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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 April 3, 2004
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)
(913) 676-8800
(Registrant's telephone number, including area code)
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 April 26, 2004.
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)
April 3, December 31,
2004 2003
Assets
Current assets:
Cash and cash equivalents $ 17,665 $ 37,377
Short-term investments 90,491 58,022
Receivables, net 216,681 190,013
Inventories 303,761 276,033
Deferred income taxes 20,808 17,972
Other current assets 51,984 35,419
Total current assets 701,390 614,836
Investments in and advances to foreign affiliates 47,447 46,680
Net property, plant and equipment 634,220 643,968
Other assets 20,868 20,207
Total assets $1,403,925 $1,325,691
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 73,598 $ 75,564
Current maturities of long-term debt 57,201 56,983
Accounts payable 69,685 61,817
Other current liabilities 187,737 149,726
Total current liabilities 388,221 344,090
Long-term debt, less current maturities 319,111 321,555
Deferred income taxes 97,019 85,295
Other liabilities 48,473 46,720
Total non-current and deferred liabilities 464,603 453,570
Minority and other noncontrolling interests 1,868 7,466
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 (59,295) (61,527)
Retained earnings 607,273 580,837
Total stockholders' equity 549,233 520,565
Total liabilities and stockholders' equity $1,403,925 $1,325,691
See notes to condensed consolidated financial statements.
1
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended
April 3, March 29,
2004 2003
Net sales:
Products $ 478,067 $ 344,598
Service revenues 122,081 99,645
Other 15,527 17,624
Total net sales 615,675 461,867
Cost of sales and operating expenses:
Products 432,461 325,713
Services 98,363 87,078
Other 11,279 13,727
Total cost of sales and operating expenses 542,103 426,518
Gross income 73,572 35,349
Selling, general and administrative expenses 30,810 27,375
Operating income 42,762 7,974
Other income (expense):
Interest expense (7,739) (6,821)
Interest income 1,755 742
Loss from foreign affiliates (137) (3,291)
Minority and other noncontrolling interests (82) (253)
Foreign currency loss, net (1,661) (1,370)
Miscellaneous, net 2,340 2,208
Total other income (expense), net (5,524) (8,785)
Earnings (loss) before income taxes and cumulative
effect of changes in accounting principles 37,238 (811)
Income tax expense (9,861) (122)
Earnings (loss) before cumulative effect of changes
in accounting principles 27,377 (933)
Cumulative effect of changes in accounting for asset
retirement obligations and drydock accruals,
net of income tax expense of $550 - 3,648
Net earnings $ 27,377 $ 2,715
Net earnings per common share:
Earnings (loss) per share before cumulative effect of
changes in accounting principles $ 21.81 $ (0.74)
Cumulative effect of changes in accounting for asset
retirement obligations and drydock accruals - 2.90
Net earnings per common share $ 21.81 $ 2.16
Dividends declared per common share $ 0.75 $ 0.75
Average number of shares outstanding 1,255,054 1,255,054
See notes to condensed consolidated financial statements.
2
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Thousands of dollars)
(Unaudited)
Three Months Ended
April 3, March 29,
2004 2003
Cash flows from operating activities:
Net earnings $ 27,377 $ 2,715
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 16,356 16,414
Loss from foreign affiliates 137 3,291
Foreign currency exchange gains (435) (2,507)
Cumulative effect in accounting changes, net - (3,648)
Deferred income taxes 8,262 (3,309)
Changes in current assets and liabilities:
Receivables, net of allowance (26,386) 18,743
Inventories (27,228) 5,080
Other current assets (16,081) 1,535
Current liabilities exclusive of debt 40,068 (13,024)
Other, net 1,272 1,850
Net cash from operating activities 23,342 27,140
Cash flows from investing activities:
Purchase of short-term investments (33,499) (17,880)
Proceeds from the sale or maturity of short-term
investments 1,217 6,156
Investments in and advances to foreign affiliates, net 80 1,474
Capital expenditures (6,347) (10,517)
Other, net 80 1,447
Net cash from investing activities (38,469) (19,320)
Cash flows from financing activities:
Notes payable to banks, net (1,966) (1,741)
Principal payments of long-term debt (2,424) (1,095)
Dividends paid (941) (941)
Other, net - 396
Net cash from financing activities (5,331) (3,381)
Effect of exchange rate change on cash 746 822
Net change in cash and cash equivalents (19,712) 5,261
Cash and cash equivalents at beginning of year 37,377 23,242
Cash and cash equivalents at end of period $ 17,665 $ 28,503
See notes to condensed consolidated financial statements.
3
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
("Seaboard"). All significant intercompany balances and transactions
have been eliminated in consolidation. Seaboard'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 Seaboard for
the year ended December 31, 2003 as filed in its Annual Report on
Form 10-K. Seaboard's first three quarterly periods include
approximately 13 weekly periods ending on the Saturday closest to the
end of March, June and September. Seaboard'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
Seaboard's interest rate exchange agreements do not qualify as hedges
for accounting purposes. During the quarters ended April 3, 2004 and
March 29, 2003, Seaboard recorded losses of $2,743,000 and $749,000,
respectively, related to these agreements. The losses are included in
miscellaneous, net on the Condensed Consolidated Statements of
Earnings and reflect changes in fair market value, net of interest
paid or received. These amounts include net payments of $2,212,000
and $1,985,000 during 2004 and 2003, respectively, resulting from the
difference between the fixed rate paid and variable rate received on
these agreements.
