Exhibit 13
SEABOARD CORPORATION
2003 Annual Report
Description of Business
Seaboard Corporation is a diversified international
agribusiness and transportation company primarily engaged
domestically in pork production and processing, and cargo
shipping. Overseas, Seaboard is primarily engaged in
commodity merchandising, flour and feed milling, sugar
production, and electric power generation.
Table of Contents
Letter to Stockholders 2
Division Summaries 4
Principal Locations 6
Summary of Selected Financial Data 7
Quarterly Financial Data (unaudited) 8
Management's Discussion & Analysis 9
Responsibility for Financial Statements 24
Independent Auditors' Report 24
Consolidated Balance Sheets 25
Consolidated Statements of Earnings 26
Consolidated Statements of Changes in Equity 27
Consolidated Statements of Cash Flows 28
Notes to Consolidated Financial Statements 29
Stockholder Information 53
This report, including information included or incorporated by
reference in this report, contains certain forward-looking
statements with respect to the financial condition, results of
operations, plans, objectives, future performance and business
of Seaboard Corporation and its subsidiaries (Seaboard).
Forward-looking statements generally may be identified as:
statements that are not historical in nature; and statements
preceded by, followed by or that include the words "believes,"
"expects," "may," "will," "should," "could," "anticipates,"
"estimates," "intends," or similar expressions. In more
specific terms, forward-looking statements, include, without
limitation: statements concerning projection of revenues,
income or loss, capital expenditures, capital structure or
other financial items; statements regarding the plans and
objectives of management for future operations; statements of
future economic performance; statements regarding the intent,
belief or current expectations of Seaboard and its management
with respect to: (i) the cost and timing of the completion of
new or expanded facilities, (ii) Seaboard's ability to obtain
adequate financing and liquidity, (iii) the price of feed
stocks and other materials used by Seaboard, (iv) the sale
price for pork products from such operations, (v) the price
for other products and services, (vi) the charter hire rates
and fuel prices for vessels, (vii) the demand for power,
related spot market prices and collectibility of receivables
in the Dominican Republic, (viii) the effect of the
devaluation of the Argentine and Dominican Republic pesos,
(ix) the potential effect of the proposed meat packer ban
legislation on the Pork Division, (x) the effect of the
Venezuelan economy on the Marine Division, (xi) the potential
effect of Seaboard's investment in a wine business on the
consolidated financial statements, (xii) the potential impact
of various environmental actions pending or threatened against
Seaboard, or (xiii) other trends affecting Seaboard's
financial condition or results of operations, and statements
of the assumptions underlying or relating to any of the
foregoing statements.
Forward-looking statements are not guarantees of future
performance or results. They involve risks, uncertainties and
assumptions. Actual results may differ materially from those
contemplated by the forward-looking statements due to a
variety of factors. The information contained in this report,
including without limitation the information under the
headings "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Letter to
Stockholders", identifies important factors which could cause
such differences.
1
SEABOARD CORPORATION
Letter to Stockholders
A strong fourth quarter resulted in record sales and one
of the highest levels of operating income in our
company's history. I am particularly encouraged by the
rebound in our pork business and the continued success
of our overseas businesses. We continue our efforts to
streamline each of our businesses. We are taking
advantage of technological advances enabling us to
better control costs, track products, and benchmark
our businesses against each other and competing companies.
Our pork business was able to capitalize on higher pork
prices, which helped this business return to profitability
and maintain margins in the face of relatively high pork
supply. During the year we continued to expand our
further-processing business. Seaboard Farms produces an
increasing variety of seasoned and marinated products.
These products are sold under our Prairie Fresh brand as
well as private labels.
An exciting new development for our company is the
announcement we made in February 2004 that we had entered
into an agreement to market 100% of the pork products to
be produced by Triumph Foods. Triumph Foods is
constructing a state-of-the-art vertically integrated pork
processing facility in St. Joseph, Missouri. This
facility will be based on the design for our proposed
Texas plant and will have approximately the same capacity
and product capabilities as our Guymon plant. The
arrangement will allow us to effectively double the amount
of product we market to meet our customer demands without
the expense of a new plant.
In previous reports, I have talked about the possibility
of constructing a second vertically integrated pork
complex in Texas. With the announcement of the venture
with Triumph Foods, it is unlikely that this new plant
project will move forward until sometime after the Triumph
plant reaches full capacity and our customers demand
additional product.
Our Commodity Trading and Milling Division experienced
another solid year. Favorable milling margins together
with record output improved the contribution to earnings
from our milling businesses. Grain-trading
volumes were lower for the year because of improved local
harvests in our key markets, which lowered import
requirements. We continue to leverage our grain supply to
affiliated milling businesses with third-party commodity
trade in order to better serve our customers, lower unit
costs, and generate incremental income. Although the
markets in which we operate continue at times to be
volatile politically and economically, the division
continues to pursue strategic investments and joint
ventures that will increase our base of milling assets and
grain customers while further diversifying our base.
Our Miami-based container shipping business began to show
improvement in late 2003. The business had record sales
because of increased shipping volumes in both new and
existing markets. Operating income was significantly
lower in 2003 because of continuing economic disruption in
Venezuela. In addition, higher fuel and charter hire
costs affected earnings. We are encouraged by the growth
of the business outside of Venezuela and are seeking
opportunities to lessen the impact of the continued
disruptions on our business.
2
SEABOARD CORPORATION
Letter to Stockholders
The Sugar and Citrus Division posted record operating
income in 2003. The turnaround and success of this
division in recent years can be traced to production
efficiencies, increasing sugar prices, and the peso
devaluation, all of which contributed to a substantial
lowering of costs. The improved results of all sugar
producers as well as a more stable Argentine economy have
resulted in a potential oversupply of sugar in the
domestic economy. Consequently, we do not expect to be
able to maintain this level of performance in 2004. We
anticipate, however, that the division will continue to
produce positive results.
During 2003, the Power Division began to suffer the
effects of the declining economic environment in the
Dominican Republic. The Dominican peso devalued
substantially during the year, and the country's
government is currently not able to meet its financial
obligations, including payments to independent power
producers, such as Seaboard. The majority of our sales are
to the ailing government-controlled power distribution
companies and payments are not being made on a timely
basis. We are aggressively pursuing additional private-
contract customers that will allow us to increase the
level of power generation and generate more reliable cash
flow. We are optimistic that our current plan of action
will help us successfully confront this challenge during
2004.
Overall I am pleased by the improved performance of our
company this year. In the face of volatile commodity
markets and worldwide political and economic
uncertainties, our ability to maintain flexibility and
customer focus is to be applauded. We are prepared for the
challenges we will face in 2004 and look forward to the
opportunities created. As always, we appreciate the
continued dedication and commitment of our 9,000 plus
employees who serve to make this Company a leader in its
respective industries.
/s/ H.H. Bresky
H.H. Bresky
Chairman of the Board, President
and Chief Executive Officer
3
SEABOARD CORPORATION
Division Summaries
Pork Division
Seaboard's Pork Division is one of the largest vertically
integrated pork processors in the United States. Seaboard is
able to control animal production and processing from research
and development in nutrition and genetics, to the production of
high quality meat products at our processing facility.
Seaboard's processing facility in Guymon, Oklahoma opened in
1995. The facility operates at double shift capacity and
processes approximately four and one-half million hogs annually.
Seaboard produces and sells fresh and frozen pork to further
processors, foodservice outlets, grocery stores and other retail
customers, and distributors primarily in the western half of the
United States and foreign markets. Hogs processed at our plant
include company raised hogs as well as hogs raised by third
parties purchased under contract.
Seaboard's hog production facilities consist of genetic and
commercial breeding, farrowing, nursery and finishing buildings
located in Oklahoma, Kansas, Texas and Colorado to produce
approximately three million hogs annually. In addition, Seaboard
recently completed expansion of the facilities to produce an
additional 500,000 hogs annually. Seaboard currently operates
six centrally located feed mills to provide formulated feed to
these facilities and has additional feed mill capacity to support
future growth.
Seaboard's vertically integrated system provides a number of
strategic advantages relative to other companies in the industry.
These advantages, which result largely from significant control
of the production and processing chain, allow Seaboard to produce
high quality, safe products. The consistency and quality of
Seaboard pork have allowed Seaboard to become one of the leading
exporters of pork products from the United States to Japan and
other foreign markets.
Commodity Trading & Milling Division
Seaboard's Commodity Trading & Milling Division markets wheat,
corn, soybean meal and other commodities in bulk to third-party
customers internationally and affiliated companies. These
commodities are purchased worldwide with primary destinations in
Africa, South America, the Caribbean, and the Eastern
Mediterranean.
The division originates, transports and markets approximately
four million tons annually of wheat, corn, soybean meal and other
commodities. The focus remains on the efficient supply of
quality products and services to the wheat and maize milling and
animal feed industries. Seaboard integrates the service of
delivering commodities to its customers through the use of its
seven owned bulk carriers and other chartered bulk vessels as
required.
Seaboard's Commodity Trading and Milling Division operates in
seventeen countries, including five trading locations and
thirteen grain processing businesses. The grain processing
businesses are operated through four owned and nine non-
consolidated affiliates in Africa, South America, and the
Caribbean with flour, feed and maize milling businesses producing
approximately one and one-half million metric tons of finished
product per year.
4
SEABOARD CORPORATION
Division Summaries
Marine Division
Seaboard's Marine Division, formed in 1983, provides
containerized shipping service between the United States, the
Caribbean Basin, and Central and South America. Seaboard's
primary operations, located in Miami, include a 135,000 square-
foot warehouse for cargo consolidation and temporary storage in
addition to a 70 acre terminal at the Port of Miami. At the Port
of Houston, Seaboard operates a 62 acre cargo terminal facility
that includes over 690,000 square feet of on-dock warehouse space
for temporary storage of bagged grains, resins and other cargoes.
Seaboard also makes scheduled vessel calls in New Orleans,
Louisiana and Fernandina Beach, Florida, and Philadelphia,
Pennsylvania.
Seaboard's fleet consists of approximately 28 owned or chartered
vessels, thousands of dry, refrigerated and specialized
containers and related equipment. Within its service lanes,
Seaboard is one of the largest shippers in terms of cargo volume
to and from the Port of Miami and provides direct service to over
20 countries. Seaboard also provides extended service from our
domestic ports of call to and from multiple foreign destinations
through connecting carrier agreements with major regional and
global carriers.
To maximize fleet utilization, Seaboard uses a network of offices
and agents throughout the United States, Canada, Latin American,
and the Caribbean Basin to book both northbound and southbound
cargo. Seaboard's full service intermodal capabilities allow the
transport by either truck or rail, of both import and export
cargo to and from various U.S. ports. Seaboard's frequent
sailings and fixed-day schedules make it convenient for customers
to coordinate manufacturing schedules and maintain inventories at
cost-efficient levels. Seaboard's approach is to work in
partnership with its customers and provide the most effective
level of service throughout the United States to and from Latin
America and the Caribbean Basin.
Other Divisions
Seaboard's other businesses consist largely of food-related
businesses and electric power generation.
Seaboard is involved in the production and refining of sugar, and
the production and processing of citrus products in Argentina.
These products are primarily marketed locally with some exports
to the United States, South America and Europe. Seaboard's mill,
one of the largest in Argentina, has a processing capacity of
approximately 180,000 metric tons of sugar per year. The mill is
located on a large tract of land in the Salta Province.
Approximately 40,000 acres of this land is planted with sugar
cane which supplies the majority of the raw product processed by
the mill. Seaboard also has an orange grove consisting of
approximately 3,000 acres.
Seaboard owns two floating electric power generating facilities
consisting of a series of diesel engines mounted on barges with a
combined rated capacity of approximately 112 megawatts. Seaboard
operates as an independent power producer that generates
electricity into the local power grid but is not involved in the
transmission or distribution of electricity. Electricity is sold
under contract to another local generation company and certain
commercial large users, and on the spot market which is accessed
primarily by three wholly or partially government-owned
distribution companies, and limited others.
Seaboard processes jalapeno peppers at its plant in Honduras.
These products are shipped to the United States on Seaboard
Marine vessels and distributed from Seaboard's Port of Miami cold
storage warehouse.
Seaboard sources and sells truck freight to third parties via its
brokerage business. This business also provides logistics and
transportation service to other Seaboard companies using its
owner-operator program and extensive carrier network.
Seaboard also has an equity investment in a wine business that
produces wine in Bulgaria for distribution primarily throughout
Europe.
5
SEABOARD CORPORATION
Principal Locations
Pork Seaboard Overseas Seaboard Marine Ltd.
Limited Miami, Florida
Seaboard Farms, Inc. Bermuda, Ecuador and
Shawnee Mission, Kenya Seaboard Marine
Kansas (Trinidad) Ltd.
(Pork Division Seaboard Overseas Trinidad
Office) Peru SRL
Guymon, Oklahoma Peru Seaboard Marine of
(Processing Haiti, S.E.
Plant) Seaboard Overseas Haiti
Julesburg, Colorado Trading and
Hugoton, Kansas Shipping (PTY) Ltd. SEADOM, S.A.
Leoti, Kansas South Africa Dominican Republic
Liberal, Kansas
Rolla, Kansas Seaboard West Seamaritima S.A.
Guymon, Oklahoma Africa Limited de C.V.
Hennessey, Oklahoma Sierra Leone Mexico
Optima, Oklahoma
(Live Production Unga Holdings
Operation Limited* Sugar and Citrus
Offices) Kenya and Uganda
Ingenio y Refineria
San Martin del
Commodity Trading & Marine Tabacal SRL
Milling Argentina
Agencias Generales
KWABA - Sociedade Conaven, C.A.
Industrial e Venezuela Power
Commercial, SARL*
Angola Agencia Maritima Transcontinental
del Istmo, S.A. Capital Corp.
Les Moulins d'Haiti Costa Rica (Bermuda) Ltd.
S.E.M.* Dominican Republic
Haiti Cayman Freight and
Shipping Services, Ltd.
Lesotho Flour Mills Cayman Islands Other
Limited*
Lesotho JacintoPort Boyar Estates S.A.*
International LP Bulgaria
Life Flour Mill Houston, Texas
Ltd.* Chestnut Hill Farms
Top Feeds Limited* Representaciones Honduras S. de
Nigeria Maritima y R.L. de C.V.
Aereas, S.A. Honduras
Minoterie de Guatemala
Matadi, S.A.R.L.* Mount Dora Farms Inc.
Democratic Republic Sea Cargo, S.A. Miami, Florida
of Congo Panama
Seaboard Transport, Inc.
Minoterie du Congo, Seaboard de Shawnee Mission, Kansas
Republic of Congo Colombia, S.A.
Colombia
Mobeira, SARL* Corporate Office
Mozambique Seaboard Honduras,
S. de R.L. de C.V. Seaboard Corporation
Molinos Champion, Honduras Shawnee Mission, Kansas
S.A.*
Molinos del Seaboard del
Ecuador, C.A.* Peru, S.A.
Ecuador Peru
National Milling Seaboard Freight &
Company of Shipping Jamaica
Guyana Limited Limited
Guyana Jamaica
National Milling Seaboard Marine
Corporation Bahamas Ltd.
Limited Bahamas
Zambia
*Represents a non-controlled, non-consolidated affiliate
6
SEABOARD CORPORATION
Summary of Selected Financial Data
(Thousands of dollars
except per share amounts) Years ended December 31,
2003 2002 2001 2000 1999
Net sales $1,981,340 $1,829,307 $1,804,610 $1,583,696 $1,284,262
Operating income $ 68,786 $ 47,125 $ 114,352 $ 48,065 $ 12,368
Earnings (loss) from
continuing operations $ 31,842 $ 13,507 $ 51,989 $ 8,872 $ (13,587)
Net earnings $ 31,842 $ 13,507 $ 51,989 $ 98,909 $ 47
Earnings (loss) per
common share from
continuing operations $ 25.37 $ 9.38 $ 34.95 $ 5.96 $ (9.13)
Net earnings per common
share $ 25.37 $ 9.38 $ 34.95 $ 66.49 $ 0.03
Total assets $1,325,691 $1,281,141 $1,234,757 $1,274,234 $1,249,022
Long-term debt, less
current maturities $ 321,555 $ 318,746 $ 255,819 $ 312,418 $ 318,017
Stockholders' equity $ 520,565 $ 486,731 $ 528,420 $ 540,685 $ 443,168
Dividends per common
share $ 3.00 $ 2.50 $ 1.00 $ 1.00 $ 1.00
During the fourth quarter of 2003, Seaboard sold its equity
investment in Fjord Seafood ASA (Fjord), an integrated salmon
producer and processor headquartered in Norway, recognizing a
gain of $18,036,000. The gain was not subject to tax. See Note
3 to the Consolidated Financial Statements for additional
discussion. During 2003, Seaboard recorded its share of losses
related to its investment in Fjord totaling $15,546,000,
including $12,421,000 for asset impairment charges. Seaboard's
share of losses from Fjord during 2002 and 2001 totaled
$10,158,000 and $1,316,000, respectively. See Note 13 to the
Consolidated Financial Statements for additional discussion.
Also during 2003, Seaboard adopted Statement of Financial
Accounting Standard No. 143, "Accounting for Asset Retirement
Obligations," Financial Accounting Standards Board Interpretation
No. 46, revised December 2003, "Consolidation of Variable
Interest Entities," and changed its method of accounting for
costs associated with the regularly scheduled drydocking of
vessels from the accrue-in-advance method to the direct-expense
method. As a result of these changes, Seaboard recorded a net
cumulative effect of changes in accounting principles of
$2,868,000, or $2.29 per share. See Note 1 to the Consolidated
Financial Statements for additional information.
During 2002, Seaboard completed a series of transactions related
to its Argentine sugar business, resulting in a one-time tax
benefit of $14,303,000. See Note 7 to the Consolidated Financial
Statements for further discussion.
During 2002, Seaboard effectively repurchased 232,414.85 shares
of common stock from its parent company. See Note 12 to the
Consolidated Financial Statements for further discussion.
Seaboard's 2002 and 2001 financial position and results of
operations were negatively impacted by the devaluation of the
Argentine peso. See Note 12 to the Consolidated Financial
Statements for further discussion.
Seaboard completed the sale of its Poultry Division on
January 3, 2000, recognizing an after-tax gain on disposal of
discontinued operations of $90,037,000 or $60.53 per common
share.
