 billion for the year ended December 31, 2023 compared to 2022. The decrease was primarily due to lower average sales prices, which decreased sales $619 million and lower volumes as a result of increased competition and market dynamics, which decreased sales $532 million. 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 $6 million for the year ended December 31, 2023 compared to 2022. Margins increased slightly year over year primarily due to lower commodity costs but were offset by the $10 million adjustment to the contingent consideration liability. 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 in 2024, excluding the effects of marked-to-market adjustments.
Had Seaboard not applied mark-to-market accounting to its derivative instruments, operating income for this segment would have been lower by $6 million and $7 million in 2023 and 2022, respectively, and higher by $7 million in 2021. While management believes its commodity futures, options and foreign exchange contracts are primarily economic hedges of its firm purchase and sales contracts or 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 fair 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 marked-to-market adjustments should be primarily offset by realized margins or losses as revenue is recognized over time; therefore, these marked-to-market adjustments could reverse in fiscal 2024. Management believes eliminating these marked-to-market adjustments provides a more reasonable presentation to compare and evaluate period-to-period financial results for this segment.
Income from affiliates decreased $39 million for the year ended December 31, 2023 compared to 2022. CT&M’s investments in affiliates are represented by numerous milling, feed, protein and trading affiliates, with no individual investment representing a material fluctuation. The decrease was primarily due to several entities challenged with lower margins due to higher costs and competition.
Net sales for the CT&M segment increased $1.1 billion for the year ended December 31, 2022 compared to 2021. The increase primarily reflected higher average sales prices of certain commodities of $1.1 billion.
Operating income for the CT&M segment increased $90 million for the year ended December 31, 2022 compared to 2021. The increase primarily reflected higher margins on certain commodities, costs associated with operational changes recorded in 2021 but not repeated in 2022 of approximately $25 million, and derivative contract gains of $7 million in 2022 related to the change in mark-to-market adjustments compared to losses of $7 million in 2021.
Marine Segment
Net sales for the Marine segment decreased $544 million for the year ended December 31, 2023 compared to 2022. The decrease was primarily due to an overall decline in both cargo volumes and freight rates. Cargo volumes decreased 17% for the year ended 2023 compared to the year ended 2022. 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 $363 million for the year ended December 31, 2023 compared to 2022. The decrease was primarily the result of lower voyage revenue, partially offset by lower voyage-related costs, such as slot costs, fuel costs, terminal services and trucking costs due to the lower cargo volumes, and fuel prices. Management
25
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 in 2024.
Net sales for the Marine segment increased $647 million for the year ended December 31, 2022 compared to 2021. The increase was primarily the result of higher freight rates.
Operating income for the Marine segment increased $394 million for the year ended December 31, 2022 compared to 2021. The increase was primarily the result of higher voyage revenue, partially offset by higher voyage-related costs, including charter-hire costs, fuel costs and other operational costs primarily due to increased rates.
Sugar and Alcohol Segment
Operating income $ 18 $ 11 $ 2
Net sales for the Sugar and Alcohol segment increased $30 million for the year ended December 31, 2023 compared to 2022. Sugar sales increased $20 million due to higher prices related to lower market supply. Alcohol sales increased $10 million due to higher volumes related to strong demand and higher prices primarily associated with governmental price adjustments.
Operating income for the Sugar and Alcohol segment increased $7 million for the year ended December 31, 2023 compared to 2022. The increase primarily reflected higher margins on sugar sales. Higher sugar sales prices were partially offset by higher production costs primarily due to inflationary pressure and foreign exchange volatility. Management cannot predict local sugar and alcohol prices or the volatility in the currency exchange rate for future periods, and management is uncertain whether this segment will be profitable in 2024.
Net sales for the Sugar and Alcohol segment increased $6 million for the year ended December 31, 2022 compared to 2021. Sugar and alcohol sales increased $10 million, partially offset by lower energy production. Higher sales prices were mostly offset by lower volumes of sugar and alcohol sold due to low inventory levels from recent harvests.
Operating income for the Sugar and Alcohol segment increased $9 million for the year ended December 31, 2022 compared to 2021. The increase primarily reflected higher margins on sugar and alcohol sales.
Power Segment
Operating income (loss) $ 71 $ 14 $ (9)
Net sales for the Power segment increased $79 million for the year ended December 31, 2023 compared to 2022. More power generation from EDM III, that began operations in June 2022, contributed to an increase in sales of $60 million. EDM II, the power-generating barge which began operations in 2012, increased its dispatch volume in 2023 primarily due to improved availability of competitively priced fuel.
