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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 September 27, 2003
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 .
Indicate by a check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yes X . No .
There were 1,255,053.90 shares of common stock, $1.00 par
value per share, outstanding on October 24, 2003.
Total pages in filing - 19 pages
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of dollars)
(Unaudited)
September 27, December 31,
2003 2002
Assets
Current assets:
Cash and cash equivalents $ 25,903 $ 23,242
Short-term investments 33,203 30,337
Receivables, net 185,592 201,792
Inventories 255,578 243,949
Deferred income taxes 18,475 15,481
Other current assets 33,391 42,896
Total current assets 552,142 557,697
Investments in and advances to
foreign affiliates 66,771 83,855
Net property, plant and equipment 630,328 621,593
Other assets 19,510 17,996
Total assets $1,268,751 $1,281,141
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 60,042 $ 76,112
Current maturities of long-term debt 55,197 55,869
Accounts payable 68,302 67,464
Other current liabilities 151,010 156,917
Total current liabilities 334,551 356,362
Long-term debt, less current maturities 313,888 318,746
Deferred income taxes 74,190 71,509
Other liabilities 45,536 40,639
Total non-current and deferred liabilities 433,614 430,894
Minority interest 5,995 7,154
Stockholders' equity:
Common stock of $1 par value,
Authorized 4,000,000 shares;
issued and outstanding 1,255,054 shares 1,255 1,255
Accumulated other comprehensive loss (58,237) (67,284)
Retained earnings 551,573 552,760
Total stockholders' equity 494,591 486,731
Total liabilities and stockholders' equity $1,268,751 $1,281,141
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 Nine Months Ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
Net sales $ 485,417 $ 429,800 $1,433,167 $1,349,827
Cost of sales and
operating expenses 441,037 394,901 1,316,421 1,231,700
Gross income 44,380 34,899 116,746 118,127
Selling, general and
administrative expenses 26,535 25,588 80,638 76,870
Operating income 17,845 9,311 36,108 41,257
Other income (expense):
Interest expense (6,844) (5,129) (20,393) (15,777)
Interest income 450 1,079 2,037 4,241
Loss from foreign
affiliates (15,054) (1,410) (20,932) (8,174)
Minority interest (344) (74) (452) (617)
Foreign currency loss, net (914) (739) (7,015) (14,735)
Miscellaneous, net 5,448 (14,312) 6,780 (17,301)
Total other income
(expense), net (17,258) (20,585) (39,975) (52,363)
Earnings (loss) before
income taxes and
cumulative effect of
changes in accounting
principles 587 (11,274) (3,867) (11,106)
Income tax benefit 1,251 5,601 1,856 22,254
Earnings (loss) before
cumulative effect of
changes in accounting
principles 1,838 (5,673) (2,011) 11,148
Cumulative effect of
changes in accounting
for asset retirement
obligations and drydock
accruals, net of income
tax expense of $550 - - 3,648 -
Net earnings (loss) $ 1,838 $ (5,673) $ 1,637 $ 11,148
Net earnings (loss) per
common share:
Earnings (loss) per share
before cumulative effect
of changes in accounting
principles $ 1.46 $ (3.81) $ (1.60) $ 7.49
Cumulative effect of
changes in accounting
for asset retirement
obligations and drydock
accruals - - 2.90 -
Net earnings (loss) per
common share $ 1.46 $ (3.81) $ 1.30 $ 7.49
Dividends declared per
common share $ 0.75 $ 0.75 $ 2.25 $ 1.75
Average number of shares
outstanding 1,255,054 1,487,520 1,255,054 1,487,520
Pro forma amounts assuming
changes in accounting for
asset retirement
obligations and drydock
accruals were applied
retroactively:
Net earnings (loss) $ 1,838 $ (6,166) $ (2,011) $ 11,661
Net earnings (loss) per
common share $ 1.46 $ (4.15) $ (1.60) $ 7.84
See notes to condensed consolidated financial statements.
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Thousands of dollars)
(Unaudited)
Nine Months Ended
September 27, September 28,
2003 2002
Cash flows from operating activities:
Net earnings $ 1,637 $ 11,148
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 47,715 37,780
Loss from foreign affiliates 20,932 8,174
Foreign currency exchange loss (gain) (3,891) 12,526
Cumulative effect in accounting changes, net (3,648) -
Deferred income taxes (4,427) (24,947)
Changes in current assets and liabilities:
Receivables, net of allowance 18,801 (1,089)
Inventories (8,292) (30,947)
Other current assets 9,065 14,245
Current liabilities exclusive of debt (39) 9,732
Other, net (3,068) (3,387)
Net cash from operating activities 74,785 33,235
Cash flows from investing activities:
Purchase of short-term investments (32,036) (123,916)
Proceeds from the sale or maturity of short-term
investments 29,671 181,087
Investments in and advances to foreign affiliates,
net (393) (27,033)
Capital expenditures (25,050) (34,115)
Other, net 3,848 1,696
Net cash from investing activities (23,960) (2,281)
Cash flows from financing activities:
Notes payable to banks, net (16,070) (2,387)
Principal payments of long-term debt (30,655) (29,530)
Dividends paid (2,824) (2,603)
Bond construction fund 655 569
Other, net (1,611) -
Net cash from financing activities (50,505) (33,951)
Effect of exchange rate change on cash 2,341 (4,167)
Net change in cash and cash equivalents 2,661 (7,164)
Cash and cash equivalents at beginning of year 23,242 22,997
Cash and cash equivalents at end of period $ 25,903 $ 15,833
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 condensed 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 condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 2002 as filed in its Annual
Report on Form 10-K, as amended. 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.
The accompanying unaudited condensed 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.
Interest Rate Exchange Agreements
The Company's interest rate exchange agreements do not qualify as
hedges for accounting purposes. While the three months ended
September 27, 2003 includes gains of $4,768,000, the nine month period
includes losses of $2,926,000 related to these swaps. This compares
to losses of $14,161,000 and $22,639,000 for the same periods of 2002.
The gains and losses are included in miscellaneous, net on the
Condensed Consolidated Statements of Earnings and reflect changes in
fair market value, net of amounts paid or received. The 2003 amounts
include net payments of $2,175,000 and $5,118,000 for the three and
nine month periods, respectively, resulting from the difference
between the fixed rate paid and variable rate received on these
contracts compared with payments of $1,808,000 and $4,106,000 for the
same periods in 2002.
