Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Sales and costs of Seaboard’s segments are significantly influenced by worldwide fluctuations in commodity prices and changes in foreign 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 to determine allocation of resources and assess performance, in his capacity as chief operating decision maker.
Seaboard’s operations have been both directly and indirectly impacted by the COVID-19 pandemic. At the onset of the pandemic in March and April of 2020, Seaboard experienced a change in product mix, including a significant decline in volume and prices for food service business due to restaurant closings, less demand for transportation due to customers temporarily shut down due to government orders and capital market volatility. Seaboard saw improvement in its third and fourth quarter 2020 results though challenges remain. Seaboard continues to encounter partially staffed shifts, lock downs or curfews in some geographic regions and the impacts from commodity market volatility. The near and long-term impacts of COVID-19 on Seaboard’s operations and the global economy are unknown and impossible to predict with any level of certainty.
Pork Segment
The Pork segment primarily produces hogs to process and sells fresh and frozen 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. Within the portfolio of Seaboard’s businesses, management believes profitability of the Pork segment is most susceptible to commodity price fluctuations. As a result, this segment’s operating income and cash flows can materially fluctuate from year to year, significantly affecting Seaboard’s consolidated operating income and cash flows. This segment is Seaboard’s most capital-intensive segment, representing approximately 58% of Seaboard’s total fixed assets, in addition to approximately 48% of total inventories, as of December 31, 2020. With the plant generally operating at capacity, Seaboard is continually looking for ways to enhance the plant’s operational efficiency, while also looking to increase margins by introducing new, higher value products. This segment also produces biodiesel for sale to third parties. Sales prices are affected by the supply and demand of diesel and environmental credit initiatives.
CT&M Segment
The CT&M segment provides integrated agricultural commodity trading, processing and logistics services. The majority of the CT&M segment’s sales are derived from sourcing agricultural commodities from multiple origins which are delivered to third-party and affiliate customers in various international locations. The execution of these purchase and delivery transactions have 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 46% of Seaboard’s total inventories as of December 31, 2020. This segment owns three vessels, but the majority of the trading business is transacted with chartered ships. Consolidated and non-consolidated affiliates operate the grain processing business in foreign countries that are, in most cases, lesser developed. Foreign operations 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. This segment’s sales are also significantly affected by fluctuating prices of various commodities, such as wheat, corn and soybean meal. Exports from various countries can exacerbate volatile market conditions thatmay have a significant impact on this segment’s sales and operating income. Profit margins are sometimes protected by using commodity derivatives and other risk management practices. The CT&M segment has invested in several entities in recent years and continues to seek opportunities to expand its business.
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, cargo rates can fluctuate depending on regional supply and demand for shipping services. Since the Marine segment time-charters the majority of its ocean cargo vessels, it is affected by fluctuations in charter hire rates as well as fuel costs. This segment continues to explore ways to increase volumes on existing routes while seeking opportunities to broaden its route structure in the regions it serves.
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Sugar and Alcohol Segment
The Sugar and Alcohol segment produces and processes sugar and alcohol in Argentina, primarily to be marketed locally. The Sugar and Alcohol segment’s sales and operating income are significantly affected by local and worldwide sugar and alcohol prices. Domestic sugar production levels in Argentina affect the local price. Global sugar price fluctuations, to a lesser extent, have an impact in Argentina as well. 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 significantly affect the profitability and cash flows of Butterball.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Sources and Uses of Cash
As of December 31, 2020, Seaboard had cash and short-term investments of $1.5 billion and additional total working capital of $737 million. Cash and short-term investments as of December 31, 2020 decreased $18 million from December 31, 2019. The decrease was primarily the result of $259 million of capital expenditures and $69 million of long-term debt payments, partially offset by $291 million of cash from operations. Cash from operating activities increased $120 million primarily due to higher adjusted earnings partially offset by uses of cash for working capital.
As of December 31, 2020, $52 million of the $1.5 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. Seaboard intends to continue permanently reinvesting the majority of these funds outside the U.S. as current plans do not demonstrate a need to repatriate them to fund Seaboard’s U.S. operations. For any planned repatriation to the U.S., Seaboard would record applicable deferred taxes for state or foreign withholding taxes.
Capital Expenditures, Acquisitions and Other Investing Activities
During 2020, Seaboard invested $259 million in property, plant and equipment, of which $207 million was in the Pork segment and $27 million in the Power segment. The Pork segment expenditures were primarily for the expansion of the Oklahoma pork processing plant and the modifications of an idle ethanol plant and its related assets in Hugoton, Kansas. The Power segment expenditures were primarily for its power generating barge under construction. All other capital expenditures were primarily of a normal recurring nature such as replacements of machinery and equipment and general facility modernizations and upgrades.
The total budget for 2021 capital expenditures is approximately $456 million, with $340 million planned in the Pork segment and $25 million in the Power segment to complete the new barge and interconnection for existing barge at a different site. The Pork segment budgeted approximately $173 million to complete modifications to convert an acquired idle ethanol facility to a renewable diesel plant with operations currently expected to begin in 2022, and the remainder to new projects, including biogas recovery projects. Certain projects or purchases were delayed due to COVID-19, so overall capital expenditures are expected to be higher than last year. 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 has acquired businesses in 2020, 2019 and 2018, and intends to continue to look for opportunities to further grow and diversify its operations, but there are no definitive plans at this time. Also, from time to time, Seaboard may fund capital calls and issue borrowings for its equity method investments based on the specific facts and circumstances. During 2020, Seaboard contributed $8 million to non-consolidated affiliates for working capital needs.
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Financing Activities
The following table presents a summary of Seaboard’s available borrowing capacity. During 2020, Seaboard entered into a committed line of credit agreement for $250 million of additional liquidity for working capital and general corporate purposes.
