Attached files

file filename
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - SEABOARD CORP /DE/seb-20151003ex321c385a2.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - SEABOARD CORP /DE/seb-20151003ex312015013.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - SEABOARD CORP /DE/seb-20151003ex3221ebbce.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - SEABOARD CORP /DE/seb-20151003ex311c9c37c.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended October 3, 2015

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________________ to __________________________

 

Seaboard Corporation

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

 

1-3390

 

04-2260388

(State or other jurisdiction of

 

(Commission

 

(I.R.S. Employer

incorporation)

 

File Number)

 

Identification No.)

 

 

 

 

 

9000 West 67th Street, Shawnee Mission, Kansas

 

66202

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code    (913) 676-8800

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer    (Do not check if a smaller reporting company)

Smaller Reporting Company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No    .

 

There were 1,170,550 shares of common stock, $1.00 par value per share, outstanding on October 30, 2015.

 

1


 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Thousands of dollars except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

 

    

2015

    

2014

    

2015

    

2014

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products (includes sales to affiliates of $240,544, $205,644, $664,714 and $580,661)

 

$

1,139,144

 

$

1,350,329

 

$

3,464,235

 

$

3,981,200

 

Service revenues

 

 

242,732

 

 

218,988

 

 

743,687

 

 

655,148

 

Other

 

 

28,897

 

 

53,324

 

 

83,095

 

 

160,520

 

Total net sales

 

 

1,410,773

 

 

1,622,641

 

 

4,291,017

 

 

4,796,868

 

Cost of sales and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

1,076,488

 

 

1,228,624

 

 

3,276,576

 

 

3,583,456

 

Services

 

 

223,002

 

 

198,276

 

 

666,318

 

 

595,265

 

Other

 

 

21,440

 

 

34,798

 

 

65,587

 

 

134,189

 

Total cost of sales and operating expenses

 

 

1,320,930

 

 

1,461,698

 

 

4,008,481

 

 

4,312,910

 

Gross income

 

 

89,843

 

 

160,943

 

 

282,536

 

 

483,958

 

Selling, general and administrative expenses

 

 

66,892

 

 

64,857

 

 

200,084

 

 

188,330

 

Operating income

 

 

22,951

 

 

96,086

 

 

82,452

 

 

295,628

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(3,630)

 

 

(8,408)

 

 

(11,920)

 

 

(17,084)

 

Interest income

 

 

1,700

 

 

2,344

 

 

7,625

 

 

11,148

 

Interest income from affiliates

 

 

7,082

 

 

6,775

 

 

21,321

 

 

20,011

 

Income from affiliates

 

 

16,026

 

 

9,892

 

 

39,062

 

 

25,293

 

Other investment income (loss), net

 

 

(26,192)

 

 

(2,990)

 

 

(22,380)

 

 

370

 

Foreign currency gains (losses), net

 

 

(152)

 

 

(530)

 

 

1,623

 

 

(9,217)

 

Gain on sale of controlling interest in subsidiary

 

 

 -

 

 

64,392

 

 

 -

 

 

64,392

 

Miscellaneous, net

 

 

(4,667)

 

 

655

 

 

(5,577)

 

 

(1,598)

 

Total other income (loss), net

 

 

(9,833)

 

 

72,130

 

 

29,754

 

 

93,315

 

Earnings before income taxes

 

 

13,118

 

 

168,216

 

 

112,206

 

 

388,943

 

Income tax expense

 

 

(10,317)

 

 

(63,536)

 

 

(44,167)

 

 

(140,421)

 

Net earnings

 

$

2,801

 

$

104,680

 

$

68,039

 

$

248,522

 

Less: Net loss (income) attributable to noncontrolling interests

 

 

226

 

 

469

 

 

(459)

 

 

(576)

 

Net earnings attributable to Seaboard

 

$

3,027

 

$

105,149

 

$

67,580

 

$

247,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$

2.59

 