Supplemental Non-cash Disclosures
As more fully described in Note 2, the volatility of the Argentine
peso has affected the U.S. dollar value of the peso-denominated assets
and liabilities of the Sugar and Citrus segment. During the nine
months ended September 27, 2003, the Company recorded non-cash net
gains of $3,891,000 compared with non-cash net losses of $12,526,000
for the same 2002 period related to revaluations of certain dollar
denominated net liabilities. In addition, see Note 2 for a discussion
of the tax benefits recorded in the second quarter of 2002 related to
the devaluation. The following table shows the non-cash impact of the
change in exchange rates on various peso-denominated balance sheet
categories, caused by the peso devaluation during 2002 and subsequent
strengthening during 2003.
Nine Months Ended
September 27, September 28,
Increase (Decrease) (thousands of dollars) 2003 2002
Working capital $ 7,555 $(16,470)
Fixed assets 6,949 (35,226)
Other long-term net assets or liabilities 62 (1,908)
During the second quarter of 2003, in connection with the purchase of
certain hog production facilities previously leased under a master
lease agreement, the Company recorded fixed assets of $25,042,000, and
assumed debt and a related interest payable totaling $24,507,000. See
Note 5 for additional discussion.
Accounting Changes and New Accounting Standards
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standard No. 143 (FAS 143), "Accounting for Asset
Retirement Obligations," which required the Company to record a long-
lived asset and related liability for asset retirement obligation
costs associated with the closure of the hog lagoons it is legally
obligated to close. Accordingly, on January 1, 2003, the Company
recorded the cumulative effect of the change in accounting principle
with a charge to earnings of $2,195,000 ($1,339,000 net of tax), an
increase in fixed assets of $3,221,000, and the recognition of a
liability, discounted to reflect present value, of $5,416,000. The
retirement asset is amortized over the economic life of the related
asset. The Company currently estimates the annual accretion of the
liability and amortization of the assets during 2003 will increase
cost of sales by approximately $540,000. The adoption of SFAS 143
decreased operating income by $143,000 and $398,000, and net earnings
by $87,000 and $243,000, or $0.07 and $0.19 per common share
respectively, for the three and nine months ended September 27, 2003.
If the Company had adopted SFAS 143 retroactively to January 1, 2002,
operating income, net earnings and net earnings per common share would
have decreased by $117,000, $71,000 and $0.05 per share, respectively,
for the three months ended and $349,000, $213,000 and $0.14 per share,
respectively, for the nine months ended September 28, 2002.
Through December 31, 2002, costs expected to be incurred during
regularly scheduled drydocking of vessels were accrued ratably prior
to the drydock date. Effective January 1, 2003, the Company changed
its method of accounting for these costs from the accrual method to
the direct-expense method. Under the new accounting method, drydock
maintenance costs are recognized as expense when maintenance services
are performed. The Company believes the newly adopted accounting
principle is preferable in these circumstances because the maintenance
expense is not recorded until the maintenance services are performed
and, accordingly, the direct-expense method eliminates significant
estimates and judgments inherent under the accrual method. As a
result, on January 1, 2003, the Company reversed the balance of the
accrued liability for drydock maintenance as of December 31, 2002 for
its Marine, Commodity Trading and Milling, and Power segments,
resulting in an increase in earnings of $6,393,000 ($4,987,000 net of
related tax expense) as a cumulative effect of a change in accounting
principle. The application of the new accounting principle decreased
operating income and net earnings for the third quarter of 2003 by
$38,000 and $97,000, respectively ($0.08 per common share). For the
nine months ended September 27, 2003, operating income and net
earnings increased $394,000 and $316,000, respectively ($0.25 per
common share). The Company currently estimates the change from
accruing in advance to expensing as incurred will reduce cost of sales
by approximately $800,000 during 2003. If the change in accounting
principle was made retroactively to January 1, 2002, operating income,
net earnings and net earnings per common share would have decreased by
$835,000, $422,000, and $0.28 per share respectively, for the 2002
three month period and increased $720,000 and $726,000, and $0.49 per
common share respectively, for the 2002 nine month period.
In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46 (FIN 46), "Consolidation of Variable
Interest Entities". FIN 46 applies to an entity if its total equity
at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support or if the equity
investors lack certain characteristics of a controlling financial
interest. If an entity has these characteristics, FIN 46 requires a
test to identify the primary beneficiary based on expected losses and
expected returns associated with the variable interest. The primary
beneficiary is then required to consolidate the entity. In October
2003, the FASB delayed the effective date of FIN 46. Accordingly,
while the consolidation requirements apply to all variable interest
entities (VIEs) created after January 31, 2003, for VIEs that existed
prior to February 1, 2003, the consolidation requirements will be
effective for reporting periods ending after December 15, 2003 for
those VIEs that remain in existence.
The Company is a party to certain contract production agreements (the
"Facility Agreements") with limited liability companies which own
certain of the facilities used in connection with the Company's
vertically integrated hog production. Through September 27, 2003,
these arrangements have been accounted for as operating leases. These
facilities are owned by companies considered to be VIEs in accordance
with FIN 46, for which the Company is deemed to be the primary
beneficiary. Accordingly, the Company will be required to consolidate
these entities in the fourth quarter of 2003. Under one Facility
Agreement, the Company has certain rights to acquire any or all of the
properties at the conclusion of their respective terms at a price
which is expected to reflect estimated fair market value of the
property. In the event the Company does not acquire any property
which it has ceased to lease, the Company has a limited obligation for
any deficiency between the amortized cost of the property and the
price for which it is sold, up to a maximum of 80% to 87% of amortized
cost. As of September 27, 2003, the value of fixed assets related to
this property was $31,219,000. Consolidation of these VIEs on
September 27, 2003 would have increased fixed assets, related debt and
noncontrolling interest by $32,342,000, $31,919,000 and $1,791,000,
respectively, with a cumulative effect of a change in accounting
principle for the excess of fixed asset depreciation over mortgage
loan amortization of $1,206,000, ($736,000 net of tax, or $0.59 per
common share). These amounts are not expected to change materially by
December 31, 2003, the date of adoption for FIN 46.
