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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 October 2, 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 October 29, 2004.
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)
October 2, December 31,
2004 2003
Assets
Current assets:
Cash and cash equivalents $ 18,282 $ 37,377
Short-term investments 64,510 58,022
Receivables, net 262,021 190,013
Inventories 299,707 276,033
Deferred income taxes 15,544 17,972
Other current assets 45,458 35,419
Total current assets 705,522 614,836
Investments in and advances to foreign affiliates 40,370 46,680
Net property, plant and equipment 612,632 643,968
Other assets 29,289 20,207
Total assets $1,387,813 $1,325,691
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 11,352 $ 75,564
Current maturities of long-term debt 54,178 56,983
Accounts payable 77,284 61,817
Other current liabilities 160,318 149,726
Total current liabilities 303,132 344,090
Long-term debt, less current maturities 290,831 321,555
Deferred income taxes 118,884 85,295
Other liabilities 45,489 46,720
Total non-current and deferred liabilities 455,204 453,570
Minority and other noncontrolling interests 2,119 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 (60,091) (61,527)
Retained earnings 686,194 580,837
Total stockholders' equity 627,358 520,565
Total liabilities and stockholders' equity $1,387,813 $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 Nine Months Ended
October 2, September 27, October 2, September 27,
2004 2003 2004 2003
Net sales:
Products $ 522,422 $ 361,525 $1,563,177 $1,065,490
Services 132,272 105,793 388,375 315,161
Other 12,768 18,099 43,892 52,516
Total net sales 667,462 485,417 1,995,444 1,433,167
Cost of sales and operating
expenses:
Products 454,546 331,786 1,398,154 995,482
Services 101,466 95,960 301,871 280,805
Other 10,516 13,291 33,773 40,134
Total cost of sales and
operating expenses 566,528 441,037 1,733,798 1,316,421
Gross income 100,934 44,380 261,646 116,746
Selling, general and
administrative expenses 29,566 26,535 91,989 80,638
Operating income 71,368 17,845 169,657 36,108
Other income (expense):
Interest expense (6,120) (6,844) (20,538) (20,393)
Interest income 2,140 450 5,705 2,037
Income (loss) from foreign
affiliates 103 (15,054) (128) (20,932)
Minority and other
noncontrolling interests (227) (344) (621) (452)
Foreign currency gain
(loss), net 5,040 (914) 3,536 (7,015)
Miscellaneous, net (5,161) 5,448 (2,288) 6,780
Total other income (expense),
net (4,225) (17,258) (14,334) (39,975)
Earnings (loss) before income
taxes and cumulative effect
of changes in accounting
principles 67,143 587 155,323 (3,867)
Income tax benefit (expense) (20,595) 1,251 (47,142) 1,856
Earnings (loss) before
cumulative effect of changes
in accounting principles 46,548 1,838 108,181 (2,011)
Cumulative effect of changes
in accounting for asset
retirement obligations and
drydock accruals,net of
income tax expense of $550 - - - 3,648
Net earnings $ 46,548 $ 1,838 $ 108,181 $ 1,637
Net earnings per common share:
Earnings (loss) per share
before cumulative effect
of changes in accounting
principles $ 37.09 $ 1.46 $ 86.20 $ (1.60)
Cumulative effect of changes
in accounting for asset
retirement obligations and
drydock accruals - - - 2.90
Net earnings per common
share $ 37.09 $ 1.46 $ 86.20 $ 1.30
Dividends declared per
common share $ 0.75 $ 0.75 $ 2.25 $ 2.25
Average number of shares
outstanding 1,255,054 1,255,054 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)
Nine Months Ended
October 2, September 27,
2004 2003
Cash flows from operating activities:
Net earnings $ 108,181 $ 1,637
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 48,590 47,715
Loss from foreign affiliates 128 20,932
Foreign currency exchange gains (246) (3,891)
Cumulative effect of accounting changes, net - (3,648)
Deferred income taxes 35,613 (4,427)
Changes in current assets and liabilities:
Receivables, net of allowance (84,497) 18,801
Inventories (17,983) (8,292)
Other current assets (10,632) 9,065
Current liabilities exclusive of debt 24,089 (39)
Other, net (63) (3,068)
Net cash from operating activities 103,180 74,785
Cash flows from investing activities:
Purchase of short-term investments (144,874) (32,036)
Proceeds from the sale or maturity of short-term
investments 138,592 29,671
Investments in and advances to foreign affiliates,
net 3,014 (393)
Capital expenditures (21,768) (25,050)
Other, net 4,089 3,848
Net cash from investing activities (20,947) (23,960)
Cash flows from financing activities:
Notes payable to banks, net (64,212) (16,070)
Principal payments of long-term debt (32,297) (30,655)
Repurchase of minority interest in a controlled
subsidiary (5,000) -
Dividends paid (2,824) (2,824)
Bond construction fund 1,200 655
Other, net (152) (1,611)
Net cash from financing activities (103,285) (50,505)
Effect of exchange rate change on cash 1,957 2,341
Net change in cash and cash equivalents (19,095) 2,661
Cash and cash equivalents at beginning of year 37,377 23,242
Cash and cash equivalents at end of period $ 18,282 $ 25,903
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 three and nine months ended
October 2, 2004 Seaboard recorded losses of $4,172,000 and $4,016,000,
respectively, related to these agreements compared to gains totaling
$4,768,000 for the 2003 three month period and losses of $2,926,000
for the 2003 nine month period. 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 interest
paid or received. During the 2004 three and nine month periods,
Seaboard made net payments of $2,142,000 and $5,409,000, respectively,
compared to payments made of $2,175,000 and $5,118,000 during the same
periods of 2003 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 nine months ended October 2, 2004, this
segment recorded non-cash gains of $246,000 caused by the revaluation
of certain dollar denominated net assets compared to gains of
$3,891,000 during the nine months ended September 27, 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.
