Quarterly Report (10-q)

Date : 07/31/2019 @ 9:25PM
Source : Edgar (US Regulatory)
Stock : Seaboard Corp (SEB)
Quote : 3029.98  48.98 (1.64%) @ 10:19PM
After Hours
Last Trade
Last $ 3,010.00 ▼ -19.98 (-0.66%)

Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM  10-Q

(Mark One)

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2019

OR

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________________ to ____________________________________

Commission File Number:  1-3390

Seaboard Corporation

(Exact name of registrant as specified in its charter)

Delaware

04-2260388

(State or other jurisdiction of incorporation)

(I.R.S. Employer Identification No.)

9000 West 67th Street , Merriam , Kansas

66202

(Address of principal executive offices)

(Zip Code)

( 913 ) 676-8800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock $1.00 Par Value

SEB

NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation  S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No   .

There were 1,165,309 shares of common stock, $1.00 par value per share, outstanding on July 24, 2019.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three Months Ended

Six Months Ended

June 29,

June 30,

June 29,

June 30,

(Millions of dollars except share and per share amounts)

2019

    

2018

    

2019

    

2018

 

Net sales:

Products (affiliate sales of $357, $343, $677 and $649)

$

1,513

$

1,382

$

2,758

$

2,673

Services (affiliate sales of $4, $3, $8 and $5)

 

275

 

278

 

544

 

542

Other

 

34

 

31

 

63

 

55

Total net sales

 

1,822

 

1,691

 

3,365

 

3,270

Cost of sales and operating expenses:

Products

 

1,422

 

1,309

 

2,652

 

2,454

Services

 

238

 

242

 

478

 

482

Other

 

26

 

24

 

49

 

46

Total cost of sales and operating expenses

 

1,686

 

1,575

 

3,179

 

2,982

Gross income

 

136

 

116

 

186

 

288

Selling, general and administrative expenses

 

83

 

84

 

167

 

159

Operating income

 

53

 

32

 

19

 

129

Other income (expense):

Interest expense

 

(12)

 

(11)

 

(18)

 

(19)

Interest income

 

8

 

3

 

15

 

6

Loss from affiliates

 

(16)

 

(16)

 

(34)

 

(22)

Other investment income (loss), net

 

37

 

12

 

150

 

(25)

Foreign currency gains (loss), net

 

(1)

 

(6)

 

2

 

(2)

Miscellaneous, net

 

 

(3)

 

 

(2)

Total other income (expense), net

 

16

 

(21)

 

115

 

(64)

Earnings before income taxes

 

69

 

11

 

134

 

65

Income tax expense

 

(11)

 

(4)

 

(19)

 

(26)

Net earnings

$

58

$

7

$

115

$

39

Less: Net loss attributable to noncontrolling interests

 

 

 

 

Net earnings attributable to Seaboard

$

58

$

7

$

115

$

39

Earnings per common share

$

50.13

$

6.28

$

98.92

$

33.03

Average number of shares outstanding

 

1,165,740

 

1,170,550

 

1,166,575

 

1,170,550

Other comprehensive loss, net of income tax benefit of $0, $1, $0 and $1:

Foreign currency translation adjustment

 

(9)

 

(17)

 

(11)

 

(27)

Unrecognized pension cost

 

3

 

(3)

 

6

 

(2)

Other comprehensive loss, net of tax

$

(6)

$

(20)

$

(5)

$

(29)

Comprehensive income (loss)

 

52

 

(13)

 

110

 

10

Less: Comprehensive loss attributable to noncontrolling interests

 

 

 

 

Comprehensive income (loss) attributable to Seaboard

$

52

$

(13)

$

110

$

10

See accompanying notes to condensed consolidated financial statements.

2

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

June 29,

December 31,

 

(Millions of dollars except share and per share amounts)

2019

    

2018

 

Assets

Current assets:

Cash and cash equivalents

$

110

$

194

Short-term investments

 

1,440

 

1,336

Receivables, net

 

546

 

551

Inventories

 

871

 

815

Other current assets

 

107

 

131

Total current assets

 

3,074

 

3,027

Property, plant and equipment, net

 

1,288

 

1,160

Operating lease right of use assets, net

453

Investments in and advances to affiliates

 

783

 

804

Goodwill

 

165

 

167

Other non-current assets

 

138

 

149

Total assets

$

5,901

$

5,307

Liabilities and Stockholders’ Equity

Current liabilities:

Notes payable to banks

$

160

$

148

Current maturities of long-term debt

 

54

 

39

Accounts payable

 