$

89.83

 

$

57.73

 

$

209.91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of income tax benefit of $730, $1,506, $1,554 and $11,894:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(7,001)

 

 

(3,120)

 

 

(21,795)

 

 

(32,685)

 

Unrealized gain (loss) on investments

 

 

(342)

 

 

(105)

 

 

332

 

 

919

 

Unrealized gain on cash flow hedges

 

 

 -

 

 

149

 

 

 -

 

 

235

 

Unrecognized pension cost

 

 

938

 

 

320

 

 

3,165

 

 

960

 

Other comprehensive loss, net of tax

 

$

(6,405)

 

$

(2,756)

 

$

(18,298)

 

$

(30,571)

 

Comprehensive income (loss)

 

 

(3,604)

 

 

101,924

 

 

49,741

 

 

217,951

 

Less: Comprehensive loss (income) attributable to the noncontrolling interests

 

 

226

 

 

476

 

 

(528)

 

 

(568)

 

Comprehensive income (loss) attributable to Seaboard

 

$

(3,378)

 

$

102,400

 

$

49,213

 

$

217,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

 

1,170,550

 

 

1,170,550

 

 

1,170,550

 

 

1,181,217

 

 

See accompanying notes to condensed consolidated financial statements.

 

2


 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Thousands of dollars except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

October 3,

 

December 31,

 

 

    

2015

    

2014

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,208

 

$

36,459

 

Short-term investments

 

 

689,443

 

 

490,566

 

Receivables, net of allowance

 

 

456,100

 

 

633,965

 

Inventories

 

 

694,249

 

 

736,302

 

Deferred income taxes

 

 

56,042

 

 

45,647

 

Other current assets

 

 

115,894

 

 

110,053

 

Total current assets

 

 

2,060,936

 

 

2,052,992

 

Net property, plant and equipment

 

 

842,113

 

 

846,757

 

Investments in and advances to affiliates

 

 

635,949

 

 

543,411

 

Notes receivable from affiliates

 

 

196,087

 

 

197,270

 

Other assets

 

 

69,148

 

 

51,328

 

Total Assets

 

$

3,804,233

 

$

3,691,758

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Notes payable to banks

 

$

104,465

 

$

75,524

 

Accounts payable

 

 

204,950

 

 

214,218

 

Deferred revenue

 

 

76,896

 

 

51,158

 

Other current liabilities

 

 

327,215

 

 

293,932

 

Total current liabilities

 

 

713,526

 

 

634,832

 

Deferred income taxes

 

 

71,920

 

 

95,538

 

Other liabilities and deferred credits

 

 

234,492

 

 

226,677

 

Total non-current liabilities

 

 

306,412

 

 

322,215

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock of $1 par value. Authorized 1,250,000 shares; issued and outstanding 1,170,550 shares

 

 

1,171

 

 

1,171

 

Accumulated other comprehensive loss

 

 

(270,935)

 

 

(252,637)

 

Retained earnings

 

 

3,049,382

 

 

2,981,802

 

Total Seaboard stockholders’ equity

 

 

2,779,618

 

 

2,730,336

 

Noncontrolling interests

 

 

4,677

 

 

4,375

 

Total equity

 

 

2,784,295

 

 

2,734,711

 

Total Liabilities and Stockholders’ Equity

 

$

3,804,233

 

$

3,691,758

 

 

See accompanying notes to condensed consolidated financial statements.