Nine Months Ended
October 2, September 27,
Increase (decrease) (thousands of dollars) 2004 2003
Working capital $1,744 $7,555
Fixed assets (45) 6,949
Other long-term net assets (14) 62
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 each year.
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Thousands of dollars) 2004 2003 2004 2003
Beginning balance $6,449 $5,909 $6,086 $5,416
Accretion expense 116 109 345 309
Liability for additional
lagoons placed in service - - 134 293
Ending balance $6,565 $6,018 $6,565 $6,018
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 during 2003 would have decreased by $48,000, $29,000 and
$0.02, respectively, for the third quarter and $180,000, $110,000 and
$0.09, respectively, for the nine month period.
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 valued at $5,709,000. An initial
payment of $5,000,000 was paid during the second quarter of 2004 to
reacquire this interest 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. During the second quarter of 2004 Seaboard agreed to
terminate that relationship by making a one-time payment of
$2,000,000, included in selling, general and administrative expenses.
Note 3 - Comprehensive Income (Loss)
Components of total comprehensive income (loss), net of related taxes,
are summarized as follows:
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Thousands of dollars) 2004 2003 2004 2003
Net earnings $46,548 $1,838 $108,181 $ 1,637
Other comprehensive income
(loss) net of applicable
taxes:
Foreign currency
translation adjustment (470) 30 1,457 9,175
Unrealized gains on
investments 37 79 111 117
Unrealized gains (losses)
on cash flow hedges 80 (19) 18 (94)
Amortization of deferred
gain on interest rate
swaps (50) (51) (150) (151)
Total comprehensive income $46,145 $1,877 $109,617 $10,684
5
The components of and changes in accumulated other comprehensive loss
for the nine months ended October 2, 2004 are as follows:
Balance Balance
December 31, Period October 2,
(Thousands of dollars) 2003 Change 2004
Foreign currency translation adjustment $(56,490) $1,457 $(55,033)
Unrealized gain on investments 14 111 125
Unrecognized pension cost (5,772) - (5,772)
Net unrealized loss on cash flow hedges (30) 18 (12)
Deferred gain on interest rate swaps 751 (150) 601
Accumulated other comprehensive loss $(61,527) $1,436 $(60,091)
The unrecognized pension cost is calculated and adjusted annually
during the fourth quarter. However, as a result of an anticipated
lower discount rate used in the calculation of unrecognized pension
cost and the retirement plan amendment discussed in Note 5, management
expects the 2004 calculation will result in additional comprehensive
loss 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 October 2, 2004 and
December 31, 2003:
October 2, December 31,
(Thousands of dollars) 2004 2003
At lower of LIFO cost or market:
Live hogs & materials $146,469 $142,396
Dressed pork & materials 20,261 22,220
166,730 164,616
LIFO allowance (3,450) (7,608)
Total inventories at lower of LIFO
cost or market 163,280 157,008
At lower of FIFO cost or market:
Grain, flour and feed 99,559 87,831
Sugar produced & in process 15,746 14,807
Other 21,122 16,387
Total inventories at lower of FIFO
cost or market 136,427 119,025
Total inventories $299,707 $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 the 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. During 2004, payments of
$1,922,000, $562,000 and $3,279,000 were made on April 15, July 15,
and September 15, respectively.
