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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29,2002
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-3390
Seaboard Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-2260388
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9000 W. 67th Street, Shawnee Mission, Kansas 66202
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (913) 676-8800
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No ___.
There were 1,487,520 shares of common stock, $1.00 par value per share,
outstanding on July 26, 2002.
Total pages in filing - 18 pages
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of dollars)
(Unaudited)
June 29, December 31,
2002 2001
Assets
Current assets:
Cash and cash equivalents $ 19,868 $ 22,997
Short-term investments 88,920 126,795
Receivables, net 196,399 187,416
Inventories 186,377 205,345
Deferred income taxes 14,897 13,966
Other current assets 25,356 36,343
Total current assets 531,817 592,862
Investments in and advances to foreign
affiliates 48,333 52,256
Net property, plant and equipment 516,096 556,273
Other assets 30,463 34,201
Total assets $ 1,126,709 $ 1,235,592
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 30,882 $ 37,703
Current maturities of long-term debt 52,030 55,166
Accounts payable 42,990 61,513
Other current liabilities 113,726 126,218
Total current liabilities 239,628 280,600
Long-term debt, less current maturities 226,202 255,819
Deferred income taxes 79,624 131,957
Other liabilities 34,422 33,946
Total non-current and deferred liabilities 340,248 421,722
Minority interest 6,610 6,067
Stockholders' equity:
Common stock of $1 par value,
Authorized 4,000,000 shares;
Issued 1,789,599 shares 1,790 1,790
Less 302,079 shares held in treasury (302) (302)
1,488 1,488
Additional capital 13,214 13,214
Accumulated other comprehensive loss (71,157) (65,406)
Retained earnings 596,678 577,907
Total stockholders' equity 540,223 527,203
Total liabilities and stockholders' equity $ 1,126,709 $ 1,235,592
See notes to condensed consolidated financial statements.
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
Net sales $ 477,104 $ 468,513 $ 920,027 $ 903,773
Cost of sales and
operating expenses 436,962 398,720 836,799 785,181
Gross income 40,142 69,793 83,228 118,592
Selling, general and
administrative expenses 24,950 30,153 51,282 60,916
Operating income 15,192 39,640 31,946 57,676
Other income (expense):
Interest expense (5,197) (7,184) (10,648) (15,111)
Interest income 1,487 2,213 3,162 4,522
Other investment income,
net 149 18,711 152 18,600
Loss from foreign
affiliates (1,236) (2,423) (3,327) (3,046)
Minority interest (366) 11 (543) (16)
Foreign currency loss, net (8,582) (11) (13,996) (459)
Miscellaneous, net (4,446) 1,732 (3,141) 3,063
Total other income
(expense), net (18,191) 13,049 (28,341) 7,553
Earnings (loss) before
income taxes (2,999) 52,689 3,605 65,229
Income tax benefit
(expense) 18,680 (21,170) 16,653 (26,095)
Net earnings $ 15,681 $ 31,519 $ 20,258 $ 39,134
Earnings per common
share $ 10.54 $ 21.19 $ 13.62 $ 26.31
Dividends declared per
common share $ 0.75 $ 0.25 $ 1.00 $ 0.50
Average number of
shares outstanding 1,487,520 1,487,520 1,487,520 1,487,520
See notes to condensed consolidated financial statements.
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Thousands of dollars)
(Unaudited)
June 29, June 30,
2002 2001
Cash flows from operating activities:
Net earnings $ 20,258 $ 39,134
Adjustments to reconcile net earnings
to cash from operating activities:
Depreciation and amortization 25,222 27,492
Loss from foreign affiliates 3,327 3,046
Foreign currency translation loss 10,219 -
Deferred income taxes (17,247) 4,356
(Gain) loss from sale of fixed assets (8) 1,072
Gain on exchange of investment - (18,745)
Changes in current assets and liabilities:
Receivables, net of allowance (19,896) 30,829
Inventories 8,722 9,054
Other current assets 10,801 (9,644)
Current liabilities exclusive of debt (22,782) 7,028
Other, net 133 4,512
Net cash from operating activities 18,749 98,134
Cash flows from investing activities:
Purchase of short-term investments (46,629) (333,302)
Proceeds from the sale or maturity of
short-term investments 84,699 293,053
Investments in and advances to foreign
affiliates, net 369 (2,198)
Capital expenditures (21,366) (27,428)
Other, net (148) 2,391
Net cash from investing activities 16,925 (67,484)
Cash flows from financing activities:
Notes payable to banks, net (6,821) (34,193)
Principal payments of long-term debt (28,597) (2,907)
Dividends paid (1,487) (744)
Bond construction fund 575 2,367
Net cash from financing activities (36,330) (35,477)
Effect of exchange rate change on cash (2,473) -
Net change in cash and cash equivalents (3,129) (4,827)
Cash and cash equivalents at beginning of year 22,997 19,760
Cash and cash equivalents at end of quarter $ 19,868 $ 14,933
See notes to condensed consolidated financial statements.
SEABOARD CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1 - Accounting Policies and Basis of Presentation
The consolidated financial statements include the accounts of Seaboard
Corporation and its domestic and foreign subsidiaries (the "Company").