Total amount
(Millions of dollars) available
Short-term uncommitted and committed lines $ 1,028
Amounts drawn against lines (222)
Available borrowing capacity as of December 31, 2020 $ 806
Seaboard has debt of $763 million, which includes term loans of $714 million and foreign subsidiary obligations of $49 million. Subsequent to year-end, Seaboard repaid $46 million of foreign subsidiary obligations. Seaboard has capacity under its debt covenants to undertake additional debt financings of approximately $1.3 billion as of December 31, 2020. See Note 8 to the consolidated financial statements for further discussion of debt.
Management intends to continue seeking opportunities for expansion in the industries in which Seaboard operates, utilizing existing liquidity, available borrowing capacity and other financing alternatives. 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. Accordingly, 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 for the next twelve months.
Contractual Obligations and Off-Balance Sheet Arrangements
Several of Seaboard’s segments have long-term contractual obligations, including non-cancelable lease agreements and purchase commitments. See Notes 6 and 9 to the consolidated financial statements for discussion on purchase commitments and leases, respectively.
The following table provides a summary of Seaboard’s long-term contractual obligations as of December 31, 2020:
Payments due by period
Less than 1-3 3-5 More than
(Millions of dollars) Total 1 year years years 5 years
Finance lease obligations 112 14 28 25 45
Interest payments on long-term debt (a) 91 13 24 23 31
Retirement benefit payments (b) 75 3 34 18 20
Mandatory deemed repatriation tax (c) 6 — — — 6
Deferred income taxes and certain other long-term liabilities in the consolidated balance sheets are not included in the table above as management is unable to reliably estimate the timing of the payments for these items.
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RESULTS OF OPERATIONS
Prior period financial information included in this Form 10-K has been adjusted for the effect of a change in method in accounting for inventory in the Pork segment. See Note 1 to the consolidated financial statements for further discussion of this change in accounting principle and the related impact to the financial statements.
Net sales for the years ended December 31, 2020, 2019 and 2018 were $7.1 billion, $6.8 billion and $6.6 billion, respectively. The increase for 2020 compared to 2019 primarily reflected higher volumes of certain commodities in the CT&M segment and higher volumes for pork products and hogs sold in the Pork segment, partially offset by lower cargo volumes in the Marine segment and lower spot prices and generation in the Power segment. The increase for 2019 compared to 2018 primarily reflected higher volumes of certain commodities in the CT&M segment and higher prices for pork products sold in the Pork segment, partially offset by lower biodiesel revenue in the Pork segment and lower volumes and prices of sugar and alcohol sold in the Sugar and Alcohol segment.
Operating income for the years ended December 31, 2020, 2019 and 2018 was $245 million, $110 million and $236 million, respectively. The increase for 2020 compared to 2019 primarily reflected lower derivative contract losses and higher margins on pork product sales in the Pork segment and higher margins on third-party sales and derivative contract gains in the CT&M segment, partially offset by lower revenues in the Power segment. The decrease for 2019 compared to 2018 primarily reflected derivative contract losses and lower margins on biodiesel sales in the Pork segment, lower alcohol margins in the Sugar and Alcohol segment and higher voyage costs in the Marine segment.
Pork Segment
Operating income $ 131 $ 60 $ 144
Loss from affiliates $ (9) $ (22) $ (30)
Net sales for the Pork segment increased $90 million for the year ended December 31, 2020 compared to 2019. The increase was primarily the result of higher volumes of pork products, market hogs and biodiesel sold and the recognition of more federal blender’s credits than the prior year, partially offset by lower biodiesel prices.
Operating income for the Pork segment increased $71 million for the year ended December 31, 2020 compared to 2019. The increase was primarily due to lower derivative contract losses, higher pork product sales, lower costs for feed and third-party hogs, more income associated with the federal blender’s credits received, and no expense related to the withdrawal liability from a multi-employer pension fund recorded in 2019 as discussed below, partially offset by higher plant processing costs and lower margins on biodiesel sales. Seaboard sells pork to international customers located in China, among other countries, and incremental tariffs, the duration of which is uncertain, continue to have a negative impact on earnings. Management is unable to predict market prices for pork products, the cost of feed or third-party hogs, the prices of biodiesel or the ongoing impacts of the COVID-19 pandemic for future periods. For 2021, it currently appears that overall costs will be higher than in 2020 because of higher grain prices. Based on these conditions, management cannot predict if this segment will be profitable in 2021.
Loss from affiliates has decreased primarily due to the STF plant processing more hogs and utilizing more capacity. STF’s operations began in September 2017 with a second shift commencing in October 2018.
Net sales for the Pork segment increased $77 million for the year ended December 31, 2019 compared to 2018. The increase was primarily the result of higher volumes and prices of market hogs sold, higher prices and volumes for pork products sold and the recognition of the federal blender’s credits of $60 million in 2019 for biodiesel production in tax years 2018 and 2019, partially offset by lower biodiesel prices and volumes. In December 2019, the President of the U.S. signed into law the Further Consolidated Appropriations Act that extended the federal blender’s credits through 2022. In the first quarter of 2018, the Pork segment received $42 million of revenue related to 2017 biodiesel production.
Operating income for the Pork segment decreased $84 million for the year ended December 31, 2019 compared to 2018. The decrease was primarily due to derivative contract losses, lower margins on biodiesel sales and a $14 million expense related to the withdrawal liability from a multi-employer pension fund as discussed in Note 10 to the consolidated financial statements, partially offset by higher margins on pork product sales and the increase in federal blender’s credits received. Margins on pork product sales increased as higher sales prices were only partially offset by higher production and processing costs.
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CT&M Segment
Operating income as reported $ 118 $ 62 $ 46
Marked-to-market adjustments (15) 5 3
Income (loss) from affiliates $ (2) $ (5) $ (11)
Net sales for the CT&M segment increased $322 million for the year ended December 31, 2020 compared to 2019. The increase primarily reflected higher volumes of certain commodities to third-party customers, including sales from a business acquired in October 2019, and higher corn, soybean and other commodity prices, partially offset by lower volumes to affiliates.