Operating income for the Power segment increased $57 million for the year ended December 31, 2023 compared to 2022. The increase was due to more revenue generated primarily from EDM III’s operations, partially offset primarily by an increase in fuel costs of $12 million and other costs related to EDM III. 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 in 2024. While EDM II remains in operation in the Dominican Republic, Seaboard continues to explore strategic alternatives for this barge, including a sale or relocation.
Net sales for the Power segment increased $98 million for the year ended December 31, 2022 compared to 2021. The increase primarily reflected more power generation with EDM III also in operation of $76 million, and to a lesser extent, higher spot market rates of $22 million as a result of higher fuel prices.
Operating income for the Power segment increased $23 million for the year ended December 31, 2022 compared to 2021 primarily due to higher revenues, partially offset by higher fuel and other operational costs due to higher prices.
26
Turkey Segment
Income (loss) from affiliate $ 87 $ 103 $ (20)
The Turkey segment, accounted for using the equity method, represents Seaboard’s 52.5% investment in Butterball. Income from affiliate decreased $16 million for the year ended December 31, 2023 compared to 2022 as Butterball’s net income decreased $30 million for the year ended December 31, 2023 compared to 2022. The decrease in net income was primarily the result of income recorded in the prior year related to a $21 million gain on the sale of businesses, and $11 million of mark-to-market gains on interest-rate swap agreements that were terminated in 2022. The decrease was partially offset by higher margins with a stronger mix of value-added products sold and production efficiencies. Volumes sold decreased 7% for the year ended December 31, 2023 compared to 2022. 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 in 2024.
Income from affiliate increased $123 million for the year ended December 31, 2022 compared to 2021 as Butterball’s net income increased $234 million for the year ended December 31, 2022 compared to 2021. The increase in net income was primarily the result of higher revenues of $258 million, primarily due to higher selling prices and strong markets, and gains on the sale of businesses and interest rate-swap agreements of $32 million, slightly offset by higher feed and plant production costs.
CRITICAL ACCOUNTING ESTIMATES
The preparation of Seaboard’s consolidated financial statements requires Seaboard to make estimates, judgments, and assumptions. See Note 1 to the consolidated financial statements for a discussion of significant accounting policies.Management has identified the accounting estimate believed to be the most important to the portrayal of Seaboard’s financial condition and results of operations, and that requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of inherently uncertain matters. Management has reviewed this critical accounting estimate with the Audit Committee of the Board of Directors.
Accrued Pension Liability – The measurement of Seaboard’s pension liability and related expense is dependent on a variety of assumptions and estimates regarding future events. These assumptions include discount rates, assumed rate of return on plan assets, compensation increases, mortality rates and retirement rates. The discount rate and return on plan assets are important elements of liability and expense measurement and are reviewed on an annual basis. The effect of decreasing both the discount rate and assumed rate of return on plan assets by 50 basis points would have a minimal impact on pension expense. The effects of actual results differing from the assumptions (i.e. gains or losses) are primarily accumulated in accrued pension liability and amortized over future periods, if it exceeds the 10% corridor and therefore, could affect Seaboard’s recognized pension expense in such future periods as permitted under generally accepted accounting principles (“GAAP”). See Note 9 to the consolidated financial statements for discussion of the pension rates and assumptions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 derivatives are used to manage these overall market risks; however, Seaboard does not perform the extensive record-keeping required to account for derivative transactions as hedges. These derivatives are not accounted for as hedges, so fluctuations in the related prices could have a material impact on earnings in any given year. From time to time, Seaboard also enters into speculative derivative transactions related to its market risks.
Commodity price changes affect the cost of necessary raw materials and other inventories, finished product sales and firm sales commitments. Seaboard uses various grain, hog, oilseed and other commodity futures and options purchase contracts to manage certain risks of increasing prices of raw materials and firm sales commitments or anticipated sales contracts. Short sales contracts are used to offset the open purchase derivatives when the related commodity inventory is purchased in advance of the derivative maturity, effectively offsetting the initial futures or option purchase contract.
The political and economic conditions of the countries in which Seaboard does business, along with fluctuations in the value of the U.S. dollar, cause volatility in currency exchange rates, which exposes Seaboard to fluctuating foreign currency gains and losses that cannot be predicted. Since changes in foreign currency exchange rates affect the cash paid or received on foreign currency-denominated receivables and payables, Seaboard manages certain of these risks through the use of foreign currency exchange agreements.