7
SEABOARD CORPORATION
Quarterly Financial Data (unaudited)
(UNAUDITED)
(Thousands of dollars 1st 2nd 3rd 4th Total for
except per share amounts) Quarter Quarter Quarter Quarter the Year
2003
Net sales $ 461,867 485,883 485,417 548,173 $1,981,340
Operating income $ 7,974 10,289 17,845 32,678 $ 68,786
Net earnings (loss) $ 2,715 (2,916) 1,838 30,205 $ 31,842
Earnings (loss) per common
share $ 2.16 (2.32) 1.46 24.07 $ 25.37
Dividends per common share $ 0.75 0.75 0.75 0.75 $ 3.00
Market price range per
common share:
High $ 263.00 225.75 268.00 284.95
Low $ 195.00 195.00 203.00 215.00
2002
Net sales $ 442,923 477,104 429,800 479,480 $1,829,307
Operating income $ 16,754 15,192 9,311 5,868 $ 47,125
Net earnings (loss) $ 1,723 15,098 (5,673) 2,359 $ 13,507
Earnings (loss) per common
share $ 1.16 10.15 (3.81) 1.81 $ 9.38
Dividends per common share $ 0.25 0.75 0.75 0.75 $ 2.50
Market price range per
common share:
High $ 335.00 305.00 301.00 259.00
Low $ 260.00 202.00 220.00 195.00
In the first quarter of 2003, Seaboard adopted Statement of
Financial Accounting Standard No. 143, "Accounting for Asset
Retirement Obligations" and changed its method of accounting for
costs associated with the regularly scheduled drydocking of
vessels from the accrue-in-advance method to the direct-expense
method. As result of these changes, Seaboard recorded a net
cumulative effect of changes in accounting principles of
$3,648,000, or $2.90 per share. See Note 1 to the Consolidated
Financial Statements for further discussion.
During the fourth quarter of 2003, Seaboard adopted Financial
Accounting Standards Board Interpretation No. 46, revised
December 2003, "Consolidation of Variable Interest Entities," and
recorded a cumulative effect of a change in accounting principles
of $(780,000), or $(0.62) per common share. See Note 1 to the
Consolidated Financial Statements for further discussion.
During the fourth quarter of 2003, Seaboard sold its equity
investment in Fjord, recognizing a gain of $18,036,000. The gain
was not subject to tax. See Note 3 to the Consolidated Financial
Statements for further discussion.
During the third quarter of 2003, Seaboard recorded a $12,421,000
charge to earnings for its share of asset impairments related to
its investment in Fjord. See Note 13 to the Consolidated
Financial Statements for further discussion.
During the second quarter of 2002, Seaboard completed a series of
transactions related to its Argentine sugar business, resulting
in a one-time tax benefit of $14,303,000. See Note 7 to the
Consolidated Financial Statements for further discussion.
8
SEABOARD CORPORATION
Managements's Discussion & Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Seaboard is a diverse agribusiness and transportation company
with global operations in several industries. Most of the sales
and costs of Seaboard's segments are significantly influenced by
worldwide fluctuations in commodity prices or changes in foreign
political and economic conditions. Accordingly, sales, operating
income and cash flows can fluctuate significantly from year to
year. As each segment operates in unrelated industries and
different geographical locations, management evaluates their
operations separately.
Pork Segment
Seaboard's most significant operation is the Pork segment which
is primarily a domestic business with some export sales to Japan
and other foreign markets. All sales of pork products are
generated from a single hog processing plant in Guymon, Oklahoma,
which operates at double shift capacity. In 2003, Seaboard
raised over 60% of the hogs processed at the plant with the
remaining hog requirements purchased primarily under contracts
from independent producers. This segment has the largest dollar
amount of sales and is the most capital intensive segment with
over 50% of consolidated assets, including 75% of Seaboard's
fixed assets, and material dollar amounts for live hog
inventories. Of all Seaboards' businesses, management believes
the Pork segment possesses the ability to generate the most
material amount of operating income and cash flow in any one
year.
Of Seaboard's businesses, the Pork segment also has the greatest
exposure to commodity price fluctuations. As a result, this
segment's operating income and cash flows can materially
fluctuate from year to year, significantly affecting Seaboard's
consolidated operating income and cash flows. Sales prices are
directly affected by both domestic and world-wide supply and
demand for pork products and other proteins. Feed costs are the
most significant single component of the cost of raising hogs and
can be materially affected by commodity price fluctuations for
corn and soybean meal. In addition, costs can be materially
affected by fluctuations in market prices for hogs purchased from
third parties for processing at the plant.
During 2003, this segment completed populating its existing live
production facilities and management currently has no immediate
plans for further expansion to support the Guymon processing
plant. Accordingly, future working capital needs and other
financing requirements related to incremental expansion should be
minimal, as Seaboard has put on hold any future plans to
construct a second processing plant as discussed below. As the
Guymon plant operates at double shift capacity, to improve
operating income Seaboard is constantly working towards improving
the efficiencies of the Pork operations while considering ways to
expand product offerings.
In early 2004, Seaboard entered into a marketing agreement with
Triumph Foods LLC (Triumph) to market all of the pork products
produced at Triumph's new pork processing plant planned for
construction in St. Joseph, Missouri. The plant is scheduled to
begin operations in mid to late 2005. This plant will have
similar capacity to Seaboard's Guymon plant. The Triumph plant
is not expected to reach operating capacity until late 2006 and
Seaboard does not intend to make any final decisions regarding
construction of its potential second plant prior to that time.
Commodity Trading and Milling Segment
The Commodity Trading and Milling segment is Seaboard's second
largest segment in terms of sales and assets, which consist
primarily of working capital assets. This segment operates
principally overseas with locations in Africa, Bermuda, South
America and the Caribbean. These foreign operations can be
significantly impacted by local crop production, political or
economic situations. This segment's sales are also significantly
affected by fluctuating commodity prices fueled by the dynamics
of world-wide supply and demand for various commodities, such as
wheat, corn and soybean meal. Although this segment owns seven
ships, most of the third-party trading business is transacted by
chartering ships. Charter hire rates, influenced by available
charter capacity for worldwide trade in bulk cargoes, and related
fuel costs can also impact business volumes and margins. The
milling businesses, both owned and non-consolidated affiliates,
operate in many foreign and, in most cases, lesser developed
countries. Local and worldwide crop harvests, economic
conditions, periodic political instability and subsidized flour
imports can create fluctuating market conditions that can have a
significant impact on both the trading and milling businesses'
sales and operating income.
9
SEABOARD CORPORATION
Managements's Discussion & Analysis
The majority of the Commodity Trading and Milling segment's sales
pertain to the commodity trading business which has experienced
significant volume growth over the past few years, although
growth slowed somewhat in 2003. This growth has increased the
amount of working capital required to fund increases in accounts
receivable and inventories while shipping requirements have been
satisfied by the charter hiring of bulk cargo ships. As the
commodity trading portion of the business sources grain worldwide
with international destinations, timing of completion of voyages
and fluctuations in the availability of and rates for bulk cargo
shipping can significantly affect sales volumes, operating income
and cash flows from quarter-to-quarter. Seaboard continues to
look for opportunities for additional markets to expand the
commodity trading and milling operations.
Marine Segment
The Marine segment is the third largest in terms of sales and
assets. This segment provides containerized cargo shipping
services primarily from the United States to over twenty
different countries in the Caribbean basin, and Central and South
America. Fluctuations in economic conditions and the potential
unstable local political situations in the countries in which
Seaboard operates can affect import/export trade volumes. In
addition, containerized cargo rates can fluctuate depending on
local supply and demand for shipping services. This division is
also affected by fluctuations in fuel costs and charter hire
rates.
For the past couple of years, Seaboard has experienced the
negative effects of the political instability in Venezuela,
previously Seaboard's largest foreign destination, which also
affected other related South American markets. This has had a
significant impact on operating income while reducing the related
cash flows. Seaboard's marine business is fairly mature and,
excluding the effects of the Venezuelan situation, has had fairly
stable cash flows and minimal financing requirements. Seaboard
has successfully replaced the volume lost as a result of the
Venezuelan situation by adding new routes and expanding volumes
on existing routes although margins have decreased. Seaboard
continues to look for ways to increase volumes on existing routes
while looking to provide additional new services for the region.
Sugar and Citrus Segment
Seaboard's Sugar and Citrus segment operates a sugar mill in
Argentina. In addition, Seaboard grows locally a substantial
portion of the sugar cane processed at the mill. This segment's
sales and operating income are significantly impacted by
fluctuating prices for sugar. Fluctuations in the Argentine
sugar harvest can have an impact on the local price of sugar.
Also, but to a lesser degree, price fluctuations on the world
market can affect local sugar prices and can also result in lower
export sale volumes. Depending on local harvest and market
conditions, from time to time, this business purchases third-
party sugar for resale. Over the past several years, Seaboard
made several modifications to this business to improve
efficiencies of its operations.
As the functional currency of the Sugar and Citrus segment is the
Argentine peso, currency fluctuations can also have an impact on
reported U.S. dollar sales, operating income and cash flows. As
discussed in Note 12 to the Consolidated Financial Statements, in
2001 and early 2002, Argentina's peso experienced a significant
devaluation to the U.S. dollar resulting in material foreign
currency losses and write-downs in Seaboard's asset values
related to this operation. Although initially the economy of
Argentina was severely, negatively impacted by the devaluation
and ensuing recession, the situation in Argentina has steadily
improved in 2003 and the peso has been relatively stable. This
devaluation, in addition to efficiency improvements, caused a
significant increase in local sugar prices and decreases in
inventory and production costs resulting in an improvement in
operating income and cash flows for the past two years. Future
financing needs are not expected to be significant for this
operation. Seaboard continues to explore ways to improve and
expand its existing operations while considering other
alternatives to expand this segment.
Power Segment
Seaboard's Power segment operates as an unregulated independent
power producer in the Dominican Republic (DR) generating power
from a series of diesel engines mounted on two barges. The
engines have historically operated at capacity. After the
addition of the second barge in late 2000, this segment's
financing needs have been minimal. For the past several years,
this segment has produced some of Seaboard's best return on
investment while operating cash flows have fluctuated from
inconsistent customer collections. Seaboard has contracts to
sell approximately one half of its power to certain government-
approved commercial large users and another local
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Managements's Discussion & Analysis
generation company, with the remaining production sold on the
spot market, primarily to three wholly or partially-
government-owned distribution companies. Fuel is the largest cost
component but increases in fuel prices usually have been passed
through to the contract customers.
The economic environment in the DR weakened significantly
throughout 2003. During 2003, the Dominican peso devalued
approximately 68%. In addition, during the last half of 2003 the
power industry in the DR suffered from a cash flow imbalance.
This occurred as a result of the government not allowing retail
electricity rates, charged by the distribution companies, to
increase sufficiently to cover the significant peso devaluation
and increases in dollar-denominated fuel costs. The government
has been unable to fully fund this cash shortfall.
As a result of the weakened economic environment in the DR,
during the second half of 2003, trade receivables grew
substantially from the government-owned distribution companies or
other companies that must also collect from the government in
order to make payments on their accounts. While multilateral
credit agencies may eventually provide funding support to this
country to improve liquidity, management can not predict if
adequate funding will occur to fully resolve this situation
during the next year. As a result, similar to other independent
power producers, Seaboard began to fluctuate its level of power
generation in mid-December 2003 between full capacity and
approximately 50% capacity, based on management's belief about
collectibility. With the exception of those government or
government-reliant customers, all other contract customers
continue to pay their accounts timely. Seaboard continues to
pursue other contract customers which would allow this segment to
increase generation of power in the future and reduce dependency
on the government-owned distribution companies.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Sources and Uses of Cash
Cash and short-term investments as of December 31, 2003 increased
$41.8 million over December 31, 2002 primarily reflecting the
proceeds of $37.4 million from the sale of 100% of Seaboard's
equity investment in Fjord Seafood, ASA (Fjord) in the fourth
quarter of 2003. Uncertainties about the future profitability of
this business, led to management's decision to divest its equity
investment in the salmon industry. Cash generated from operating
activities totaled $91.7 million for 2003 and was used primarily
for scheduled principal payments of long-term debt of
$52.9 million and capital expenditures of $31.5 million.
Cash from operating activities for 2003 increased $64.2 million
compared to 2002 primarily related to improved operating results
of the Pork segment and a lower level of funding for working
capital requirements. The reduced funding for working capital
requirements primarily reflects the substantial prior year
increase in working capital requirements for the expansion of the
commodity trading business, while in 2003 such working capital
needs remained fairly constant for this business. However,
working capital requirements increased for the Pork segment, as
live hog inventory levels were increased during 2003 reflecting
new hog production facilities being fully populated. In
addition, the Power segment's receivables increased due to recent
collection problems.
Cash and short-term investments as of December 31, 2002 decreased
$96.2 million from December 31, 2001 as a result of payments of
$47.2 million made to effectively repurchase shares of Seaboard's
common stock from its parent, Seaboard Flour Corporation (see
Note 12 to the Consolidated Financial Statements), a
$26.9 million additional investment in Fjord, and $51.4 million
of scheduled payments made on the long-term debt. The outflows
were partially offset by an increase of $38.4 million in short-
term borrowings and cash generated from operating activities of
$27.5 million. Capital expenditures of $149.9 million in 2002
were primarily financed with $109.0 million of proceeds from a
private placement of senior notes as discussed below.
Cash from operating activities for 2002 decreased $131.7 million
compared to 2001. The decrease was primarily due to lower net
earnings, principally related to the Pork segment, and an
increase in working capital requirements. Working capital
requirements increased in 2002 primarily as a result of the
increase in the commodity trading business and the timing of
related normal transactions for voyage settlements, trade
payables and receivables.
Capital Expenditures
During 2003 Seaboard invested $15.8 million in the Pork segment
primarily for the expansion of existing hog production
facilities, and land acquisition and permitting activities to
support the requirements of a potential second processing plant.
These capital expenditures exclude an increase in net fixed
assets in 2003 for hog production
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Managements's Discussion & Analysis
facilities previously leased under a master lease agreement that
were acquired for a total of $25.0 million primarily from the
assumption of debt as discussed below, and also exclude $31.7
million of net fixed assets from the consolidation of variable
interest entities (VIEs). See Note 1 to the Consolidated
Financial Statements for further discussion of consolidation
of VIEs. During 2004, Seaboard expects to invest $7.4 million
for improvements to existing hog production facilities and
upgrades to the pork processing plant.
Seaboard invested $7.7 million in the Marine segment primarily to
expand and replace cargo transportation and loading equipment,
and make facility improvements. Instead of purchasing two
previously chartered vessels during 2003, Seaboard entered into
new leasing arrangements. During 2004, management plans to
invest $8.6 million to purchase additional equipment.
Seaboard invested $4.4 million in the Sugar and Citrus segment
primarily for machinery and equipment, and improvements to the
mill and sugarcane fields. During 2004, management anticipates
spending $5.1 million for additional improvements to the
plantation, mill and harvesting equipment.
During 2003, capital expenditures for all other segments totaled
$3.6 million for general modernization, mill expansion, and
efficiency upgrades of plant and equipment. During 2004,
Seaboard expects to spend a total of $5.5 million, of which
$4.9 million is for mill expansion and equipment in the Commodity
Trading and Milling division.
Total planned capital expenditures for 2004 are $26.6 million.
As these capital expenditures are primarily of a normal recurring
operating amount, management anticipates financing from
internally generated cash, the use of available short-term
investments or from existing available short-term borrowing
capacity. As of December 31, 2003, there were no material
commitments for planned 2004 capital expenditures as these
amounts primarily represent capital budget plans only.
During 2002, Seaboard invested $149.9 million in property, plant
and equipment. Seaboard invested $135.1 million in the Pork
segment primarily to purchase hog production facilities
previously leased, expand the hog production facilities, make
improvements to the pork processing plant, and purchase land and
obtain operating permits for the potential Texas expansion
project. The hog production facilities, previously leased from
Shawnee Funding, Limited Partnership under a master lease
arrangement, were purchased in 2002 for a total of
$117.5 million, including the assumption of a $10.0 million bond
payable and offsetting $2.2 million cash in a construction fund.
This was financed primarily with the proceeds from a private
placement of $109.0 million of Senior Notes, as discussed below.
Seaboard also invested $9.7 million in the Marine segment
primarily for the purchase of additional machinery and equipment,
$2.5 million in the Sugar and Citrus segment primarily for
improvements to existing facilities and sugarcane fields, and
$2.6 million in all other segments for general modernization and
efficiency upgrades of plant and equipment.
In early 2002, Seaboard announced plans to build a second
processing plant in northern Texas along with related plans to
expand its vertically integrated hog production facilities.
However, with the planned construction of the Triumph pork
processing plant discussed above, Seaboard does not intend to
make any final decisions regarding construction until late 2006
when the Triumph plant is expected to reach its operating
capacity. As a result, management does not intend to proceed
with the expansion project at this time beyond the expenditures
required to allow future land development possibilities. If
Seaboard ultimately decides to pursue this project, it would be
contingent on a number of other factors, including obtaining
financing for the project, obtaining the necessary permits,
commitments for a sufficient quantity of hogs to operate the
plant, and no statutory impediments being imposed. As of
December 31, 2003, $7.4 million of land, development costs, and
land purchase options were included in fixed assets related to
this project.
Financing Activities, Debt and Related Covenants
During 2003, Seaboard extended two committed revolving credit
facilities totaling $45.0 million, and entered into two new
committed lines for $75.0 million and $5.0 million for use by a
subsidiary in the Commodity Trading and Milling segment as a
result of the increased working capital needs in the commodity
trading business. The new subsidiary credit lines are secured by
certain commodity trading inventory and accounts receivable and
include financial covenants for that subsidiary which require
maintenance of certain levels of working capital and net worth,
and limitations on debt to net worth and liabilities to net worth
ratios. See Note 8 to the Consolidated Financial
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Statements for a summary of the material terms of Seaboard's
credit facilities, including financial ratios and covenants.
Management believes there are currently no covenants that
materially restrict our ability to undertake additional debt
financings. As of December 31, 2003, Seaboard is in compliance
with all restrictive covenants relating to these arrangements.
In conjunction with the 2003 purchase of hog production
facilities previously leased, Seaboard assumed bank debt of
$24.4 million as discussed in Note 8 to the Consolidated
Financial Statements. In addition, Seaboard assumed
$29.9 million of bank debt from one VIE. As of
December 31, 2003, the consolidation of VIEs in accordance with
FIN 46, including the assumed debt, increased long-term debt by
$31.5 million.
In 2002, Seaboard completed the private placement of
$109.0 million of Senior Notes due 2009 and 2012 with a weighted
average interest rate of 6.29%. Seaboard used $107.3 million of
the proceeds from this private placement to purchase the
indebtedness related to hog production facilities previously
leased under a master lease program, effectively reducing the net
lease payments. On December 31, 2002, Seaboard paid an
additional $4.1 million and assumed a $10.0 million bond payable
to complete the acquisition of Shawnee Funding, Limited
Partnership effectively acquiring all of the related hog
production facilities previously leased and $2.2 million of cash
held in a construction fund which was used to repay a portion of
the bonds payable.
The following table represents a summary of Seaboard's available
borrowing capacity as of December 31, 2003. Borrowings
outstanding under committed and uncommitted lines as of
December 31, 2003 totaled $55.0 million and $20.6 million,
respectively. Letters of credit (LCs) of $11.5 million reduce
Seaboard's borrowing capacity under its committed credit lines.
Total amount
(Thousands of dollars) available
Short-term credit facilities - committed $125,000
Short-term uncommitted demand notes 51,921
Total borrowing capacity 176,921
Amounts drawn against lines (75,564)
Letters of credit reducing borrowing availability (11,537)
Available borrowing capacity at December 31, 2003 $ 89,820
During the first quarter of 2004, Seaboard entered into two new,
one-year committed credit lines totaling $45.0 million. In
addition, Seaboard's committed subsidiary credit lines totaling
$80.0 million were extended to April 30, 2004, at which time
management expects to extend them for one additional year.