3


 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Thousands of dollars)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

October 3,

 

September 27,

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net earnings

 

$

68,039

 

$

248,522

 

Adjustments to reconcile net earnings to cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

68,742

 

 

69,322

 

Gain from sale of fixed assets

 

 

(500)

 

 

(1,631)

 

Gain from sale of power generating facility assets

 

 

 -

 

 

(4,953)

 

Deferred income taxes

 

 

(32,535)

 

 

14,690

 

Pay-in-kind interest and accretion on notes receivable from affiliates

 

 

(13,074)

 

 

(11,511)

 

Income from affiliates

 

 

(39,062)

 

 

(25,293)

 

Dividends received from affiliates

 

 

35,610

 

 

1,823

 

Other investment income (loss), net

 

 

22,380

 

 

(370)

 

Gain on sale of controlling interest in a subsidiary

 

 

 -

 

 

(64,392)

 

Other, net

 

 

2,179

 

 

(735)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Receivables, net of allowance

 

 

176,705

 

 

89,718

 

Inventories

 

 

29,964

 

 

(74,971)

 

Other current assets

 

 

(8,681)

 

 

3,781

 

Current liabilities, exclusive of debt

 

 

40,352

 

 

22,016

 

Other, net

 

 

15,814

 

 

17,250

 

Net cash from operating activities

 

 

365,933

 

 

283,266

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of short-term investments

 

 

(674,647)

 

 

(922,902)

 

Proceeds from the sale of short-term investments

 

 

434,343

 

 

842,294

 

Proceeds from the maturity of short-term investments

 

 

23,631

 

 

5,794

 

Capital expenditures

 

 

(95,992)

 

 

(94,665)

 

Proceeds from the sale of fixed assets

 

 

24,276

 

 

2,639

 

Proceeds from the sale of power generating facility assets

 

 

 -

 

 

7,715

 

Investments in and advances to affiliates, net

 

 

(77,677)

 

 

(22,083)

 

Purchase of long-term investments

 

 

(25,690)

 

 

(2,333)

 

Proceeds from the sale of controlling interest in a subsidiary

 

 

 -

 

 

72,500

 

Other, net

 

 

5,554

 

 

2,757

 

Net cash from investing activities

 

 

(386,202)

 

 

(108,284)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Notes payable to banks, net

 

 

32,968

 

 

(31,815)

 

Principal payments of long-term debt

 

 

 -

 

 

(91,403)

 

Repurchase of common stock

 

 

 -

 

 

(53,781)

 

Other, net

 

 

(226)

 

 

(48)

 

Net cash from financing activities

 

 

32,742

 

 

(177,047)

 

Effect of exchange rate change on cash

 

 

276

 

 

3,043

 

Net change in cash and cash equivalents

 

 

12,749

 

 

978

 

Cash and cash equivalents at beginning of year

 

 

36,459

 

 

55,055

 

Cash and cash equivalents at end of period

 

$

49,208

 

$

56,033

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

SEABOARD CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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-consolidated affiliates are accounted for by the equity method.  The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of Seaboard for the year ended December 31, 2014 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 adjustments) 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. As Seaboard conducts its commodity trading business with third parties, consolidated subsidiaries and non-consolidated affiliates on an interrelated basis, gross margin on non-consolidated affiliates cannot be clearly distinguished without making numerous assumptions primarily with respect to mark-to-market accounting for commodity derivatives.

 

Use of Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles ("GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to allowance for doubtful accounts, valuation of inventories, impairment of long-lived assets, potential write-down related to investments in and advances to affiliates and notes receivable from affiliates, income taxes and accrued pension liability. Actual results could differ from those estimates.

 

Supplemental Non-Cash Transactions

Seaboard has notes receivable from affiliates which accrue pay-in-kind interest income, primarily from one affiliate as discussed in Note 9. Seaboard recognized $4,309,000 and $13,074,000 of non-cash, pay-in-kind interest income and accretion of discount for the three and nine months ended October 3, 2015, respectively, and $3,976,000 and $11,511,000 for the three and nine months ended September 27, 2014, respectively, related to these notes receivable.