All significant intercompany balances and transactions have been
eliminated in consolidation. The Company's investments in non-
controlled affiliates are accounted for by the equity method. The
unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company
for the year ended December 31, 2001 as filed in its Annual Report on
Form 10-K. Beginning with the quarter ended September 29, 2001, the
Company's first three quarterly periods include approximately 13
weekly periods ending on the Saturday closest to the end of March,
June and September. The Company's year-end is December 31. Certain
reclassifications have been made to prior year amounts to conform to
the current year presentation.
The accompanying unaudited consolidated financial statements include
all adjustments (consisting only of normal recurring accruals) which,
in the opinion of management, are necessary for a fair presentation of
financial position, results of operations and cash flows. Results of
operations for interim periods are not necessarily indicative of
results to be expected for a full year.
Supplemental Noncash Transactions - As more fully described in Note 2,
the continuing devaluation of the Argentine peso decreased the assets
and liabilities of the Sugar and Citrus segment during 2002. The
devaluation of the peso-denominated assets and liabilities reduced
working capital by $15,420,000, fixed assets by $34,905,000, and net
long-term liabilities by $834,000 during the year. See Note 4 for a
discussion of the tax benefits recorded related to this devaluation.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of;" however, it retains most of the
provisions of that Statement related to the recognition and
measurement of the impairment of long-lived assets to be "held and
used." The Statement provides more guidance on estimating cash flows
when performing a recoverability test, requires that a long-lived
asset to be disposed of other than by sale be classified as "held and
used" until it is disposed of, and establishes more restrictive
criteria to classify an asset as "held for sale." The adoption had no
immediate impact on the Company's financial statements.
Note 2 - Comprehensive Income (Loss)
Components of total comprehensive income (loss), net of related taxes,
are summarized as follows:
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Thousands of dollars) 2002 2001 2002 2001
Net income $ 15,681 $ 31,519 $ 20,258 $ 39,134
Other comprehensive income (loss)
net of applicable taxes:
Foreign currency translation
adjustment 31,741 (326) (3,444) (326)
Unrealized loss on investments (4,903) (6,151) (2,283) (6,102)
Net unrealized gain on cash flow
hedges 213 - 76 -
Deferred gain on swaps - - - 1,353
Amortization of deferred gain on
swaps (50) (51) (100) (101)
Total comprehensive income $ 42,682 $ 24,991 $ 14,507 $ 33,958
The components of and changes in accumulated other comprehensive loss
for the six months ended June 29, 2002 are as follows:
Balance Balance
December 31, Period June 29,
(Thousands of dollars) 2001 Change 2002
Foreign currency translation adjustment $ (62,218) $ (3,444) $ (65,662)
Unrealized loss on investments (3,067) (2,283) (5,350)
Unrecognized pension cost (1,273) - (1,273)
Net unrealized gain on cash flow hedges - 76 76
Deferred gain on swaps 1,152 (100) 1,052
Accumulated other comprehensive loss $ (65,406) $ (5,751) $ (71,157)
The foreign currency translation adjustment primarily represents the
effect of the Argentine peso devaluation on the net assets of the
Company's Sugar and Citrus segment. During 2002, the peso continued
to devalue against the dollar. As a result of this devaluation the
Company has recorded charges against earnings, excluding tax
adjustments discussed below, totaling $12,304,000 for the six-month
period in 2002 related to dollar denominated net liabilities of the
Company's Argentine subsidiary. In addition, currency translation
losses of $37,831,000 have been recorded during the six month period
as a component of other comprehensive loss related to the peso-
denominated net assets. At June 29, 2002 the Company has $41,482,000
in net assets denominated in Argentine pesos and $10,530,000 in net
liabilities denominated in U.S. dollars in Argentina. Impacts of
further fluctuations in the currency exchange rate will be recorded in
future periods. Prior to the second quarter of 2002, no tax benefit
was recorded for the devaluation losses. During the second quarter of
2002, the Company reduced the foreign currency translation adjustment
by recognizing a tax benefit of $34.6 million. See Note 4 for further
discussion.
The unrecognized pension cost is calculated and adjusted annually
during the fourth quarter. With the exception of the provision
related to the foreign currency translation losses discussed above,
which are provided at a 35% rate, income taxes for components of
accumulated other comprehensive loss were recorded using a 39%
effective tax rate.
Note 3 - Inventories
The following is a summary of inventories at June 29, 2002 and December 31,2001
(in thousands):
June 29, December 31,
2002 2001
At lower of LIFO cost or market:
Live hogs and related materials $ 119,694 $ 124,212
Dressed pork and related materials 6,428 12,930
126,122 137,142
LIFO allowance (5,371) (5,231)
Total inventories at lower of
LIFO cost or market: 120,751 131,911
At lower of FIFO cost or market:
Grain, flour and feed 44,222 42,581
Sugar produced and in process 4,857 15,039
Other 16,547 15,814
Total inventories at lower of
FIFO cost or market 65,626 73,434
Total inventories $ 186,377 $ 205,345
Note 4 - Contingencies
In May 2002, the Farm Security and Rural Investment Act of 2002 (Farm
Bill) was signed into law without the Johnson Amendment, which would
have prohibited packers such as the Company from owning and raising
swine. The Farm Bill is still pending appropriations. Based on the
current political environment concerning packers, it is uncertain
whether new legislation will be introduced in the future which could
have a negative impact on the Company.
