SEABOARD CORP /DE/ - Annual Report: 2019 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 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)

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

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

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

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ◻ No ⌧

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.

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 Act). Yes ☐ No ☒

The aggregate market value of the 255,723 shares of Seaboard common stock held by nonaffiliates was approximately $1,057,859,563, based on the closing price of $4,136.74 per share on June 29, 2019, the end of Seaboard’s most recently completed second fiscal quarter. As of January 31, 2020, the number of shares of common stock outstanding was 1,164,718.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference to the registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2019.

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SEABOARD CORPORATION

FORM 10-K

YEAR ENDED DECEMBER 31, 2019

TABLE OF CONTENTS

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PART I

Forward-looking Statements

This report, including information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Seaboard Corporation and its subsidiaries (“Seaboard”). Forward-looking statements generally may be identified as statements that are not historical in nature and statements preceded by, followed by or that include the words “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends” or similar expressions.

In more specific terms, forward-looking statements include, without limitation:

This list of forward-looking statements is not exclusive. Seaboard undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions or otherwise, except as required by law. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to a variety of factors. The information contained in this Form 10-K and in other filings Seaboard makes with the Securities and Exchange Commission (the “SEC”), including without limitation, the information under the items “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K, identifies important factors which could cause such differences.

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Item 1. Business

General Development of Business

Seaboard Corporation was originally founded in 1918 as a flour brokerage business and was organized as a Delaware corporation in 1946. Seaboard Corporation and its subsidiaries (collectively, “Seaboard”) together comprise a diverse global agribusiness and transportation company. In the United States (“U.S.”), Seaboard is primarily engaged in hog production, pork processing and ocean transportation. Overseas, Seaboard is primarily engaged in commodity merchandising, grain processing, sugar and alcohol production and electric power generation. Seaboard also has an equity method investment in Butterball, LLC (“Butterball”), a producer and processor of branded and non-branded turkey products. See Note 15 to the consolidated financial statements for specific developments for each segment.

Approximately 77% of the outstanding common stock of Seaboard is collectively owned by Seaboard Flour LLC and SFC Preferred, LLC. Mr. Steven J. Bresky, President and Chief Executive Officer of Seaboard, and other members of the Bresky family, including trusts created for their benefit, own the equity interests of Seaboard Flour LLC and SFC Preferred, LLC, which are Delaware limited liability companies.

Description of Business

Principal Products and Services

Pork Segment – Seaboard, through its subsidiary Seaboard Foods LLC, engages in the business of hog production and pork processing in the U.S. Seaboard’s Pork segment is a vertically integrated pork producer that primarily produces and sells fresh and frozen pork products to further processors, foodservice operators, distributors and grocery stores. This segment sells to U.S. customers and exports to Japan, Mexico, China and numerous other foreign markets. Pork products include fresh pork, such as loins, tenderloins and ribs which are primarily sold to distributors and grocery stores and fresh and frozen pork products sold in bulk to further processors who produce products, such as lunchmeat, ham, bacon and sausage.

This segment’s pork processing plant, located in Guymon, Oklahoma, generally operates at a double-shift processing capacity of approximately six million hogs annually. Seaboard also has a ham boning and processing plant in Mexico. In 2019, Seaboard raised approximately 88% of the hogs processed at its processing plant, with the remaining hog requirements purchased primarily under contracts from independent producers. Seaboard’s hog production facilities consist of genetic and commercial breeding, farrowing, nursery and finishing buildings located in the Central U.S. These facilities have capacity to produce approximately eight million hogs annually.

The Pork segment also produces biodiesel at facilities in Oklahoma and Missouri. Biodiesel is produced from pork fat supplied by the Oklahoma pork processing plant and from other animal fats and vegetable oils purchased from third parties. The biodiesel is sold to fuel blenders for distribution. In 2019, the Pork segment purchased and began modifying an idle ethanol plant in Hugoton, Kansas, that it plans to use to produce renewable diesel in the future. The Kansas plant is expected to produce 85 million gallons of renewable diesel annually when operating at full capacity.

Seaboard has a 50% noncontrolling interest in Seaboard Triumph Foods, LLC (“STF”), which operates a pork processing plant located in Sioux City, Iowa. STF began single-shift operations in September 2017 and a second shift commenced in October 2018. STF’s plant is designed to process approximately six million market hogs annually when operating at full capacity. Seaboard has agreements with STF and Triumph Foods, LLC (“Triumph”), an independent pork processor, to market substantially all pork products produced at STF’s and Triumph’s pork processing plants. Seaboard and Triumph supply a portion of the hogs processed at the STF plant. Seaboard’s revenues for its pork products are primarily based on a margin sharing arrangement that considers the average sales price, standard costs and the mix of products sold from the Seaboard and Triumph pork processing plants. The Pork segment also has a 50% noncontrolling interest in Daily’s Premium Meats, LLC (“Daily’s”). Daily’s produces and markets raw and pre-cooked bacon using pork bellies sourced from Seaboard, Triumph and STF.

Commodity Trading and Milling Segment – Seaboard’s CT&M segment, which is managed under the name of Seaboard Overseas and Trading Group, is an integrated agricultural commodity trading, processing and logistics company. Overall, the CT&M segment has facilities in 29 countries, primarily in Africa, South America and the Caribbean. This segment sources, transports and markets approximately 13 million metric tons per year of wheat, corn, soybeans, soybean meal and other commodities. Also, Seaboard and its affiliates produce approximately six million metric tons of wheat flour, maize meal, manufactured feed and oilseed crush commodities per year in addition to other related grain-based products. This segment owns three vessels, but the majority of the trading business is transacted with chartered ships.