27
The following table presents the sensitivity of the fair value of Seaboard’s derivatives to a hypothetical 10% change in market prices and foreign exchange rates as of December 31, 2023 and 2022. The fair value is calculated for each item by valuing each net position at quoted market prices as of the applicable date.
Grains and oilseeds $ 19 $ 9
Vegetable oils 1 1
Hogs 2 —
Foreign currencies 17 22
Equity price risk is the risk that Seaboard may incur losses due to adverse changes in the market prices of the equity securities it holds in its short-term investment portfolio. Market prices for equity securities are subject to fluctuation and may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. As of December 31, 2023 and 2022, the fair value of Seaboard’s marketable equity securities was approximately $239 million and $602 million, respectively, and a hypothetical 10% change in market prices would impact the income statement by $24 million and $60 million, respectively.
As changes in interest rates affect the cash required to service variable-rate debt, Seaboard may use interest rate exchange agreements to manage risks of increasing interest rates. At December 31, 2023, Seaboard had variable-rate long-term debt outstanding of $973 million with an interest rate of 7.08%. A hypothetical 10% change in interest rates effective at December 31, 2023, would have a minimal impact on interest expense. Long-term debt sensitive to changes in interest rates as of December 31, 2022 totaled $670 million with an interest rate of 6.01%.
28
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Seaboard Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Seaboard Corporation and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
29
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
(i) Sufficiency of audit evidence over net sales
As described in Note 13 to the consolidated financial statements, the Company earned $9.6 billion of net sales in 2023. Net sales were primarily generated by the Company’s Pork, Commodity, Trading and Milling, Marine, Sugar and Alcohol, and Power operations, which were dispersed over numerous countries. We identified the evaluation of the sufficiency of audit evidence over net sales as a critical audit matter. Evaluating the sufficiency of audit evidence obtained required auditor judgment due to the geographical dispersion of net sales. Furthermore, given the disaggregation of local management and language differences between locations, our audit team consisted of auditors located in multiple countries around the world. The following are the primary procedures we performed to address this critical audit matter. We evaluated the nature and amounts of the Company’s net sales at its various locations and applied auditor judgment to determine the locations at which procedures were to be performed. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s net sales process, including controls related to the recognition of global net sales amounts. We tested samples of individual net sales transactions by comparing the amounts recognized by the Company to relevant underlying documentation such as purchase orders, contractual arrangements, and delivery documents, as applicable. We also performed a software-assisted data analysis to test relationships among certain revenue transactions. In addition, we evaluated the sufficiency of audit evidence obtained over net sales by assessing the results of procedures performed, including the appropriateness of the nature and extent of audit effort.
We have served as the Company’s auditor since 1959.
Kansas City, Missouri
February 13, 2024
30
SEABOARD CORPORATION
Consolidated Statements of Comprehensive Income
Years ended December 31,
(Millions of dollars except share and per share amounts) 2023 2022 2021
Net sales:
Cost of sales and operating expenses:
Total cost of sales and operating expenses 9,246 10,213 8,411
Selling, general and administrative expenses 403 373 360
Operating income (loss) (87) 657 458
Other income (expense):
Interest expense (58) (40) (13)
Interest income 62 32 22
Income from affiliates 105 152 7
Other investment income (loss), net 85 (239) 133
Foreign currency gains (losses), net (4) 5 16
Miscellaneous, net 4 12 13
Total other income (expense), net 194 (78) 178
Earnings before income taxes 107 579 636
Income tax benefit (expense) 120 3 (65)
Less: Net earnings attributable to noncontrolling interests (1) (2) (1)
Net earnings attributable to Seaboard $ 226 $ 580 $ 570
Foreign currency translation adjustment (3) (33) 8
Unrecognized pension cost 15 43 31
Other comprehensive income, net of tax $ 12 $ 10 $ 39
Comprehensive income attributable to Seaboard $ 238 $ 590 $ 609
See accompanying notes to consolidated financial statements.