Note 2 - Comprehensive Income (Loss)
Components of total comprehensive income (loss), net of related taxes, are
summarized as follows:
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Thousands of dollars) 2003 2002 2003 2002
Net (loss) income $1,838 $(5,673) $ 1,637 $11,148
Other comprehensive income
(loss) net of applicable
taxes:
Foreign currency
translation adjustment 30 5,290 9,175 1,648
Unrealized gains (losses)
on investments 79 (190) 117 (63)
Net unrealized gains
(losses) on foreign
exchange cash flow
hedges (19) (70) (94) 6
Amortization of deferred
gain on interest rate
swaps (51) (50) (151) (150)
Total comprehensive income
(loss) $1,877 $ (693) $10,684 $12,589
The components of and changes in accumulated other comprehensive loss
for the nine months ended September 27, 2003 are as follows:
Balance Balance
December 31, Period September 27,
(Thousands of dollars) 2002 Change 2003
Foreign currency translation adjustment $(62,555) $9,175 $(53,380)
Unrealized gain on investments 118 117 235
Unrecognized pension cost (5,799) - (5,799)
Net unrealized loss on cash flow hedges - (94) (94)
Deferred gain of interest rate swaps 952 (151) 801
Accumulated other comprehensive loss $(67,284) $9,047 $(58,237)
The foreign currency translation adjustment primarily represents the
effect of the Argentine peso currency exchange fluctuation on the net
assets of the Company's Sugar and Citrus segment as first recorded by
the Company in the fourth quarter of 2001 when the one to one parity
with the U.S. dollar was lifted. Since that time, the peso has
devalued approximately 66%. As of September 27, 2003, the Company had
net assets with a carrying value of $61,045,000 denominated in
Argentine pesos which have been revalued through the foreign currency
translation adjustment. In addition, the Company had $10,503,000 of
dollar denominated net liabilities which are first revalued to the
peso currency through earnings. During 2003, the strengthening of the
peso increased total stockholders' equity by $11,215,000 including an
earnings increase of $758,000 for the dollar denominated net
liabilities, and a positive translation adjustment of $10,457,000
included as a component of other comprehensive income. During 2002,
the devaluation of the peso resulted in a charge against earnings of
$12,526,000 for the nine months ended September 28, 2002 for the
dollar denominated net liabilities, and an additional translation loss
of $37,262,000 included as a component of other comprehensive loss.
Until the second quarter of 2002, no tax benefit was provided related
to the reduction to stockholders' equity. However, after a series of
transactions was completed which changed the organizational structure
of the Company's Sugar and Citrus segment, a deferred tax benefit of
$34,641,000 relating to the currency translation adjustment component
of accumulated other comprehensive loss, and a one-time current
benefit of $14,303,000 were recorded in the second quarter of 2002.
Since then, income taxes have been accrued at a 35% rate.
The unrecognized pension cost is calculated and adjusted annually
during the fourth quarter. With the exception of the foreign currency
translation loss discussed above, 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 September 27, 2003 and
December 31, 2002 (in thousands):
September 27, December 31,
2003 2002
At lower of LIFO cost or market:
Live hogs & materials $136,004 $129,386
Dressed pork & materials 20,297 21,198
156,301 150,584
LIFO allowance (15,149) (11,422)
Total inventories at lower of LIFO
cost or market 141,152 139,162
At lower of FIFO cost or market:
Grain, flour and feed 85,214 80,618
Sugar produced & in process 12,331 9,929
Other 16,881 14,240
Total inventories at lower of FIFO
cost or market 114,426 104,787
Total inventories $255,578 $243,949
Note 4 - Contingencies
In early 2003, individual bills (the Bills) were introduced in the
United States Senate and House of Representatives which include a
provision to prohibit meat packers, such as the Company, from owning
or controlling livestock intended for slaughter. The Bills also
contain a transition rule applicable to packers of pork providing for
an effective date which is 18 months after enactment. Similar
language was passed by the U.S. Senate in 2002 as part of the Senate's
version of the Farm Bill, but was eventually dropped in conference
committee and was not part of the final Farm Bill.
If any of the Bills containing the proposed language become law, it
could have a material adverse effect on the Company, its operations
and its strategy of vertical integration in the pork business.
Currently, the Company owns and operates production facilities and
owns swine and produces over three million hogs per year. If passed
in their current form, the Bills would prohibit the Company from
owning or controlling hogs, and thus would require the Company to
divest these operations, possibly at prices which are below the
carrying value of such assets on the Company's balance sheet, or
otherwise restructure its ownership and operation. At September 27,
2003, the Company had $385,512,000 in hog production facilities
classified as net fixed assets on the Condensed Consolidated Balance
Sheet and approximately $32,342,000 in hog production facilities under
facility agreements (see Note 1 for a discussion of FIN 46). In
addition, the Company has $136,004,000 invested in live hogs and
related materials classified as inventory on the Consolidated Balance
Sheet.
The Bills could also be construed as prohibiting or restricting the
Company from engaging in various contractual arrangements with third
party hog producers, such as traditional contract finishing
arrangements. At September 27, 2003, the Company had approximately
$98,784,000 in commitments through 2018 for various grower finishing
agreements. In addition, another bill was introduced in the Senate in
May 2003 which prohibits or severely limits the use of forward
contracts for hog purchases. Accordingly, the Company's ability to
contract for the supply of hogs to its processing facility could be
significantly, negatively impacted.
The Company, along with industry groups and other similarly situated
companies are vigorously lobbying against enactment of any such
legislation. However, Management cannot presently predict the
ultimate outcome.
The Company is a defendant in a pending arbitration proceeding 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 plaintiff has the right to continue
the arbitration based on other legal theories, but currently the
plaintiff is not actively prosecuting the matter. The Company
believes that it will have no responsibility for the loss.
The Company has reached an agreement to settle litigation brought by
the Sierra Club, subject to court approval. Under the terms of the
settlement, the Company will conduct an investigation at three farms
and potentially will be required to take remedial actions at the farms
if conditions so warrant.
The Company is subject to regulatory actions and an investigation by
the United States Environmental Protection Agency and the State of
Oklahoma. In the opinion of Management, the above action and
investigation are not expected to result in a material adverse effect
on the consolidated financial statements of the Company.