The Company is a defendant in a pending arbitration proceeding and
related litigation in Puerto Rico brought by the owner of a chartered
barge and tug which were damaged by fire after delivery of the cargo.
Damages of $47.6 million are alleged. The Company received a ruling
in the arbitration proceeding in its favor which dismisses the
principal theory of recovery and that ruling has been upheld on
appeal. The arbitration is continuing based on other legal theories,
although the Company believes that it will have no responsibility for
the loss.
The Company is a defendant in an action brought by the Sierra Club
alleging violations of various environmental laws related to one of
the Company's hog production operations. The Company believes it has
meritorious defenses to all of the claims of the Sierra Club but
cannot predict with certainty the outcome of the litigation. The
Company is also subject to an ongoing investigation by the United
States Environmental Protection Agency. In the opinion of management,
the above action and investigation are not expected to result in a
materially adverse effect on the consolidated financial statements of
the Company.
The Company had not previously recognized any tax benefits from losses
generated by Ingenio y Refineria San Martin del Tabacal S.A.
(Tabacal), its sugar and citrus segment, for financial reporting
purposes since it was not a controlled entity for tax purposes and it
was not apparent that the permanent basis difference would reverse in
the foreseeable future. In February 2002, the Company began a tender
offer in Argentina to purchase the outstanding shares of Tabacal not
owned by the Company. During the second quarter of 2002, the Company
completed a series of transactions which culminated in Tabacal's
conversion from a Sociedad Anonima (S.A.) to a Sociedad de
Responsabilidad Limitada or (S.R.L.) organizational entity. This
conversion resulted in the Company recognizing a tax benefit of $48.9
million, of which $34.6 million reduced the currency translation
adjustment recorded as accumulated other comprehensive loss. The
remaining benefit of $14.3 million was recognized as a current tax
benefit in the Consolidated Statement of Earnings for 2002.
The Company is a plaintiff in a lawsuit against several manufacturers
of vitamins and feed additives which have plead guilty in the context
of criminal proceedings to price fixing. Because the manufacturers
have admitted to the price fixing in the criminal context, it is
likely that the manufacturers will be liable for the overcharges made
as a result of the price fixing. During the second quarter of 2002,
the Company recorded as miscellaneous income $4.9 million received as
settlement from certain of the manufacturers from which the Company
had purchases aggregating $13.3 million during the relevant period.
The Company had purchases aggregating approximately $23.5 million from
the remaining manufacturers during the relevant time period.
The Company is subject to various other legal proceedings related to
the normal conduct of its business. In the opinion of management,
none of these actions is expected to result in a judgment having a
materially adverse effect on the consolidated financial statements of
the Company.
Note 5 - Segment Information
The following tables set forth specific financial information about
each segment as reviewed by the Company's management. Operating
income for segment reporting is prepared on the same basis as that
used for consolidated operating income. Operating income is used as
the measure of evaluating segment performance because management does
not consider interest and income tax expense on a segment basis.
As the Sugar and Citrus segment operates solely in Argentina with
primarily local sales and operating expenses, the functional currency
is the Argentine peso. As described in Note 2, the Company has
recorded the effects of the recent and ongoing devaluation of the
Argentine peso. As a result, peso-denominated assets have been
reduced by $60,183,000 during the first six months of 2002.
Management is currently considering various strategic alternatives for
the Produce Division and has ceased its shrimp, pickle and pepper
farming operations in Honduras. After evaluating the recoverability
of the long-lived assets of the Produce Division at December 31, 2001,
management believes the values are presently recoverable. As of June
29, 2002, the total carrying value of these long-lived assets totaled
$5,955,000.
Sales to External Customers:
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Thousands of dollars) 2002 2001 2002 2001
Pork $ 159,331 $ 211,103 $ 330,389 $ 392,997
Commodity Trading and Milling 184,134 121,046 331,672 237,275
Marine 96,648 96,663 187,463 186,554
Sugar and Citrus 14,596 16,841 29,295 37,218
Power 16,313 16,203 28,525 33,170
All Other 6,082 6,657 12,683 16,559
Segment/Consolidated Totals $ 477,104 $ 468,513 $ 920,027 $ 903,773
Operating Income:
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Thousands of dollars) 2002 2001 2002 2001
Pork $ (5,352) $ 25,476 $ (2,835) $ 37,302
Commodity Trading and Milling 7,607 4,152 14,356 4,476
Marine 5,562 6,379 9,175 11,032
Sugar and Citrus 4,812 2,156 7,947 3,178
Power 3,287 3,920 4,912 7,213
All Other (22) (1,421) (536) (3,254)
Segment Totals 15,894 40,662 33,019 59,947
Corporate Items (702) (1,022) (1,073) (2,271)
Consolidated Totals $ 15,192 $ 39,640 $ 31,946 $ 57,676
Total Assets:
June 29, December 31,
(Thousands of dollars) 2002 2001
Pork $ 499,070 $ 508,642
Commodity Trading and Milling 181,852 172,684
Marine 119,034 131,334
Sugar and Citrus 63,115 115,402
Power 75,402 77,102
All Other 18,139 20,276
Segment Totals 956,612 1,025,440
Corporate Items 170,097 210,152
Consolidated Totals $ 1,126,709 $ 1,235,592
Administrative services provided by the corporate office are primarily
allocated to the individual segments based on the size and nature of
their operations. Corporate assets include short-term investments,
certain investments in and advances to foreign affiliates, fixed
assets, deferred tax amounts and other miscellaneous items. Corporate
operating losses represent certain operating costs not specifically
allocated to individual segments.