Supplemental Non-cash Disclosures
The fluctuation 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 first quarter of 2004, this segment
recorded non-cash gains of $435,000 caused by the revaluation of
certain dollar denominated net liabilities compared to gains of
$2,507,000 during the first quarter of 2003. The following table
shows the non-cash impact of the change in exchange rates on various
balance sheet categories for the peso denominated assets and
liabilities.
Three Months Ended
April 3, March 29,
Increase in thousands of dollars 2004 2003
Working capital $1,425 $4,285
Fixed assets 849 4,330
Other long-term net assets 38 25
Accounting Changes and New Accounting Standards
Effective January 1, 2003, Seaboard adopted Statement of Financial
Accounting Standard No. 143 (SFAS 143), "Accounting for Asset
Retirement Obligations," which required Seaboard 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, Seaboard
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, or
$1.07 per common share). The following table shows the changes in the
asset retirement obligation during 2004.
Three Months Ended
Thousands of dollars April 3, 2004
Beginning balance $6,086
Accretion expense 113
Liability for additional lagoons placed in service 134
Ending balance $6,333
4
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, Seaboard 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. Seaboard 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 balance of the accrued liability for
drydock maintenance as of December 31, 2002 for its Commodity Trading
and Milling, Marine, and Power segments was reversed, resulting in an
increase in earnings of $6,393,000 ($4,987,000 net of related tax
expense or $3.97 per common share) as a cumulative effect of a change
in accounting principle.
As of December 31, 2003, Seaboard adopted Financial Accounting
Standards Board Interpretation No. 46, revised December 2003 (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. Based on its evaluations, Seaboard
consolidated certain limited liability companies as of
December 31, 2003, which own certain of the facilities used in
connection with Seaboard's vertically integrated hog production
because Seaboard was determined to be the primary beneficiary. If the
consolidation requirements would have been applied retroactively to
January 1, 2003, operating income, net earnings, and net earnings per
common share would have decreased by $67,000, $41,000 and $0.03,
respectively, for the first quarter of 2003.
Note 2 - Repurchase of Minority Interest
In connection with the December 2001 sale of a 10% minority interest
in one of the two power barges in the Dominican Republic, the buyer
was given a three-year option to sell the interest back to Seaboard
for the book value at the time of sale, pending collections of
outstanding receivables. During January 2004, the buyer provided
notice to exercise the option. As of April 3, 2004, the book value of
$5,709,000 was reclassified from minority and other noncontrolling
interests to other current liabilities on the Condensed Consolidated
Balance Sheets. An initial payment of $5,000,000 will be paid during
the second quarter of 2004 with the remaining balance payable upon
collection of the remaining outstanding receivables.
In addition, Seaboard has historically paid commissions to a related
entity of the above party relative to the performance of the other
power barge. Subsequent to April 3, 2004, Seaboard agreed to
terminate that relationship with a one-time payment of $2,000,000.
Note 3 - Comprehensive Income (Loss)
Components of total comprehensive income, net of related taxes, are
summarized as follows:
Three Months Ended
April 3, March 29,
(Thousands of dollars) 2004 2003
Net earnings $27,377 $ 2,715
Other comprehensive income (loss)
net of applicable taxes:
Foreign currency translation adjustment 2,244 6,791
Unrealized gains (losses) on investments 90 (32)
Net unrealized losses on cash flow hedges (52) (136)
Amortization of deferred gain on interest rate swaps (50) (50)
Total comprehensive income $29,609 $ 9,288
5
The components of and changes in accumulated other comprehensive loss
for the three months ended April 3, 2004 are as follows:
Balance Balance
December 31, Period April 3,
(Thousands of dollars) 2003 Change 2004
Foreign currency translation adjustment $(56,490) $2,244 $(54,246)
Unrealized gain on investments 14 90 104
Unrecognized pension cost (5,772) - (5,772)
Net unrealized loss on cash flow hedges (30) (52) (82)
Deferred gain of interest rate swaps 751 (50) 701
Accumulated other comprehensive loss $(61,527) $2,232 $(59,295)
The unrecognized pension cost is calculated and adjusted annually
during the fourth quarter. With the exception of the foreign currency
translation loss to which a 35% federal tax rate is applied, income
taxes for components of accumulated other comprehensive loss were
recorded using a 39% effective tax rate.
Note 4 - Inventories
The following is a summary of inventories at April 3, 2004 and
December 31, 2003:
April 3, December 31,
(Thousands of dollars) 2004 2003
At lower of LIFO cost or market:
Live hogs & materials $150,585 $142,396
Dressed pork & materials 25,795 22,220
176,380 164,616
LIFO allowance (8,758) (7,608)
Total inventories at lower
of LIFO cost or market 167,622 157,008
At lower of FIFO cost or market:
Grain, flour and feed 104,450 87,831
Sugar produced & in process 14,718 14,807
Other 16,971 16,387
Total inventories at lower
of FIFO cost or market 136,139 119,025
Total inventories $303,761 $276,033
Note 5 - Employee Benefits
Seaboard maintains a defined benefit pension plan (the Plan) for its
domestic salaried and clerical employees and also sponsors non-
qualified, unfunded supplemental executive plans, and unfunded
supplemental retirement agreements with certain executive employees.