On November 5, 2004, Seaboard amended its Executive Retirement Plan,
which provides a supplemental retirement benefit to officers and
certain key employees of Seaboard and its subsidiaries, to conform the
benefit calculation to the Plan discussed above by changing the
methodology for calculating the benefit to a percentage of final
average pay for all years of service. The amendment also changes the
normal form of the benefit to a lump sum payment, provided the
employee has at least 5 years of service after the plan amendment was
6
adopted. Seaboard has also established a Rabbi Trust in order to
provide a mechanism to provide discretionary funding for the benefit.
While this amendment has no effect on the 2004 net periodic benefit
cost, it will impact the amount of future benefit costs. Had this
amendment been in effect at the beginning of 2004, the 2004 annual net
periodic benefit cost would have increased by $1,179,000 ($719,000
after tax, or $0.57 per share). Seaboard is considering providing
funding for a portion of the liability to a trust during the fourth
quarter of 2004 for this plan. As the Executive Retirement Plan is a
non-qualified plan, the assets will remain on the books of Seaboard as
a long-term asset.
The net periodic benefit cost of these plans was as follows:
Three months ended Nine months ended
October 2, September 27, October 2, September 27,
(Thousands of dollars) 2004 2003 2004 2003
Components of net periodic
benefit cost:
Service cost $ 854 $ 735 $2,467 $2,283
Interest cost 1,021 841 2,877 2,724
Expected return on plan assets (847) (522) (2,414) (1,781)
Amortization and other 210 231 605 733
Net periodic benefit cost $1,238 $1,285 $3,535 $3,959
Note 6 - Contingencies
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). Seaboard has undertaken an extensive
investigation, and has had significant discussions with the EPA and
the State of Oklahoma, proposing to take a number of corrective
actions with respect to the farms, and one additional farm, in order
to attempt to settle the action. In connection with these
discussions, EPA and the State of Oklahoma each stated that any
settlement must include a civil fine of $1,200,000 for EPA and
$500,000 for the State of Oklahoma. Seaboard believes that the EPA
has no authority to impose a civil fine and so advised the EPA as a
part of a settlement proposal. The EPA initially advised Seaboard
that it rejected its most recent settlement proposal and settlement
discussions terminated. The EPA recently requested a meeting with
Seaboard Farms to reinstate settlement discussions. If the matter is
not settled, the EPA could bring an action against Seaboard, although
Seaboard believes it has meritorious defenses to any such action, or
the EPA could determine to take no further action. Settlement
discussions are continuing with the State of Oklahoma, and Seaboard
intends to proceed with its proposed corrective actions with respect
to the farms.
PIC is indemnifying Seaboard with respect to the action pursuant to an
indemnification agreement which has a $5 million limit. If the
settlement being discussed with the State of Oklahoma 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 or the $500,000 penalty demanded
by the State of Oklahoma. 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 and penalties, 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 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.
7
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 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 October 2, 2004.
Guarantee beneficiary Maximum exposure Maturity
Foreign non-consolidated affiliate grain $1,000,000 Annual renewal
processor-Uganda
Foreign non-consolidated affiliate food $ 400,000 August 2005
product distributor-Ecuador
Various hog contract growers $1,585,000 Annual renewal
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 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. During the second
quarter of 2004, Seaboard renewed the guarantee for an additional year
but reduced it from $1,300,000 to $1,000,000. Unga has provided a
reciprocal guarantee to Seaboard. As of October 2, 2004, this
affiliate had $905,000 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 October 2, 2004, Seaboard had outstanding $10,642,000 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 $211,000 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.
8
Note 7 - Segment Information
The Bulgarian wine business (the Business), in which Seaboard has an
equity investment has obtained the necessary working capital resources
during the third quarter of 2004 to support its inventory purchases
for the fall 2004 vintage. However, this affiliate has continued to
incur losses from its operations. As a result of sustained losses,
Seaboard's common stock investment has been reduced to zero and
Seaboard began applying losses against its remaining investment,
consisting of preferred stock and debt, based on the change in
Seaboard's claim on the Business' book value. Accordingly, Seaboard
increased its share of losses from this Business from 37% to 73% in
the third quarter of 2004. Annually during the fourth quarter, the
Business evaluates the recoverability of its long-lived assets based
on projected cash flows. Seaboard will consider this evaluation,
among other things, and determine whether there is an other-than-
temporary decline in value for this investment. Such a determination
could have a material affect on the results of operations for 2004.
As of October 2, 2004, Seaboard's investments in and advances to the
Business totaled $13,274,000. Seaboard's share of losses from the
Business, included in All Other below, included a provision for
inventory write-downs totaling $800,000 during the second quarter of
2004.
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
three and nine months ended September 27, 2003 totaled $13,420,000 and
$16,256,000, respectively, including third quarter charges totaling
$12,421,000 reflecting Fjord's asset impairment charges to write down
licenses, inventory and fixed assets.