Note 6 - Subsequent Events
In July 2002, Seaboard Corporation (Seaboard) purchased for $26.9
million an additional 66,666,667 shares of common stock of Fjord
Seafood ASA (Fjord), an integrated salmon producer and processor
headquartered in Norway. This additional investment increased
Seaboard's ownership in Fjord to approximately 21%.
Through June 29, 2002, Seaboard had accounted for this investment as a
long-term available-for-sale equity security. As a result of the
increase in ownership to over 20% in July 2002, in the third quarter
of 2002 Seaboard will begin to account for this investment under the
equity method. In addition, in the third quarter of 2002 Seaboard
will be required by Accounting Principles Board Opinion No. 18 to
retroactively adjust all previous quarters' financial statements as if
the equity method of accounting had been used at the time of
Seaboard's initial investment in Fjord on May 2, 2001. Below is a
summary of the expected retroactive adjustment of assets, equity and
net income:
Year-to-date
(Thousands of dollars) Total Assets Equity Net Earnings
June 30, 2001
As reported $1,279,179 $573,899 $39,134
As adjusted $1,285,265 $579,985 $39,134
September 29, 2001
As reported $1,312,397 $584,619 $45,560
As adjusted $1,309,756 $585,107 $44,759
December 31, 2001
As reported $1,235,592 $527,203 $53,305
As adjusted $1,234,757 $528,420 $51,989
March 30, 2002
As reported $1,167,277 $498,656 $ 4,577
As adjusted $1,158,760 $494,131 $ 1,723
June 29, 2002
As reported $1,126,709 $540,223 $20,258
As adjusted $1,126,207 $540,215 $16,821
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities for the six months ended June 29, 2002,
decreased $79.4 million compared to the same period one year earlier.
The decrease in cash flows was primarily related to lower net earnings
and changes in the components of working capital. Changes in
components of working capital are primarily related to the timing of
normal transactions for voyage settlements, trade payables and
receivables. Within the Commodity Trading and Milling segment,
increased sales during 2002 resulted in an increase in receivables
compared to a decrease in receivables during the first half of 2001.
Cash from investing activities for the six months ended June 29, 2002,
increased $84.4 million compared to the same period one year earlier.
The increase was primarily related to proceeds from the net sale of
short-term investments compared to net purchases of investments in the
prior year.
The Company invested $21.4 million in property, plant and equipment
for the six months ended June 29, 2002, of which $13.5 million was
expended in the Pork segment, $1.4 million in the Commodity Trading
and Milling Segment, $4.1 million in the Marine segment, $1.5 million
in the Sugar and Citrus segment, and $0.9 million in other businesses
of the Company.
The Company invested $13.5 million in the Pork segment primarily for
expansion of existing hog production facilities, improvements to the
pork processing plant, and purchase options for land upon which the
Company plans to expand operations as discussed below. During the
remainder of 2002, the Company anticipates spending $20.3 million for
continued expansion of existing hog production facilities, upgrades to
the existing pork processing plant and certain costs related to the
planning for construction of the new processing plant. In addition,
during the third quarter of 2002, the Company currently intends to
purchase approximately $121.0 million of certain facilities currently
under lease. See below for further discussion.
In February 2002, the Company announced plans to build a second
processing plant in northern Texas along with related plans to expand
its vertically integrated hog production facilities. These plans are
contingent on a number of factors, including obtaining necessary
permits, commitments for a sufficient quantity of hogs to operate the
plant, no statutory impediments being imposed and an improvement in
market conditions. These plans will require extensive capital outlays
and financing demands. The current cost estimates to build the plant
are approximately $150.0 million with an additional $200.0 million for
live production facilities for a total of approximately
$350.0 million. The Company also anticipates pursuing various
contract growing arrangements. The Company is currently evaluating
its alternatives for financing these expansion plans, including
additional borrowings, leases or other business ventures with third
parties. Due to the above uncertainties and current pork industry
conditions, Management is currently not able to predict the exact
timing of the expansion project. It is currently estimated that the
earliest construction might commence is the second half of 2003,
subject to the necessary permits and financing being obtained.
The Company invested $1.4 million in the Commodity Trading and Milling
segment primarily for the purchase of additional equipment. During
the remainder of 2002, the Company anticipates spending $1.1 million
for additional equipment.
The Company invested $4.1 million in the Marine segment primarily for
the purchase of additional machinery and equipment. During the
remainder of 2002, the Company anticipates spending $8.2 million for
additional equipment.
The Company invested $1.5 million in the Sugar and Citrus segment
primarily for improvements to existing facilities and sugarcane
fields. During the remainder of 2002, the Company anticipates
spending $1.6 million for additional improvements.
In July 2002, the Company invested an additional $26.9 million in
Fjord Seafood ASA (Fjord), an integrated salmon producer and processor
headquartered in Norway, increasing its ownership percentage from
approximately 11% to approximately 21%. See Note 6 to the
Consolidated Financial Statements for further discussion.
The Company's one-year revolving credit facilities totaling $141.0
million at December 31, 2001 matured during the first quarter of 2002.