During 2004, Seaboard intends to extend its $20.0 million non-
subsidiary committed credit facility expiring in May for another
year, and plans to evaluate the renewal of its remaining credit
facilities.
Scheduled long-term debt maturities range from $42.0 to
$64.9 million per year over the next four years. As Seaboard's
existing operations currently have no material capital
expenditure needs, based on current expenditure levels it is
anticipated that such annual capital expenditures will range
between $25-40 million. Accordingly, management believes
Seaboard's current combination of internally generated cash,
liquidity, capital resources and borrowing capabilities will be
adequate for its existing operations. Management does, however,
periodically review various alternatives for future financings to
provide additional liquidity for future operating plans. As
management intends to continue seeking future opportunities for
expansion in the industries in which Seaboard operates, such as
the potential second processing plant discussed above, depending
on the timing of such opportunities it may have to pursue various
financing alternatives at that time.
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Managements's Discussion & Analysis
Contractual Obligations and Off-Balance-Sheet Arrangements
A summary of the Seaboard's contractual cash obligations as of
December 31, 2003 is as follows:
(Thousands of dollars) 2004 2005 2006 2007 2008 Thereafter
Contract grower finishing
agreements $ 8,489 $ 7,789 $ 7,599 $ 7,505 $ 7,582 $ 65,533
Other operating lease
payments 26,379 8,850 8,360 6,976 4,705 8,226
Total lease obligations 34,868 16,639 15,959 14,481 12,287 73,759
Long-term debt 56,983 60,258 41,975 64,880 13,845 140,597
Short-term notes payable 75,564 - - - - -
Other purchase commitments 98,312 1,814 288 288 - -
Total cash obligations
and commitments $265,727 $78,711 $58,222 $79,649 $26,132 $214,356
To support the operations of the Pork Division, Seaboard has
agreements in place with farmers to raise a portion of Seaboard's
hogs according to specifications. Under the terms of the
agreements, additional payments would be required if the grower
achieves certain performance standards. The contract grower
finishing obligations shown above do not include these incentive
payments which, given current operating performance, could range
from about $1.0 to $1.5 million per year. In the event the
farmer is unable to perform at an acceptable level, Seaboard has
the right to terminate the agreement.
The Marine segment enters into short-term contracts to time-
charter vessels for use in its operations. These commitments of
$16.5 million for 2004 are included above in other operating
lease payments.
The Commodity Trading and Milling segment enters into commodity
purchase contracts, primarily to support sales commitments.
These purchase commitments are not included in the commitment
table above as they are cancelable and may be settled net. Using
December 31, 2003 spot prices to calculate commitments based on
spot prices, the value of purchase contracts in place at December
31, 2003 totals $136.6 million. See Note 11 to the Consolidated
Financial Statements for a further discussion and for a more
detailed listing of other purchase commitments.
Seaboard has also issued $3.3 million of guarantees to support
certain activities of non-consolidated affiliates or third
parties who provide services for Seaboard. See Note 11 to the
Consolidated Financial Statements for a detailed discussion.
In connection with Seaboard's December 31, 2001 sale of a ten
percent minority interest in one of its power barges in the
Dominican Republic, the buyer was given the option to sell its
interest back to Seaboard at any time until December 31, 2004 for
the book value at the time of the sale, pending collection of
outstanding receivables. During January of 2004, the buyer
provided notice to exercise the put option. The book value of
this minority interest as of December 31, 2003 of $5.7 million is
included in minority and other non-controlling interests on the
Consolidated Balance Sheets.
In early 2004, in conjunction with the Marketing Agreement with
Triumph, as discussed above, Seaboard committed to provide
Triumph with future financing of up to $1.75 million in the event
of certain specified cost over-runs incurred during plant
development and construction.
RESULTS OF OPERATIONS
Net sales increased to a record $1,981.3 million for the year
ended December 31, 2003 from $1,829.3 million and
$1,804.6 million for the years ended December 31, 2002 and 2001,
respectively. The increase in net sales in 2003 was primarily
the result of higher domestic market prices for pork products for
the Pork segment and higher sales for the Marine segment
attributable to higher cargo volumes. The increase in net sales
in 2002 was primarily the result of increased trading volumes
from expanding in certain existing and new trading markets for
the Commodity Trading and Milling segment, partially offset by
lower sales in the Pork segment as a result of lower sale prices
for pork products from increases in domestic meat supplies.
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SEABOARD CORPORATION
Managements's Discussion & Analysis
Operating income improved to $68.8 million for 2003 compared to
$47.1 million in 2002 and $114.4 million in 2001. The main
component of this improvement in 2003 compared to 2002 was
increased pork prices. Operating income for the Commodity
Trading and Milling segment declined slightly in 2003 as a result
of changing crop conditions in southern Africa. The Sugar and
Citrus segment had record operating income in 2003 from higher
sugar prices. The Marine and Power segment incurred significant
declines in their operating income in 2003 reflecting various
difficulties experienced in certain countries where they conduct
business. Operating income declined in 2002 compared to 2001
primarily from lower sale prices for pork products.
Pork Segment
(Dollars in millions) 2003 2002 2001
Net sales $ 735.7 $ 645.8 $ 772.4
Operating income (loss) $ 22.4 $ (13.9) $ 68.7
Net sales for the Pork segment increased in 2003 compared to 2002
primarily as a result of higher domestic market prices for pork
products. The excess domestic meat supplies experienced during
2002 resulted in lower sales prices throughout 2002 and into
early 2003, although prices have generally improved during 2003
compared with 2002, especially in the fourth quarter of 2003.
However, prices have not returned to the levels achieved during
2001 when world-wide supplies of meat products were lower. Sales
volumes remained relatively unchanged for 2003 compared to 2002.
Operating income for the Pork segment increased in 2003 compared
to operating losses incurred during 2002. The increase primarily
reflects improved market prices as discussed above, partially
offset by higher costs of hogs purchased from third parties for
processing and higher feed costs for hogs raised by Seaboard.
For 2003, operating income also includes a $3.8 million LIFO
benefit (including a $7.5 million benefit in the fourth quarter),
reflecting increases in the number of Seaboard-raised hogs over
prior year, as compared with a $6.2 million LIFO charge to
earnings in 2002 (including a $6.5 million charge in the fourth
quarter). Operating income for 2003 was reduced by a
$2.5 million charge for land development costs for several
potential hog production sites that Seaboard determined it would
no longer pursue.
Currently, management is unable to determine what, if any, effect
the discovery of mad cow disease in the United States in December
2003 will have on pork prices, although prices have remained
favorable in the first two months of 2004. While unable to
predict future market prices for pork products, feed costs and
third party hogs, management currently expects overall market
conditions to continue to be favorable during 2004. Future
results may also be adversely affected by the proposed packer ban
legislation as discussed in Note 11 to the Consolidated Financial
Statements.
Net sales for the Pork segment decreased in 2002 compared to 2001
as the result of lower 2002 pork prices. Reduced world-wide meat
supplies during 2001 contributed to higher sales prices for that
year. During 2002, domestic meat supplies increased, which
resulted in significantly lower sales prices compared with the
prior year. Operating income for this segment decreased in 2002
compared to 2001 primarily as the result of the lower 2002 sales
prices, as discussed above and higher feed costs, partially
offset by a decrease in cost of third party hogs.
Commodity Trading and Milling Segment
(Dollars in millions) 2003 2002 2001
Net sales $ 667.9 $ 652.1 $ 476.2
Operating income $ 16.0 $ 18.4 $ 13.2
Loss from foreign affiliates $ (0.4) $ (3.8) $ (4.5)
Net sales for the Commodity Trading and Milling segment increased
in 2003 compared to 2002. The increase was primarily attributed
to higher selling prices and increased commodity trading volumes
to affiliates. This revenue increase was partially offset by a
decrease in volume for third party customers during 2003 as a
result of lower grain import demands in southern Africa primarily
from changed crop conditions.
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SEABOARD CORPORATION
Managements's Discussion & Analysis
Operating income for this segment decreased in 2003 compared to
2002. Operating income decreased primarily from lower commodity
trading activity with third parties, as noted above, increased
selling expenses and reserves for bad debts. In addition, during
the latter half of 2003, increased demand for bulk cargo-carrying
vessels has caused a significant increase in charter hire costs.
While management believes its commodity futures and options are
economic hedges of its firm purchase and sales contracts, we do
not perform the extensive record-keeping required to account for
commodity transactions as hedges for accounting purposes. As a
result, operating income for 2003 includes a gain of $2.6 million
compared to losses of $1.5 million for 2002 related to mark-to-
market adjustments. See Note 9 to the Consolidated Financial
Statements for further discussion on accounting for commodity
derivatives. Management is unable to predict future sales and
operating results due to the challenging political and economic
climates under which it operates, however, it does anticipate
remaining profitable in 2004.
Loss from foreign affiliates decreased in 2003 compared to 2002
primarily as a result of improved operating performance for
several milling operations. As a result of improved local market
conditions, these operations were able to obtain higher prices
generally for their products. Due to the fluctuating political
and economic climate in the countries in which the grain
processing affiliates operate, management cannot predict whether
results from these foreign affiliates will continue to improve in
2004.
Net sales for this segment increased in 2002 compared to 2001.
This increase is primarily the result of increased commodity
trading volumes of corn and wheat to third party customers and,
to a lesser extent, increased milling revenues. Commodity
trading volumes to third party customers increased in 2002
compared to 2001 as Seaboard focused its efforts on expanding in
certain existing and new trading markets. Milling revenues
increased primarily as a result of favorable operating
environments in certain foreign locations, which allowed certain
mills to increase production levels. The Commodity Trading and
Milling segment's operating income increased in 2002 compared to
2001. This increase was primarily a result of increased third
party trading volumes and increased production at certain foreign
milling operations as discussed above.
Loss from foreign affiliates decreased in 2002 compared to 2001.
This decrease was primarily a result of a $1.0 million charge in
2001 for the other than temporary decline in value of a shrimp
business in Ecuador due to recurring losses in that business
partially offset by lower 2002 operating results at certain
African milling operations.
Marine Segment
(Dollars in millions) 2003 2002 2001
Net sales $ 409.0 $ 383.4 $ 384.9
Operating income $ 5.8 $ 16.6 $ 24.0
Net sales for the Marine segment increased in 2003 compared to
2002 exceeding $400 million for the first time in this division's
twenty-year history. The increase primarily reflects increased
cargo volumes in most existing markets, certain new routes added
during the fourth quarter of 2002, and chartering of certain
company-owned vessels to carry military cargo to the Middle East
in the first quarter. The 2003 fourth quarter volumes were
especially strong compared to 2002. These increases were
partially offset by a decrease in average cargo rates and a
significant decline in volumes in the Venezuelan and related
markets. Since March 2002, this segment's operations began to
experience significant declines in cargo volumes for certain
South American routes due primarily to the political instability
in Venezuela. Commercial activity in Venezuela has not yet
recovered from the general strike that began in December 2002 and
ended in February 2003.
Operating income for the Marine segment decreased in 2003
compared 2002, primarily reflecting the impact of the political
instability in Venezuela, discussed above, higher fuel costs,
increased charter hire costs and, to a lesser extent, increased
selling expenses as a result of new routes. The Marine segment
did have higher operating income in the fourth quarter of 2003
compared to 2002 from increased volumes noted above, potentially
indicating better future operating results. However, the
duration and extent of reduced shipping demand attributed to the
economic contraction from the political instability in Venezuela
will continue to affect future results while shipping demand for
affected South American routes remains depressed. In addition,
charter hire rates in the fourth quarter of 2003 increased
significantly indicating future higher operating costs. As
management is not able to predict to what extent
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SEABOARD CORPORATION
Managements's Discussion & Analysis
economic conditions will improve for the Venezuelan and related
markets, management cannot currently predict whether this
segment will achieve increased operating income during 2004.
Net sales for the Marine segment remained relatively constant in
2002 compared to 2001. Overall, cargo volumes increased in most
existing markets and certain new routes were added during the
fourth quarter of 2002. These increases were partially offset by
significant declines in certain South American routes as a result
of political instability in Venezuela throughout 2002. In
addition, in December 2002 a general strike commenced in
Venezuela resulting in the discontinuance of all port calls to
that country. The overall increase in cargo volumes was also
partially offset by generally lower cargo rates in 2002 compared
to 2001. Operating income for the Marine segment decreased in
2002 compared to 2001, as a direct result of the political
instability in Venezuela throughout 2002 as discussed above.
Sugar and Citrus Segment
(Dollars in millions) 2003 2002 2001
Net sales $ 70.7 $ 57.7 $ 77.7
Operating income (loss) $ 18.8 $ 16.3 $ 6.6
Loss from foreign affiliates $ (0.3) $ - $ -
Sales increased in 2003 compared to 2002 primarily as a result of
higher sales prices for sugar. The peso price of sugar has
increased over 2002 prices to offset the effects of the devalued
peso. Partially offsetting the increase in sales price were
lower sales volumes as a result of lower quantities of sugar
purchased from third parties for resale. While not able to
predict sugar prices, management does not expect sales prices to
continue to increase and believes prices may decline in 2004 as
the sugar harvest in Argentina during the second half of 2003
yielded an abundant sugar supply.
Operating income for 2003 increased compared to 2002 primarily as
a result of the higher sugar prices partially offset by higher
operating expenses as the local economy recovers. While expenses
have not increased at the same rate as sugar prices, management
expects production costs will continue to increase during 2004.
As future cost of sales will reflect the higher costs of the 2003
sugar harvest and production now in inventory, combined with the
potential for lower sugar prices in 2004 discussed above,
management expects this to result in lower operating income
during 2004. However, management expects operating income to
remain positive for 2004. Operating income does not include the
effects of the material currency translation losses on
shareholders' equity and net earnings that were incurred in 2002
and 2001. See Note 12 to the Consolidated Financial Statements
for further discussion.
In 2002, net sales for the Sugar and Citrus segment decreased
compared to 2001, primarily reflecting the devaluation of the
Argentine peso at year-end 2001, as discussed above. The
reduction was partially offset by increasing peso sales prices
for sugar and increased sales volumes from export sales.
Operating income increased in 2002 compared to 2001, reflecting
the reduction in cost of goods sold as a result of the
devaluation discussed above and, to a lesser extent, improved
peso sales prices.
Power Segment
(Dollars in millions) 2003 2002 2001
Net sales $ 69.6 $ 63.1 $ 63.6
Operating income $ 7.0 $ 14.3 $ 14.6
Net sales for the Power segment increased for 2003 compared to
2002, despite curtailed production which began in mid-
December 2003, primarily reflecting an increase in rates. During
2003, spot prices increased primarily as a result of higher fuel
costs, a component of pricing. The contracts with large power
users reduce Seaboard's exposure to changes in spot market rates
and currency fluctuations. Contract pricing and the valuation of
the corresponding receivable is more closely tied to the U.S.
dollar while spot market sales are stated in Dominican pesos.
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SEABOARD CORPORATION
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Operating income decreased for 2003 compared to 2002 primarily
reflecting an increase in the allowance of doubtful accounts
related to those government-related receivables, and increased
transmission access tolls and fees. For 2003, Seaboard recorded
a $4.5 million charge to earnings ($4.3 million in the fourth
quarter) for an increase in the allowance for doubtful accounts
compared to a credit of $2.9 million in 2002 (all in the fourth
quarter) as a result of recovery of previously reserved
receivables. As trade receivables for this segment have
increased significantly, management continues to monitor the
situation closely. Pending resolution of the crisis within the
country, management cannot predict at what level it will generate
electricity or whether this segment will be profitable for 2004.
Foreign exchange losses included in other income (expense) for
this segment totaled $6.7 million during 2003 compared to
$2.0 million in 2002 and a stable exchange rate for 2001.
Although the Company cannot predict foreign currency exchange
rates, given the current economic condition in the Dominican
Republic, without funding support it is reasonable to assume that
there is the potential for additional foreign currency losses
during 2004.
Net sales for the Power segment remained fairly constant in 2002
compared to 2001. Operating income also remained fairly constant
in 2002 compared to 2001. During 2002, increased transmission
fees incurred in conjunction with spot market sales were
primarily offset by recovery of previously reserved receivables.
All Other Segments
(Dollars in millions) 2003 2002 2001
Net sales $ 28.5 $ 27.1 $ 29.8
Operating income (loss) $ 2.0 $ (0.8) $ (8.8)
Loss from foreign affiliates $ (20.6) $ (13.0) $ (5.0)
Net sales and operating income for all other businesses increased
for the year ended December 31, 2003 compared to 2002 primarily
from improvements in the Produce Division and discontinuing
certain businesses during 2002 as discussed below. For 2004,
management expects operating income for All Other Segments to
remain positive.
The loss from foreign affiliates represents Seaboard's share of
losses from equity method investments in Fjord and a Bulgarian
wine business. Operating results for these investments have been
recorded on a three-month lag. Seaboard's share of losses from
Fjord totaled $15.5 million for 2003, including $12.4 million for
Seaboard's share of asset impairment charges incurred by Fjord,
compared to losses of $10.2 million in 2002. See Note 13 to the
Consolidated Financial Statements for further discussion. During
the fourth quarter of 2003, Seaboard sold its equity investment
in Fjord and recognized a gain on the sale of $18.0 million,
recorded in Other Investment Income.
The Bulgarian wine business (the Business), in which Seaboard
owns approximately 37%, went through a troubled debt
restructuring during 2003. As a result of this transaction, the
Business incurred a loss from the sale of assets, net of the gain
from debt forgiveness, of which Seaboard recorded its share,
$1.5 million, during 2003. See Note 13 to the Consolidated
Financial Statements for further discussion. In addition, the
Business has evaluated the recoverability of its long-lived
assets based on projected future cash flows and accordingly,
management believes that there is not an other than temporary
decline in value for this investment. As of December 31, 2003,
Seaboard's book value of the investments in and advances to the
Business totaled $17.0 million. Seaboard's share of losses from
this Business totaled $5.0 million, $2.9 million and $3.7 million
for the years ended December 31, 2003, 2002 and 2001,
respectively.
Net Sales for All Other segments decreased in 2002 compared to
2001 and operating loss improved for 2002 compared to 2001.
These fluctuations are primarily the result of the Produce
division's decision to cease shrimp, pickle and pepper farming
operations in Honduras in late 2001 and, to a lesser extent,
discontinuing two non-produce related small businesses during
early 2002.
The loss from foreign affiliates in 2002 includes a full year of
Seaboard's share of losses from Fjord which totaled $10.2 million
compared to $1.3 million for two quarters of losses in 2001, and
losses from the Bulgarian wine business. Fjord losses increased
in 2002 as a result of low worldwide salmon prices and include
$3.8 million for Seaboard's share of charges incurred to close
and combine certain of Fjord's operations.