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 when evaluating segment performance
because management does not consider interest and income tax expense
on a segment basis.
Sales to External Customers:
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Thousands of dollars) 2004 2003 2004 2003
Pork $241,538 $186,125 $ 716,667 $ 531,238
Commodity Trading and Milling 255,808 151,830 805,859 478,971
Marine 124,994 99,301 354,143 295,625
Sugar and Citrus 25,749 22,710 54,600 53,305
Power 12,768 18,099 43,892 52,516
All Other 6,605 7,352 20,283 21,512
Segment/Consolidated Totals $667,462 $485,417 $1,995,444 $1,433,167
Operating Income:
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Thousands of dollars) 2004 2003 2004 2003
Pork $ 38,765 $ 3,954 $ 98,119 $ 2,250
Commodity Trading and Milling 9,395 5,445 15,855 10,002
Marine 17,153 (1,394) 41,202 42
Sugar and Citrus 3,285 5,899 9,404 15,237
Power 2,089 3,309 3,316 8,250
All Other 980 832 2,375 1,642
Segment Totals 71,667 18,045 170,271 37,423
Corporate Items (299) (200) (614) (1,315)
Consolidated Totals $ 71,368 $ 17,845 $ 169,657 $ 36,108
9
Income (loss) from Foreign Affiliates:
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Thousands of dollars) 2004 2003 2004 2003
Commodity Trading and Milling $ 1,365 $ 788 $ 3,953 $ (871)
All Other (1,262) (15,842) (4,081) (20,061)
Segment/Consolidated Totals $ 103 $(15,054) $ (128) $ (20,932)
Total Assets:
October 2, December 31,
(Thousands of dollars) 2004 2003
Pork $ 666,828 $ 670,288
Commodity Trading and Milling 288,005 243,065
Marine 115,764 114,375
Sugar and Citrus 90,666 75,674
Power 83,003 76,920
All Other 16,934 13,953
Segment Totals 1,261,200 1,194,275
Corporate Items 126,613 131,416
Consolidated Totals $1,387,813 $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.
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 decreased $12.6 million from
December 31, 2003. While Seaboard generated $103.2 million of cash
from operating activities, $32.3 million was used for scheduled
payments on long-term debt, $64.2 million was used to repay notes
payable to banks, and $21.8 million was used for capital expenditures.
Cash from operating activities for the nine months ended October
2, 2004 increased $28.4 million compared to the same period one year
earlier, primarily reflecting increased earnings, partially offset by
the increased working capital needs of the Pork, Commodity Trading and
Milling and Power segments. Receivables in the Pork segment increased
reflecting strong sales while inventory levels increased 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 continuing slow collections of accounts receivable.
10
Capital Expenditures
Seaboard invested $21.8 million in property, plant and equipment
during 2004, of which $8.7 million was expended in the Pork segment,
$4.7 million in the Marine segment, $3.9 million in the Commodity
Trading and Milling segment, $4.0 million in the Sugar and Citrus
segment and $0.5 million in the remaining businesses. The capital
expenditures for 2004 have primarily been of a normal recurring nature
including replacements of machinery and equipment, and general
facility modernizations and upgrades. There are no material
commitments for capital expenditures, nor are any major expansions
currently planned for the next year. For the remainder of 2004,
management has budgeted additional capital expenditures of
$2.5 million in the Pork segment, $1.4 million in the Commodity
Trading and Milling segment, $2.4 million in the Marine segment,
$1.5 million in the Sugar and Citrus segment and $0.3 million in all
other businesses. Management anticipates financing these capital
expenditures from internally generated cash and the use of available
short-term investments.
Financing Activities and Debt
During 2004, Seaboard entered into two new, one-year committed credit
lines totaling $45.0 million and extended for one year a $20.0 million
committed credit facility. In addition, Seaboard combined, increased,
and extended its committed subsidiary credit facilities from a total
of $80.0 million to $95.0 million expiring on April 30, 2005. This
facility is denominated in U.S. dollars. As of October 2, 2004,
Seaboard had committed lines of credit totaling $185.0 million and
uncommitted lines totaling $32.0 million. As of October 2, 2004
Seaboard had $10.0 million of borrowings outstanding under the
committed credit lines and $1.4 million borrowed under its uncommitted
credit lines. Outstanding standby letters of credit totaling
$10.6 million reduced Seaboard's borrowing capacity under its
committed credit lines.