As a result of recently passed pension relief legislation and
finalization of Plan data, in order to meet the minimum funding
standards to avoid Pension Benefit Guaranty Corporation variable rate
premiums established by the Employee Retirement Income Security Act of
1974, Seaboard revised its original schedule of contributions for 2004
from $7,000,000 to $5,763,000. The first payment of $1,922,000
was made on April 15, 2004.
The net periodic benefit cost of these plans was as follows:
Three months ended
April 3, March 29,
(Thousands of dollars) 2004 2003
Components of net periodic benefit cost:
Service cost $ 872 $ 828
Interest cost 974 1,019
Expected return on plan assets (792) (690)
Amortization and other 213 270
Net periodic benefit cost $ 1,267 $ 1,427
6
Note 6 - Contingencies
From time to time bills have been introduced in the United States
Senate and House of Representatives which include provisions to
prohibit meat packers, such as Seaboard, from owning or controlling
livestock intended for slaughter. If passed, such bills could
prohibit Seaboard from owning or controlling hogs, and thus would
require divestiture of our operations, possibly at prices which are
below the carrying value of such assets on the balance sheet, or
otherwise restructure its ownership and operation. Such bills could
also be construed as prohibiting or restricting Seaboard from engaging
in various contractual arrangements with third party hog producers,
such as traditional contract finishing arrangements. To date, none
have been passed into law nor does Seaboard expect any to be passed in
2004. However, Seaboard cannot assure such legislation will not be
adopted in the future. Seaboard, along with industry groups and
other similarly situated companies, continues to vigorously lobby
against enactment of any such legislation.
Seaboard reached an agreement in 2002 to settle litigation brought by
the Sierra Club. Under the terms of the settlement, Seaboard is
conducting an environmental investigation to determine the source of
elevated nitrates at three farms and potentially will be required to
take remedial actions at the farms if conditions so warrant.
Seaboard is subject to regulatory actions and an investigation by the
United States Environmental Protection Agency and the State of
Oklahoma. One such action involves five properties utilized in
Seaboard's hog production operations which were purchased from PIC
International Group, Inc. (PIC). PIC is indemnifying Seaboard with
respect to the action pursuant to an indemnification agreement which
has a $5 million limit. A settlement is being discussed with the
agencies. If the settlement being discussed is agreed to, the
estimated cumulative costs which will be expended will total
approximately $6.2 million, not including the additional legal costs
required to negotiate the settlement. If the measures taken pursuant
to the settlement are not effective, other measures with additional
costs may be required. PIC has advised Seaboard that it is not
responsible for the costs in excess of $5 million. Seaboard disputes
PIC's determination of the costs to be included in the calculation and
believes that the costs to be considered are less than $5 million,
such that PIC is responsible for all such costs, except for
approximately $180,000 of estimated costs that would be incurred over
5 years subsequent to the settlement for certain testing and sampling.
Seaboard Farms has agreed to conduct such testing and sampling as a
part of the sampling it conducts in the normal course of operations
and believes that the incremental costs incurred to conduct such
testing and sampling will be less than $180,000. Seaboard also
believes that a more general indemnity agreement would require
indemnification of a liability in excess of $5 million (excluding the
estimated $180,000 cost for testing and sampling), although PIC
disputes this. With respect to other actions and the investigation,
neither is expected to have a material adverse effect on Seaboard's
consolidated financial statements.
Seaboard 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 material adverse effect on Seaboard's
consolidated financial statements.
Contingent Obligations
Certain of the non-consolidated affiliates and third party contractors
who perform services for Seaboard have bank debt supporting their
underlying operations. From time to time, Seaboard will provide
guarantees of that debt allowing a lower borrowing rate or
facilitating third party financing in order to further Seaboard's
business objectives. Seaboard does not issue guarantees of third
parties for compensation. The following table sets forth the terms of
guarantees as of April 3, 2004.
Guarantee beneficiary Maximum exposure Maturity
Foreign non-consolidated affiliate grain $1,300,000 Annual renewal
processor - Uganda
Foreign non-consolidated affiliate food $ 400,000 August 2004
product distributor - Ecuador
Various hog contract growers $1,585,000 Annual renewal
7
Seaboard guaranteed a bank borrowing for a subsidiary of a non-
consolidated foreign affiliate grain processor in Kenya, Unga Holdings
Limited (Unga), to facilitate bank financing used for the
rehabilitation and expansion of a milling facility in Uganda. This
guarantee was a part of the original purchase agreement with Unga when
Seaboard first invested in this company in 2000. The guarantee can be
drawn upon in the event of non-payment of a bank borrowing by the
Unga's subsidiary. While the guarantee may be cancelled by Seaboard
annually, the bank has the right to draw on the guarantee in the event
it is advised that the guarantee will be cancelled. The guarantee
renews annually until the debt expires in 2007. Unga has provided a
reciprocal guarantee to Seaboard. As of April 3, 2004, this affiliate
had $1,049,000 of borrowings outstanding related to this guarantee.
The non-consolidated affiliate food product distributor in Ecuador
purchases certain products from a U.S. domiciled vendor. Seaboard has
guaranteed the payments for these purchases in order to secure normal
credit terms for this affiliate.