The Company is subject to various other legal proceedings related to
the normal conduct of its business, including various environmental
related actions. In the opinion of management, none of these actions
is expected to have a materially adverse effect on the consolidated
financial statements of the Company.
Certain of the Company's nonconsolidated affiliates and third party
contractors who perform services for the Company have bank debt
supporting their underlying operations. From time to time, the
Company will provide partial guarantees of that debt allowing a lower
borrowing rate or facilitating third party financing in order to
further the Company's business objectives. The Company is not
compensated for these guarantees. The following table sets forth the
terms of guarantees of third party and nonconsolidated affiliate bank
indebtedness outstanding at September 27, 2003.
Guarantee beneficiary Maximum exposure Maturity
Foreign non-consolidated affiliate grain
processor-Uganda $1,300,000 2004
Foreign non-consolidated affiliate food
product distributor-Ecuador $ 400,000 2004
Various hog contract growers $1,585,000 2004
The Company's guarantees of the various hog contract growers secure
underlying debt that does not mature until 2013 and 2014 and may
require annual renewal until the related debt matures.
The Company's Sugar and Citrus segment has agreed to market certain
sugar product for a third party under a contract expiring in 2008. In
the event the Company does not perform under the contract, it would be
responsible to make payments to the third party of a maximum of
$1,000,000 for 2003, decreasing annually to $200,000 in 2008.
As of September 27, 2003, the Company had outstanding $20,541,000 of
standby letters of credit (LCs) with various banks to facilitate
operations of consolidated subsidiaries and limited affiliate
projects. Of these LCs, $8,822,000 reduced available borrowing
capacity under the Company's credit lines. One LC for 4,000,000 Euros
(approximately $4,590,000) was issued to facilitate bridge borrowing
from a bank for the Company's Bulgarian wine affiliate which will be
repaid (and LC cancelled) from proceeds of escrowed funds generated
from the sale of certain fixed assets and inventory of that affiliate.
Because the contracted sales price of the assets serving as collateral
for the LC was in excess of LC amount, the Company did not record a
liability for this LC. The Company also obtained an LC for
approximately $1,519,000 to support purchases for a non-controlled
affiliate mill expansion project. While this affiliate has sufficient
liquidity to pay for the improvements, the mill is located in Haiti
and the LC was posted in lieu of advance vendor payments for the
purchases.
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, along with
losses from foreign affiliates for the Commodity Trading and Milling
Division, is used as the measure of evaluating segment performance
because management does not consider interest and income tax expense
on a segment basis.
During the second quarter of 2003, the Company purchased certain hog
production facilities previously leased under a master lease agreement
with Mission Funding, LLC for $25,042,000, consisting of $535,000 net
cash and the assumption of $24,507,000 in bank debt and a related
interest payable.
Management ceased its shrimp, pickle and pepper farming operations in
Honduras in the fourth quarter of 2001. During the third quarter
of 2003, the Company sold its shrimp farming and shrimp processing
assets for $3,900,000, including cash received of $200,000 and notes
receivable of $3,700,000, due in annual installments through 2009.
Since a significant portion of the proceeds is in the form of a note
receivable, the Company will use the cost recovery method of
accounting, and no gain will be recognized by the Company until the
actual cash is collected. The remaining book value of the assets sold
of $2,744,000 is reflected as assets sold under contract and is
included in other assets on the consolidated Balance Sheet. In
addition, certain pickle and pepper farming assets are leased to local
farmers. The remaining carrying value of the pickle and farming
assets to be disposed is not material.
As of September 27, 2003 the Company owned approximately 20% of Fjord
Seafood ASA (Fjord), an integrated salmon producer and processor
headquartered in Norway, which is accounted for on a three-month lag
using the equity method. Due primarily to sustained low world-wide
salmon prices, Fjord's second quarter losses included asset impairment
charges primarily related to inventory and fixed assets of which the
Company recorded its share, $6,684,000, during the third quarter of
2003. However, world-wide salmon prices have begun to improve during
the third quarter. On October 30, 2003, Fjord announced their third
quarter earnings which included additional asset impairments, and a
bank waiver regarding the covenant of EBITDA to Net Interest Bearing
Debt. These additional asset impairments relate to write-downs of
licenses and fixed assets of its United States operation as a result
of a recent unfavorable U.S. Court ruling restricting Fjord from the use
of its genetic material and requiring extended fallowing of sites.
Accordingly, the Company also recorded its share of these asset
impairments, $5,737,000, in the third quarter of 2003. As of
September 27, 2003, the carrying value of the Company's investment in
Fjord was $21,166,000 compared to a market value of approximately
$34,475,000 (based on September 26, 2003 per share stock price of 2.77
NOK per share, as quoted on the Oslo Stock Exchange), which has remained
fairly constant through November 4, 2003. On November 4, 2003, Fjord
announced a private placement, subject to approval by the Oslo Stock
Exchange, of 36,363,636 shares at 2.75 NOK per share. This private
placement will decrease the Company's ownership in Fjord to below 20%
and may result in the Company changing its accounting for this investment
from the equity method to the cost method during the fourth quarter of
2003. The Company's share of losses from Fjord is included in All
Other in the Loss from Foreign Affiliates table and the investment
balance is included with Corporate Items in the Total Assets table below.
The Bulgarian wine business (the Business), in which the Company owns
approximately 37% and accounts for using the equity method, had
negotiated a series of extensions after it was unable to make
scheduled principal payments to a bank. During the third quarter of
2003, the Business successfully negotiated a refinancing of certain of
its debt. As part of the refinancing, the bank forgave a portion of
the debt and the Business contracted to sell certain assets, the
proceeds of which will be used to repay a portion of the principal
balance plus accrued interest. As a result of this transaction, the
Business incurred a loss from the sale of assets, net of the gain from
debt forgiveness, of which the Company recorded its share, $1,489,000,
during the third quarter of 2003. As of September 27, 2003, the book
value of Company's investments in and advances to the Business totaled
$16,914,000. The Company's share of losses from the Business is
included with All Other in the loss from foreign affiliates table
below.