The Company extended the $20.0 million facility for one year. While
the Company currently anticipates replacing the facility that was not
extended during 2002, the total amount and related terms of the
facility have not yet been determined. The Company also has short-
term uncommitted credit lines totaling $75.3 million at June 29, 2002.
As of June 29, 2002, the Company had no borrowings outstanding under
the one-year revolving credit facility and $30.9 million outstanding
under the short-term uncommitted credit lines.
The Company is a party to various master lease programs and a contract
finishing agreement (the "Facility Agreements") with limited
partnerships and a limited liability company which own certain of the
facilities that are used in connection with the Company's vertically
integrated hog production. These arrangements are accounted for as
operating leases. At June 29, 2002, the total amount of unamortized
costs representing fixed asset values and the underlying outstanding
debt under these Facility Agreements was approximately $183.0 million.
These hog production facilities produce approximately 45% of the
Company owned hogs processed at the plant. During the second quarter
of 2002, the underlying bank facility in one of the limited
partnerships was extended to December 2002. The Company currently
intends to purchase certain assets from the limited partnerships for
approximately $121.0 million, subject to obtaining the necessary
financing. Management is uncertain as to the exact timing of this
purchase but anticipates finalizing the purchase and related financing
during the third quarter of 2002. The Company is also currently
evaluating various options for certain of the remaining facilities,
including purchasing certain assets from the limited partnerships
($26.3 million at June 29, 2002) or having the limited partnerships
and limited liability company attempt to sell properties to third
parties with which the Company may enter into grower arrangements.
Currently, management believes that it will have sufficient liquidity
and financing capacity to accomplish any of the alternatives.
In addition to the financing requirements to accommodate the Pork
segment expansion plans, the Company's Senior Notes continue to mature
through 2007. Management believes that the Company's current
combination of liquidity, capital resources and borrowing capabilities
will be adequate for its existing operations during fiscal 2002.
Management is evaluating various alternatives for future financings to
provide adequate liquidity for the Company's future operating and
expansion plans. In addition, management intends to continue seeking
opportunities for expansion in the industries in which it operates.
RESULTS OF OPERATIONS
Net sales for the three and six months ended June 29, 2002, increased
by $8.6 and $16.3 million, respectively, compared to the same periods
one year earlier. Operating income for the three and six months ended
June 29, 2002 decreased by $24.4 and $25.7 million, respectively,
compared to the same periods one year earlier. Results of operations
for interim periods are not necessarily indicative of results to be
expected for a full year.
Pork Segment
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Dollars in millions) 2002 2001 2002 2001
Net sales $ 159.3 $ 211.1 $ 330.4 $ 393.0
Operating income (loss) $ (5.4) $ 25.5 $ (2.8) $ 37.3
Net sales for the Pork segment decreased $51.8 and $62.6 million,
respectively, for the three and six months ended June 29, 2002
compared to the same periods in 2001 primarily as a result of lower
pork prices. Reduced world-wide meat supplies during 2001 contributed
to higher sales prices for that year. During 2002, domestic meat
supplies have increased, causing increased competition for pork
products which has resulted in significantly lower sales prices
compared with the prior year.
Operating income for the Pork segment decreased $30.9 and $40.1
million, for the three and six months ended June 29, 2002,
respectively, compared to the same periods in 2001, resulting in
operating losses for the 2002 periods. The decreases primarily
reflect the lower sales prices discussed above, partially offset by a
decrease in cost of third party hogs. While unable to predict future
market prices, management expects pork prices will remain below prior
year levels and anticipates operating income for the remainder of 2002
will continue to be significantly lower than 2001, including the
potential for breakeven operating results or minimal losses.
Commodity Trading and Milling Segment
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Dollars in millions) 2002 2001 2002 2001
Net sales $ 184.1 $ 121.0 $ 331.7 $ 237.3
Operating income $ 7.6 $ 4.2 $ 14.4 $ 4.5
Loss from foreign affiliates $ (0.0) $ (1.2) $ (1.2) $ (1.8)
Net sales for the Commodity Trading and Milling segment increased
$63.1 and $94.4 million, respectively, for the three and six months
ended June 29, 2002 compared to the same periods in 2001. The
increase is primarily a result of increased commodity trading volumes
to third party customers, increased milling revenues and, to a lesser
extent, increased commodity trading volumes to foreign affiliates.
Commodity trading volumes to third party customers increased as the
Company has focused its efforts on expanding in certain existing and
new trading markets. Milling revenues have increased primarily as a
result of favorable operating environments in certain foreign
locations, which have allowed certain mills to increase production
levels.
Operating income for this segment increased $3.4 and $9.9 million for
the three and six months ended June 29, 2002, respectively, compared
to the same periods in 2001. Operating income increased primarily
from increased trading volumes discussed above, increased production
at certain foreign milling operations, and, to a lesser extent, a
lower provision for bad debts. In addition, operating income for the
six months ended June 29, 2002 increased $3.0 million compared to 2001
as a result of the change in the Company's treatment of commodity
contracts. During 2001, commodity derivative contracts were treated
as fair value hedges with minimal earnings impact since the related
firm contract was also marked to market. While the Company believes
its commodity futures and options are economic hedges of its firm
purchase and sales contracts, beginning in the fourth quarter of 2001,
the Company discontinued the extensive record-keeping required to
account for commodity transactions as fair value hedges. As a result,
during 2002, while the derivative contracts have been marked-to-market
through cost of goods sold, the related, offsetting change in market
value of the firm commitments has not been recognized. Accordingly,
the Company will recognize decreased operating income in future
quarters related to these contracts based on current market values.