Seaboard has guaranteed a portion of the bank debt for certain
farmers, which debt proceeds were used to construct facilities to
raise hogs for Seaboard's Pork division. The guarantees enabled the
farmers to obtain favorable financing terms. These bank guarantees
renew annually until the underlying debt is fully repaid in 2013-2014.
The maximum exposure to Seaboard from these guarantees is $1,585,000.
Seaboard has not accrued a liability for any of the third party or
affiliate guarantees as management considered the likelihood of loss
to be remote.
As of April 3, 2004, Seaboard had outstanding $11,672,000 of letters
of credit with various banks that reduced Seaboard's borrowing
capacity under its committed credit facilities. The largest letter of
credit of $8,700,000 is for workers compensation insurance. Also
included is a letter of credit for $1,241,000 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 letter of credit was posted in lieu
of advance vendor payments for the purchases.
Note 7 - Segment Information
During the fourth quarter of 2003, Seaboard sold its equity investment
in Fjord, a non-consolidated affiliate included in the All Other
segment. Seaboard's share of Fjord's losses recognized during the
first quarter of 2003 totaled $999,000.
The following tables set forth specific financial information about
each segment as reviewed by Seaboard's management. Operating income
for segment reporting is prepared on the same basis as that used for
consolidated operating income. Operating income, along with income or
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.
Sales to External Customers:
Three Months Ended
April 3, March 29,
(Thousands of dollars) 2004 2003
Pork $ 211,722 $ 153,926
Commodity Trading and Milling 256,676 177,775
Marine 110,918 92,286
Sugar and Citrus 13,719 12,772
Power 15,527 17,624
All Other 7,113 7,484
Segment/Consolidated Totals $ 615,675 $ 461,867
8
Operating Income:
Three Months Ended
April 3, March 29,
(Thousands of dollars) 2004 2003
Pork $ 21,334 $ (1,445)
Commodity Trading and Milling 8,713 3,394
Marine 7,417 (951)
Sugar and Citrus 3,558 4,462
Power 1,525 2,465
All Other 525 787
Segment Totals 43,072 8,712
Corporate Items (310) (738)
Consolidated Totals $ 42,762 $ 7,974
Income (Loss) from Foreign Affiliates:
Three Months Ended
April 3, March 29,
(Thousands of dollars) 2004 2003
Commodity Trading and Milling $ 667 $ (1,700)
All Other (804) (1,591)
Segment/Consolidated Totals $ (137) $ (3,291)
Total Assets:
April 3, December 31,
(Thousands of dollars) 2004 2003
Pork $ 678,183 $ 670,288
Commodity Trading and Milling 289,266 243,065
Marine 112,064 114,375
Sugar and Citrus 75,367 75,674
Power 76,748 76,920
All Other 15,513 13,953
Segment Totals 1,247,141 1,194,275
Corporate Items 156,784 131,416
Consolidated Totals $1,403,925 $1,325,691
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.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Summary of Sources and Uses of Cash
Cash and short-term investments increased $12.8 million from
December 31, 2003 primarily reflecting the cash generated from
operations of $23.3 million less capital expenditures and debt
repayments. Cash from operating activities for the three months ended
April 3, 2004, decreased $3.8 million compared to the same period one
year earlier, primarily reflecting the increased working capital needs
of the Pork, Commodity Trading and Milling and Power segments.
Inventory levels increased for the Pork segment reflecting the
recently populated new hog production facilities. For the Commodity
Trading and Milling segment, the overall increase in trading activity
caused increases in accounts receivable and inventories. Working
capital needs also increased for the Power segment as a result of
slowed collections of accounts receivable.
Capital Expenditures
Seaboard invested $6.3 million in property, plant and equipment for
the three months ended April 3, 2004, of which $2.1 million was
expended in the Pork segment, $1.7 million in the Marine segment,
$1.6 million in the Commodity Trading and Milling segment and
$0.9 million in the remaining businesses. The capital expenditures
for 2004 are of a normal recurring nature and primarily include
replacements of machinery and equipment, and general facility
modernizations and upgrades. While there are no material commitments
for capital expenditures, during the remainder of 2004 management has
budgeted additional capital expenditures of $5.3 million in the Pork
segment, $4.6 million in the Commodity Trading and Milling segment,
$7.6 million in the Marine segment, $4.6 million in the Sugar and
Citrus segment and $0.5 million of all other businesses. Management
anticipates financing these capital expenditures from internally
generated cash, the use of available short-term investments or
existing short-term borrowing capacity.
Financing Activities and Debt
During the first quarter of 2004, Seaboard entered into two new, one-
year committed credit lines totaling $45.0 million and extended its
committed subsidiary credit facilities totaling $80.0 million through
April 30, 2004. As of April 3, 2004, Seaboard had committed lines of
credit totaling $170.0 million and uncommitted lines totaling
$52.0 million. Borrowings outstanding under committed and uncommitted
lines as of April 3, 2004 totaled $51.9 million and $21.7 million,
respectively. Outstanding standby letters of credit totaling
$11.7 million reduced Seaboard's borrowing capacity under its
committed credit lines.
Subsequent to April 3, 2004, Seaboard's committed subsidiary credit
lines totaling $80.0 million were combined into one facility,
increased to $95.0 million, and extended to April 30, 2005. This
facility is denominated in U.S. dollars. In addition, a $20.0 million
committed credit facility was extended for one additional year.