In addition to funding Seaboard's planned capital expenditures as
discussed above, Seaboard's scheduled long-term debt maturities total
$54.2 million over the next year with $23.0 million maturing during
the fourth quarter of 2004. 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 the
next year. 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 2004, the 10% minority interest owner of one of the power
barges located in the Dominican Republic exercised 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 for the three and nine months ended October 2, 2004
increased by $182.0 and $562.3 million, respectively, compared to the
same periods of 2003. The increase in net sales was primarily the
result of higher market prices and, to a lesser extent, sales volumes
for pork products, increased trading volumes and commodity prices,
and, to a lesser extent, increased level of marine cargo service with
improved rates. Operating income increased by $53.5 and
$133.5 million for the 2004 three and nine month periods compared to
same periods of 2003. The increase in sales also contributed to
higher operating income.
11
Pork Segment
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Dollars in millions) 2004 2003 2004 2003
Net sales $ 241.5 $ 186.1 $ 716.7 $ 531.2
Operating income $ 38.8 $ 4.0 $ 98.1 $ 2.3
Net sales for the Pork segment increased $55.4 and $185.5 million for
the three and nine months of 2004 compared to the same periods of
2003, primarily as a result of higher market prices for pork products
and, to a lesser extent, higher sales volumes. The demand for pork
products has remained strong during 2004. 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 2004 as
a result of the increasing demand for pork products. Sales volumes
also increased as Seaboard operated additional weekend processing
shifts during 2004 to take advantage of the favorable market
conditions, and had an additional three business days in the 2004 year-
to-date period compared to 2003.
Operating income for the Pork segment increased $34.8 and
$95.8 million for the third quarter and year-to-date periods of 2004
compared with the same periods of 2003 primarily as a result of the
higher sales prices and volumes discussed above, partially offset by
higher overall hog costs. Overall hog costs increased primarily as a
result of higher costs for third-party hogs, partially offset by a
decrease in the cost of internally-raised hogs and an increase in the
percentage of lower cost internally-raised hogs. The third-quarter of
2004 includes charges of $1.4 million for abandoned land development
costs at certain potential hog production sites and a potential second
plant site that Seaboard has decided not to pursue at this time. The
year-to-date 2003 period also includes charges totaling $1.6 million
for abandoned land development costs of potential hog production sites
that Seaboard decided not to pursue. Management is unable to predict
future market prices for pork products, feed costs and third party
hogs, or for how long the relatively strong overall market conditions
will be sustained. However, management expects these operations to
remain profitable for the fourth quarter of 2004.
Commodity Trading and Milling Segment
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Dollars in millions) 2004 2003 2004 2003
Net sales $ 255.8 $ 151.8 $ 805.9 $ 479.0
Operating income $ 9.4 $ 5.4 $ 15.9 $ 10.0
Income (loss) from foreign
affiliates $ 1.4 $ 0.8 $ 4.0 $ (0.9)
Net sales for the Commodity Trading and Milling segment increased
$104.0 and $326.9 million for the three and nine month periods of 2004
compared to the same periods of 2003. This increase is primarily the
result of increased trading volumes to third parties and affiliates,
primarily for wheat and soybean meal, and world-wide increased
commodity and freight prices. However, commodity prices decreased
significantly during the third quarter of 2004 compared to commodity
prices the first half of 2004.
Operating income for this segment increased $4.0 and $5.9 million for
the 2004 quarter and year-to-date periods compared to the prior year
reflecting the increased sales volumes in the trading business
discussed above. However, the impact of mark-to-market accounting for
commodity futures and options contracts partially offset the
improvement. While management believes its commodity futures and
options are economic hedges of its firm purchase and sales contracts,
Seaboard does not perform the extensive record-keeping required to
account for commodity transactions as hedges for accounting purposes.
As a result, operating income for the three and nine month periods of
2004 includes losses of $0.4 and $10.8 million, respectively, compared
to gains of $0.3 and $2.0 million for the comparable 2003 periods for
these mark-to-market adjustments. If commodity prices stabilize for
the fourth quarter of 2004, management anticipates that a significant
portion of the negative impact of the mark-to-market accounting noted
above will reverse as products are delivered to customers resulting in
higher operating income at that time. In addition, charter hire rates
continue to be significantly higher during 2004 compared to 2003
although a portion of the increased expense was offset by increased
freight rates charged. Seaboard had entered into some longer term
charter contracts in 2003, allowing it to take advantage of higher
freight market rates during the second and third quarters of 2004.
However, management expects higher freight rates to continue during
the remainder of 2004 and 2005 while the long-term charters expire,
thus reducing freight opportunities and potentially operating income.
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 for the remainder of 2004.
12
Income from foreign affiliates for the three and nine months ended
October 2, 2004 improved $0.6 and $4.9 million, respectively, from the
comparable 2003 periods 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.