Operating income for the CT&M segment increased $56 million for the year ended December 31, 2020 compared to 2019. The increase primarily reflected higher margins on third-party sales, including margins for a business acquired in October 2019, from higher prices and volumes, derivative contract gains of $20 million related to mark-to-market adjustments and lower selling, general and administrative expenses. Due to worldwide commodity price fluctuations, the uncertain political and economic conditions in the countries in which this segment operates, the volatility in the commodity markets and the ongoing impacts of the COVID-19 pandemic, 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 2021, excluding the effects of marking to market derivative contracts.
Had Seaboard not applied mark-to-market accounting to its derivative instruments, operating income for this segment would have been lower by $15 million in 2020 and higher by $5 million and $3 million in 2019 and 2018 respectively. 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 and therefore, these marked-to-market adjustments could reverse in fiscal 2021. 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.
Net sales for the CT&M segment increased $244 million for the year ended December 31, 2019 compared to 2018. The increase primarily reflected higher volumes of certain commodities for third-party customers, including sales for a business acquired in January 2018 with certain entities on a three-month lag and another business acquired in October 2019, and higher wheat, corn and other commodity prices, partially offset by lower affiliate volumes and sales prices.
Operating income for the CT&M segment increased $16 million for the year ended December 31, 2019 compared to 2018. The increase primarily reflected higher margins on third-party sales, partially offset by higher selling, general and administrative costs related to the business acquired.
Marine Segment
Operating income $ 21 $ 4 $ 25
Income from affiliates $ 2 $ 3 $ 2
Net sales for the Marine segment decreased $56 million for the year ended December 31, 2020 compared to 2019. The decrease was primarily the result of lower cargo volumes, partially offset by slightly higher rates due to a change in cargo mix with more refrigerated containers that generally have a higher freight rate. The Marine segment’s results were significantly impacted in the second quarter of 2020 with a decrease of $67 million in sales compared to the same period in 2019 due to less demand with many of Marine’s customers temporarily shut down due to government orders associated with COVID-19.
Operating income for the Marine segment increased $17 million for the year ended December 31, 2020 compared to 2019. The increase was primarily the result of lower fuel costs due to the decrease in price and consumption and lower other
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voyage costs and terminal costs related to the reduction in cargo volumes. Management cannot predict fuel costs, cargo volumes and cargo rates, the ongoing impacts of the COVID-19 pandemic or to what extent changes in economic conditions in markets served will affect net sales or operating income for future periods. However, management anticipates positive operating income for this segment in 2021.
Net sales for the Marine segment increased $4 million for the year ended December 31, 2019 compared to 2018. The increase was primarily the result of a change in cargo mix, with more refrigerated containers that generally have a higher rate, partially offset by lower cargo volumes.
Operating income for the Marine segment decreased $21 million for the year ended December 31, 2019 compared to 2018. The decrease was primarily the result of higher voyage costs related to charter hire rates, terminal costs and fuel costs. The reduced global sulfur emissions cap from 3.5% to 0.5% became effective on January 1, 2020 and resulted in higher fuel costs as purchases of low-sulfur fuel began in late 2019.
Sugar and Alcohol Segment
Operating income (loss) $ 2 $ (16) $ 9
Income from affiliates $ 1 $ 1 $ 1
Net sales for the Sugar and Alcohol segment decreased $15 million for the year ended December 31, 2020 compared to 2019. The decrease primarily reflected lower volumes and prices of alcohol sold as a result of less demand for fuels with the lengthy COVID-19 pandemic lockdown, partially offset by higher sugar prices. Sugar and alcohol sales are denominated in Argentine pesos, and an increase in local sales prices may be offset by exchange rate changes in the Argentine peso against the U.S. dollar. This segment’s functional currency is the U.S. dollar, which will continue to be effective as long as the Argentine economy is considered highly inflationary.
Operating income for the Sugar and Alcohol segment increased $18 million for the year ended December 31, 2020 compared to 2019. The increase primarily reflected higher margins on sugar due to higher prices and lower alcohol and sugar production costs. Management cannot predict local sugar and alcohol prices, the volatility in the currency exchange rate or the ongoing impacts of the COVID-19 pandemic for future periods. Based on these conditions, management cannot predict if this segment will be profitable in 2021.
Net sales for the Sugar and Alcohol segment decreased $63 million for the year ended December 31, 2019 compared to 2018. The decrease primarily reflected lower volumes and prices of sugar and alcohol sold.
Operating income for the Sugar and Alcohol segment decreased $25 million for the year ended December 31, 2019 compared to 2018. The decrease primarily reflected lower margins on alcohol, partially offset by lower selling, general and administrative expenses.
Power Segment
Operating income $ 3 $ 27 $ 21
Income from affiliates $ — $ 3 $ 10
Net sales for the Power segment decreased $53 million for the year ended December 31, 2020 compared to 2019. The decrease primarily reflected lower spot market rates as a result of lower fuel prices and lower production related to more power generation from lower variable-cost producers.
Operating income for the Power segment decreased $24 million for the year ended December 31, 2020 compared to 2019 primarily due to lower revenues, partially offset by lower fuel costs due to lower prices and fuel consumption. Management cannot predict fuel costs, the extent that spot market rates will fluctuate compared to fuel costs or other power producers, or the ongoing impacts of the COVID-19 pandemic for future periods. Based on these conditions, management cannot predict if this segment will be profitable in 2021. Financial results are expected to be lower during the period of interconnection for the existing barge at a new site.
Net sales for the Power segment decreased $5 million for the year ended December 31, 2019 compared to 2018. The decrease primarily reflected lower spot market rates as a result of lower fuel prices.
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Operating income for the Power segment increased $6 million for the year ended December 31, 2019 compared to 2018 primarily due to lower fuel costs, partially offset by lower revenues.