Management plans to evaluate the renewal of its remaining credit
facilities.
In addition to funding Seaboard's planned capital expenditures as
discussed above, Seaboard's remaining 2004 scheduled long-term debt
maturities total $54.9 million. Management believes that Seaboard's
current combination of internally generated cash, liquidity, capital
resources and borrowing capabilities will be adequate to make these
scheduled debt payments and support existing operations during fiscal
2004. Management does, however, periodically review various
alternatives for future financing to provide additional liquidity for
future operating plans. As management intends to continue seeking
opportunities for expansion in the industries in which Seaboard
operates, management may have to pursue financing alternatives at that
time.
During January 2004, the 10% minority interest owner of one of the
power barges located in the Dominican Republic notified Seaboard of
its intention to exercise a put option for the equity interest. See
Note 2 to the Condensed Consolidated Financial Statements for further
discussion.
See Note 6 to the Condensed Consolidated Financial Statements for a
summary of Seaboard's contingent obligations, including guarantees
issued to support certain activities of non-consolidated affiliates or
third parties who provide services for Seaboard.
RESULTS OF OPERATIONS
Net sales increased to $615.7 million for the first quarter of 2004
compared to $461.9 million for the first quarter of 2003. The
increase in net sales was primarily the result of higher sales volumes
and market prices for pork products, increased commodity prices and
trading volumes, and, to a lesser extent, an increased level of marine
cargo service with improved rates. Operating income increased to
$42.8 million in 2004 compared to $8.0 million for the first quarter
of 2003. The increase in sales also contributed to higher operating
income for the quarter.
10
Pork Segment
Three Months Ended
April 3, March 29,
(Dollars in millions) 2004 2003
Net sales $211.7 $153.9
Operating income (loss) $ 21.3 $ (1.4)
Net sales for the Pork segment increased $57.8 million in the first
quarter of 2004 compared to the first quarter of 2003 primarily as a
result of higher market prices for pork products and higher sales
volumes. The excess domestic meat supplies experienced in early 2003
resulted in lower sales prices through the first quarter of 2003.
Prices generally improved throughout the remainder of 2003 and further
improved through the first quarter of 2004 as a result of a strong
demand for pork products. Sales volumes increased as Seaboard
operated additional weekend processing shifts during 2004 to take
advantage of the favorable market conditions, and had an additional
four business days in 2004 compared to 2003. In comparison, during
2003 Seaboard held selected product in inventory during the first
quarter in anticipation of improved market conditions later in the
year.
Operating income for the Pork segment increased $22.7 million in the
first quarter of 2004 compared to the first quarter of 2003 as a
result of the higher sales prices and volumes discussed above,
partially offset by an increase in cost of third party hogs.
Commodity prices for corn and soybean meal increased significantly
throughout the first quarter of 2004 causing increased feed costs, but
were primarily offset by gains from the mark to market of commodity
futures contracts. As Seaboard does not perform the extensive record-
keeping required to account for commodity futures transactions as
hedges, commodity gains totaling $3.3 million during the first quarter
of 2004 and $0.1 million in 2003 reduced cost of sales while a portion
of the higher feed costs remained in inventory and could decrease
future profitability in the later half of 2004. Management is unable
to predict future market prices for pork products, feed costs and
third party hogs, or whether overall market conditions will continue
to be favorable, and therefore, management cannot predict whether this
segment will continue to be as profitable during the remainder of
2004.
Commodity Trading and Milling Segment
Three Months Ended
April 3, March 29,
(Dollars in millions) 2004 2003
Net sales $256.7 $177.8
Operating income $ 8.7 $ 3.4
Income (loss) from foreign affiliates $ 0.7 $ (1.7)
Net sales for the Commodity Trading and Milling segment increased
$78.9 million in the first quarter of 2004 compared to the first
quarter of 2003. This increase is primarily the result of world-wide
increased commodity prices and, to a lesser extent, increased trading
volumes to third parties and affiliates. The increase in trading
revenues was partially offset by lower milling revenues primarily
reflecting less favorable local operating conditions for certain
consolidated African milling operations.
Operating income for this segment increased $5.3 million in the first
quarter of 2004 compared to the first quarter of 2003. The increase
primarily reflects the increase in sales volumes in the trading
business, partially offset by lower milling revenues as discussed
above. In addition, charter hire rates were significantly higher
during the first quarter of 2004 compared to 2003. Seaboard had
entered into some longer term charter contracts in 2003, delaying the
impact of the higher costs. While management believes its commodity
futures and options are economic hedges of its firm purchase and sales
contracts, we do not perform the extensive record-keeping required to
account for commodity transactions as hedges for accounting purposes.
As a result, operating income for the first quarter of 2004 includes a
gain of $1.3 million compared to losses of $0.4 million for 2003
related to mark-to-market adjustments. Due to the uncertain political
and economic conditions in the countries in which Seaboard operates,
management is unable to predict future sales and operating results,
but anticipates positive operating income to continue in 2004.
Income from foreign affiliates in the first quarter of 2004 improved
$2.4 million from 2003 primarily reflecting improved operating results
from most African milling operations. Based on current political and
economic situations in the countries in which the flour and feed mills
operate, management cannot predict whether the foreign affiliates will
remain profitable for the remainder of 2004.