31
SEABOARD CORPORATION
Consolidated Balance Sheets
December 31,
(Millions of dollars except share and per share amounts) 2023 2022
Assets
Current assets:
Cash and cash equivalents $ 56 $ 199
Short-term investments 973 1,086
Receivables:
Due from affiliates 127 195
Total receivables 779 954
Allowance for credit losses (30) (31)
Other current assets 123 139
Operating lease right of use assets, net 394 445
Investments in and advances to affiliates 731 753
Other intangible assets, net 26 31
Deferred tax asset 199 17
Other non-current assets 283 239
Liabilities and Stockholders’ Equity
Current liabilities:
Lines of credit $ 255 $ 457
Accounts payable (includes $1 and $2 to affiliates) 400 429
Accrued compensation and benefits 143 158
Deferred revenue (includes $28 and $12 from affiliates) 66 70
Operating lease liabilities 117 156
Accrued voyage costs 56 61
Other current liabilities 298 198
Total current liabilities 1,335 1,529
Long-term debt, less current maturities 997 702
Long-term operating lease liabilities 304 318
Accrued pension liability 74 71
Deferred tax liability 32 —
Other non-current liabilities 190 268
Commitments and contingent liabilities
Stockholders’ equity:
Accumulated other comprehensive loss (410) (422)
Total Seaboard stockholders’ equity 4,616 4,996
Noncontrolling interests 18 18
Total liabilities and equity $ 7,566 $ 7,902
See accompanying notes to consolidated financial statements.
32
SEABOARD CORPORATION
Consolidated Statements of Changes in Equity
Accumulated
Other
Common Comprehensive Retained Noncontrolling
Comprehensive income:
Net earnings — — 570 1 571
Other comprehensive income, net of tax — 39 — — 39
Acquisition of noncontrolling interests — — — 6 6
Dividends on common stock, $9.00/share — — (10) — (10)
Comprehensive income:
Net earnings — — 580 2 582
Other comprehensive income, net of tax — 10 — — 10
Distributions to noncontrolling interests — — — (2) (2)
Dividends on common stock, $9.00/share — — (10) — (10)
Comprehensive income:
Net earnings — — 226 1 227
Other comprehensive income, net of tax — 12 — — 12
Repurchase of common stock from affiliates — — (608) — (608)
Distributions to noncontrolling interests — — — (1) (1)
Dividends on common stock, $9.00/share — — (10) — (10)
See accompanying notes to consolidated financial statements.
33
SEABOARD CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31,
Cash flows from operating activities:
Depreciation and amortization 283 235 178
Deferred income taxes (154) (112) (12)
Income from affiliates (105) (152) (7)
Other investment loss (income), net (85) 239 (133)
Dividends received from affiliates 117 40 44
Receivables, net of allowance 176 (188) (228)
Other assets 3 (7) (20)
Accounts payable (32) 26 117
Other liabilities, exclusive of debt 73 (6) 1
Net cash from operating activities 710 676 92
Cash flows from investing activities:
Purchase of short-term investments (2,519) (567) (2,031)
Proceeds from sale of short-term investments 2,686 717 2,202
Proceeds from maturity of short-term investments 60 15 26
Capital expenditures (506) (474) (460)
Proceeds from sale of property, plant and equipment 34 29 39
Purchase of long-term investments (16) (117) (98)
Acquisition of businesses — (58) (7)
Proceeds from sale of non-consolidated affiliates — 13 —
Proceeds from the sale of subsidiaries, net of cash sold — 17 —
Investments in and advances to affiliates (11) (4) (1)
Other, net (1) (8) 28
Net cash from investing activities (273) (437) (302)
Cash flows from financing activities:
Uncommitted lines of credit, net (172) (27) 135
Draws under committed lines of credit 1,173 1,215 672
Repayments of committed lines of credit (1,199) (1,241) (515)
Proceeds from long-term debt 310 1 —
Principal payments of long-term debt (8) (8) (55)
Finance lease payments (57) (44) (14)
Payment of contingent consideration (14) — —
Repurchase of common stock from affiliates (600) — —
Dividends paid (10) (10) (10)
Other, net (4) (2) —
Net cash from financing activities (581) (116) 213
Effect of exchange rate changes on cash and cash equivalents 1 1 (4)
Net change in cash and cash equivalents (143) 124 (1)
Cash and cash equivalents at beginning of year 199 75 76
Cash and cash equivalents at end of year $ 56 $ 199 $ 75
See accompanying notes to consolidated financial statements.
