UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2005
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-3390
Seaboard Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-2260388
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9000 W. 67th Street, Shawnee Mission, Kansas 66202
(Address of principal executive offices) (Zip Code)
(913) 676-8800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Indicate by a check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X . No .
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes . No X .
There were 1,255,053.90 shares of common stock, $1.00 par
value per share, outstanding on October 24, 2005.
Total pages in filing - 24 pages
1
PART I - FINANCIAL INFORMATION
Item1. Financial Statements
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of dollars)
(Unaudited)
October 1, December 31,
2005 2004
Assets
Current assets:
Cash and cash equivalents $ 50,084 $ 14,620
Short-term investments 247,189 119,259
Receivables, net 222,775 246,129
Inventories 313,688 301,049
Deferred income taxes 16,137 14,341
Other current assets 48,884 48,040
Total current assets 898,757 743,438
Investments in and advances to foreign affiliates 37,035 38,001
Net property, plant and equipment 625,684 603,382
Goodwill 28,261 -
Intangible assets, net 30,460 -
Other assets 38,711 51,873
Total assets $1,658,908 $1,436,694
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 1,983 $ 1,789
Current maturities of long-term debt 61,166 60,756
Accounts payable 103,037 83,506
Other current liabilities 155,675 162,855
Total current liabilities 321,861 308,906
Long-term debt, less current maturities 223,963 262,544
Deferred income taxes 125,979 125,559
Other liabilities 55,272 44,865
Total non-current and deferred liabilities 405,214 432,968
Minority and other noncontrolling interests 48,252 2,138
Stockholders' equity:
Common stock of $1 par value,
Authorized 4,000,000 shares;
issued and outstanding 1,255,054 shares 1,255 1,255
Additional paid-in capital 8,317 -
Accumulated other comprehensive loss (52,186) (53,741)
Retained earnings 926,195 745,168
Total stockholders' equity 883,581 692,682
Total liabilities and stockholders' equity $1,658,908 $1,436,694
See notes to condensed consolidated financial statements.
2
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
Net sales:
Products $ 451,247 $ 522,422 $1,542,199 $1,563,177
Services 164,387 132,272 488,143 388,375
Other 21,145 12,768 56,726 43,892
Total net sales 636,779 667,462 2,087,068 1,995,444
Cost of sales and operating expenses:
Products 384,128 454,546 1,313,989 1,398,154
Services 133,414 101,466 381,486 301,871
Other 17,831 10,516 47,126 33,773
Total cost of sales and operating
expenses 535,373 566,528 1,742,601 1,733,798
Gross income 101,406 100,934 344,467 261,646
Selling, general and administrative
expenses 36,023 29,566 99,856 91,989
Operating income 65,383 71,368 244,611 169,657
Other income (expense):
Interest expense (5,206) (6,120) (16,810) (20,538)
Interest income 3,729 2,140 9,985 5,705
Income (loss) from foreign
affiliates 235 103 (1,509) (128)
Minority and other noncontrolling
interests (2,118) (227) (2,590) (621)
Foreign currency gain (loss), net (439) 5,040 (380) 3,536
Loss from the sale of a portion of
operations 27 - (1,746) -
Miscellaneous, net 4,385 (5,161) 4,691 (2,288)
Total other income (expense), net 613 (4,225) (8,359) (14,334)
Earnings before income taxes 65,996 67,143 236,252 155,323
Income tax expense (13,406) (20,595) (52,401) (47,142)
Net earnings $ 52,590 $ 46,548 $ 183,851 $ 108,181
Earnings per common share
Basic $ 41.90 $ 37.09 $ 146.49 $ 86.20
Diluted $ 41.69 $ 37.09 $ 146.24 $ 86.20
Weighted average shares outstanding
Basic 1,255,123 1,255,054 1,255,077 1,255,054
Diluted 1,261,367 1,255,054 1,257,151 1,255,054
Dividends declared per common share $ 0.75 $ 0.75 $ 2.25 $ 2.25
See notes to condensed consolidated financial statements.
3
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Thousands of dollars)
(Unaudited)
Nine Months Ended
October 1, October 2,
2005 2004
Cash flows from operating activities:
Net earnings $ 183,851 $ 108,181
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 47,859 48,590
Loss from foreign affiliates 1,509 128
Foreign currency exchange gains (31) (246)
Loss from the sale of a portion of operations 1,746 -
Deferred income taxes (1,709) 35,613
Changes in current assets and liabilities,
net of portion of operations sold and business acquired:
Receivables, net of allowance 37,246 (84,497)
Inventories (28,184) (17,983)
Other current assets (3,745) (10,632)
Current liabilities exclusive of debt 19,956 24,089
Other, net 5,487 (63)
Net cash from operating activities 263,985 103,180
Cash flows from investing activities:
Purchase of short-term investments (488,938) (144,874)
Proceeds from the sale or maturity of short-term
investments 361,008 138,592
Investments in and advances to foreign affiliates, net 245 3,014
Proceeds from the sale of a portion of operations 25,821 -
Acquisition of business (47,540) -
Capital expenditures (43,208) (21,768)
Other, net 5,988 4,089
Net cash from investing activities (186,624) (20,947)
Cash flows from financing activities:
Notes payable to banks, net 194 (64,212)
Principal payments of long-term debt (37,937) (32,297)
Repurchase of minority interest in a controlled
subsidiary (485) (5,000)
Dividends paid (2,824) (2,824)
Other, net (1,187) 1,048
Net cash from financing activities (42,239) (103,285)
Effect of exchange rate change on cash 342 1,957
Net change in cash and cash equivalents 35,464 (19,095)
Cash and cash equivalents at beginning of year 14,620 37,377
Cash and cash equivalents at end of period $ 50,084 $ 18,282
See notes to condensed consolidated financial statements.
4
SEABOARD CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Accounting Policies and Basis of Presentation
The condensed consolidated financial statements include the accounts
of Seaboard Corporation and its domestic and foreign subsidiaries
("Seaboard"). All significant intercompany balances and transactions
have been eliminated in consolidation. Seaboard's investments in non-
controlled affiliates are accounted for by the equity method. The
unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements of Seaboard
for the year ended December 31, 2004 as filed in its Annual Report on
Form 10-K. Seaboard's first three quarterly periods include
approximately 13 weekly periods ending on the Saturday closest to the
end of March, June and September. Seaboard's year-end is December 31.
The accompanying unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring accruals)
which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash
flows. Results of operations for interim periods are not necessarily
indicative of results to be expected for a full year.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Derivative Instruments
As of January 1, 2005, Seaboard discontinued accounting for its
foreign currency exchange agreements as hedges for all new agreements
entered into by the commodity trading business. In addition, as of
January 1, 2005, Seaboard de-designated all then outstanding hedges
with a value of $5,558,000, effectively fixing the asset resulting
from the mark-to-market gain on the firm sales commitment recorded in
other current assets on the Consolidated Balance Sheets as of December
31, 2004, until such time as the firm sales commitments mature.
Beginning January 1, 2005, the mark-to-market changes in the foreign
exchange agreements were no longer offset with the mark-to-market
changes of the underlying firm sales commitment. While $50,000 and
$4,241,000 of the related sales were consummated during the three and
nine months ended October 1, 2005, respectively, $1,317,000 of the
firm sales commitments were also sold as part of the sale of a portion
of the third party trading operations as discussed in Note 2. There
was no remaining net asset value as of October 1, 2005. Although
management believes all of these instruments effectively managed
market risks, the growth of Seaboard's commodity trading business
increased the ongoing costs to maintain the extensive record-keeping
requirements to qualify these instruments as hedges for accounting
purposes.
Seaboard's interest rate exchange agreements do not qualify as hedges
for accounting purposes. During the three and nine months ended
October 1, 2005 Seaboard recorded gains of $3,101,000 and $1,713,000,
respectively, related to these agreements compared to losses of
$4,172,000 and $4,016,000 during the same periods of 2004. The gains
and losses are included in miscellaneous, net on the Condensed
Consolidated Statements of Earnings and reflect changes in fair market
value, net of interest paid or received. During the 2005 three and
nine month periods, Seaboard made net payments of $1,162,000 and
$3,585,000 respectively, compared to payments made of $2,142,000 and
$5,409,000 during the same periods of 2004 resulting from the
difference between the fixed rate paid and variable rate received on
these agreements.