Due to the nature of this segment's operations and its exposure to
foreign political and economic situations, management is unable to
predict future sales and operating results.
Loss from foreign affiliates decreased $1.2 and $0.6 million for the
three and six months ended June 29, 2002, respectively, compared to
the same periods in 2001. These decreases are primarily a result of
improved operating environments at certain African milling operations
during the second quarter. Based on the exposure to foreign political
and economic situations in the countries in which the flour and feed
mills operate, management believes that losses from foreign affiliates
for the remainder of 2002 are possible.
Marine Segment
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Dollars in millions) 2002 2001 2002 2001
Net sales $ 96.6 $ 96.7 $ 187.5 $ 186.6
Operating income $ 5.6 $ 6.4 $ 9.2 $ 11.0
Net sales for the Marine segment remained fairly constant for the
three and six months ended June 29, 2002 compared to the same periods
in 2001. Overall, lower average cargo rates compared with prior year
were primarily offset by higher volumes to certain markets. Beginning
in March 2002, the Company experienced declining cargo volumes in
certain South American markets as the result of political instability
in that region, but this decline was offset by increases in other
markets.
Operating income for the Marine segment decreased $0.8 and $1.8
million, respectively, for the three and six months ended June 29,
2002 compared to the same periods in 2001, primarily reflecting the
lower margins due to declining cargo rates. The duration and extent
of certain South American political instability will continue to
affect future results while shipping demand for that market remains
depressed. Although Management expects operating results for this
segment to remain profitable during 2002, with the political
instability of certain markets, operating income for the remainder of
2002 is expected to be lower than 2001.
Sugar and Citrus Segment
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Dollars in millions) 2002 2001 2002 2001
Net sales $ 14.6 $ 16.8 $ 29.3 $ 37.2
Operating income $ 4.8 $ 2.2 $ 7.9 $ 3.2
Net sales for the Sugar and Citrus segment decreased $2.2 and $7.9
million, respectively, for the three and six months ended June 29,
2002 compared to the same periods in 2001. This decrease primarily
reflects the devaluation of the Argentine peso, discussed below,
partially offset by higher sales prices for sugar and, during the
second quarter of 2002, increased sales volumes. Operating income
increased $2.6 and $4.7 million, respectively, for the three and six
months ended June 29, 2002 compared to the same periods in 2001,
reflecting the reduction in cost of goods sold as a result of the
devaluation and improved sales prices. At this time, management is
not able to predict future sugar prices and operating income for the
remainder of 2002 in light of the events in Argentina discussed below.
As discussed in Note 2 to the Consolidated Financial Statements, the
functional currency of the Sugar and Citrus segment, the Argentine
peso, continues to devalue compared to the U.S. dollar resulting in
material currency translation losses. Operating income, as discussed
above, does not include the effects of the material currency
translation losses on shareholders' equity and net earnings that have
been incurred by the Company. The economy of Argentina has been
severely, negatively impacted by the devaluation and continuing
recession. To date, the peso prices for sugar have increased more
than peso costs have increased, resulting in improved operating income
in terms of U.S. dollars. However, as a result of the economic
turmoil and uncertainty, it is not possible for management to predict
if this trend will continue or if costs will begin to increase more
than sugar prices in the coming months.
Power Segment
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Dollars in millions) 2002 2001 2002 2001
Net sales $ 16.3 $ 16.2 $ 28.5 $ 33.2
Operating income $ 3.3 $ 3.9 $ 4.9 $ 7.2
Net sales for the Power segment increased $0.1 million and decreased
$4.7 million, respectively, for the three and six months ended June
29, 2002 compared to the same periods in 2001 reflecting lower average
market rates in the spot market for the first three months of 2002.
Through the third quarter of 2001, all sales from this division were
made under contract to the state-owned electric company. That
contract was rescinded during September 2001 and the Company began
selling power at market rates on the spot market. Market rates
decreased through the first quarter of 2002 reflecting, in part, lower
average fuel costs, a component of pricing, but gradually increased
during the second quarter ultimately reaching levels more comparable
with the prior year.
Operating income decreased $0.6 and $2.3 million, respectively, for
the three and six months ended June 29, 2002 compared to the same
periods in 2001 primarily reflecting the lower average market rates
and additional transmission fees, partially offset by lower operating
expenses. The 2002 second quarter results improved over the first
quarter, reflecting the improvement in prices during the quarter as
discussed above. While management is not able to predict future
market rates, it is anticipated that operating income will be lower
for the remainder of 2002 compared to 2001.
All Other
Three Months Ended Six Months Ended
June 29, June 30, June 29, June 30,
(Dollars in millions) 2002 2001 2002 2001
Net sales $ 6.1 $ 6.7 $ 12.7 $ 16.6
Operating loss $ (0.0) $ (1.4) $ (0.5) $ (3.3)
Loss from foreign affiliates $ (1.2) $ (1.2) $ (2.1) $ (1.2)
Net sales for all other businesses decreased $0.6 and $3.9 million,
respectively, and operating loss decreased $1.4 and $2.8 million,
respectively, for the three and six months ended June 29, 2002
compared to the same periods of 2001. These decreases are primarily
the result of the Produce division's decision to cease shrimp, pickle
and pepper farming operations in Honduras. Management currently
anticipates improved operating results for the remainder of 2002
compared to 2001. Management has evaluated the recoverability of
those long-lived farming assets at December 31, 2001, believes the
value is presently recoverable, and is currently considering various
strategic alternatives for those assets. However, the final decision
regarding the alternatives, or continued losses from existing
operations, could result in the carrying values not being recoverable,
and could result in a material charge to earnings for the impairment
of those assets.