34
Note 1− Summary of Significant Accounting Policies
Operations of Seaboard Corporation and its Subsidiaries
Seaboard Corporation and its subsidiaries (collectively, “Seaboard”) together comprise a diversified group of companies that operate worldwide in agricultural and ocean transport businesses. Seaboard is primarily engaged in hog production and pork processing in the United States (“U.S.”); commodity trading and grain processing in Africa and South America; cargo shipping services in the U.S., Caribbean and Central and South America; sugar and alcohol production in Argentina; and electric power generation in the Dominican Republic. Seaboard also has an equity method investment in Butterball, LLC (“Butterball”), a producer and processor of turkey products. Seaboard’s outstanding common stock is closely held, with approximately 73% collectively owned by Seaboard Flour LLC and SFC Preferred, LLC.
Principles of Consolidation
The consolidated financial statements include the accounts of Seaboard Corporation and its domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Financial information from certain foreign subsidiaries is reported on a one- to three-month lag, depending on the specific entity.
Investments in Affiliates
Investments in non-consolidated affiliates, where Seaboard has significant influence but does not have a controlling interest, are accounted for by the equity method. Under the equity method of accounting, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses and dividends, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. Seaboard reviews its investments in affiliates for impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. For the Commodity Trading and Milling (“CT&M”) segment, investments in affiliates are primarily in foreign countries, which are less developed than the U.S., and therefore, expose Seaboard to greater financial risks. At certain times when there are ongoing losses, local economies are depressed, commodity-based markets are less stable or foreign governments cause challenging business conditions, management evaluates the fair value of the equity method investments for impairment. As the fair value of these investments is not readily determinable, management uses other methods to determine fair value such as estimated future cash flows, including assumptions on growth rates and consideration of other local business conditions as applicable.
Use of Estimates
These financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Foreign Currency Transactions and Translation
Seaboard has operations in several foreign countries, and the currencies of the countries fluctuate in relation to the U.S. dollar, resulting in foreign currency gains and losses. Certain CT&M segment subsidiaries located in Guyana, Ivory Coast, Senegal, South Africa and Zambia use local currency as their functional currency. Assets and liabilities of these subsidiaries are translated to U.S. dollars at year-end exchange rates, and income and expenses are translated at average exchange rates. Translation gains and losses are recorded as components of other comprehensive income (loss). Also certain non-consolidated affiliates, primarily in the CT&M segment, use local currency as their functional currency.
Seaboard applies highly inflationary accounting for countries whose cumulative inflation rate for a three-year period meets or exceeds 100%. Under highly inflationary accounting, the financial statements of a subsidiary are remeasured into Seaboard’s reporting currency (U.S. dollars) and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in net income, rather than accumulated other comprehensive income (loss) on the balance sheet, until the economy is no longer considered highly inflationary. Certain non-monetary assets and liabilities are recorded at the applicable historical exchange rates. Seaboard applies highly inflationary accounting for the Sugar and Alcohol segment, which operates in Argentina.
Cash and Cash Equivalents
Cash equivalents include all demand deposits, overnight investments and other highly liquid investments with original maturities of three months or less.
35
Supplemental Cash Flow Information
The amounts paid for interest and income taxes are as follows:
Years ended December 31,
Interest, net of interest capitalized $ 56 $ 35 $ 10
Income taxes, net of refunds 47 101 104
Non-cash activities include capital expenditures of $4 million, $15 million and $5 million that were included in accounts payable as of December 31, 2023, 2022 and 2021, respectively.
Short-term Investments
Short-term investments are categorized as trading securities and carried at fair value. Changes in the fair value of short-term investments are recorded as unrealized gains and losses included in other investment income (loss), net in the consolidated statements of comprehensive income, with any purchases and sales recorded on a settlement date basis.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and generally do not bear interest.
The allowance for credit losses is Seaboard’s best estimate of the amount of probable credit losses using the current expected credit loss model. This model estimates the lifetime of expected credit loss based on historical experience, current conditions and reasonable supportable forecasts. Changes in estimates, developing trends and other new information can have a material effect on future evaluations. As of December 31, 2023 and 2022, Seaboard had gross foreign receivables of approximately $522 million and $659 million, respectively, which generally represent more of a collection risk than the domestic receivables; however as of December 31, 2023, no individual material amounts were deemed to have a heightened risk of collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
The activity within the allowance for credit losses was as follows:
Balance at Balance at
Allowance for Credit Losses:
(a) Provision amounts are charged to selling, general and administrative expenses.
(b) Includes write-offs net of recoveries, foreign currency translation adjustments and other adjustments.