11
Marine Segment
Three Months Ended
April 3, March 29,
(Dollars in millions) 2004 2003
Net sales $110.9 $ 92.3
Operating income (loss) $ 7.4 $ (1.0)
Net sales for the Marine segment increased $18.6 million in the first
quarter of 2004 compared to the first quarter of 2003 reflecting
higher cargo volumes and, to a lesser extent, increased average cargo
rates. The 2003 quarter was significantly negatively impacted by the
general strike in Venezuela which began in 2002 and continued into
February of 2003, resulting in the discontinuance of all port calls to
that country. While the political and economic instability remains in
Venezuela and that market has not yet fully recovered, cargo volumes
have increased during the first quarter of 2004 compared to 2003. In
addition, cargo volumes also increased in most other markets. Average
cargo rates for 2004 improved over 2003 reflecting increased rates and
improved cargo mixes in certain markets. Partially offsetting these
increases, the first quarter of 2003 included revenue from chartering
of certain company-owned vessels to carry military cargo to the Middle
East.
Operating income for the Marine segment increased $8.4 million in the
first quarter of 2004 compared to the first quarter of 2003, primarily
reflecting the increased volumes and rates discussed above. The
duration and extent of the economic situation due to the political
instability in Venezuela will continue to affect future results while
shipping demand for the affected routes remains below historical
levels. Management cannot predict whether or to what extent economic
conditions will change for the Venezuelan and related markets, and
therefore cannot predict whether this segment will continue to operate
as profitably during the remainder of 2004.
The U.S. Maritime Transportation Security Act and corresponding
international regulations under The International Ship and Port-
facility Security Code go into effect July 1, 2004. These regulations
require comprehensive security assessments and plans for vessels and
facilities in the U.S. and throughout the world. While management
believes Seaboard's U.S. facilities and vessels will be compliant by
the deadline, trade could be adversely affected in areas where foreign
ports do not fully comply.
Sugar and Citrus Segment
Three Months Ended
April 3, March 29,
(Dollars in millions) 2004 2003
Net sales $ 13.7 $ 12.8
Operating income $ 3.6 $ 4.5
Net sales for the Sugar and Citrus segment increased slightly in the
first quarter of 2004 compared to the first quarter of 2003 reflecting
higher sales volumes. This increase was partially offset by the lower
average sales price. The higher volumes and lower prices reflect the
abundant 2003 harvest in Argentina which resulted in large sugar
supplies. While management cannot predict future sales prices,
management does not expect sales prices to increase above the 2003
prices for the remainder of 2004.
Operating income decreased $0.9 million for the first quarter of 2004
compared to the prior year primarily due to the higher inventoried
costs of the recent sugar harvest and production. During 2003, the
peso price of sugar increased at a higher rate than the related peso
costs, a trend that has now reversed as expenses are increasing.
Management expects operating income for 2004 will remain positive
although lower than comparable 2003 periods.
12
Power Segment
Three Months Ended
April 3, March 29,
(Dollars in millions) 2004 2003
Net sales $ 15.5 $ 17.6
Operating income $ 1.5 $ 2.5
The economic environment of the Dominican Republic remained unstable
throughout the first quarter of 2004. Even though multilateral credit
agencies provided some funding during the quarter, the economic
problems still exist. The Power segment was able to collect a small
portion of past due amounts from certain distribution companies, but
significant balances are still outstanding from other generating and
distribution companies. As a result of the economic instability in
this country, during the first quarter of 2004 the Dominican Republic
peso weakened further against the U.S. dollar, causing $1.9 million of
foreign exchange losses related to the peso-denominated net assets
compared to $1.8 million in 2003. The exchange losses are included in
other income (expense) on the Condensed Consolidated Statements of
Earnings and are not a component of operating income.
Net sales for the Power segment decreased $2.1 million in the first
quarter of 2004 compared to the first quarter of 2003 due to lower
production and lower spot prices in 2004. In early 2004, Seaboard
curtailed production due to management's concerns about collectibility
of the revenues. Operations have since resumed to full capacity
though management may impose further curtailments if liquidity
conditions warrant.
Operating income decreased $1.0 million for the first quarter of 2004
compared to the first quarter of 2003 primarily reflecting higher
commission expenses and bad debt expenses for the 2004 quarter,
partially offset by lower fuel costs. Pending improvement to the
economic problems and the upcoming May elections in the country,
management cannot predict whether this segment will remain profitable
for the remainder of 2004.
All Other
Three Months Ended
April 3, March 29,
(Dollars in millions) 2004 2003
Net sales $ 7.1 $ 7.5
Operating income $ 0.5 $ 0.8
Loss from foreign affiliates $ (0.8) $ (1.6)
Net sales and operating income for All Other remained consistent with
2003. The loss from foreign affiliates in 2004 represents Seaboard's
share of losses from its equity method investment in a Bulgarian wine
business whereas 2003 also included $1.0 million of foreign affiliate
losses for Seaboard's share of Fjord Seafood ASA (Fjord) results. The
equity investment in Fjord was sold during the fourth quarter of 2003.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the first
quarter of 2004 increased by $3.4 million over the first quarter of
2003 primarily in the Power segment due to increased commissions and
bad debt expense and, to a lesser extent, increased selling costs in
the Commodity Trading and Milling and Marine segments related to the
growth of these businesses. As a percentage of revenues, SG&A
decreased to 5.0% in the first quarter of 2004 compared to 5.9% for
the first quarter of 2003 as a result of increased sales in the Pork,
Commodity Trading and Milling, and Marine segments.
