10-Q 1 seb-20180331x10q.htm SEABOARD CORPORATION 10-Q DATED MARCH 31, 2018 seb_Current folioQ1_10Q

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 March 31, 2018

 

OR

 

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

 

For the transition period from __________________________ to __________________________

 

Seaboard Corporation

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

 

1-3390

 

04-2260388

(State or other jurisdiction of

 

(Commission

 

(I.R.S. Employer

incorporation)

 

File Number)

 

Identification No.)

 

 

 

 

 

9000 West 67th Street, Merriam, Kansas

 

66202

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code    (913) 676-8800

Not Applicable

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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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   ☐ (Do not check if a smaller reporting company)

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 1,170,550 shares of common stock, $1.00 par value per share, outstanding on April 27, 2018.

 

1


 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

April 1,

 

(Millions of dollars except share and per share amounts)

2018

    

2017

 

Net sales:

 

 

 

 

 

 

Products (includes affiliate sales of $306 and $259)

$

1,291

 

$

1,125

 

Services (includes affiliate sales of $2 and $2)

 

264

 

 

249

 

Other

 

24

 

 

25

 

Total net sales

 

1,579

 

 

1,399

 

Cost of sales and operating expenses:

 

 

 

 

 

 

Products

 

1,145

 

 

1,022

 

Services

 

240

 

 

219

 

Other

 

22

 

 

20

 

Total cost of sales and operating expenses

 

1,407

 

 

1,261

 

Gross income

 

172

 

 

138

 

Selling, general and administrative expenses

 

75

 

 

70

 

Operating income

 

97

 

 

68

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

(8)

 

 

(3)

 

Interest income

 

 2

 

 

 2

 

Interest income from affiliates

 

 1

 

 

 6

 

Income (loss) from affiliates

 

(6)

 

 

 1

 

Other investment income (loss), net

 

(37)

 

 

37

 

Foreign currency gains, net

 

 4

 

 

 3

 

Miscellaneous, net

 

 1

 

 

(2)

 

Total other income (loss), net

 

(43)

 

 

44

 

Earnings before income taxes

 

54

 

 

112

 

Income tax expense

 

(22)

 

 

(28)

 

Net earnings

$

32

 

$

84

 

Less: Net loss attributable to noncontrolling interests

 

 —

 

 

 1

 

Net earnings attributable to Seaboard

$

32

 

$

85

 

 

 

 

 

 

 

 

Earnings per common share

$

26.75

 

$

71.84

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of income tax expense of $0 and $(1):

 

 

 

 

 

 

Foreign currency translation adjustment

 

(10)

 

 

(2)

 

Unrealized gain on investments

 

 —

 

 

 1

 

Unrecognized pension cost

 

 1

 

 

 1

 

Other comprehensive loss, net of tax

$

(9)

 

$

 —

 

Comprehensive income

 

23

 

 

84

 

Less: Comprehensive loss attributable to noncontrolling interests

 

 —

 

 

 1

 

Comprehensive income attributable to Seaboard

$

23

 

$

85

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

1,170,550

 

 

1,170,550

 

 

 

 

 

 

 

 

Dividends declared per common share

$

1.50

 

$

1.50

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(Millions of dollars except share and per share amounts)

2018

    

2017

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

100

 

$

116

 

Short-term investments

 

1,264

 

 

1,576

 

Receivables, net

 

608

 

 

482

 

Inventories

 

797

 

 

780

 

Other current assets

 

134

 

 

174

 

Total current assets

 

2,903

 

 

3,128

 

Net property, plant and equipment

 

1,126

 

 

1,077

 

Investments in and advances to affiliates

 

866

 

 

851

 

Other non-current assets

 

360

 

 

105

 

Total assets

$

5,255

 

$

5,161

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Notes payable to banks

$

198

 

$

162

 

Current maturities of long-term debt

 

23

 

 

53

 

Accounts payable

 

221

 

 

272

 

Deferred revenue

 

75

 

 

81

 

Other current liabilities

 

270

 

 

250

 

Total current liabilities

 

787

 

 

818

 

Long-term debt, less current maturities

 

522

 

 

482

 