 

As more fully described in Note 9, as of September 27, 2014 Seaboard’s Pork segment sold to Triumph Foods LLC (“Triumph”) a 50% interest in its processed meats division, Daily’s Premium Meats, LLC (“Daily’s”).  As a result, Seaboard deconsolidated Daily’s from its Condensed Consolidated Balance Sheet as of September 27, 2014.  The following table summarizes the non-cash transactions resulting from this deconsolidation: 

 

 

 

 

 

 

(Thousands of dollars)

September 27, 2014

Decrease in net working capital

    

$

19,349

 

Increase in investment in and advances to affiliates

 

 

(72,500)

 

Decrease in fixed assets

 

 

16,038

 

Decrease in goodwill

 

 

28,372

 

Decrease in other intangible assets, net (not subject to amortization)

 

 

17,000

 

Decrease in noncontrolling interest

 

 

(151)

 

Gain on sale of controlling interest in subsidiary

 

 

64,392

 

Net proceeds from sale of controlling interest in subsidiary

 

$

72,500

 

 

 

 

5


 

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance to develop a single, comprehensive revenue recognition model for all contracts with customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Seaboard is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures. Seaboard will be required to adopt this guidance on January 1, 2018 and it is currently anticipated that Seaboard will apply this guidance using the cumulative effect transition method.

 

In July 2015, the FASB issued guidance to simplify the subsequent measurement of inventory; excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new guidance is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. Seaboard is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net earnings.

 

Change in Accounting Method

During the second quarter of 2015, Seaboard invested an additional $10,000,000 in a business operating a 300 megawatt electricity generating facility in the Dominican Republic. This investment increased Seaboard's ownership interest to 29.9% from less than 20%. Seaboard's previous investment of $5,910,000 was accounted for using the cost method and as a result of this additional investment, Seaboard changed its accounting method to the equity method. This change in accounting requires Seaboard to present its prior period financial results to reflect the equity method of accounting from the date of the initial investment which resulted in a $12,691,000 adjustment to retained earnings and a corresponding increase to its investment as of January 1, 2014. The results for the three and nine months ended October 3, 2015 and September 27, 2014, which represents Seaboard's portion of the income (losses) incurred by the investee were not material. There is no tax impact to Seaboard on these amounts. See Note 9 for more information.

 

Note 2 – Investments

 

Seaboard’s short-term investments are treated as either available-for-sale securities or trading securities.  All of Seaboard’s available-for-sale and trading securities are classified as current assets as they are readily available to support Seaboard’s current operating needs.  Available-for-sale securities are recorded at their estimated fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive loss.  Trading securities are recorded at their estimated fair value with unrealized gains and losses reflected in other investment income (loss), net. At October 3, 2015, money market funds included $970,000 denominated in British pounds and $147,000 denominated in Canadian dollars.

 

The following is a summary of the amortized cost and estimated fair value of short-term investments for both available-for-sale and trading securities at October 3, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 3, 2015

 

December 31, 2014

 

 

    

Amortized

    

Fair

    

Amortized

    

Fair

 

(Thousands of dollars)

 

Cost

 

Value

 

Cost

 

Value

 

Money market funds

 

$

100,648

 

$

100,648

 

$

142,432

 

$

142,432

 

Corporate bonds

 

 

 -

 

 

 -

 

 

11,000

 

 

11,015

 

U.S. Government agency securities

 

 

 -

 

 

 -

 

 

9,684

 

 

9,666

 

Other available-for-sale securities

 

 

 -

 

 

 -

 

 

3,933

 

 

3,983

 

Total available-for-sale short-term investments

 

 

100,648

 

 

100,648

 

 

167,049

 

 

167,096

 

Domestic equity securities

 

 

167,770

 

 

158,815

 

 

 -

 

 

 -

 

High yield debt securities

 

 

125,347

 

 

122,178

 

 

187,491

 

 

181,483

 

Domestic equity mutual funds

 

 

86,309

 

 

80,525

 

 

83,809

 

 

82,542

 

Domestic equity ETFs

 

 

78,925

 

 

77,443

 

 

31,307

 

 

32,651

 

Foreign equity securities

 

 

78,876

 

 

76,669

 

 

 -

 

 