Income from affiliates decreased as the Power segment sold its 29.9% interest in an electricity generation facility during 2019.
Turkey Segment
Loss from affiliate $ (10) $ (21) $ (16)
The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball. The decrease in loss from affiliate for 2020 compared to 2019 was primarily the result of higher sales attributable to more whole bird volumes and increased prices related to a stronger sales mix of value-added products sold and less interest expense, partially offset by higher live and production costs. The increase in loss from affiliate for 2019 compared to 2018 was primarily the result of higher production and other costs, including interest, partially offset by higher prices for turkey products sold. Management is unable to predict market prices for turkey products, the cost of feed or the ongoing impacts of the COVID-19 pandemic for future periods. Based on these conditions, management cannot predict if this segment will be profitable in 2021.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2020 decreased $7 million compared to 2019. The decrease was primarily the result of lower costs related to Seaboard’s deferred compensation program, recovery of bad debt expense and lower travel costs and other cost reduction efforts, partially offset by higher personnel costs, which included higher pension settlement charges in 2020. The deferred compensation program costs are offset by the effect of the mark-to-market on investments recorded in other investment income (loss). SG&A expenses for the year ended December 31, 2019 increased $22 million compared to 2018. The increase was primarily the result of increased personnel-related costs, including higher costs related to Seaboard’s deferred compensation program and the businesses acquired.
Interest Expense
Interest expense totaled $19 million, $36 million and $44 million for the years ended December 31, 2020, 2019 and 2018, respectively. The decrease in interest expense for 2020 compared to 2019 primarily related to lower interest rates on outstanding debt and increased capitalized interest related to ongoing capital expenditure investments. The decrease in interest expense for 2019 compared to 2018 primarily related to lower interest rates on outstanding debt for the Sugar and Alcohol segment and more capitalized interest related to capital expenditure investments, partially offset by higher debt outstanding related to the Term Loan due 2028 amended in September 2018.
Interest Income
Interest income totaled $22 million, $30 million and $14 million for the years ended December 31, 2020, 2019 and 2018, respectively. The decrease for 2020 compared to 2019 was primarily due to less interest earned on debt securities. The increase for 2019 compared to 2018 was primarily due to increased investments in debt securities.
Other Investment Income (Loss), Net
Other investment income (loss), net totaled $84 million, $225 million and ($152) million for the years ended December 31, 2020, 2019 and 2018, respectively. The changes primarily reflect mark-to-market fluctuations on short-term investments.
Foreign Currency Gains (Losses), Net
Foreign currency gains (losses), net totaled ($31) million, $0 million and $4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in foreign currency losses for 2020 compared to 2019 primarily reflected losses in the euro, Zambian kwacha and South African rand, among fluctuations of other currency exchange rates in several foreign countries. The decrease in foreign currency gains for 2019 compared to 2018 primarily reflected losses in the Argentine peso, partially offset by fluctuations of other currency exchange rates.
Income Tax Expense
The 2020 effective tax rate was higher than the 2019 effective tax rate primarily due to decreased tax-exempt income and federal investment tax credits, partially offset by a decrease in foreign tax expense related to a change in the mix of domestic and foreign earnings as compared to the prior year. The 2019 effective tax rate was lower than the 2018 effective tax rate primarily due to increased federal investment tax credits and more tax-exempt income from the retroactive
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extension of the federal blender’s credits in December 2019 for both 2018 and 2019. Also, the 2018 rate was impacted by the change in tax classification of a wholly owned subsidiary from a partnership to a corporation and an adjustment to the Tax Cuts and Jobs Act (“2017 Tax Act”) income tax liability. See Note 14 to the consolidated financial statements for further information on Seaboard’s income taxes.
CRITICAL ACCOUNTING ESTIMATES
This discussion and analysis of financial condition and results of operations is based upon Seaboard’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires Seaboard to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of consolidated financial statements. See Note 1 to the consolidated financial statements for a discussion of significant accounting policies.Management has identified the accounting estimates believed to be the most important to the portrayal of Seaboard’s financial condition and results, and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates 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 be an increase in pension expense of approximately $4 million per year. 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 GAAP. See Note 10 to the consolidated financial statements for discussion of the pension rates and assumptions.
Income Taxes – Income taxes are determined by management based on current tax regulations in the various worldwide taxing jurisdictions in which Seaboard conducts its business. In various situations, accruals have been made for estimates of the tax effects for certain transactions, business structures, the estimated reversal of timing differences and future projected profitability of Seaboard’s various business units based on management’s interpretation of existing facts, circumstances and tax regulations. Should new evidence come to management’s attention that could alter previous conclusions, if tax laws change or if taxing authorities disagree with the positions taken by Seaboard, the change in estimate could result in a material adverse or favorable impact on the financial statements. An increase in the future U.S. federal income tax rate of 5% would increase tax expense on the reversal of timing differences by approximately $27 million as a one-time adjustment, which would be fully reflected in the period of enactment.
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. Management believes it uses derivatives primarily as economic hedges, although they do not qualify as hedges for accounting purposes. Since these derivatives are not accounted for as hedges, 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, 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. Also, since changes in interest rates affect the cash required to service variable-rate debt, Seaboard uses interest rate exchange agreements to manage risks of increasing interest rates.
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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, 2020 and 2019, the fair value of Seaboard’s marketable equity securities was approximately $835 million and $910 million, respectively. Seaboard enters into equity futures contracts to manage the equity price risk with respect to certain short-term investments.
The following table presents the sensitivity of the fair value of Seaboard’s open net commodity future and option contracts, foreign currency exchange agreements, interest rates and marketable equity securities to a hypothetical 10% change in market prices, interest rates and foreign exchange rates as of December 31, 2020 and 2019. For all open derivatives, the fair value of such positions is a summation of the fair values calculated for each item by valuing each net position at quoted market prices as of the applicable date.