Deferred income taxes

 

150

 

 

112

 

Long-term income tax liability

 

111

 

 

111

 

Other liabilities

 

252

 

 

230

 

Total non-current liabilities

 

1,035

 

 

935

 

Commitments and contingent liabilities

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock of $1 par value. Authorized 1,250,000 shares; issued and outstanding 1,170,550 shares

 

 1

 

 

 1

 

Accumulated other comprehensive loss

 

(370)

 

 

(354)

 

Retained earnings

 

3,787

 

 

3,750

 

Total Seaboard stockholders’ equity

 

3,418

 

 

3,397

 

Noncontrolling interests

 

15

 

 

11

 

Total equity

 

3,433

 

 

3,408

 

Total liabilities and stockholders’ equity

$

5,255

 

$

5,161

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

April 1,

 

(Millions of dollars)

2018

    

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

$

32

 

$

84

 

Adjustments to reconcile net earnings to cash from operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

32

 

 

27

 

Deferred income taxes

 

 7

 

 

10

 

Loss (income) from affiliates

 

 6

 

 

(1)

 

Dividends received from affiliates

 

 2

 

 

12

 

Other investment loss (income), net

 

37

 

 

(37)

 

Other, net

 

(1)

 

 

(2)

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

Receivables, net of allowance

 

(88)

 

 

29

 

Inventories

 

 2

 

 

(78)

 

Other current assets

 

42

 

 

(2)

 

Current liabilities, exclusive of debt

 

(67)

 

 

(53)

 

Other, net

 

 4

 

 

 5

 

Net cash from operating activities

 

 8

 

 

(6)

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchase of short-term investments

 

(254)

 

 

(191)

 

Proceeds from the sale of short-term investments

 

537

 

 

198

 

Proceeds from the maturity of short-term investments

 

 9

 

 

25

 

Capital expenditures

 

(36)

 

 

(36)

 

Cash paid for acquisition of businesses

 

(270)

 

 

(14)

 

Investments in and advances to affiliates, net

 

(17)

 

 

(25)

 

Principal payments received on notes receivable from affiliates

 

 4

 

 

 —

 

Purchase of long-term investments

 

(3)

 

 

(2)

 

Other, net

 

 1

 

 

 —

 

Net cash from investing activities

 

(29)

 

 

(45)

 

Cash flows from financing activities:

 

 

 

 

 

 

Notes payable to banks, net

 

39

 

 

21

 

Proceeds from long-term debt

 

 —

 

 

 5

 

Principal payments of long-term debt

 

(32)

 

 

(5)

 

Dividends paid

 

(2)

 

 

(2)

 

Net cash from financing activities

 

 5

 

 

19

 

Effect of exchange rate changes on cash and cash equivalents

 

 —

 

 

(2)

 

Net change in cash and cash equivalents

 

(16)

 

 

(34)

 

Cash and cash equivalents at beginning of year

 

116

 

 

77

 

Cash and cash equivalents at end of period

$

100

 

$

43

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

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, 2017 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 and accrued pension liability. Actual results could differ from those estimates.

Supplemental Non-Cash Transaction

In conjunction with the January 2018 acquisition discussed further in Note 10, Seaboard incurred debt consisting of a $46 million note payable and contingent consideration estimated at $14 million at the time of acquisition.

Recently Issued Accounting Standards Adopted

On January 1, 2018, Seaboard adopted guidance that developed a single, comprehensive revenue recognition model for all contracts with customers using the cumulative effect transition method. The adjustment to opening retained earnings, which only included the impact of contracts that were not completed at the date of adoption, was less than $1 million. All of Seaboard’s equity method investments must adopt the new standard by December 31, 2019. See Note 2 for additional details on the impact of adopting this new accounting standard.

On January 1, 2018, Seaboard adopted guidance that requires the service cost component of net periodic benefit cost to be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. Only the service cost component is eligible for capitalization in inventory. The other components of net periodic benefit cost are presented outside of operating income and are not capitalizable. Effective in the first quarter of 2018, $2 million of net periodic benefit cost for the three month period of 2017 was reclassified from selling, general and administrative expenses to miscellaneous, net below operating income. Seaboard elected to apply the practical expedient to estimate amounts for comparative periods.