Notes Receivable
Notes receivable are included in other receivables, if current, and other non-current assets, if long-term. Seaboard’s non-current notes receivable balances, net of reserves, were $41 million and $40 million as of December 31, 2023 and 2022, respectively. There were notes receivable due from affiliates outstanding of $2 million, net as of December 31, 2023 and 2022. Seaboard monitors the credit quality of notes receivable, using the current expected credit loss model.
The activity within the allowance for notes receivable was as follows:
Balance at Balance at
Allowance for Notes Receivable:
36
Inventories
Grain, flour and feed inventories at the CT&M segment’s foreign milling operations are valued at the lower of weighted-average cost and net realizable value (“NRV”). All other inventories are valued at the lower of first-in, first-out (“FIFO”) cost and NRV. In determining NRV, management makes assumptions regarding estimated sales prices, estimated costs to complete and estimated disposal costs. Changes in future market prices or facts and circumstances could result in a material write down in the value of inventory or decreased future margins on the sale of inventory.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and, except for land, depreciated using the straight-line method over an estimated useful life, ranging from 3 to 30 years. Property, plant and equipment under finance leases are stated at the present value of minimum lease payments and subsequently amortized using the straight-line method over the earlier of the end of its useful life or the end of the lease term. Routine and planned major maintenance, repairs and minor renewals are expensed as incurred, while major renewals and improvements are capitalized. Property, plant and equipment and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. Impairment is recognized if the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Right of Use Assets and Lease Liabilities
Right of Use (“ROU”) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. For leases that do not have readily determinable implicit discount rates, Seaboard adjusts its incremental borrowing rate by the local risk-free interest rate on its term loan with a credit risk premium corresponding to Seaboard’s unreported credit rating. Then Seaboard determines discount rates based on term, country and currency where the leased asset is located. Seaboard accounts for lease and non-lease components as a single lease component for all classes of underlying assets. Seaboard does not recognize ROU assets and lease liabilities for short-term leases with terms greater than 1 month, but less than 12 months.
Goodwill and Other Intangible Assets
Prior to 2023, goodwill was assessed annually for impairment by each reporting unit at the quarter-end closest to the anniversary date of the initial acquisition. In 2023, Seaboard changed the date of its annual goodwill test to the fourth quarter to align the testing date of all reporting units and therefore is a preferable change. The change was not material to the financial statements, has been applied prospectively and does not delay, accelerate or avoid any potential impairment charges. Goodwill is assessed more frequently if events or changes in circumstances indicate that impairment is likely. Seaboard first assesses qualitative factors to determine whether it is more likely than not the fair value of any reporting unit is less than its carrying amount. If qualitative factors indicate more likely than not that an impairment is possible, Seaboard performs a quantitative impairment test using discounted cash flow analysis by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. Due to the continued Pork segment operating losses, management performed an interim quantitative goodwill impairment test during the third quarter of 2023 and concluded goodwill was not impaired. No impairments were recorded during 2023 or 2022 based on annual qualitative assessments and certain immaterial reporting units recorded a total of $4 million of impairment charges during 2021.
The changes in the carrying amount of goodwill were as follows:
Pork CT&M
(Millions of dollars) Segment Segment Total
Foreign currency translation — (13) (13)
Acquisition 4 — 4
Foreign currency translation — 6 6
37
Separable intangible assets with finite lives are amortized over their estimated useful lives and evaluated for impairment similar to property, plant and equipment discussed above. The gross carrying amount and accumulated amortization for finite-lived intangible were as follows:
Customer Trade Customer Trade
Amortization of intangible assets was $8 million, $8 million and $9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Using the exchange rates in effect at year-end, estimated amortization of intangible assets as of December 31, 2023 is $8 million each year for the next three years and $2 million in year four.
Accrued Self-Insurance
Seaboard is self-insured for certain levels of workers’ compensation, health care coverage, property damage, vehicle, product recall and general liability. Liabilities associated with some of these risks are estimated based on actuarially-determined amounts and accrued in part by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Changes in estimates to previously recorded reserves are reflected in current operating results.