 -

 

Money market funds held in trading accounts

 

 

40,152

 

 

40,152

 

 

21,401

 

 

21,401

 

Foreign equity mutual fund

 

 

20,000

 

 

19,831

 

 

 -

 

 

 -

 

Collateralized loan obligation

 

 

10,000

 

 

9,791

 

 

 -

 

 

 -

 

Other trading securities

 

 

4,651

 

 

3,391

 

 

6,173

 

 

5,393

 

Total trading short-term investments

 

 

612,030

 

 

588,795

 

 

330,181

 

 

323,470

 

Total short-term investments

 

$

712,678

 

$

689,443

 

$

497,230

 

$

490,566

 

 

6


 

 

Unrealized losses related to trading securities for the three and nine months ended October 3, 2015 were $22,377,000 and $20,902,000, respectively, and $3,774,000 and $3,149,000 for the three and nine months ended September 27, 2014, respectively. 

 

In addition to its short-term investments, Seaboard also has trading securities related to Seaboard’s deferred compensation plans classified in other current assets in the Condensed Consolidated Balance Sheets.  See Note 5 to the Condensed Consolidated Financial Statements for information on the types of trading securities held related to the deferred compensation plans.

 

Note 3 – Inventories

 

The following is a summary of inventories at October 3, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

October 3,

 

December 31,

 

(Thousands of dollars)

    

2015

    

2014

 

At lower of LIFO cost or market:

 

 

 

 

 

 

 

Live hogs and materials

 

$

202,968

 

$

208,641

 

Fresh pork and materials

 

 

29,997

 

 

28,573

 

 

 

 

232,965

 

 

237,214

 

LIFO adjustment

 

 

(31,847)

 

 

(36,560)

 

Total inventories at lower of LIFO cost or market

 

 

201,118

 

 

200,654

 

At lower of FIFO cost or market:

 

 

 

 

 

 

 

Grains, oilseeds and other commodities

 

 

296,827

 

 

320,066

 

Sugar produced and in process

 

 

49,306

 

 

48,863

 

Other

 

 

55,581

 

 

57,344

 

Total inventories at lower of FIFO cost or market

 

 

401,714

 

 

426,273

 

Grain, flour and feed at lower of weighted average cost or market

 

 

91,417

 

 

109,375

 

 Total inventories

 

$

694,249

 

$

736,302

 

 

 

Note 4 – Income Taxes

 

Seaboard’s tax returns are regularly audited by federal, state and foreign tax authorities, which may result in material adjustments.  Seaboard’s U.S. federal income tax years are closed through 2011. There have not been any material changes in unrecognized income tax benefits since December 31, 2014.  Interest and penalties related to unrecognized tax benefits were not material for the nine months ended October 3, 2015.

 

Note 5 – Derivatives and Fair Value of Financial Instruments

 

U.S. GAAP discusses valuation techniques, such as the market approach (prices and other relevant information generated by market conditions involving identical or comparable assets or liabilities), the income approach (techniques to convert future amounts to single present amounts based on market expectations including present value techniques and option-pricing), and the cost approach (amount that would be required to replace the service capacity of an asset, which is often referred to as replacement cost).  U.S. GAAP utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The following is a brief description of those three levels:

 

Level 1:  Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2:  Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

7


 

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

The following table shows assets and liabilities measured at fair value on a recurring basis as of October 3, 2015 and also the level within the fair value hierarchy used to measure each category of assets and liabilities.  Seaboard uses the end of the reporting period to determine if there were any transfers between levels.  There were no transfers between levels that occurred in the first nine months of 2015.  The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

 

 

    

 

 

    

 

 

 

 

 

October 3,

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

 

2015

 

Level 1

Level 2

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

100,648

 

$

100,648

 

$

 -

 

$

 -

 

Trading securities – short term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Domestic equity securities

 

 

158,815

 

 

158,815

 

 

 -

 

 

 -

 