The nature of Seaboard's market risk exposure related to its
derivative instruments has not changed materially since
December 31, 2004 although the amount of commodity futures and option
contracts and foreign exchange contracts decreased considerably with
the sale of a portion of the third party trading operations as
discussed in Note 2.
5
Supplemental Non-Cash Transactions
As more fully described in Note 2, Seaboard sold some components of
its third party commodity trading operations in May 2005. The
following table summarizes the non-cash transactions resulting from
this sale:
Nine Months Ended
(Thousands of dollars) October 1, 2005
Decrease in net working capital $28,053
Decrease in fixed assets 75
Decrease in other assets 88
Receivable from buyer as of October 1, 2005 (649)
Loss on the sale of a portion of operations (1,746)
Net proceeds from sale $25,821
As more fully described in Note 2, Seaboard acquired a bacon processor
in July 2005. The following table summarizes the non-cash
transactions resulting from this acquisition:
Nine Months Ended
(Thousands of dollars) October 1, 2005
Increase in net working capital $11,600
Increase in fixed assets 28,800
Increase in intangible assets 30,800
Increase in goodwill 28,300
Increase in non-controlling interest (44,500)
Increase in other non-controlling interest (200)
Increase in put option value (6,700)
Payable to seller as of October 1, 2005 (600)
Cash paid $47,500
Asset Retirement Obligations
Seaboard has recorded 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. The following table
shows the changes in the asset retirement obligation during the three
and nine month periods of each year.
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Thousands of dollars) 2005 2004 2005 2004
Beginning balance $6,498 $6,449 $6,266 $6,086
Accretion expense 116 116 348 345
Liability for additional lagoons
placed in service - - - 134
Ending balance $6,614 $6,565 $6,614 $6,565
New Accounting Standards
On December 21, 2004, the FASB issued FASB Staff Position 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004"
(FSP 109-2). FSP 109-2, which was effective upon issuance, allows
companies time beyond the financial reporting period of enactment to
evaluate the effect of the earnings repatriation provision on its plan
for reinvestment or repatriation of foreign earnings for purposes of
applying SFAS 109. Additionally, FSP 109-2 provides guidance
regarding the required disclosures surrounding a company's
reinvestment or repatriation of foreign earnings. See Note 4 for
further discussion.
6
Note 2 - Acquisitions, Dispositions and Repurchase of Minority
Interest
On July 5, 2005, Seaboard completed the acquisition effective July 3,
2005 of Daily's, a bacon processor located in the western United
States, for approximately $44,500,000 in cash, plus preliminary
working capital adjustments of approximately $3,100,000 subject to
final adjustments, a 4.74% equity interest in Seaboard Foods LLC
(previously Seaboard Farms, Inc.) with an estimated value of
approximately $44,500,000, a put option associated with the 4.74%
equity interest estimated to have a fair value of approximately
$6,700,000, as discussed below and $700,000 of additional acquisition
costs incurred. The acquisition includes Daily's two bacon processing
plants located in Salt Lake City, Utah and Missoula, Montana. Daily's
produces premium sliced and pre-cooked bacon primarily for food
service. This acquisition continues Seaboard's expansion of its
integrated pork model into value-added products and is expected to
enhance Seaboard's ability to venture into other further processed
pork products. The Sellers have an option to put their 4.74% equity
interest back to Seaboard after two years for the greater of $40
million or a formula determined value, as defined, as of the put date.
The minimum put option value of $40 million expires after five years.
Likewise, Seaboard has a call provision after five years of operations
whereby Seaboard could reacquire the 4.74% equity interest for the
greater of $45 million or a formula determined value.
The percentage ownership interest issued to the Sellers was based on
an earnings multiple of the business which approximates fair value.
Seaboard is in the process of finalizing the agreement of working
capital acquired and finalizing third-party valuations of the real
estate and certain intangible assets acquired; accordingly the
purchase price allocation may be revised when final information is
obtained and completed. The following table summarizes the
preliminary allocation of the purchase price to the fair values of the
assets acquired and liabilities assumed at the effective acquisition
date of July 3, 2005.
(Thousands of dollars) July 3, 2005
Net working capital $11,600,000
Net property, plant and equipment 28,800,000
Intangible assets 30,800,000
Goodwill 28,300,000
Purchase price, subject to final adjustments $99,500,000
The intangible assets acquired include approximately $24,000,000 of
trade names and registered trademarks which are not subject to
amortization. The remaining intangible asset balance consists
primarily of contractual and direct customer relationships, and
covenants not to compete and will be amortized over five years.
Operating results for Daily's are included in Seaboard's Consolidated
Statement of Operations from the date of acquisition. Pro forma
results of operations are not presented, as the effects of the
acquisition are not considered material to Seaboard's results of
operations.
Effective May 9, 2005 Seaboard's Commodity Trading and Milling segment
agreed to sell some components of its third party commodity trading
operations, consisting primarily of certain forward sales contracts,
certain grain inventory and all related contracts to support such
sales contracts, including commodity futures and options, foreign
exchange agreements, purchase contracts and charter agreements for
$26,470,000, subject to final adjustments. This transaction closed on
May 27, 2005. As a result of the sale, Seaboard intends to focus on
the supply of raw materials to its core milling operations and the
transaction of third party commodity trades in support of these
operations. In addition, Seaboard intends to continue competing in
many of the markets and routes associated with the sale transaction,
although at a reduced level.
The counterparty to this transaction is a South African multi-national
shipping company, Grindrod Limited. Since Seaboard does not use hedge
accounting for its commodity and foreign exchange derivative
instruments, these derivative instruments were marked to market
through the effective date of the sale while the change in value of
the related commodity forward purchase and sale agreements were not.
As a result, derivative gains relating to derivative instruments sold
totaling $2,161,000 were included in operating income prior to the
sale of a portion of the operations resulting in a loss on the sale
transaction totaling $1,746,000, subject to final adjustments.
7
Since Seaboard has conducted its commodity trading business with third
parties, consolidated subsidiaries, and foreign affiliates on an
interrelated basis and intends to continue trading with third parties
in certain markets, operating income from the business sold cannot be
clearly distinguished from the remaining operations of Seaboard's
Commodity Trading and Milling segment without making numerous
subjective assumptions primarily with respect to mark-to-market
accounting. For the first half of 2005, this transaction did not have
a material effect on net sales, net earnings or earnings per common
share as transactions in process at the date of sale were completed by
and the responsibility of Seaboard after the date of sale. Seaboard's
revenues from the portion of the operations sold for the first two
quarters of 2005 totaled approximately $317,291,000, compared to
$311,952,000 for the first two quarters of 2004. Net sales for the
third quarter of 2005 for third party commodity trading operations
decreased $98,845,000, compared to the same period in 2004, primarily
as a result of the sale to Grindrod Limited and will continue to be
comparably smaller than 2004 for the remainder of 2005 primarily as a
result of this transaction; however, the extent of the decrease beyond
2005 will depend on Seaboard's ability to effectively compete in the
markets.
In connection with the December 2001 sale of a 10% minority interest
in one of the two power barges in the Dominican Republic, the buyer
was given a three-year option to sell the interest back to Seaboard
for the book value at the time of sale, pending collections of
outstanding receivables. During January 2004, the buyer provided
notice to exercise the option valued at $5,709,000. An initial
payment of $5,000,000 was paid during the second quarter of 2004 to
reacquire this interest and $485,000 was paid during the third quarter
of 2005 with the remaining balance payable upon collection of the
remaining outstanding receivables.
In addition, Seaboard has historically paid commissions to a related
entity of the above party relative to the performance of the other
power barge. During the second quarter of 2004 Seaboard agreed to
terminate that relationship by making a one-time payment of
$2,000,000, included in selling, general and administrative expenses.
Note 3 - Inventories
The following is a summary of inventories at October 1, 2005 and
December 31, 2004:
October 1, December 31,
(Thousands of dollars) 2005 2004
At lower of LIFO cost or market:
Live hogs & materials $145,213 $141,126
Dressed pork & materials 20,809 20,334
166,022 161,460
LIFO allowance 3,389 461
Total inventories at lower of LIFO cost or market 169,411 161,921
At lower of FIFO cost or market:
Grain, flour and feed 91,802 98,699
Sugar produced & in process 20,526 20,006
Other 31,949 20,423
Total inventories at lower of FIFO cost or market 144,277 139,128
Total inventories $313,688 $301,049
Note 4 - Income Taxes
During the fourth quarter of 2004, President Bush signed into law H.R.