Marine Segment
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Dollars in millions) 2004 2003 2004 2003
Net sales $ 125.0 $ 99.3 $ 354.1 $ 295.6
Operating income (loss) $ 17.2 $ (1.4) $ 41.2 $ 0.0
Net sales for the Marine segment increased $25.7 and $58.5 million for
the three and nine month periods of 2004 compared to the same periods
of 2003 reflecting higher average cargo rates, especially in the third
quarter, and higher cargo volumes. Average cargo rates for 2004
improved over 2003 reflecting improved market conditions and improved
cargo mixes in certain markets. The 2003 periods were 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 continued to increase during
2004 compared to 2003. In addition, cargo volumes also increased in
most other markets. Partially offsetting these increases for the
nine month period, in 2003 Seaboard earned revenue from chartering
certain company-owned vessels to carry military cargo to the Middle
East.
Operating income for the Marine segment increased $18.6 and
$41.2 million during the 2004 three and nine month periods compared to
the same periods in 2003, primarily reflecting the increased rates and
volumes discussed above. Although management cannot predict changes
in future cargo rates or to what extent economic conditions will
continue to improve for the Venezuelan and related markets, it does
anticipate these operations to remain profitable for the fourth
quarter of 2004.
The U.S. Maritime Transportation Security Act and corresponding
international regulations under The International Ship and Port-
facility Security Code were effective July 1, 2004. These regulations
require comprehensive security assessments and plans for vessels and
facilities in the U.S. and throughout the world. Management believes
Seaboard is in compliance and, to date, has not experienced any trade
disruptions from these regulations, although it cannot predict if any
disruptions could occur in the future if foreign ports do not fully
comply.
Sugar and Citrus Segment
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Dollars in millions) 2004 2003 2004 2003
Net sales $ 25.7 $ 22.7 $ 54.6 $ 53.3
Operating income $ 3.3 $ 5.9 $ 9.4 $ 15.2
Net sales for the Sugar and Citrus segment increased in the three and
nine month periods of 2004 compared to the same periods of 2003. The
increase was due to higher seasonal citrus trading volumes during the
third quarter. This increase was partially offset by lower sugar
prices during 2004 resulting from the abundant 2003 harvest in
Argentina which resulted in large sugar supplies. While unable to
predict future sales prices, management does not expect sales prices
to increase significantly for the remainder of 2004.
Operating income decreased $2.6 and $5.8 million during the three and
nine month periods of 2004 compared to the prior year periods
primarily due to lower sugar prices as discussed above and higher
costs of sales from the previously inventoried 2003 sugar harvest and
production. During 2003, the peso price of sugar increased at a
higher rate than the related peso costs, but that trend reversed and
expenses have increased. The higher citrus sales volumes had a
negligible impact on operating income. Management expects operating
income for the fourth quarter of 2004 will remain positive although
lower than 2003.
13
Power Segment
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Dollars in millions) 2004 2003 2004 2003
Net sales $ 12.8 $ 18.1 $ 43.9 $ 52.5
Operating income $ 2.1 $ 3.3 $ 3.3 $ 8.3
The economic environment of the Dominican Republic (DR) has remained
unstable throughout 2004. Multilateral credit agencies have not
provided sufficient funding to the DR government to restore liquidity;
consequently the economic problems still exist and this segment has
experienced difficulty in collecting amounts owed from certain
generating and distribution companies. As of October 2, 2004,
Seaboard's net receivable exposure from customers with significant
past due balances totaled $16.0 million, including $9.3 million
classified in other long-term assets on the Condensed Consolidated
Balance Sheet. Seaboard is continuing to contract directly with large
power users, which reduces the exposure to changes in spot market
rates, currency fluctuations and collection risks. However, a
significant exposure to the partially government-owned distribution
companies still exists. Despite the continued liquidity problems,
during the three and nine months ended October 2, 2004 the Dominican
Republic peso strengthened against the U.S. dollar, resulting in
foreign exchange gains of $5.1 and $2.5 million, respectively, related
to the peso-denominated net assets, compared to a gain of $0.7 million
and loss of $6.1 million for the same periods in 2003. The exchange
gains and 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 $5.3 and $8.6 million for
the three and nine month periods of 2004 compared to the same periods
of 2003 primarily due to lower production. Periodically during 2004,
Seaboard has curtailed production due to management's concerns about
the collectibility of revenues. In addition, approximately $1.5
million of spot market sales were not recognized during the third
quarter of 2004 as collectibility is not reasonably assured.
Management may continue to impose further curtailments if it
determines that liquidity conditions warrant.