High yield debt securities

 

 

122,178

 

 

 -

 

 

122,178

 

 

 -

 

Domestic equity mutual funds

 

 

80,525

 

 

80,525

 

 

 -

 

 

 -

 

Domestic equity ETFs

 

 

77,443

 

 

77,443

 

 

 -

 

 

 -

 

Foreign equity securities

 

 

76,669

 

 

76,669

 

 

 -

 

 

 -

 

Money market funds held in trading accounts

 

 

40,152

 

 

40,152

 

 

 -

 

 

 -

 

Foreign equity mutual fund

 

 

19,831

 

 

19,831

 

 

 -

 

 

 -

 

Collateralized loan obligation

 

 

9,791

 

 

 -

 

 

9,791

 

 

 -

 

Other trading securities

 

 

3,391

 

 

2,187

 

 

1,204

 

 

 -

 

Trading securities – other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic equity securities

 

 

34,044

 

 

34,044

 

 

 -

 

 

 -

 

Foreign equity securities

 

 

6,246

 

 

6,246

 

 

 -

 

 

 -

 

Fixed income mutual funds

 

 

3,366

 

 

3,366

 

 

 -

 

 

 -

 

Other

 

 

3,104

 

 

2,617

 

 

487

 

 

 -

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

 

9,639

 

 

9,639

 

 

 -

 

 

 -

 

Foreign currencies

 

 

1,715

 

 

 -

 

 

1,715

 

 

 -

 

Total Assets

 

$

747,557

 

$

612,182

 

$

135,375

 

$

 -

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

$

21,739

 

$

21,739

 

$

 -

 

$

 -

 

Interest rate swaps

 

 

8,714

 

 

 -

 

 

8,714

 

 

 -

 

Foreign currencies

 

 

1,417

 

 

 -

 

 

1,417

 

 

 -

 

Total Liabilities

 

$

31,870

 

$

21,739

 

$

10,131

 

$

 -

 

 

(1)

Seaboard’s commodity derivative assets and liabilities are presented in the Condensed Consolidated Balance Sheets on a net basis, including netting the derivatives with the related margin accounts.  As of October 3, 2015, the commodity derivatives had a margin account balance of $34,852,000 resulting in a net other current asset in the Condensed Consolidated Balance Sheet of $22,949,000 and a net other current liability of $197,000.

 

 

8


 

The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and also the level within the fair value hierarchy used to measure each category of assets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance

    

 

 

    

 

 

    

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

(Thousands of dollars)

 

2014

 

Level 1

Level 2

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities – short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

142,432

 

$

142,432

 

$

 -

 

$

 -

 

Corporate bonds

 

 

11,015

 

 

 -

 

 

11,015

 

 

 -

 

U.S. Government agency securities

 

 

9,666

 

 

 -

 

 

9,666

 

 

 -

 

Other available-for-sale securities

 

 

3,983

 

 

 -

 

 

3,983

 

 

 -

 

Trading securities – short term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

High yield debt securities

 

 

181,483

 

 

 -

 

 

181,483

 

 

 -

 

Domestic equity mutual fund

 

 

82,542

 

 

82,542

 

 

 -

 

 

 -

 

Domestic equity ETF

 

 

32,651

 

 

32,651

 

 

 -

 

 

 -

 

Money market funds held in trading accounts

 

 

21,401

 

 

21,401

 

 

 -

 

 

 -

 

Other trading securities

 

 

5,393

 

 

2,614

 

 

2,779

 

 

 -

 

Trading securities – other current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic equity securities

 

 

33,857

 

 

33,857

 

 

 -

 

 

 -

 

Foreign equity securities

 

 

6,532

 

 

6,532

 

 

 -

 

 

 -

 

Fixed income mutual funds

 

 

4,570

 

 

4,570

 

 

 -

 

 

 -

 

Other

 

 

2,676

 

 

2,405

 

 

271

 

 

 -

 

Derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

 

6,136

 

 

6,136

 

 

 -

 

 

 -

 

Foreign currencies

 

 

1,675

 

 

 -

 

 

1,675

 

 

 -

 

Total Assets

 

$

546,012

 

$

335,140

 

$

210,872

 

$

 -

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodities (1)

 

$

1,779

 

$

1,779

 

$

 -

 

$

 -

 

Interest rate swaps

 

 

7,715

 

 

 -

 

 

7,715

 

 

 -

 

Foreign currencies

 

 

407

 

 

 -

 

 

407

 

 

 -

 

Total Liabilities

 

$

9,901

 

$

1,779

 

$

8,122

 

$

 -

 

 

(1)

Seaboard’s commodity derivative assets and liabilities are presented in the Condensed Consolidated Balance Sheets on a net basis, including netting the derivatives with the related margin accounts.  As of December 31, 2014, the commodity derivatives had a margin account balance of $4,314,000 resulting in a net other current asset in the Condensed Consolidated Balance Sheet of $9,267,000 and a net other current liability of $596,000.

 

Financial instruments consisting of cash and cash equivalents, net receivables, notes payable, and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments. The amortized cost and estimated fair values of investments at October 3, 2015 and December 31, 2014 are presented in Note 2.

 

While management believes its derivatives are primarily economic hedges of its firm purchase and sales contracts or anticipated sales contracts, Seaboard does not perform the extensive record-keeping required to account for these types of transactions as hedges for accounting purposes.  Since the derivatives discussed below are not accounted for as hedges, fluctuations in the related commodity prices, currency exchange rates and interest rates could have a material impact on earnings in any given period.  Seaboard also enters into speculative derivative transactions not directly related to its raw material requirements.  The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2014.

 

Commodity Instruments

Seaboard uses various derivative futures and options to manage its risk to price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments.  At October 3, 2015, Seaboard had open net derivative

9


 

contracts to purchase 17,228,000 bushels of grain, 9,438,000 pounds of sugar, 7,960,000 pounds of hogs, 7,260,000 pounds of soybean oil, 704,000 pounds of dry whey powder, 276,000 tons of soybean meal and 40,000 pounds of cheese and open net derivative contracts to sell 2,940,000 gallons of heating oil. At December 31, 2014, Seaboard had open net derivative contracts to purchase 19,800,000 pounds of hogs, 19,620,000 pounds of soybean oil, 15,551,000 pounds of sugar, 10,697,000 bushels of grain, 88,000 pounds of dry whey powder and 85,000 tons of soybean meal and open net derivative contracts to sell 4,326,000 gallons of heating oil. Commodity derivatives are recorded at fair value with any changes in fair value being marked-to-market as a component of cost of sales in the Condensed Consolidated Statements of Comprehensive Income.

 

Foreign Currency Exchange Agreements

Seaboard enters into foreign currency exchange agreements to manage the foreign currency exchange rate risk with respect to certain transactions denominated in foreign currencies.  Foreign currency exchange agreements that are primarily related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of cost of sales in the Condensed Consolidated Statements of Comprehensive Income.  Foreign currency exchange agreements that are not related to an underlying commodity transaction are recorded at fair value with changes in value marked-to-market as a component of foreign currency gains (losses), net in the Condensed Consolidated Statements of Comprehensive Income.

 

At October 3, 2015 and December 31, 2014, Seaboard had trading foreign currency exchange agreements to cover a portion of its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $66,084,000 and $143,961,000, respectively, primarily related to the South African rand.