4520, the American Jobs Creation Act ("Act"). The Act is a significant
and complicated reform of U.S. income tax law. The Act contains
several provisions which will be favorable for Seaboard. Of
particular note, the Act repealed the prior law treatment of shipping
income as a component of subpart F income. This change allows Seaboard
to avoid current U.S. taxation on its post-2004 shipping income and
has a material impact on Seaboard's 2005 and future effective tax rate
and cash tax payments. This change decreased income tax expense
approximately $5,580,000 and $19,234,000 for the three and nine months
ended October 1, 2005, respectively.
The Act would also allow Seaboard a one-time election to repatriate
permanently invested foreign earnings at a 5.25% effective U.S. income
tax rate rather than the statutory 35% rate, if certain domestic
reinvestment requirements are met. Management is currently evaluating
this provision of the Act and expects to complete its evaluation in
the fourth quarter of 2005. Factors in Seaboard's decision to utilize
this provision include its ability to economically borrow at the
foreign subsidiary level to allow for the payment of a qualifying
dividend, the recent
8
disposition of a portion of the third party commodity trading
operations discussed in Note 2 above, and Seaboard's planned domestic
and international cash needs. Because of various uncertainties, the
range of potential dividend amounts and corresponding taxes
cannot be reasonably estimated at this time. As of October 1, 2005,
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 currently determined that the earnings are
permanently invested in these foreign operations. Should such
accumulated earnings be distributed, ignoring the one-time
election to repatriate foreign earnings at a reduced rate, the
resulting Federal income taxes applicable to earnings through October
1, 2005 assuming a 35% federal income tax rate would have amounted to
approximately $105,000,000.
Seaboard is regularly audited by federal, state and foreign tax
authorities, which may result in adjustments. The IRS has recently
closed its examination of Seaboard's federal income tax returns for
2000 through 2002 and as part of its normal process forwarded the case
for review to the Joint Committee on Taxation (JCT). If the IRS
report is accepted by the JCT, Seaboard will record a tax benefit when
the case is finalized.
Seaboard also filed tax returns utilizing NOLs on September 15, 2005.
See Note 7 for further discussion.
Note 5 - Employee Benefits
Seaboard maintains a defined benefit pension plan (the Plan) for its
domestic salaried and clerical employees. While Seaboard's policy has
historically been to provide funding to the Plan in order to meet the
minimum funding standards to avoid the Pension Benefit Guaranty
Corporation variable rate premiums established by the Employee
Retirement Income Security Act of 1974, Seaboard made a special
contribution equal to the maximum deductible amount in the fourth
quarter of 2004 resulting in an over-funding of the Plan. As a
result, management does not expect to make any contributions to the
Plan during 2005. Additionally, Seaboard also sponsors non-qualified,
unfunded supplemental executive plans, and unfunded supplemental
retirement agreements with certain executive employees. Management
currently has no plans to provide funding for these supplemental
plans.
The net periodic benefit cost of these plans was as follows:
Three months ended Nine months ended
October 1, October 2, October 1, October 2,
(Thousands of dollars) 2005 2004 2005 2004
Components of net periodic benefit
cost:
Service cost $ 924 $ 854 $ 2,782 $ 2,467
Interest cost 1,096 1,021 3,300 2,877
Expected return on plan assets (1,123) (847) (3,387) (2,414)
Amortization and other 294 210 884 605
Net periodic benefit cost $ 1,191 $1,238 $ 3,579 $ 3,535
Note 6 - Commitments and Contingencies
Seaboard reached an agreement in 2002 to settle litigation brought by
the Sierra Club. Under the terms of the settlement, Seaboard
conducted an investigation at three farms. Based on the
investigation, it has been determined that two farms do not require
any corrective action. The investigation at the one remaining farm is
continuing; however, it has been determined that the lagoon at this
farm is a likely source of elevated nitrates in the ground water.
Seaboard advised the Oklahoma Department of Agriculture, Food &
Forestry as to this fact, and is in the process of determining the
necessary corrective action. The cost of the repairs and any other
implications are not known at this time, but if a new lagoon is
constructed, the cost could exceed $1 million. The farm was one of
the farms purchased from PIC International Group, Inc. (PIC).
Seaboard has given notice to PIC as to its right to indemnification
from any loss as a result of the lagoon. To date, PIC has declined to
provide indemnification.
9
Seaboard is subject to regulatory actions and an investigation by the
United States Environmental Protection Agency (EPA) and the State of
Oklahoma. One such action involves five properties utilized in
Seaboard's hog production operations which were purchased from PIC
International Group, Inc. (PIC). Seaboard has undertaken an extensive
investigation, and has had significant discussions with the EPA and
the State of Oklahoma, proposing to undertake continued monitoring and
take a number of corrective actions with respect to the farms, and one
additional farm, in order to attempt to settle the action. The EPA,
Seaboard and PIC have also engaged in settlement negotiations
regarding civil penalty. Originally, the EPA stated that any
settlement must include a civil fine of $1,200,000, but the EPA has
since reduced the amount of its demand for a civil penalty to
$345,000. Seaboard believes that the EPA has no authority to impose a
civil fine, but settlement discussions are continuing. If the matter
is not settled, the EPA could bring an action against Seaboard,
although Seaboard believes it has meritorious defenses to any such
action. The EPA could instead determine to take no further action.
A tentative verbal settlement has been reached with the State of
Oklahoma to resolve the State's notice of violation regarding the same
farms and allegations of violations of State law based on the same
facts as those alleged by the EPA. The settlement with the State of
Oklahoma would require Seaboard to pay a fine of $100,000 and to
undertake agreed upon supplemental environmental projects at a cost of
approximately $80,000. The settlement is subject to the final terms
of the settlement being agreed to and the approval of the Oklahoma
Board of Agriculture. Irrespective of the settlement, Seaboard has
completed or is in the process of completing many of the proposed
corrective actions at the relevant farms.
PIC is indemnifying Seaboard with respect to the action pursuant to an
indemnification agreement which has a $5 million limit. To date, the
$5 million limit has not been exceeded. If the tentative settlement
with the State of Oklahoma is agreed to, the estimated cumulative
costs which will be expended will total approximately $6.9 million,
not including the additional legal costs required to negotiate the
settlement or the penalties demanded by the EPA and tentatively agreed
to with the State of Oklahoma. If the measures taken pursuant to the
settlement are not effective, other measures with additional costs may
be required. PIC has advised Seaboard that it is not responsible for
the costs in excess of $5 million. Seaboard disputes PIC's
determination of the costs to be included in the calculation to
determine whether the $5 million limit will be exceeded and believes
that the costs to be considered are less than $5 million, such that
PIC is responsible for all such costs and penalties, except for
approximately $180,000 of estimated costs that would be incurred over
5 years subsequent to the settlement for certain testing and sampling.
Seaboard has agreed to conduct such testing and sampling as a part of
the sampling it conducts in the normal course of operations and
believes that the incremental costs incurred to conduct such testing
and sampling will be less than $180,000. Seaboard also believes that
a more general indemnity agreement would require indemnification of
liability in excess of $5 million (excluding the estimated $180,000
cost for testing and sampling), although PIC disputes this.
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.
From time to time bills have been introduced in the United States
Senate and House of Representatives which included provisions to
prohibit meat packers, such as Seaboard, from owning or controlling
livestock intended for slaughter. Such bills could have prohibited
Seaboard from owning or controlling hogs, and thus would have required
divestiture of our operations, or otherwise a restructuring of the
ownership and operation. In April of 2005, such a bill was again
introduced in the Senate, although Seaboard does not expect any such
action to be passed in 2005.
Contingent Obligations
Certain of the non-consolidated affiliates and third party contractors
who perform services for Seaboard have bank debt supporting their
underlying operations. From time to time, Seaboard will provide
guarantees of that debt allowing a lower borrowing rate or
facilitating third party financing in order to further Seaboard's
business objectives. Seaboard does not issue guarantees of third
parties for compensation. The following table sets forth the terms of
guarantees as of October 1, 2005.
Guarantee beneficiary Maximum exposure Maturity
Foreign non-consolidated affiliate grain $ 712,000 Annual renewal
processor - Uganda
Foreign non-consolidated affiliate food $ 400,000 August 2006
product distributor - Ecuador
Various hog contract growers $1,529,000 Annual renewal
10
Seaboard guaranteed a bank borrowing for a subsidiary of a foreign
affiliate grain processor in Kenya, Unga Holdings Limited (Unga), a
nonconsolidated 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 October 1, 2005, $616,000 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 for these purchases in order to secure normal
credit terms for this affiliate.