262

 

238

Deferred revenue

37

39

Deferred revenue from affiliates

28

31

Operating lease liabilities

98

Other current liabilities

 

266

 

289

Total current liabilities

 

905

 

784

Long-term debt, less current maturities

 

734

 

739

Long-term operating lease liabilities

391

Deferred income taxes

 

143

 

127

Long-term income tax liability

73

73

Other liabilities

 

236

 

255

Total non-current liabilities

 

1,577

 

1,194

Commitments and contingent liabilities

Stockholders’ equity:

Common stock of $1 par value. Authorized 1,250,000 shares; issued and outstanding 1,165,407 shares in 2019 and 1,169,217 shares in 2018

 

1

 

1

Accumulated other comprehensive loss

 

(415)

 

(410)

Retained earnings

 

3,823

 

3,727

Total Seaboard stockholders’ equity

 

3,409

 

3,318

Noncontrolling interests

 

10

 

11

Total equity

 

3,419

 

3,329

Total liabilities and stockholders’ equity

$

5,901

$

5,307

See accompanying notes to condensed consolidated financial statements.

3

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

 

June 29,

June 30,

(Millions of dollars)

2019

    

2018

 

Cash flows from operating activities:

Net earnings

$

115

$

39

Adjustments to reconcile net earnings to cash from operating activities:

Depreciation and amortization

 

68

 

67

Deferred income taxes

 

8

 

3

Loss from affiliates

 

34

 

22

Dividends received from affiliates

 

2

 

3

Other investment loss (income), net

 

(150)

 

25

Other, net

 

6

 

2

Changes in assets and liabilities, net of acquisitions:

Receivables, net of allowance

 

(3)

 

(10)

Inventories

 

(54)

 

(89)

Other assets

 

32

 

51

Other liabilities, exclusive of debt

 

(19)

 

(49)

Net cash from operating activities

 

39

 

64

Cash flows from investing activities:

Purchase of short-term investments

 

(733)

 

(336)

Proceeds from the sale of short-term investments

 

617

 

615

Proceeds from the maturity of short-term investments

 

164

 

21

Capital expenditures

 

(156)

 

(58)

Cash paid for acquisition of businesses

(270)

Investments in and advances to affiliates, net

 

(11)

 

(17)

Issuance of notes receivable

 

(6)

 

Principal payments received on notes receivable from affiliates

 

 

4

Purchase of long-term investments

 

(9)

 

(8)

Other, net

 

8

 

3

Net cash from investing activities

 

(126)

 

(46)

Cash flows from financing activities:

Notes payable to banks, net

 

13

 

(8)

Proceeds from long-term debt

 

31

 

Principal payments of long-term debt

 

(20)

 

(43)

Repurchase of common stock

 

(14)

 

Dividends paid

 

(5)

 

(4)

Other, net

 

(2)

 

Net cash from financing activities

 

3

 

(55)

Effect of exchange rate changes on cash and cash equivalents

 

 

Net change in cash and cash equivalents

 

(84)

 

(37)

Cash and cash equivalents at beginning of year

 

194

 

116

Cash and cash equivalents at end of period

$

110

$

79

See accompanying notes to condensed consolidated financial statements.

4

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

Accumulated

Other

Common

Comprehensive

Retained

Noncontrolling

(Millions of dollars)

Stock

Loss

Earnings

Interests

Total

Balances, December 31, 2017

$

1

$

(354)

$

3,750

$

11

$

3,408

Adoption of accounting guidance

(7)

7

Addition to noncontrolling interests

4

4

Comprehensive income:

Net earnings

32

32

Other comprehensive loss, net of tax

(9)

(9)

Dividends on common stock ($1.50/share)

(2)

(2)

Balances, March 31, 2018

$

1

$

(370)

$

3,787

$

15

$

3,433

Comprehensive income:

Net earnings

7

7

Other comprehensive loss, net of tax

(20)

(20)

Dividends on common stock ($1.50/share)

(2)

(2)

Balances, June 30, 2018

$

1

$

(390)

$

3,792

$

15

$

3,418

Balances, December 31, 2018

$

1

$

(410)

$

3,727

$

11

$

3,329

Reduction to noncontrolling interests

(1)

(1)

Comprehensive income:

Net earnings

57

57

Other comprehensive income, net of tax

1

1

Repurchase of common stock

(13)

(13)

Dividends on common stock ($2.25/share)

(3)

(3)

Balances, March 30, 2019

$

1

$

(409)

$

3,768

$

10

$

3,370

Comprehensive income:

Net earnings

58

58

Other comprehensive loss, net of tax

(6)

(6)

Repurchase of common stock

(1)

(1)

Dividends on common stock ($2.25/share)

(2)

(2)

Balances, June 29, 2019

$

1

$

(415)

$

3,823

$

10

$

3,419

See accompanying notes to condensed consolidated financial statements

5

SEABOARD CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1 – Accounting Policies and Basis of Presentation

The condensed consolidated financial statements include the accounts of Seaboard Corporation and its domestic and foreign subsidiaries (“Seaboard”). All significant intercompany balances and transactions have been eliminated in consolidation. Seaboard’s investments in non-consolidated affiliates are accounted for by the equity method. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of Seaboard for the year ended December 31, 2018 as filed in its annual report on Form 10-K. Seaboard’s first three quarterly periods include approximately 13 weekly periods ending on the Saturday closest to the end of March, June and September. Seaboard’s year-end is December 31.

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows. Except for new guidance adopted prospectively as discussed below, Seaboard has consistently applied all accounting policies as disclosed in the annual report on Form 10-K to all periods presented in these condensed consolidated financial statements. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year. As Seaboard conducts its commodity trading business with third parties, consolidated subsidiaries and non-consolidated affiliates on an interrelated basis, gross margin on non-consolidated 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 condensed consolidated financial statements in conformity with United States (“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 condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to allowance for doubtful accounts, valuation of inventories, impairment of long-lived assets, potential write-down related to investments in and advances to affiliates and notes receivable from affiliates, income taxes, lease liabilities and right of use (“ROU”) assets and accrued pension liability. Actual results could differ from those estimates.

Supplemental Cash Flow Information

Non-cash investing and financing activities included purchases of property, plant and equipment in accounts payable of $15 million and the impact upon adoption of the new leasing guidance further discussed below. During the six months ended June 29, 2019, $42 million and $19 million of leased assets were obtained in exchange for new operating and finance lease liabilities, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $66 million, all included in net cash from operating activities. Cash paid for amounts included in the measurement of finance lease liabilities was $1 million. Seaboard reports the amortization of the ROU asset and the change in the operating lease liabilities in other liabilities, exclusive of debt in the condensed consolidated statement of cash flows.

Goodwill and Other Intangible Assets

The change in the carrying amount of goodwill of $2 million from year-end to June 29, 2019 was related to foreign currency exchange differences within the Commodity Trading and Milling (“CT&M”) segment. As of June 29, 2019, intangible assets were $63 million, net of accumulated amortization of $11 million.

Recently Issued Accounting Standard Adopted

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 at year-end, and lease liabilities of $498 million. The adoption of the new guidance did not have a material impact on the condensed consolidated statement of comprehensive income and the condensed 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,

6

lease classification and initial direct costs. All of Seaboard’s equity method investments must adopt the new standard by December 31, 2020. See Note 4 for additional details on the impact of adopting this new accounting standard.

In June 2016, the Financial Accounting Standards Board issued guidance on the measurement of financial instrument credit losses that requires, among other things, the use of a new current expected credit loss ("CECL") model in order to determine the allowance for doubtful accounts with respect to accounts receivable and notes receivable. The CECL model requires estimation of lifetime expected credit loss based on historical experience, current conditions and reasonable supportable forecasts. The new guidance replaces the existing incurred loss model and will be effective for Seaboard on January 1, 2020. Seaboard is currently evaluating the impact of the new guidance on the consolidated financial statements.

Note 2 – Investments

The following is a summary of the estimated fair value of short-term investments classified as trading securities:

June 29,

December 31,

 

(Millions of dollars)

    

2019

2018

 

Domestic equity securities

$

689

$

632

Domestic debt securities

392

268

Foreign equity securities

 

195

 

218

High yield securities

57

19

Foreign debt securities

49

16

Collateralized loan obligations

27

28

Money market funds held in trading accounts

 

21

 

146

Term deposits

5

9

Other trading securities

5

Total trading short-term investments

$

1,440

$

1,336

The change in unrealized gains (losses) related to trading securities still held at the end of the respective reporting period was $38 million and $126 million for the three and six months ended June 29, 2019, respectively, and $(2) million and $(24) million for the three and six months ended June 30, 2018, respectively.