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, as a result of
currency fluctuations, the carrying value of peso-denominated assets
have increased by $15,972,000 during 2003.
Sales to External Customers:
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Thousands of dollars) 2003 2002 2003 2002
Pork $186,125 $147,864 $ 531,238 $ 478,253
Commodity Trading and
Milling 151,830 152,845 478,971 484,517
Marine 99,301 91,801 295,625 279,264
Sugar and Citrus 22,710 14,364 53,305 43,659
Power 18,099 16,338 52,516 44,863
All Other 7,352 6,588 21,512 19,271
Segment/Consolidated
Totals $485,417 $429,800 $1,433,167 $1,349,827
Operating Income:
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Thousands of dollars) 2003 2002 2003 2002
Pork $ 3,954 $ (2,397) $ 2,250 $ (5,232)
Commodity Trading and
Milling 5,445 3,480 10,002 17,836
Marine (1,394) 3,190 42 12,365
Sugar and Citrus 5,899 3,375 15,237 11,322
Power 3,309 2,488 8,250 7,400
All Other 832 121 1,642 (415)
Segment Totals 18,045 10,257 37,423 43,276
Corporate Items (200) (946) (1,315) (2,019)
Consolidated Totals $ 17,845 $ 9,311 $ 36,108 $ 41,257
Loss from Foreign Affiliates:
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Thousands of dollars) 2003 2002 2003 2002
Commodity Trading and
Milling $ 788 $ (427) $ (871) $ (1,687)
All Other (15,842) (983) (20,061) (6,487)
Segment/Consolidated
Totals $(15,054) $ (1,410) $ (20,932) $ (8,174)
Total Assets:
September 27, December 31,
(Thousands of dollars) 2003 2002
Pork $ 642,892 $ 627,937
Commodity Trading and Milling 223,397 239,187
Marine 113,502 117,366
Sugar and Citrus 83,350 69,515
Power 75,464 73,872
All Other 15,788 15,971
Segment Totals 1,154,393 1,143,848
Corporate Items 114,358 137,293
Consolidated Totals $1,268,751 $1,281,141
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.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments as of September 27, 2003, remained
consistent with year end balances as the reduction of receivable
balances and cash generated from current operating activities was used
to pay maturing debt and fund capital expenditures. Cash from
operating activities for the nine months ended September 27, 2003,
increased $41.6 million compared to the same period one year earlier.
The increase in cash flows was primarily related to an improvement in
net earnings after adjustment for non-cash items, and changes in the
components of working capital, primarily in the Commodity Trading and
Milling segment. Within the Commodity Trading and Milling segment,
lower sales in 2003 resulted in a decrease in receivables and a
smaller increase in inventories compared to higher sales during 2002
which caused an increase in receivables and a larger increase in
inventories for 2002.
Cash from investing activities for the nine months ended September 27,
2003, decreased $21.7 million compared to the same period one year
earlier. The decrease primarily reflects the higher net sales of
short-term investments during 2002 partially offset by an additional
$26.9 million investment in Fjord Seafood ASA in 2002, which increased
the Company's percentage ownership to approximately 20%.
The Company invested $25.1 million in property, plant and equipment
for the nine months ended September 27, 2003, of which $14.5 million
was expended in the Pork segment, $4.7 million in the Marine segment,
$3.9 million in the Sugar and Citrus segment, and $2.0 million in
other businesses of the Company.
The Company invested $14.5 million in the Pork segment primarily for
the expansion of existing hog production facilities, and land
acquisition and permitting activities to support the requirements of a
second processing plant. In addition, the hog production facilities
previously leased from Mission Funding, LLC under a master lease
arrangement were also purchased during the second quarter of 2003 for
a total of $25.0 million, including the assumption of $24.5 million in
bank debt and a related interest payable.
The Company previously announced plans to build a second processing
plant in northern Texas along with related plans to expand its
vertically integrated hog production facilities. Based on current
financial and market conditions in the pork industry caused by the
oversupply of hogs and pork, the Company does not intend to proceed
with the expansion project at this time beyond the expenditures
required to allow future land development possibilities should market
conditions change. If the Company ultimately pursues this project, it
is also contingent on a number of other factors, including obtaining
financing for the project, obtaining the necessary permits,
commitments for a sufficient quantity of hogs to operate the plant,
and no statutory impediments being imposed. As of September 27, 2003,
$7.6 million of land, development costs, and land purchase options
were included in fixed assets related to this project. During the
remainder of 2003, the Company anticipates spending $1.5 million for
activities to support this Texas project, and $2.4 million for
improvements to existing hog production facilities and upgrades to the
existing pork processing plant.
The Company invested $4.7 million in the Marine segment primarily to
expand and replace fleet and cargo transportation equipment and make
facility improvements. Instead of purchasing two previously charted
vessels during the third quarter, the Company entered into new leasing
arrangements. During the remainder of 2003, the Company anticipates
spending $6.7 million to purchase additional equipment.
The Company invested $3.9 million in the Sugar and Citrus segment
primarily for machinery and equipment, and improvements to sugarcane
fields. During the remainder of 2003, the Company anticipates
spending $0.4 million for additional improvements.
Excluding the potential Pork expansion plans, management anticipates
the additional 2003 capital expenditures for existing operations will
be financed by internally generated cash or the use of available short-
term investments.
Cash from financing activities during the nine months ended September
27, 2003 decreased $16.6 million compared to the same period in 2002
primarily reflecting reductions in short-term borrowings.
In the first quarter of 2003, the Company extended a $20.0 million
revolving credit facility, and entered into two new committed lines
for $75.0 million and $5.0 million for use by a subsidiary in the
Commodity Trading and Milling segment. The new subsidiary credit
lines are secured by certain of the Company's commodity trading
inventory and accounts receivable and include financial covenants for
that subsidiary which require maintenance of certain levels of working
capital and net worth, and limitations on debt to net worth and
liabilities to net worth ratios. As of September 27, 2003, the
Company had committed lines of credit totaling $125.0 million and
uncommitted lines totaling $58.8 million. Borrowings outstanding
under committed and uncommitted lines as of September 27, 2003 totaled
$40.0 million and $20.0 million, respectively. As of September 27,
2003, standby letters of credit of $8.8 million reduced the Company's
borrowing capacity.