Operating income decreased $1.2 and $5.0 million for the three and
nine months of 2004 compared to the same periods of 2003. In addition
to lower sales, commission expenses increased by $2.4 million for the
2004 nine month period. However, as a result of recent collections of
a previously reserved accounts receivable, during the third quarter of
2004 $1.0 million of bad debt expense was reversed. As discussed in
Note 2 to the Condensed Consolidated Financial Statements, during the
second quarter Seaboard made a one-time commission payment of $2
million to terminate a business relationship. Absent improvement to
the economic problems in the country including the related receivable
collection issues, management cannot predict whether this segment will
be profitable for the remainder of 2004.
All Other
Three Months Ended Nine Months Ended
October 2, September 27, October 2, September 27,
(Dollars in millions) 2004 2003 2004 2003
Net sales $ 6.6 $ 7.4 $ 20.3 $ 21.5
Operating income $ 1.0 $ 0.8 $ 2.4 $ 1.6
Loss from foreign
affiliates $ (1.3) $ (15.8) $ (4.1) $ (20.1)
Net sales for All Other decreased $0.8 and $1.2 million for the three
and nine months of 2004 compared with the same periods of 2003 while
operating income increased slightly. The increase in operating income
primarily reflects improved operations for the pepper processing
business. The loss from foreign affiliates in 2004 represents
Seaboard's share of losses from its equity method investment in a
Bulgarian wine business including losses of $0.8 million recorded in
the second quarter for Seaboard's share of inventory write-downs. See
Note 7 to the Condensed Consolidated Financial Statements for further
discussion of this business.
The 2003 foreign affiliate losses also include Seaboard's share of
Fjord Seafood ASA (Fjord) losses which totaled $13.4 and $16.3 million
for three and nine month periods, respectively. Seaboard's share of
third quarter losses included impairment charges of $12.4 million
reflecting Fjord's write down of licenses, inventory and fixed assets.
The equity investment in Fjord was sold during the fourth quarter of
2003.
14
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the three and
nine month periods of 2004 increased by $3.0 and $11.4 million over
the same periods of 2003 primarily due to increased selling costs in
the Marine and Commodity Trading and Milling segments related to the
growth of these businesses. The 2004 nine-month period also reflects
the increased commissions in the Power segment. Partially offsetting
the increase in SG&A for the 2004 quarter, the Power segment reversed
$1.0 million of bad debt expense reflecting the collection of a
previously reserved receivable. As a percentage of revenues, SG&A
decreased to 4.4% and 4.6% for the 2004 quarter and year-to-date
periods, respectively, compared to 5.5% and 5.6% for the same periods
of 2003 as a result of increased sales in the Pork, Commodity Trading
and Milling, and Marine segments.
Interest Expense
Interest expense decreased for the quarter but increased slightly for
the nine month period of 2004 compared to the same 2003 periods.
During the second quarter of 2004, Seaboard repaid a significant
portion of the notes payable to banks with cash from operations.
Interest Income
Interest income increased $1.7 and $3.7 million for the three and nine
month periods of 2004 compared to the same periods of 2003 primarily
reflecting larger amounts of interest received from past due customer
accounts receivable in the Power and Commodity Trading and Milling
segments. In addition, Seaboard had higher average levels of short-
term investments during the 2004 periods.
Foreign Currency Gains (Losses)
Seaboard realized net foreign currency gains of $5.0 and $3.5 million
during the three and nine month periods of 2004 respectively, compared
to losses of $0.9 and $7.0 million for each respective period of 2003.
The strengthening of the Dominican Republic peso during the third
quarter of 2004 created gains of $5.1 and $2.5 million for the three
and nine months ended October 2, 2004 compared to a gain of $0.7
million for the 2003 three month period and a loss of $6.1 million
during the 2003 nine month period. 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 the three and nine month periods of 2004
includes losses from the mark-to-market of interest rate swap
agreements totaling $4.2 and $4.0 million, respectively, compared to a
2003 third quarter gain of $4.8 and year to date losses of $2.9
million. 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. Miscellaneous, net for
the three and nine months ended October 2, 2004 also includes losses
of $1.6 and $1.3 million, respectively, from the mark-to-market of
commodity futures and options contracts that management does not view
as direct economic hedges of its operations. In addition,
miscellaneous, net for the 2004 nine month period includes a gain of
$0.5 million from the settlement of antitrust litigation compared to
antitrust litigation gains of $0.4 and $7.0 million for the 2003 three
and nine month periods, respectively.
Income Tax Expense
The effective tax rate increased to 30.4% for 2004 primarily as a
result of increased domestic taxable income and lower amounts of
permanently deferred foreign earnings.