Seaboard had $59 million of equity securities denominated in foreign currencies as of June 29, 2019, with $29 million in euros, $11 million in Japanese yen, $9 million in British pounds, $4 million in Swiss francs and the remaining $6 million in various other currencies. As of December 31, 2018, Seaboard had $66 million of equity securities denominated in foreign currencies, with $25 million in euros, $20 million in Japanese yen, $9 million in British pounds, $3 million in Swiss francs and the remaining $9 million in various other currencies. Also, money market funds included less than $1 million and $10 million denominated in various foreign currencies as of June 29, 2019 and December 31, 2018, respectively. Term deposits are denominated in the West African franc.

Note 3 – Inventories

The following is a summary of inventories:

June 29,

December 31,

 

(Millions of dollars)

    

2019

    

2018

At lower of LIFO cost or market:

Hogs and materials

$

375

$

361

Fresh pork and materials

 

32

 

36

LIFO adjustment

 

(67)

 

(58)

Total inventories at lower of LIFO cost or market

 

340

 

339

At lower of FIFO cost and net realizable value:

Grains, oilseeds and other commodities

 

277

 

229

Sugar produced and in process

 

32

 

17

Other

 

63

 

81

Total inventories at lower of FIFO cost and net realizable value

 

372

 

327

Grain, flour and feed at lower of weighted average cost and net realizable value

 

159

 

149

 Total inventories

$

871

$

815

7

d

Note 4 – Leases

Seaboard’s operating leases are primarily for land, buildings, machinery and equipment, contract growers and vessels. Seaboard’s finance leases are primarily for contract growers. The Pork segment has contract grower agreements in place with farmers to raise a portion of Seaboard’s hogs using the farmer’s buildings, land and equipment. Seaboard’s Marine segment leases its PortMiami terminal, among other ports. The Marine and CT&M segments lease vessels for use in operations. Seaboard elected to account for lease and nonlease maintenance components as a single lease component for all classes of underlying assets. Seaboard’s nonlease components are primarily for services related to labor associated with caring for hogs in its contract grower agreements and crew services on vessel charter arrangements.

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 of June 29, 2019, the weighted average remaining lease term for Seaboard’s operating and finance leases was approximately 7 years and 9 years, respectively. Seaboard’s lease terms vary depending upon the class of asset and some leases include options to extend or terminate. Since Seaboard is not reasonably certain to exercise these renewal or termination options, the options are not considered in determining the lease term, and associated potential option payments or penalties are excluded from lease payments. 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.

The components of lease cost were as follows:

Three

Six

Months

Months

Ended

Ended

(Millions of dollars)

    

June 29, 2019

June 29, 2019

Operating lease cost

$

34

$

67

Finance lease cost:

Amortization of right of use assets

1

1

Interest on lease liabilities

Variable lease cost

1

4

Short-term lease cost

13

23

Total lease cost

$

49

$

95

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 event, activity or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are primarily for payments in excess of minimums with regards to throughput of containers at PortMiami. Short-term leases are primarily for containers and vessels at Seaboard’s Marine segment. Lease cost is included in various line items in the condensed consolidated statements of comprehensive income or capitalized to inventory. Rental expense for leases with terms of a month or less are excluded from the total lease cost above.

Seaboard’s operating lease assets and liabilities are reported separately in the condensed consolidated balance sheet. The classification of Seaboard’s finance leases in the condensed consolidated balance sheet as of June 29, 2019 was as follows:

Balance

Description

Balance Sheet Classification

(Millions of dollars)

Finance lease right of use assets, net

Property, plant and equipment, net

$

26

Finance lease liabilities

Other current liabilities

2

Non-current finance lease liabilities

Other liabilities

17

8

Maturities of lease liabilities as of June 29, 2019 were as follows:

Operating

Finance

(Millions of dollars)

    

Leases

Leases

    

Remainder of 2019

$

71

$

2

2020

113

 

3

2021

99

3

2022

74

3

2023

68

3

Thereafter

188

 

14

Total undiscounted lease payments

613

28

Less imputed interest

(124)

(9)

Total lease liability

$

489

$

19

Seaboard’s weighted average discount rate for operating and finances leases was 6.63% and 6.93%, respectively, as of June 29, 2019. There were estimates and judgements made in determining Seaboard’s multiple discount rates based on term, country and currency, including developing a secured credit rating and spreading market yield data across maturities and country risk-free rates.

Below is Seaboard’s commitments table as of December 31, 2018 that disclosed operating lease payments for the next five years and thereafter. Seaboard had no material capital leases as of December 31, 2018.