18
SEABOARD CORPORATION
Managements's Discussion & Analysis
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased
$15.1 million to $118.0 million for the year ended
December 31, 2003 compared to 2002. The increase primarily
reflects increased bad debt expense in the Power and Commodity
Trading and Milling divisions as discussed above. To a lesser
extent, selling expenses also increased in the Marine and the
Commodity Trading and Milling divisions related to the expansion
of these businesses. As a percentage of revenues, SG&A increased
to 6.0% in 2003 from 5.6% in 2002.
Selling, general and administrative (SG&A) expenses decreased
$12.3 million to $102.9 million in 2002 compared to 2001. This
decrease is primarily a result of lower operating costs for the
Sugar and Citrus segment reflecting the effects of the Argentine
peso devaluation on peso denominated expenses, recovery of
previously written-off receivables in the Power segment and
discontinuing operations of certain other small businesses. As a
percentage of revenues, SG&A decreased to 5.6% for 2002 from 6.4%
in 2001.
Interest Expense
Interest expense totaled $26.8 million, $22.7 million and
$27.7 million for the years ended December 31, 2003, 2002 and
2001, respectively. The increase in 2003 interest expense
primarily reflects a higher average level of long-term borrowings
outstanding during the year. The decrease in 2002 from 2001
primarily reflects lower average interest rates and, to a lesser
extent, a lower average level of short-term borrowings
outstanding during 2002.
Interest Income
Interest income totaled $2.5 million, $5.9 million and
$8.5 million for the years ended December 31, 2003, 2002 and
2001, respectively. The decreasing trend since 2001 is primarily
due to a decreasing average level of invested funds. The
decrease for 2002 also reflects lower interest rates.
Other Investment Income, Net
Other investment income, net totaled $21.4 million, $0.8 million
and $4.8 million for the years ended December 31, 2003, 2002 and
2001, respectively. In the fourth quarter of 2003, Seaboard sold
its equity investment in Fjord, recognizing a nontaxable gain of
$18.0 million on the sale. See Note 3 to the Consolidated
Financial Statements for further discussion. During 2001,
Seaboard sold its shares of a long-term investment in a foreign
company recognizing a gain of $3.7 million.
Foreign Currency Losses
Foreign currency losses totaled $8.0 million, $17.1 million and
$8.8 million for the years ended December 31, 2003, 2002 and
2001, respectively. The weakening economy and liquidity crisis
in the Dominican Republic during 2003 has resulted in a
significant devaluation of the Dominican peso. Foreign currency
losses in 2003 in the Power segment totaled $6.7 million related
to peso-denominated net assets compared to losses of $2.0 million
for 2002 and a stable exchange rate in 2001. Conversely, the
Argentine peso has remained fairly stable during 2003 after two
years of significant devaluation. The 2002 and 2001 foreign
currency losses primarily reflect the Argentine peso devaluation
effect on the dollar denominated net liabilities of the Sugar and
Citrus segment for those years which totaled $12.5 million and
$7.8 million, respectively. See Note 12 to the Consolidated
Financial Statements for further discussion. In addition, during
2003 and 2002, Seaboard experienced increased foreign currency
losses in its Commodity Trading and Milling division. 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.
19
SEABOARD CORPORATION
Managements's Discussion & Analysis
Miscellaneous, Net
Miscellaneous, net totaled $7.4 million, $(5.7) million and
$5.6 million for the years ended December 31, 2003, 2002 and
2001, respectively. Included in 2003 and 2002 is $7.0 million
and $18.3 million of proceeds from settlements of antitrust
litigation primarily arising out of purchases of vitamins and
methionine, feed additives used by Seaboard. Miscellaneous, net
also includes the impact of changing interest rates on interest
rate swap agreements which mature in 2011. Seaboard pays a
weighted average fixed rate of 5.52% on the notional amount of
$150.0 million and receives a variable interest rate in return.
These contracts are marked-to-market. During 2003 and 2002,
Seaboard recorded losses of $2.3 million and $25.0 million
respectively, related to these swaps reflecting the higher
contracted fixed rate compared to variable rates during those
years. During 2001, Seaboard recognized a gain of $2.8 million
on these contracts as variable rates were higher than the average
fixed rate. 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. See Note 9 to
the Consolidated Financial Statements for additional discussion.
Income Tax Expense
During 2003, Seaboard generated income from foreign operations
which it plans to permanently invest overseas, free from U.S.
tax, and domestic source income. In addition, while the 2003
sale of Seaboard's equity interest in Fjord generated a book
gain, it generated a capital loss for U.S. income tax purposes.
Because of the uncertainty surrounding Seaboard's ability to
utilize this loss, the tax benefit of this loss was offset by a
valuation allowance. In the event Seaboard generates sufficient
capital gains to utilize the capital losses, a tax benefit will
be recognized. During 2002, Seaboard generated domestic source
losses and also recognized a one-time tax benefit of
$14.3 million related to the cumulative basis difference in the
Argentine Sugar and Citrus subsidiary. See Note 7 to the
Consolidated Financial Statements for further discussion.
OTHER FINANCIAL INFORMATION
Seaboard is subject to various federal and state regulations
regarding environmental protection and land and water use. Among
other things, these regulations affect the disposal of livestock
waste and corporate farming matters in general. Management
believes it is in compliance, in all material respects, with all
such regulations. Laws and regulations in the states where
Seaboard currently conducts its pork operations are restrictive.
Future changes in environmental or corporate farming laws could
affect the manner in which Seaboard operates its business and its
cost structure.
On February 12, 2003, the Environmental Protection Agency (EPA)
published its final regulations related to concentrated animal
feeding operations (CAFOs) which are applicable to Seaboard's hog
confinement operations. The regulations require Seaboard to
obtain federal National Pollutant Discharge Elimination System
(NPDES) Permits and to implement nutrient management plans with
respect to virtually all of Seaboard's hog confinement
operations. Management believes that it will be able to obtain
the requisite permits and implement the requisite nutrient
management plans without incurring expenditures which would have
any material adverse effect on the financial condition or results
of operations.
Management does not believe its businesses have been materially
adversely affected by general inflation.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates. Management has identified the accounting estimates
believed to be the most important to the portrayal of Seaboard's
financial condition and results, and which require management's
most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters
that are inherently uncertain. These critical accounting
policies include:
Allowance for doubtful receivables - Management uses various data
and historical information to evaluate the adequacy of this
reserve for receivables estimated to be uncollectible as of the
consolidated balance sheet date. Changes in estimates,
developing trends and other new information can have a material
effect on future evaluations. Seaboard's receivables are heavily
weighted towards foreign receivables ($155.8 million or 73% at
20
SEABOARD CORPORATION
Managements's Discussion & Analysis
December 31, 2003), including receivables from foreign affiliates
as discussed below and the Power segment, which generally
represent more of a collection risk than its domestic
receivables. For receivables in the Power segment, which
operates in the Dominican Republic (DR), Seaboard evaluates the
adequacy on a specific customer basis. Historically, collection
patterns in the DR have been sporadic and are sometimes based
upon negotiated settlements for past due receivables resulting in
material revisions to the allowance for doubtful accounts from
year-to-year. See Note 13 to the Consolidated Financial
Statements for further discussion of 2003 events in the DR.
Future collections or lack thereof could result in a material
charge or credit to earnings depending on the ultimate resolution
of each individual customer past due receivable.
Investments in and advances to foreign affiliates - Management
uses the equity method of accounting for these investments. At
the balance sheet date, management will evaluate equity
investments and related advances for a potential decline in value
deemed other than temporary when management believes conditions
warrant such an assessment. If management believes conditions
warrant an assessment, such assessment is based on future
projected net cash flows expected to be generated by the asset.
These projected cash flows are subjective in nature and are based
on management's best estimates and judgment. In addition, in
most cases there is very little industry market data available
for the countries in which these operations conduct their
business. Since these investments mostly involve entities in
foreign countries considered underdeveloped, changes in the local
economy or political environment may occur suddenly and can
materially alter the evaluation and estimates used to project
cash flows. In most cases, Seaboard has an ongoing business
relationship through sales of grain to these entities that also
includes receivables from these foreign affiliates. Management
considers the long-term business prospects of such investments
when making its assessment. At December 31, 2003, the total
investment in and advances to foreign affiliates was
$46.7 million. See Note 5 to the Consolidated Financial
Statements for further discussion.
Income Taxes - Income taxes are determined by management based on
current tax regulations in the various worldwide taxing
jurisdictions in which Seaboard conducts its business. In
various situations, accruals have been made for estimates of the
tax effects for certain transactions, business structures, the
estimated reversal of timing differences and future projected
profitability of Seaboard's various business units based on
management's interpretation of existing facts, circumstances and
tax regulations. Should new evidence come to management's
attention which could alter previous conclusions or if taxing
authorities disagree with the positions taken by Seaboard, the
change in estimate could result in a material adverse impact on
the financial statements. As of December 31, 2003, Seaboard has
net deferred tax assets of $73.2 million, net of the valuation
allowance of $23.9 million, and net deferred tax liabilities of
$140.6 million. For the years ended December 31, 2003, 2002 and
2001, income tax expense included $11.9 million, $(26.2 million)
and $26.2 million for deferred taxes to federal, foreign, state
and local taxing jurisdictions.
Contingent liabilities - Management has evaluated the various
exposures, including environmental exposures of its Pork
division, as described in Note 11 to the Consolidated Financial
Statements. Based on currently available information and
analysis, management has analyzed the potential probability of
the various exposures and believes that all such items have been
adequately accrued for and reflected in the consolidated balance
sheet as of December 31, 2003. Changes in information, legal
statutes or events could result in management making changes in
estimates that could have a material adverse impact on the
financial statements.
DERIVATIVE INFORMATION
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 the 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
21
SEABOARD CORPORATION
Managements's Discussion & Analysis
cash required to service variable rate debt. From time to time,
Seaboard uses interest rate swaps to manage risks of increasing
interest rates.
Inventories that are sensitive to changes in commodity prices,
including carrying amounts at December 31, 2003 and 2002, are
presented in Note 4 to the Consolidated Financial Statements.
Raw material requirements, finished product sales, and firm sales
commitments are also sensitive to changes in commodity prices.
The tables below provide information about Seaboard's derivative
contracts that are sensitive to changes in commodity prices.
Although used to manage overall market risks, Seaboard does not
perform the extensive record-keeping required to account for
commodity transactions as hedges. Management continues to
believe its commodity futures and options are economic hedges and
not speculative transactions although they do not qualify as
hedges for accounting purposes. Since these derivatives are not
accounted for as hedges, fluctuations in the related commodity
prices could have a material impact on earnings in any given
year. The following tables present the notional quantity
amounts, the weighted average contract prices, the contract
maturities, and the fair values of the open commodity derivative
positions at December 31, 2003.
Trading:
Contract Volumes Wtd.-avg. Fair Value
Futures Contracts Quantity Units Price/Unit Maturity (000's)
Corn purchases - long 7,148,509 bushels $ 2.78 2004 $ 662
Corn sales - short 3,167,605 bushels 3.00 2004 (150)
Wheat purchases - long 9,794,144 bushels 4.02 2004 (728)
Wheat sales - short 5,194,316 bushels 4.05 2004 597
Soybean meal purchases
- long 249,400 tons 220.16 2004 5,083
Soybean meal sales
- short 152,800 tons 231.43 2004 (1,764)
Contract Volumes Wtd.-avg. Fair Value
Options Contracts Quantity Units Price/Unit Maturity (000's)
Soybean meal puts
written - long 6,000 bushels $ 3.00 2004 $ 12
Soybean meal puts
purchased - short 6,000 bushels 3.50 2004 (12)
Corn puts written
- long 2,411,356 bushels 0.11 2004 (5)
Corn puts purchased
- long 500,000 bushels 0.04 2004 14
Corn calls purchased
- long collars 1,000,000 bushels 0.05 2004 51
At December 31, 2002, Seaboard had net trading contracts to
purchase 11,454,000 bushels of grain (fair value of ($1,607,000))
and 98,400 tons of meal (fair value of $(10,000)).
The table below provides information about the forward currency
exchange agreements entered into by Seaboard's commodity trading
business and the related firm commitments and trade receivables
and financial instruments sensitive to foreign currency exchange
rates at December 31, 2003. Information is presented in U.S.
dollar equivalents and all contracts mature in 2004. The table
presents the notional amounts and weighted average exchange rate.
The notional amount is generally used to calculate the
contractual payments to be exchanged under the contract.
22
SEABOARD CORPORATION
Managements's Discussion & Analysis
Contract/ Change in
(Dollars in thousands) Historical Cost Fair Values
Trading:
Forward exchange agreements
(receive $U.S./pay South African
rand (ZAR)) $10,288 $ (89)
Nontrading:
Accounts receivables and firmly committed
sales contracts (denominated in ZAR) $68,877 $ 2,764
Accounts receivables and firmly committed
sales contracts (denominated in Euro) $ 773 $ (2)
Firmly committed purchase contracts
(denominated in ZAR) $ 196 $ 5
Related derivatives:
Forward exchange agreements
(receive $U.S./pay ZAR) $68,877 $(2,809)
Forward exchange agreements
(receive $U.S./pay Euro) $ 773 $ 2
Forward Exchange agreements
(receive ZAR/pay $U.S.) $ 196 $ (5)
Average contractual exchange rates:
Forward exchange agreements
(receive $U.S./pay ZAR) 7.06
Forward exchange agreements
(receive $U.S./pay Euro) 0.83
Forward exchange agreements
(receive ZAR/pay $U.S.) 6.58
At December 31, 2002, Seaboard had net agreements to exchange the
equivalent of $105,447,000 of South African rand at an average
contractual exchange rate of 10.01 ZAR to one U.S. dollar and
$892,000 of euros at an average rate of 0.99 euro to one U.S.
dollar.
The table below provides information about Seaboard's non-trading
financial instruments sensitive to changes in interest rates at
December 31, 2003. For debt obligations, the table presents
principal cash flows and related weighted average interest rates
by expected maturity dates. At December 31, 2003, long-term debt
included foreign subsidiary obligations of $2.5 million payable
in Argentine pesos, $2.4 million denominated in CFA francs (a
currency used in several central African countries), and
$2.0 million denominated in U.S. dollars. At December 31, 2002,
long-term debt included foreign subsidiary obligations of
$2.6 million payable in Argentine pesos, $2.1 million denominated
in CFA francs, and $2.0 million denominated in U.S. dollars.
Weighted average variable rates are based on rates in place at
the reporting date. Short-term instruments including short-term
investments, non-trade receivables and current notes payable have
carrying values that approximate market and are not included in
this table due to their short-term nature.
(Dollars in thousands) 2004 2005 2006 2007 2008 Thereafter Total
Long-term debt:
Fixed rate $55,474 $60,258 $41,975 $64,880 $13,845 $98,808 $335,240
Average interest rate 7.02% 6.78% 6.87% 4.39% 5.70% 5.75% 6.02%
Variable rate $ 1,509 $ - $ - $ - $ - $41,789 $ 43,298
Average interest rate 2.43% - - - - 1.3% 1.34%
Non-trading financial instruments sensitive to changes in
interest rates at December 31, 2002 consisted of fixed rate long-
term debt totaling $328.7 million with an average interest rate
of 7.21%, and variable rate long-term debt totaling $45.9 million
with an average interest rate of 1.69%.
Seaboard entered into five, ten-year interest rate exchange
agreements during 2001 in which Seaboard pays a stated fixed rate
and receives a variable rate of interest on a total notional
amount of $150.0 million. As of December 31, 2003, the weighted
average fixed rate payable was 5.52% and the aggregate fair value
of the contracts at December 31, 2003 of $(14.2) million was
recorded in accrued financial derivative liabilities. As of
December 31, 2002, these agreements had a net fair value of
$(18.0) million.
23
SEABOARD CORPORATION
Responsibility for Financial Statements
The consolidated financial statements appearing in this annual
report have been prepared by management in conformity with
accounting principles generally accepted in the United States of
America and necessarily include amounts based upon judgments with
due consideration given to materiality.
Management relies on a system of internal accounting controls
that is designed to provide reasonable assurance that assets are
safeguarded, transactions are executed in accordance with company
policy and are properly recorded, and accounting records are
adequate for preparation of financial statements and other
information. The concept of reasonable assurance is based on
recognition that the cost of a control system should not exceed
the benefits expected to be derived and such evaluations require
estimates and judgments. The design and effectiveness of the
system are monitored by a professional staff of internal
auditors.
The consolidated financial statements have been audited by the
independent accounting firm of KPMG LLP, whose responsibility is
to examine records and transactions and to gain an understanding
of the system of internal accounting controls to the extent
required by auditing standards generally accepted in the United
States of America and render an opinion as to the fair
presentation of the consolidated financial statements.
The Board of Directors pursues its review of auditing, internal
controls and financial statements through its audit committee,
composed entirely of independent directors. In the exercise of
its responsibilities, the audit committee meets periodically with
management, with the internal auditors and with the independent
accountants to review the scope and results of audits. Both the
internal auditors and independent accountants have unrestricted
access to the audit committee with or without the presence of
management.
Independent Auditors' Report
We have audited the accompanying consolidated balance sheets of
Seaboard Corporation and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated
statements of earnings, changes in equity and cash flows for each
of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Seaboard Corporation and subsidiaries as of
December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 1 to the Consolidated Financial Statements,
the Company adopted Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations", and FASB
Interpretation No. 46, "Consolidation of Variable Interest
Entities", and changed its method of accounting for costs
expected to be incurred during regularly scheduled drydocking of
vessels from the accrual method to the direct-expense method in
2003.
/s/ KPMG LLP
Kansas City, Missouri
February 23, 2004
24
SEABOARD CORPORATION
Consolidated Balance Sheets
December 31,
(Thousands of dollars except per share amounts) 2003 2002
Assets
Current assets:
Cash and cash equivalents $ 37,377 $ 23,242
Short-term investments 58,022 30,337
Receivables:
Trade 152,136 150,563
Due from foreign affiliates 47,979 41,360
Other 13,257 26,047
213,372 217,970
Allowance for doubtful receivables (23,359) (16,178)
Net receivables 190,013 201,792
Inventories 276,033 243,949
Deferred income taxes 17,972 15,481
Other current assets 35,419 42,896
Total current assets 614,836 557,697
Investments in and advances to foreign affiliates 46,680 83,855
Net property, plant and equipment 643,968 621,593
Other assets 20,207 17,996
Total Assets $1,325,691 $1,281,141
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 75,564 $ 76,112
Current maturities of long-term debt 56,983 55,869
Accounts payable 61,817 67,464
Accrued compensation and benefits 42,509 35,633
Accrued financial derivative liabilities 20,109 33,630
Income taxes payable 19,692 17,583
Other accrued liabilities 67,416 70,071
Total current liabilities 344,090 356,362
Long-term debt, less current maturities 321,555 318,746
Deferred income taxes 85,295 71,509
Other liabilities 46,720 40,639
Total non-current and deferred liabilities 453,570 430,894
Minority and other noncontrolling interests 7,466 7,154
Commitments and contingent liabilities
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 (61,527) (67,284)
Retained earnings 580,837 552,760
Total stockholders' equity 520,565 486,731
Total Liabilities and Stockholders' Equity $1,325,691 $1,281,141
See accompanying notes to consolidated financial statements.