Asset Retirement Obligation
Seaboard records a long-lived asset and a related liability for the asset retirement obligation costs associated with the closure of all hog lagoons. Based on detailed assessments and appraisals obtained to estimate the future asset retirement obligation costs, Seaboard records the present value of the projected costs in other non-current liabilities in the consolidated balance sheets. The retirement asset is depreciated over the economic life of the related asset. The following table shows the changes in the asset retirement obligation:
December 31,
Beginning balance $ 32 $ 29
Accretion expense 2 2
Liability for additional lagoons — 1
Ending balance $ 34 $ 32
Pension Plans
Seaboard records annual income and expense amounts relating to its pension plans based on calculations which include various actuarial assumptions, including discount rates, mortality, assumed rates of return, compensation increases, and retirement rates. Seaboard reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The effect of modifications on the value of plan obligations and assets is recognized immediately within other comprehensive income (loss) and amortized into operating earnings over future periods using the corridor approach. Actuarial (gains) losses that exceed 10% of the greater of the pension benefit obligation or the fair value of plan assets are generally amortized over the average remaining working lifetime of the participants. The measurement date for all plans is December 31. Any overfunded status is recognized as an asset and any underfunded status is recognized as a liability. The service cost component of net periodic benefit cost is recorded in either cost of sales or selling, general and administrative expenses depending upon the employee, and the other components of net periodic benefit cost are recorded in miscellaneous, net in the consolidated statements of comprehensive income. Settlements are recognized when lump sum payments on a cumulative basis exceed the service cost plus interest cost for the respective plan.
Revenue Recognition
Almost all of Seaboard’s contracts with its customers are less than one year. Seaboard recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration it expects to receive in exchange for those goods or services. The majority of Seaboard’s revenue arrangements consist of a single performance obligation as the promise to transfer the individual product or service is not separately identifiable from other promises in the contracts, including shipping and handling and customary storage, and, therefore, not distinct. Revenue from goods and services transferred to customers at a single point in time account for approximately 85% of Seaboard’s net sales. Substantially all of the sales in Seaboard’s Marine segment are recognized ratably over the transit time for each voyage, as the performance obligation to its customers is satisfied.
38
Seaboard’s transaction prices are mostly fixed, but occasionally include minimal variable consideration for early payment, volume and other similar discounts, which are highly probable based on the history with the respective customers. Taxes assessed by a governmental authority that are collected by Seaboard from a customer are excluded from sales. Seaboard recognizes a financing component only on obligations that extend longer than one year.
Deferred revenue represents cash payments received in advance of Seaboard’s performance or revenue billed that is unearned. The CT&M segment requires certain customers to pay in advance or upon delivery to avoid collection risk. The Marine segment’s deferred revenue balance primarily relates to the unearned portion of billed revenue when a ship is on the water and has not arrived at the designated port. Deferred revenue balances are reduced when revenue is recognized. The majority of the deferred revenue balance as of year-end is recognized as revenue during the following quarter.
Research and Development
Seaboard conducts research and development activities to develop new products and to improve existing products and processes. Seaboard incurred research and development expenses of $361 million, $210 million and $191 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Income Taxes
Effects of changes in tax laws, including retroactive changes, are recognized in the financial statements in the period that the changes are enacted. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Seaboard accounts for the global intangible low-taxed income (“GILTI”) provision and the base-erosion and anti-abuse tax (“BEAT”) provision taxes in the period incurred. For quarters, Seaboard computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year-to-date pre-tax income or loss and adjusts the provision for discrete tax items recorded in the period.
Earnings Per Common Share
Earnings per common share are based upon the weighted-average shares outstanding during the period. Basic and diluted earnings per share are the same for all periods presented.
Accounting Standards Recently Issued Not Yet Adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued guidance that requires incremental segment disclosures on an annual and interim basis related to significant segment expenses. Seaboard will adopt this guidance for the annual reporting period beginning on January 1, 2024 and interim periods within the calendar year beginning on January 1, 2025. The disclosure requirements must be applied retrospectively to all prior periods presented in the financial statements. Seaboard is currently evaluating the impact this guidance will have on its related disclosures.
In December 2023, the FASB issued guidance that requires additional detailed income tax disclosures related to standardization and disaggregation of information in the rate reconciliation and income taxes paid by jurisdiction. Seaboard will adopt this guidance for the annual reporting period beginning on January 1, 2025. Seaboard is currently evaluating the impact this guidance will have on its disclosures.