Grains and oilseeds $ 9 $ 12
Vegetable oils 3 4
Energy related resources — 2
Equity prices 84 91
Foreign currencies 13 11
Interest rates 2 —
The table below provides information about Seaboard’s long-term debt that is sensitive to changes in interest rates as of December 31, 2020. For this variable-rate debt, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.
Long-term debt:
Variable rate $ 9 $ 8 $ 7 $ 7 $ 7 $ 649 $ 687
Long-term debt sensitive to changes in interest rates as of December 31, 2019 totaled $749 million with a weighted average interest rate of 3.44%.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Seaboard Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Seaboard Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 16, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Changes in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has elected to change its method of accounting for certain inventories in the United States to the first-in, first-out (“FIFO”) method from the last-in, first-out (“LIFO”) method effective January 1, 2018.
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update 2016-02 - Leases (Topic 842).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits 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. We believe that our audits provide a reasonable basis for our opinion.
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.
Sufficiency of audit evidence over net sales
As described in Note 13 to the consolidated financial statements, the Company earned $7.1 billion of net sales in 2020. The net sales was primarily generated by the Pork, Commodity, Trading and Milling, Marine, Sugar and Alcohol, and Power reporting segments. Within these reporting segments, the Company has operating locations in over 45 countries.
26
We identified the evaluation of the sufficiency of audit evidence over net sales as a critical audit matter. Due to the geographical and reporting segment dispersion of net sales, we applied auditor judgment to determine the extent of locations at which to perform procedures. 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 implementation as well as tested the operating effectiveness of certain internal controls over the Company’s net sales process, including controls related to the recognition and consolidation 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. 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 16, 2021
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SEABOARD CORPORATION
Consolidated Statements of Comprehensive Income
Years ended December 31,
Net sales:
Cost of sales and operating expenses:
Total cost of sales and operating expenses 6,552 6,394 6,033
Selling, general and administrative expenses 329 336 314
Other income (expense):
Interest expense (19) (36) (44)
Interest income 22 30 14
Loss from affiliates (18) (41) (44)
Other investment income (loss), net 84 225 (152)
Foreign currency gains (losses), net (31) — 4
Miscellaneous, net 3 2 (3)
Total other income (loss), net 41 180 (225)
Earnings before income taxes 286 290 11
Income tax expense (3) (3) (8)
Net earnings $ 283 $ 287 $ 3
Less: Net loss attributable to noncontrolling interests — — —
Net earnings attributable to Seaboard $ 283 $ 287 $ 3
Foreign currency translation adjustment (7) (20) (53)
Unrecognized pension cost (23) (10) 3
Other comprehensive loss, net of tax $ (30) $ (30) $ (50)
Comprehensive income (loss) 253 257 (47)
Comprehensive income (loss) attributable to Seaboard $ 252 $ 257 $ (46)
See accompanying notes to consolidated financial statements.
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SEABOARD CORPORATION
Consolidated Balance Sheets
December 31,
(Millions of dollars except share and per share amounts) 2020 2019 ADJUSTED
Assets
Current assets:
Cash and cash equivalents $ 76 $ 125
Receivables:
Due from affiliates 111 109
Total receivables 560 674
Allowance for credit losses (28) (28)
Prepaid expenses 44 48
Other current assets 59 75
Net property, plant and equipment 1,582 1,431
Operating lease right of use assets, net 390 446
Investments in and advances to affiliates 698 735
Other intangible assets, net 54 58
Other non-current assets 154 101
Liabilities and Stockholders’ Equity
Current liabilities:
Lines of credit $ 222 $ 246
Current maturities of long-term debt 55 62
Accounts payable (includes $7 and $14 to affiliates) 276 368
Accrued compensation and benefits 110 131
Deferred revenue (includes $38 and $32 to affiliates) 89 80
Operating lease liabilities 111 104
Accrued voyage costs 68 68
Other current liabilities 145 130
Total current liabilities 1,076 1,189
Long-term debt, less current maturities 707 730
Long-term operating lease liabilities 318 379
Accrued pension liability 179 159
Deferred income taxes 103 93
Long-term income tax liability 6 62
Other liabilities 182 136
Total non-current liabilities 1,495 1,559
Commitments and contingent liabilities
Stockholders’ equity:
Accumulated other comprehensive loss (471) (440)
Total Seaboard stockholders’ equity 3,817 3,591
Noncontrolling interests 11 10
Total liabilities and stockholders’ equity $ 6,399 $ 6,349
See accompanying notes to consolidated financial statements.
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SEABOARD CORPORATION
Consolidated Statements of Changes in Equity
Accumulated
Other
Common Comprehensive Retained Noncontrolling
(Millions of dollars) Stock Loss Earnings Interests Total
Comprehensive loss:
Net earnings — — 3 — 3
Other comprehensive loss, net of tax — (49) — (1) (50)
Repurchase of common stock — — (5) — (5)
Additions to noncontrolling interests — — — 4 4
Reduction to noncontrolling interests — — (1) (3) (4)
Dividends on common stock, $6.00/share — — (7) — (7)
Comprehensive income:
Net earnings — — 287 — 287
Other comprehensive loss, net of tax — (30) — — (30)
Repurchase of common stock — — (17) — (17)
Reduction to noncontrolling interests — — — (1) (1)
Dividends on common stock, $9.00/share — — (10) — (10)
Comprehensive income:
Net earnings — — 283 — 283
Other comprehensive income (loss), net of tax — (31) — 1 (30)
Repurchase of common stock — — (13) — (13)
Dividends on common stock, $9.00/share — — (10) — (10)
See accompanying notes to consolidated financial statements.