Other Financial Information
On October 22, 2004, President Bush signed into law H.R. 4520, the
American Jobs Creation Act ("Act"). The Act is a significant and
complicated reform of U.S. income tax law. Management is currently
reviewing the new law to determine the impact on Seaboard. The Act
contains several provisions which initially appear to be favorable for
Seaboard. These include: phasing out the Extraterritorial Income
Exclusion and replacing it with an income tax deduction for U.S.
manufacturers, simplifying the U.S. foreign tax credit calculation by
reducing the foreign tax credit baskets, reforming the interest
allocation rules and allowing for recharacterization of overall
domestic losses, and repealing the alternative minimum tax limitation
on the use of foreign tax credits. The carryover period for foreign
tax credits was generally extended from 5 to 10 years. More
importantly, the Act repeals the prior law treatment of shipping
income as a component of subpart F income. This change will allow
Seaboard's post-2004 shipping income to avoid current taxation in the
U.S. and should have a material impact on Seaboard's future effective
tax rate and cash tax payments. The Act would also allow Seaboard a
one-time election to repatriate permanently invested foreign earnings
at a 5.25% effective U.S. income tax rate rather than the statutory
35% rate, if certain domestic reinvestment requirements are met.
Management is evaluating this provision and has not determined whether
to utilize the one-time repatriation opportunity.
15
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 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 October 2, 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 October 2,
2004 that has materially affected, or is reasonably likely to
materially affect, Seaboard's internal control over financial
reporting.
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. section 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 the subject
of a Notice of Violation letter 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 advised the EPA that it
won't comply with the RCRA Order, as written. Notwithstanding,
Seaboard Farms has undertaken an extensive investigation under the
RCRA Order, and has had significant discussions with the EPA and the
State of Oklahoma, proposing to take a number of corrective actions
with respect to the farms in order to attempt to settle the RCRA Order
and the Oklahoma Notice of Violation. As a part of those discussions,
the EPA and the State of Oklahoma, 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. The EPA recently advised Seaboard Farms that
any such settlement must include a civil fine of $1,200,000. Seaboard
Farms believes that the EPA has no authority to impose a civil fine
and so advised the EPA as a part of a settlement proposal. The EPA
initially advised Seaboard Farms that it rejected its most recent
settlement proposal and settlement discussions terminated. The EPA
recently requested a meeting with Seaboard Farms to reinstate
settlement discussions. If the matter is not settled, the EPA could
bring an action
16
against Seaboard Farms to enforce the RCRA Order,
although Seaboard Farms believes it has meritorious defenses to any
such action, or the EPA could determine to take no further action.
The State of Oklahoma recently advised Seaboard Farms that any
settlement with it must include a civil fine of approximately
$500,000. Settlement discussions are continuing with the State of
Oklahoma, and Seaboard Farms intends to proceed with its proposed
corrective actions with respect to the farms.
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 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 and not
including the approximately $500,000 penalty suggested by the State of
Oklahoma. 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 and penalties, 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. sections 5104-5124 and 49 C.F.R. sections
171-173 relating to the transportation, storage and discharge of
hazardous materials. On September 21, 2004, Seaboard Marine pled
guilty to the violations. In conjunction with this guilty plea,
Seaboard Marine entered into a Plea Agreement agreeing to pay a fine,
restitution and other costs totaling approximately $300,000, to
implement a compliance plan, and to conduct training of employees. At
the sentencing, the US attorney will recommend that the judge impose
the sentence set forth in the Plea Agreement, although the judge has
discretion to impose a fine of up to $500,000.
Item 5. Other Information
(a) As discussed in Note 5 to the Condensed Consolidated Financial
Statements, on November 5, 2004, Seaboard amended its Executive
Retirement Plan, which provides a supplemental retirement benefit
to officers and certain key employees of Seaboard and its
subsidiaries. In addition, Seaboard has established a Rabbi
Trust in order to provide a mechanism to provide discretionary
funding for the benefit. The amendment to the Executive
Retirement Plan and Rabbi Trust document are included as exhibits
10.1 and 10.2 of this Form 10-Q.
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Item 6. Exhibits
Exhibits
10.1 Seaboard Corporation Executive Retirement Plan dated
November 5, 2004, amending and restating the Seaboard
Corporation Executive Retirement Plan dated January 1, 1997
as amended and restated February 28, 2001. The addendums to
the Executive Retirement Plan have been omitted from the
filing, but will be provided supplementally upon request of
the Commission.
10.2 Seaboard Corporation Executive Retirement Plan Trust dated
November 5, 2004 between Seaboard Corporation and Robert L.
Steer, as trustee.
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
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, including
the impact of mark-to-market accounting on operating income;
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, (xiii) the potential
impact of the American Jobs Creation Act, or (xiv) 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.
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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 5, 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)
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