Derivatives and Fair Value of Financial Instruments

9 Months Ended

Oct. 01, 2022

Derivatives and Fair Value of Financial Instruments

Derivatives and Fair Value of Financial Instruments

Note 6 – Derivatives and Fair Value of Financial Instruments

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

	Balance
	October 1,
(Millions of dollars)	2022		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic equity securities	$	413	$	413	$	—	$	—
Domestic debt securities		352		149		203		—
Foreign equity securities		134		134		—		—
Foreign debt securities		91		—		91		—
Money market funds held in trading accounts		20		20		—		—
Other trading securities		13		—		13		—
Trading securities – other current assets		25		24		1		—
Long-term investment - BDC		70		—		70		—
Derivatives		29		24		5		—
Total assets	$	1,147	$	764	$	383	$	—
Liabilities:
Contingent consideration	$	19	$	—	$	—	$	19
Derivatives		30		20		10		—
Total liabilities	$	49	$	20	$	10	$	19

	Balance
	December 31,
(Millions of dollars)	2021		Level 1		Level 2		Level 3
Assets:
Trading securities – short-term investments:
Domestic debt securities	$	542	$	247	$	295	$	—
Domestic equity securities		472		472		—		—
Foreign equity securities		193		193		—		—
Foreign debt securities		133		2		131		—
Money market funds held in trading accounts		59		59		—		—
Other trading securities		17		—		17		—
Trading securities – other current assets		29		28		1		—
Long-term investment - BDC		81		—		—		81
Derivatives		11		6		5		—
Total assets	$	1,537	$	1,007	$	449	$	81
Liabilities:
Contingent consideration	$	18	$	—	$	—	$	18
Derivatives		10		5		5		—
Total liabilities	$	28	$	5	$	5	$	18

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

Seaboard has a long-term investment in a BDC that primarily lends to and invests in debt securities of privately held companies. This long-term investment is valued at net asset value (“NAV”), but is subject to contractual sale restrictions pursuant to shareholder arrangements. During the third quarter of 2022, Seaboard early adopted recent guidance from the Financial Accounting Standards Board that clarifies these restrictions are not security specific and should not impact the fair value. As a result of this adoption, the BDC investment’s liquidity discount of $1 million was removed and accordingly, the instrument is now classified as level 2 rather than level 3.

The fair value of long-term debt is estimated by comparing interest rates for debt with similar terms and maturities. As Seaboard’s long-term debt is mostly variable-rate, its carrying amount approximates fair value. If Seaboard’s long-term debt was measured at fair value on its condensed consolidated balance sheets, it would have been classified as level 2 in the fair value hierarchy. See Note 4 for a discussion of Seaboard’s long-term debt.

Seaboard’s contingent consideration, classified in other non-current liabilities, is related to a 2018 acquisition. The fair value is dependent on the probability of the acquiree achieving certain financial performance targets using earnings before interest, taxes, depreciation and amortization (“EBITDA”) as a metric. The contingent consideration ranges between zero and $48 million payable between five and eight years following the closing, with timing at the discretion of the sellers. The fair value is classified as level 3 since the calculation is dependent upon projected company specific inputs using a Monte Carlo simulation. Seaboard remeasures the estimated fair value of the contingent consideration liability until settled, with adjustments included in net earnings (loss). The change in value during 2022 was related to higher projected EBITDA at the measurement date.

Seaboard’s operations are exposed to market risks from changes in commodity prices, foreign currency exchange rates, interest rates and equity prices. Seaboard uses various commodity derivative futures and options to manage its risk of price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments. Also, Seaboard enters into foreign currency exchange agreements to manage the foreign currency exchange rate risk with respect to certain transactions denominated in foreign currencies. From time to time, Seaboard enters into interest rate swap agreements to manage the interest rate risk with respect to certain variable rate long-term debt and enters into equity futures contracts to manage the equity price risk with respect to certain short-term investments. While management believes its derivatives are

primarily economic hedges, Seaboard does not perform the extensive record-keeping required to account for these types of transactions as hedges for accounting purposes. These derivative contracts are recorded at fair value, with any changes in fair value recognized in the condensed consolidated statements of comprehensive income. As the derivative contracts are not accounted for as hedges, fluctuations in the related prices or rates could have a material impact on earnings in any given reporting period. The nature of Seaboard’s market risk exposure has not materially changed since December 31, 2021.

Seaboard had the following aggregated outstanding notional amounts related to derivative financial instruments:

		October 1,	December 31,
(Millions)	Metric	2022	2021
Commodities:
Grain	Bushels	21	1
Soybean oil	Pounds	53	20
Heating oil	Gallons	—	15
Foreign currencies	U.S. dollar	54	95

Credit risks associated with these derivative contracts are not significant as Seaboard minimizes counterparty exposure by dealing with credit-worthy counterparties and uses margin accounts for some contracts. As of October 1, 2022, the maximum amount of credit risk, had the counterparties failed to perform according to the terms of the contract, was $5 million.

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

		Asset Derivatives					Liability Derivatives
		October 1,		December 31,			October 1,		December 31,
(Millions of dollars)		2022		2021			2022		2021
Commodities	Other current assets	$	24	$	6	Other current liabilities	$	20	$	5
Foreign currencies	Other current assets		5		5	Other current liabilities		10		5

Seaboard’s commodity derivative assets and liabilities are presented in the condensed consolidated balance sheets on a net basis, including netting the derivatives with the related margin accounts. As of October 1, 2022 and December 31, 2021, the commodity derivatives had a margin account balance of $34 million and $28 million, respectively, resulting in a net other current asset in the condensed consolidated balance sheets of $38 million and $29 million, respectively.

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

		Three Months Ended				Nine Months Ended
		October 1,		October 2,		October 1,		October 2,
(Millions of dollars)		2022		2021		2022		2021
Commodities	Cost of sales	$	13	$	(12)	$	(45)	$	(32)
Foreign currencies	Cost of sales		(19)		6		(25)		9
Foreign currencies	Foreign currency gains (losses), net		9		1		18		4
Interest rate swaps	Interest expense		—		(1)		—		5
Equity futures	Other investment income (loss), net		—		(1)		—		(1)

During the third quarter of 2021, all of Seaboard’s interest rate swap agreements were terminated. Seaboard paid fixed-rate interest payments at a weighted-average interest rate of 0.26% and received variable-rate interest payments based on the one-month LIBOR from the counterparty without the exchange of the underlying notional amounts of $400 million.