25
SEABOARD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31,
(Thousands of dollars except per share amounts) 2003 2002 2001
Net sales:
Products $1,474,101 $1,365,314 $1,342,889
Service revenues 437,617 400,887 398,149
Other 69,622 63,106 63,572
Total net sales 1,981,340 1,829,307 1,804,610
Cost of sales and operating expenses:
Products 1,362,904 1,296,370 1,202,752
Services 379,681 337,177 329,773
Other 51,934 45,717 42,545
Total cost of sales and operating expenses 1,794,519 1,679,264 1,575,070
Gross income 186,821 150,043 229,540
Selling, general and administrative expenses 118,035 102,918 115,188
Operating income 68,786 47,125 114,352
Other income (expense):
Interest expense (26,847) (22,659) (27,732)
Interest income 2,520 5,887 8,500
Other investment income, net 21,440 757 4,823
Loss from foreign affiliates (21,274) (16,826) (9,508)
Minority and other noncontrolling interests (332) (1,087) -
Foreign currency loss, net (7,965) (17,143) (8,776)
Miscellaneous, net 7,393 (5,696) 5,564
Total other income (expense), net (25,065) (56,767) (27,129)
Earnings (loss) before income taxes and
cumulative effect of changes in accounting
principles 43,721 (9,642) 87,223
Income tax benefit (expense) (14,747) 23,149 (35,234)
Earnings before cumulative effect of changes
in accounting principles 28,974 13,507 51,989
Cumulative effect of changes in accounting for
asset retirement obligations, drydock accruals,
and variable interest entities, net of income
tax expense of $52 2,868 - -
Net earnings $ 31,842 $ 13,507 $ 51,989
Net earnings per common share:
Net earnings before cumulative effect of
changes in accounting principles $ 23.08 $ 9.38 $ 34.95
Cumulative effect of changes in accounting for
asset retirement obligations, drydock accruals,
and variable interest entities 2.29 - -
Net earnings per common share $ 25.37 $ 9.38 $ 34.95
Dividends declared per common share $ 3.00 $ 2.50 $ 1.00
Average number of shares outstanding 1,255,054 1,439,753 1,487,520
Pro forma amounts assuming changes in
accounting for asset retirement obligations,
drydock accruals, and variable interest
entities were applied retroactively:
Net earnings $ 28,800 $ 13,373 $ 51,890
Net earnings per common share $ 22.95 $ 9.29 $ 34.88
See accompanying notes to consolidated financial statements.
26
SEABOARD CORPORATION
Consolidated Statements of Changes in Equity
Accumulated
Other
(Thousands of dollars Common Treasury Additional Comprehensive Retained
except per share amounts) Stock Stock Capital Loss Earnings Total
Balances, January 1, 2001 $1,790 $(302) $ 13,214 $ (106) $526,089 $540,685
Comprehensive loss
Net earnings 51,989 51,989
Other comprehensive loss net
of income tax benefit of $115:
Foreign currency translation
adjustment (62,433) (62,433)
Unrealized loss on investments (213) (213)
Unrecognized pension cost (1,273) (1,273)
Cumulative effect of SFAS 133
adoption related to deferred
gains on interest rate swaps 1,352 1,352
Amortization of deferred
gains on interest rate swaps (200) (200)
Comprehensive loss (10,778)
Dividends on common stock (1,487) (1,487)
Balances, December 31, 2001 1,790 (302) 13,214 (62,873) 576,591 528,420
Comprehensive income
Net earnings 13,507 13,507
Other comprehensive income net
of income tax benefit of $37,557:
Foreign currency translation
adjustment 33 33
Unrealized gain on investments 282 282
Unrecognized pension cost (4,526) (4,526)
Amortization of deferred
gains on interest rate swaps (200) (200)
Comprehensive income 9,096
Repurchase of common stock and
cancellation of treasury stock (535) 302 (13,214) (33,794) (47,241)
Dividends on common stock (3,544) (3,544)
Balances, December 31, 2002 1,255 - - (67,284) 552,760 486,731
Comprehensive income
Net earnings 31,842 31,842
Other comprehensive income net
of income tax benefit of $3,470:
Foreign currency translation
adjustment 6,065 6,065
Unrealized loss on investments (104) (104)
Unrecognized pension cost 27 27
Unrealized loss on cash flow
hedges (30) (30)
Amortization of deferred
gains on interest rate swaps (201) (201)
Comprehensive income 37,599
Dividends on common stock (3,765) (3,765)
Balances, December 31, 2003 $1,255 $ - $ - $(61,527) $580,837 $520,565
<FN>
See accompanying notes to consolidated financial statements.
27
SEABOARD CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Cash flows from operating activities:
Net earnings $ 31,842 $ 13,507 $ 51,989
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 64,203 52,636 55,800
Loss from foreign affiliates 21,274 16,826 9,508
Other investment income, net (21,440) (757) (4,823)
Foreign currency exchange (gains) losses (3,775) 15,552 7,830
Cumulative effect of accounting changes,
net (2,868) - -
Deferred income taxes 7,773 (26,244) 26,086
Loss (gain) from sale of fixed assets 1,280 (1,452) (1,958)
Changes in current assets and liabilities:
Receivables, net of allowance 14,067 (28,408) 7,085
Inventories (28,983) (50,917) (8,831)
Other current assets 12,039 (3,292) (21,725)
Current liabilities exclusive of debt (7,634) 41,693 31,202
Other, net 3,913 (1,658) 7,065
Net cash from operating activities 91,691 27,486 159,228
Cash flows from investing activities:
Purchase of short-term investments (88,453) (129,806) (388,786)
Proceeds from the sale of short-term
investments 51,246 223,643 270,204
Proceeds from the maturity of short-term
investments 165 2,725 84,016
Proceeds from disposition of investment in
foreign affiliate 37,390 - -
Investments in and advances to foreign
affiliates, net (1,388) (27,674) (5,048)
Capital expenditures (31,472) (149,879) (54,962)
Other, net 10,490 9,487 7,101
Net cash from investing activities (22,022) (71,504) (87,475)
Cash flows from financing activities:
Notes payable to banks, net (548) 38,409 (42,777)
Proceeds from issuance of long-term debt - 109,000 -
Principal payments of long-term debt (52,922) (51,352) (31,773)
Purchase of common stock - (47,241) -
Sale of minority interest in a controlled
subsidiary - - 5,000
Dividends paid (3,765) (3,544) (1,487)
Bond construction fund 654 563 3,116
Other, net (1,588) - -
Net cash from financing activities (58,169) 45,835 (67,921)
Effect of exchange rate change on cash 2,635 (1,572) (595)
Net change in cash and cash equivalents 14,135 245 3,237
Cash and cash equivalents at beginning of year 23,242 22,997 19,760
Cash and cash equivalents at end of year $ 37,377 $ 23,242 $ 22,997
See accompanying notes to consolidated financial statements.
28
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Note 1
Summary of Significant Accounting Policies
Operations of Seaboard Corporation and its Subsidiaries
Seaboard Corporation and its subsidiaries (Seaboard) is a
diversified international agribusiness and transportation company
primarily engaged domestically in pork production and processing,
and cargo shipping. Overseas, Seaboard is primarily engaged in
commodity merchandising, flour and feed milling, sugar
production, and electric power generation. Seaboard Flour, LLC
(the Parent Company) is the owner of 70.7% of Seaboard's
outstanding common stock.
Principles of Consolidation and Investments in Affiliates
The consolidated financial statements include the accounts of
Seaboard Corporation and its domestic and foreign subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation. The investments in non-controlled
affiliates are accounted for by the equity method. Financial
information from certain foreign subsidiaries and affiliates is
reported on a one- to three-month lag depending on the specific
entity.
Short-term Investments
Short-term investments are retained for future use in the
business and may include money market accounts, tax-exempt bonds,
corporate bonds and U.S. government obligations. All short-term
investments held by Seaboard are categorized as available-for-
sale and are reported at fair value with any related unrealized
gains and losses reported net of tax, as a component of
accumulated other comprehensive income. When held, the cost of
debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is
included in interest income.
Accounts Receivable
Accounts receivable are recorded at the invoiced amount and
primarily do not bear interest. The allowance for doubtful
accounts is Seaboard's best estimate of the amount of probable
credit losses in Seaboard's existing accounts receivable. For
most operating segments, Seaboard uses a specific identification
approach to determine, in management's best judgment, the
collection value of certain past due accounts. For the Marine,
and Sugar and Citrus segments, the allowance for doubtful
accounts is based on an aging percentage methodology primarily
based on historical write-off experience. Seaboard reviews its
allowance for doubtful accounts monthly. Account balances are
charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered
remote.
Inventories
Seaboard uses the lower of last-in, first-out (LIFO) cost or
market for determining inventory cost of live hogs, dressed pork
product and related materials. All other inventories are valued
at the lower of first-in, first-out (FIFO) cost or market.
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are being
depreciated generally on the straight-line method over useful
lives ranging from 3 to 30 years. Property, plant and equipment
leases which are deemed to be installment purchase obligations
have been capitalized and included in the property, plant and
equipment accounts. Routine maintenance, repairs, and minor
renewals are charged to operations while major renewals and
improvements are capitalized.
Deferred Grant Revenue
Included in other liabilities at December 31, 2003 and 2002 is
$9,010,000 and $9,434,000, respectively, of deferred grant
revenue. Deferred grant revenue represents economic development
funds contributed by government entities that were limited to
construction of a hog processing facility in Guymon, Oklahoma.
Deferred grants are being amortized to income over the life of
the assets acquired with the funds.
Income Taxes
Deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities.
29
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Revenue Recognition
Revenue of the containerized cargo service is recognized ratably
over the transit time for each voyage. Revenue of the commodity
trading business is recognized when the commodity is delivered to
the customer. Revenues from all other commercial exchanges are
recognized at the time title to the goods transfers to the buyer.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Impairment of Long-lived Assets
At each balance sheet date, long-lived assets, primarily fixed
assets, are reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
Earnings Per Common Share
Earnings per common share are based upon the average shares
outstanding during the period. Average shares outstanding were
1,255,054, 1,439,753 and 1,487,520 for the years ended December
31, 2003, 2002 and 2001, respectively. Basic and diluted
earnings per share are the same for all periods presented.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows,
management considers all demand deposits and overnight
investments as cash equivalents. Included in accounts payable
are outstanding checks in excess of cash balances of $16,935,000
and $23,782,000 at December 31, 2003 and 2002, respectively. The
amounts paid for interest and income taxes are as follows:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Interest (net of amounts capitalized) $26,891 $21,310 $29,182
Income taxes 3,039 2,856 2,557
Supplemental Noncash Transactions
As of December 31, 2003, Seaboard consolidated the balance sheets
of certain variable interest entities as required by Financial
Accounting Standards Board (FASB) Interpretation No. 46, revised
December 2003 (FIN 46) resulting in an increase in net fixed
assets, related debt and other non-controlling interests of
$31,717,000, $31,492,000 and $1,619,000, respectively. See below
for further discussion under the caption Accounting Changes and
New Accounting Standards.
During 2003, in connection with the purchase of certain hog
production facilities previously leased under master lease
agreements, Seaboard recorded fixed assets of $25,042,000 and
assumed debt and a related interest payable totaling $24,507,000.
See Note 6 for additional information.
During 2002, Seaboard also acquired previously leased hog
production facilities valued at $117,535,000 assuming a
$10,000,000 bond payable and $2.2 million of related funds held
in trust which were used to repay a portion of the bonds assumed.
This purchase was financed primarily with proceeds from a private
placement of senior notes as discussed in Note 8.
As more fully described in Note 12, the volatility of the
Argentine peso has affected the U.S. dollar value of the peso-
denominated assets and liabilities of the Sugar and Citrus
segment. During 2003, this segment recorded non-cash net gains
of $3,775,000 related to the revaluation of certain dollar-
denominated net liabilities compared to non-cash net losses of
$15,552,000 and $7,830,000 for 2002 and 2001, respectively. The
following table shows the non-cash
30
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
impact of the change in exchange rates on various peso-
denominated balance sheet items caused by the Argentine peso
devaluation during 2002 and 2001, and its subsequent strengthening
during 2003.
Years ended December 31,
Increase (Decrease) (Thousands of dollars) 2003 2002 2001
Working capital $ 7,545 $(17,177) $(22,355)
Fixed assets 6,545 (35,302) (47,244)
Other long-term net assets or liabilities (62) (2,107) 625
As more fully described in Note 2, during 2001 $1,007,000 in
previously recorded payables was contributed as partial
consideration received for the sale of a minority interest in a
power barge.
Foreign Currency Transactions and Translation
Seaboard has operations in and transactions with customers in a
number of foreign countries. The currencies of the countries
fluctuate in relation to the U.S. dollar. Certain of the major
contracts and transactions, however, are denominated in U.S.
dollars. In addition, the value of the U.S. dollar fluctuates in
relation to the currencies of countries where certain of
Seaboard's foreign subsidiaries and affiliates primarily conduct
business. These fluctuations result in exchange gains and
losses. The activities of these foreign subsidiaries and
affiliates are primarily conducted with U.S. subsidiaries or
operate in hyper-inflationary environments. As a result, the
financial statements of certain foreign subsidiaries and
affiliates are re-measured using the U.S. dollar as the
functional currency.
Seaboard's Sugar and Citrus segment and two foreign affiliates (a
Bulgarian wine business and a flour and feed milling operation in
Kenya), use local currency as their functional currency. Assets
and liabilities of these subsidiaries are translated to U.S.
dollars at year-end exchange rates, and income and expense items
are translated at average rates during the year. Translation
gains and losses are recorded as components of other
comprehensive loss. U.S. dollar denominated net asset or
liability conversions to the local currency are recorded through
income.
Derivative Instruments and Hedging Activities
Effective January 1, 2001, Seaboard adopted Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting
for Derivative Investments and Hedging Activities," as amended.
This statement requires that an entity recognize all derivatives
as either assets or liabilities at their fair values. Accounting
for changes in the fair value of a derivative depends on its
designation and effectiveness. Derivatives qualify for treatment
as hedges for accounting purposes when there is a high
correlation between the change in fair value of the instrument
and the related change in value of the underlying commitment. In
order to designate a derivative financial instrument as a hedge
for accounting purposes, extensive record-keeping is required.
For derivatives that qualify as hedges for accounting purposes,
the change in fair value has no net impact on earnings until the
hedged transaction affects earnings. For derivatives that are
not designated as hedging instruments for accounting purposes, or
for the ineffective portion of a hedging instrument, the change
in fair value does affect current period net earnings.
Seaboard holds and issues certain derivative instruments to
manage various types of market risks from its day-to-day
operations including commodity futures and option contracts,
foreign currency exchange agreements and interest rate exchange
agreements. While management believes each of these instruments
effectively manages various market risks, only certain
instruments are designated and accounted for as hedges as a
result of the extensive record-keeping requirements.
Adoption of SFAS 133 resulted in adjustments during 2001
primarily to Seaboard's balance sheet as derivative instruments
and related agreements and deferred amounts were recorded as
assets and liabilities with corresponding adjustments to other
comprehensive loss or earnings. The adoption resulted in a
cumulative-effect-type adjustment increasing other comprehensive
income by $1,352,000, net of related income taxes, as deferred
proceeds from previously terminated swap agreements were
reclassified from liabilities. The adoption did not have a
material impact on net earnings or cash flows.
31
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Transactions with Parent Company
As of December 31, 2003 and 2002, Seaboard had a liability to the
Parent Company of $15,000 and $51,000, respectively for a deposit
to pay for any miscellaneous operating expenses incurred by
Seaboard on behalf of the Parent Company. At December 31, 2001,
Seaboard had a long-term receivable balance from the Parent
Company of $8,576,000. Interest on this receivable was charged
at the prime rate. In the first quarter of 2002, the receivable
was formalized into Promissory Notes payable upon demand, was
collateralized by 100,000 shares of Seaboard stock, and Seaboard
advanced an additional $1,553,000 to the Parent Company and
changed the interest rate to be the greater of the prime rate or
7.88% per annum. In October 2002, Seaboard effectively
repurchased common stock from its Parent Company and the Parent
Company repaid the Promissory Note in full. Related interest
income for the years ended December 31, 2002 and 2001 amounted to
$634,000 and $580,000, respectively. See Note 12 for further
discussions.
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. Management has performed
detailed assessments and obtained the appraisals to estimate the
future retirement costs and, accordingly, on January 1, 2003, the
cumulative effect of the change in accounting principle was
recorded with a charge to earnings of $2,195,000 ($1,339,000 net
of tax, or $1.07 per common share), an increase in fixed assets
of $3,221,000, and the recognition of a liability, discounted to
reflect present value, of $5,416,000. The retirement asset is
depreciated over the economic life of the related asset. The
annual accretion of the liability of $420,000 and depreciation of
the assets of $124,000 during 2003 decreased operating income,
net earnings and net earnings per common share by $544,000,
$332,000 and $0.26 per share, respectively. The accrued closure
obligation of $6,086,000 as of December 31, 2003 also reflects
$250,000 related to sites added during 2003. If Seaboard had
adopted SFAS 143 retroactively to January 1, 2001, operating
income, net earnings and net earnings per common share would have
decreased by $526,000, $321,000 and $0.22 per share,
respectively, for 2002 and $441,000, $269,000 and $0.18 per
share, respectively, for 2001.
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. Management 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 Marine, Commodity
Trading and Milling, 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. The change from
accruing in advance to expensing as incurred increased operating
income, net earnings and net earnings per common share by
$1,420,000, $1,076,000 and $0.86 per share, respectively, during
2003. If the change in accounting principle was made
retroactively to January 1, 2001, operating income, net earnings
and net earnings per common share would have increased by
$341,000, $413,000, and $0.29 per share, respectively, for 2002,
and $556,000, $431,000, and $0.29 per common share, respectively,
for 2001.
In 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities" (VIEs). FIN 46 applies to entities 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. As of
December 31, 2003, Seaboard adopted FIN 46 and performed the
required analysis to determine whether its non-consolidated
affiliates or other arrangements qualified as VIEs pursuant to
the requirements. Based on these evaluations, the VIEs for which
Seaboard was determined to be the primary beneficiary are
discussed in the following paragraph. In the event of certain
changes in structure as defined in FIN 46, Seaboard will re-
evaluate those relationships as needed.