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Marine Segment – Seaboard, through its subsidiary, Seaboard Marine Ltd., and various foreign affiliated companies and third-party agents, provides cargo shipping services in the U.S. and 26 countries in the Caribbean and Central and South America. The Marine segment’s primary operations are at PortMiami and include a terminal and an off-port warehouse for cargo consolidation and temporary storage. At the Port of Houston, this segment operates a cargo terminal facility that includes on-dock warehouse space for temporary storage of bagged grains, resins and other cargoes. Seaboard also makes scheduled vessel calls to Brooklyn, New Orleans, Philadelphia, Savannah and various ports in the Caribbean and Central and South America. The Marine segment uses a network of offices and agents throughout the U.S., Canada, the Caribbean and Central and South America to sell freight services. Seaboard’s capabilities allow transport by truck or rail of import and export cargo to and from various U.S. ports and foreign ports. This segment’s fleet consists of 22 chartered and 3 owned vessels, and includes dry, refrigerated and specialized containers and other cargo related equipment.

Sugar and Alcohol Segment – Seaboard, through its subsidiary, Seaboard Energías Renovables y Alimentos S.R.L., operates a vertically integrated sugar and alcohol production facility in Argentina. Sugarcane grown on owned land supplies most of the raw material processed in its plant. The sugar is primarily marketed locally, with some exports to the U.S. and other countries. The alcohol is primarily marketed to industrial users or sold as dehydrated alcohol to certain oil companies under the Argentine governmental bioethanol program, which requires alcohol to be blended with gasoline. This segment also owns a 51 megawatt cogeneration power plant, which is fueled by the burning of sugarcane by-products, natural gas and other biomass when available.

Power Segment – Seaboard, through its subsidiary, Transcontinental Capital Corp. (Bermuda) Ltd., is an independent power producer generating electricity for the Dominican Republic power grid. Seaboard’s Power segment owns and operates a power generating barge, located on the Ozama River, that contains a system of engines capable of using natural gas or heavy fuel oil to produce up to 108 megawatts of electricity. Seaboard’s Power segment sells the electricity it generates primarily on the spot market to government-owned distribution companies. It is not directly involved in the transmission or distribution of electricity and is exempt from regulations under the Public Utility Holding Company Act of 1938, as amended. Seaboard’s Power segment is currently constructing a new floating power barge with capacity to generate approximately 146 megawatts of electricity using gaseous fuels, including natural gas. Operations are anticipated to begin in mid-2021. Seaboard is exploring strategic alternatives for the existing barge, including selling, relocating or operating in conjunction with the new barge at the current site. The estimated total cost of the project ranges from approximately $185 million to $210 million depending upon the alternative selected.

Turkey Segment – Seaboard has a 50% noncontrolling interest in Butterball, LLC (“Butterball”), a vertically integrated producer and processor of branded and non-branded conventional, antibiotic-free and organic turkey products. Butterball is a national supplier to retail stores, foodservice outlets and industrial entities, and to a lesser extent, exports products to Mexico and other foreign markets.

Other Businesses – Seaboard, through its subsidiary, Mount Dora Farms Inc., processes jalapeño peppers at its plant in Honduras, which are primarily shipped to and sold in the U.S.

The information required by this item with respect to the amount or percentage of total revenue contributed by any class of similar products or services, which account for 10% or more of consolidated revenue in any of the last three fiscal years, is set forth in Note 15 to the consolidated financial statements.

Sources and Availability of Raw Materials

The Power segment and Turkey segment utilize material amounts of raw materials that are dependent on purchases from one supplier or a small group of dominant suppliers. The Power segment has one primary supplier of natural gas, but the barge can run on other types of fuel. The Turkey segment purchases a significant portion of its feed and grain used in the manufacturing of feed for its turkeys in North Carolina from Seaboard’s 50% partner in Butterball.

Patents, Trademarks, Licenses, Franchises and Concessions

Seaboard believes there is significant recognition of the trademarks identified below in the various industries Seaboard serves and by many of its customers. Seaboard uses the trademark of Seaboard™.

The Pork segment uses registered trademarks including, but not limited to, Seaboard Foods®, Seaboard Farms®, Seaboard Energy^TM, Prairie Fresh®, Our Farms, Our Commitment®, St. Joe Pork®, and Cook-in Bag®. Daily’s uses the trademarks Daily’s®, Daily’s Premium Meats Since 1893®, Belly Up to the Best®, Buffet Brand® and Del Pueblo®. Seaboard considers the use of these trademarks important to the marketing and promotion of its pork products.

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The CT&M segment uses registered trademarks including, but not limited to, Mothers Pride® and Zambia’s Pride® in Zambia, Thunderbolt Flour® and Maid Marian® in Guyana, GMA® and Top Pain® in Ivory Coast, and GMD® and Jarga® in Senegal.

The Marine segment uses the registered trademarks of Seaboard Marine® and Seaboard Solutions®.

The Sugar and Alcohol segment markets sugar under the Chango® brand.

The Turkey segment uses registered trademarks including, but not limited to, Butterball®, Carolina Turkey® and Farm to Family Butterball®. Seaboard considers the use of these trademarks important to marketing and promotion of its turkey products.

Seasonal Business

The Turkey business is seasonal for whole birds and related products with the Thanksgiving and Christmas holiday demands driving the majority of those sales. Seaboard’s other segments are not seasonally dependent to any material extent.

Dependence on a Single Customer or Few Customers

Seaboard does not have sales to any one customer equal to 10% or more of consolidated revenues. The CT&M segment derived 11% and 12% of its sales from a former non-consolidated affiliate for the years ended December 31, 2018 and 2017, respectively. Additional equity interests were obtained in 2019 and as a result, this entity became consolidated in 2019. The Sugar and Alcohol segment derived 25%, 29% and 39% of its sales from one customer for the years ended December 31, 2019, 2018 and 2017, respectively, and another customer represented 23%, 19% and 10% of its sales for the years ended December 31, 2019, 2018 and 2017, respectively. The Power segment sells power in the Dominican Republic on the spot market accessed primarily by three wholly government-owned distribution companies. The Turkey segment had one customer that represented 16%, 15% and 13% of its sales for the years ended December 31, 2019, 2018 and 2017, respectively, and another customer that represented 12%, 11% and 11% of its sales for the years ended December 31, 2019, 2018 and 2017, respectively. No other segment has sales to a few customers that, if lost, would have a material adverse effect on any such segment or on Seaboard taken as a whole.