The loss from foreign affiliates represents the Company's share of
losses from an equity method investment in a Bulgarian wine business.
The equity in losses from that investment began during the second
quarter of 2001. See Note 6 to the Consolidated Financial Statements
for a discussion of the Company's investment in Fjord Seafood ASA
whose results will be included using the equity method of accounting
in future financial statements. Management currently anticipates
continuing losses for the remainder of 2002.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses decreased $5.2 and
$9.6 million, respectively, for the three and six months ended June
29, 2002 compared to the same periods in 2001. The decrease primarily
reflects lower operating costs for the Sugar and Citrus segment,
including the effects of the Argentine peso devaluation on peso
denominated expenses, reduced operating expenses in the Marine and
Power divisions and lower provision for bad debts in the Commodity
Trading and Milling division. As a percentage of revenues, SG&A
decreased to 5.2% and 5.6% from 6.4% and 6.7%, respectively, for the
three months and six months ended June 29, 2002 compared to the same
periods in 2001. These decreases are primarily the result of
increased revenues in the Commodity Trading and Milling segment and
the reduced SG&A expenses in the segments discussed above.
Interest Expense
Interest expense decreased $2.0 and $4.5 million, respectively, for
the three and six months ended June 29, 2002 compared to the same
periods in 2001. The decrease is primarily a result of a lower
average level of short-term and long-term borrowings outstanding
during the 2002, and, to a lesser extent, lower average interest
rates.
Interest Income
Interest income decreased $0.7 and $1.4 million, respectively, for the
three and six months ended June 29, 2002 compared to the same periods
in 2001 reflecting a reduction in average funds invested and lower
average interest rates during 2002.
Other Investment Income, Net
During the second quarter of 2001, the Company exchanged its non-
controlling interest in a joint venture for shares of common stock in
Fjord Seafood ASA resulting in gain of $18.7 million ($11.4 million
after taxes). Subsequently, primarily as a result of lower operating
results, the need for additional capital, and the price decline of
Fjord's common stock, management determined the decline in value of
its total investment to be other than temporary and recorded a charge
to earnings of $18.6 million ($11.4 million after taxes) during the
third quarter of 2001.
Foreign Currency Losses, Net
Foreign currency losses, net, increased for 2002 primarily reflecting
the effect of the Argentine peso devaluation on the dollar denominated
assets and liabilities of the Company's Argentine subsidiary. See
Note 2 to the Consolidated Financial Statements for additional
discussion of the devaluation. As a result of the continuing economic
uncertainties in Argentina, management is unable to predict the future
extent of any further devaluation of the Argentine peso.
Miscellaneous, Net
Miscellaneous, net, for the 2002 three and six-month periods includes
$9.6 and $8.5 million of losses, respectively, from interest rate swap
agreements partially offset by a gain of $4.9 million in the second
quarter related to proceeds received from a lawsuit as discussed in
Note 4 to the Consolidated Financial Statements.
Income Tax Expense
During the second quarter of 2002, the Company recognized a one-time
tax benefit of $14.3 million related to Tabacal. See Note 4 to the
Consolidated Financial Statements for additional discussion.
Excluding the effects of Tabacal, discussed above, the effective tax
rate decreased during 2002 compared to 2001 primarily as the result of
increased permanently deferred foreign earnings and lower domestic
taxable income.
Other Financial Information
The Financial Accounting Standards Board (FASB) has issued SFAS No.
143, "Accounting for Asset Retirement Obligations", effective for
fiscal years beginning after June 15, 2002. This statement will
require the Company to record a long-lived asset and related liability
for estimated future costs of retiring certain assets. The estimated
asset retirement obligation, discounted to reflect present value, will
grow to reflect accretion of the interest component. The related
retirement asset will be amortized over the economic life of the
related asset. Upon adoption of this statement, a cumulative effect
of a change in accounting principle will be recorded at the beginning
of the year to recognize the deferred asset and related accumulated
amortization to date and the estimated discounted asset retirement
liability together with cumulative accretion since the inception of
the liability.
The Company will incur asset retirement obligation costs associated
with the closure of the hog lagoons it is legally obligated to close.
Accordingly, the Company is performing detailed assessments and
obtaining the appraisals required to estimate the future retirement
costs. Although these costs could change by the date of adoption, it
is currently estimated that the Company will record a cumulative
effect of approximately $2.1 million as a charge to earnings, an
increase in net fixed assets of $2.9 million and a liability of
$5.0 million for this change in accounting principle at the date of
adoption. Currently, the Company plans to adopt this statement during
the first quarter of fiscal 2003. During 2003, the Company currently
estimates the total accretion of the liability and depreciation of
fixed assets to increase cost of sales by approximately $0.5 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various types of market risks from its day-
to-day operations. Primary market risk exposures result from changing
interest rates, commodity prices and foreign currency exchange rates.