32
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Seaboard is a party to certain contract production agreements
(the "Facility Agreements") with limited liability companies
which own certain of the facilities used in connection with the
Pork segment's vertically integrated hog production. Through
December 31, 2003 these arrangements were accounted for as
operating leases. These facilities are owned by companies
considered to be VIEs in accordance with FIN 46, for which
Seaboard is deemed to be the primary beneficiary. Accordingly,
Seaboard consolidated these entities as of December 31, 2003. In
December 2003, Seaboard assumed the bank debt (with a balance of
$29,895,000 at December 31, 2003) of one VIE. Under that
Facility Agreement, which supplies approximately 14% of the
Seaboard-owned hogs processed at the plant, Seaboard has the
right to acquire any or all of the properties at the adjusted
production cost, as defined. In the event Seaboard does not
acquire any property which it has ceased to lease, Seaboard has
the obligation for any deficiency between the adjusted production
cost of the property and the price for which it is sold. As of
December 31, 2003, the adjusted production cost of these fixed
assets was $30,699,000. Consolidation of these VIEs on December
31, 2003, including the debt assumption, increased fixed assets,
debt and non-controlling interest by $31,717,000, $31,492,000 and
$1,619,000, respectively, and decreased net liabilities by
$116,000, with a cumulative effect of a change in accounting
principle for the excess of fixed asset depreciation over
mortgage loan amortization of $1,278,000, ($780,000 net of tax,
or $0.62 per common share). If the consolidation requirements
would have been applied retroactively to January 1, 2001,
operating income, net earnings, and net earnings per common share
would have decreased by $252,000, $174,000 and $0.14,
respectively for 2003, $370,000, $226,000 and $0.16, respectively
for 2002, and $428,000, $261,000 and $0.18 respectively for 2001.
Note 2
Dispositions of Businesses
Effective December 31, 2001, Seaboard sold a ten percent minority
interest in its power barge placed in service during the fourth
quarter of 2000 in the Dominican Republic for $6,007,000,
consisting of $5,000,000 cash and $1,007,000 in contributed
payables previously recorded by Seaboard. No gain or loss was
recognized on the sale. As part of the sale agreement, the buyer
has the option to sell its interest back to Seaboard at any time
until December 31, 2004 for the recorded book value at the time
of the sale, pending collections of outstanding receivables.
During January 2004, the buyer provided notice to exercise his
option. As of December 31, 2003, the recorded book value of
$5,740,000 is included in minority and other non-controlling
interests on the Consolidated Balance Sheets.
Note 3
Investments
Seaboard's short-term marketable debt securities are treated as
available-for-sale securities and are stated at their fair market
values, which approximates amortized cost. As of
December 31, 2003, no investment is valued at less than its cost.
All available for sale securities are readily available to meet
current operating needs. The following is a summary of the
estimated fair value of available-for-sale securities classified
as short-term investments at December 31, 2003 and 2002.
December 31,
(Thousands of dollars) 2003 2002
Obligations of states and political subdivisions $24,520 $10,765
Money market funds 33,502 19,572
Total short-term investments $58,022 $30,337
33
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Other investment income for each year is as follows:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Realized gain on sale/exchange of
non-controlled affiliates $18,036 $ - $ 18,745
Loss from other-than-temporary
decline in investment value - - (18,635)
Realized gain on sale of securities 1,081 383 1,192
Other 2,323 374 3,521
Other investment income, net $21,440 $ 757 $ 4,823
Through May 2001, Seaboard owned a 42.5% non-controlling interest
in a joint venture in Maine primarily engaged in the production
and processing of salmon and other seafood products. This
investment was accounted for using the equity method. In May
2001, this joint venture completed a merger with Fjord Seafood
ASA (Fjord), an integrated salmon producer and processor
headquartered in Norway. The merger resulted in Seaboard
exchanging its interest for 5,950,000 shares, or 7%, of common
stock of Fjord. Based on the fair market value of Fjord stock on
May 2, 2001, as quoted on the Oslo Stock Exchange, Seaboard
recognized a gain in the second quarter of 2001 of $18,745,000
($11,434,000 after taxes) related to this transaction.
In mid-August 2001, Fjord's management announced significantly
lower operating results primarily caused by sustained low market
prices for salmon resulting in a decline of Fjord's stock price.
On September 28, 2001, Fjord's management announced plans for a
Norwegian Kroner (NOK) 700 million private placement to raise
needed capital. As a result of the events discussed above and
the amount of the per share price decline, management determined
the decline in value of its total investment in Fjord was other
than temporary. As a result, a charge to earnings was recorded
in the third quarter of 2001 for $18,635,000 ($11,367,000 after
taxes). In November 2001, Fjord completed the private placement.
As part of this plan, Seaboard invested an additional $10,779,000
for 15,800,000 shares at NOK 6 per share, increasing its
ownership to approximately 11%. During the third quarter of
2002, Seaboard increased its ownership in Fjord to approximately
21% (see Note 5). During the fourth quarter of 2003, Seaboard
sold its equity investment for $37,273,000, resulting in a gain
on the sale of $18,036,000, which includes approximately
$3,537,000 of foreign currency translation gains previously
recorded through other comprehensive income. The gain was not
subject to tax. See Note 7 for further discussion of the tax
treatment.
Note 4
Inventories
A summary of inventories at the end of each year is as follows:
December 31,
(Thousands of dollars) 2003 2002
At lower of LIFO cost or market:
Live hogs & materials $142,396 $129,386
Dressed pork & materials 22,220 21,198
164,616 150,584
LIFO allowance (7,608) (11,422)
Total inventories at lower of LIFO cost or
market 157,008 139,162
At lower of FIFO cost or market:
Grain, flour and feed 87,831 80,618
Sugar produced & in process 14,807 9,929
Other 16,387 14,240
Total inventories at lower of FIFO cost or
market 119,025 104,787
Total inventories $276,033 $243,949
34
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
The use of the LIFO method increased 2003 net earnings by
$2,327,000 ($1.85 per common share) and decreased net earnings in
2002 and 2001 by $3,777,000 ($2.62 per common share) and
$2,992,000 ($2.01 per common share), respectively. If the FIFO
method had been used for certain inventories of the Pork
Division, inventories would have been $7,608,000 and $11,422,000
higher than those reported at December 31, 2003 and 2002,
respectively.
Note 5
Investments in and Advances to Foreign Affiliates
Seaboard's investments in and advances to non-controlled, non-
consolidated foreign affiliates are primarily with businesses
conducting flour, maize and feed milling. The location and
percentage ownership of these foreign affiliates are as follows:
Angola (45%), the Democratic Republic of Congo (50%), Lesotho
(50%), Kenya (35%), Mozambique (50%) and Nigeria (45-48%) in
Africa; Ecuador (50%) in South America; and Haiti (33%) in the
Caribbean. In addition, Seaboard owns a 37% investment in, and
has made advances to a wine business in Bulgaria. The equity
method is used to account for these investments.
The investments in foreign affiliates are primarily carried at
Seaboard's share of equity in the underlying net assets of each
subsidiary. Certain of these foreign affiliates operate under
restrictions imposed by local governments which limit
management's ability to have significant influence on their
operations. These restrictions have resulted in a loss in value
of these investments and advances that are other than temporary.
Use of the equity method was suspended for these investments and
the impairment charge to earnings was recorded in years prior to
2001.
As discussed in Note 3, during the fourth quarter of 2003,
Seaboard sold its equity investment in Fjord, previously
accounted for as a non-controlled foreign affiliate. During the
third quarter of 2002, Seaboard purchased for $26,908,000 an
additional 66,666,667 shares of Fjord increasing its ownership to
21%.
During 2003, the Bulgarian wine business (the Business) went
through a troubled debt restructuring. See Note 13 for further
discussion. In addition, as of December 31, 2003, the Business
evaluated the recoverability of its long-lived assets based on
projected future cash flows. Based on this evaluation,
management does not believe there is an other-than-temporary
decline in value for this investment. As of December 31, 2003,
the book value of Seaboard's investments in and advances to the
Business totaled $17,027,000.
Seaboard generally is the primary provider of choice for grains
and supplies purchased by the non-controlled foreign affiliates
primarily conducting grain processing. Sales of grain and
supplies to these non-consolidated foreign affiliates included in
consolidated net sales for the years ended December 31, 2003,
2002 and 2001 amounted to $148,318,000, $124,151,000 and
$113,191,000, respectively. At December 31, 2003 and 2002,
Seaboard had $28,040,000 and $27,151,000, respectively, of
investments in and advances to, and $46,434,000 and $41,308,000,
respectively, of receivables due from, these foreign affiliates.
Combined condensed financial information of the non-controlled,
non-consolidated foreign affiliates for their fiscal periods
ended within each of Seaboard's years ended, including the new
acquisitions since their respective investment dates, and the
operations of affiliates through disposition dates, are as
follows:
Commodity Trading and Milling Segment December 31,
(Thousands of dollars) 2003 2002 2001
Net sales $329,506 296,261 280,792
Net loss $ (1,408) (9,407) (12,447)
Total assets $178,458 160,658 150,085
Total liabilities $120,986 107,103 87,181
Total equity $ 57,472 53,555 62,904
35
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Other Businesses December 31,
(Thousands of dollars) 2003 2002 2001
Net sales $614,626 438,263 174,549
Net loss $(90,497) (74,281) (24,792)
Total assets $ 64,106 708,096 617,373
Total liabilities $ 49,000 476,356 497,169
Total equity $ 15,106 231,740 120,204
Although the balance sheet data for the Other Businesses in 2003
excludes amounts related to Fjord, net sales and net loss for
2003 reflect $571,978,000 and $(77,030,000) respectively, related
to Fjord's operations through the date of disposition.
Note 6
Property, Plant and Equipment
A summary of property, plant and equipment at the end of each
year is as follows:
December 31,
(Thousands of dollars) 2003 2002
Land and improvements $ 106,864 $ 84,879
Buildings and improvements 272,269 238,638
Machinery and equipment 544,098 502,800
Transportation equipment 108,194 106,909
Office furniture and fixtures 12,881 12,355
Construction in progress 11,658 20,426
1,055,964 966,007
Accumulated depreciation and amortization (411,996) (344,414)
Net property, plant and equipment $ 643,968 $ 621,593
During 2003, Seaboard purchased certain hog production facilities
previously leased under a master lease agreement for $25,042,000
consisting of $535,000 net cash and the assumption of $24,358,000
in bank debt, and a related interest payable. In addition, as of
December 31, 2003, Seaboard adopted FIN 46 as discussed in Note
1, which required the consolidation of certain limited liability
companies for which Seaboard was determined to be the primary
beneficiary. Consolidation of these entities increased fixed
assets and accumulated depreciation as of December 31, 2003 by
$38,059,000 and $6,342,000, respectively.
During 2003, Seaboard sold certain hog production facilities for
approximately $6,400,000 and entered into a grow finish agreement
with the purchaser of the facilities, with a term expiring in
2018. The deferred gain on the sale of $432,000 will be
amortized over the term of that agreement.
During 2002, Seaboard purchased certain hog production facilities
previously leased under a master lease agreement with Shawnee
Funding, Limited Partnership for $117,535,000, consisting of
$107,535,000 net cash and the assumption of a $10,000,000 bond
payable. This purchase was primarily financed with the proceeds
from a private placement of notes for $109,000,000 as discussed
in Note 8.
36
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Note 7
Income Taxes
Income taxes attributable to continuing operations for the years
ended December 31, 2003, 2002 and 2001 differ from the amounts
computed by applying the statutory U.S. Federal income tax rate
to earnings (loss) from continuing operations before income taxes
for the following reasons:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Computed "expected" tax expense (benefit) $ 15,302 $ (3,375) $ 30,988
Adjustments to tax expense (benefit) attributable
to:
Foreign tax differences (9,195) (19,083) (3,175)
Tax-exempt investment income (55) (87) (497)
State income taxes, net of Federal benefit 407 313 582
Change in valuation allowance 4,638 10,352 6,794
Other 3,650 (11,269) 542
Income tax (benefit) expense before cumulative
effect 14,747 (23,149) 35,234
Income tax expense - cumulative effect
of changes in accounting principles 52 - -
Total income tax (benefit) expense $ 14,799 $(23,149) $ 35,234
The components of total income taxes are as follows:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Current:
Federal $ 517 $ - $ 5,635
Foreign 2,239 2,989 1,357
State and local 136 107 1,994
Deferred:
Federal 10,930 (27,193) 27,565
Foreign 531 573 (113)
State and local 394 375 (1,204)
Income tax (benefit) expense 14,747 (23,149) 35,234
Unrealized changes in other comprehensive income 3,470 (37,557) (115)
Income tax expense - cumulative effect
of changes in accounting principles 52 - -
Total income taxes $18,269 $(60,706) $ 35,119
37
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Components of the net deferred income tax liability at the end of
each year are as follows:
December 31,
(Thousands of dollars) 2003 2002
Deferred income tax liabilities:
Cash basis farming adjustment $ 13,253 $ 14,061
Deferred earnings of foreign subsidiaries 11,373 13,894
Depreciation 86,721 90,738
LIFO 29,218 14,582
140,565 133,275
Deferred income tax assets:
Reserves/accruals 37,823 45,786
Tax credit carryforwards 16,877 13,443
Net operating and capital loss carryforwards 38,848 33,591
Other 3,628 3,723
97,176 96,543
Valuation allowance 23,934 19,296
Net deferred income tax liability $ 67,323 $ 56,028
While the 2003 sale of Seaboard's equity investment in Fjord
generated a gain for book purposes, a capital loss was generated
for tax purposes. Because of the uncertainty surrounding
Seaboard's ability to utilize this loss, the tax benefit of this
loss was offset by a valuation allowance. In the event Seaboard
generates sufficient capital gains to utilize the capital losses,
a tax benefit will be recognized.
Seaboard had not previously recognized any tax benefits from
losses generated by Tabacal for financial reporting purposes
since it was not a controlled entity for tax purposes and it was
not apparent that the permanent basis difference would reverse in
the foreseeable future. In the second quarter of 2002,
management completed the purchase of the outstanding shares of
Tabacal not owned by Seaboard, and converted Tabacal from a
Sociedad Anonima (S.A.) to a Sociedad de Responsabilidad Limitada
(S.R.L.) organizational entity. This conversion resulted in the
recognition of a one-time tax benefit of $48,944,000, of which
$34,641,000 reduced the currency translation adjustment recorded
as accumulated other comprehensive income. The remaining benefit
of $14,303,000 was recognized as a current tax benefit in the
Consolidated Statement of Earnings for 2002.
Management believes Seaboard's future taxable income will be
sufficient for full realization of the deferred tax assets. The
valuation allowance relates to the tax benefits from losses on
investments that would be recognized as capital losses, and from
net operating losses. Management does not believe these benefits
are more likely than not to be realized due to limitations
imposed on the deduction of these losses. At December 31, 2003,
Seaboard had tax credit carryforwards of approximately
$16,877,000. Approximately $7,833,000 of these carryforwards
expire in varying amounts in 2007 through 2022 while the
remaining balance may be carried forward indefinitely. At
December 31, 2003, Seaboard had federal net operating loss
carryforwards of approximately $42,000,000 expiring in varying
amounts in 2004 through 2024.
At December 31, 2003 and 2002, no provision has been made in the
accounts for Federal income taxes which would be payable if the
undistributed earnings of certain foreign subsidiaries were
distributed to Seaboard Corporation since management has
determined that the earnings are permanently invested in these
foreign operations. Should such accumulated earnings be
distributed, the resulting Federal income taxes would amount to
approximately $58,000,000.
38
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Note 8
Notes Payable and Long-term Debt
Notes payable amounting to $75,564,000 and $76,112,000 at
December 31, 2003 and 2002, respectively, consisted of
obligations due banks on demand or within one year. At
December 31, 2003, Seaboard had committed short-term lines
totaling $125,000,000 and uncommitted lines totaling
approximately $51,921,000. Borrowings outstanding under
committed and uncommitted lines as of December 31, 2003 totaled
$55,000,000 and $20,564,000, respectively. The committed amount
includes $80,000,000 of subsidiary credit lines for the Commodity
Trading and Milling segment which are secured by certain
commodity trading inventory and accounts receivable, and include
financial covenants for that subsidiary which require maintenance
of certain levels of working capital and net worth, limitations
on debt to net worth, and liabilities to net worth ratios. The
committed borrowings were under the subsidiary credit line. The
committed subsidiary lines include a $5,000,000 facility
denominated in South African Rand, of which $4,750,000 was drawn
as of December 31, 2003. At December 31, 2003, Seaboard's
borrowing capacity under its committed lines was reduced by
letters of credit totaling $11,537,000. The weighted average
interest rates for all notes payable were 3.59% and 3.69% at
December 31, 2003 and 2002, respectively.
During the first quarter of 2004, Seaboard entered into two new,
one-year committed credit lines for a total of $45,000,000. In
addition, the subsidiary committed credit lines were extended
though April 30, 2004, at which time management expects to extend
such credit lines for one additional year.
With the exception of the notes payable under the Commodity
Trading and Milling credit lines, the notes payable from banks
under the credit lines are unsecured. The lines of credit do not
require compensating balances. Facility fees on these agreements
are not material.
As discussed in Note 6, in connection with the purchase of
certain previously-leased hog production facilities during 2003,
Seaboard assumed bank debt of $24,358,000 with a weighted average
interest rate of 7.45% due in 2014. As discussed in Note 1, in
accordance with FIN 46, on December 31, 2003 Seaboard
consolidated certain limited liability companies. As a result,
bank debt totaling $31,492,000 is included in notes payable to
banks in the table below. In connection with this consolidation,
during December 2003, Seaboard assumed the bank debt of one VIE
(with a balance of $29,895,000 as of December 31, 2003, a
weighted average interest rate of 7.53%, and a maturity date in
2007).
During 2002, Seaboard completed a private placement of
$109,000,000 of Senior Notes due 2009 and 2012 with a weighted
average interest rate of 6.29%. Seaboard used $107,267,000 of
the proceeds from this private placement to refinance the
indebtedness related to hog production facilities previously
leased under a master lease program, effectively reducing
Seaboard's net lease payments. On December 31, 2002, Seaboard
paid an additional $4,077,000 to complete the acquisition of
Shawnee Funding, Limited Partnership, effectively acquiring all
of the related hog production facilities previously leased. As
part of the purchase, Seaboard also assumed a variable rate (1.3%
at December 31, 2003) $10,000,000 bond payable due 2014, and
$2,210,000 of related cash in a construction fund which was used
to repay a portion of bond during 2003.
39
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
A summary of long-term debt at the end of each year is as
follows:
December 31,
(Thousands of dollars) 2003 2002
Private placements:
6.49% senior notes, due 2004 through 2005 $ 40,000 $ 60,000
7.88% senior notes, due 2004 through 2007 100,000 125,000
5.80% senior notes, due 2005 through 2009 32,500 32,500
6.21% senior notes, due 2009 38,000 38,000
6.21% senior notes, due 2006 through 2012 7,500 7,500
6.92% senior notes, due 2012 31,000 31,000
Industrial Development Revenue Bonds, floating rates
(1.25% at December 31, 2003) due 2014 through 2027 42,989 45,600
Notes payable to banks, 5.79 - 8.58%, due 2004 through 2014 76,424 24,654
Foreign subsidiary obligations, 10.00% - 17.50%, due 2004
through 2010 6,582 6,432
Foreign subsidiary obligation, floating rate due 2004 309 307
Capital lease obligations and other 3,234 3,622
378,538 374,615
Current maturities of long-term debt (56,983) (55,869)
Long-term debt, less current maturities $321,555 $318,746
Of the 2003 foreign subsidiary obligations, $2,490,000 is payable
in Argentine pesos, $2,401,000 is denominated in CFA francs and
the remaining $2,000,000 is denominated in U.S. dollars. Of the
2002 foreign subsidiary obligations, $2,601,000 is payable in
Argentine pesos, $2,138,000 is denominated in CFA francs and the
remaining $2,000,000 is denominated in U.S. dollars. At
December 31, 2003, Argentine land, sugar production facilities
and equipment with a depreciated cost of $4,768,000 secured
certain bond issues and foreign subsidiary debt.