Competitive Conditions

Competition in Seaboard’s Pork segment comes from a variety of regional, national and international producers and processors and is based primarily on product quality, customer service and price. According to the trade publications Successful Farming and Informa Economics, Seaboard was ranked number three in hog production (based on sows in production) and number four in pork processing in the U.S. in 2019 (based on daily processing capacity, including Triumph’s and STF’s capacity).

Seaboard’s commodity trading business faces competition from numerous traders around the world. Most of the grain processing and related businesses face competition from either imported products or other local producers in the same industries.

Seaboard’s Marine segment faces competition based on price, reliable sailing frequencies and customer service. Seaboard believes it is among the top five ranking ocean liner services for cargoes in the Caribbean and Central America based on cargo volume.

Seaboard’s Sugar and Alcohol segment owns one of the largest sugar mills in Argentina and faces significant competition for sugar sales in the local Argentine market. Sugar prices in Argentina can fluctuate compared to world markets due to Argentine government price controls and protection policies.

Seaboard’s Power segment sells the power it generates to the spot market or to contract customers at prices based on market conditions and cost-based rates.

Competition for the Turkey segment comes from a variety of regional and national producers and processors and is based primarily on product quality, customer service and price. Butterball ranks as one of the nation’s top three turkey producers based on live production.

Environmental Compliance

Seaboard’s Pork segment and Turkey segment are subject to numerous federal, state and local laws and regulations relating to the environment that require the expenditure of funds in the ordinary course of business. Seaboard’s Pork segment and Turkey segment do not anticipate making expenditures for these purposes that, in the aggregate, would have a material effect on Seaboard’s financial condition or results of operations.

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Number of Persons Employed by Registrant

At the time of this report, Seaboard, excluding non-consolidated affiliates, had approximately 13,100 employees, of whom approximately 6,600 were employed in the U.S.

Available Information

Seaboard electronically files with the SEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act. The SEC maintains an internet website that contains reports, proxy and information statements, and other information regarding electronic filers at http://www.sec.gov. Seaboard provides access to its most recent Form 10-K, 10-Q and 8-K reports, and any amendments to these reports, on its internet website, www.seaboardcorp.com, free of charge, as soon as reasonably practicable after those reports are electronically filed with the SEC. Please note that any internet addresses provided in this report are for information purposes only and are not intended to be hyperlinks. Accordingly, no information provided at such internet addresses is intended or deemed to be incorporated herein by reference.

Executive Officers of the Registrant

The following table lists the executive officers of Seaboard. Generally, executive officers are elected at the annual meeting of the Board of Directors following the Annual Meeting of Stockholders and hold office until the next such annual meeting or until their respective successors are duly chosen and qualified. There are no arrangements or understandings pursuant to which any executive officer was elected.

Mr. Bresky has served as President and Chief Executive Officer of Seaboard since July 2006.

Mr. Steer has served as Executive Vice President, Chief Financial Officer of Seaboard since April 2011.

Mr. Becker has served as Senior Vice President, General Counsel and Secretary of Seaboard since April 2011.

Mr. Gutsch has served as Senior Vice President, Engineering of Seaboard since April 2011.

Mr. Moss has served as Senior Vice President, Governmental Affairs of Seaboard since April 2011.

Mr. Oswalt has served as Senior Vice President, Finance and Treasurer since April 2013.

Mr. Rankin has served as Senior Vice President, Taxation and Business Development since April 2015 and previously as Vice President, Taxation and Business Development since April 2013.

Mr. Trollinger has served as Vice President, Corporate Controller and Chief Accounting Officer of Seaboard since March 2015. Prior to that, he served as Vice President, Finance and Operational Reporting for Jack Cooper Enterprises, Inc. from 2011 to 2015.

Mr. Tywater has served as Vice President, Audit Services of Seaboard since November 2008.

Mr. Winfield has served as Vice President, Information Technology since February 2018 and previously as Director of Information Technology from 2009 to 2018.

Mr. Dannov has served as President of Seaboard Overseas and Trading Group since August 2006.

Mr. Gonzalez has served as President of Seaboard Marine Ltd. since January 2005.

Mr. Sand has served as President of Seaboard Foods LLC since March 2018 and previously as Senior Vice President of Sales since 2011.

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Item 1A. Risk Factors

Seaboard has identified important risks and uncertainties that could affect the results of operations, financial condition or business and that could cause them to differ materially from Seaboard’s historical results of operations, financial condition or business, or those contemplated by forward-looking statements made herein or elsewhere, by, or on behalf of, Seaboard. Factors that could cause or contribute to such differences include those factors described below.

Pathogens which may cause food contamination are found generally in livestock and in the environment and therefore may be present in Seaboard’s products. These pathogens also can be introduced to its products as a result of improper handling by customers or consumers. Seaboard does not have control over handling procedures once products have been shipped for distribution. If one or more of these risks were to materialize, Seaboard’s revenues could decrease, costs of doing business could increase, and Seaboard’s operating results could be adversely affected.

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Any of these hazards could result in death or injury to persons, loss of property, environmental damages, delays or rerouting. If one of Seaboard’s vessels were involved in an incident, the resulting negative public perception could have a material adverse effect on Seaboard’s business, financial condition and results of operations. Also, many aspects of the shipping industry are subject to extensive governmental regulations. Compliance with applicable laws, regulations and standards may require installation of costly equipment or operational changes, while the failure to comply may result in administrative and civil penalties, criminal sanctions, the suspension or termination of Seaboard’s operations or detention of its vessels.