Years ended December 31,

 

(Millions of dollars)

    

2019

    

2020

    

2021

    

2022

    

2023

    

Thereafter

Ports

$

18

$

18

$

19

$

19

$

20

$

109

Vessel, time and voyage-charters

 

58

 

27

 

26

 

13

 

8

 

25

Contract grower agreements

47

 

41

 

37

 

27

 

18

 

61

Other operating lease payments

 

18

 

13

 

9

 

8

 

6

 

15

Total unrecognized non-cancelable commitments

$

141

$

99

$

91

$

67

$

52

$

210

Note 5 – Notes Payable, Long-Term Debt, Commitments and Contingencies

Notes Payable

Notes payable outstanding under uncommitted lines of credit was $160 million as of June 29, 2019, with $119 million denominated in South African rand, $20 million denominated in Canadian dollars, $14 million denominated in Zambian kwacha and $7 million denominated in Brazilian real. The weighted average interest rate for outstanding notes payable was 8.23% and 7.76% as of June 29, 2019 and December 31, 2018, respectively. The notes payable under the uncommitted lines of credit are unsecured and do not require compensating balances. Also, Seaboard has a $100 million committed credit line secured by certain short-term investments with no balance outstanding as of June 29, 2019. Seaboard’s borrowing capacity under its uncommitted and committed lines of credit was reduced by the outstanding balances and letters of credit totaling $18 million as of June 29, 2019.

Long-Term Debt

The following is a summary of long-term debt:

June 29,

December 31,

(Millions of dollars)

2019

2018

Term Loan due 2028

$

695

$

698

Foreign subsidiary obligations due 2019 through 2023

94

81

Total long-term debt at face value

789

779

Current maturities of long-term debt and unamortized discount and costs

(55)

(40)

Long-term debt, less current maturities and unamortized discount and costs

$

734

$

739

The interest rate on the Term Loan was 4.03% and 4.15% as of June 29, 2019 and December 31, 2018, respectively. The weighted average interest rate on Seaboard’s foreign subsidiary obligations was 3.91% and 3.80% June 29, 2019 and December 31, 2018, respectively. Seaboard was in compliance with all restrictive debt covenants relating to these agreements as of June 29, 2019.

9

Contingencies

On June 28, 2018, Wanda Duryea and eleven other indirect purchasers of pork products, acting on behalf of themselves and a putative class of indirect purchasers of pork products, filed a class action complaint in the U.S. District Court for the District of Minnesota against several pork processors, including Seaboard Foods LLC and Agri Stats, Inc., a company described in the complaint as a data sharing service. Subsequent to the filing of this initial complaint, additional class action complaints making similar claims on behalf of putative classes of direct and indirect purchasers were filed in the U.S. District Court for the District of Minnesota. The complaints allege, among other things, that beginning in January 2009, the defendants conspired and combined to fix, raise, maintain, and stabilize the price of pork products in violation of U.S. antitrust laws by coordinating their output and limiting production, allegedly facilitated by the exchange of non-public information about prices, capacity, sales volume and demand through Agri Stats, Inc. The complaints on behalf of the putative classes of indirect purchasers also include causes of action under various state laws, including state antitrust laws, unfair competition laws, consumer protection statutes, and state common law claims for unjust enrichment. The complaints also allege that the defendants concealed this conduct from the plaintiffs and the members of the putative classes. The relief sought in the respective complaints includes treble damages, injunctive relief, pre- and post-judgment interest, costs, and attorneys’ fees on behalf of the putative classes. The complaints were amended and consolidated, and the cases are now organized into three consolidated putative class actions brought on behalf of (a) direct purchasers, (b) consumer indirect purchasers, and (c) commercial and institutional indirect purchasers.  The amended complaints named Seaboard Corporation as an additional defendant. On July 9, 2019, the Commonwealth of Puerto Rico filed a similar class action complaint against Seaboard Foods LLC and Seaboard Corporation in the U.S. District Court of Puerto Rico making essentially the same contentions as set forth in the cases filed in the U.S. District Court for the District of Minnesota, but also contending violation of Puerto Rican antitrust laws. Seaboard intends to defend these cases vigorously. It is impossible at this stage either to determine the probability of a favorable or unfavorable outcome resulting from these suits, or to estimate the amount of potential loss, if any, resulting from the suits.