Seaboard has guaranteed a portion of the bank debt for certain
farmers, which debt proceeds were used to construct facilities to
raise hogs for Seaboard's Pork segment. 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 $1,529,000.
Seaboard has not accrued a liability for any of the third party or
affiliate guarantees as management considered the likelihood of loss
to be remote.
As of October 1, 2005, Seaboard had outstanding $52,900,000 of letters
of credit (LCs) with various banks that reduced Seaboard's borrowing
capacity under its committed credit facility. Included in this amount
are LCs totaling $42,688,000 which support the Industrial Development
Revenue Bonds included as long-term debt and $9,458,000 of LCs related
to insurances coverages.
Note 7 - Stockholders' Equity and Accumulated Other Comprehensive
Income (Loss)
In conjunction with a 2002 transaction (the Transaction) between
Seaboard and its parent company, Seaboard Flour LLC (the Parent
Company), whereby Seaboard effectively repurchased shares of its
common stock owned by the Parent Company in return for repayment of
all indebtedness owed by the Parent Company to Seaboard, the Parent
Company also transferred to Seaboard rights to receive possible future
cash payments from a subsidiary of the Parent Company and the benefit
of other assets owned by that subsidiary. Seaboard also received tax
net operating losses ("NOLs") which allow Seaboard to reduce the
amount of future income taxes it otherwise would pay. To the extent
Seaboard receives cash payments as a result of the transferred rights
or reduces its federal income taxes payable by utilizing the NOLs,
Seaboard agreed to issue to the Parent Company new shares of common
stock with a value equal to the cash received and/or the NOLs
utilized. The value of the common stock for purposes of determining
the number of shares issued is equal to the ten day rolling average
closing price, determined as of the twentieth day prior to the issue
date. The maximum number of shares of common stock which may be
issued to the Parent Company under the Transaction is capped at
232,414.85, the number of shares which were originally purchased from
the Parent Company.
On September 15, 2005, Seaboard filed tax returns utilizing the NOLs
resulting in reducing its federal income tax by $8,317,416. Based on
terms of the Transaction, the price of the shares of Seaboard's common
stock to be issued to the Parent Company is equal to the ten day
rolling average closing price prior to October 1, 2005, which was
$1,317.44. This resulted in Seaboard issuing 6,313.34 shares to
Parent Company on November 3, 2005. As of October 1, 2005, Seaboard
has accounted for this income tax benefit by reducing current taxes
payable in the amount of $8,317,416 and recording additional paid in
capital.
As all contingencies regarding the issuance of the shares to the
Parent Company were resolved as of October 1, 2005, the weighted
average number of shares presented below reflect such shares as
outstanding for one day for the basic earnings per share periods and
for the entire third quarter for the diluted earnings per share
periods. The following table reconciles the number of shares utilized
in the earnings per share calculations:
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
Weighted average number of shares
Common shares - basic 1,255,123 1,255,054 1,255,077 1,255,054
Effect of dilutive securities
Stock issuance to Parent 6,244 - 2,074 -
Common shares - diluted 1,261,367 1,255,054 1,257,151 1,255,054
11
Components of total comprehensive income, net of related taxes, are
summarized as follows:
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Thousands of dollars) 2005 2004 2005 2004
Net earnings $52,590 $46,548 $183,851 $108,181
Other comprehensive income (loss)
net of applicable taxes:
Foreign currency translation
adjustment (993) (470) 1,441 1,457
Unrealized gains on investments 62 37 109 111
Unrealized gains on cash flow hedges - 80 155 18
Amortization of deferred gain on
interest rate swaps (50) (50) (150) (150)
Total comprehensive income $51,609 $46,145 $185,406 $109,617
The components of and changes in accumulated other comprehensive
loss for the nine months ended October 1, 2005 are as follows:
Balance Balance
December 31, Period October 1,
(Thousands of dollars) 2004 Change 2005
Foreign currency translation adjustment $(53,986) $1,441 $(52,545)
Unrealized gain on investments 257 109 366
Unrecognized pension cost (375) - (375)
Net unrealized loss on cash flow hedges (188) 155 (33)
Deferred gain on interest rate swaps 551 (150) 401
Accumulated other comprehensive loss $(53,741) $1,555 $(52,186)
The unrecognized pension cost is calculated and adjusted annually
during the fourth quarter. With the exception of the foreign currency
translation loss to which a 35% federal tax rate is applied, income
taxes for components of accumulated other comprehensive loss were
recorded using a 39% effective tax rate.
Note 8 - Segment Information
As a result of sustained losses from an investment in a Bulgarian wine
business (the Business) and recognition in 2004 of a decline in value
considered other than temporary, Seaboard's common stock investment
and subordinated debt in the Business were reduced to zero. During
2005, Seaboard began applying losses from the Business against its
remaining investment in preferred stock, based on the change in
Seaboard's claim on the Business' book value. As a result, Seaboard
increased its share of losses to 100%.
In February 2005, the Board of Directors of the Business, and the
majority of the owners of the Business, including Seaboard, agreed to
pursue the sale of the entire Business or all of its assets. During
the third quarter of 2005, certain equity holders agreed to advance up
to 4.5 million Euros (approximately $5.4 million) to the Business, one-
half by Seaboard, to fulfill the terms of its debt covenants, make
principal payments, avoid bankruptcy and finance the current year's
grape purchases. As of October 1, 2005, Seaboard had advanced
$1,751,000. Based on current negotiations to sell a substantial
portion of the Business and all related wine labels, and other
information on the fair value for the sale of all other assets of this
Business, management believes if negotiations are successful the
remaining carrying value of its investment at the time of disposition
will be recoverable from sales proceeds. Seaboard anticipates
incurring additional losses from the operations of this Business until
the sale of this Business is completed. As of October 1, 2005, the
remaining carrying value of Seaboard's investments in and advances to
this business total $4,060,000, including $2,758,000 of foreign
currency translation gains recorded in other comprehensive income from
this business which will be recognized in earnings upon completion of
the sale. The investment and losses from the Business are included in
the All Other segment.
Effective May 9, 2005, Seaboard's Commodity Trading and Milling
segment sold certain of its third party commodity trading operations
as discussed in Note 2.
12
The following tables set forth specific financial information about
each segment as reviewed by Seaboard's management. Operating income
for segment reporting is prepared on the same basis as that used for
consolidated operating income. Operating income, along with income or
losses from foreign affiliates for the Commodity Trading and Milling
segment, is used as the measure of evaluating segment performance
because management does not consider interest and income tax expense
on a segment basis.
Sales to External Customers:
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Thousands of dollars) 2005 2004 2005 2004
Pork $259,185 $241,538 $ 756,652 $ 716,667
Commodity Trading and Milling 159,304 255,808 718,216 805,859
Marine 161,111 124,994 470,692 354,143
Sugar and Citrus 31,469 25,749 64,079 54,600
Power 21,145 12,768 56,726 43,892
All Other 4,565 6,605 20,703 20,283
Segment/Consolidated Totals $636,779 $667,462 $2,087,068 $1,995,444
Operating Income:
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Thousands of dollars) 2005 2004 2005 2004
Pork $ 42,719 $ 39,637 $ 141,011 $ 100,719
Commodity Trading and Milling 2,113 9,936 29,858 17,232
Marine 18,075 17,687 64,046 42,934
Sugar and Citrus 3,156 3,271 8,427 9,370
Power 2,072 2,105 6,640 3,359
All Other 521 962 2,351 2,326
Segment Totals 68,656 73,598 252,333 175,940
Corporate Items (3,273) (2,230) (7,722) (6,283)
Consolidated Totals $ 65,383 $ 71,368 $ 244,611 $ 169,657
Income (Loss) from Foreign Affiliates:
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Thousands of dollars) 2005 2004 2005 2004
Commodity Trading and Milling $ 2,157 $ 1,365 $ 5,635 $ 3,953
Sugar and Citrus (230) 71 (17) 247
All Other (1,692) (1,333) (7,127) (4,328)
Segment/Consolidated Totals $ 235 $ 103 $ (1,509) $ (128)
Investments in and Advances to Foreign Affiliates:
October 1, December 31,
(Thousands of dollars) 2005 2004
Commodity Trading and Milling $ 31,023 $ 26,762
Sugar and Citrus 1,952 2,050
All Other 4,060 9,189
Segment/Consolidated Totals $ 37,035 $ 38,001
13
Total Assets:
October 1, December 31,
(Thousands of dollars) 2005 2004
Pork $ 738,736 $ 655,551
Commodity Trading and Milling 268,110 278,324
Marine 240,114 138,238
Sugar and Citrus 114,123 90,035
Power 91,889 77,978
All Other 9,969 13,924
Segment Totals 1,462,941 1,254,050
Corporate Items 195,967 182,644
Consolidated Totals $1,658,908 $1,436,694
During the third quarter of 2005, Seaboard revised its allocation of
corporate items for operating income to the individual segments to
primarily represent corporate services rendered to and costs incurred
for each specific division with no allocation to individual segments
of general corporate management oversight costs. Previously,
administrative services provided by the corporate office were
primarily allocated to the individual segments based on the size and
nature of their operations with certain operating expenses not
specifically allocated to individual segments. Operating income for
each segment presented above for the three and nine months ended
October 2, 2004 and the first six months of 2005 have been restated to
reflect changes in the allocation of administrative services by the
corporate office. Corporate assets include short-term investments,
certain investments in and advances to foreign affiliates, fixed
assets, deferred tax amounts and other miscellaneous items.
14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Summary of Sources and Uses of Cash
Cash and short-term investments increased $163.4 million from
December 31, 2004 reflecting the cash generated from operations and
proceeds of $25.8 million from the sale of a portion of the commodity
trading operations as noted below. Cash from operating activities
totaled $264.0 million for the nine months ended October 1, 2005, of
which $43.2 million was used for capital expenditures, $37.9 million
was used to pay scheduled maturities on long-term debt and $47.5
million for the acquisition of Daily's as discussed below. Cash from
operating activities for the nine months ended October 1, 2005
increased compared to the same period one year earlier primarily
reflecting the increased earnings of the Pork, Commodity Trading and
Milling, and Marine segments without corresponding increases in
working capital needs as experienced in the prior year. In addition,
ongoing working capital requirements have decreased for the Commodity
Trading and Milling segment with the sale of some components of the
commodity trading operations as noted below.
Acquisitions, Capital Expenditures and Other Investing Activities
As discussed in Note 2 to the Condensed Consolidated Financial
Statements, effective May 9, 2005 Seaboard's Commodity Trading and
Milling segment sold some components of its third party commodity
trading operations for $26.5 million, subject to final adjustments.
Transactions in process at the date of sale were completed by and the
responsibility of Seaboard after the date of sale. Although Seaboard
intends to continue competing in many of the markets of the sold
operations, the volume of business will be less and thus the overall
working capital requirements will be less in the future periods than
periods prior to the sale.
During the nine months ended October 1, 2005, Seaboard invested
$43.2 million in property, plant and equipment, of which $5.3 million
was expended in the Pork segment, $11.7 million was expended in the
Commodity Trading and Milling segment, $15.5 million in the Marine
segment, and $9.7 million in the Sugar and Citrus segment. For the
Commodity Trading and Milling segment, $8.8 million was spent to
purchase a used bulk vessel and make necessary improvements. For the
Marine segment, $4.1 million was spent to purchase a crane and a
previously chartered containerized cargo vessel, with the remaining
expenditures primarily used to purchase cargo carrying equipment. In
the Sugar and Citrus segment, the capital expenditures were primarily
used for mill expansion, plantation development and harvesting
equipment. All other capital expenditures are of a normal recurring
nature and primarily include replacements of machinery and equipment,
and general facility modernizations and upgrades. For the remainder
of 2005 management has budgeted additional capital expenditures
totaling $20.6 million, including $3.8 million for the Pork segment,
$2.8 million for the Commodity Trading and Milling segment, $11.3
million in the Marine segment, and $2.2 million in the Sugar and
Citrus segment. These budgeted expenditures are primarily of a normal
recurring nature and include replacements of equipment and general
facility upgrades and improvements with the exception of approximately
$6.0 million to purchase cargo-carrying equipment for the Marine
segment. Management anticipates funding these capital expenditures
from internally generated cash, the use of available short-term
investments or existing borrowing capacity.
During the fourth quarter of 2004, Seaboard placed $0.7 million in
escrow for a potential investment in an electricity generating company
in the Dominican Republic. Initially, Seaboard's investment
commitment was for a total of $3.4 million, or a 12.9% investment in
this company, but during the second quarter of 2005, Seaboard
increased its commitment to approximately $5.5 million for a total
investment of less than 20% in this company. Seaboard has contracted
to pay the remaining portion of the investment as soon as the local
government, regulatory and banking approvals are received. However,
because of delay in obtaining the requisite consents, both the seller
and the purchaser presently have the right to cancel the transaction,
although neither has yet exercised this right. It is unknown when, or
if, the requisite consents will ever be obtained in order to complete
the transaction.
As discussed in Note 2 to the Condensed Consolidated Financial
Statements, at the beginning of the third quarter of 2005, Seaboard
completed the acquisition of a bacon processing company (Daily's) in
exchange for $44.5 million in cash, plus preliminary working capital
adjustments of approximately $3.1 million subject to final
adjustments, a 4.74% equity interest in Seaboard Foods LLC (formerly
Seaboard Farms, Inc.) valued at $44.5 million, a put right associated
with the 4.74% interest in Seaboard Foods LLC valued at $6.7 million
and $0.7 million of acquisition costs incurred. The cash payment was
funded with proceeds from the sale of short-term investments.
15
Financing Activities and Debt
During the second quarter of 2005, Seaboard allowed a $20.0 million
committed line of credit to expire and also cancelled its $95.0
million subsidiary credit facility, leaving its $200.0 million five-
year committed credit facility, and uncommitted lines totaling
$29.4 million as of October 1, 2005. Subsequent to October 1, 2005,
Seaboard reduced its five-year committed credit facility to $100
million as a result of the current levels of cash and short-term
investments held by Seaboard. The borrowings outstanding as of
October 1, 2005 of $2.0 million were under uncommitted lines.
Outstanding standby letters of credit totaling $52.9 million reduced
Seaboard's borrowing capacity under its committed credit line,
primarily representing $42.7 million for Seaboard's outstanding
Industrial Development Revenue Bonds and $9.5 million related to
insurance coverages.
In addition to funding Seaboard's planned capital expenditures as
discussed above, Seaboard's remaining 2005 scheduled long-term debt
maturities total $22.9 million. Management believes that Seaboard's
current combination of internally generated cash, liquidity, capital
resources and borrowing capabilities will be adequate to make these
scheduled debt payments and support existing operations during fiscal
2005. Management periodically reviews various alternatives for future
financings to provide additional liquidity for future operating plans,
and intends to continue seeking opportunities for expansion in the
industries in which Seaboard operates.
See Note 6 to the Condensed Consolidated Financial Statements for a
summary of Seaboard's contingent obligations, including guarantees
issued to support certain activities of non-consolidated affiliates or
third parties who provide services for Seaboard.
RESULTS OF OPERATIONS
Net sales decreased $30.7 million and increased $91.6 million for the
three and nine month periods of 2005, respectively, compared to the
same periods in 2004, respectively. The decrease for the quarter
primarily reflect the sale of some components of Seaboard's third
party commodity trading operations as discussed in Note 2 of the
Condensed Consolidated Financial Statements. Partially offsetting the
decrease in the quarter and primarily reflecting the increase in net
sales for the nine month period of 2005 are improved average rates and
volumes for marine cargo service, improved international markets for
the Pork segment and, to a lesser degree, the acquisition of Daily's.
Operating income decreased $6.0 million and increased $75.0 million
for the three and nine month periods of 2005, respectively, compared
to the same periods of 2004. The decrease for the 2005 quarter
primarily represents lower sales volumes discussed above and
significant losses from the mark-to-market of commodity futures and
options in the Commodity Trading and Milling segment. The increase
for the nine months of 2005 is primarily the result of the improved
rates and volumes in the Marine segment, lower feed costs and improved
international markets in the Pork segment and the significant losses
recorded in 2004 from the mark-to-market of commodity futures and
options in the Commodity Trading and Milling segment.
Seaboard's operations primarily involve commodity based industries,
which typically have cyclical upswings and downswings. For the past
several quarters, Seaboard has experienced the positive effects from
favorable pricing conditions in the Pork and Marine segments, while
other segments have not experienced material negative conditions. If
there is a cyclical downswing in the Pork or Marine industries or
other industries in which Seaboard operates, Seaboard's results from
operations will be adversely affected.
Operating income for each segment presented below for the three and
nine months ended October 2, 2004 and the first six months of 2005
have been restated to reflect changes in the allocation of
administrative services by the corporate office as discussed in Note 8
to the Condensed Consolidated Financial Statements.
16
Pork Segment
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Dollars in millions) 2005 2004 2005 2004
Net sales $259.2 $241.5 $756.7 $716.7
Operating income $ 42.7 $ 39.6 $141.0 $100.7
Net sales for the Pork segment increased $17.7 million for the quarter
and increased $40.0 million for the first nine months of 2005 as
compared to 2004. The increases were primarily the result of the
acquisition of Daily's, a processor of premium sliced and pre-cooked
bacon as discussed in Note 2 to the Condensed Consolidated Financial
Statements, and to a lesser degree, the result of strong demand in the
international markets which provided opportunities to shift volumes
and product mix to higher margin opportunities in international
markets. The increases were partially offset by lower prices for pork
products in the domestic markets. Management expects prices for the
remainder of 2005 to be lower than prices in the similar period of
2004.
Operating income for the Pork segment increased $3.1 million and $40.3
million for the three and nine month periods of 2005, respectively,
compared to the same periods of 2004. For the quarter, the increase
was primarily the result of the acquisition of Daily's. For the nine
months, the increase is primarily a result of lower feed costs, a
higher percentage of Seaboard-raised hogs processed which cost less
than third party hogs and, to a lesser extent, the acquisition of
Daily's.
During the past several quarters, market prices for pork products were
high relative to historic norms and there was a shift of more sales to
the international markets. Historically high market prices have not
been sustained over long periods of time. Management is unable to
predict future market prices for pork products, feed costs and third
party hogs, or how long the international market volumes will continue
to grow as compared to the domestic market volumes. Management expects
operating results to remain positive for the remainder of 2005.
Commodity Trading and Milling Segment
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Dollars in millions) 2005 2004 2005 2004
Net sales $159.3 $255.8 $718.2 $805.9
Operating income $ 2.1 $ 9.9 $ 29.9 $ 17.2
Income from foreign affiliates $ 2.2 $ 1.4 $ 5.6 $ 4.0
As discussed in Note 2 to the Condensed Consolidated Financial
Statements, effective May 9, 2005, Seaboard sold some components of
its third party commodity trading operations. Seaboard intends to
continue competing in many of the markets and routes associated with
the sale transaction, although at a reduced level. Since Seaboard has
conducted its commodity trading business with third parties,
consolidated subsidiaries, and foreign affiliates on an interrelated
basis and intends to continue trading to third parties in certain
markets, operating income from the business sold cannot be clearly
distinguished from the remaining operations of Seaboard's Commodity
Trading and Milling segment without making numerous subjective
assumptions primarily with respect to mark-to-market accounting. For
the first half of 2005, this transaction did not have a material
effect on net sales, net earnings or earnings per common share as
transactions in process at the date of sale were completed by and the
responsibility of Seaboard after the date of sale. Seaboard's
revenues from the portion of the operations sold for the first two
quarters of 2005 totaled approximately $317.3 million, compared to
$312.0 million for the first two quarters of 2004. Net sales for the
third quarter of 2005 for the third party commodity trading operations
decreased $98.8 million, compared to the third quarter of 2004, and
will continue to be comparably smaller than 2004 for the remainder of
2005 as a result of this transaction; however, the extent of the
decrease beyond 2005 will depend on the ability to effectively compete
in the markets.
Net sales for the Commodity Trading and Milling segment decreased
$96.5 and $87.7 million for the three and nine month periods of 2005,
respectively, compared to the same periods of 2004. The decreases
primarily reflect the sale of some components of Seaboard's third
party commodity trading operations as discussed above.
Operating income for this segment decreased $7.8 million and increased
$12.7 million for the three and nine month periods of 2005,
respectively, compared to the same periods of 2004, primarily
reflecting the significant impact of marking to market the derivative
contracts as discussed below and, for the quarter, the sale of
operations discussed above. Included in operating income for the nine
months of 2005 are $2.2 million of derivative gains related to
derivative instruments sold in the sale transaction discussed above as
a result of mark- to-market accounting discussed below. Additionally,
both periods reflect improved margins on sales to certain
17
affiliates, and improved operations for certain milling locations.
These improvements were partially offset by higher selling, general
and administrative costs in 2005 primarily as a result of higher bad
debt expenses. Due to the uncertain political and economic conditions
in the countries in which Seaboard operates, management is unable to
predict future sales and operating results, but anticipates positive
operating income, excluding the potential effects of derivative gains
or losses, to continue in 2005.
Had Seaboard applied hedge accounting to its derivative instruments,
operating income would have been higher by $4.6 million and lower by
$0.3 million for the three and nine months of 2005, respectively,
whereas operating income for the three and nine months of 2004 would
have been higher by $0.4 million and $10.8 million, respectively.
While management believes its foreign exchange contracts and commodity
futures and options are economic hedges of its firm purchase and sales
contracts, Seaboard does not perform the extensive record-keeping
required to account for either type of derivative as hedges for
accounting purposes. Accordingly, while the changes in value of the
derivative instruments were marked to market, the changes in value of
the firm purchase or sales contracts were not. As a result, operating
income for the three and nine months of 2005 includes commodity
derivative losses of $3.5 and $0.5 million, respectively, compared to
losses of $0.4 million and $10.8 million for the same 2004 periods
related to these mark-to-market adjustments. In addition, operating
income for the three and nine months of 2005 includes foreign exchange
contract losses of $1.1 million and gains of $0.7 million,
respectively. During 2004, the foreign exchange contracts were
accounted for as hedges. Seaboard's market risk exposure related to
its derivative instruments has been reduced with the sale of the third
party commodity trading business as discussed below.
Income from foreign affiliates for the three and nine months of 2005
increased $0.8 million and increased $1.6 million, respectively, from
the same 2004 periods primarily as a result of improved local
operating conditions. Based on current political and economic
situations in the countries in which the flour and feed mills operate,
management cannot predict whether the foreign affiliates will remain
profitable for the remainder of 2005.
Marine Segment
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Dollars in millions) 2005 2004 2005 2004
Net sales $161.1 $125.0 $470.7 $354.1
Operating income $ 18.1 $ 17.7 $ 64.0 $ 42.9
Net sales for the Marine segment increased $36.1 million and $116.6
million for the three and nine month periods of 2005, respectively,
compared to the same periods of 2004. These increases are the result
of higher average cargo rates and higher cargo volumes in most markets
reflecting the continuation of improved market conditions since the
second half of 2004. Management cannot predict whether rates will
continue to increase or be in an amount sufficient to cover increases
in charter hire and fuel related expenses.
Operating income for the Marine segment increased $0.4 million and
$21.1 million for the three and nine months of 2005, respectively,
compared to the same periods of 2004, primarily reflecting the
increased rates and volumes discussed above, partially offset by
higher charter hire expenses and fuel costs, especially during the
third quarter of 2005. Although management cannot predict changes in
future cargo rates, fuel related costs, charter hire expenses or to
what extent changes in economic conditions will impact cargo volumes,
it does expect this segment to remain profitable for the remainder of
2005.
Sugar and Citrus Segment
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Dollars in millions) 2005 2004 2005 2004
Net sales $ 31.5 $25.7 $ 64.1 $ 54.6
Operating income $ 3.2 $ 3.3 $ 8.4 $ 9.4
Income (loss) from foreign affiliates $ (0.2) $ 0.1 $ 0.0 $ 0.2
Net sales for the Sugar and Citrus segment increased $5.8 million and
$9.5 million, respectively, for the three and nine months of 2005
compared to the same periods of 2004 primarily as a result of higher
sales volumes of sugar from increased purchases of sugar from third
parties for resale and, to a lesser extent, increased production.
Operating income decreased $0.1 million and $1.0 million,
respectively, for the three and nine month periods of 2005 compared to
the prior year as a result of operating losses from lower margins for
the citrus operation partially offset by higher sugar sales discussed
above. Management expects operating income will remain positive for
2005.
18
Power Segment
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Dollars in millions) 2005 2004 2005 2004
Net sales $ 21.1 $12.8 $ 56.7 $ 43.9
Operating income $ 2.1 $ 2.1 $ 6.6 $ 3.4
Net sales for the Power segment increased $8.3 million and $12.8
million for the three and nine month periods of 2005, respectively,
compared to the same periods of 2004 primarily reflecting higher sales
prices and in the third quarter, to a lesser extent, increased
kilowatt hour production. Sales prices have increased during 2005
reflecting the increased cost of fuel. While Seaboard has entered
into short-term and long-term sales contracts for most of its
production capacity, at times management has curtailed production to
avoid selling power in the spot market. During the third quarter of
2005, management began selling additional amounts in the spot market
based on favorable spot market conditions. Management will continue
to monitor the situation and will impose further curtailments to avoid
sales to the spot market if market conditions do not remain favorable.
Operating income remained flat at $2.1 million for the quarter and
increased $3.2 million for the nine month period of 2005 compared to
the same period of 2004. Although the third quarter operating income
remained flat, the third quarter of 2004 included a reversal of $1.0
million of bad debt expense. For the nine months, the increase is
primarily reflecting lower commission and bad debt expenses in 2005,
partially offset by higher fuel costs in excess of increased sales
prices and the impact of the strengthening peso on local expenses.
During 2004, Seaboard terminated a business relationship with a one-
time commission payment of $2.0 million during the second quarter of
2004. Management expects the economic situation in the Dominican
Republic to remain relatively stable in the near term; however, higher
fuel prices could pose a significant payment risk for the electric
sector. Assuming fuel prices are stable or revert to more historical
price levels, management expects to remain profitable for the
remainder of 2005.
All Other
Three Months Ended Nine Months Ended
October 1, October 2, October 1, October 2,
(Dollars in millions) 2005 2004 2005 2004
Net sales $ 4.6 $ 6.6 $ 20.7 $ 20.3
Operating income $ 0.5 $ 1.0 $ 2.4 $ 2.3
Loss from foreign affiliate $ (1.7) $(1.3) $ (7.1) $ (4.3)
The loss from foreign affiliate reflects Seaboard's share of losses
from its equity method investment in a Bulgarian wine business. In
2005 Seaboard recorded 100% of the losses from this business compared
to 37% in 2004. The loss in 2004 for this business includes a
provision for inventory write-downs of which Seaboard recorded its
share, $0.8 million, during the second quarter of 2004. Management
expects additional losses from the operations of this business for the
remainder of 2005. See Note 8 to the Condensed Consolidated Financial
Statements for further discussion of this business and intentions to
sell the business.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased by
$6.5 million and $7.9 million during the three and nine months of 2005
compared to the same periods of 2004 primarily as a result of
increases in the Marine segment reflecting increased selling costs
related to the volume growth of this business, increases in the
Commodity Trading and Milling segment primarily from higher bad debt
expense and, to a lesser extent, the acquisition of Daily's in the
Pork segment. Lower commission expenses and bad debt expense for the
Power segment partially offset these increases for the nine month
period. As a percentage of revenues, SG&A increased to 5.7% and 4.8%
for the 2005 three and nine month periods, respectively, compared to
4.4% and 4.6%, respectively, for the same periods of 2004 primarily as
a result of the sale of some components of Seaboard's third party
commodity trading operations to Grindrod Limited as discussed in Note
2 to the Condensed Consolidated Financial Statements.
Interest Expense
Interest expense decreased $0.9 million and $3.7 million in the 2005
three and nine month periods, respectively, compared to the same
periods of 2004 primarily reflecting the lower average level of short-
term and long-term borrowings outstanding during 2005. During the
second quarter of 2004, Seaboard repaid a significant portion of its
short-term notes payable to banks with operating cash flows and there
has been no need for additional borrowings.
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Interest Income
Interest income increased $1.6 million and $4.3 million in the three
and nine month periods of 2005, respectively, compared to the same
periods of 2004, primarily reflecting the higher level of average
funds invested during 2005 and an increase in interest received on
outstanding customer receivable balances in the Power segment.
Minority and Other Noncontrolling Interests
Minority and other noncontrolling interests expense increased $1.9
million and $2.0 million in the three and nine month periods of 2005,
respectively, compared to the same periods of 2004, primarily
reflecting the acquisition of Daily's as discussed in Note 2.
Foreign Currency Gains (Losses)
Seaboard realized net foreign currency losses of $0.4 million in the
three and nine month periods of 2005, compared to gains of $5.0 and
$3.5 million in the same periods of 2004. The strengthening of the
Dominican Republic peso during the third quarter of 2004 created gains
of $5.1 and $2.5 million for the three and nine months ended October
2, 2004 compared to losses of $0.8 and $0.3 million for comparable
periods in 2005.
Loss from the Sale of a Portion of Operations
As discussed in Note 2 to the Condensed Consolidated Financial
Statements, Seaboard sold some components of its third party commodity
trading operations in May 2005. Because Seaboard does not use hedge
accounting for its commodity and foreign exchange agreements, gains of
$2.2 million from the mark-to-market of the sold derivative
instruments were recorded in cost of sales prior to the date of the
sale while the change in value of the related firm sales commitment
was not, resulting in a loss on the sale from this transaction
totaling $1.7 million, subject to final adjustments.
Miscellaneous, Net
Miscellaneous, net for the three and nine months of 2005 includes $3.1
million and $1.7 million, respectively, of gains from the mark-to-
market of interest rate swap agreements compared to losses of $4.2
million and $4.0 million, respectively for the same periods in 2004.
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. The third quarter of 2005 also includes
income of $0.8 million of put option value change as discussed in Note
2 to the Condensed Consolidated Financial Statements. Miscellaneous,
net for the three and nine months ended October 2, 2004 also includes
losses of $1.6 and $1.3 million, respectively, from the mark-to-market
of commodity futures and options contracts that management does not
view as direct economic hedges of its operations.
Income Tax Expense
The effective tax rate decreased during 2005 compared to 2004
primarily as a result of changes to the treatment of shipping income
by the U.S. taxing authorities as further discussed in Note 4 of
Condensed Consolidated Financial Statements. In addition, see Note 4
to the Condensed Consolidated Financial Statements for a discussion of
the Internal Revenue Service's examination of Seaboard's federal
income tax returns for 2000 through 2002.
Other Financial Information
On December 21, 2004, the Financial Accounting Standards Board (FASB)
issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" (FSP109-2). FSP 109-2, which was effective
upon issuance, allows companies time beyond the financial reporting
period of enactment to evaluate the effect of the earnings
repatriation provision on its plan for reinvestment or repatriation of
foreign earnings for purposes of applying Statement of Financial
Accounting Standards (SFAS) No. 109. Additionally, FSP 109-2 provides
guidance regarding the required disclosures surrounding a company's
reinvestment or repatriation of foreign earnings. Seaboard continues
to evaluate this provision of the Act to determine the amount of
foreign earnings to repatriate and expects to complete its evaluation
in the fourth quarter of 2005.
In November 2004, FASB issued SFAS No. 151, "Inventory Costs". This
statement amends Accounting Research Board No. 43 to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). SFAS No. 151
requires that those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal". In
addition, SFAS No. 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity
of the production facilities. Any costs outside the normal range
would be considered a period expense instead of an inventoried cost.
For Seaboard, this standard is effective for the fiscal year beginning
January 1, 2006. The adoption of SFAS No. 151 is not expected to have
a material impact on Seaboard's financial position or net earnings.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Seaboard is exposed to various types of market risks from its day-to-
day operations. Primary market risk exposures result from changing
commodity prices, foreign currency exchange rates and interest rates.
Changes in commodity prices impact the cost of necessary raw
materials, finished product sales and firm sales commitments.
Seaboard uses various grain and meal futures and options purchase
contracts to manage certain risks of increasing prices of raw
materials and firm sales commitments. Short sales contracts may then
be used to offset any open purchase derivatives when the related
commodity inventory is purchased in advance of the derivative
maturity, effectively canceling the initial futures or option purchase
contract. From time to time, hog futures are used to manage risks of
increasing prices of live hogs acquired for processing. Because
changes in foreign currency exchange rates impact the cash paid or
received on foreign currency denominated receivables and payables,
Seaboard manages certain of these risks through the use of foreign
currency forward exchange agreements. Changes in interest rates
impact the cash required to service variable rate debt. From time to
time, Seaboard uses interest rate swaps to manage risks of increasing
interest rates. The nature of Seaboard's market risk exposure related
to these items has not changed materially since December 31, 2004,
although the amount of commodity futures and option contracts and
foreign exchange contracts decreased considerably with the sale of a
portion of the third party trading operations as discussed in Note 2
to the Condensed Consolidated Financial Statements.
At October 1 2005, Seaboard had net trading contracts to purchase
1,161,000 bushels of grain (fair value of negative $3,516,000) and to
purchase 14,000 tons of meal (fair value of negative $87,000). At
December 31, 2004, Seaboard had net trading contracts to purchase
7,626,000 bushels of grain (fair value of negative $304,000) and
81,000 tons of meal (fair value of negative $1,492,000).
At October 1, 2005, Seaboard had net agreements to exchange the
equivalent of $32,882,000 of South African rand at an average
contractual exchange rate of 6.40 ZAR to one U.S. dollar. At December
31, 2004, Seaboard had net agreements to exchange the equivalent of
$98,476,000 of South African rand at an average contractual exchange
rate of 6.14 ZAR to one U.S. dollar.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Seaboard's
management evaluated, under the direction of our chief executive and
chief financial officers, the effectiveness of Seaboard's disclosure
controls and procedures as defined in Exchange Act 15(d) - 15(e) as of
October 1, 2005. Based upon and as of the date of that evaluation,
Seaboard's chief executive and chief financial officers concluded that
Seaboard's disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports it files and
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported as and when required. It should be
noted that any system of disclosure controls and procedures, however
well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met. In
addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the likelihood of
future events. Due to these and other inherent limitations of any
such system, there can be no assurance that any design will always
succeed in achieving its stated goals under all potential future
conditions.
Change in Internal Controls - During the third quarter of 2005,
Seaboard completed the acquisition of Daily's. Management is
currently completing post merger integration plans which include
converting certain accounting information systems and is in the
process of documenting and evaluating internal controls with respect
to Daily's. Although management does not consider it material to its
results of operations, Seaboard intends to extend its Sarbanes-Oxley
Act of 2002 Section 404 compliance program to include Daily's with an
effective date of July 1, 2006. Except as set forth above, there has
been no change in Seaboard's internal control over financial reporting
that occurred during the fiscal quarter ended October 1, 2005 that has
materially affected, or is reasonably likely to materially affect,
Seaboard's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In order to settle threatened additional litigation with Sierra Club,
Seaboard agreed to conduct an investigation to determine if corrective
action is required at three farms purchased from PIC located in
Kingfisher and Major Counties in Oklahoma according to an agreed-upon
process. Based on the investigation, it has been determined that two
farms do not require any corrective action. The investigation at the
one remaining farm is continuing; however, it has been determined that
the lagoon at this farm is a likely source of elevated nitrates in the
ground water. Seaboard advised the Oklahoma Department of
Agriculture, Food & Forestry as to this fact, and is in the process of
determining the necessary corrective action. The cost of the repairs
and any other implications is not known at this time, but if a new
lagoon is constructed, the cost could exceed $1 million. The farm was
one of the farms purchased from PIC International Group, Inc. (PIC).
Seaboard has given notice to PIC as to its right to indemnification
from any loss as a result of the lagoon. To date, PIC has declined to
provide indemnification.
Seaboard's subsidiary, Seaboard Foods, Inc. (Seaboard Foods), is
subject to an ongoing Unilateral Administrative Order (RCRA Order)
pursuant to Section 7003 of the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. Sec. 6973 (RCRA), filed by the United
States Environmental Protection Agency (EPA) on June 29. These same
farms are the subject of a Notice of Violation letter received from
the State of Oklahoma, alleging that Seaboard Foods has violated
various provisions of state law and the operating permits based on the
same conditions which gave rise to the RCRA Order.
Seaboard Foods disputes the RCRA Order and the State of Oklahoma's
contentions on legal and factual grounds, and advised the EPA that it
won't comply with the RCRA Order, as written. Notwithstanding,
Seaboard Foods has undertaken an extensive investigation under the
RCRA Order, and has had significant discussions with the EPA and the
State of Oklahoma, proposing to pay a civil penalty and to undertake
continued monitoring and take a number of corrective actions with
respect to the farms, and one additional farm, in order to attempt to
settle the RCRA Order and the Oklahoma Notice of Violation
Originally, EPA advised Seaboard Foods that any such settlement must
include a civil fine of $1,200,000, but EPA has since reduced the
amount of its demand for a civil penalty to $345,000. Seaboard Foods
believes that the EPA has no authority to impose a civil fine, but
settlement discussions are continuing.
A tentative verbal settlement has been reached with the State of
Oklahoma which would require Seaboard Foods to pay a fine of $100,000
and to undertake agreed upon supplemental environmental projects at a
cost of $80,000. The settlement is subject to the final terms being
agreed to and the approval of the Oklahoma Board of Agriculture.
Irrespective of the settlement, Seaboard Foods has completed or is in
the process of completing many of the proposed corrective actions at
the relevant farms.
PIC is indemnifying Seaboard with respect to the action pursuant to an
indemnification agreement which has a $5 million limit. To date, the
$5 million limit has not been exceeded. If the tentative settlement
with the State of Oklahoma is agreed to, the estimated cumulative
costs which will be expended will total approximately $6.9 million,
not including the additional legal costs required to negotiate the
settlement or the penalties demanded by EPA and tentatively agreed to
with the State of Oklahoma. If the measures taken pursuant to the
settlement are not effective, other measures with additional costs may
be required. PIC has advised Seaboard that it is not responsible for
the costs in excess of $5 million. Seaboard disputes PIC's
determination of the costs to be included in the calculation to
determine whether the $5 million limit will be exceeded and believes
that the costs to be considered are less than $5 million, such that
PIC is responsible for all such costs and penalties, except for
approximately $180,000 of estimated costs that would be incurred over
5 years subsequent to the settlement for certain testing and sampling.
Seaboard has agreed to conduct such testing and sampling as a part of
the sampling it conducts in the normal course of operations and
believes that the incremental costs incurred to conduct such testing
and sampling will be less than $180,000. Seaboard also believes that a
more general indemnity agreement would require indemnification of
liability in excess of $5 million (excluding the estimated $180,000
cost for testing and sampling), although PIC disputes this.
Item 6. Exhibits
4.1 Notice of Reduction of Aggregate Commitments under Credit
Agreement dated as of December 3, 2004 among Seaboard
Corporation, Bank of America, N.A., Scotia Capital, Inc., Harris
Trust and Savings Bank and Suntrust Bank and the Other Lenders
Party Hereto
31.1 Certification of the Chief Executive Officer Pursuant to Exchange
Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
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31.2 Certification of the Chief Financial Officer Pursuant to Exchange
Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
This Form 10-Q contains forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of Seaboard Corporation and its subsidiaries
(Seaboard). Forward-looking statements generally may be identified
as: statements that are not historical in nature; and statements
preceded by, followed by or that include the words "believes,"
"expects," "may," "will," "should," "could," "anticipates,"
"estimates," "intends," or similar expressions. In more specific
terms, forward-looking statements, include, without limitation:
statements concerning projection of revenues, income or loss, capital
expenditures, capital structure or other financial items; 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) Seaboard's ability to obtain
adequate financing and liquidity, (ii) the price of feed stocks and
other materials used by Seaboard, (iii) the sale price or market
conditions for pork products from such operations, (iv) the price or
market conditions for other products and services, (v) the ability of
Seaboard's Commodity Trading and Milling segment to successfully
continue competing in the markets and routes associated with the
assets sold to Grindrod Limited, (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 fluctuation in exchange rates for the
Dominican Republic pesos, (ix) the potential effect of Seaboard's
investment in a wine business on the consolidated financial
statements, (x) the potential impact of various environmental actions
pending or threatened against Seaboard, (xi) the potential impact of
the American Jobs Creation Act, (xii) the potential impact of the
current IRS audit, (xiii) statements concerning profitability of any
of Seaboard's segments or (xiv) other trends affecting Seaboard's
financial condition or results of operations, and statements of the
assumptions underlying or relating to any of the foregoing statements.
Forward-looking statements are not guarantees of future performance or
results. They involve risks, uncertainties and assumptions. Actual
results may differ materially from those contemplated by the forward-
looking statements due to a variety of factors. The information
contained in this report, including without limitation the information
under the headings "Management's Discussion and Analysis of Financial
Condition and Results of Operations," identifies important factors
which could cause such differences.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: November 4, 2005
Seaboard Corporation
by: /s/ Robert L. Steer
Robert L. Steer, Senior Vice President, Treasurer
and Chief Financial Officer
(principal financial officer)
by: /s/ John A. Virgo
John A. Virgo, Vice President,
Corporate Controller and Chief Accounting Officer
(principal accounting officer)
24