 

Interest Rate Exchange Agreements

During 2014, Seaboard initially put into place four, approximately eight-year interest rate exchange agreements with mandatory early termination dates in the second half of 2014 and early 2015 for one of the agreements. During 2014 and 2015, these interest rate exchange agreements were terminated and replaced, each with a mandatory early termination date, which coincides with the revised anticipated delivery dates in 2015 and 2016 of dry bulk vessels to be leased, and have similar terms as the original agreements terminated. In June 2015, one agreement was terminated and not renewed with the delivery of a bulk vessel now leased. Payments made by Seaboard to unwind these agreements were not material. These exchange agreements involve the exchange of fixed-rate and variable-rate interest payments without the exchange of the underlying notional amounts to mitigate the potential effects of fluctuations in interest rates on the anticipated four dry bulk vessel leases in 2015 and 2016. Seaboard pays a fixed rate and receives a variable rate of interest on these three notional amounts outstanding of $22,000,000 each.  In 2010, Seaboard entered into three ten-year interest rate exchange agreements, which involve the exchange of fixed-rate and variable-rate interest payments over the life of the agreements without the exchange of the underlying notional amounts, to mitigate the effects of fluctuations in interest rates on variable rate debt.  Seaboard pays a fixed rate and receives a variable rate of interest on these three notional amounts of $25,000,000 each. All of Seaboard’s outstanding interest rate exchange agreements do not qualify as hedges for accounting purposes. Accordingly, the changes in fair value of these agreements are recorded in miscellaneous, net in the Condensed Consolidated Statements of Comprehensive Income. At October 3, 2015 and December 31, 2014, Seaboard had six and seven interest rate exchange agreements outstanding respectively, with a total notional value of $141,000,000 and $163,000,000, respectively.

 

Counterparty Credit Risk

From time to time Seaboard is subject to counterparty credit risk, related to its foreign currency exchange agreements and interest rate swaps, should the counterparties fail to perform according to the terms of the contracts.  As of October 3, 2015, Seaboard had a maximum amount of loss due to credit risk in the amount of $1,715,000 with three counterparties related to foreign currency exchange agreements and no counterparty credit risk related to the interest rate swaps.  Seaboard does not hold any collateral related to these agreements.

 

10


 

The following table provides the amount of gain or (loss) recognized in income for each type of derivative and where it was recognized in the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 3, 2015 and September 27, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

October 3,

 

September 27,

 

October 3,

 

September 27,

 

(Thousands of dollars)

    

 

    

2015

    

2014

    

2015

    

2014

 

Commodities

 

Cost of sales

 

$

(15,945)

 

$

(296)

 

$

(18,007)

 

$

3,082

 

Foreign currencies

 

Cost of sales

 

 

3,820

 

 

1,957

 

 

5,241

 

 

4,770

 

Foreign currencies

 

Foreign currency

 

 

352

 

 

3,145

 

 

1,954

 

 

2,725

 

Interest rate

 

Miscellaneous, net

 

 

(4,994)

 

 

91

 

 

(6,117)

 

 

(3,804)

 

 

The following table provides the fair value of each type of derivative held as of October 3, 2015 and December 31, 2014 and where each derivative is included in the Condensed Consolidated Balance Sheets.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives

 

 

 

Liability Derivatives

 

 

 

 

 

October 3,

 

December 31,

 

 

 

October 3,

 

December 31,

 

(Thousands of dollars)

    

 

    

2015

    

2014

    

 

    

2015

    

2014

 

Commodities(1)

 

Other current assets

 

$

9,639

 

$

6,136

 

Other current liabilities

 

$

21,739

 

$

1,779

 

Foreign currencies

 

Other current assets

 

 

1,715

 

 

1,675

 

Other current liabilities

 

 

1,417

 

 

407

 

Interest rate

 

Other current assets

 

 

 -

 

 

 -

 

Other current liabilities

 

 

8,714

 

 

7,715

 

 

(1)

Seaboard’s commodity derivative assets and liabilities are presented in the Condensed Consolidated Balance Sheets on a net basis, including netting the derivatives with the related margin accounts.  As of October 3, 2015 and December 31, 2014, the commodity derivatives had a margin account balance of $34,852,000 and $4,314,000, respectively, resulting in a net other current asset in the Condensed Consolidated Balan