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Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

Management believes that Seaboard’s present facilities are adequate and suitable for its current purposes. Seaboard’s principal properties by segment are described below:

(1)   Pork — Seaboard’s Pork segment owns a pork processing plant in Guymon, Oklahoma. It has a double-shift capacity to process approximately six million hogs annually and generally operates at capacity with additional weekend shifts depending on market conditions. Seaboard’s hog production operations consist of the breeding and raising of approximately eight million hogs annually at facilities it primarily owns or at facilities owned and operated by third parties with whom it has grower contracts. This segment owns and operates seven centrally located feed mills, which have a combined capacity to produce approximately three million tons of formulated feed annually. These feed mills are used primarily to support Seaboard’s existing hog production and have the capability of supporting additional hog production in the future. These facilities are located in Iowa, Oklahoma, Texas, Kansas and Colorado. The Pork segment also operates a ham-boning and processing plant in Mexico that has the capacity to process 96 million pounds of ham annually. The Pork segment owns biodiesel plants in Oklahoma and Missouri, with the capacity to produce 46 million gallons and 30 million gallons, respectively, of biodiesel annually. In 2019, the Pork segment purchased and began modifying an idle ethanol plant in Hugoton, Kansas, that it plans to use to produce renewable diesel in the future. The Kansas plant is expected to produce 85 million gallons of renewable diesel annually when operating at full capacity.

(2)   Commodity Trading and Milling — Seaboard’s CT&M grain-processing business, which includes 10 consolidated and 17 non-consolidated affiliates, operates facilities at 41 locations in 23 countries. Seaboard and its affiliates produce approximately six million metric tons of wheat flour, maize meal, manufactured feed and oilseed crush commodities per year in addition to other related grain-based products. The grain-processing and related agribusiness operations located in Botswana, Brazil, Colombia, the Democratic Republic of Congo, Ecuador, Gambia, Ghana, Guyana, Haiti, Jamaica, Kenya, Lesotho, Mauritania, Morocco, Mozambique, Nigeria, Peru, Republic of Congo, South Africa, Turkey, and Zambia own their facilities; and in Ivory Coast, Kenya, Lesotho, Morocco, Mozambique, Nigeria, Republic of Congo, Senegal and Zambia, the land on which certain facilities are located is leased under long-term agreements. Certain foreign milling operations may operate at less than full capacity due to low demand, poor consumer purchasing power, excess milling capacity in their competitive environment or imported flour. The commodity trading business has 13 offices in 12 countries, in addition to two non-consolidated affiliates in two other countries. Seaboard’s CT&M segment owns three 18,900 metric ton deadweight dry bulk vessels and charters between 30 and 59 bulk vessels with deadweights ranging from 5,000 to 64,000 metric tons under short-term agreements. Also, the CT&M segment charters four dry bulk vessels, each with a deadweight of 28,000 metric tons, which were originally purchased and then subsequently sold and leased-back.

(3)   Marine — Seaboard’s Marine segment leases approximately 297,000 square feet of off-port warehouse space and approximately 86 acres of port terminal land and facilities in Miami, Florida, which are used in its containerized cargo

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operations. Seaboard’s Marine segment also leases an approximately 62-acre cargo handling and terminal facility in Houston, Texas, which includes several on-dock warehouses totaling approximately 690,000 square feet for cargo storage. As of December 31, 2019, the Marine segment owned three ocean cargo vessels with deadweights ranging from 7,700 to 11,000 metric tons. In addition, this segment chartered 22 vessels under contracts ranging from less than one year to over two years with deadweights ranging from approximately 8,500 to 34,700 metric tons but has also entered into some contracts for longer-term charters that range up to 11 years. Seaboard’s Marine segment owns or leases dry, refrigerated and specialized containers and other related equipment.

(4)   Sugar and Alcohol — Seaboard’s Sugar and Alcohol segment owns nearly 70,000 acres of planted sugarcane and a sugar mill with an annual capacity to crush approximately three million metric tons of sugar cane. The facility, including an alcohol distillery, has an annual production capacity of approximately 250,000 metric tons of sugar and approximately 33 million gallons of alcohol. This capacity is sufficient to process all of the cane harvested by this segment and additional quantities purchased from third-party farmers in the region. The sugarcane fields, processing mill, distillery and 51 megawatt cogeneration power plant are located in northern Argentina in the Salta Province. This area experiences seasonal rainfalls that may limit the harvest season, which then affects the duration of mill operations and quantities of sugar and alcohol produced.

(5)   Power — Seaboard’s Power segment owns one power generating barge with capacity to generate approximately 108 megawatts of electricity that is secured on the Ozama River in Santo Domingo, Dominican Republic. Seaboard’s Power segment is currently constructing a new floating power barge with capacity to generate approximately 146 megawatts of electricity using gaseous fuels, including natural gas.

(6)   Turkey — Seaboard’s Turkey segment has a total of four processing plants, two further processing plants and numerous company and third-party live production facilities and feed milling operations, located in North Carolina, Arkansas, Missouri and Kansas. These facilities produce over one billion pounds of turkey each year. Although capacity to meet core further processing demand is sufficient, Butterball uses third-party copack arrangements to supplement portions of its portfolio where it either does not maintain competencies, or to meet demand beyond its internal production capacity.

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Item 3. Legal Proceedings

The information required by this item is included in Note 9 to the consolidated financial statements.

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Item 4. Mine Safety Disclosures

Not Applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Seaboard’s common stock is traded on the NYSE American under the symbol SEB. Seaboard had 2,308 stockholders of record of its common stock as of January 31, 2020.

Stock Performance Chart

The SEC requires a five-year comparison of stock performance for Seaboard with that of an appropriate broad equity market index and similar industry index. Since there is no single industry index to compare stock performance, the companies comprising the Dow Jones U.S. Food Products and Dow Jones U.S. Marine Transportation Industry indices (the “Peer Group”) were chosen as the second comparison.

The following graph shows a five-year comparison of cumulative total return for Seaboard Corporation, the NYSE American Index and the companies comprising the Peer Group, weighted by market capitalization for the five fiscal years commencing December 31, 2014 and ending December 31, 2019.

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The comparison of cumulative total returns presented in the above graph was plotted using the following index values and common stock price values:

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In each of the four quarters of 2019, Seaboard declared and paid quarterly dividends of $2.25 per share of common stock. In each of the four quarters of 2018 and 2017, Seaboard declared and paid quarterly dividends of $1.50 per share of common stock. Seaboard’s Board of Directors intends that Seaboard will continue to pay quarterly dividends for the reasonably foreseeable future, with the amount of any dividends being dependent upon such factors as Seaboard’s financial condition, results of operations and current and anticipated cash needs, including capital requirements. As discussed in Note 8 to the consolidated financial statements, Seaboard’s ability to declare and pay dividends is subject to limitations imposed by debt agreements.

Seaboard has not established any equity compensation plans or individual agreements for its employees under which Seaboard common stock, or options, rights or warrants with respect to Seaboard common stock, may be granted.

As of December 31, 2019, Seaboard may repurchase up to $78 million of its common stock at market value from time to time in open market or privately negotiated purchases under its share repurchase program. There were no purchases made by or on behalf of Seaboard or any “affiliated purchaser” (as defined by applicable rules of the SEC) of shares of Seaboard’s common stock during the fourth quarter of the fiscal year covered by this report. See Note 12 to the consolidated financial statements for discussion of share repurchase activity during 2019.

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Item 6. Selected Financial Data

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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 Chief Executive Officer to determine allocation of resources and assess performance, in his capacity as chief operating decision maker.

Pork Segment

The Pork segment primarily produces hogs to process and sells fresh and frozen pork products to further processors, foodservice operators, distributors and grocery stores throughout the U.S. and to foreign markets. This segment also produces biodiesel from pork fats and other animal fat and vegetable oils for sale to third parties. 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 53% of Seaboard’s total fixed assets, in addition to approximately 41% of total inventories. 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.

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 52% of Seaboard’s total inventories. 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, soybeans and soybean meal. Exports from various countries can exacerbate volatile market conditions that may have a significant impact on both the trading and milling businesses’ 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 trading, milling and agro-processing businesses.

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.

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. Historically, the functional currency of this segment was the Argentine peso, but during the third quarter of 2018 highly inflationary accounting was adopted and the U.S. dollar became the functional currency for U.S. generally accepted accounting principles (“GAAP”) purposes. See Note 1 to the consolidated

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financial statements for discussion on highly inflationary accounting. 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 operating a power generating barge. Supply of power in the Dominican Republic is determined by a government body and is subject to fluctuations based on governmental budgetary constraints. 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 branded and non-branded 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

As of December 31, 2019, Seaboard had cash and short-term investments of $1.6 billion and additional total working capital of $602 million. 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 or business segments for the next twelve months.

As of December 31, 2019, $195 million of the $1.6 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. See Note 14 for discussion of repatriation.

Summary of Sources and Uses of Cash

Cash and short-term investments as of December 31, 2019 increased $29 million from December 31, 2018. The increase was primarily the result of $171 million of net cash from operating activities, $132 million net proceeds from short-term investments, $42 million net proceeds from long-term debt and lines of credit and $24 million proceeds from sale of a non-consolidated affiliate. Partially offsetting the increase was cash used for capital expenditures of $349 million. Cash from operating activities decreased $67 million from 2018, primarily due to lower adjusted earnings for unrealized gains on short-term investments and significant cash outlays for inventories.

Capital Expenditures, Acquisitions and Other Investing Activities

During 2019, Seaboard invested $349 million in property, plant and equipment, of which $164 million was in the Pork segment, $23 million in the CT&M segment, $26 million in the Marine segment, $15 million in the Sugar and Alcohol segment and $121 million in the Power segment. The Pork segment expenditures were primarily for the expansion of the Oklahoma pork processing plant and the purchase and modifications of an idle ethanol plant and its related assets in Hugoton, Kansas. The CT&M segment expenditures were primarily for milling assets. The Sugar and Alcohol expenditures were primarily for alcohol fermentation expansion. 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 2020 capital expenditures is $313 million. The Pork segment budgeted $215 million primarily for the expansion of the pork processing plant that is expected to be completed in the first half of 2020 and the modifications to convert the Hugoton, Kansas plant to a renewable diesel production facility, with operations expected to begin in 2022. The estimated cost of the conversion is expected to be between approximately $220 million and $270 million, depending upon finalization of construction contracts. The CT&M segment budgeted $25 million primarily for milling assets, including a new mixing plant, and other improvements to existing facilities and related equipment. The Marine segment budgeted $37 million primarily for additional cargo carrying and handling equipment. The Sugar and Alcohol segment budgeted $14 million primarily for general plant improvements and production process updates. The Power segment budgeted $22 million for further capital expenditures associated with the new power barge. Seaboard’s Power segment continues to explore strategic alternatives for the existing barge, including selling, relocating or operating in conjunction with the new barge at the current site. The estimated total cost of the project is expected to be between approximately $185 million to $210 million, depending upon the alternative selected. Management anticipates paying for these capital

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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 2019, 2018 and 2017, and intends to continue to look for opportunities to further grow and diversify its operations. Also, from time to time, Seaboard may fund capital calls and borrowings for its equity method investments based on the specific facts and circumstances. During 2019, Seaboard contributed $20 million to STF, a non-consolidated affiliate of the Pork segment, for working capital needs.

Financing Activities

The following table presents a summary of Seaboard’s available borrowing capacity:

Seaboard has long-term debt of $793 million, which includes a term loan of $691 million and foreign subsidiary obligations of $102 million. Seaboard has capacity under existing Term Loan Credit Agreement debt covenants to undertake additional debt financings of approximately $1,326 million as of December 31, 2019. See Note 8 to the consolidated financial statements for discussion of lines of credit and long-term 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.

Seaboard’s Board of Directors intends that Seaboard will continue to pay quarterly dividends for the reasonably foreseeable future, with the amount of any dividends being dependent upon such factors as Seaboard’s financial condition, results of operations and current and anticipated cash needs, including capital requirements. Also, Seaboard may repurchase shares of its common stock from time to time.

Contractual Obligations and Off-Balance Sheet Arrangements

Several of Seaboard’s segments have long-term contractual obligations, including purchase commitments and non-cancelable lease agreements. See Notes 9 and 6 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, 2019:

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^(a)  Interest payments in the table above include expected cash payments for interest on variable and fixed rate long-term debt. Variable interest rates are based on interest rates as of December 31, 2019.

^(b)  Retirement benefit payments in the table above represent expected benefit payments for various non-qualified pension plans and supplemental retirement arrangements as discussed in Note 10 to the consolidated financial

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statements, which are unfunded obligations that are deemed to be employer contributions. No contributions are planned at this time to the qualified pension plan.

^(c)  U.S. federal income tax on mandatory deemed repatriation pursuant to the 2017 Tax Act.

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.

RESULTS OF OPERATIONS

Net sales for the years ended December 31, 2019, 2018 and 2017 were $6.8 billion, $6.6 billion and $5.8 billion, respectively. 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. The increase for 2018 compared to 2017 primarily reflected higher volumes and sales prices for certain commodities in the CT&M segment, higher biodiesel revenue and higher volumes of market hogs and pork products sold in the Pork segment and higher cargo volumes and rates in the Marine segment.

Operating income for the years ended December 31, 2019, 2018 and 2017 was $104 million, $209 million and $240 million, respectively. 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. The decrease for 2018 compared to 2017 primarily reflected lower prices on pork products sold and higher feed costs in the Pork segment, partially offset by higher margins from biodiesel sales in the Pork segment, higher margins on third-party sales in the CT&M segment and higher spot market rates in the Power segment.

Pork Segment

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 December 2019 for biodiesel production in tax years 2018 and 2019, partially offset by lower biodiesel prices and volumes. 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 $63 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. 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 future market prices for pork products, the cost of feed or third-party hogs; however, management anticipates positive operating income for this segment in 2020.

Loss from affiliates decreased $8 million for the year ended December 31, 2019 compared to 2018, primarily due to the commencement of a second shift in October 2018 at the STF plant.

Net sales for the Pork segment increased $165 million for the year ended December 31, 2018 compared to 2017. The increase was primarily the result of higher overall increased volumes of pork products sold, increased volumes and prices of biodiesel sales, the recognition of the federal blender’s credits of $42 million and higher sales of market hogs to third parties and affiliates. The increase was partially offset by lower prices for both pork products and market hogs sold. 

Operating income for the Pork segment decreased $76 million for the year ended December 31, 2018 compared to 2017. The decrease was primarily the result of lower prices for pork products along with higher feed costs, partially offset by higher volumes of pork products sold and the federal blender’s credits of $42 million.

Loss from affiliates increased $20 million for the year ended December 31, 2018 compared to 2017, primarily due to the start-up of STF operations, which began in September 2017.

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Commodity Trading and Milling 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. Due to worldwide commodity price fluctuations, the uncertain political and economic conditions in the countries in which this segment operates, and the volatility in the commodity markets, management is unable to predict future sales and operating results for this segment. However, management anticipates positive operating income for this segment in 2020, 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 higher by $5 and $3 million in 2019 and 2018, respectively, and lower by $4 million in 2017. 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 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 mark-to-market adjustments should be primarily offset by realized margins or losses as revenue is recognized over time and therefore, these mark-to-market adjustments could reverse in fiscal 2020. Management believes eliminating these mark-to-market adjustments provides a more reasonable presentation to compare and evaluate period-to-period financial results for this segment.

Loss from affiliates for the CT&M segment decreased by $6 million for the year ended December 31, 2019 compared to 2018. Based on the uncertainty of local political and economic environments in the countries in which Seaboard’s affiliates operate, management cannot predict future results.

Net sales for the CT&M segment increased $483 million for the year ended December 31, 2018 compared to 2017. The increase primarily reflected higher volumes of third-party sales, including sales for a business acquired in January 2018, and higher affiliate sales prices, partially offset by lower third-party sales prices.

Operating income for the CT&M segment increased $21 million for the year ended December 31, 2018 compared to 2017. The increase primarily reflected higher margins on third-party sales, predominantly related to the business acquired, partially offset by higher selling, general and administrative costs related to the business acquired. Excluding the effects of the mark-to-market adjustments for derivative contracts, operating income increased $28 million.

Income from affiliates for the CT&M segment decreased $18 million for the year ended December 31, 2018 compared to 2017. The decrease primarily reflected price and volume volatility in local markets of certain Seaboard affiliates, including losses at an equity method investment located in the Democratic Republic of Congo. 

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Marine Segment

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 reefer 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. Management cannot predict changes in future cargo volumes, cargo rates and fuel costs or to what extent changes in economic conditions in markets served will affect net sales or operating income. Based on market conditions, management currently cannot predict if this segment will be profitable in 2020.

Net sales for the Marine segment increased $101 million for the year ended December 31, 2018 compared to 2017. The increase was primarily the result of higher volumes and rates in certain markets during 2018 compared to 2017.

Operating income for the Marine segment increased $4 million for the year ended December 31, 2018 compared to 2017. The increase was primarily the result of higher revenues, partially offset by higher voyage costs related to fuel price increases and other expenses.

Income from affiliates increased $9 million for the year ended December 31, 2018 compared to 2017, primarily due to an other-than-temporary impairment charge of $6 million incurred in 2017.

Sugar and Alcohol Segment

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. Sugar and alcohol sales are denominated in Argentine pesos, and an increase in local sales prices was offset by exchange rate changes as the Argentine peso continued to weaken against the U.S. dollar. Management cannot predict local sugar and alcohol prices or the volatility in the currency exchange rate. Argentina was determined by management to be a highly inflationary economy in the second quarter of 2018, and as a result, this segment’s functional currency is the U.S. dollar effective in the third quarter of 2018 until the economic environment stabilizes.

Operating income for the Sugar and Alcohol 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. Based on market conditions, management cannot predict if this segment will be profitable in 2020.

Net sales for the Sugar and Alcohol segment decreased $2 million for the year ended December 31, 2018 compared to 2017. The decrease primarily reflected lower prices of sugar and alcohol sold, partially offset by higher volumes of sugar and alcohol sold.

Operating income for the Sugar and Alcohol segment decreased $12 million for the year ended December 31, 2018 compared to 2017. The decrease primarily reflected lower margins on sugar, alcohol and cogeneration, partially offset by lower selling, general and administrative expenses related to salaries and benefits.

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Power Segment

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.

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. Management cannot predict future fuel costs or the extent that spot market rates will fluctuate compared to fuel costs; however, management anticipates positive operating income for this segment in 2020.

Net sales for the Power segment increased $25 million for the year ended December 31, 2018 compared to 2017. The increase primarily reflected higher spot market rates.

Operating income for the Power segment increased $12 million for the year ended December 31, 2018 compared to 2017 primarily due to higher spot market rates, partially offset by higher fuel costs.

Turkey Segment

The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball. 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 future market prices for turkey products or the cost of feed. Based on market conditions, management currently cannot predict if this segment will be profitable in 2020.

The increase in income from affiliate for 2018 compared to 2017 was primarily the result of higher logistics and production costs and lower volumes of turkey products sold in 2018, partially offset by Seaboard’s proportionate share of the Illinois plant closure during 2017. Butterball closed a further processing plant located in Illinois and recognized fixed asset impairment charges and accrued severance. Seaboard’s proportionate share of these charges, recognized in income (loss) from affiliates, was $18 million, all recorded in 2017.

Selling, General and Administrative Expenses

Selling, general and administrative (“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. 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, 2018 increased $5 million compared to 2017. The increase was primarily the result of increased personnel-related costs in the CT&M segment, related to the business acquired in January 2018, partially offset by lower costs related to Seaboard’s deferred compensation program. As a percentage of revenues, SG&A was 5% for 2019, 2018 and 2017.

Interest Expense

Interest expense totaled $36 million, $44 million and $29 million for the years ended December 31, 2019, 2018 and 2017, respectively. 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. The increase in interest expense for 2018 compared to 2017 primarily related to more debt outstanding, an increase in interest rates and less capitalized interest.

Interest Income

Interest income totaled $28 million, $11 million and $15 million for the years ended December 31, 2019, 2018 and 2017, respectively. The increase for 2019 compared to 2018 was primarily due to increased investments in debt securities.

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Interest Income from Affiliates

Interest income from affiliates totaled $2 million, $3 million and $22 million for the years ended December 31, 2019, 2018 and 2017, respectively. The decrease for 2018 compared 2017 primarily related to the Butterball note receivable, which was repaid in December 2017.

Other Investment Income (Loss), Net

Other investment income (loss), net totaled $225 million, $(152) million and $177 million for the years ended December 31, 2019, 2018 and 2017, respectively. The changes primarily reflect mark-to-market fluctuations on short-term investments.

Foreign Currency Gains, Net

Foreign currency gains, net totaled $0 million, $4 million and $14 million for the years ended December 31, 2019, 2018 and 2017, respectively. 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 in several foreign countries. The decrease in foreign currency gains for 2018 compared to 2017 primarily reflected losses in the euro and British pound on Seaboard’s short-term investments and the Zambian kwacha, partially offset by gains in the Argentine peso, among fluctuations of other currency exchange rates in several foreign countries. The Sugar and Alcohol segment’s functional currency became the U.S. dollar in mid-2018 due to highly inflationary accounting and any translation gains or losses are recorded in the income statement rather than other comprehensive income.

Income Tax Expense

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 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. The 2018 effective tax rate was lower than 2017 primarily due to a current year loss versus prior year earnings, tax exempt income from the retroactive extension of the 2017 federal blender’s credits during the first quarter of 2018 and the lower statutory U.S. federal income tax rate per the 2017 Tax Act. The decrease was partially offset by a tax classification entity change, additional tax related to the 2017 Tax Act and a change in mix of domestic and foreign earnings from the prior year. See Note 14 to the consolidated financial statements for further information on Seaboard’s income taxes.

OTHER FINANCIAL INFORMATION

See Note 1 to the consolidated financial statements for a discussion of recently issued accounting standards.

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 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.

Allowance for Doubtful Accounts – Seaboard primarily uses a specific identification approach to evaluate the adequacy of this reserve for estimated uncollectible receivables at the consolidated balance sheet date. Changes in estimates, developing trends and other new information can have a material effect on future evaluations. Furthermore, Seaboard’s total gross current receivables are weighted toward foreign receivables ($390 million or 59% as of December 31, 2019), including foreign receivables due from affiliates ($81 million as of December 31, 2019), which generally represent more of a collection risk than its domestic receivables. Receivables due from affiliates are generally associated with entities located in foreign countries considered less developed than the U.S. that can experience conditions causing sudden changes to their ability to pay such receivables on a timely basis or in full. Based on various historical experiences, future collections of receivables or lack thereof could result in a material charge or credit to earnings depending on the ultimate resolution of each individual customer past due receivable. Bad debt expense for the years ended December 31, 2019, 2018 and 2017 was $5 million, $7 million and $12 million, respectively.

Valuation of Inventories – Inventories are generally valued at the lower of cost and net realizable value. In determining net realizable value, management makes assumptions regarding estimated sales prices, estimated costs to complete and estimated disposal costs. For commodity trading inventories, when contract performance by a customer becomes a

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concern, management must also evaluate available options to dispose of the inventory, including assumptions about potential negotiated changes to sales contracts, sales prices in alternative markets in various foreign countries and potentially additional transportation costs. At times, management must consider probability, weighting various viable alternatives, in its determination of the net realizable value of the inventories. These assumptions and probabilities are subjective in nature and are based on management’s best estimates and judgments existing at the time of preparation. 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.

Impairment of Long-Lived Assets – The recoverability of long-lived assets, primarily property, plant and equipment and definite-lived intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales prices, estimated costs, royalty rates and terminal values. In some cases, judgment is also required in assigning probability weighting to the various future cash flow scenarios. The probability weighting percentages used, and the various future projected cash flow models prepared by management are based on facts and circumstances existing at the time of preparation and management’s best estimates and judgment of future operating results. Seaboard cannot predict the occurrence of certain future events that might adversely affect the reported value of long-lived assets, which include, but are not limited to, a change in the business climate, government incentives, a negative change in relationships with significant customers, and changes to strategic decisions made in response to economic and competitive conditions. Changes in these facts, circumstances and management’s estimates and judgment could result in an impairment of property, plant and equipment or definite-lived intangibles, resulting in a material charge to earnings.

Lease liabilities and right of use assets – For leases other than short-term leases, Seaboard recognizes right of use assets and lease liabilities based primarily on the present value of future minimum lease payments over the lease term at lease commencement. As Seaboard’s leases do not have readily determinable implicit discount rates, Seaboard adjusts its incremental borrowing rate to determine the present value of the lease payments. The incremental borrowing rate represents an estimate of the interest rate that would be required to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Seaboard determines the incremental borrowing rates for its leases by adjusting the local risk-free interest rate on its Term Loan due 2028 with a credit risk premium corresponding to Seaboard’s unreported credit rating. Estimation of the incremental borrowing rate requires judgment by management and reflects an assessment of Seaboard’s credit standing to derive an implied secured credit rating and corresponding yield curve. The discount rate is further impacted by Seaboard’s global footprint, operating in more than 45 countries with diverse economies, and related foreign currency rates. Changes in management’s estimates of discount rate assumptions could result in a significant overstatement or understatement of right of use assets or lease liabilities, resulting in an adverse impact to Seaboard’s financial position.

Equity Method Investments – Seaboard has numerous investments in and advances to various businesses that it owns 50% or less and are accounted for using the equity method. In addition, for some of these investments, Seaboard also has notes receivable for loans it provided to these businesses. 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 operating 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 investment 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. In addition, Seaboard may need to write down any affiliate or notes receivables to estimated realizable value. Information and events creating uncertainty about the realization of recorded amounts for notes include, but are not limited to, the estimated cash flows to be generated by the affiliate’s business, the sufficiency of collateral securing the amounts, the creditworthiness of the counterparties involved, and the consideration of other local business conditions as applicable. Changes in facts, circumstances and management’s estimates and judgment could result in a material charge to earnings.

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

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conclusions 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.

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 a decrease in pension expense of approximately $1 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.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

DERIVATIVE INFORMATION

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. From time to time, hog futures are used to manage risks of increasing prices of hogs acquired for processing, and hog futures are used to manage risks of fluctuating prices of pork product inventories and related future sales. Inventories that are sensitive to changes in commodity prices, including carrying amounts as December 31, 2019 and 2018, are presented in Note 4 to the consolidated financial statements.

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 sometimes uses interest rate exchange agreements to manage risks of increasing interest rates.

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, 2019 and 2018, the fair value of Seaboard’s marketable equity securities was approximately $910 million and $878 million, respectively. Seaboard enters into equity futures contracts to manage the equity price risk with respect to certain short-term investments.

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The following table presents the sensitivity of the fair value of Seaboard’s open net commodity future and option contracts, foreign currency exchange agreements and marketable equity securities to a hypothetical 10% change in market prices, foreign exchange rates and interest rates as of December 31, 2019 and 2018. 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.

The table below provides information about Seaboard’s long-term debt that is sensitive to changes in interest rates as of December 31, 2019. For this variable rate debt, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.

Long-term debt sensitive to changes in interest rates as of December 31, 2018 totaled $735 million with a weighted average interest rate of 4.16%.

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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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, 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, 2019, 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 19, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

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 Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate 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 critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of lease liabilities

As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s lease liabilities as of December 31, 2019 were $528 million. The lease liability represents the obligation to make the lease payments arising from leases, measured on a discounted basis, using an estimated incremental borrowing rate.

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We identified the evaluation of the Company’s lease liability recorded as of January 1, 2019, the transition date for the adoption of Accounting Standards Update 2016-02 – Leases (Topic 842), to be a critical audit matter.

Specialized skills were required to evaluate the Company’s assumptions used to determine the lease liability, specifically the incremental borrowing rates.  

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The primary procedures we performed to address this critical audit matter included the following.  We tested certain internal controls over the Company’s lease liability determination process including controls to evaluate the incremental borrowing rates used to calculate the lease liability. We involved a valuation professional with specialized skills and knowledge, who assisted in understanding the Company’s methodology and assumptions used to determine the incremental borrowing rates. The valuation professional also assisted us in developing an independent estimate of the incremental borrowing rates. We compared the independent estimate of the incremental borrowing rates to those utilized by the Company, and we performed sensitivity analyses over the incremental borrowing rates to assess the impact on the Company’s calculation of the lease liability.

Evaluation of the sufficiency of audit evidence over revenue

As described in Note 13 to the consolidated financial statements, the Company earned $6.8 billion of revenue in 2019.  The revenue 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 associated with consolidated entities in over 45 countries.  Revenue generated based on the location of the operations sourcing the product or service primarily resides within the United States, Colombia, and South Africa, and comprised 42% of revenue.  The remaining 58% of revenue was sourced from other countries throughout the Caribbean, Central, and South America, Africa, Pacific Basin and Far East, Canada/Mexico, Europe, and other countries.

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We identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter.  The geographical dispersion of revenue required especially subjective auditor judgment in determining which locations to perform procedures and evaluating the sufficiency of audit evidence.  Furthermore, given the time zone, language and business composition differences between countries, our audit team consisted of auditors located in multiple countries around the world.

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The primary procedures we performed to address this critical audit matter included the following.  We evaluated the nature and amounts of the Company’s revenue at its various locations and applied auditor judgment to determine the locations at which procedures were to be performed.  We tested certain internal controls over the Company’s revenue process, including controls related to the recognition and consolidation of global revenue amounts.  We tested a sample of individual revenue transactions by comparing the amounts recognized by the Company to relevant underlying documentation such as contracts.  In addition, we evaluated the overall sufficiency of audit evidence obtained over revenue.

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We have served as the Company’s auditor since 1959.

Kansas City, Missouri

February 19, 2020

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SEABOARD CORPORATION

Consolidated Statements of Comprehensive Income

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See accompanying notes to consolidated financial statements.

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SEABOARD CORPORATION

Consolidated Balance Sheets