Interest Expense
Interest expense increased $0.9 million in the first quarter of 2004
compared to the first quarter of 2003. The increase primarily
reflects the higher average level of short-term and long-term
borrowings outstanding during 2004, partially offset by lower average
interest rates.
Interest Income
Interest income increased $1.0 million in the first quarter of 2004
compared to the first quarter of 2003 primarily reflecting the higher
level of average funds invested during 2004.
13
Foreign Currency Losses
Foreign currency losses totaled $1.7 million for the first quarter of
2004 compared with $1.4 million for the same period in 2003. Losses
from the devaluation of the Dominican Republic peso totaled
$1.9 million in 2004 compared to $1.8 million during 2003. Seaboard
operates in many developing countries throughout the world. The
political and economic conditions of these markets cause volatility in
currency exchange rates and expose Seaboard to the risk of exchange
loss.
Miscellaneous, Net
Miscellaneous, net for 2004 includes realized gains of $1.5 million
and unrealized gains of $1.6 million from the mark to market of
commodity futures and options contracts that management doesn't view
as direct economic hedges of its operations. In addition,
miscellaneous, net for 2004 and 2003 includes gains of $0.5 million
and $1.9 million, respectively, from the settlement of antitrust
litigation for feed additives used by Seaboard. Losses from interest
rate swap agreements totaling $2.7 million and $0.7 million for 2004
and 2003, respectively, partially offset these gains. 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
The effective tax rate increased during 2004 compared to 2003
primarily as a result of increased domestic taxable income and lower
amounts of permanently deferred foreign earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Seaboard is exposed to various types of market risks from its day-to-
day operations. Primary market risk exposures result from changing
commodity prices, foreign currency exchange rates and interest rates.
Changes in commodity prices impact the cost of necessary raw
materials, finished product sales and firm sales commitments.
Seaboard uses various grain and meal futures and options purchase
contracts to manage certain risks of increasing prices of raw
materials and firm sales commitments. Short sales contracts are then
used to offset any open purchase derivatives when the related
commodity inventory is purchased in advance of the derivative
maturity, effectively canceling the initial futures or option purchase
contract. From time to time, hog futures are used to manage risks of
increasing prices of live hogs acquired for processing. Because
changes in foreign currency exchange rates impact the cash paid or
received on foreign currency denominated receivables and payables,
Seaboard 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 Seaboard's Argentine subsidiary and net
earnings for the impact of the change on that subsidiary's dollar
denominated net liabilities. Changes in interest rates impact the
cash required to service variable rate debt. From time to time,
Seaboard uses interest rate swaps to manage risks of increasing
interest rates. Seaboard's market risk exposure related to these
items has not changed materially since December 31, 2003.
Item 4. Controls and Procedures
Seaboard's management has evaluated, under the direction of our chief
executive and chief financial officers, the effectiveness of
Seaboard's disclosure controls and procedures as of April 3, 2004.
Based upon and as of the date of that evaluation, Seaboard's chief
executive and chief financial officers concluded that Seaboard's
disclosure controls and procedures were effective to ensure that
information required to be disclosed in the reports it files and
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported as and when required. It should be
noted that any system of disclosure controls and procedures, however
well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met. In
addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the likelihood of
future events. Because of these and other inherent limitations of any
such system, there can be no assurance that any design will always
succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
There has been no change in Seaboard's internal control over financial
reporting that occurred during the fiscal quarter ended April 3, 2004
that has materially affected, or is reasonably likely to materially
affect, Seaboard's internal control over financial reporting.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Environmental Protection Agency (EPA) and State of Oklahoma Claims
Concerning Farms in Major and Kingfisher County, Oklahoma
Seaboard Farms, Inc. (Seaboard Farms), is subject to an ongoing
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"), filed by the EPA on June 29,
2001 against Seaboard Farms, Shawnee Funding, Limited Partnership and
PIC International Group, Inc. ("PIC") (collectively, "Respondents")
related to five swine farms located in Major County and Kingfisher
County, Oklahoma purchased from PIC. These same farms are subject to
a Notice of Violation received from the State of Oklahoma, alleging
that Seaboard Farms has violated various provisions of state law and
the operating permits based on the same conditions which gave rise to
the RCRA Order.
Seaboard Farms disputes the RCRA Order and the State of Oklahoma's
contentions on legal and factual grounds, and has advised the EPA that
it won't comply with the RCRA Order, as written. Notwithstanding,
Seaboard Farms is cooperating with the EPA and the State of Oklahoma,
and has had significant and ongoing dialogue with the EPA and the
State of Oklahoma in order to attempt to settle the RCRA Order and the
Oklahoma Notice of Violation. Seaboard Farms has undertaken an
extensive investigation under the RCRA Order. The EPA and the State of
Oklahoma, have advised Seaboard Farms that one additional farm in
Kingfisher County must be included in any settlement, although neither
agency has filed any formal claims with respect to that farm. No
settlement has yet been reached with the EPA or the State of Oklahoma.