Included in other current assets at December 31, 2003 and 2002
are $1,289,000 and $4,152,000 respectively, of unexpended bond
proceeds held in trust that are invested in accordance with the
bond issuance agreements. During 2004, Seaboard expects to use
remaining construction funds to redeem portions of or pay
interest on the related industrial development revenue bonds
(IDRBs). As a result, as of December 31, 2003, $1,200,000 of
related debt was included in current maturities of long-term
debt.
The terms of the note agreements pursuant to which the senior
notes, IDRBs, notes payable to banks and revolving credit
facilities were issued require, among other terms, the
maintenance of certain ratios and minimum net worth, the most
restrictive of which requires the ratio of consolidated funded
debt to consolidated shareholders' equity, as defined, not to
exceed .90 to 1; an interest charge coverage ratio of 2.0 to 1.0;
requires the maintenance of consolidated tangible net worth, as
defined, of not less than $350,000,000 plus 25% of cumulative
consolidated net income beginning January 1, 2003; limits
aggregate dividend payments to $10.0 million plus 50% of
consolidated net income less 100% of consolidated net losses
beginning January 1, 2002 ($29,181,000 as of December 31, 2003);
limits the sum of subsidiary funded debt and basket-secured debt,
as defined, to 20% of consolidated tangible net worth; and limits
Seaboard's ability to sell assets under certain circumstances.
Seaboard is in compliance with all restrictive debt covenants
relating to these agreements as of December 31, 2003.
Annual maturities of long-term debt at December 31, 2003 are as
follows: $56,983,000 in 2004, $60,258,000 in 2005, $41,975,000
in 2006, $64,880,000 in 2007, $13,845,000 in 2008 and
$140,597,000 thereafter.
40
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Note 9
Derivatives and Fair Value of Financial Instruments
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 cost and fair values of investments and long-term debt at
December 31, 2003 and 2002 are presented below.
December 31 2003 2002
(Thousands of dollars) Cost Fair Value Cost Fair Value
Short-term investments $ 58,022 $ 58,022 $ 30,337 $ 30,337
Long-term debt 378,538 386,814 374,615 386,732
The fair value of the short-term investments is based on quoted
market prices at the reporting date for these or similar
investments. The fair value of long-term debt is determined by
comparing interest rates for debt with similar terms and
maturities.
Commodity Instruments
Seaboard uses various grain and meal futures and options to
manage its exposure to price fluctuations for raw materials,
finished product sales and firm sales commitments. However, due
to the extensive record-keeping required to designate the
commodity derivative transactions as hedges for accounting
purposes, Seaboard marks to market its commodity futures and
options primarily as a component of cost of sales. Management
continues to believe its commodity futures and options are
economic hedges although they do not qualify as hedges for
accounting purposes. Since these derivatives are not accounted
for as hedges, fluctuations in the related commodity prices could
have a material impact on earnings in any given year.
At December 31, 2003 and 2002, Seaboard had open net contracts to
purchase 409,000 and 410,000 metric tons of grain with fair
values of $3,760,000 and $(1,617,000) respectively, included with
other current assets or accrued financial derivative liabilities
on the Consolidated Balance Sheets. For the years ended December
31, 2003, 2002 and 2001 Seaboard realized net gains (losses) of
$4,882,000, $5,304,000, and $(2,681,000) related to commodity
contracts, primarily included in cost of sales on the
Consolidated Statements of Earnings.
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, primarily
related to its commodity trading business. Seaboard accounts for
its currency exchange hedges of firm commitments and trade
receivables from third parties as fair value hedges. Exchange
agreements related to firm commitments and receivables from
foreign affiliates are accounted for as cash flow hedges. For
foreign currency exchange agreements designated as fair value
hedges, the derivative gains and losses are recognized in
operating income along with the change in fair value of the
related contract. For foreign currency exchange agreements
designated as cash flow hedges, the derivative gains and losses
are included as a component of other comprehensive income until
the underlying contract is recorded and revalued through
earnings. The change in value of third party firm commitments
and all foreign exchange derivatives are included in other
current assets or accrued financial derivative liabilities on the
Consolidated Balance Sheets. The firm sales commitments and
related derivatives mature during 2004. The net gains and losses
from the exchange agreements were not material for the years
ended December 31, 2003, 2002 and 2001.
At December 31, 2003 and 2002, Seaboard had hedged South African
Rand (ZAR) denominated firm sales contracts and trade receivables
from third parties with historical values totaling $64,353,000
and $98,242,000 with changes in fair values of $2,734,000 and
$15,864,000, respectively. To hedge the change in value of these
firm contracts and trade receivables, Seaboard entered into
agreements to exchange $64,353,000 and $93,396,000 of contracts
denominated in ZAR, with derivative fair values of $(2,779,000)
and $(14,043,000), respectively. As of December 31, 2003,
Seaboard also had ZAR denominated firm purchase contracts with
historical values totaling $196,000 and changes in fair value
totaling $5,000. Hedging the change in value of these
agreements, Seaboard entered into agreements to exchange $196,000
for ZAR with derivative fair values totaling $(5,000) at
December 31, 2003.
41
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
At December 31, 2003 and 2002, Seaboard had hedged Euro
denominated sales contracts and trade receivables from third
parties totaling $773,000 and $890,000 with changes in fair value
of $(2,000) and $32,000, respectively. To hedge the changes in
values of the firm contracts and receivables, at
December 31, 2003 and 2002 Seaboard had open agreements to
exchange $773,000 and $892,000 of contracts denominated in Euros
with derivative fair values of $2,000 and $(33,000),
respectively.
At December 31, 2003, Seaboard had ZAR denominated firm sales
contracts with a foreign affiliate with historical values
totaling $4,524,000 and changes in fair values of $30,000. To
hedge the change in value of these contracts, Seaboard entered
into agreements to exchange $4,524,000 of contracts denominated
in ZAR with derivative fair values of $(30,000), which are
included as a component of other comprehensive income at
December 31, 2003.
At December 31, 2003 and 2002, Seaboard also had trading foreign
exchange contracts (receive $U.S./pay ZAR) to cover various
foreign currency working capital needs for notional amounts of
$10,288,000 and $12,051,000, respectively, with fair values of
$(89,000) and $(241,000).
Interest Rate Exchange Agreements
Seaboard, from time-to-time, enters into 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.
At December 31, 2003 and 2002, deferred gains on prior year's
terminated interest rate exchange agreements (net of tax) totaled
$751,000 and $952,000, respectively, relating to swaps that
hedged variable rate debt. This amount is included in
accumulated other comprehensive loss on the Consolidated Balance
Sheet. For the years ended December 31, 2003, 2002 and 2001,
interest rate exchange agreements accounted for as hedges,
including any amortization of terminated proceeds, decreased
interest expense by $329,000, $329,000 and $326,000,
respectively.
At December 31, 2003 and 2002 Seaboard had five, ten-year
interest rate exchange agreements outstanding that are not paired
with specific variable rate contracts, whereby Seaboard pays a
stated fixed rate and receives a variable rate of interest on a
total notional amount of $150,000,000. While Seaboard has
certain variable rate debt, these interest rate exchange
agreements do not qualify as hedges for accounting purposes. At
December 31, 2003 and 2002, the fair values of these contracts
totaled $(14,160,000) and $(18,019,000), respectively, and are
included in accrued financial derivative liabilities on the
Consolidated Balance Sheets. For the years ended
December 31, 2003, 2002, and 2001 the net gain (loss) for
interest rate exchange agreements not accounted for as hedges
were $(2,296,000), $(25,030,000) and $2,808,000, respectively,
and are included in miscellaneous, net in the Consolidated
Statements of Earnings. Included in the losses for 2003 and 2002
are net payments of $6,155,000 and $4,970,000 for the difference
between the fixed rate paid and variable rate received on these
contracts.
Note 10
Employee Benefits
Seaboard maintains a defined benefit pension plan (the Plan) for
its domestic salaried and clerical employees. Seaboard also
sponsors non-qualified, unfunded supplemental executive plans.
The plans generally provide for normal retirement at age 65 and
eligibility for participation after one year's service upon
attaining the age of 21. Seaboard bases pension contributions on
minimum funding standards to avoid the Pension Benefit Guaranty
Corporation variable rate premiums established by the Employee
Retirement Income Security Act of 1974. During 2004, management
expects to contribute approximately $7,000,000 to the Plan to
meet the minimum funding requirements. Benefits are generally
based upon the number of years of service and a percentage of
final average pay.
Plan assets are invested to achieve a diversified overall
portfolio of various mutual funds. Seaboard is willing to accept
a moderate level of risk to potentially achieve higher investment
returns. The overall portfolio is evaluated relative to
customized benchmarks, and is expected to exceed the customized
benchmark over five year rolling periods and longer. The
investment strategy is periodically reviewed for continued
appropriateness. Derivatives, real estate investments, non-
marketable and private equity or placement securities are not
allowed investments under the Plan. Seaboard's asset allocation
targets and actual investment composition within the Plan are as
follows:
42
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Actual Plan Composition
Target Percentage at December 31,
of Portfolio 2003 2002
Domestic Large Cap Equity 35% 36% 37%
Domestic Small Cap Equity 15% 16% 15%
International Equity 15% 14% 12%
Domestic Fixed Income 35% 34% 36%
Assumptions used in determining pension information for the plans
were:
Years ended December 31,
2003 2002 2001
Weighted-average assumptions
Discount rate 6.25% 6.75% 7.25%
Expected return on plan assets 8.25% 8.45% 8.75%
Long-term rate of increase in compensation
levels 4.00-5.00% 4.00-5.00% 4.00-5.00%
Management selects the discount rate based on Moody's year-end
published Aa corporate bond yield plus 25 basis points (to
reflect the long-term nature of the pension liability compared to
the average duration of the corporate bond), rounded to the
nearest quarter percentage point. The expected return on Plan
assets assumption is based on the weighted average of asset class
expected returns that are consistent with historical returns.
The assumed rate is selected to fall between the 50th and 75th
percentiles of model-based results that reflect the plan's asset
allocation. The measurement date for the Plan is December 31.
The changes in the plans' benefit obligations and fair value of
assets for the years ended December 31, 2003 and 2002, and a
statement of the funded status as of December 31, 2003 and 2002
are as follows:
December 31,
(Thousands of dollars) 2003 2002
Reconciliation of benefit obligation:
Benefit obligation at beginning of year $ 49,167 $ 41,126
Service cost 2,892 2,242
Interest cost 3,407 2,978
Actuarial losses 6,454 4,466
Benefits paid (1,886) (1,645)
Benefit obligation at end of year 60,034 49,167
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year 23,987 25,661
Actual return on plan assets 6,004 (2,391)
Employer contributions 5,089 2,362
Benefits paid (1,886) (1,645)
Fair value of plan assets at end of year 33,194 23,987
Funded status (26,840) (25,180)
Unrecognized transition obligation 301 407
Unamortized prior service cost (664) (802)
Unrecognized net actuarial losses 17,029 15,396
Accrued benefit cost $(10,174) $(10,179)
43
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Amounts recognized in the Consolidated Balance Sheets as of
December 31, 2003 and 2002 consist of:
December 31,
(Thousands of dollars) 2003 2002
Accrued benefit liability $(19,221) $(19,610)
Accumulated other comprehensive loss 9,047 9,431
Accrued benefit cost $(10,174) $(10,179)
As of December 31, 2003, the projected benefit obligation and
accumulated benefit obligation for unfunded pension plans were
$12,633,000 and $9,161,000, respectively. As of
December 31, 2002, the projected benefit obligation and
accumulated benefit obligation for unfunded pension plans were
$8,918,000 and $6,618,000, respectively.
The net periodic benefit cost of these plans was as follows:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Components of net periodic benefit cost:
Service cost $ 2,892 $ 2,242 $ 1,886
Interest cost 3,407 2,978 2,751
Expected return on plan assets (2,128) (2,209) (2,404)
Amortization and other 913 232 21
Net periodic benefit cost $ 5,084 $ 3,243 $ 2,254
Seaboard also has certain individual, non-qualified, unfunded
supplemental retirement agreements for certain executive
employees. Pension expense for these plans was $697,000,
$726,000 and $936,000 for the years ended December 31, 2003, 2002
and 2001, respectively. Included in other liabilities at
December 31, 2003 and 2002 is $10,260,000 and $9,975,000,
respectively, representing the accrued benefit obligation for
these plans. As of December 31, 2003, an unrecognized pension
cost related to this plan of $415,000 was included in accumulated
other comprehensive loss, net of related tax.
Seaboard maintains a defined contribution plan covering most of
its domestic salaried and clerical employees. Seaboard
contributes to the plan an amount equal to 100% of employee
contributions up to a maximum of 3% of employee compensation.
Employee vesting is based upon years of service with 20% vested
after one year of service and an additional 20% vesting with each
additional complete year of service. Contribution expense was
$1,471,000, $1,428,000 and $1,301,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.
Seaboard has an Investment Option Plan which allows certain
employees to reduce their compensation in exchange for options to
buy shares of certain mutual funds and/or pooled separate
accounts. The exercise price for each investment option is
established based upon the fair market value of the underlying
investment on the date of grant. Seaboard contributes to the
plan based on 3% of the employees reduced compensation.
Seaboard's expense for this plan, which primarily includes
amounts related to the change in fair value of the underlying
investment accounts, was $2,127,000, $(1,360,000), and $303,000
for the years ended December 31, 2003, 2002 and 2001,
respectively. Included in other liabilities at December 31, 2003
and 2002 is $8,275,000 and $3,942,000 representing the market
value of the payable to the employees upon exercise. In
conjunction with this plan, Seaboard has purchased the specified
number of units of the employee-designated investment plus the
option price. These investments are treated as trading
securities and are stated at their fair market values.
Accordingly, as of December 31, 2003 and 2002, $10,742,000 and
$5,673,000 were included in other current assets on the
Consolidated Balance Sheets. Investment income related to the
mark-to-market of these investments for 2003, 2002, and 2001
totaled $2,061,000, $(1,430,000) and $244,000, respectively.
44
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Note 11
Commitments and Contingencies
In early 2003, individual legislative bills (the Bills) were
introduced in the United States Senate and House of
Representatives which include a provision to prohibit meat
packers, such as Seaboard, from owning or controlling livestock
intended for slaughter. The Bills also contain a transition rule
applicable to packers of pork providing for an effective date
which is 18 months after enactment. Similar language was passed
by the U.S. Senate in 2002 as part of the Senate's version of the
Farm Bill, but was eventually dropped in conference committee and
was not part of the final Farm Bill.
If any of the Bills containing the proposed language becomes law,
it could have a material adverse effect on Seaboard, its
operations and its strategy of vertical integration in the pork
business. Currently, Seaboard has the capacity to produce over
three and one-half million hogs per year at facilities it either
owns or leases or at facilities owned and operated by third
parties with whom it has grower contracts. If passed in their
current form, the Bills would 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 as recorded on the balance sheet, or otherwise
restructure its ownership and operation. At December 31, 2003,
Seaboard has $403,322,000 in hog production facilities classified
as net fixed assets on the Consolidated Balance Sheet. In
addition, Seaboard has $142,396,000 invested in live hogs and
related materials classified as inventory on the Consolidated
Balance Sheet.
The Bills could also be construed as prohibiting or restricting
Seaboard from engaging in various contractual arrangements with
third party hog producers, such as traditional contract finishing
arrangements. At December 31, 2003, Seaboard has firm
commitments of $104,497,000 through 2018 for various grow
finishing agreements. Accordingly, Seaboard's ability to
contract for the supply of hogs to its processing facility could
be significantly, negatively impacted.
Seaboard, along with industry groups and other similarly situated
companies are vigorously lobbying against enactment of any such
legislation. However, management cannot presently predict the
ultimate outcome.
Seaboard reached an agreement in 2002 to settle litigation
brought by the Sierra Club. Under the terms of the settlement,
Seaboard is conducting an investigation 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. In the opinion of management, the above action and
investigation are not expected to result in a material adverse
effect on Seaboard's consolidated financial statements.
Seaboard is subject to various other legal proceedings related to
the normal conduct of its business, including various
environmental related actions. In the opinion of management,
none of these actions is expected to result in a judgment having
a materially adverse effect on the consolidated financial
statements.
Seaboard was a plaintiff in lawsuits against several
manufacturers of vitamins and methionine, feed additives used by
Seaboard, which pleaded guilty in the context of criminal
proceedings to price fixing. The manufacturers admitted to the
price fixing in the criminal context, and were liable for the
overcharges made. During 2003 and 2002, Seaboard recorded
miscellaneous income of $6,960,000 and $18,315,000, respectively,
representing amounts received as settlement from the
manufacturers.
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 business objectives. Seaboard does not issue guarantees
of third parties for compensation. The following table sets
forth the terms of guarantees as of December 31, 2003.
45
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Guarantee beneficiary Maximum exposure Maturity
Foreign non-consolidated affiliate grain $ 1,300,000 2004
processor - Uganda
Foreign non-consolidated affiliate food $ 400,000 2004
product distributor - Ecuador
Various hog contract growers $ 1,585,000 2004
Seaboard guaranteed a bank borrowing for a subsidiary of a
foreign affiliate grain processor in Kenya, Unga Holdings Limited
(Unga), a non-consolidated milling affiliate, 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. While the guarantee may
be cancelled by Seaboard annually, the bank has the right to draw
on the guarantee in the event it is advised that the guarantee
will be cancelled. The guarantee renews annually until the debt
expires in 2007. Unga Holdings has provided a reciprocal
guarantee to Seaboard. As of December 31, 2003, $1,121,000 of
borrowings was 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 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 December 31, 2003, Seaboard had outstanding $11,537,000 of
letters of credit (LCs) with various banks that reduced
Seaboard's borrowing capacity under its committed credit
facilities as discussed in Note 8. The largest letter of credit
of $7,200,000 is for workers compensation insurance. Also
included is an LC for $1,519,000 to support purchases for a non-
controlled affiliate mill expansion project. While this
affiliate has sufficient liquidity to pay for the improvements,
the mill is located in Haiti and the LC was posted in lieu of
advance vendor payments for the purchases.
Commitments
As of December 31, 2003 Seaboard had various noncancelable
purchase commitments and commitments under operating leases as
described in the table below.