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SEABOARD CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31,
Cash flows from operating activities:
Net earnings $ 283 $ 287 $ 3
Depreciation and amortization 172 138 134
Deferred income taxes 11 (53) (13)
Mandatory deemed repatriation tax (56) (11) 14
Loss from affiliates 18 41 44
Dividends received from affiliates 20 10 23
Other investment loss (income), net (84) (225) 152
Other, net 34 7 5
Changes in assets and liabilities, net of acquisitions:
Receivables, net of allowance 104 (84) (58)
Other assets (10) 27 44
Accounts payable (99) 114 (25)
Other liabilities, exclusive of debt (3) 78 (24)
Net cash from operating activities 291 171 238
Cash flows from investing activities:
Purchase of short-term investments (739) (1,026) (1,130)
Proceeds from sale of short-term investments 791 973 1,191
Proceeds from maturity of short-term investments 47 185 53
Capital expenditures (259) (349) (162)
Proceeds from sale of non-consolidated affiliate — 24 —
Acquisition of businesses (27) (7) (264)
Investments in and advances to affiliates, net (8) (21) (26)
Purchase of long-term investments (47) (38) (21)
Other, net (20) 6 10
Net cash from investing activities (262) (253) (349)
Cash flows from financing activities:
Uncommitted lines of credit, net (18) 34 —
Draws under committed lines of credit 290 100 30
Repayments of committed lines of credit (290) (100) (30)
Proceeds from long-term debt 37 43 251
Principal payments of long-term debt (69) (35) (46)
Repurchase of common stock (13) (17) (5)
Dividends paid (10) (10) (7)
Other, net (9) (4) (3)
Net cash from financing activities (82) 11 190
Effect of exchange rate changes on cash and cash equivalents 4 2 (1)
Net change in cash and cash equivalents (49) (69) 78
Cash and cash equivalents at beginning of year 125 194 116
Cash and cash equivalents at end of year $ 76 $ 125 $ 194
See accompanying notes to consolidated financial statements.
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SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Operations of Seaboard Corporation and its Subsidiaries
Seaboard Corporation and its subsidiaries (collectively, “Seaboard”) together comprise a diverse group of integrated companies with a broad global presence. Seaboard is primarily engaged in hog production and pork processing in the 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. Approximately 77% of the outstanding common stock of Seaboard is collectively owned by Seaboard Flour LLC and SFC Preferred, LLC.
Principles of Consolidation and Investments in Affiliates
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 and affiliates is reported on a one- to three-month lag, depending on the specific entity. As Seaboard conducts its agricultural commodity trading business with third parties, consolidated subsidiaries and affiliates on an interrelated basis, cost of sales on affiliates cannot be clearly distinguished without making numerous assumptions, primarily with respect to mark-to-market accounting for commodity derivatives.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) 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.
Change in Accounting Principle
During the fourth quarter of 2020, Seaboard elected to change its method for valuing hogs, fresh pork and other inventories in the Pork segment from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method. Total inventories accounted for under the LIFO method represented approximately 42% of consolidated inventories prior to this change in method. Seaboard believes that the FIFO method is preferable as this method more accurately matches cost of sales with the related revenues than the LIFO method as the FIFO method more closely resembles the physical flow of inventory. Also, the FIFO method results in the inventory at the end of a period consisting of more recently incurred costs.
The effects of the change in accounting principle from LIFO to FIFO have been applied retrospectively to all periods presented and certain financial statement line items in Seaboard’s consolidated financial statements were adjusted as necessary. As of January 1, 2018, the cumulative effect of this change on periods prior to those presented resulted in an increase to beginning retained earnings of $23 million.
The impact of the change on Seaboard’s consolidated statements of comprehensive income is summarized below:
Year ended Year ended Year ended
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SEABOARD CORPORATION
Notes to Consolidated Financial Statements
The impact of the change on Seaboard’s consolidated balance sheet is summarized below:
The impact of the change on Seaboard’s consolidated statements of cash flows is summarized below:
Year ended Year ended Year ended
As As Impact of As Impact of As Impact of
Deferred income taxes $ (5) $ 11 $ 16 $ (55) $ 2 $ (53) $ (20) $ 7 $ (13)
This change did not affect Seaboard’s previously reported cash flows from operating, investing or financing activities.
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. Certain of the major contracts and transactions, however, are denominated in U.S. dollars. These fluctuations result in exchange gains and losses. In addition, the value of the U.S. dollar fluctuates in relation to the currencies of countries where certain of Seaboard’s foreign subsidiaries and affiliates primarily conduct business. Certain Commodity Trading and Milling (“CT&M”) segment consolidated subsidiaries located in Brazil, Canada, Guyana, Ivory Coast, Senegal, South Africa and Zambia use local currency as their functional currency. Also, certain non-controlled, non-consolidated affiliates of the CT&M and Sugar and Alcohol segments 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 rates. Translation gains and losses are recorded as components of other comprehensive income (loss). For the consolidated subsidiaries and non-consolidated affiliates, U.S. dollar denominated net asset or liability conversions to the local currency are recorded through income.
GAAP requires the use of highly inflationary accounting for countries whose cumulative three-year inflation exceeds 100%. In mid-2018, the Argentine peso rapidly devalued relative to the U.S. dollar, which along with increased inflation, indicated that the three-year cumulative inflation in that country exceeded 100%. As a result, Seaboard adopted highly inflationary accounting as of July 1, 2018 for Seaboard’s Sugar and Alcohol segment. Under highly inflationary accounting, the Sugar and Alcohol segment’s functional currency became the U.S. dollar, and its income statement and balance sheet are measured in U.S. dollars using both current and historical rates of exchange. The effect of changes in exchange rates on peso-denominated monetary assets and liabilities are reflected in foreign currency gains (losses), net. For the years ended December 31, 2020, 2019 and 2018, Seaboard recognized $1 million, $(3) million and $9 million, respectively, in foreign currency gains (losses) related to the adoption of highly inflationary accounting as a result of its net monetary liability position.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, management considers all demand deposits, overnight investments and other investments with original maturities less than three months as cash equivalents.