Changes in interest rates impact the cash required to service variable
rate debt. From time to time, the Company uses interest rate swaps to
manage risks of increasing interest rates. Changes in commodity
prices impact the cost of necessary raw materials, finished product
sales and firm sales commitments. The Company uses corn, wheat,
soybeans and soybean meal futures and options to manage certain risks
of increasing prices of raw materials and firm sales commitments.
From time to time, the Company uses hog futures to manage risks of
increasing prices of live hogs acquired for processing. Changes in
foreign currency exchange rates impact the cash paid or received by
the Company on foreign currency denominated receivables and payables.
The Company manages certain of these risks through the use of foreign
currency forward exchange agreements. Changes in the exchange rate
for the Argentine peso affect the valuation of foreign currency
denominated net assets of the Company's Argentine subsidiary and net
earnings for the impact of the change on that subsidiary's dollar
denominated net liabilities. The Company's market risk exposure
related to these items has not changed materially since December 31,
2001.
SEABOARD CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, on June 29, 2001, the EPA filed a Unilateral
Administrative Order (the "RCRA Order"), pursuant to Section 7003 of
the Resource Conservation and Recovery Act, as amended, 42 U.S.C.
Sec. 6973 ("RCRA"), against the Company's subsidiary, Seaboard Farms,
Inc. ("Seaboard Farms"), Shawnee Funding, Limited Partnership, and PIC
International Group, Inc. ("PIC") (collectively, "Respondents"). The
RCRA Order alleges that five swine farms located in Major County and
Kingfisher County, Oklahoma purchased from PIC are causing or could
cause contamination of the groundwater. The RCRA Order alleges that,
as a result, Respondents have contributed to an "imminent and
substantial endangerment" within the meaning of RCRA from the leaking
of solid waste in the lagoons or other infrastructure at the farms.
The RCRA Order requires Respondents to develop and undertake a study
to determine if there has been any contamination from farm
infrastructure and, if contamination has occurred, to develop and
undertake a remedial plan. In the event the Respondents fail to
comply with the RCRA Order, the EPA may commence a civil action and
can seek a civil penalty of up to $5,500 per day, per violation.
The Company has recently received notice from the State of Oklahoma
alleging that the Company has violated various provisions of Oklahoma
state law and the operating permits related to these farms based on
the same conditions which gave rise to the RCRA Order.
Although the Company disputes the RCRA Order and the State of
Oklahoma's contentions, the Company is cooperating with the EPA and
the State of Oklahoma.
The farms that are the subject of the RCRA Order and the allegations
by the State of Oklahoma were previously owned by PIC. PIC is
presently providing indemnity and defense of the RCRA Order (reserving
its right to contest the obligation to do so) and the Company has
demanded that PIC provide indemnity and defense with respect to any
actions taken by the State of Oklahoma. The Company does not believe
there are valid grounds for PIC to contest its obligation to provide
the indemnity and defense of these matters. One indemnity agreement
with PIC is subject to a $5,000,000 limit, but the Company believes
that a more general environmental indemnity agreement would require
indemnification of liability in excess of that amount.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on April 29, 2002 in
Newton, Massachusetts. Two items were submitted to a vote of
stockholders as described in the Company's Proxy Statement dated March
12, 2002. The following table briefly describes the proposals and
results of the stockholders' vote.
Votes in Votes
Favor Against Abstain
1. To elect:
H. Harry Bresky 1,293,424.75 0 40,428
David A. Adamsen 1,328,840.75 0 5,012
Douglas W. Baena 1,329,315.75 0 4,537
Joe E. Rodrigues 1,329,075.75 0 4,777
and Thomas J. Shields 1,328,790.75 0 5,062
as directors.
2. To ratify selection of KPMG LLP
as independent auditors. 1,328,623.75 2,604 2,625
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act 2002
(b) Reports on Form 8-K. - Seaboard Corporation has not filed any
reports on Form 8-K during the quarter ended June 29, 2002.
This Form 10Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, which may
include statements concerning projection of revenues, income or loss,
capital expenditures, capital structure or other financial items,
statements regarding the plans and objectives of management for future
operations, statements of future economic performance, statements of
the assumptions underlying or relating to any of the foregoing
statements and other statements which are other than statements of
historical fact. These statements appear in a number of places in
this Report and include statements regarding the intent, belief or
current expectations of the Company and its management with respect to
(i) the cost and timing of the completion of new or expanded
facilities, (ii) the Company's financing plans, (iii) the price of
feed stocks and other materials used by the Company, (iv) the sale
price for pork products from such operations, (v) the price for the
Company's products and services, (vi) the effect of the devaluation of
the Argentine peso, (vii) the effect of changes to the produce
division operations on the consolidated financial statements of the
Company, (viii) the potential impact of various environmental actions
pending or threatened against the Company or (ix) other trends
affecting the Company's financial condition or results of operations.
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties,
and that actual results may differ materially as a result of various
factors. The accompanying information contained in this Form 10-Q,
including without limitation the information under the headings
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," identifies important factors which could cause
such differences.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: August 5, 2002
Seaboard Corporation
by: /s/ Robert L. Steer
Robert L. Steer, Senior Vice President,
Treasurer, and Chief Financial Officer
by: /s/ John A. Virgo
John A. Virgo, Corporate Controller