The Company is a party to certain contract production agreements (the
"Facility Agreements") with limited liability companies which own
certain of the facilities used in connection with the Company's
vertically integrated hog production. Through September 27, 2003,
these arrangements have been accounted for as operating leases. These
facilities are owned by companies considered to be variable interest
entities (VIEs) in accordance with Financial Accounting Standards
Board Interpretation No. 46 (FIN 46), for which the Company is deemed
to be the primary beneficiary. Accordingly, the Company will be
required to consolidate these entities in the fourth quarter of 2003.
Consolidation of these VIEs as of September 27, 2003 would have
increased fixed assets, related debt and noncontrolling interest by
$32,362,000, $31,919,000, and $1,791,000 respectively, with a
cumulative effect of a change in accounting principle for the excess
of fixed asset depreciation over mortgage loan amortization of
$1,206,000, ($736,000 net of tax, or $0.59 per common share). These
amounts are not expected to change materially by December 31, 2003,
the date of adoption for FIN 46.
In addition to the financing requirement to accommodate the Pork
segment expansion plans, the Company continues to make payments on
maturing Senior Notes. Management believes that the Company's current
combination of liquidity, capital resources and borrowing capabilities
will be adequate for its existing operations. 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.
See Note 4 to the Condensed Consolidated Financial Statements for
additional information with regard to commercial commitments and
contingent obligations.
RESULTS OF OPERATIONS
Net sales for the three and nine months ended September 27, 2003,
increased by $55.6 and $83.3 million, respectively, compared to the
same periods one year earlier. Operating income increased by $8.5
million for the quarter and decreased $5.1 million for the nine month
period 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 Nine Months Ended
September 27, September 28, September 27, September 28,
(Dollars in millions) 2003 2002 2003 2002
Net sales $ 186.1 $ 147.9 $ 531.2 $ 478.3
Operating income (loss) $ 4.0 $ (2.4) $ 2.3 $ (5.2)
Net sales for the Pork segment increased $38.2 and $52.9 million,
respectively, for the three and nine months ended September 27, 2003
compared to the same periods in 2002 primarily as a result of improved
pork prices. Excess domestic meat supplies resulted in lower sales
prices throughout 2002 and into early 2003, although prices have
generally improved during 2003 compared with the first nine months of
2002.
Operating income for the Pork segment increased $6.4 and $7.5 million,
for the three and nine months ended September 27, 2003, respectively,
compared to operating losses for the same periods in 2002. The
increases primarily reflect improved market prices discussed above,
partially offset by higher feed costs and higher costs of hogs
purchased from third parties. Included in the 2003 nine month period
is a $1.6 million charge incurred in the second quarter for abandoned
land development costs for several potential hog production sites that
the Company determined it would no longer pursue. While unable to
predict future market prices, management currently expects overall
market conditions to continue to improve compared to prior year
allowing this segment to maintain its positive operating income for
the remainder of 2003.
Commodity Trading and Milling Segment
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Dollars in millions) 2003 2002 2003 2002
Net sales $ 151.8 $ 152.8 $ 479.0 $ 484.5
Operating income $ 5.4 $ 3.5 $ 10.0 $ 17.8
Income (loss) from
foreign affiliates $ 0.8 $ (0.4) $ (0.9) $ (1.7)
Net sales for the Commodity Trading and Milling segment decreased $1.0
and $5.5 million for the three and nine months ended September 27,
2003 compared to the same periods in 2002. The decreases are
primarily the result of lower commodity trading volumes to third party
customers during 2003 as a result of changing crop conditions in
Southern Africa, partially offset by higher average selling prices and
increased sales to affiliates.
Operating income for this segment increased $1.9 million for the
quarter but decreased $7.8 million for the nine months ended September
27, 2003, respectively, compared to the same periods in 2002.
Operating income decreased for the nine month period primarily from
lower margins on commodity trading activity as a result of changing
crop conditions in Southern Africa, as noted above, and to a lesser
extent, increased selling expenses and reserves for bad debts. In
addition, while the Company believes its commodity futures and options
are economic hedges of its firm purchase and sales contracts, the
Company does not perform the extensive record-keeping required to
account for commodity transactions as hedges. As a result, these
derivative contracts have been marked-to-market through cost of goods
sold, but the related, offsetting change in market value of the firm
sales commitments have not been recognized. Operating income for 2003
included realized derivative gains of $0.3 and $2.0 million for the
three and nine months ended September 27, 2003 compared to a 2002 loss
of $0.5 million for the third quarter and a year-to-date gain of $4.8
million. Due to the political and economic conditions in the
countries in which the Company operates, management is unable to
predict future sales and operating results.
Income (loss) from foreign affiliates improved $1.2 and $0.8 million
for the three and nine months ended September 27, 2003, respectively,
compared to the same periods in 2002. The improved results primarily
reflect profitable operations during the quarter for certain milling
operations. Based on the current political and economic situations in
the countries in which the flour and feed mills operate, management
cannot predict whether these foreign affiliates will continue to be
profitable for the remainder of 2003.
Marine Segment
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Dollars in millions) 2003 2002 2003 2002
Net sales $ 99.3 $ 91.8 $ 295.6 $ 279.3
Operating income (loss) $ (1.4) $ 3.2 $ 0.0 $ 12.4
Net sales for the Marine segment increased $7.5 and $16.3 million for
the three and nine months ended September 27, 2003 compared to the
same periods in 2002. These increases primarily reflect increased
cargo volumes in most existing markets, certain new routes added
during the fourth quarter of 2002, and chartering of certain company-
owned vessels to carry military cargo to the Middle East, partially
offset by a decrease in average cargo rates. However, since March
2002, this segment's operations began to experience significant
declines in cargo volumes for certain South American routes as a
result of the political instability in Venezuela. Commercial activity
has not yet recovered from the general strike that began in December
2002 and ended in February 2003.
Operating income for the Marine segment decreased $4.6 and $12.4
million, respectively, for the three and nine months ended September
27, 2003 compared to the same periods in 2002, primarily reflecting
the impact of the political instability in Venezuela, discussed above,
higher fuel costs and, to a lesser extent, increased selling expenses
as a result of new routes. The reduced margin for the comparative
nine month periods also reflects a higher level of bad debt expense.