On March 20, 2018, the bankruptcy trustee (the “Trustee”) for Cereoil Uruguay S.A. (“Cereoil”) filed a suit in the Bankruptcy Court of First Instance in Uruguay that was served during the second quarter naming as parties Seaboard and Seaboard’s subsidiaries, Seaboard Overseas Limited (“SOL”) and Seaboard Uruguay Holdings Ltd. (“Seaboard Uruguay”). Seaboard has a 45% indirect ownership of Cereoil. The suit seeks an order requiring Seaboard, SOL, and Seaboard Uruguay to reimburse Cereoil the amount of $22 million, contending that deliveries of soybeans to SOL pursuant to purchase agreements should be set aside as fraudulent conveyances. Seaboard intends to defend this case vigorously. It is impossible at this stage to determine the probability of a favorable or unfavorable outcome resulting from this suit. In the event of an adverse ruling, Seaboard and its two subsidiaries could be ordered to pay the amount of $22 million. Any award in this case would offset against any award in the additional case described below filed by the Trustee on April 27, 2018.

On April 27, 2018, the Trustee for Cereoil filed another suit in the Bankruptcy Court of First Instance in Uruguay that was served during the second quarter naming as parties Seaboard, SOL, Seaboard Uruguay, all directors of Cereoil, including two individuals employed by Seaboard who served as directors at the behest of Seaboard, and the Chief Financial Officer of Cereoil, an employee of Seaboard who also served at the behest of Seaboard (collectively, the “Cereoil Defendants”). The Trustee contends that the Cereoil Defendants acted with willful misconduct to cause Cereoil’s insolvency, and thus should be ordered to pay all liabilities of Cereoil, net of assets. The bankruptcy filing lists total liabilities of $53 million and assets of $30 million. Seaboard intends to defend this case vigorously. It is impossible at this stage to determine the probability of a favorable or unfavorable outcome resulting from this suit. In the event of an adverse ruling, Seaboard and the other Cereoil Defendants could be ordered to pay the amount of the net indebtedness of Cereoil, which based on the bankruptcy schedules would total $23 million. It is possible that the net indebtedness could be higher than this amount if Cereoil’s liabilities are greater than $53 million and/or Cereoil’s assets are worth less than $30 million. In addition, in the event of an adverse ruling, the Bankruptcy Court of First Instance could order payment of the Trustee’s professional fees, interest, and other expenses. Any award in this case would offset against any award in the case described above filed on March 20, 2018.

On May 15, 2018, the Trustee for Nolston S.A. (“Nolston”) filed a suit in the Bankruptcy Court of First Instance in Uruguay that was served during the second quarter naming as parties Seaboard and the other Cereoil Defendants. Seaboard has a 45% indirect ownership of Nolston. The Trustee contends that the Cereoil Defendants acted with willful misconduct to cause Nolston’s insolvency, and thus should be ordered to pay all liabilities of Nolston, net of assets. The bankruptcy filing lists total liabilities of $29 million and assets of $15 million. Seaboard intends to defend this case vigorously. It is impossible at this stage to determine the probability of a favorable or unfavorable outcome resulting from this suit. In the

10

event of an adverse ruling, Seaboard and the other Cereoil Defendants could be ordered to pay the amount of the net indebtedness of Nolston, which based on the bankruptcy schedules would total $14 million. It is possible that the net indebtedness could be higher than this amount if Nolston’s liabilities are greater than $29 million and/or Nolston’s assets are worth less than $15 million. In addition, in the event of an adverse ruling, the Bankruptcy Court of First Instance could order payment of the Trustee’s professional fees, interest, and other expenses.

On September 18, 2014, and subsequently in 2015 and 2016, Seaboard received a number of grand jury subpoenas and informal requests for information from the Department of Justice, Asset Forfeiture and Money Laundering Section (“AFMLS”), seeking records related to specified foreign companies and individuals. The companies and individuals as to which the requested records relate were not affiliated with Seaboard, although Seaboard has also received subpoenas and requests for additional information relating to an affiliate of Seaboard. During 2017, Seaboard received grand jury subpoenas requesting documents and information related to money transfers and bank accounts in the Democratic Republic of Congo (“DRC”) and other African countries and requests to interview certain Seaboard employees and to obtain testimony before a grand jury. Seaboard has retained outside counsel and is cooperating with the government’s investigation. It is impossible at this stage either to determine the probability of a favorable or unfavorable outcome or to estimate the amount of potential loss, if any, resulting from the government’s inquiry.

Seaboard is subject to various administrative and judicial proceedings and other legal matters related to the normal conduct of its business. In the opinion of management, the ultimate resolution of these items is not expected to have a material adverse effect on the condensed consolidated financial statements of Seaboard.

Guarantees

Certain of the non-consolidated affiliates and third-party contractors who perform services for Seaboard have bank debt supporting their underlying operations. From time to time, Seaboard will provide guarantees of that debt in order to further Seaboard’s business objectives. Seaboard does not issue guarantees of third parties for compensation. As of June 29, 2019, guarantees outstanding to affiliates and third parties were not material. Seaboard has not accrued a liability for any of the affiliate or third-party guarantees as management considers the likelihood of loss to be remote. See Notes Payable above for discussion of letters of credit.