Purchase commitments Years ended December 31,
(Thousands of dollars) 2004 2005 2006 2007 2008 Thereafter
Grain and feed ingredients $ 42,287 $ 450 $ - $ - $ - $ -
Fuel purchase contract 32,472 - - - - -
Charter hire contracts 16,321 - - - - -
Equipment purchases and
facility improvements 3,998 - - - - -
Other purchase commitments 1,870 - - - - -
Hog procurement contracts 1,364 1,364 288 288 - -
Total firm purchase
commitments 98,312 1,814 288 288 - -
Contract grower finishing
agreements 8,489 7,789 7,599 7,505 7,582 65,533
Other operating lease
payments 26,379 8,850 8,360 6,976 4,705 8,226
Total unrecognized firm
commitments $133,180 $18,453 $16,247 $14,769 $12,287 $73,759
46
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Seaboard has entered into grain and feed ingredient purchase
contracts to support the live hog operations of the Pork segment.
The commitment amount included in the table are based on market
prices as of December 31, 2003.
The Power segment has entered into a contract for the supply of
substantially all fuel required for 2004 at market-based prices.
The fuel vendor is affiliated with the Dominican Republic
government. The fuel commitment shown above reflects the average
price per barrel at December 31, 2003 for the number of barrels
specified in the agreement. The Power division has reduced its
production resulting in reduced fuel requirements. While the
quantity to be delivered is stated in the contract, the vendor
has allowed Seaboard to reduce the amount of fuel purchases.
The Commodity Trading and Milling segment has short-term time-
charter and voyage-charger contracts in place to provide delivery
of future grain sales. This segment also enters into commodity
purchase contracts, primarily to support sales commitments.
These purchase commitments are not included in the commitment
table above as they are cancelable and may be settled net. Using
December 31, 2003 spot prices to calculate commitments based on
spot prices, the value of purchase contracts in place at December
31, 2003 totals $136,645,000.
To support the operations of the Pork division, Seaboard has
agreements in place with farmers to raise a portion of Seaboard's
hogs according to Seaboard's specifications under long-term
purchase contracts. Under the terms of the agreements,
additional payments would be required if the grower achieves
certain performance standards. The contract grower finishing
obligations shown above do not reflect these incentive payments
which, given current operating performance, could range from
about $1,000,000 to $1,500,000 per year. In the event the farmer
is unable to perform at an acceptable level, Seaboard has the
right to terminate the contract.
The Marine segment enters into short-term contracts to time-
charter vessels for use in its operations. These commitments of
$16,541,000 for 2004 are included above in other operating lease
payments.
Seaboard leases various ships, facilities and equipment under
noncancelable operating lease agreements. Rental expense for
operating leases, including payments made under the Facility
Agreements prior to adoption of FIN 46, amounted to $60,751,000,
$71,124,000 and $64,484,000 in 2003, 2002 and 2001, respectively.
Seaboard's Sugar and Citrus segment has agreed to market certain
sugar products for a third party under a contract expiring in
2008. In the event Seaboard does not perform under the contract,
it would be responsible to make payments to the third party of a
maximum of $800,000 for 2004, decreasing annually to $200,000
through 2008.
In early 2004, in conjunction with a marketing agreement with
Triumph Foods LLC (Triumph), Seaboard committed to provide
Triumph with up to $1,750,000 of future financing in the event of
specified costs over-runs incurred in the development and
construction of the plant.
Note 12
Stockholders' Equity and Accumulated Other Comprehensive Loss
In October 2002, Seaboard consummated a transaction with the
Parent Company, pursuant to which Seaboard effectively
repurchased 232,414.85 shares of its common stock owned by the
Parent Company for $203.26 per share. Of the total consideration
of $47,241,000, the Parent Company was required under the terms
of the transaction immediately to pay $11,260,000 to Seaboard to
repay in full all indebtedness owed by the Parent Company to
Seaboard, and to use the balance of the consideration to pay bank
indebtedness of the Parent Company and transaction expenses.
The transaction was approved by Seaboard's Board of Directors
after receiving the recommendation in favor of the transaction by
a special committee of independent directors. The special
committee was advised by independent legal counsel and an
independent investment banking firm. As a result of the
transaction, the Parent Company's ownership interest dropped from
approximately 75 percent to approximately 71 percent.
47
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
As a part of the transaction, the Parent Company also transferred
to Seaboard rights to receive possible future cash payments from
a subsidiary of the Parent Company, based primarily on the future
sale of real estate owned by that subsidiary. To the extent
Seaboard receives cash payments in the future as a result of
those transferred rights, Seaboard will issue to the Parent
Company, at the ten day rolling average closing price, determined
as of the twentieth day prior to the issue date, new shares of
common stock. The maximum number of shares of common stock which
may be issued to the Parent Company under this transaction is
capped and cannot exceed the number of shares which were
originally purchased from the Parent Company. The right to
receive such payments expires September 17, 2007. As of
December 31, 2003, Seaboard had not received any cash payments
from the subsidiary of its Parent Company.
During the fourth quarter of 2002, Seaboard cancelled 534,547
shares of common stock held in treasury including shares
previously held by the Parent Company.
The components of accumulated other comprehensive loss, net of
related taxes, are summarized as follows:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Cumulative foreign currency translation
adjustment $(56,490) $(62,555) $(62,588)
Unrealized gain (loss) on investments 14 118 (164)
Unrecognized pension cost (5,772) (5,799) (1,273)
Net unrealized loss on cash flow hedges (30) - -
Deferred gain on interest rate swaps 751 952 1,152
Accumulated other comprehensive loss $(61,527) $(67,284) $(62,873)
The foreign currency translation adjustment primarily represents
the effect of the Argentine peso currency exchange fluctuation on
the net assets of the Sugar and Citrus segment. During the
fourth quarter of 2001, the Argentine government lifted the one
to one parity of the peso with the U.S. dollar which resulted in
immediate and significant devaluation. The devaluation continued
throughout 2002 but the peso regained some value during 2003.
Since the parity was lifted, the peso has lost approximately 67%
of its value against the dollar. As a result of the change in
peso value, stockholders' equity increased for the year ended
December 31, 2003 by $10,749,000, compared to decreases of
$50,372,000 and $68,974,000 for the years ended December 31, 2002
and 2001, respectively. These changes reflect the foreign
currency exchange gains and losses recorded in earnings in each
year by $519,000, $(12,540,000) and $(7,830,000) for 2003, 2002
and 2001, respectively, relating to net dollar-denominated debt
of the Argentine subsidiary, and currency translation adjustments
of $10,230,000, $(37,832,000) and $(61,144,000) as other
comprehensive gains or losses for the peso-denominated net assets
as of December 31, 2003, 2002, and 2001, respectively. At
December 31, 2003, the Sugar and Citrus segment has $66,334,000
in net assets denominated in Argentine pesos and $17,286,000 in
net liabilities denominated in U.S. dollars in Argentina. Until
2002, no tax benefit was provided related to this reduction of
shareholders' equity. However, after a series of transactions
was completed in 2002 which changed the organizational structure
of this subsidiary as described in Note 7, Seaboard recorded a
35% deferred tax benefit relating to the currency translation
adjustment component of accumulated other comprehensive loss and
a one-time current benefit of $14,303,000 through the
Consolidated Statements of Earnings.
With the exception of the provision related to the foreign
currency translation gains and losses discussed above, which are
taxed at a 35% rate, income taxes for components of accumulated
other comprehensive loss were recorded using a 39% effective tax
rate.
48
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Note 13
Segment Information
Seaboard Corporation had five reportable segments through
December 31, 2003: Pork, Commodity Trading and Milling, Marine,
Sugar and Citrus, and Power, each offering a specific product or
service. The Pork segment produces and sells fresh and frozen
pork to further processors, foodservice outlets, grocery stores
and other retail outlets, and distributors primarily in the
western half of the United States and foreign markets. The
Commodity Trading and Milling segment markets wheat, corn,
soybean meal and other commodities in bulk to third-party
customers internationally and to non-consolidated foreign
affiliates, and operates foreign flour, maize and feed mills.
The Marine segment, primarily based out of the Port of Miami,
provides containerized cargo shipping services between the United
States, the Caribbean basin, and Central and South America. The
Sugar and Citrus segment produces and processes sugar and citrus
in Argentina primarily to be marketed locally. The Power segment
operates as an unregulated independent power producer in the
Dominican Republic generating power from a series of diesel
engines mounted on two barges. Revenues from all other segments
are primarily derived from the jalapeno pepper processing and
domestic trucking transportation operations. Each of the five
main segments is separately managed and each was started or
acquired independent of the other segments.
As discussed in Note 6, during 2003, Seaboard purchased certain
hog production facilities previously leased increasing the Pork
segment's assets by $25,042,000. As discussed in Note 1, as of
December 31, 2003, in accordance with FIN 46, Seaboard
consolidated the net assets of certain limited liability
companies which own certain of the facilities used in connection
with the Pork segment's vertically integrated hog production.
Consolidation of these entities increased the Pork segment's
assets by $31,709,000 as of December 31, 2003.
As the Sugar and Citrus segment operates solely in Argentina with
primarily local sales and operating expenses, the functional
currency is the Argentine peso. As described in Note 1, as a
result of currency fluctuations, the carrying value of peso-
denominated assets has increased by $15,399,000 during 2003.
As a result of the weakened economic environment in the Dominican
Republic (DR), where the Power segment operates, the local
government has experienced liquidity problems which have impaired
its ability to pay commercial creditors on a timely basis. The
liquidity problems have directly affected the government-owned
distribution companies and other companies that must collect from
the government to make payments on their accounts. During the
latter half of 2003, certain customers did not make any payments
for electric power sold to them by Seaboard. As of
December 31, 2003, Seaboard had $20,734,000 in receivables from
these customers not making payments. In mid-December 2003,
Seaboard began to fluctuate its level of power generation between
full capacity and approximately 50% based on management's belief
about collectibility. As a result, Seaboard recorded a
$4,284,000 charge to operating expense during the fourth quarter
of 2003 to increase the allowance for doubtful accounts related
to the nonpaying customers. For 2002, the allowance was reduced
by $2,932,000, reflecting the recovery of previously reserved
receivables for which Seaboard had negotiated full payment for
all past due amounts. The economic environment in the DR
weakened significantly during 2003 resulting in the devaluation
of the Dominican peso of approximately 68%. Foreign exchange
losses included in other income (expense) for this segment
totaled $6,735,000 compared to $1,952,000 for 2002 and a stable
exchange rate for 2001. The peso has continued to devalue
through February 2004.
During the fourth quarter of 2001, Seaboard ceased shrimp, pickle
and pepper farming operations in Honduras. As a result, Seaboard
incurred a charge to earnings for $1,300,000 primarily related to
employee severance at these locations for the year ended
December 31, 2001. During 2003, Seaboard sold its shrimp farming
and processing assets in Honduras with a book value of
$2,744,000 for $3,900,000, including cash received of $200,000
and notes receivable of $3,700,000, due in annual installments
through 2009. As a substantial portion of the sale price is in
the form of a long-term note receivable from the buyer,
management will use the cost recovery method of accounting and no
gain will be recognized until the actual cash is collected. The
remaining carrying value of pickle and pepper farming assets to
be disposed is not material.
49
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
As discussed in Note 3, 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 2003, 2002 and 2001 as a loss
from foreign affiliates totaled $15,546,000, $10,158,000 and
$1,316,000, respectively. Included in 2003 losses is $12,421,000
for asset impairment charges primarily related to inventory,
license, and fixed assets caused by sustained low world-wide
salmon prices and an unfavorable U.S. Court ruling restricting
Fjord from the use of its genetic material.
Beginning with the third quarter of 2002, the Bulgarian wine
business (the Business) had negotiated a series of extensions
when it was unable to make a scheduled principal payment to a
bank syndication. During the third quarter of 2003, the Business
successfully negotiated a refinancing of certain of its debt. As
part of the refinancing, the bank syndication forgave a portion
of the debt and the Business sold certain assets, the proceeds of
which were used to repay a portion of the principal balance plus
accrued interest. As a result of this transaction, the Business
incurred a loss from the sale of assets, net of the gain from
debt forgiveness, of which Seaboard recorded its share,
$1,489,000, during the third quarter of 2003. Seaboard's share
of the Business' losses are included in the All Other segment as
a loss from foreign affiliates.
As a result of recurring losses in a shrimp business operated as
a subsidiary of a foreign affiliate in Ecuador, at
December 31, 2001, management evaluated the carrying value of its
investment in the affiliate. Based on this evaluation, in the
fourth quarter of 2001 Seaboard recognized a charge of $1,023,000
for the other than temporary decline in value in its investment
in a foreign affiliate as a charge to losses from foreign
affiliates related to the shrimp business in the Commodity
Trading and Milling segment.
The following tables set forth specific financial information
about each segment as reviewed by management. Operating income
for segment reporting is prepared on the same basis as that used
for consolidated operating income. Operating income, along with
losses from foreign affiliates for the Commodity Trading and
Milling Division, is used as the measure of evaluating segment
performance because management does not consider interest and
income tax expense on a segment basis.
Sales to External Customers:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Pork $ 735,662 $ 645,820 $ 772,447
Commodity Trading and Milling 667,869 652,120 476,207
Marine 408,971 383,419 384,906
Sugar and Citrus 70,740 57,700 77,662
Power 69,622 63,106 63,572
All Other 28,476 27,142 29,816
Segment/Consolidated Totals $1,981,340 $1,829,307 $1,804,610
Operating Income:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Pork $ 22,447 $ (13,876) $ 68,717
Commodity Trading and Milling 15,951 18,430 13,223
Marine 5,759 16,599 24,001
Sugar and Citrus 18,755 16,294 6,614
Power 7,037 14,258 14,576
All Other 2,014 (784) (8,786)
Segment Totals 71,963 50,921 118,345
Corporate (3,177) (3,796) (3,993)
Consolidated Totals $ 68,786 $ 47,125 $ 114,352
50
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
Loss from Foreign Affiliates:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Commodity Trading and Milling $ (384) $ (3,813) $ (4,506)
Sugar and Citrus (337) - -
All Other (20,553) (13,013) (5,002)
Segment/Consolidated Totals $ (21,274) $ (16,826) $ (9,508)
Depreciation and Amortization:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Pork $ 37,173 $ 24,069 $ 22,083
Commodity Trading and Milling 3,261 3,148 2,975
Marine 13,264 14,276 13,763
Sugar and Citrus 3,817 3,857 9,338
Power 5,348 5,220 5,153
All Other 936 1,322 1,599
Segment Totals 63,799 51,892 54,911
Corporate 404 744 889
Consolidated Totals $ 64,203 $ 52,636 $ 55,800
Capital Expenditures:
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
Pork $ 15,756 $ 135,145 $ 20,686
Commodity Trading and Milling 2,741 1,122 2,034
Marine 7,651 9,710 20,879
Sugar and Citrus 4,435 2,545 10,252
Power 396 814 422
All Other 235 128 398
Segment Totals 31,214 149,464 54,671
Corporate 258 415 291
Consolidated Totals $ 31,472 $ 149,879 $ 54,962
Total Assets:
December 31,
(Thousands of dollars) 2003 2002
Pork $ 670,288 $ 627,937
Commodity Trading and Milling 243,065 239,187
Marine 114,375 117,366
Sugar and Citrus 75,674 69,515
Power 76,920 73,872
All Other 13,953 15,971
Segment Totals 1,194,275 1,143,848
Corporate 131,416 137,293
Consolidated Totals $1,325,691 $1,281,141
51
SEABOARD CORPORATION
Notes to Consolidated Financial Statements
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.
Geographic Information
Seaboard had sales in South Africa totaling $200,310,000,
$242,415,000, and $155,921,000 for the years ended December 31,
2003, 2002 and 2001, respectively, representing approximately
10%, 13% and 9% of total sales for each respective year. No other
individual foreign country accounts for 10% or more of sales to
external customers. The following table provides a geographic
summary of net sales based on the location of product delivery.
Years ended December 31,
(Thousands of dollars) 2003 2002 2001
United States $ 758,325 $ 636,091 $ 747,877
Caribbean, Central and South America 555,680 541,332 548,386
Africa 485,619 478,273 348,217
Pacific Basin and Far East 93,568 94,550 106,504
Canada/Mexico 72,051 56,575 41,638
Eastern Mediterranean 9,301 14,435 6,861
Europe 6,796 8,051 5,127
Totals $1,981,340 $1,829,307 $1,804,610
The following table provides a geographic summary of Seaboard's
long-lived assets according to their physical location and
primary port for the vessels:
December 31,
(Thousands of dollars) 2003 2002
United States $ 544,016 $ 521,693
Dominican Republic 45,898 48,608
Argentina 37,174 30,385
All other 19,121 20,907
Totals $ 646,209 $ 621,593
At December 31, 2003 and 2002, Seaboard had approximately
$107,828,000 and $113,331,000, respectively, of foreign
receivables, excluding receivables due from foreign affiliates,
which generally represent more of a collection risk than the
domestic receivables. Management believes its allowance for
doubtful receivables is adequate.
52
SEABOARD CORPORATION
Board of Directors
H.H. Bresky Joe E. Rodrigues
Chairman of the Board, Director
President and Retired Executive Vice
Chief Executive Officer President and Treasurer
David A. Adamsen Kevin M. Kennedy
Director Director
Vice President - Group General President and Chief Investment
Manager, Officer, Great Circle
Northeast Region, Dean Foods Management LLC
Company
Douglas W. Baena
Director
Chief Executive Officer,
CreditAmerica, Inc.
Officers
H.H. Bresky James L. Gutsch
Chairman of the Board, Vice President, Engineering
President and
Chief Executive Officer Ralph L. Moss
Vice President, Governmental
Steven J. Bresky Affairs
Senior Vice President,
International Operations David S. Oswalt
Vice President, Taxation and
Robert L. Steer Business Development
Senior Vice President,
Treasurer and Chief Financial John A. Virgo
Officer Vice President, Corporate
Controller and Chief Accounting
David M. Becker Officer
Vice President, General Counsel
and Secretary William H. Croutch
Assistant Secretary and Senior
Barry E. Gum Attorney
Vice President, Finance
Chief Executive Officers of Principal Seaboard Operations
Rodney K. Brenneman Steven J. Bresky
Pork Commodity Trading and Milling
John Lynch
Marine
Stock Transfer Agent and Availability of 10-K Report
Registrar of Stock
Seaboard files its Annual
UMB Bank, n.a. Report on Form 10-K with the
Securities Transfer Division Securities and Exchange
P.O. Box 410064 Commission. Copies of the
Kansas City, Missouri 64141-0064 Form 10-K for fiscal 2003 are
(800) 884-4225 available without charge by
writing Seaboard Corporation,
9000 West 67th Street, Shawnee
Auditors Mission, Kansas 66202,
Attention: Shareholder
KPMG LLP Relations or via the internet
1000 Walnut, Suite 1600 at www.seaboardcorp.com.
P.O. Box 13127 Seaboard provides access to
Kansas City, Missouri 64199 its most recent Form 10-K,
10-Q and 8-K reports on its
Stock Listing internet website, free of
charge, as soon as reasonably
Seaboard's common stock is practicable after those
traded on the American Stock reports are electronically
Exchange under the symbol SEB. filed with the Securities and
Seaboard had 231 shareholders Exchange Commission.
of record of shares of its
common stock as of December
31, 2003.
53