33
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Supplemental Cash Flow Information
The amounts paid for interest and income taxes are as follows:
Years ended December 31,
Interest, net of interest capitalized $ 16 $ 36 $ 43
Income taxes, net of refunds 55 31 35
The following table includes supplemental cash and non-cash information related to leases. Seaboard reports the amortization of right of use (“ROU”) assets and changes in operating lease liabilities in other liabilities, exclusive of debt in the consolidated statements of cash flows.
Twelve months ended
December 31,
(Millions of dollars) 2020 2019
Operating cash flows from operating leases $ 142 $ 137
Operating cash flows from finance leases 4 1
Financing cash flows from finance leases 7 2
Other non-cash activities were related to the non-cash consideration paid in the acquisitions discussed further in Note 2, including incurrence of debt and contingent consideration, and capital expenditures of $7 million included in accounts payable.
Short-Term Investments
Short-term investments are categorized as trading securities and reported at their estimated fair value with any unrealized gains and losses included in other investment income (loss), net in the consolidated statements of comprehensive income. Purchases and sales are recorded on a settlement date basis, and gains and losses on investment sales are generally based on the specific identification method. Short-term investments are retained for future use in the business.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and generally do not bear interest. The Power segment, however, collects interest on certain past due accounts, and the CT&M segment provides extended payment terms for certain customers in certain countries due to local market conditions.
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, 2020 and 2019, Seaboard had gross foreign receivables of approximately $410 million and $390 million, respectively, which generally represent more of a collection risk than the domestic receivables, although as of December 31, 2020 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.
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SEABOARD CORPORATION
Notes to Consolidated Financial Statements
The activity within the allowance for credit losses was as follows:
Balance at Transition Balance at
Allowance for Credit Losses:
Year Ended December 31, 2020 $ 28 3 — (3) $ 28
Year Ended December 31, 2018 $ 29 — 7 (3) $ 33
(a) Adjustment made upon adoption of new guidance to retained earnings.
(b) Provision amounts are charged to selling, general and administrative expenses.
(c) 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 monitors the credit quality of notes receivable, the majority of which are from its affiliates, using the current expected credit loss model as well. For notes receivable from affiliates, Seaboard obtains and reviews financial information monthly and Seaboard representatives serve on their Board of Directors.
The activity within the allowance for notes receivable was as follows:
Balance at Balance at
Allowance for Notes Receivable:
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 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. During the fourth quarter of 2020, Seaboard elected to change its method of accounting for valuing hogs, fresh pork and other inventories in the Pork segment from the LIFO method to the FIFO method, with all prior periods adjusted to apply the new method. See the Change in Accounting Principle section above for further discussion.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are being depreciated on the straight-line method over useful lives, 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 a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which 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
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. As Seaboard’s leases do not have readily determinable implicit discount rates, Seaboard adjusts its incremental borrowing rate to determine the present value
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SEABOARD CORPORATION
Notes to Consolidated Financial Statements
of the lease payments. Seaboard determines the incremental borrowing rate for its leases by adjusting the local risk-free interest rate on its Term Loan due 2028 with a credit risk premium corresponded to Seaboard’s unreported credit rating. Seaboard has elected not to recognize ROU assets and lease liabilities for short-term leases for all classes of underlying assets. Short-term leases are leases with terms greater than 1 month, but less than 12 months. Also, Seaboard elected to account for lease and non-lease maintenance components as a single lease component for all classes of underlying assets.
Equity Method Investments
Investments in non-controlled affiliates where we have significant influence are accounted for by the equity method. For the CT&M segment, these investments 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, the fair value of the equity method investments is evaluated by management. The fair value of these investments is not readily determinable as almost all of these investments are not publicly traded. Management will use other methods to determine fair value such as estimated future cash flows, including assumptions on growth rates, for the business and consideration of other local business conditions as applicable.
Goodwill and Other Intangible Assets
Goodwill is assessed annually for impairment by each reporting unit at the quarter end closest to the anniversary date of the initial acquisition, or more frequently if circumstances indicate that impairment is likely. Any one event or a combination of events such as change in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, could require an interim assessment prior to the next required annual assessment. If qualitative factors indicate more likely than not an impairment is possible, Seaboard performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and would recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Based on the annual qualitative assessments conducted by these reporting units, there were no impairment charges recorded for the year ended December 31, 2020.
The changes in the carrying amount of goodwill were as follows:
Pork CT&M
(Millions of dollars) Segment Segment Total
Acquisition — 1 1
Foreign currency translation — (4) (4)
Foreign currency translation — 4 4
Other adjustments — (1) (1)
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 for both the years ended December 31, 2020 and 2019. Using the exchange rates in effect at year-end, estimated amortization of intangible assets as of December 31, 2020 was $8 million each year for the next five years and $14 million thereafter.
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SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Accrued Self-Insurance
Seaboard is self-insured for certain levels of workers’ compensation, health care coverage, property damage, vehicle, product recall and general liability. The cost of these self-insurance programs is accrued based upon estimated settlements for known and anticipated claims. Changes in estimates to previously recorded reserves are reflected in current operating results.
Asset Retirement Obligation
Seaboard has recorded long-lived assets and a related liability for the asset retirement obligation costs associated with the closure of the hog lagoons it is legally obligated to close in the future should Seaboard cease operations or plan to close such lagoons voluntarily in accordance with a changed operating plan. Based on detailed assessments and appraisals obtained to estimate the future asset retirement obligation costs, Seaboard recorded the present value of the projected costs in non-current other liabilities in the consolidated balance sheets with the retirement asset depreciated over the economic life of the related asset. The following table shows the changes in the asset retirement obligation:
Years ended December 31,
Beginning balance $ 25 $ 23
Accretion expense 2 2
Ending balance $ 27 $ 25
Revenue Recognition
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. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. 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. 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 does not disclose the value of unsatisfied performance obligations for: (i) contracts with an original expected length of one year or less; and (ii) contracts for which revenue is recognized at the amount to which it has the right to invoice for services performed. Also, Seaboard recognizes a financing component only on obligations that extend longer than one year.