The duration and extent of reduced shipping demand, primarily
attributed to the economic contraction in Venezuela, will continue to
affect future results while shipping demand for affected South
American routes remains depressed. Management is not able to predict
when economic conditions will improve for the markets in which this
segment operates, and cannot predict whether this segment will return
to profitable operations during the remainder of the year.
Sugar and Citrus Segment
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Dollars in millions) 2003 2002 2003 2002
Net sales $ 22.7 $ 14.4 $ 53.3 $ 43.7
Operating income $ 5.9 $ 3.4 $ 15.2 $ 11.3
The functional currency of the Sugar and Citrus segment is the
Argentine peso. After the Argentine government ended the one peso to
one U.S. dollar parity in January 2002, the peso suffered significant
and on-going devaluation throughout the first half of 2002 before
stabilizing somewhat for the last half of the year. During 2003, the
peso has regained some value. See Note 2 to the Condensed
Consolidated Financial Statements for further discussion.
Net sales for the Sugar and Citrus segment increased $8.3 and $9.6
million for the three and nine months ended September 27, 2003
compared to the same periods in 2002. These increases are primarily
the result of higher sugar prices and, to a lesser extent for the
quarter, higher sales volumes. Year-to-date sales volumes remain
lower as a result of lower quantities of sugar purchased from third
parties, partially offsetting the increase in sales price. The peso
price of sugar has increased over the 2002 period prices to offset the
effects of the devaluation of the peso. Operating income increased
$2.5 and $3.9 million for the three and nine months ended September
27, 2003, respectively, compared to the same periods in 2002 primarily
from the increase in net sales. While management is not able to
predict future sugar prices or whether costs will increase more than
sugar prices in the coming months, management expects operating income
will remain positive for 2003.
Power Segment
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Dollars in millions) 2003 2002 2003 2002
Net sales $ 18.1 $ 16.3 $ 52.5 $ 44.9
Operating income $ 3.3 $ 2.5 $ 8.3 $ 7.4
Net sales for the Power segment increased $1.8 and $7.6 million for
the three and nine months ended September 27, 2003 compared to the
same periods in 2002, primarily reflecting an increase in rates.
During 2003, spot prices have increased as a result of higher fuel
costs, a component of pricing, and have also been impacted by the
change in the exchange rate for Dominican pesos (see discussion
below). The Company continues to contract directly with large power
users to reduce the exposure to changes in spot market rates and
currency fluctuations. Contract pricing and the valuation of the
corresponding receivable is more closely tied to the U.S. dollar while
spot market sales are stated in Dominican Pesos. As of September 27,
2003, the Company has contracts in place for approximately 57% of its
capacity.
Operating income increased $0.8 and $0.9 million for the three and
nine months ended September 27, 2003 respectively, compared to the
same periods in 2002 primarily reflecting higher sales prices. The
economy and liquidity in Dominican Republic (D.R.) has weakened
significantly during 2003, causing delays in the collection of certain
large customer accounts associated with the D.R. government. The
trade receivables for this segment have nearly doubled during the
third quarter and management continues to monitor the situation
closely. While management is not able to predict whether multilateral
credit agencies will provide funding support to this country as
currently being discussed, funding would provide needed liquidity to
help the government pay its commercial debts. Although management
cannot predict future spot market rates or potential funding support,
it is anticipated that operating income will remain positive for the
remainder of 2003.
Foreign exchange losses are a component of other income (expense) and
not operating income. While the Dominican Peso has stabilized
somewhat during the third quarter, it devalued significantly against
the U.S. dollar during the first half of 2003. Accordingly, the
Company incurred foreign currency losses of $6.1 million for the nine
months ended September 27, 2003 related to the Power division.
Although the Company cannot predict foreign currency exchange rates,
given the current economic condition in the D.R., without funding
support it is reasonable to assume that there is the potential for
additional foreign currency losses during the remainder of 2003.
All Other
Three Months Ended Nine Months Ended
September 27, September 28, September 27, September 28,
(Dollars in millions) 2003 2002 2003 2002
Net sales $ 7.4 $ 6.6 $ 21.5 $ 19.3
Operating income (loss) $ 0.8 $ 0.1 $ 1.6 $ (0.4)
Loss from foreign
affiliates $ (15.8) $ (1.0) $ (20.1) $ (6.5)
Net sales and operating income for all other businesses increased for
the three and nine months ended September 27, 2003 compared to the
same periods in 2002 primarily from improvements in the Produce
Division. During the third quarter of 2003, the Company sold the
shrimp farming and shrimp processing assets. See Note 5 to the
Condensed Consolidated Financial Statements for additional discussion.
The loss from foreign affiliates represents the Company's share of
losses from equity method investments in Fjord Seafood ASA (Fjord) and
a Bulgarian wine business. Operating results for these investments
are recorded on a three-month lag. Continued losses from Fjord result
primarily from low world-wide salmon prices and asset impairment
charges. Salmon prices have recently begun to improve, however. The
losses recorded by the Company during the third quarter include
$6.7 million for the Company's share of asset impairment charges
incurred by Fjord during its second quarter, primarily related to
inventory and fixed assets, and additional impairment charges totaling
$5.7 million relating to Fjord's third quarter impairments which
resulted mostly from an unfavorable U.S. Court ruling restricting the
use of its genetic material and requiring extended fallowing of sites
for its U.S. operations. Although management cannot predict future
salmon prices, losses are expected to continue through the remainder
of 2003. The market value of the Company's investment in Fjord,
based on the September 26, 2003 closing stock price of 2.77 NOK per
share as quoted on the Oslo Stock Exchange, was approximately $34.5
million compared to the book value of $21.2 million. Fjord's stock
price has remained fairly constant through November 4, 2003. On
November 4, 2003, Fjord announced a private placement, subject to
approval by the Oslo Stock Exchange, of 36,363,636 shares at 2.75 NOK
per share. This private placement will decrease the Company's ownership
in Fjord to below 20% and may result in the Company changing its
accounting for this investment from the equity method to the cost method
during the fourth quarter of 2003.