The farms at issue were previously owned by PIC and PIC is
indemnifying Seaboard Farms with respect to the RCRA Order (reserving
its right to contest the obligation to do so), pursuant to an
indemnification agreement which has a $5 million limit. If the
settlement being discussed with EPA and the State of Oklahoma is
agreed to, the estimated cumulative costs which will be expended
pursuant to the settlement will total approximately $6.2 million, not
including the additional legal costs required to negotiate the
settlement. If the measures taken pursuant to the settlement are not
effective or if certain additional issues arise at the farms after the
settlement, other measures with additional costs may be required. PIC
has advised Seaboard Farms that it is not responsible for the costs in
excess of $5 million. Seaboard Farms disputes PIC's determination of
the costs to be included in the calculation. Seaboard Farms
believes that the costs to be considered are less than $5 million,
such that PIC is responsible for all such costs, except for
approximately $180,000 of estimated costs that would be incurred over
5 years subsequent to the settlement for certain testing and sampling.
Seaboard Farms has agreed to conduct such testing and sampling as a
part of the sampling it conducts in the normal course of operations
and believes that the incremental costs incurred to conduct such
testing and sampling will be less than $180,000. Seaboard Farms also
believes that a more general indemnity agreement would require
indemnification of liability in excess of $5 million (excluding the
estimated $180,000 cost for testing and sampling), although PIC
disputes this.
Other
On January 26, 2004, the U.S. Department of Justice sent Seaboard
Marine, Ltd. a letter stating that it was investigating possible
violations of 49 U.S.C. Secs. 5104- 5124 and 49 C.F.R. Secs. 171- 173
relating to the transportation, storage and discharge of hazardous
materials. The Department of Justice is amenable to resolving the
matter by entering a plea agreement which includes Seaboard Marine's
agreement to pay a fine, restitution and other costs totaling
approximately $300,000, to implement a compliance plan, and to conduct
training of employees. A draft of the plea agreement setting forth
all of the terms of the plea has not yet been presented to Seaboard
Marine. Upon receipt, Seaboard Marine intends to attempt to negotiate
an acceptable plea agreement with the Department of Justice.
15
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on April 26, 2004 in
Newton, Massachusetts. Three items were submitted to a vote of
stockholders as described in Seaboard's Proxy Statement dated
March 12, 2004. The following table briefly describes the proposals
and results of the stockholders' vote.
Votes in Votes
Favor Withheld
1. To elect:
H. Harry Bresky 1,185,892.9 28,879
David A. Adamsen 1,201,043.9 13,728
Douglas W. Baena 1,201,258.9 13,513
Joe E. Rodrigues 1,186,449.9 28,322
and Kevin M. Kennedy 1,201,043.9 13,728
as directors.
Votes in Votes Votes Broker
Favor Against Abstaining Non-Votes
2. To ratify selection of
KPMG LLP as independent
auditors. 1,208,560.9 4,559 1,652 0
3. Stockholder proposal for
an independent director
to serve as Chair of the
Board 73,190 1,065,770.9 2,272 73,539
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.
i. On February 3, 2004, Seaboard Corporation filed a report on Form 8-K
with respect to Items 5 and 6 to report Seaboard's issuance of a
press release announcing a marketing agreement with Triumph Foods LLC.
ii. On February 27, 2004, Seaboard Corporation filed a report on Form
8-K with respect to Items 7 and 12 to report Seaboard's issuance of a
press release announcing earnings of Seaboard Corporation for the
quarter and year ended December 31, 2003.
16
This Form 10-Q contains forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of Seaboard Corporation and its subsidiaries
(Seaboard). Forward-looking statements generally may be identified
as: statements that are not historical in nature; and statements
preceded by, followed by or that include the words "believes,"
"expects," "may," "will," "should," "could," "anticipates,"
"estimates," "intends," or similar expressions. In more specific
terms, forward-looking statements, include, without limitation:
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
regarding the intent, belief or current expectations of Seaboard and
its management with respect to: (i) the cost and timing of the
completion of new or expanded facilities, (ii) Seaboard's ability to
obtain adequate financing and liquidity, (iii) the price of feed
stocks and other materials used by Seaboard, (iv) the sale price for
pork products from such operations, (v) the price for other products
and services, (vi) the charter hire rates and fuel prices for
vessels, (vii) the demand for power, related spot market prices and
collectibility of receivables in the Dominican Republic, (viii) the
effect of the devaluation of the Argentine and Dominican Republic
pesos, (ix) the potential effect of the proposed meat packer ban
legislation on the Pork Division, (x) the effect of the Venezuelan
economy on the Marine Division, (xi) the potential effect of
Seaboard's investment in a wine business on the consolidated financial
statements, (xii) the potential impact of various environmental
actions pending or threatened against Seaboard, or (xiii) other trends
affecting Seaboard's financial condition or results of operations, and
statements of the assumptions underlying or relating to any of the
foregoing statements.
Forward-looking statements are not guarantees of future performance or
results. They involve risks, uncertainties and assumptions. Actual
results may differ materially from those contemplated by the forward-
looking statements due to a variety of factors. The information
contained in this report, 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.
17
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: May 7, 2004
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, Vice President,
Corporate Controller
and Chief Accounting Officer
(principal accounting officer)
18