Derivative Instruments and Hedging Activities
Seaboard recognizes all derivatives as either assets or liabilities at their fair values. Accounting for changes in the fair value of a derivative depends on its designation and effectiveness. Derivatives qualify for treatment as hedges for accounting purposes when there is a high correlation between the change in fair value of the instrument and the related change in value of the underlying commitment. Additionally, in order to designate a derivative financial instrument as a hedge for accounting purposes, extensive record keeping is required. For derivatives that qualify as hedges for accounting purposes, the change in fair value has no net impact on earnings, to the extent the derivative is considered effective, until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments for accounting purposes, or for the ineffective portion of a hedging instrument, the change in fair value affects current period net earnings.
Seaboard uses derivative instruments to manage various types of market risks, including primarily commodity futures and option contracts, foreign currency exchange agreements, interest rate exchange agreements and equity future contracts. While management believes each of these instruments are primarily entered into in order to effectively manage various market risks, as of December 31, 2020, none of the derivatives were designated and accounted for as hedges, primarily as a result of the extensive record-keeping requirements. From time to time, Seaboard also enters into speculative derivative transactions not directly related to its raw materials requirements.
37
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Research and Development
Seaboard conducts continuous research and development activities to develop new products and to improve existing products and processes. Seaboard incurred research and development expenses of $134 million, $143 million and $77 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Income Taxes
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.
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 Adopted
On January 1, 2020, Seaboard adopted guidance which requires the use of a new current expected credit loss model in order to determine the allowance for credit losses with respect to receivables, among other financial instruments. This model estimates the lifetime of expected credit loss and replaces the existing incurred loss model. As a result of this adoption, Seaboard recorded a cumulative-effect adjustment of $3 million on January 1, 2020 that decreased retained earnings and increased the allowance for credit losses. See the Accounts Receivable section above for additional details related to the adoption of this new accounting standard.
On January 1, 2019, Seaboard adopted guidance which requires the recognition of ROU assets and lease liabilities for most leases. As a result of this adoption, Seaboard recorded operating lease ROU assets of $460 million, adjusted for the deferred rent liability balance as of December 31, 2018, and lease liabilities of $498 million. The adoption of the new guidance did not have a material impact on the consolidated statement of comprehensive income and the consolidated statement of cash flows. The accounting for finance leases, formerly called capital leases, remained substantially unchanged. Seaboard adopted the new guidance using the effective date method and, therefore, prior period financials were not revised. Seaboard elected the package of practical expedients available upon transition, which permitted Seaboard to not reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. See Note 6 for additional details on leases.
On January 1, 2018, Seaboard adopted guidance that eliminated cost method accounting and requires measuring equity investments, other than those accounted for using the equity method of accounting, at fair value and recognizing fair value changes in net income if a readily determinable fair value exists. On January 1, 2018, $7 million of accumulated other comprehensive loss was reclassified to retained earnings by means of a cumulative effect adjustment, and all future gains/losses on these equity investments is reflected in other investment income (loss), net.
Note 2 - Acquisitions
In November 2020, Seaboard’s Pork segment purchased substantially all of the operating assets of Hitch Pork Producers, Inc., a hog production company that previously supplied hogs to the Guymon plant. The purchase price of $27 million included $23 million in hog farms and related assets and $4 million in inventories.
On October 28, 2019, Seaboard’s CT&M segment increased its ownership percentage from 50% to 100% to obtain control of Seaboard Overseas Peru S.A., formerly known as ContiLatin del Peru S.A., an importer and trader of grains in Peru. Seaboard accounted for this transaction as a business combination achieved in stages. Total consideration for the purchase price included $7 million of cash paid, net of $2 million cash acquired, Seaboard’s previously held equity interest was remeasured at its acquisition-date fair value of $9 million and pre-existing affiliate trade receivables fair valued at the acquisition date of $13 million.
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SEABOARD CORPORATION
Notes to Consolidated Financial Statements
The following table summarizes the purchase price allocation resulting from this consolidation:
(Millions of dollars)
Receivables $ 33
Inventories 55
Other current assets 7
Property, plant and equipment 12
Intangible assets 1
Total fair value of assets acquired 108
Lines of credit (65)
Current maturities of long-term debt (2)
Other current liabilities (6)
Long-term debt, less current maturities (6)
Total fair value of liabilities assumed (79)
Net fair value of assets acquired $ 29
On January 5, 2018, Seaboard’s CT&M segment acquired substantially all of the outstanding common shares of Borisniak Corp., Les Grands Moulins d’Abidjan, Les Grands Moulins de Dakar, Eurafrique, and Societe Mediterraneenne de Transport, collectively operating as Groupe Mimran (“Mimran”). Mimran operates three flour mills and an associated grain trading business located in Senegal, Ivory Coast and Monaco. This acquisition increased Seaboard’s flour and feed milling capacity and annual grain trading volume.
The total purchase price for this acquisition based on the acquisition date fair values and using the exchange rate in effect at the time of acquisition, was $324 million consisting of:
(Millions of dollars)
Cash payment, net of $64 million of cash acquired $ 264
Euro-denominated note payable due 2021, 3.25% interest 46
Contingent consideration 14
Total fair value of consideration at acquisition date $ 324
The fair value of the contingent consideration, classified in other non-current liabilities in the consolidated balance sheet, is dependent on the probability of Mimran achieving certain financial performance targets using earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a metric. The contingent consideration ranges between zero and $48 million payable between five and eight years following the closing, at the discretion of the sellers. The note payable and the contingent consideration are noncash transactions that were excluded from the consolidated statement of cash flows for the year ended December 31, 2018.
The following table summarizes the purchase price allocation resulting from this acquisition:
(Millions of dollars)
Current assets $ 83
Property, plant and equipment 91
Intangible assets 78
Goodwill 148
Other long-term assets 4
Total fair value of assets acquired 404