The Bulgarian wine business (the Business), in which the Company owns
approximately 37%, had negotiated a series of extensions after it was
unable to make scheduled principal payments to a bank. During the
third quarter of 2003, the Business successfully negotiated a
refinancing of certain of its debts. As part of the refinancing, the
bank forgave a portion of the debt and the Business contracted to sell
certain assets, the proceeds of which will be used to repay a portion
of the principal balance plus accrued interest. As a result of this
transaction, the Business incurred a loss from the sale of assets, net
of the gain from debt forgiveness, of which the Company recorded its
share, $1,489,000, during the third quarter of 2003. As of
September 27, 2003, the book value of the Company's investments in and
advances to the Business totaled $16.9 million.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased $0.9 and
$3.8 million, respectively, for the three and nine months ended
September 27, 2003 compared to the same periods in 2002. These
increases primarily reflect increased selling and bad debt expenses in
the Marine and Commodity Trading and Milling divisions. As a
percentage of revenues, SG&A decreased to 5.5% and 5.6% from 6.0% and
5.7%, respectively, for the three months and nine months ended
September 27, 2003 compared to the same periods in 2002.
Interest Expense
Interest expense increased $1.7 and $4.6 million, respectively, for
the three and nine months ended September 27, 2003 compared to the
same periods in 2002. These increases are primarily the result of
higher average levels of short-term and long-term debt outstanding
during the 2003 periods.
Interest Income
Interest income decreased $0.6 and $2.2 million, respectively, for the
three and nine months ended September 27, 2003 compared to the same
periods in 2002 primarily reflecting a reduction of average funds
invested during 2003.
Foreign Currency Losses, Net
Foreign currency losses increased $0.2 million for the quarter and
decreased $7.7 million for the nine months ended September 27, 2003
compared with the same periods in 2002. The year-to-date losses
during 2003 primarily result from the effects of the devaluation of
the Dominican Republic peso during the first half of the year on peso-
denominated net assets of the Power division, principally customer
receivables. The 2002 exchange losses primarily resulted from the
effect of the 2002 devaluation of the Argentine peso on dollar
denominated net liabilities of the Sugar and Citrus segment. See Note
2 to the Condensed Consolidated Financial Statements for additional
discussion of the Argentine peso devaluation. The Company operates in
many developing countries throughout the world. The political and
economic conditions of these markets cause volatility in currency
exchange rates and expose the Company to risk of exchange loss.
Miscellaneous, Net
Miscellaneous, net, for the 2003 three and nine month periods includes
gains of $0.4 and $7.0 million, related to proceeds from settlements
of antitrust litigation primarily arising out of purchases by the
Company of methionine, a feed additive used by the Company. The 2002
nine month period includes a gain of $5.0 million related to proceeds
from a settlement of antitrust litigation against several
manufacturers of vitamins and feed additives. Miscellaneous, net also
includes a $4.8 million gain for the third quarter of 2003 and a $2.9
million loss for the 2003 nine-month period on interest rate exchange
agreements. This compares to losses of $14.2 and $22.6 million
respectively, for the comparable 2002 periods. These swap agreements
do not qualify as hedges for accounting purposes and accordingly,
changes in the market value are recorded to earnings as interest rates
change.
Income Tax Expense
For 2003 and 2002, the Company has generated income from foreign
operations which it plans to permanently invest overseas, free from
tax, and domestic source losses which generate tax benefits. During
the third quarter of 2003, the Company revised its effective annual
tax rate as a result of changes in the estimated percentage mix of
foreign versus domestic results. During the second quarter of 2002,
the Company recognized a one-time tax benefit of $14.3 million related
to the Company's Sugar and Citrus segment. See Note 2 to the
Consolidated Financial Statements for additional discussion.
Excluding the effects of the one-time benefit discussed above, the
income tax benefits recorded for the nine months of 2003 decreased
compared to 2002 primarily due to reduced levels of current year
domestic net losses subject to tax.
Other Financial Information
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities". FIN 46 applies to an entity if its total equity
at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support or if the equity
investors lack certain characteristics of a controlling financial
interest. If an entity has these certain characteristics, FIN 46
requires a test to identify the primary beneficiary based on expected
losses and expected returns associated with the variable interest.
The primary beneficiary is then required to consolidate the entity.
The consolidation requirements apply to all variable interest entities
(VIEs) created after January 31, 2003. In October 2003, the FASB
delayed the effective date of FIN 46. Accordingly, the Company must
apply the consolidation requirements for VIEs that existed prior to
February 1, 2003 and remain in existence as of the end of the
reporting period ending after December 15, 2003. See Note 1 to the
Condensed Consolidated Financial Statements for the related disclosure
of existing VIEs as of September 27, 2003.
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,
2002.
Item 4. Controls and Procedures
The Company has established a system of controls and other procedures
designed to ensure that information required to be disclosed in its
periodic reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's
rules and forms. These disclosure controls and procedures have been
evaluated under the direction of the Company's Chief Executive Officer
and Chief Financial Officer as of the end of the period covered by
this report. Based on such evaluations, the Chief Executive Officer
and Chief Financial Officer have concluded that the disclosure
controls and procedures are effective. There has not been any change
in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer Pursuant to
Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer Pursuant to
Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 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
32.2 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 of 2002
(b) Reports on Form 8-K. - On August 5, 2003 Seaboard Corporation
filed a report on Form 8-K including the press release of
earnings of Seaboard Corporation for the second quarter ended
June 28, 2003.
This Form 10-Q 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 ability to obtain adequate financing
and liquidity, (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 demand for power and related spot prices in the Dominican
Republic, (vii) the effect of currency fluctuations of the Argentine
and Dominican Republic pesos, (viii) the effect of changes to the
produce division operations on the consolidated financial statements
of the Company, (ix) the potential effect of the proposed meat packer
ban legislation, (x) the effect of the Venezuelan economy on the
Company's Marine Division, (xi) the potential effect of the Company's
investments in a wine business and salmon and other seafood business
on the consolidated financial statements of the Company, (xii) the
potential impact of various environmental actions pending or
threatened against the Company or (xiii) 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: November 4, 2003
Seaboard Corporation
by: /s/ Robert L. Steer
Robert L. Steer, Senior Vice President,
Treasurer, and Chief Financial Officer
(principal financial officer)
by: /s/ John A. Virgo
John A. Virgo, Corporate Controller
(principal accounting officer)