Note 6 – Employee Benefits

Seaboard has a defined benefit pension plan for certain domestic salaried and clerical employees. At this time, no contributions are expected to be made to the plan in 2019. Seaboard also sponsors non-qualified, unfunded supplemental executive plans, and has individual, non-qualified, unfunded supplemental retirement agreements for certain retired employees. Management has no plans to provide funding for these supplemental plans in advance of when the benefits are paid.

The net periodic benefit cost for all of these plans was as follows:

Three Months Ended

Six Months Ended

June 29,

June 30,

June 29,

June 30,

 

(Millions of dollars)

    

2019

    

2018

    

2019

    

2018

 

Components of net periodic benefit cost:

Service cost

$

2

$

2

$

4

$

5

Interest cost

 

3

 

2

 

6

 

5

Expected return on plan assets

 

(3)

 

(2)

 

(5)

 

(5)

Amortization and other

 

3

 

2

 

4

 

3

Net periodic benefit cost

$

5

$

4

$

9

$

8

Seaboard participates in a multi-employer pension fund, the United Food and Commercial Workers International Union-Industry Pension Fund (the “Fund”). Pursuant to a collective bargaining agreement, Seaboard made contributions to the Fund based on hours worked by certain union employees who are participants in the Fund. Effective July 22, 2019, after ratification of a renewed collective bargaining agreement, Seaboard ceased contributing to the Fund, which will result in the termination of participation in the Fund. Seaboard will record an estimated $14 million withdrawal liability during the third quarter of 2019, that will be payable in quarterly installments over 20 years, beginning in the second half of 2020.

11

Note 7 – Derivatives and Fair Value of Financial Instruments

The following tables shows assets and liabilities measured at fair value on a recurring basis as of June 29, 2019 and December 31, 2018, and also the level within the fair value hierarchy used to measure each category of assets and liabilities. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

    

Balance

    

    

    

 

June 29,

 

(Millions of dollars)

2019

Level 1

Level 2

Level 3

 

Assets:

Trading securities – short-term investments:

Domestic equity securities

$

689

$

689

$

$

Domestic debt securities

 

392

 

115

 

277

 

Foreign equity securities

195

195

High yield securities

57

10

47

Foreign debt securities

49

2

47

Collateralized loan obligations

 

27

 

27

Money market funds held in trading accounts

21

21

Term deposits

5

5

Other trading securities

5

5

Trading securities – other current assets:

Domestic equity securities

 

36

 

36

 

 

Money market fund held in trading accounts

2

2

 

 

Foreign equity securities

 

2

 

2

 

 

Fixed income securities

 

2

 

2

 

 

Other

 

2

 

1

 

1

 

Derivatives:

Commodities (1)

 

8

 

8

 

 

Foreign currencies

 

1

 

 

1

 

Total Assets

$

1,493

$

1,093

$

400

$

Liabilities:

Contingent consideration

$

13

$

$

$

13

Derivatives:

Commodities (1)

6

6

Total Liabilities

$

19

$

6

$

$

13

(1) Seaboard’s commodity derivative assets and liabilities are presented in the condensed consolidated balance sheets on a net basis, including netting the derivatives with the related margin accounts. As of June 29, 2019, the commodity derivatives had a margin account balance of $11 million resulting in a net other current asset in the condensed consolidated balance sheet of $13 million.

12

    

Balance

    

    

    

 

December 31,

 

(Millions of dollars)

2018

Level 1

Level 2

Level 3

 

Assets:

Trading securities – short-term investments:

Domestic equity securities

$

632

$

632

$

$

Domestic debt securities

268

215

53

Foreign equity securities

218

218

Money market funds held in trading accounts

 

146

 

146

 

 

Collateralized loan obligations

28

28

High yield securities

19

7

12

Foreign debt securities

16

2

14

Term deposits

9

9

Other trading securities

 

5

 

5

 

 

Trading securities – other current assets:

Domestic equity securities

 

32

 

32

 

 

Money market fund held in trading accounts

5

5

 

Foreign equity securities

 

3

 

3

 

 

Fixed income securities

 

3

 

3

 

 

Other

 

1

 

1

 

 

Derivatives:

Commodities (1)

 

6

 

4

 

2

 

Foreign currencies

 

2

 

 

2

 

Total Assets

$

1,393

$

1,282

$

111

$

Liabilities:

Trading securities – short-term investments:

Other trading securities

$

5

$

$

5

$

Contingent consideration

13

13

Derivatives:

Commodities (1)

4

$

4

$

$

Total Liabilities

$

22

$

4

$

5

$

13

(1) Seaboard’s commodity derivative assets and liabilities are presented in the condensed consolidated balance sheets on a net basis, including netting the derivatives with the related margin accounts. As of December 31, 2018, the commodity derivatives had a margin account balance of $15 million resulting in a net other current asset in the condensed consolidated balance sheet of $17 million.