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. As of January 1, 2018,

5


 

Seaboard had minimal investments without readily determinable fair values, which will be recorded at cost, less impairment, and plus or minus subsequent adjustments for observable price changes.

Recently Issued Accounting Standard Not Yet Adopted

In February 2016, the FASB issued guidance that a lessee should record a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The recognition, measurement, and presentation of expenses and cash flows arising from a financing lease have not significantly changed from the previous guidance. For operating leases, a lessee is required to: (1) recognize a ROU asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (3) classify all cash payments within operating activities in the statement of cash flows. Seaboard will adopt this guidance on January 1, 2019, for all consolidated subsidiaries and elect to apply all practical expedients, including any optional transition relief that permits the recognition and measurement of leases at the date of adoption. Therefore, Seaboard will not restate comparative period financial information for the effects of this accounting standard. While Seaboard continues its process of assessing its leases and evaluating the effect this guidance will have on its consolidated financial statements, Seaboard expects the adoption will have a material increase in assets and liabilities on the consolidated balance sheets due to the recording of ROU assets and corresponding lease liabilities. See Note 10 to the consolidated financial statements included in Seaboard’s annual report for the year ended December 31, 2017, for information about Seaboard’s lease obligations.

 

Note 2 – 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, the unit of account in Topic 606 Revenue from Contracts with Customers (“Topic 606”), 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 has multiple segments with diverse revenue streams. For additional information on Seaboard’s segments, see Note 10. The following table presents Seaboard’s sales disaggregated by revenue source and segment for the three month period ended March 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

 

 

Pork

 

 

Commodity Trading & Milling

 

 

Marine

 

 

Sugar

 

 

Power

 

 

All          Other

 

 

Consolidated Totals

 

Major Products/Services Lines:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

$

361

 

$

781

 

$

 —

 

$

50

 

$

 —

 

$

 4

 

$

1,196

 

Transportation

 

 

 4

 

 

 —

 

 

249

 

 

 —

 

 

 —

 

 

 —

 

 

253

 

Energy

 

 

93

 

 

 —

 

 

 —

 

 

 1

 

 

23

 

 

 —

 

 

117

 

Other

 

 

 8

 

 

 5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13

 

Segment/Consolidated Totals

 

$

466

 

$

786

 

$

249

 

$

51

 

$

23

 

$

 4

 

$

1,579

 

 

Revenue from goods and services transferred to customers at a single point in time accounted for approximately 85% of Seaboard’s net sales for the three month period of 2018. Substantially all of the sales in Seaboard’s Marine segment are recognized ratably over the transit time for each voyage as Seaboard believes this is a faithful depiction of the performance obligation to its customers.

Almost all of Seaboard’s contracts with its customers are short-term, defined as less than one year. As of March 31, 2018, Seaboard had $17 million of remaining performance obligations that extend beyond one year, of which 33% is expected to be recognized as net sales in 2018, an additional 33% in 2019, and the remaining balance thereafter. Seaboard elected to use all practical expedients and therefore will 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

6


 

amount to which it has the right to invoice for services performed. Also, Seaboard will recognize a financing component only on obligations that extend longer than one year.

Deferred revenue represents cash payments received in advance of Seaboard’s performance or revenue billed that is unearned. The Commodity Trading and Milling (“CT&M”) segment, which operates internationally with sales in Africa and South America, requires certain customers to pay in advance or upon delivery to avoid collection risk. The Marine segment’s deferred revenue balance primarily relates to the unearned portion of billed revenue when a ship is on the water and has not arrived at the designated port. The Pork segment has a marketing agreement with Triumph Foods, LLC, of which certain fees paid at commencement are recognized over the term of the agreement. Deferred revenue balances are reduced when revenue is recognized. Revenue recognized for the three month period of 2018 that was included in the deferred revenue balance at the beginning of the year was $68 million.