Note 2 − Investments
The following is a summary of the fair value of short-term investments classified as trading securities:
December 31,
(Millions of dollars) 2023 2022
Domestic equity securities $ 143 $ 433
Foreign equity securities 96 169
Domestic debt securities 593 399
Foreign debt securities 120 66
Money market funds held in trading accounts 17 12
Other trading securities 4 7
Total trading short-term investments $ 973 $ 1,086
The unrealized gains (losses) related to trading securities still held at the end of the respective reporting period were $39 million, ($129) million and $12 million for the years ended December 31, 2023, 2022 and 2021, respectively. Seaboard had $18 million and $16 million of short-term investments denominated in foreign currencies as of December 31, 2023 and 2022, respectively.
Seaboard had long-term investments of $207 million and $185 million as of December 31, 2023 and 2022, respectively, classified in other non-current assets on the consolidated balance sheets. These investments are in a business development
39
company (“BDC”), real estate and renewable-energy facilities. The BDC investment is included in the fair value hierarchy table in Note 10 and the other investments are primarily accounted for under the equity method of accounting with any gains (losses) recorded in other investment income (loss).
Note 3 − Inventories
The following table is a summary of inventories:
December 31,
At lower of FIFO cost and NRV:
Hogs and materials $ 527 $ 538
Pork products and materials 61 75
Grains, oilseeds and other commodities 366 475
Biofuels and related credits 160 221
Total inventories at lower of FIFO cost and NRV 1,238 1,413
Total inventories $ 1,462 $ 1,670
Note 4 − Property, Plant and Equipment
The following table is a summary of property, plant and equipment:
Useful December 31,
Land and improvements 3 - 15 years $ 369 $ 331
Buildings and improvements 30 years 802 779
Vessels and vehicles 3 - 18 years 398 373
Office furniture and fixtures 5 years 45 43
Contract growers 5 - 15 years 156 151
Construction in progress 476 286
Total property, plant and equipment 4,366 3,990
Accumulated depreciation and amortization (1,956) (1,744)
Net property, plant and equipment $ 2,410 $ 2,246
Seaboard’s capitalized interest on construction in progress was $17 million, $4 million and $7 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Note 5 − Leases
Seaboard leases ports, vessels, contract grower assets, and to a lesser extent, land, buildings and machinery and equipment. Seaboard’s non-lease components are primarily for services related to labor associated with crew services on vessel charter arrangements and caring for hogs in its contract grower agreements.
Seaboard’s operating lease assets and liabilities are reported separately in the consolidated balance sheets. The classifications of Seaboard’s finance leases in the consolidated balance sheets were as follows:
(Millions of dollars) 2023 2022
Finance lease liabilities Other current liabilities 51 56
Non-current finance lease liabilities Other liabilities 96 143
Lease cost is included in various line items in the consolidated statements of comprehensive income or capitalized to inventory. Operating lease cost and short-term lease cost are recognized on a straight-line basis over the lease term. Finance lease cost is recognized based on the effective interest method for the lease liability and straight-line amortization of the ROU asset. Variable lease payments are recognized when the circumstance on which those payments are assessed occurs.
40
The components of lease cost were as follows for the years ended December 31:
Operating lease cost $ 190 $ 184 $ 162
Finance lease cost:
Amortization of right of use assets 54 46 17
Interest on lease liabilities 6 6 5
Variable lease cost (a) 10 18 20
Short-term lease cost (b) 9 13 27
Sublease income (7) (6) (8)
(b) Short-term leases are primarily for cargo containers and vessels.
Weighted-average lease terms and discount rates were as follows as of December 31, 2023 and 2022:
Operating Leases Finance Leases
Weighted-average remaining term (in years) 6 5 5 5
Weighted-average discount rate 6.63% 6.13% 3.79% 3.44%
Maturities of lease liabilities as of December 31, 2023 were as follows:
Operating Finance
(Millions of dollars) Leases Leases
Total undiscounted lease payments 517 167
Less: Imputed interest (96) (20)
Total lease liability $ 421 $ 147
The following table includes supplemental cash and non-cash information related to leases. Seaboard reports the amortization of ROU assets and changes in operating lease liabilities in other liabilities, exclusive of debt in the consolidated statements of cash flows.
Years ended December 31,
Operating cash flows from operating leases $ 193 $ 194 $ 166
Operating cash flows from finance leases 6 6 5
Financing cash flows from finance leases 57 44 14
ROU assets obtained in exchange for new lease liabilities:
Finance leases 5 116 54
41
Note 6 – Investments in Affiliates
Seaboard has investments in several non-consolidated affiliates to further its business strategies and partner with other entities that have expertise in certain industries and countries. These investments are all accounted for using the equity method of accounting.