Financial instruments consisting of cash and cash equivalents, net receivables, notes payable, and accounts payable are carried at cost, which approximates fair value as a result of the short-term nature of the instruments. The fair value of short-term investments is measured using multiple levels. Domestic debt securities categorized as level 1 in the fair value hierarchy include debt securities held in mutual funds and ETFs. Domestic debt securities categorized as level 2 include corporate bonds, mortgage-backed securities, asset-backed securities and U.S. Treasuries. Foreign debt securities categorized as level 1 in the fair value hierarchy include debt securities held in mutual funds and ETFs with a country of origin concentration outside the U.S. Foreign debt securities categorized as level 2 include foreign government or government related securities and asset-backed securities with a country of origin concentration outside the U.S. High yield securities categorized as level 1 in the fair value hierarchy include high yield securities held in mutual funds and ETFs, and level 2 includes corporate bonds and bank loans.

13

The fair value of long-term debt is estimated by comparing interest rates for debt with similar terms and maturities. As Seaboard’s long-term debt is mostly variable-rate, the carrying amount approximates fair value. If Seaboard’s long-term debt was measured at fair value in its condensed consolidated balance sheets, it would have been classified as level 2 in the fair value hierarchy. The fair value of Seaboard’s contingent consideration related to a 2018 acquisition was classified as a level 3 in the fair value hierarchy since the calculation is dependent upon projected company specific inputs using a Monte Carlo simulation. Seaboard will remeasure the estimated fair value of the contingent consideration liability until settled.

While management believes its derivatives 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 types of transactions as hedges for accounting purposes. As the derivatives discussed below are not accounted for as hedges, fluctuations in the related commodity prices, foreign currency exchange rates and equity prices could have a material impact on earnings in any given reporting period. The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2018.

Commodity Instruments

Seaboard uses various derivative futures and options to manage its risk of price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. As of June 29, 2019, Seaboard had open net derivative contracts to purchase 21 million bushels of grain and 11 million pounds of hogs and open net derivative contracts to sell 46 million pounds of soybean oil and 4 million gallons of heating oil. As of December 31, 2018, Seaboard had open net derivative contracts to purchase 33 million bushels of grain and 8 million pounds of soybean oil and open net derivative contracts to sell 26 million pounds of hogs and 7 million gallons of heating oil. Commodity derivatives are recorded at fair value with any changes in fair value being marked-to-market as a component of cost of sales in the condensed consolidated statements of comprehensive income.

Foreign Currency Exchange Agreements

Seaboard enters into foreign currency exchange agreements to manage the foreign currency exchange rate risk with respect to certain transactions denominated in foreign currencies. Foreign currency exchange agreements that are primarily related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of cost of sales in the condensed consolidated statements of comprehensive income. Foreign currency exchange agreements that are not related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of foreign currency gains (losses), net in the condensed consolidated statements of comprehensive income. As of June 29, 2019 and December 31, 2018, Seaboard had trading foreign currency exchange agreements to cover a portion of its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $66 million and $82 million, respectively, primarily related to the South African rand and euro. From time to time, Seaboard is subject to counterparty credit risk related to its foreign currency exchange agreements should the counterparties fail to perform according to the terms of the applicable agreements. As of June 29, 2019, Seaboard had a maximum amount of loss due to credit risk of $1 million with five counterparties related to foreign currency exchange agreements. Seaboard does not hold any collateral related to these agreements.

Equity Futures Contracts

Seaboard enters into equity futures contracts to manage the equity price risk with respect to certain short-term investments. Equity futures contracts are recorded at fair value with changes in value marked-to-market as a component of other investment income (loss), net in the condensed consolidated statements of comprehensive income. The notional amounts of these equity futures contracts were less than $1 million and $97 million as of June 29, 2019 and December 31, 2018, respectively.

The following table provides the amount of gain or (loss) recognized in income for each type of derivative and where it was recognized in the condensed consolidated statements of comprehensive income: