Leases

9 Months Ended

Sep. 28, 2019

Leases

Leases

Note 4 – Leases

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

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. As of September 28, 2019, the weighted average remaining lease term for Seaboard’s operating and finance leases was approximately 7 years and 9 years, respectively. Seaboard’s lease terms vary depending upon the class of asset and some leases include options to extend or terminate. Since Seaboard is not reasonably certain to exercise these renewal or termination options, the options are not considered in determining the lease term, and associated potential option payments or penalties are excluded from lease payments. Seaboard has elected not to recognize ROU assets and lease liabilities for short-term leases for all classes of underlying assets. Short-term leases are leases with terms greater than 1 month, but less than 12 months.

The components of lease cost were as follows:

	Three		Nine
	Months		Months
	Ended		Ended
(Millions of dollars)	September 28, 2019		September 28, 2019
Operating lease cost	$	33	$	100
Finance lease cost:
Amortization of right of use assets		1		2
Interest on lease liabilities		1		1
Variable lease cost		3		7
Short-term lease cost		12		35
Total lease cost	$	50	$	145

Operating lease cost and short-term lease cost are recognized on a straight-line basis over the lease term. Finance lease cost is recognized based on the effective interest method for the lease liability and straight-line amortization of the ROU asset. Variable lease payments are recognized when the circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are primarily for payments in excess of minimums with regards to throughput of shipping containers. Short-term leases are primarily for containers and vessels at Seaboard’s Marine segment. Lease cost is included in various line items in the condensed consolidated statements of comprehensive income or capitalized to inventory. Rental expense for leases with terms of a month or less are excluded from the total lease cost above.

Seaboard’s operating lease assets and liabilities are reported separately in the condensed consolidated balance sheet. The classification of Seaboard’s finance leases in the condensed consolidated balance sheet as of September 28, 2019 was as follows:

			Balance
Description	Balance Sheet Classification		(Millions of dollars)
Finance lease right of use assets, net	Property, plant and equipment, net	$	39
Finance lease liabilities	Other current liabilities		4
Non-current finance lease liabilities	Other liabilities		30

Maturities of lease liabilities as of September 28, 2019 were as follows:

		Operating		Finance
(Millions of dollars)		Leases		Leases
Remainder of 2019	$	41	$	1
2020		117		6
2021		103		6
2022		77		6
2023		56		5
Thereafter		205		23
Total undiscounted lease payments		599		47
Less imputed interest		(120)		(13)
Total lease liability	$	479	$	34

Seaboard’s weighted average discount rate for operating and finances leases was 6.63% and 6.96%, respectively, as of September 28, 2019. There were estimates and judgments made in determining Seaboard’s multiple discount rates based on term, country and currency, including developing a secured credit rating and spreading market yield data across maturities and country risk-free rates.

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

	Years ended December 31,
(Millions of dollars)	2019		2020		2021		2022		2023		Thereafter
Ports	$	18	$	18	$	19	$	19	$	20	$	109
Vessel, time and voyage-charters		58		27		26		13		8		25
Contract grower agreements		47		41		37		27		18		61
Other operating lease payments		18		13		9		8		6		15
Total unrecognized non-cancelable commitments	$	141	$	99	$	91	$	67	$	52	$	210