The primary impact of adopting the new guidance was the acceleration of revenue related to sales in Seaboard’s CT&M segment that previously had not been recognized as a fixed and determinable price was not established at the time of sale. Under the new guidance, revenue is recognized when control is transferred, and adjustments are made to revenue for pending sale prices dependent upon market fluctuations, further processing, or other factors until sales prices are finalized. The following tables summarize the impacts of adoption on Seaboard’s condensed consolidated financial statements as of and for the three month period ended March 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances without

 

 

 

 

 

 

 

(Millions of dollars)

 

 

adoption of Topic 606

 

 

Adjustments

 

 

As reported

 

Total net sales

 

$

1,575

 

$

 4

 

$

1,579

 

Total cost of sales and operating expenses

 

$

1,404

 

$

 3

 

$

1,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances without

 

 

 

 

 

 

 

(Millions of dollars)

 

 

adoption of Topic 606

 

 

Adjustments

 

 

As reported

 

Receivables, net

 

$

599

 

$

 9

 

$

608

 

Inventories

 

$

813

 

$

(16)

 

$

797

 

Deferred revenue

 

$

82

 

$

(7)

 

$

75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances without

 

 

 

 

 

 

 

(Millions of dollars)

 

 

adoption of Topic 606

 

 

Adjustments

 

 

As reported

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

 

 

Receivables, net of allowance

 

$

(79)

 

$

(9)

 

$

(88)

 

Inventories

 

$

(14)

 

$

16

 

$

 2

 

Current liabilities, exclusive of debt

 

$

(60)

 

$

(7)

 

$

(67)

 

 

 

 

 

 

Note 3 – Investments

The following is a summary of the estimated fair value of short-term investments classified as trading securities held at March 31, 2018 and December 31, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(Millions of dollars)

 

2018

 

2017

 

Domestic equity securities

 

$

744

 

$

752

 

Foreign equity securities

 

 

320

 

 

319

 

Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries

 

 

135

 

 

439

 

Collateralized loan obligations

 

 

28

 

 

29

 

High yield securities

 

 

21

 

 

21

 

Money market funds held in trading accounts

 

 

 8

 

 

10

 

Other trading securities

 

 

 8

 

 

 6

 

Total trading short-term investments

 

$

1,264

 

$

1,576

 

 

7


 

Seaboard had $111 million of equity securities denominated in foreign currencies at March 31, 2018, with $47 million in euros, $24 million in Japanese yen, $19 million in British pounds, $6 million in Swiss francs and the remaining $15 million in various other currencies. At December 31, 2017, Seaboard had $114 million of equity securities denominated in foreign currencies, with $48 million in euros, $25 million in Japanese yen, $20 million in British pounds, $6 million in Swiss francs and the remaining $15 million in various other currencies. Also, money market funds included less than $1 million denominated in various foreign currencies at March 31, 2018 and December 31, 2017.

The change in unrealized gains (losses) related to trading securities still held at the end of the respective reporting period was $(22) million and $38 million for the three months ended March 31, 2018 and April 1, 2017, respectively.

In addition to its short-term investments, Seaboard also has trading securities related to Seaboard’s deferred compensation plans classified in other current assets in the condensed consolidated balance sheets. See Note 6 to the condensed consolidated financial statements for information on the types of trading securities held related to the deferred compensation plans.

Note 4 – Inventories

The following is a summary of inventories at March 31, 2018 and December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

(Millions of dollars)

    

2018

    

2017

 

At lower of LIFO cost or market:

 

 

 

 

 

 

 

Live hogs and materials

 

$

332

 

$

313

 

Fresh pork and materials

 

 

36

 

 

28

 

 

 

 

368

 

 

341

 

LIFO adjustment

 

 

(34)

 

 

(31)

 

Total inventories at lower of LIFO cost or market

 

 

334

 

 

310

 

At lower of FIFO cost and net realizable value:

 

 

 

 

 

 

 

Grains, oilseeds and other commodities

 

 

209

 

 

253

 

Sugar produced and in process

 

 

39

 

 

38

 

Other

 

 

76

 

 

90

 

Total inventories at lower of FIFO cost and net realizable value

 

 

324

 

 

381

 

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

 

 

139

 

 

89

 

 Total inventories

 

$

797

 

$

780

 

 

 

 

Note 5 – Income Taxes

Pursuant to the measurement period permitted in the Securities and Exchange Commission’s Staff Accounting Bulletin 118 for the Tax Cuts and Jobs Act (“2017 Tax Act”), Seaboard had no material updates to its provisional tax impacts related to mandatory deemed repatriated earnings and the revaluation of deferred tax assets and liabilities. The ultimate impact may differ, possibly materially, from Seaboard’s provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions Seaboard has made, additional regulatory guidance that may be issued, and actions Seaboard may take as a result of the 2017 Tax Act. The accounting is expected to be complete during the fourth quarter of 2018 when the 2017 U.S. corporate income tax return is filed. Seaboard’s projected annual income tax rate for the first quarter of 2018 includes less than $1 million of anticipated tax expense associated with the global intangible low-taxed income (“GILTI”) provision and no anticipated tax expense associated with the base-erosion and anti-abuse tax (“BEAT”) provision.

During the first quarter of 2018, Seaboard elected to change the tax status of a wholly owned subsidiary from a partnership to a corporation. This change in tax status resulted in an estimated $22 million of additional tax expense and additional deferred tax liabilities that Seaboard recognized in the condensed consolidated financial statements for the period ended March 31, 2018.

In February 2018, Congress retroactively extended the Federal blender’s credits for 2017. In accordance with U.S. GAAP, the effects of changes in tax laws, including retroactive changes, are recognized in the financial statements in the period that the changes are enacted.  Accordingly, in the first quarter of 2018, a one-time tax benefit of $4 million related to the 2017 Federal blender’s credits was recorded in income tax expense. In addition to this amount, Seaboard recognized $42

8


 

million of Federal blender’s credits as non-taxable revenue in the first quarter of 2018. See Note 10 for further discussion on the Federal blender’s credits.

 

Note 6 – Derivatives and Fair Value of Financial Instruments

Seaboard uses a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad levels:

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities that Seaboard has the ability to access at the measurement date.

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

The following table shows assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and also the level within the fair value hierarchy used to measure each category of assets and liabilities. Seaboard determines if there are any transfers between levels at the end of a reporting period. There were no transfers between levels that occurred in the first three months of 2018. The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

 

 

    

 

 

    

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

 

2018

 

Level 1

Level 2

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities – short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic equity securities

 

$

744

 

$

744

 

$

 —

 

$

 —

 

Foreign equity securities

 

 

320

 

 

320

 

 

 —

 

 

 —

 

Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries

 

 

135

 

 

111

 

 

24

 

 

 —

 

Collateralized loan obligations

 

 

28

 

 

 —

 

 

28

 

 

 —

 

High yield securities

 

 

21

 

 

21

 

 

 —

 

 

 —

 

Money market funds held in trading accounts

 

 

 8

 

 

 8

 

 

 —

 

 

 —

 

Other trading securities

 

 

 8

 

 

 5

 

 

 3

 

 

 —

 

Trading securities – other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic equity securities

 

 

34

 

 

34

 

 

 —

 

 

 —

 

Money market fund held in trading accounts

 

 

 5

 

 

 5

 

 

 —

 

 

 —

 

Foreign equity securities

 

 

 4

 

 

 4

 

 

 —

 

 

 —

 

Fixed income securities

 

 

 3

 

 

 3

 

 

 —

 

 

 —

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

 

 5

 

 

 5

 

 

 —

 

 

 —

 

Total Assets

 

$

1,315

 

$

1,260

 

$

55

 

$

 —

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

$

11

 

$

11

 

$

 —

 

$

 —

 

Foreign currencies

 

 

 1

 

 

 —

 

 

 1

 

 

 —

 

Total Liabilities

 

$

12

 

$

11

 

$

 1

 

$

 —

 

 

(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 March 31, 2018, the commodity derivatives had a margin account balance of $23 million resulting in a net other current asset in the condensed consolidated balance sheet of $17 million.

 

 

9


 

The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 and also the level within the fair value hierarchy used to measure each category of assets and liabilities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

 

 

    

 

 

    

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

 

2017

 

Level 1

Level 2

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities – short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic equity securities

 

$

752

 

$

752

 

$

 —

 

$

 —

 

Domestic debt securities held in mutual funds/ETFs/U.S. Treasuries

 

 

439

 

 

438

 

 

 1

 

 

 —

 

Foreign equity securities

 

 

319

 

 

319

 

 

 —

 

 

 —

 

Collateralized loan obligations

 

 

29

 

 

 —

 

 

29

 

 

 —

 

High yield securities

 

 

21

 

 

21

 

 

 —

 

 

 —

 

Money market funds held in trading accounts

 

 

10

 

 

10

 

 

 —

 

 

 —

 

Other trading securities

 

 

 6

 

 

 6

 

 

 —

 

 

 —

 

Trading securities – other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic equity securities

 

 

35

 

 

35

 

 

 —

 

 

 —

 

Money market fund held in trading accounts

 

 

 5

 

 

 5

 

 

 —

 

 

 —

 

Foreign equity securities

 

 

 4

 

 

 4

 

 

 —

 

 

 —

 

Fixed income securities

 

 

 2

 

 

 2

 

 

 —

 

 

 —

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

 

 4

 

 

 4

 

 

 —

 

 

 —

 

Foreign currencies

 

 

 3

 

 

 —

 

 

 3

 

 

 —

 

Total Assets

 

$

1,629

 

$

1,596

 

$

33

 

$

 —

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

$

 6

 

$

 6

 

$

 —

 

$

 —

 

Foreign currencies

 

 

 6

 

 

 —

 

 

 6

 

 

 —

 

Total Liabilities

 

$

12

 

$

 6

 

$

 6

 

$

 —

 

 

(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, 2017, the commodity derivatives had a margin account balance of $20 million resulting in a net other current asset in the condensed consolidated balance sheet of $18 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 long-term debt is estimated by comparing interest rates for debt with similar terms and maturities. As Seaboard’s long-term debt is variable-rate, its 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 recorded in conjunction with the acquisition discussed further in Note 10 was classified as a level 3 in the fair value hierarchy as the calculation is dependent upon a company specific model.

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 period. Seaboard also enters into speculative derivative transactions not directly related to its raw material requirements. The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2017.

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. At March 31, 2018, Seaboard had open net derivative contracts to purchase 91 million pounds of soybean oil, 30 million bushels of grain and 26 million pounds of hogs, and open net derivative contracts to sell 17 million gallons of heating oil. At December 31, 2017, Seaboard had open net

10


 

derivative contracts to purchase 29 million bushels of grain and 1 million pounds of soybean oil, and open net derivative contracts to sell 13 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, net in the condensed consolidated statements of comprehensive income. At March 31, 2018 and December 31, 2017, 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 $70 million and $20 million, respectively, primarily related to the South African rand, Canadian dollar and euro.

Equity Future Contracts

Seaboard enters into equity future contracts to manage the equity price risk with respect to certain short-term investments. Equity future contracts are recorded at fair value with changes in value marked-to-market as a component of other investment income (loss) in the condensed consolidated statements of comprehensive income. The notional amounts of these equity future contracts were $371 million and $0 million at March 31, 2018 and December 31, 2017, respectively.

Counterparty Credit Risk

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 contracts. As of March 31, 2018, Seaboard had a maximum amount of loss due to credit risk of less than $1 million with two counterparties related to foreign currency exchange agreements. Seaboard does not hold any collateral related to these agreements.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

April 1,

 

(Millions of dollars)

    

 

    

2018

    

2017

 

Commodities

 

Cost of sales

 

$

 9

 

$

 2

 

Foreign currencies

 

Cost of sales

 

 

(6)

 

 

(5)

 

Equity

 

Other investment income (loss), net

 

 

(10)

 

 

 —

 

The following table provides the fair value of each type of derivative held and where each derivative is included in the condensed consolidated balance sheets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

 

 

Liability Derivatives

 

 

 

 

 

March 31,

 

December 31,

 

 

 

March 31,

 

December 31,

 

(Millions of dollars)

    

 

    

2018

    

2017

    

 

    

2018

    

2017

 

Commodities (1)

 

Other current assets

 

$

 5

 

$

 4

 

Other current liabilities