Exhibit 13
SEABOARD CORPORATION
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
Principal Locations 3
Division Summaries 4
Summary of Selected Financial Data 6
Quarterly Financial Data (unaudited) 7
Management's Discussion & Analysis of Financial Condition
and Results of Operations 8
Managements' Responsibility for Financial Statements 25
Managements' Report on Internal Control over Financial
Reporting 25
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting 26
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements 26
Consolidated Statements of Earnings 28
Consolidated Balance Sheets 29
Consolidated Statements of Cash Flows 30
Consolidated Statements of Changes in Equity 31
Notes to Consolidated Financial Statements 32
Stockholder Information 60
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, including the impact of mark-to-market
accounting on operating income; statements regarding the plans
and objectives of management for future operations; statements
of future economic performance; statements regarding the
intent, belief or current expectations of Seaboard and its
management with respect to: (i) 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, sugar and other products,
(iv) the sales price or market conditions for other products
and services, (v) statements concerning management's
expectations of recorded tax effects under existing
circumstances, (vi) the ability of trading and milling to
successfully compete in the markets it serves and the "volume
of business and working capital requirements associated with
the competitive trading environment, (vii) the charter hire
rates and fuel prices for vessels, (viii) the stability of
the Dominican Republic's economy and demand for power,
related spot market prices and collectibility of receivables
in the Dominican Republic, (ix) the effect of the fluctuation
in exchange rates for the Dominican Republic peso, (x) the
potential effect of Seaboard's investment in a wine business
on the consolidated financial statements, (xi) the potential
impact of various environmental actions pending or threatened
against Seaboard, (xii) statements concerning profitability
or sales volume of any of Seaboard's segments, (xiii) the
impact of the 2005 Daily's acquisition in enhancing Seaboard's
ability to venture into other further processed pork
products, (xiv) the timetable for the Triumph Foods pork
processing plant to reach full double shift operating
capacity, (xv) the ability of Seaboard to successfully market
the increased volume of pork produced by Triumph Foods, or
(xvi) 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
Letter to Stockholders
In the face of fluctuating commodity prices and global
uncertainty, Seaboard delivered a second straight year of record
profits in 2005. We have earned more in this two year period
than the previous thirteen years combined. Since January 2004,
stockholders' equity has nearly doubled and our stock price has
risen over 400%. This excellent performance comes from across
all of our major business divisions. This is a reflection of
positive industry factors and strong management. I am proud not
only of the aggregate performance but of how well we have fared
relative to our peers in each of our industries.
I have often talked about the commodity nature of our businesses
and of how our "portfolio of companies" can provide a hedge
against a decline in any one of our businesses. Over the past two
years, we have had the good fortune of having all of our major
businesses performing at very high levels. This may be best
illustrated in the case of our marine business, which posted
record earnings despite very high charter rates for ships and
rising fuel costs. I am particularly gratified to see Seaboard
Marine do so well during the first year of leadership under the
division's new president, Eddie Gonzalez. In addition to facing
the usual challenges in the maritime business, Seaboard Marine
had to deal with Hurricanes Katrina and Wilma, which impacted our
operations in Miami and Houston as well as a number of our
foreign outports.
In 2005, we changed the name of our pork group from Seaboard
Farms to Seaboard Foods. This better reflects the nature of our
existing operations and strategic plan to move forward on the
value chain toward more varied products in the retail and
foodservice sectors. An increasing number of products produced
by Seaboard Foods are further processed. This includes, among
other things, marinated, cooked and specially prepared higher
value items for export. With the purchase of Daily's in July of
2005, Seaboard has become a major producer of a variety of bacon
products with a greater presence in the food service and
institutional markets. We intend to use the Daily's platform to
substantially increase the amount of ham products we produce as
well. To handle the expected growth in our value-added meat
business, Seaboard Foods intends to begin construction of a
further processing facility in 2006. As we move further into
value-added and higher end products, it is more likely that you
will be able to find our products in retail stores. I encourage
you to try our products. I think you will be as impressed as I
am with our quality, consistency and product presentation.
Despite political and economic challenges we are seeing
worldwide, our grain processing and trading division has
completed another very successful year. Milling revenues and
operating income reached record levels this year and our plan is
to continue in an expansionary mode as trade and grain processing
opportunities arise. Although our operations are scattered in
numerous locations, we are building a focused logistical base
which we believe will secure our competitive position for many
years to come.
With our excellent performance, we find ourselves in the
favorable position of having a substantial amount of liquidity.
This liquidity not only provides a safety net against volatile
commodity markets, but also puts us in a good position to make
strategic acquisitions in the future. We are constantly
evaluating opportunities to grow our businesses, both organically
and through acquisitions. In the U.S. and overseas, there is a
substantial amount of cash and investment capital available in
the market today to fund acquisitions. Increasingly we see hedge
funds and private equity compete for strategic business
opportunities. This has made some acquisition candidates
unattractive as purchase multiples have risen to extremely high
levels. We will be cautious in making acquisitions to ensure
that we get good value.
The overall profitability of our company from year to year is
going to be impacted by commodity markets. This includes the
price of feed and food grains, protein meals, hogs and pork
products, and the cost of fuel, trucking and ocean
transportation. We know from experience that the confluence of
events and prices that has led to such high profitability in the
last two years is not sustainable over the long term. We have
already started to see some softness in the meat sector,
including pork, which, if it continues, may signal a retreat from
the record profits we have experienced. Aside from this and the
cyclical nature of our businesses, we remain very optimistic
about our long term prospects.
I encourage all of our investors to visit our corporate website
where you can get a better idea of what our company does and how
we operate.
I would like to thank our customers, employees and shareholders
for their loyalty and involvement with the Company. Your support
is very much appreciated.
/s/H.H. Bresky
H.H. Bresky
Chairman of the Board, President
And Chief Executive Officer
2
Principal Locations
Corporate Office
Molinos Champion, S.A.* Seaboard del Peru,
Seaboard Corporation Molinos del Ecuador, C.A.* S.A.
Shawnee Mission, Ecuador Peru
Kansas
National Milling Company Seaboard Freight &
Pork of Guyana, Inc. Shipping Jamaica
Guyana Limited
Seaboard Foods LP Jamaica
Pork Division Office
Shawnee Mission, National Milling
Kansas Corporation Limited Seaboard Honduras,
Zambia S. de R.L. de C.V.
Processing Plant Honduras
Guymon, Oklahoma Seaboard West Africa
Limited Seaboard Marine
Live Production Sierra Leone Bahamas Ltd.
Operation Offices Bahamas
Julesburg, Colorado Marine
Hugoton, Kansas Seaboard Marine
Leoti, Kansas Seaboard Marine Ltd. (Trinidad) Ltd.
Liberal, Kansas Marine Division Office Trinidad
Rolla, Kansas Miami, Florida
Guymon, Oklahoma Seaboard Marine of
Hennessey, Oklahoma Port Operations Haiti, S.E.
Optima, Oklahoma Fernandina Beach, Florida Haiti
Houston, Texas
Miami, Florida SEADOM, S.A.
Processed Meats New Orleans, Louisiana Dominican Republic
Salt Lake City, Utah Philadelphia, Pennsylvania
Missoula, Montana
Agencias Generales Conaven, Seamaritima S.A. de
C.A. C.V.
Commodity Trading & Milling Venezuela Mexico
Agencia Maritima del Istmo,
Commodity Trading Operations S.A. Sugar and Citrus
Bermuda Costa Rica
Ecuador Ingenio y Refineria
South Africa Cayman Freight Shipping San Martin del
Services, Ltd. Tabacal SRL
Cayman Islands Argentina
Les Moulins d'Haiti
S.E.M.* JacintoPort International LP
Haiti Houston, Texas Power
Lesotho Flour Mills Representaciones Maritimas y Transcontinental
Limited Aereas, S.A. Capital Corp.
Lesotho Guatemala (Bermuda) Ltd.
Domincan Republic
Life Flour Mill Ltd* Sea Cargo, S.A.
Top Feeds Limited* Panama
Nigeria Other
Seaboard de Colombia, S.A.
Minoterie de Matadi, Colombia Boyar Estates S.A.*
S.A.R.L.* Bulgaria
Democratic Republic Seaboard de Nicaragua, S.A.
of Congo Nicaragua Chestnut Hill Farms
Honduras, S. de
Minoterie de Matadi, R.L. de C.V.
S.A.R.L.* Honduras
Republic of Congo
Mount Dora Farms
Mobeira, SARL Inc.
Mozambique Miami, Florida
*Represents a non-controlled, non-consolidated affiliate
3
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 has a daily double shift capacity to process
approximately 16,000 hogs and generally operates at capacity with
additional weekend shifts depending on market conditions.
Seaboard produces and sells fresh, frozen and further processed
pork products to further processors, foodservice outlets, grocery
stores and other retail outlets, and other distributors
throughout the United States and to Japan and other foreign
markets. Hogs processed at the plant principally include
Seaboard-raised hogs as well as hogs raised by third parties
purchased under contract and in the open market.
Seaboard's hog production facilities consist of genetic and
commercial breeding, farrowing, nursery and finishing buildings
located in Oklahoma, Kansas, Texas and Colorado. These
facilities have a capacity to produce over three and one-half
million market hogs annually. Seaboard owns and 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 Pork Division also owns two bacon processing plants
located in Salt Lake City, Utah and Missoula, Montana. The
processing plants produce premium sliced and pre-cooked bacon
primarily for food service. This acquisition in 2005 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.
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 pork processing plant in St. Joseph,
Missouri. Seaboard earns a commission for this service and is
entitled to be reimbursed for certain expenses. The plant began
operations in January 2006.
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 internationally
markets wheat, corn, soybean meal and other commodities in bulk
to third party customers 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
2.5 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 primarily through the use
of chartered bulk vessels and its eight owned bulk carriers.
Seaboard's Commodity Trading and Milling Division operates in
fourteen countries, including three trading locations and eleven
grain processing businesses. The grain processing businesses are
operated through five consolidated and six non-consolidated
affiliates in Africa, South America, and the Caribbean with
flour, feed and maize milling businesses producing over one and
one-half million metric tons of finished product per year.
4
Marine Division
Seaboard's Marine Division 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 Philadelphia, Pennsylvania,
Fernandina Beach, Florida, and New Orleans, Louisiana.
Seaboard's fleet consists of eight owned and approximately 27
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
25 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 America,
and the Caribbean Basin to book both northbound and southbound
cargo to and from the United States and between the countries it
serves. 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 and between the countries it
serves.
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, other South American countries and Europe.
Seaboard's mill, one of the largest in Argentina, currently has a
processing capacity of approximately 200,000 metric tons of sugar
per year. The mill is located in the Salta Province.
Approximately 50,000 acres of this land is planted with sugar
cane which supplies the majority of the raw product processed by
the mill. Another approximately 3,000 acres is planted with
orange trees.
Seaboard owns two floating electric power generating facilities
consisting of a system 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 certain large commercial users, and on the spot
market that is accessed 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 facilities.
Seaboard also has an equity investment in a wine business that
produces wine in Bulgaria for distribution primarily throughout
Europe.
5
Summary of Selected Financial Data
Years ended December 31,
(Thousands of dollars
except per share amounts) 2005 2004 2003 2002 2001
Net sales $2,688,894 $2,683,980 $1,981,340 $1,829,307 $1,804,610
Operating income $ 320,045 $ 251,254 $ 68,786 $ 47,125 $ 114,352
Net earnings $ 266,662 $ 168,096 $ 31,842 $ 13,507 $ 51,989
Basic earnings per
common share $ 212.20 $ 133.94 $ 25.37 $ 9.38 $ 34.95
Diluted earnings per
common share $ 211.94 $ 133.94 $ 25.37 $ 9.38 $ 34.95
Total assets $1,816,321 $1,436,694 $1,325,691 $1,281,141 $1,234,757
Long-term debt, less
current maturities $ 201,063 $ 262,544 $ 321,555 $ 318,746 $ 255,819
Stockholders' equity $ 977,870 $ 692,682 $ 520,565 $ 486,731 $ 528,420
Dividends per common
share $ 3.00 $ 3.00 $ 3.00 $ 2.50 $ 1.00
In the fourth quarter of 2005, Seaboard made a one-time election
to repatriate previously permanently invested foreign earnings
resulting in a total tax expense of approximately $11,586,000,
recognized a tax benefit of $21,428,000 for the finalization of
certain tax years as a result of a settlement with the Internal
Revenue Service and recognized a tax benefit of $4,977,000 as a
result of an agreement with the Puerto Rican Treasury department
that favorably resolved certain prior years' tax issues. The net
effect of these events was an increase in net earnings of
$14,819,000, or $11.78 per common share on a diluted earnings
basis for the year. See Note 7 of the Consolidated Financial
Statements for further discussion.
In January 2005, Seaboard agreed to a tax settlement related to
prior year tax returns resulting in a tax benefit of $14,356,000,
or $11.44 per common share, which was recognized in the fourth
quarter of 2004. See Note 7 to the Consolidated Financial
Statements for further discussion.
In the fourth quarter of 2004, Seaboard recognized a $3,592,000
decline in value considered other than temporary in its
investment in a Bulgarian wine business as a charge to loss from
foreign affiliates. See Note 13 to the Consolidated Financial
Statements for further discussion. As a result of its decision
to sell this equity investment, in the fourth quarter of 2004,
Seaboard recharacterized the related accounting for income tax
purposes from ordinary to capital losses, which resulted in the
reversal of a previously recorded tax benefit of $5,795,000
related to prior year losses. See Note 7 to the Consolidated
Financial Statements for further discussion. The effect of these
fourth quarter events related to this business was a decrease in
net earnings of $7.48 per common share.
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. Also 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.
6
Quarterly Financial Data (unaudited)
(UNAUDITED)
(Thousands of dollars 1st 2nd 3rd 4th Total for
except per share amounts) Quarter Quarter Quarter Quarter the Year
2005
Net sales $ 713,327 $ 736,962 $ 636,779 $ 601,826 $2,688,894
Operating income $ 97,080 $ 82,148 $ 65,383 $ 75,434 $ 320,045
Net earnings $ 68,677 $ 62,584 $ 52,590 $ 82,811 $ 266,662
Earnings per common share:
Basic $ 54.72 $ 49.87 $ 41.90 $ 65.65 $ 212.20
Diluted $ 54.72 $ 49.87 $ 41.69 $ 65.65 $ 211.94
Dividends per common share $ 0.75 $ 0.75 $ 0.75 $ 0.75 $ 3.00
Market price range per common share:
High $1,147.20 $1,695.00 $1,784.00 $1,809.00
Low $ 978.00 $ 855.00 $1,177.00 $1,290.00
2004
Net sales $ 615,675 $ 712,307 $ 667,462 $ 688,536 $2,683,980
Operating income $ 42,762 $ 55,527 $ 71,368 $ 81,597 $ 251,254
Net earnings $ 27,377 $ 34,256 $ 46,548 $ 59,915 $ 168,096
Earnings per common share:
Basic $ 21.81 $ 27.29 $ 37.09 $ 47.74 $ 133.94
Diluted $ 21.81 $ 27.29 $ 37.09 $ 47.74 $ 133.94
Dividends per common share $ 0.75 $ 0.75 $ 0.75 $ 0.75 $ 3.00
Market price range per common share:
High $ 352.00 $ 498.00 $ 669.99 $1,038.00
Low $ 280.00 $ 317.00 $ 482.65 $ 545.00
In the fourth quarter of 2005, Seaboard made a one-time election
to repatriate previously permanently invested foreign earnings
resulting in a total tax expense of approximately $11,586,000,
recognized a tax benefit of $21,428,000 for the finalization of
certain tax years as a result of a settlement with the Internal
Revenue Service and recognized a tax benefit of $4,977,000 as a
result of an agreement with the Puerto Rican Treasury department
that favorably resolved certain prior years' tax issues. The net
effect of these fourth quarter events was an increase in net
earnings of $14,819,000, or $11.75 per common share on a diluted
basis for the quarter. See Note 7 of the Consolidated Financial
Statements for further discussion.
In January 2005, Seaboard agreed to a tax settlement related to
prior year tax returns resulting in a tax benefit of $14,356,000,
or $11.44 per common share, which was recognized in the fourth
quarter of 2004. See Note 7 to the Consolidated Financial
Statements for further discussion.
In the fourth quarter of 2004, Seaboard recognized a $3,592,000
decline in value considered other than temporary in its
investment in a Bulgarian wine business as a charge to loss from
foreign affiliates. See Note 13 to the Consolidated Financial
Statements for further discussion. As a result of its decision
to sell this equity investment, in the fourth quarter of 2004,
Seaboard recharacterized the related accounting for income tax
purposes from ordinary to capital losses, which resulted in the
reversal of a previously recorded tax benefit of $5,795,000
related to prior year losses. See Note 7 to the Consolidated
Financial Statements for further discussion. The effect of these
fourth quarter events related to this business was a decrease in
net earnings of $7.48 per common share.
7
Management'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. Seaboard determined its segments based on
information provided to the chief operating decision maker which
is used to determine allocation of resources and assess
performance.
Pork Segment
Management views the Pork segment as Seaboard's most significant
operation. It 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 and two
bacon plants located in Salt Lake City, Utah and Missoula,
Montana acquired in 2005. In 2005, Seaboard raised over 70% of
the hogs processed at the Guymon plant with the remaining hog
requirements purchased primarily under contracts from independent
producers.
This segment is also the most capital intensive segment with
approximately 40% of consolidated assets, including approximately
70% of Seaboard's fixed assets and material dollar amounts for
live hog inventories. Management believes the Pork segment
possesses the ability to generate more operating income and cash
flow in any one year than any of Seaboard's other businesses, as
was demonstrated by the 2005 and 2004 operating results.
In July 2005, Seaboard completed the acquisition of Daily's, a
bacon processor located in the western United States. The
acquisition included 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.
Of Seaboard's businesses, management believes 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 worldwide
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 prices
for corn and soybean meal. In addition, costs can be materially
affected by market prices for hogs purchased from third parties
for processing at the plant.
Seaboard is currently evaluating several further processing
opportunities related to its pork operations. Management
currently has no immediate plans for significant expansion of its
live production facilities to support the Guymon plant. As the
Guymon plant operates at capacity, to improve operating income
Seaboard is constantly working towards improving the efficiencies
of the Pork operations as well as considering ways to increase
margins by expanding 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 pork processing plant in St. Joseph,
Missouri. Seaboard earns a commission for this service and is
entitled to be reimbursed for certain expenses. The plant began
operations in January 2006. This plant has similar capacity to
Seaboard's Guymon plant with the business based upon the same
integrated model as Seaboard's. The Triumph plant is not
expected to reach full double shift operating capacity until 2007.
8
Commodity Trading and Milling Segment
The Commodity Trading and Milling segment is Seaboard's second
largest segment with approximately 15% of consolidated assets,
which consist primarily of working capital assets. This segment
principally operates overseas with locations in Africa, Bermuda,
South America and the Caribbean. These foreign operations can be
significantly impacted by local crop production, political
instability, economic conditions and currency fluctuations. This
segment's sales are also significantly affected by fluctuating
prices for various commodities, such as wheat, corn and soybean
meal. Although this segment owns eight ships, most of the third
party trading business is transacted with chartered 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 consolidated and non-consolidated affiliates, operate in
many foreign and, in most cases, lesser developed countries.
Subsidized wheat and flour exports can create fluctuating market
conditions that can have a significant impact on both the trading
and milling businesses' sales and operating income.
The majority of the Commodity Trading and Milling segment's sales
pertain to the commodity trading business. As the commodity
trading portion of the business originates grain sales from and
sells to many international locations, timing of completion of
voyages, and the availability of and rates for bulk cargo
shipping can significantly affect sales volumes, operating
income, working capital and related cash flows from quarter-to-
quarter. Seaboard continues to look for opportunities for
additional markets to expand the milling operations.
Effective May 9, 2005 Seaboard's Commodity Trading and Milling
segment agreed to sell some components of its third party
commodity trading operations. 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.
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-five
different countries in the Caribbean Basin, and Central and South
America. Fluctuations in economic conditions or 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 segment time-charters or
leases the majority of its ocean cargo vessels and is also
affected by fluctuations in charter hire rates and fuel costs.
Seaboard's marine business operates in many foreign countries,
and can experience significant fluctuations as a result of
local economic or political instability. In prior years,
Seaboard has experienced the effects of the economic and
political instability in Venezuela which also affected other
related South American markets. This had a significant negative
impact on operating income while reducing related cash flows.
During this time, Seaboard replaced the lost Venezuelan volumes
with new routes, and expanded volumes on existing routes,
although margins decreased. During 2004, Seaboard was able to
increase cargo rates in most markets, and commercial activity
improved in Venezuela. During 2005, Seaboard was able to
continue increasing its cargo rates in most markets. These rate
increases helped offset higher charter hire rates and fuel costs.
Assuming this segment continues to expand its volumes, needs for
cargo carrying and handling equipment will increase over the next
couple of years. 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, locally growing a substantial portion of the sugar
cane processed at the mill. This segment's sales and operating
income are significantly impacted by local and worldwide sugar
prices. Yields from the Argentine sugar harvest can have an
impact on the local price of sugar. Also, but to a lesser
degree, price fluctuations of the world market can affect local
sugar prices and can also impact export sale volumes. Depending
on local harvest and market conditions, this business purchases
third party sugar and citrus for resale. Over the past several
years, Seaboard made several modifications to this business to
improve the efficiency of its operations.
9
As the functional currency of the Sugar and Citrus segment is the
Argentine peso, the currency exchange rate can also have an
impact on reported U.S. dollar sales, operating income and cash
flows. Financing needs for the foreseeable future 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 diesel engines mounted on two barges. Historically, these
engines have been fully dispatched as a result of the relative
efficiency of the operations, and until the end of 2003, the
engines operated at capacity. This segment's financing needs
have been minimal. Until the past few years, this segment had
produced some of Seaboard's best return on investment although
operating cash flows have fluctuated from inconsistent customer
collections. Seaboard has contracts to sell approximately 40% of
its power to certain government-approved commercial large users
under long-term contracts and, at year-end, entered into short-
term contracts for most of the remaining production. Energy
produced in excess of contracted amounts is sold on the spot
market to three wholly or partially-government-owned distribution
companies or other generators who lack sufficient power
production to service their customers. Fuel is the largest cost
component but increases in fuel prices have generally been passed
through to customers.
During 2003, the exchange rate for the Dominican peso devalued
significantly before stabilizing somewhat during 2004 and 2005.
In addition, since the last half of 2003, the power industry in
the DR has suffered from a cash flow imbalance that began when
the government did not allow retail electricity rates charged by
the distribution companies to increase sufficiently in a timely
manner to cover the significant peso devaluation and increases in
U.S. dollar-denominated fuel costs.
As a result of a more stable payment performance from all
customers, during the last half of 2005 management decided to
produce at near capacity, while during 2004 Seaboard curtailed
its level of power production from time to time due to lack of
payments from spot sales. Seaboard continues to pursue
additional commercial contract customers, which would reduce
dependency on the government for liquidity. In addition,
Seaboard is pursuing additional investment opportunities in the
power industry.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Sources and Uses of Cash
Cash and short-term investments as of December 31, 2005 increased
$278.6 million from December 31, 2004 reflecting cash generated
from operations, short-term borrowings of $90.0 million which
occurred at year-end primarily to help fund a one-time qualifying
foreign intercompany dividend (see Note 7 to the Consolidated
Financial Statements for further discussion) and proceeds of
$26.5 million from the sale of a portion of the commodity trading
operations as discussed below. While cash from operating
activities totaled $331.1 million, $64.2 million was used for
capital expenditures, $60.6 million was used for scheduled
maturities of long-term debt, and $48.0 million was used for the
acquisition of Daily's as discussed below.
Cash from operating activities for 2005 increased $137.0 million
compared to 2004, primarily reflecting increased earnings of the
Pork and Marine segments. 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 discussed below, and as a result of improved
collections of receivables for the Power segment.
Cash and short-term investments as of December 31, 2004 increased
$38.5 million over December 31, 2003, reflecting cash generated
from operations. While cash from operating activities totaled
$194.1 million, $54.2 million was used for scheduled maturities
of long-term debt, $73.8 million was used to repay notes payable
to banks, and $33.6 million was used for capital expenditures.
Cash from operating activities for 2004 increased $102.4 million
compared to 2003, primarily reflecting increased earnings,
partially offset by the increased working capital needs primarily
from the increase in business, especially in the Commodity
Trading and Milling segment, and an additional special funding of
$14.3 million to Seaboard's qualified defined benefit pension
plan (see Note 10 to the Consolidated Financial Statements). For
the Commodity
10
Trading and Milling segment, the overall increase in trading
activity and commodity costs caused increases in accounts
receivable and inventories. Working capital needs also
increased for the Power segment as a result of continuing slow
collections of accounts receivable. Overall, the Pork segment
and, to a lesser degree, the Marine segment generated cash from
operating activities.
Acquisitions, Capital Expenditures and Other Investing Activities
During 2005 Seaboard invested $64.2 million in property, plant
and equipment, of which $8.1 million was expended in the Pork
segment, $13.8 million in the Commodity Trading and Milling
segment, $30.0 million in the Marine segment, $11.2 million in
the Sugar and Citrus segment and $1.1 million in the remaining
businesses. For the Commodity Trading and Milling segment, $10.3
million was spent to purchase a used bulk vessel and make
necessary improvements. For the Marine segment, $8.8 million was
spent to purchase two previously chartered containerized cargo
vessels and a crane, 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 were of a normal recurring nature
and primarily included replacements of machinery and equipment,
and general facility modernizations and upgrades.
The Pork segment is currently planning to expand its processed
meats capabilities by constructing a separate further processing
plant, primarily for bacon and sausage processing, at an
approximate cost of $40.0 million. Construction of this facility
is expected to begin during 2006 and to be completed in 2007 with
approximately $29.3 million to be spent in 2006. In addition,
the Pork segment is pursuing the construction of a processing
plant to utilize by-products from its Guymon processing plant to
produce biodiesel which will be marketed to third parties. This
plant will be completed in 2007 and its estimated to cost $18.5
million with approximately $11.1 million to be spent in 2006.
Triumph Foods has the option to participate in up to fifty
percent of this project and is in the process of reviewing its
participation.
The total 2006 capital expenditures budget is $116.7 million. In
addition to the projects detailed above, the Pork segment plans
to spend $23.7 million for improvement to existing hog
facilities, expansion of the further processing capacity acquired
from Daily's, upgrades to the Guymon processing plant and
additional facility upgrades and related equipment. The
Commodity Trading and Milling segment plans to spend $6.0 million
primarily for milling facility upgrades and related equipment.
The Marine segment has budgeted $34.5 million for additional
cargo carrying and handling equipment, expansion of port
facilities and to purchase containerized cargo vessels currently
chartered. The Sugar and Citrus segment plans to spend $9.5
million for improvements to the plantation and harvesting
equipment. The balance of $2.6 million is planned to be spent in
all other businesses. Management anticipates paying for these
capital expenditures from internally generated cash and the use
of available short-term investments. As of December 31, 2005
Seaboard was committed to spend $1.6 million to purchase
equipment and make facility improvements.
As discussed in Note 2 to the 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 working capital
adjustments of approximately $3.1 million, a 4.74% equity
interest in Seaboard Foods LP (formerly Seaboard Farms, Inc.)
valued at $44.5 million, a put right associated with the 4.74%
interest in Seaboard Foods LP valued at $6.7 million and $0.4
million of acquisition costs incurred. The cash payment was
funded with proceeds from the sale of short-term investments.
As discussed in Note 2 to the 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. Transactions in process at the date
of sale were completed by and were 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 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
11
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.
During 2004 Seaboard invested $33.6 million in property, plant
and equipment, of which $11.8 million was expended in the Pork
segment, $10.3 million in the Marine segment, $4.9 million in the
Commodity Trading and Milling segment, $5.5 million in the Sugar
and Citrus segment and $1.1 million in the remaining businesses.
The capital expenditures for 2004 were primarily of a normal
recurring nature which included replacements of machinery and
equipment, and general facility modernizations and upgrades.
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 the potential second processing plant
that management has since decided not to pursue at this time.
These capital expenditures exclude an increase in net fixed
assets in 2003 for hog production 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.
Also during 2003, Seaboard invested $7.7 million in the Marine
segment primarily for expansion and replacement of cargo
transportation and loading equipment, and facility improvements;
$4.4 million in the Sugar and Citrus segment primarily for
machinery and equipment, and improvements to the mill and
sugarcane fields; and $3.6 million in all other segments for
general modernization, mill expansion, and efficiency upgrades of
plant and equipment.
Financing Activities, Debt and Related Covenants
As a result of the one-time qualifying foreign intercompany
dividend paid, as discussed in Note 7 to the Consolidated
Financial Statements, during December 2005 Seaboard entered into
a new two-year committed credit facility totaling $50.0 million
and a new $50.0 million uncommitted credit line for a foreign
subsidiary in the Commodity Trading and Milling segment. In
addition, Seaboard entered into a new $25.0 million uncommitted
credit facility to finance the working capital needs of a foreign
subsidiary in the Commodity Trading and Milling segment. Also,
during the fourth quarter of 2005, Seaboard reduced its five year
committed credit facility from $200.0 million to $100.0 million
because of the current levels of cash and short-term investments
held by Seaboard. 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.
See Note 8 to the Consolidated Financial 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 Seaboard's ability to undertake additional
debt financings. As of December 31, 2005, Seaboard is in
compliance with all restrictive covenants relating to these
arrangements.
In the fourth quarter of 2005, Seaboard issued 6,313.34 shares to
its parent company, Seaboard Flour LLC, as a result of a tax
benefit of $8.3 million. See Note 12 to the Consolidated
Financial Statements for further discussion.
In January 2006, Seaboard paid $2.1 million to purchase the
equity of a VIE which was consolidated by Seaboard at December
31, 2005. This VIE owned certain facilities used in the Pork
segment's vertically integrated hog production. Non-controlling
interest related to this VIE on the consolidated balance sheet as
of December 31, 2005 was $1.1 million.
During 2004, the 10% minority interest owner of one of the power
barges located in the Dominican Republic exercised a put option
for the equity interest. See Note 2 to the Consolidated
Financial Statements for further discussion.
In conjunction with the 2003 purchase of hog production
facilities previously leased, Seaboard assumed bank debt of
$24.4 million. 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.
12
The following table represents a summary of Seaboard's available
borrowing capacity as of December 31, 2005. Borrowings
outstanding under committed and uncommitted lines as of
December 31, 2005 totaled $50.0 million and $42.9 million,
respectively. The $50.0 million borrowing under the two-year
committed line is classified in current liabilities at December
31, 2005 as Seaboard has the ability and intent to repay such
borrowings during the next year. Letters of credit of $56.5
million reduced Seaboard's borrowing capacity under its committed
credit lines primarily representing $42.7 million for Seaboard's
outstanding Industrial Development Revenue Bonds and $13.2
million related to insurance coverages.
Total amount
(Thousands of dollars) available
Long-term credit facilities - committed $150,000
Short-term uncommitted demand notes 79,926
Total borrowing capacity 229,926
Amounts drawn against lines 92,938
Letters of credit reducing borrowing availability 56,521
Available borrowing capacity at December 31, 2005 $ 80,467
Scheduled long-term debt maturities range from $12.0 million to
$63.3 million per year, or a total of $136.7 million, over the
next three years. Management believes Seaboard's current
combination of internally generated cash, liquidity, capital
resources and short-term borrowing capabilities will be adequate
for its existing operations and any currently known potential
plans for expansion of existing operations or business segments.
Management does, however, periodically review various
alternatives for future financings to provide additional
liquidity for future operating plans. Management intends to
continue seeking opportunities for expansion in the industries in
which Seaboard operates and, based on current liquidity and
available borrowing capacity, has no plans to pursue other
financing alternatives.
Contractual Obligations and Off-Balance-Sheet Arrangements
A summary of Seaboard's contractual cash obligations as of
December 31, 2005 is as follows:
Payments due by period
Less than 1-3 3-5 More than
(Thousands of dollars) Total 1 year years years 5 years
Vessel time-charter commitments $ 98,677 $ 65,080 $ 33,597 $ - $ -
Contract grower finishing
Agreements 132,222 11,996 23,832 23,722 72,672
Other operating lease payments 32,822 8,996 13,364 4,266 6,196
Total lease obligations 263,721 86,072 70,793 27,988 78,868
Long-term debt 262,478 61,415 75,245 49,287 76,531
Short-term notes payable 92,938 92,938 - - -
Other purchase commitments 312,734 237,582 75,152 - -
Total contractual cash obligations
and commitments $931,871 $478,007 $221,190 $ 77,275 $155,399
The Marine segment enters into contracts to time-charter vessels
for use in its operations. Historically, these commitments have
been short-term. However, as a result of increased demand for
vessels and increasing charter hire rates, this segment has
entered into long-term commitments. These agreements are
discussed further in Note 11 to the Consolidated Financial
Statements.
13
To support the operations of the Pork segment, Seaboard has
agreements in place with farmers to raise a portion of Seaboard's
hogs according to specifications. See Note 11 to the
Consolidated Financial Statements for further information.
Seaboard has entered into grain and feed ingredient purchase
contracts to support the live hog operations of the Pork segment
and has contracted for the purchase of additional hogs from third
parties. The Commodity Trading and Milling segment also enters
into commodity purchase contracts, primarily to support sales
commitments. 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 $2.7 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.
RESULTS OF OPERATIONS
Net sales for the year ended December 31, 2005 increased to
$2,688.9 million from $2,684.0 million in 2004 and $1,981.3
million for 2003. The increase in net sales in 2005 was
primarily the result of improved average rates and volumes for
marine cargo services, the acquisition of Daily's and, to a
lesser degree, improved international markets for the Pork
segment. Partially offsetting the increase was the sale of some
components of Seaboard's third party commodity trading
operations. The increase in net sales in 2004 was primarily the
result of increased commodity trading volumes and commodity
prices, higher market prices for pork products and improved
average rates for marine cargo service with increased volumes.
Operating income increased to $320.0 million in 2005, up from
$251.3 million in 2004 and $68.8 million in 2003. The 2005
improvement compared to 2004 primarily reflects the improved
rates and volumes in the Marine segment, lower feed costs and
improved international markets in the Pork segment and, to a
lesser extent, the acquisition of Daily's. Also impacting the
increase in operating income is the effect of the mark-to-market
of commodity futures and options in the Commodity Trading and
Milling segment increasing operating income $9.3 million in 2005
compared to 2004. The 2004 improvement compared to 2003
primarily reflects the higher market prices for pork products
along with the improved average rates and, to a lesser extent,
increased volumes for marine cargo services. Increased trading
volumes also contributed to the 2004 increase.
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 2004 and
2003 has been adjusted to reflect changes in the allocation of
administrative services by the corporate office as discussed in
Note 13 to the Consolidated Financial Statements.
Pork Segment
(Dollars in millions) 2005 2004 2003
Net sales $1,023.9 $ 961.6 $ 735.7
Operating income $ 182.7 $ 147.4 $ 26.4
Net sales for the Pork segment increased $62.3 million for the
year ended December 31, 2005 compared to 2004, primarily as a
result of the acquisition of Daily's, a processor of premium
sliced and pre-cooked bacon as discussed in Note 2 to the
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
sales price opportunities in international markets. The
increases were partially offset by lower prices for pork products
in the domestic markets.
14
Operating income increased $35.3 million for the year ended
December 31, 2005 compared with 2004 primarily as a result of
lower feed costs and, to a lesser extent, the acquisition of
Daily's, lower costs for third party hogs used for processing,
and a higher percentage of Seaboard-raised hogs processed which
cost less than third party hogs. In addition, the prior year
included an $8.1 million LIFO benefit whereas for 2005 LIFO was
virtually unchanged.
Management is unable to predict future market prices for pork
products or the effect on market prices from marketing the
increased volumes of pork products produced by Triumph Foods, the
cost of feed costs and third party hogs, or how long the
relatively strong overall market conditions will be sustained.
During 2005 and the last half of 2004, market prices for pork
products were unusually high compared to historic norms. History
has demonstrated that high market prices are not sustained over
long periods of time but rather rise and fall based on prevailing
market conditions. Overall, management expects this segment to
remain profitable during 2006 although lower than 2005.
Net sales for the Pork segment increased $225.9 million in 2004
compared to 2003 primarily as a result of higher domestic and
international market prices for pork products and, to a lesser
extent, higher sales volumes. The demand for pork products
remained strong for both domestic and international markets
throughout 2004 as a result of higher prices for competing
proteins, favorable export conditions and a weakened U.S. dollar.
Sales volumes increased as Seaboard operated additional weekend
processing shifts during 2004 to take advantage of the favorable
market conditions.
Operating income for the Pork segment increased $121.0 million in
2004 compared with 2003 primarily reflecting higher sales prices
and volumes discussed above, partially offset by higher costs for
third party hogs used for processing. Also contributing to the
improved profitability percentage was an increase in processing
of both the number and percentage of Seaboard-raised hogs, which
cost less than third party hogs in 2004. For 2004, operating
income also includes an $8.1 million LIFO benefit, reflecting
increases in the number of Seaboard-raised hogs over the prior
year, compared with a $3.8 million LIFO benefit in 2003. During
2004, Seaboard expensed $1.4 million for abandoned land
development costs for certain potential hog production sites and
a potential second plant site that Seaboard has decided not to
pursue at this time.
Commodity Trading and Milling Segment
(Dollars in millions) 2005 2004 2003
Net sales $ 835.7 $1,066.5 $ 667.9
Operating income $ 34.4 $ 29.3 $ 18.0
Income (loss) from foreign affiliates $ 8.1 $ 5.8 $ (0.4)
As discussed in Note 2 to the 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. 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 the sale were completed by
and the responsibility of Seaboard after the date of the 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 last two quarters of 2005 for the third
party commodity trading operations decreased $268.4 million,
compared to the last two quarters of 2004, primarily as a result
of the transaction.
Net sales for the Commodity Trading and Milling segment decreased
$230.8 million for the year ended December 31, 2005 compared to
2004. This decrease primarily reflects the sale of some
components of Seaboard's third party commodity trading operations
as discussed above partially offset by an increase in sales for
certain consolidated milling operations from improved local
operating conditions. As worldwide commodity price fluctuations
cannot be
15
predicted and as the impact of the sale transaction discussed
above is not determinable, management is unable to predict
future sales.
Operating income for this segment increased $5.1 million for 2005
compared to 2004. This increase primarily reflects the positive
fluctuation of $9.3 million in 2005 compared to 2004 of marking
to market derivative contracts, as discussed below, and $2.2
million of gains on derivative instruments sold in the sale
transaction as discussed above. The increase was also the result
of improved operations for certain consolidated milling
locations. The increase was partially offset by the lower sales
volume as a result of the sale discussed above and higher bad
debt expenses in 2005 compared to 2004. In addition, in prior
years Seaboard had entered into some long-term charter contracts
allowing it to take advantage of higher freight market rates
during 2004 which did not occur in 2005, increasing its overall
profitability percentage during 2004. Due to the uncertain
political and economic conditions in the countries in which
Seaboard operates, management is unable to predict future
operating results, but anticipates positive operating income for
2006.
While management believes its commodity futures and options and
foreign exchange contracts are economic hedges of its firm
purchase and sales contracts, Seaboard does not perform the
extensive record-keeping required to account for commodity
transactions as hedges for accounting purposes. 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 products are delivered to
customers, these mark-to-market adjustments will be primarily
offset by actual contract margins. Operating income for the year
ended December 31, 2005 includes commodity derivative gains of
$3.0 million compared to losses of $5.4 million for 2004 for
these mark-to-market adjustments. In addition, operating income
for 2005 includes foreign exchange contract gains of $0.9
million. During 2004, the foreign exchange contracts were
accounted for as hedges. See Note 9 to the Consolidated
Financial Statements for further discussion on accounting for
commodity derivatives. 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 above.
Income from foreign affiliates for the year ended December 31,
2005 improved $2.3 million from 2004. This improvement primarily
reflects improved local operating conditions. Based on the
uncertainty of local political and economic situations in the
countries in which the flour and feed mills operate, management
cannot predict future results.
Net sales for the Commodity Trading and Milling segment increased
$398.6 million for the year ended December 31, 2004 compared to
2003. This increase is primarily the result of higher trading
volumes to third parties from increased volumes in existing
markets and new market penetration, primarily for wheat, while
corn and soybean meal volumes were also higher. To a lesser
extent, volumes also increased to affiliates, primarily for
wheat. Also contributing to the increase in sales were higher
worldwide commodity prices and third party freight rates
generally recoverable in sales prices. However, commodity prices
began to decline during the last half of 2004 compared to
commodity prices during the first half of the year.
Operating income for this segment increased $11.3 million for
2004 compared to 2003 primarily reflecting the increased sales
volumes in the trading business discussed above. However, the
impact of mark-to-market accounting for commodity futures and
options contracts partially offset the improvement. While
management believes its commodity futures and options are
economic hedges of its firm purchase and sales contracts,
Seaboard does not perform the extensive record-keeping required
to account for commodity transactions as hedges for accounting
purposes. As a result, operating income for the year ended
December 31, 2004 includes losses of $5.4 million compared to
gains of $2.6 million for 2003 for these mark-to-market
adjustments. As products are delivered to customers, these mark-
to-market adjustments are primarily offset by actual contract
margins, assuming no further commodity price fluctuation. See
Note 9 to the Consolidated Financial Statements for further
discussion on accounting for commodity derivatives. In addition,
Seaboard had entered into some long-term charter contracts in
2003, allowing it to take advantage of higher freight market
rates during 2004, increasing its overall profitability
percentage.
Income from foreign affiliates for the year ended December 31,
2004 improved $6.2 million from 2003. This improvement primarily
reflects improved operating results from most milling operations
generally as a result of improved local market conditions.
16
Marine Segment
(Dollars in millions) 2005 2004 2003
Net sales $638.3 $498.5 $409.0
Operating income $ 90.9 $ 63.9 $ 8.5
Net sales for the Marine segment increased $139.8 million for the
year ended December 31, 2005, compared to 2004 as a 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.
Operating income for the Marine segment increased by
$27.0 million over 2004, primarily reflecting the increased rates
and volumes discussed above, partially offset by higher charter
hire expenses, fuel costs and, to a lesser extent, inland
transportation costs. 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
in 2006 although lower than 2005.
Net sales for the Marine segment increased $89.5 million for the
year ended December 31, 2004, compared to 2003 as a result of
higher average cargo rates, especially in the last half of 2004,
and higher cargo volumes. Average cargo rates for 2004 increased
over 2003 reflecting improved market conditions and better cargo
mixes in certain markets. Higher cargo volumes were experienced
in most markets as a result of improved economic activities
within the countries served by this segment. This was also true
for the Venezuelan market, which had experienced significant
decreases during the past two years. Operating income for the
Marine segment increased by $55.4 million over 2003, primarily
reflecting the higher average cargo rates and volumes discussed
above.
Sugar and Citrus Segment
(Dollars in millions) 2005 2004 2003
Net sales $89.0 $72.9 $70.7
Operating income $11.9 $12.2 $18.7
Earnings (loss) from foreign affiliates $ 0.1 $ 0.7 $(0.3)
Net sales for the Sugar and Citrus segment increased $16.1
million for the year ended December 31, 2005 compared to 2004.
The increase was due to higher export sales volumes of sugar
primarily from increased purchases of sugar from third parties
for resale and, to a lesser extent, higher juice sales and
increased sugar production. Although not able to predict future
sugar prices, management currently does not expect Argentine
sugar prices to increase during 2006 as governmental authorities
are attempting to control inflation by limiting the price of
basic commodities, including sugar. However, Seaboard expects to
maintain its historical sales volume to Argentinean customers.
Operating income decreased $0.3 million during 2005 compared to
2004 primarily as a result of operating losses from lower margins
for the citrus operation. Partially offsetting the decrease was
the higher juice sales and higher sugar sales discussed above,
although increased sugar production costs and higher costs of
sugar purchases lowered gross margin on a percentage basis.
Management expects positive operating income for 2006.
Net sales for the Sugar and Citrus segment increased $2.2 million
for the year ended December 31, 2004 compared to 2003. The
increase was due to higher citrus trading volumes during the last
half of 2004. This increase was partially offset by lower sugar
prices during 2004 resulting from the abundant sugar harvests in
Argentina during the last two years which resulted in large sugar
supplies. Operating income decreased $6.5 million during 2004
compared to 2003 primarily as a result of lower 2004 sugar prices
as discussed above, and, to a lesser extent, losses incurred with
the citrus trading business.
17
Power Segment
(Dollars in millions) 2005 2004 2003
Net sales $77.7 $56.4 $69.6
Operating income $ 9.6 $ 4.4 $ 7.0
Net sales for the Power segment increased $21.3 million for the
year ended December 31, 2005 compared to 2004 primarily
reflecting higher rates and, to a lesser extent, increased
kilowatt hour production. Rates have increased during 2005
primarily as a result of higher fuel costs, a component of
pricing. While Seaboard has entered into short-term and long-
term sales contracts for most of its production capacity, at
times during 2004 and the first half of 2005 management curtailed
production to avoid selling power in the spot market, a market at
times which has created unfavorable collection concerns with
certain customers. During the third quarter of 2005, management
began selling additional amounts in the spot market based on more
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 increased $5.2 million during 2005 compared to
2004 primarily due to lower commissions and bad debt expenses in
2005, partially offset by higher fuel costs in excess of
increased rates. 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 and the spot
market remains fairly stable, management expects to remain
profitable for 2006.
Based on prior year liquidity problems within the Dominican
Republic (DR) power sector where Seaboard's Power segment
operates, certain amounts of prior years' receivables have not
been fully collected from government-owned distribution companies
and other companies that must collect from the government to make
payments on their accounts. As of December 31, 2005, Seaboard's
net receivable exposure from customers with significant past due
balances totaled $13,620,000, including $8,866,000 classified in
other long-term assets on the Consolidated Balance Sheet. The DR
Government is working with businesses in the power sector to
create a plan for companies to recover past due amounts although
it is uncertain if Seaboard will be able to fully collect all
such amounts.
Net sales for the Power segment decreased $13.2 million for the
year ended December 31, 2004 compared to 2003 primarily due to
lower production. Periodically during 2004, Seaboard curtailed
production due to management's concerns about the collectibility
of accounts receivable. In addition, Seaboard did not record
approximately $1.9 million of spot market sales in the second
half of 2004 as collectibility was not reasonably assured.
Operating income decreased $2.6 million during 2004 compared to
2003 primarily due to the lower production discussed above. In
addition to lower production, commission expenses increased by
$1.3 million in 2004. As discussed in Note 2 to the Consolidated
Financial Statements, during 2004 Seaboard made a commission
payment of $2.0 million to terminate a business relationship.
These decreases were partially offset by reduced bad debt
expense. During 2003, Seaboard recorded $4.5 million of bad debt
expense as a result of the liquidity problems discussed above.
All Other Segments
(Dollars in millions) 2005 2004 2003
Net sales $ 24.4 $ 28.0 $ 28.5
Operating income $ 2.6 $ 3.2 $ 2.1
Loss from foreign affiliates $ (7.9) $ (8.5) $(20.6)
18
Net sales and operating income decreased primarily as a result of
discontinuing a portion of Seaboard's transportation business
during the second half of 2005 and combining the remaining
related party portion of the business with the Pork segment. For
2006, management expects operating income for All Other Segments
to remain positive. Operating income for all other businesses
increased for the year ended December 31, 2004 compared to 2003
which primarily reflects improved operations for the pepper
processing business.
The loss from foreign affiliate reflects Seaboard's share of
losses from its equity method investment in a Bulgarian wine
business (the Business). In 2005 Seaboard recorded 100% of the
losses from the Business compared to 37% for the first three
quarters of 2004 and 73% for the last quarter of 2004. The loss
in 2004 for the 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 the Business during 2006. See Note 13 to
the Consolidate Financial Statements for further discussion of
the Business and Seaboard's intention to sell the Business.
The loss from foreign affiliates in 2004 improved from 2003
primarily because Seaboard sold its equity method investment in
Fjord Seafood ASA (Fjord) during the fourth quarter of 2003 as
discussed below, leaving only results from its investment in the
Business referred to above in 2004. As a result of sustained
losses, during 2004 Seaboard's common stock investment in the
Business was reduced to zero, and Seaboard began applying losses
against its remaining investments, consisting of preferred stock
and debt, based on the change in Seaboard's claim on the
Business' book value. Accordingly, Seaboard increased its share
of losses from this Business from 37% to 73% in the third quarter
of 2004. In the fourth quarter of 2004, Seaboard recognized a
$3.6 million decline in value considered other than temporary in
its investment in this Business as a charge to losses from
foreign affiliates. See Note 13 to the Consolidated Financial
Statements for further discussion. The 2004 losses from the
Business also include Seaboard's share of inventory write-downs
totaling $0.8 million. Losses for the Business in 2003 totaled
$5.0 million, including $1.5 million for Seaboard's share of
losses from a troubled debt restructuring, net of gains from the
sale of assets as discussed in Note 13 to the Consolidated
Financial Statements.
Seaboard's share of losses from Fjord in 2003 totaled
$15.5 million, including $12.4 million related to asset
impairment charges incurred by Fjord. 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. See Note 13 to the Consolidated Financial
Statements for further discussion.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the year
ended December 31, 2005 increased by $11.5 million to $139.3
million over 2004 primarily due to increases in the Marine
segment reflecting increased costs related to the volume growth
of this business, the acquisition of Daily's in the Pork segment
and increases in the Commodity Trading and Milling segment
primarily from higher bad debt expense and, to a lesser extent,
higher compensation costs as a result of increased profitability
for the year. Partially offsetting this increase were lower
commission expenses and bad debt expense for the Power segment.
As a percentage of revenues, SG&A increased to 5.2% for 2005
compared to 4.8% for 2004 as a result of the sale of some
components of Seaboard's third party commodity trading operations
discussed above, which had a high volume of revenues compared to
SG&A costs.
Selling, general and administrative (SG&A) expenses increased
$9.7 million to $127.7 million for the year ended
December 31, 2004 compared to 2003. The increase is primarily
due to costs in the Marine and Commodity Trading and Milling
segments related to the growth of these businesses. Partially
offsetting this increase were lower bad debt expenses in the
Power and Commodity Trading and Milling segments. As a
percentage of revenues, SG&A decreased to 4.8% for 2004 compared
to 6.0% for 2003 as a result of increased sales in the Pork,
Commodity Trading and Milling, and Marine segments.
Interest Expense
Interest expense totaled $22.2 million, $26.4 million and
$26.8 million for the years ended December 31, 2005, 2004 and
2003, respectively. Interest expense decreased for 2005 compared
to 2004, primarily reflecting a lower average level of short-term
and long-term borrowings outstanding during 2005. Interest
expense decreased slightly during the year ended December 31,
2004 compared to 2003, as Seaboard repaid a significant portion
of the notes payable to banks with cash from operations during
2004.
19
Interest Income
Interest income totaled $14.2 million, $8.1 million and
$2.5 million for the years ended December 31, 2005, 2004 and
2003, respectively. The increase for 2005 primarily reflects the
higher level of average funds invested during 2005, an increase
in interest received on outstanding customer receivable balances
in the Power segment and, to a lesser extent, higher interest
rates on funds invested. The increase during 2004 primarily
reflects larger amounts of interest received from past due
customer accounts receivable in the Power and Commodity Trading
and Milling segments and, to a lesser extent, a higher level of
short-term investments during 2004.
Minority and Other Noncontrolling Interests
Minority and other noncontrolling interests expense increased
$3.9 million in 2005 compared to 2004, primarily reflecting the
acquisition of Daily's as discussed in Note 2.
Foreign Currency Gains (Losses)
Foreign currency gains (losses) totaled $(1.0) million, $1.6
million and $(8.0) million for the years ended December 31, 2005,
2004 and 2003, respectively. The fluctuations primarily relates
to fluctuations in value of the Dominican Republic (DR) peso
compared to the U.S. dollar incurred by the Power division
related to its peso-denominated net assets, primarily trade
receivables.
Loss from the Sale of a Portion of Operations
As discussed in Note 2 to the 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.
Other Investment Income, Net
Other investment income, net totaled $2.0 million, $1.6 million
and $21.4 million for the years ended December 31, 2005, 2004 and
2003, 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.
Miscellaneous, Net
Miscellaneous, net totaled $5.7 million, $(3.6) million and
$7.4 million for the years ended December 31, 2005, 2004 and
2003, respectively. Miscellaneous, net includes the impact of
changing interest rates on interest rate swap agreements which
mature in 2011. Seaboard pays a weighted average fixed rate of
5.51% on the notional amount of $150.0 million and receives a
variable interest rate in return. These contracts are marked-to-
market. During 2005, Seaboard recorded a gain of $3.0 million
compared to losses of $4.6 million, and $2.3 million in 2004 and
2003, respectively, related to these swaps, reflecting the higher
contracted fixed rate compared to variable rates during those
years. 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.
Also included in 2005 is income of $1.3 million of put option
value change as discussed in Note 2 to the Consolidated Financial
Statements. Also included in 2004 and 2003 are gains of $0.7
million, and $7.0 million, respectively, of proceeds from
settlements of antitrust litigation, primarily arising out of
purchases of vitamins and methionine, feed additives used by
Seaboard.
Income Tax Expense
The effective tax rate decreased for 2005 compared to 2004. The
decrease is primarily as a result of changes to the treatment of
shipping income by the U.S. taxing authorities and the favorable
resolution of certain tax issues with the United States and
Puerto Rico authorities. Partially offsetting this decrease was
tax expense related to a one-time election to repatriate
permanently invested foreign earnings. See Note 7 to the
Consolidated Financial Statements for additional discussion of
these items.
The effective tax rate decreased for 2004 compared to 2003. The
decrease is primarily related to a settlement with the Internal
Revenue Service, resulting in a tax benefit of $14.4 million
which was recognized in the fourth quarter of 2004. See Note 7
to the Consolidated Financial Statements for further discussion.
20
During 2003, Seaboard generated income from foreign operations,
which it planned 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.
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.
In November 2004, the Financial Accounting Standard's Board
issued Statement of Financial Accounting Standards No. 151,
Inventory Costs (SFAS 151). 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 151 requires that those items
be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal". In addition, SFAS 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 151 is not
expected to have a material impact on Seaboard's financial
position or net earnings.
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. Management has reviewed these
critical accounting estimates with the Audit Committee of the
Board of Directors. These critical accounting policies include:
Allowance for doubtful accounts - Seaboard primarily uses a
specific identification approach, in management's best judgment,
to evaluate the adequacy of this reserve for estimated
uncollectible receivables as of the consolidated balance sheet
date. Changes in estimates, developing trends and other new
information can have a material effect on future evaluations.
Furthermore, Seaboard's receivables are heavily weighted towards
foreign receivables ($157.0 million or 68.1% at
December 31, 2005), 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 the Power segment which operates in the
Dominican Republic (DR), collection patterns 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
events in the DR. Bad debt expense for the years ended December
31, 2005, 2004 and 2003 was $4.0 million, $2.5 million and $8.5
million, respectively. 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 to be other than temporary when management believes
conditions warrant such an assessment. If management believes
conditions warrant an assessment, such assessment encompasses
various methods to determine net realizable value, including
methods based on the probability weighting of various future
21
projected net cash flow scenarios expected to be generated by the
long-lived assets of the entity, and the resulting ability of
that entity to repay its debt and equity based on priority,
probability weighting of various future projected net cash flow
scenarios expected to be realized through the sale of the
ownership interest of the investment, or other methods to assess
the fair value of the investment. For example, as more fully
discussed in Note 13 to the Consolidated Financial Statements, in
2004 Seaboard incurred a $3.6 million charge to earnings for a
decline in value considered other than temporary for its
investment in a Bulgarian wine business. The fair value of this
investment as of December 31, 2005 was based on probability
weightings of current sale negotiation information and available
fair value information for the remaining assets. These projected
cash flows and other methods 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, 2005, the total
investment in and advances to foreign affiliates was $40.0
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 or
favorable impact on the financial statements. As of
December 31, 2005, Seaboard has deferred tax assets of
$20.4 million, net of the valuation allowance of $41.2 million,
and deferred tax liabilities of $135.4 million. For the years
ended December 31, 2005, 2004 and 2003, income tax expense
included $5.4 million, $40.1 million and $11.9 million for
deferred taxes to federal, foreign, state and local taxing
jurisdictions.
Contingent liabilities - Management has evaluated Seaboard's
various exposures, including environmental exposures of its Pork
segment, 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, 2005. 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 and other inventories, 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
offsetting 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, pork bellies and hog
futures are used to manage risks of fluctuating prices of pork
product inventories and related future sales, and fuel oil
derivatives may be used to lock in future vessel bunker costs.
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. From time to time,
Seaboard may enter into speculative derivative transactions
related to its market risks. 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
22
exchange contracts decreased considerably with the sale of a
portion of the third party trading operations as discussed in
Note 2.
Inventories that are sensitive to changes in commodity prices,
including carrying amounts at December 31, 2005 and 2004, 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 primarily 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. 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, 2005.
Contract Volumes Wtd.-avg. Fair Value
Trading: Quantity Units Price/Unit Maturity (000's)
Futures Contracts:
Corn purchases-long 8,690,460 bushels $ 2.59 2006 $3,695
Corn sales-short 5,992,554 bushels 4.35 2006 (548)
Wheat purchases-long 2,888,710 bushels 3.75 2006 633
Wheat sales-short 4,225,000 bushels 3.63 2006 (75)
Soybean meal purchases-
long 2,800 tons 176.77 2006 55
Soybean meal sales-
short 64,600 tons 125.05 2006 (959)
Hog purchases-long 760,000 pounds .64 2006 36
Hog sales-short 1,200,000 pounds .70 2006 3
Pork bellies purchases-
long 720,000 pounds .86 2006 (26)
Options Contracts:
Soybean puts written-
long 150,000 bushels $ .11 2006 $ 10
At December 31, 2004, Seaboard had net trading contracts to
purchase (sell) 7,553,000 bushels of grain with a fair value of
($383,000), 98,600 tons of meal with a fair value of
($1,592,000), 1,500 tons of fuel oil with a fair value of
($52,000) and (2,100,000) pounds of soybean oil with a fair value
of $11,000.
The table below provides information about the forward currency
exchange agreements entered into by Seaboard's commodity trading
business and financial instruments sensitive to foreign currency
exchange rates at December 31, 2005. As more fully discussed in
Note 1 and Note 9 to the Consolidated Financial Statements,
through December 31, 2004 the majority of these forward exchange
agreements were accounted for as hedges. As of January 1, 2005,
Seaboard discontinued accounting for all forward exchange
agreement as hedges. The information below is presented in U.S.
dollar equivalents and the majority of the contracts mature
through 2006. The table presents the contract amounts in fair
values and weighted average contractual exchange rate.
23
December 31, 2005 Contract
(Dollars in thousands) Amounts Fair Values
Trading:
Forward exchange agreements (receive $U.S.
/pay South African rand (ZAR)) $57,854 $(1,057)
Weighted average contractual exchange rates:
Forward exchange agreements (receive $U.S./pay ZAR) 6.47
At December 31, 2004, Seaboard had net agreements to exchange the
equivalent of $98.5 million of South African rand at an average
contractual exchange rate of 6.14 ZAR to one U.S. dollar and a
fair value of $(6.6) million and $0.8 million of euros at an
average rate of 0.77 euro to one U.S. dollar and a fair value of
less than $0.1 million.
The table below provides information about Seaboard's non-trading
financial instruments sensitive to changes in interest rates at
December 31, 2005. For debt obligations, the table presents
principal cash flows and related weighted average interest rates
by expected maturity dates. At December 31, 2005, long-term debt
included foreign subsidiary obligations of $2.0 million
denominated in CFA francs (a currency used in several central
African countries), $0.9 million payable in Argentine pesos, and
$0.6 million denominated in Mozambique metical. At
December 31, 2004, long-term debt included foreign subsidiary
obligations of $2.4 million denominated in CFA francs,
$1.9 million payable in Argentine pesos, and $0.8 million
denominated in Mozambique metical. 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) 2006 2007 2008 2009 2010 Thereafter Total
Long-term debt:
Fixed rate $61,104 $63,264 $11,981 $47,285 $ 2,002 $34,731 $220,367
Average interest rate 4.71% 4.49% 6.60% 6.23% 10.94% 7.29% 5.54%
Variable rate $ 311 $ - $ - $ - $ - $41,800 $ 42,111
Average interest rate 7.00% - - - - 3.60% 3.63%
Non-trading financial instruments sensitive to changes in
interest rates at December 31, 2004 consisted of fixed rate long-
term debt totaling $281.2 million with an average interest rate
of 5.82%, and variable rate long-term debt totaling $42.1 million
with an average interest rate of 2.11%.
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, 2005, the weighted
average fixed rate payable was 5.51% and the aggregate fair value
of the contracts at December 31, 2005 of $(5.3) million was
recorded in accrued financial derivative liabilities. As of
December 31, 2004, these agreements had a net fair value of
$(12.4) million.
24
Management's Responsibility for Consolidated Financial Statements
The management of Seaboard Corporation and its consolidated
subsidiaries (Seaboard) is responsible for the preparation of its
consolidated financial statements and related information
appearing in this report. Management believes that the
consolidated financial statements fairly present Seaboard's
financial position and results of operations in conformity with
U.S. generally accepted accounting principles and necessarily
includes amounts that are based on estimates and judgments which
it believes are reasonable based on current circumstances with
due consideration given to materiality.
Management relies on a system of internal controls over financial
reporting that is designed to provide reasonable assurance that
assets are safeguarded, transactions are executed in accordance
with company policy and U.S. generally accepted accounting
principles, and are properly recorded, and accounting records are
adequate for preparation of financial statements and other
information and disclosures. 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.
All internal control systems, no matter how well designed, have
inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from human
failures. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
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
registered public accounting firm to review the scope and results
of audits. Both the internal auditors and the registered public
accounting firm have unrestricted access to the audit committee
with or without the presence of management.
The consolidated financial statements have been audited by the
independent registered public accounting firm of KPMG LLP. Their
responsibility is to examine records and transactions related to
the consolidated financial statements to the extent required by
the standards of the Public Company Accounting Oversight Board.
KPMG has rendered their opinion that the consolidated financial
statements are fairly presented, in all material respects, in
conformity with U.S. generally accepted accounting principles.
Their report is included herein.
Management's Report on Internal Control over Financial Reporting
The management of Seaboard Corporation and its consolidated
subsidiaries (Seaboard) is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f).
Seaboard completed the acquisition of Daily's during the third
quarter of 2005, and management excluded from its assessment of
the effectiveness of Seaboard Corporation's internal control over
financial reporting as of December 31, 2005, Daily's internal
control over financial reporting associated with total assets of
$101,588,000, or 5.6%, and total revenues of less than 3.0% of
Seaboard's consolidated revenues included in the consolidated
financial statements of Seaboard as of and for the year ended
December 31, 2005.
Except for as discussed above, under the supervision and with the
participation of management and its Internal Audit Department,
Seaboard conducted an evaluation of the effectiveness of its
internal control over financial reporting based on the framework
in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on its evaluation under the framework in Internal
Control - Integrated Framework, management concluded that
Seaboard's internal control over financial reporting was
effective as of December 31, 2005.
Seaboard's registered independent public accounting firm, that
audited the consolidated financial statements included in the
annual report, have issued an audit report on management's
assessment of Seaboard's internal control over financial
reporting. Their report is included herein.
25
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Seaboard Corporation:
We have audited the accompanying consolidated balance sheets of
Seaboard Corporation and subsidiaries (the Company) as of
December 31, 2005 and 2004, 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, 2005.
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 standards of the
Public Company Accounting Oversight Board (United States). 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, 2005 and 2004, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
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.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Seaboard Corporation's internal control over
financial reporting as of December 31, 2005, based on criteria
established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 6, 2006 expressed
an unqualified opinion on management's assessment of, and the
effective operation of, internal control over financial
reporting.
/s/KPMG LLP
Kansas City, Missouri
March 6, 2006
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Seaboard Corporation:
We have audited management's assessment, included in the
accompanying Management's Report on Internal Control Over
Financial Reporting, that Seaboard Corporation maintained
effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Seaboard Corporation's management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of
the Company's internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about
26
whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Seaboard Corporation
maintained effective internal control over financial reporting as
of December 31, 2005, is fairly stated, in all material respects,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Also, in our opinion, Seaboard
Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31,
2005, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Seaboard Corporation acquired Daily's during the third quarter of
2005 and management excluded from its assessment of the
effectiveness of Seaboard Corporation's internal control over
financial reporting as of December 31, 2005, Daily's internal
control over financial reporting associated with total assets of
$101,588,000, or 5.6%, and total revenues of less than 3.0% of
the Company's consolidated revenues included in the consolidated
financial statements of the Company as of and for the year ended
December 31, 2005. Our audit of internal control over financial
reporting of Seaboard Corporation also excluded an evaluation of
the internal control over financial reporting of Daily's.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Seaboard Corporation and
subsidiaries as of December 31, 2005 and 2004, 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, 2005, and our report dated March 6, 2006 expressed
an unqualified opinion on those consolidated financial
statements. Our report dated March 6, 2006 also contains an
explanatory paragraph that states that the Company adopted
Statement of Financial 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
March 6, 2006
27
SEABOARD CORPORATION
Consolidated Statement of Earnings
Years ended December 31,
(Thousands of dollars except per share amounts) 2005 2004 2003
Net sales:
Products $1,950,896 $2,088,030 $1,474,101
Service revenues 660,313 539,564 437,617
Other 77,685 56,386 69,622
Total net sales 2,688,894 2,683,980 1,981,340
Cost of sales and operating expenses:
Products 1,654,390 1,844,693 1,362,904
Services 511,394 416,132 379,681
Other 63,793 44,177 51,934
Total cost of sales and operating
expenses 2,229,577 2,305,002 1,794,519
Gross income 459,317 378,978 186,821
Selling, general and administrative expenses 139,272 127,724 118,035
Operating income 320,045 251,254 68,786
Other income (expense):
Interest expense (22,165) (26,406) (26,847)
Interest income 14,186 8,132 2,520
Income/(loss) from foreign affiliates 362 (2,045) (21,274)
Minority and other noncontrolling interests (4,521) (625) (332)
Foreign currency gain/(loss), net (1,032) 1,616 (7,965)
Loss from the sale of a portion of operations (1,748) - -
Other investment income, net 1,962 1,629 21,440
Miscellaneous, net 5,723 (3,644) 7,393
Total other expense, net (7,233) (21,343) (25,065)
Earnings before income taxes and cumulative
effect of changes in accounting principles 312,812 229,911 43,721
Income tax expense (46,150) (61,815) (14,747)
Earnings before cumulative effect of changes
in accounting principles 266,662 168,096 28,974
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 $ 266,662 $ 168,096 $ 31,842
Net earnings per share before cumulative
effect of changes in accounting principles $ 212.20 $ 133.94 $ 23.08
Cumulative effect of changes in accounting
for asset retirement obligations,
drydock accruals, and variable interest
entities - - 2.29
Basic earnings per common share $ 212.20 $ 133.94 $ 25.37
Diluted earnings per share before
cumulative effect of changes in accounting
principles $ 211.94 $ 133.94 $ 23.08
Cumulative effect of changes in accounting
for asset retirement obligations, drydock
accruals, and variable interest entities - - 2.29
Diluted earnings per common share $ 211.94 $ 133.94 $ 25.37
Weighted average shares outstanding
Basic 1,256,645 1,255,054 1,255,054
Diluted 1,258,202 1,255,054 1,255,054
Dividends declared per common share $ 3.00 $ 3.00 $ 3.00
Proforma amounts assuming changes in
accounting for asset retirement
obligations, drydock accruals, and
variable interest entities were
applied retroactively:
Net earnings $ - $ - $ 28,800
Basic and diluted earnings per common
share $ - $ - $ 22.95
See accompanying notes to consolidated financial statements.
28
SEABOARD CORPORATION
Consolidated Balance Sheets
December 31,
(Thousands of dollars except per share amounts) 2005 2004
Assets
Current assets:
Cash and cash equivalents $ 34,622 $ 14,620
Short-term investments 377,874 119,259
Receivables:
Trade 171,044 199,253
Due from foreign affiliates 45,240 49,038
Other 22,895 12,362
239,179 260,653
Allowance for doubtful accounts (16,155) (14,524)
Net receivables 223,024 246,129
Inventories 331,133 301,049
Deferred income taxes 9,743 14,341
Other current assets 70,814 48,040
Total current assets 1,047,210 743,438
Investments in and advances to foreign affiliates 39,992 38,001
Net property, plant and equipment 626,580 603,382
Goodwill 28,372 -
Intangible assets, net 30,120 -
Other assets 44,047 51,873
Total Assets $1,816,321 $1,436,694
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 92,938 $ 1,789
Current maturities of long-term debt 61,415 60,756
Accounts payable 112,177 83,506
Accrued compensation and benefits 61,466 50,081
Income taxes payable 2,407 29,660
Accrued voyage costs 30,801 25,134
Accrued financial derivative liabilities 6,368 19,445
Other accrued liabilities 51,817 38,524
Total current liabilities 419,389 308,895
Long-term debt, less current maturities 201,063 262,555
Deferred income taxes 124,749 125,559
Other liabilities 57,216 44,865
Total non-current and deferred liabilities 383,028 432,979
Minority and other noncontrolling interests 36,034 2,138
Commitments and contingent liabilities
Stockholders' equity:
Common stock of $1 par value. Authorized 4,000,000
shares; issued and outstanding 1,261,367 and
1,255,054 shares 1,261 1,255
Additional paid-in capital 21,574 -
Accumulated other comprehensive loss (53,025) (53,741)
Retained earnings 1,008,060 745,168
Total stockholders' equity 977,870 692,682
Total Liabilities and Stockholders' Equity $1,816,321 $1,436,694
See accompanying notes to consolidated financial statements.
29
SEABOARD CORPORATION
Consolidated Statement of Cash Flows
` Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Cash flows from operating activities:
Net earnings $ 266,662 $168,096 $ 31,842
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 65,106 64,620 64,203
Loss (income) from foreign affiliates (362) 2,045 21,274
Other investment income, net (1,962) (1,629) (21,440)
Foreign currency exchange gains (25) (229) (3,775)
Cumulative effect of accounting changes, net - - (2,868)
Minority and noncontrolling interest 4,521 625 332
Loss from the sale of a portion of operations 1,748 - -
Deferred income taxes 5,371 39,566 7,773
Loss (gain) from sale of fixed assets (2,081) (1,350) 1,280
Changes in current assets and liabilities,
net of portion of operations sold and business
acquired:
Receivables, net of allowance 37,247 (70,133) 14,067
Inventories (46,283) (18,744) (28,983)
Other current assets (25,417) (12,266) 12,039
Current liabilities, exclusive of debt 15,678 30,851 (7,634)
Other, net 10,929 (7,357) 3,581
Net cash from operating activities 331,132 194,095 91,691
Cash flows from investing activities:
Purchase of short-term investments (819,643) (317,479) (88,453)
Proceeds from the sale of short-term
investments 561,291 256,448 51,246
Proceeds from the maturity of short-term
investments - - 165
Proceeds from disposition of investment in
foreign affiliate - - 37,390
Proceeds from the sale of a portion of
operations 26,471 - -
Acquisition of business (47,993) - -
Investments in and advances to foreign
affiliates, net (399) 3,037 (1,388)
Capital expenditures (64,241) (33,622) (31,472)
Proceeds from the sale of fixed assets 4,933 9,254 10,054
Other, net 3,988 368 436
Net cash from investing activities (335,593) (81,994) (22,022)
Cash flows from financing activities:
Notes payable to banks, net 91,149 (73,775) (548)
Principal payments of long-term debt (60,580) (54,236) (52,922)
Repurchase of minority interest in a controlled
subsidiary (762) (5,000) -
Dividends paid (3,770) (3,765) (3,765)
Bond construction fund - 1,289 654
Distributions to minority and noncontrolling
interest (2,073) (232) (1,639)
Other, net - (1,125) 51
Net cash from financing activities 23,964 (136,844) (58,169)
Effect of exchange rate change on cash 499 1,986 2,635
Net change in cash and cash equivalents 20,002 (22,757) 14,135
Cash and cash equivalents at beginning of year 14,620 37,377 23,242
Cash and cash equivalents at end of year $ 34,622 $ 14,620 $ 37,377
See accompanying notes to consolidated financial statements.
30
SEABOARD CORPORATION
Consolidated Statement 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, 2003 $ 1,255 $ - $ - $(67,284) $ 552,760 $486,731
Comprehensive income
Net earnings 31,842 31,842
Other comprehensive income net
of income taxes 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
Comprehensive income
Net earnings 168,096 168,096
Other comprehensive income net
of income taxes of $4,329:
Foreign currency translation
adjustment 2,504 2,504
Unrealized gain on investments 243 243
Unrecognized pension cost 5,397 5,397
Unrealized loss on cash flow hedges (158) (158)
Amortization of deferred
gains on interest rate swaps (200) (200)
Comprehensive income 175,882
Dividends on common stock (3,765) (3,765)
Balances, December 31, 2004 1,255 - - (53,741) 745,168 692,682
Comprehensive income
Net earnings 266,662 266,662
Other comprehensive income net
of income tax benefit of $606:
Foreign currency translation
adjustment 757 757
Unrealized gain on investments 671 671
Unrecognized pension cost (666) (666)
Unrealized gain on cash flow hedges 155 155
Amortization of deferred
gains on interest rate swaps (201) (201)
Comprehensive income 267,378
Issuance of 6,313 shares of common stock
to Parent 6 8,311 8,317
Excess of fair value over book value
of equity in subsidiary issued to
a third party 13,263 13,263
Dividends on common stock (3,770) (3,770)
Balances, December 31, 2005 $ 1,261 $ - $21,574 $(53,025) $1,008,060 $977,870
<FN>
See accompanying notes to consolidated financial statements.
31
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
70.9% 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 foreign 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, domestic equity securities 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
generally do not bear interest. The Power segment, however,
collects interest on certain past due accounts and the
Commodity Trading and Milling segment provides extended
payment terms for certain customers and/or markets due to
local business conditions. 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 segment, 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, fresh
pork product and related materials. All other inventories,
including further processed pork products, 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.
Goodwill and Other Intangible Assets
Goodwill and other indefinite-life intangible assets are
evaluated annually for impairment at the quarter-end closest
to the anniversary date of the acquisition. Separable
intangible assets with finite lives are amortized over their
useful lives. Management believes there is no significant
exposure to a loss from impairment of acquired goodwill and
other intangible assets as of December 31, 2005.
32
Deferred Grant Revenue
Included in other liabilities at December 31, 2005 and 2004
is $8,164,000 and $8,587,000, 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.
However, in the future as these timing differences reverse,
a lower statutory tax rate may apply pursuant to the
provisions for domestic manufacturers of the American Jobs
Creation Act of 2004. In accordance with the Financial
Accounting Standards Board Staff Position No. 109-1,
Application of FASB Statement No. 109, "Accounting for
Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of
2004", Seaboard will recognize the benefit or cost of this
change in the future.
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 and the sales price
is fixed or determinable. Revenues from all other
commercial exchanges are recognized at the time products are
shipped or services rendered, the customer takes ownership
and assumes risk of loss, collection is reasonably assured
and the sales price is fixed or determinable.
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.
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 weighted
average shares outstanding during the period. Basic and
diluted earnings per share are different for the year ended
December 31, 2005 as a result of the issuance of shares to
the Parent Company in the fourth quarter of 2005. See Note
12 for further discussion. Basic and diluted earnings per
share are the same for the years ended December 31, 2004 and
2003.
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
$31,006,000 and $31,866,000 at December 31, 2005 and 2004,
respectively. The amounts paid for interest and income
taxes are as follows:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Interest (net of amounts capitalized) $23,116 $26,179 $26,891
Income taxes 68,243 11,752 3,039
33
Supplemental Noncash 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:
Year ended
(Thousands of dollars) December 31, 2005
Decrease in net working capital $ 28,055
Decrease in fixed assets 76
Decrease in other assets 88
Loss on the sale of a portion of operations (1,748)
Net proceeds from sale $ 26,471
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:
Year ended
(Thousands of dollars) December 31, 2005
Increase in net working capital $ 11,430
Increase in fixed assets 28,798
Increase in intangible assets 30,800
Increase in goodwill 28,372
Increase in non-controlling interest (31,225)
Increase in other non-controlling interest (219)
Increase in put option value (6,700)
Increase in additional paid-in capital (13,263)
Cash paid $ 47,993
In the fourth quarter of 2005, Seaboard issued 6,313.34
shares to its Parent Company as a result of a tax benefit of
$8,317,000. See Note 12 for further discussion.
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.
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
34
rates. 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
Seaboard follows Statement of Financial Accounting Standards
No. 133 (SFAS 133), "Accounting for Derivative Investments
and Hedging Activities," as amended to account for its
derivative contracts. 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, to the extent the derivative is
considered effective, 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 primarily including commodity futures and option
contracts, foreign currency exchange agreements and interest
rate exchange agreements. While management believes each of
these instruments primarily are entered into in order to
effectively manage various market risks, as of December 31,
2005 none of the derivatives are designated and accounted
for as hedges primarily as a result of the extensive record-
keeping requirements. From time to time, Seaboard may enter
into speculative derivative transactions related to its
market risks.
As of January 1, 2005, Seaboard discontinued accounting for
the 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 prior outstanding hedges, effectively fixing
the asset resulting from the mark-to-market gain on the firm
sales commitment of $5,558,000 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 $4,241,000 of the related sales were
consummated during fiscal 2005, $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. Although management still believes all of these
instruments effectively manage market risks, the growth of
Seaboard's commodity trading business in recent years
increased the ongoing costs to maintain the extensive record-
keeping requirements to qualify these instruments as hedges
for accounting purposes.
Transactions with Parent Company
As of December 31, 2005 and 2004, Seaboard had a liability
to the Parent Company of $24,000 and $19,000, respectively,
for a deposit to pay for any miscellaneous operating
expenses incurred by Seaboard on behalf of the Parent
Company. In the fourth quarter of fiscal 2005, Seaboard
issued 6,313.34 shares to its Parent company. See Note 12
for further discussion.
Accounting Changes and New Accounting Standards
In November 2004, the FASB issued Statement of Financial
Accounting Standards No. 151, "Inventory Costs" (SFAS 151).
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 151 requires that those items be
recognized as current period charges regardless of whether
they meet the criterion of "so abnormal". In addition, SFAS
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 151 is not expected to have a material impact on
Seaboard's financial position or net earnings.
Effective January 1, 2003, Seaboard adopted SFAS 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
35
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 following
table shows the changes in the asset retirement obligation
during 2005 and 2004.
Years ended December 31,
(Thousands of dollars) 2005 2004
Beginning balance $6,266 $6,086
Accretion expense 464 356
Liability for additional lagoons placed in service - 78
Lagoon site sold - (254)
Ending balance $6,730 $6,266
As of December 31, 2003, Seaboard adopted Financial
Accounting Standard's Board Interpretation No. 46, revised
December 2003 (FIN 46R) "Consolidation of Variable Interest
Entities" (VIEs) and performed the required analysis to
determine whether its non-consolidated affiliates or other
arrangements qualified as VIEs pursuant to the requirements.
The VIEs for which Seaboard was determined to be the primary
beneficiary based on these evaluations, are discussed in the
following paragraph. In the event of certain changes in
structure as defined in FIN 46R, Seaboard will re-evaluate
those relationships as needed.
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 46R, 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 for which the production
agreement terminates, Seaboard would be obligated to pay 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)
in 2003. If the consolidation requirements would have been
applied retroactively to January 1, 2003, operating income,
net earnings, and net earnings per common share would have
decreased by $252,000, $174,000 and $0.14.
In January 2006, Seaboard paid $2,107,000 to purchase the
equity of a VIE which was consolidated by Seaboard at
December 31, 2005. This VIE owned certain facilities used
in the Pork segment's vertically integrated hog production.
Non-controlling interest related to this VIE on the
consolidated balance sheet as of December 31, 2005 was
$1,074,000.
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.
36
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 a total purchase price of
$99,181,000. The purchase price consisted of $44,488,000 in
cash, plus working capital adjustments of $3,098,000, a
4.74% equity interest in Seaboard Foods LP (previously
Seaboard Farms, Inc.) with a book value of $31,225,000 and
fair value over book value of $13,263,000 recorded as
additional paid-in capital for a total value of $44,488,000,
a put option associated with the 4.74% equity interest
estimated to have a fair value of $6,700,000, as discussed
below, and $407,000 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 of Daily's have an option to put their 4.74%
equity interest back to Seaboard after two years for the
greater of $40,000,000 or a formula determined value as of
the put date. The minimum put option value of $40,000,000
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
$45,000,000 or a formula determined value. Included in
other liabilities at December 31, 2005 is the value of the
put option obligation in the amount of $5,400,000. Included
in Miscellaneous, net for the year ended December 31, 2005
is the change in fair value of the put option obligation of
approximately $1,300,000 since the date of acquisition.
The 4.74% ownership interest issued to the Sellers was based
on an earnings multiple of the business which approximates
fair value. The following table summarizes the allocation
of the purchase price to the fair values of the assets
acquired and liabilities assumed at July 3, 2005, the
effective date of the acquisition.
(Thousands of dollars) July 3, 2005
Net working capital $11,430
Net property, plant and equipment 28,798
Intangible assets 30,800
Goodwill (tax basis of $21,673,000) 28,372
Increase in other non-controlling interest (219)
Net assets acquired $99,181
The intangible assets acquired include $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. As a result of the acquisition,
the Pork Division is the only segment with goodwill or
intangible assets. The following table is a summary of
goodwill and intangible assets acquired from Daily's at
December 31, 2005.
37
(Thousands of dollars) December 31, 2005
Intangibles subject to amortization:
Gross carrying amount:
Customer relationships $ 5,300
Covenants not to compete 1,500
6,800
Accumulated amortization:
Customer relationships (530)
Covenants not to compete (150)
(680)
Net carrying amount:
Customer relationships 4,770
Covenants not to compete 1,350
Intangibles subject to amortization, net 6,120
Intangibles not subject to amortization:
Carrying amount-trade names and registered trademarks 24,000
Total intangible assets, net 30,120
Goodwill 28,372
Total goodwill and intangible assets, net $58,492
The amortization expense of amortizable intangible assets
for the year ended December 31, 2005 was approximately
$680,000. Amortization expense for the five succeeding
years is $1,360,000 for each of the first four years and
$680,000 in the fifth year.
Goodwill and other indefinite-life intangible assets will be
reviewed for impairment annually at the end of the second
quarter (anniversary date of acquisition), or more
frequently if certain indicators arise. Management believes
there is no significant exposure to a loss from impairment
of acquired goodwill and other intangible assets as of
December 31, 2005.
Operating results for Daily's are included in Seaboard's
Consolidated Statement of Earnings 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
$26,471,000. 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.
The counterparty to this transaction is a South African
company. 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 $1,748,000.
38
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 $317,291,000,
compared to $311,952,000 for the first two quarters of 2004.
Net sales for the last two quarters of 2005 for third party
commodity trading operations decreased $268,386,000,
compared to the last two quarters of 2004, primarily as a
result of the sale, 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. An initial payment of $5,000,000 was paid during
the second quarter of 2004 to reacquire this interest,
$762,000 was paid during fiscal 2005. The remaining balance
of $160,000 as of December 31, 2005 is payable subject to
the 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
Investments
Seaboard's short-term marketable debt securities are treated
as available-for-sale securities and are stated at their
fair market values. As of December 31, 2005 and 2004, the
short-term investments primarily consisted of variable rate
municipal debt securities and money market funds, so cost
and fair market value were the same. All available-for-sale
securities are readily available to meet current operating
needs. At December 31, 2005, short-term investments
included $7,491,000 held by a wholly-owned consolidated
insurance captive to pay Seaboard's retention of accrued
outstanding workers' compensation claims. The following is
a summary of the estimated fair value of available-for-sale
securities classified as short-term investments at
December 31, 2005 and 2004.
December 31,
(Thousands of dollars) 2005 2004
Obligations of states and political subdivisions $ 258,610 $ 81,735
Money market funds 113,951 37,524
Domestic equity securities 5,313 -
Total short-term investments $ 377,874 $ 119,259
In addition to its short-term investments, as of December
31, 2005 and 2004 Seaboard also had long-term investments
totaling $4,100,000 and $3,800,000, respectively, included
in other assets on the Consolidated Balance Sheets. Also,
see Note 10 for a discussion of assets held in conjunction
with Seaboard's Investment Option Plan.
Other investment income for each year is as follows:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Realized gain on sale/exchange of
non-controlled affiliates $ - $ - $18,036
Realized gain on sale of securities 4 196 1,081
Other 1,958 1,433 2,323
Other investment income, net $1,962 $1,629 $21,440
39
Until the fourth quarter of 2003, Seaboard owned 21% of the
common stock of Fjord Seafood ASA, an integrated salmon
producer and processor headquartered in Norway. 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) 2005 2004
At lower of LIFO cost or market:
Live hogs & materials $146,661 $141,126
Fresh pork & materials 22,987 20,334
169,648 161,460
LIFO adjustment 571 461
Total inventories at lower of LIFO cost
or market 170,219 161,921
At lower of FIFO cost or market:
Grain, flour and feed 107,073 98,699
Sugar produced & in process 26,559 20,006
Other 27,282 20,423
Total inventories at lower of FIFO cost
or market 160,914 139,128
Total inventories $331,133 $301,049
The use of the LIFO method increased 2005, 2004 and 2003 net
earnings by $67,000 ($.05 per common share), $4,922,000
($3.92 per common share), and $2,327,000 ($1.85 per common
share), respectively. If the FIFO method had been used for
certain inventories of the Pork segment, inventories would
have been $571,000 and $461,000 lower as of December 31,
2005 and 2004, 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: Democratic Republic of Congo
(50%), Lesotho (50%), Kenya (35%), and Nigeria (45-48%) in
Africa; Ecuador (50%) in South America; and Haiti (23%) in
the Caribbean. In addition, Seaboard has investments in and
advances to a wine business in Bulgaria (50%) and two sugar-
related businesses in Argentina (46% - 50%). The equity
method is used to account for these investments.
During 2005, milling operations ceased at Seaboard's non-
controlled, non-consolidated foreign affiliate in Angola.
Seaboard is seeking a buyer of its 45% ownership in this
affiliate. As a result, during 2005 Seaboard fully reserved
its past due receivables from grain sales to this affiliate
by incurring a charge to bad debts and increasing its
allowance for doubtful accounts in the amount of $1,500,000.
The investment in and advances to this affiliate was written
off as a result of Seaboard's share of operating losses
incurred during 2005 by this affiliate.
40
In February 2005, the Board of Directors of the Bulgarian
wine business (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 4,500,000 Euros (approximately $5,400,000)
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 December 31, 2005, Seaboard had advanced 2,040,000
Euros (approximately $2,457,000). As a result of the
additional advances made during 2005, Seaboard is entitled
to receive approximately 50% of any net sale proceeds of
this Business' equity after all third party bank debt has
been repaid. 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 December 31, 2005, the remaining
carrying value of Seaboard's investments in and advances to
this Business total $3,992,000, including $2,745,000 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. This Business is considered a VIE and
the related maximum exposure to Seaboard is $1,247,000 at
December 31, 2005.
As more fully discussed in Note 13, in the fourth quarter of
2004, Seaboard recognized a $3,592,000 decline in value
considered other than temporary in its investment in the
Business. See Note 7 for discussion of Seaboard's taxes
related to this business. During 2003, the Business went
through a troubled debt restructuring as more fully
discussed in Note 13.
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.
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, 2005, 2004 and 2003 amounted to
$232,864,000, $229,422,000 and $148,318,000, respectively.
At December 31, 2005 and 2004, Seaboard had $34,013,000 and
$26,762,000, respectively, of investments in and advances
to, and $44,459,000 and $48,097,000, 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 operations of affiliates through disposition
dates, are as follows:
Commodity Trading and Milling Segment December 31,
(Thousands of dollars) 2005 2004 2003
Net sales $ 501,972 442,064 329,506
Net income (loss) $ 19,995 8,450 (1,408)
Total assets $ 215,269 202,788 178,458
Total liabilities $ 138,670 141,867 120,986
Total equity $ 76,599 60,921 57,472
Other Businesses December 31,
(Thousands of dollars) 2005 2004 2003
Net sales $ 28,611 33,230 614,626
Net loss $ (7,427) (8,143) (90,497)
Total assets $ 45,668 52,827 64,106
Total liabilities $ 44,266 43,969 49,000
Total equity $ 1,402 8,858 15,106
41
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:
Useful December 31,
(Thousands of dollars) Lives 2005 2004
Land and improvements 15 years $ 115,334 $ 112,298
Buildings and improvements 30 years 286,057 272,375
Machinery and equipment 3-20 years 596,257 558,014
Vessels and vehicles 3-18 years 127,419 111,260
Office furniture and fixtures 5 years 17,679 14,881
Construction in progress 8,644 3,075
1,151,390 1,071,903
Accumulated depreciation and amortization (524,810) (468,521)
Net property, plant and equipment $ 626,580 $ 603,382
As part of the Daily's acquisition during 2005, Seaboard
acquired approximately $28,800,000 in net property, plant
and equipment, which is included in the table above. See
Note 2 for further discussion.
During 2004, Seaboard sold certain hog production facilities
for approximately $6,364,000 and entered into a grow finish
agreement with the purchaser of the facilities, with a term
expiring in 2019. The deferred gain on the sale of
$2,822,000 will be amortized over the term of that
agreement.
Note 7
Income Taxes
Income taxes attributable to continuing operations for the
years ended December 31, 2005, 2004 and 2003 differ from the
amounts computed by applying the statutory U.S. Federal
income tax rate of 35 percent to earnings (loss) before
income taxes for the following reasons:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Computed "expected" tax expense $109,484 $ 80,468 $ 15,302
Adjustments to tax expense attributable to:
Foreign tax differences (46,184) (18,585) (9,195)
Tax-exempt investment income (1,046) (221) (55)
State income taxes, net of federal benefit 6,202 1,461 407
Change in valuation allowance 4,290 (3,540) 4,638
Repatriation 11,586 - -
Federal and foreign audit settlements (26,405) - -
Other (11,777) 2,232 3,650
Income tax expense before cumulative effect 46,150 61,815 14,747
Income tax expense - cumulative effect
of changes in accounting principles - - 52
Total income tax expense $ 46,150 $ 61,815 $ 14,799
42
Earnings before income taxes consists of the following:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
United States $156,551 $120,398 $ (8,271)
Foreign $156,261 $109,513 $ 54,912
Total $312,812 $229,911 $ 46,641
The components of total income taxes are as follows:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Current:
Federal $ 28,885 $ 16,132 $ 517
Foreign 5,578 4,271 2,239
State and local 6,314 1,317 136
Deferred:
Federal 1,287 39,249 10,930
Foreign 37 - 531
State and local 4,049 846 394
Income tax expense 46,150 61,815 14,747
Unrealized changes in other comprehensive income (606) 4,329 3,470
Income tax expense - cumulative effect
of changes in accounting principles - - 52
Total income taxes $ 45,544 $ 66,144 $ 18,269
Components of the net deferred income tax liability at the end of each year
are as follows:
December 31,
(Thousands of dollars) 2005 2004
Deferred income tax liabilities:
Cash basis farming adjustment $ 12,418 $ 12,820
Deferred earnings of foreign subsidiaries 347 6,966
Depreciation 93,159 92,903
LIFO 27,054 32,721
Other 2,423 106
135,401 145,516
Deferred income tax assets:
Reserves/accruals 20,013 29,117
Tax credit carryforwards 6,533 6,872
Net operating and capital loss carryforwards 35,076 21,244
61,622 57,233
Valuation allowance 41,227 22,935
Net deferred income tax liability $115,006 $111,218
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 allowed Seaboard
to avoid current U.S. taxation on its post-2004
43
shipping income and had a material impact on Seaboard's 2005
and future effective tax rate and cash tax payments. This
change decreased income tax expense approximately
$30,298,000 for the year ended December 31, 2005.
The Act also allowed 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 concluded its evaluation of this provision of the
Act in the fourth quarter of 2005 and declared and paid a
qualifying intercompany dividend of approximately
$220,000,000. The dividend was paid from existing cash from
foreign operations and by incurring $65,000,000 of new
borrowings by a foreign subsidiary (see Note 8 for further
discussion). Total taxes resulting from this dividend were
approximately $11,586,000, including foreign withholding
taxes incurred. Seaboard has not provided for U.S. Federal
Income and foreign withholding taxes on $87,572,000 of
undistributed earnings from foreign operations as Seaboard
intends to reinvest such earnings indefinitely outside of
the United States. Determination of the tax that might be
paid on these undistributed earnings if eventually remitted
is not practicable.
The Act also repealed an export tax benefit and provides for
a nine percent deduction on U.S. manufacturing income. Both
are phased in over the next five years. Management expects
these two changes to largely offset each other in future
years.
As a matter of course, Seaboard is regularly audited by
federal, state and foreign tax authorities, which may result
in adjustments. In the fourth quarter of 2005, the Joint
Committee on Taxation (JCT) approved Seaboard's settlement
with the Internal Revenue Services (IRS) of its 2000-2002
U.S. Federal Tax Returns. The favorable resolution of these
tax issues resulted in a tax benefit of $21,428,000 for
items previously reserved. Additionally, in February 2006
Seaboard entered into a Closing Agreement with the Puerto
Rican Treasury Department which favorably resolved certain
prior years' tax issues. The resolution of these issues
resulted in Seaboard recording a tax benefit of $4,977,000
in the fourth quarter of 2005 for items previously reserved.
In January 2005, Seaboard agreed to a settlement with the
IRS related to a protest for Seaboard's federal income tax
returns for 1994 through 1996 resulting in a $14,356,000 tax
benefit which was recognized in the fourth quarter of 2004.
As more fully discussed in Note 13, Seaboard intends to
sells its equity investment in a Bulgarian wine business.
As a result of the decision to sell this business, the
accumulated losses for this business, which were previously
considered ordinary for tax purposes, are now characterized
as capital losses, which utilization is currently viewed as
uncertain as discussed below. Accordingly, in the fourth
quarter of 2004 Seaboard reversed previously recorded tax
benefits of $5,795,000 related to prior year losses. 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. Utilization of this capital
loss is also uncertain as discussed below.
Seaboard currently has tax holidays in two foreign countries
resulting in tax savings of approximately $4,311,000,
$3,376,000 and $2,335,000, or $3.43, $2.69 and $1.86 per
diluted earnings per common share for the years ended
December 31, 2005, 2004 and 2003, respectively. These tax
holidays are set to expire in 2008 in one country and 2012
for the other country.
Management believes Seaboard's future taxable income will be
sufficient for full realization of the net deferred tax
assets. The valuation allowance relates to the tax benefits
from foreign net operating losses and from losses on
investments that would be recognized as capital 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. In the event Seaboard generates
sufficient capital gains to utilize the capital losses, a
tax benefit will be recognized. At December 31, 2005,
Seaboard had foreign net operating loss carryforwards (NOLs)
of approximately $26,231,000, a portion of which expire in
varying amounts between 2006 and 2009, and others that have
indefinite expiration periods. At December 31, 2005,
Seaboard had federal capital loss carryforwards of
approximately $25,270,000 expiring in varying amounts in
2007 and 2008.
At December 31, 2005, Seaboard had state tax credit carry
forwards of approximately $6,078,000 which may carry forward
indefinitely. As discussed more fully in Note 12, during
fiscal 2005, Seaboard filed tax returns utilizing NOLs that
were available to use from its Parent Company pursuant to an
earlier agreement. The Company issued shares of common stock
to its Parent Company in exchange for the NOLs.
44
Note 8
Notes Payable and Long-term Debt
Notes payable amounting to $92,938,000 and $1,789,000 at
December 31, 2005 and 2004, respectively, consisted of
obligations due banks on demand, within one year, or based
on Seaboard's ability and intent to repay within one year.
As a result of the one time qualifying foreign intercompany
dividend paid as discussed in Note 7, during December 2005
Seaboard entered into a new two-year committed credit
facility totaling $50,000,000 and a new $50,000,000
uncommitted credit line for a foreign subsidiary in the
Commodity Trading and Milling segment. In addition,
Seaboard entered into a new $25,000,000 uncommitted credit
facility to finance the working capital needs of a foreign
subsidiary in the Commodity Trading and Milling Segment.
Also, during October 2005, Seaboard reduced its domestic
five year committed credit facility from $200,000,000 to
$100,000,000 as a result of the current levels of domestic
cash and short-term investments held by Seaboard. Also,
during the second quarter of 2005, Seaboard allowed a
$20,000,000 committed line of credit to expire and also
cancelled its $95,000,000 subsidiary credit facility. At
December 31, 2005, Seaboard had committed lines totaling
$150,000,000 and uncommitted lines totaled approximately
$79,926,000. Borrowings outstanding under committed and
uncommitted lines as of December 31, 2005, totaled
$50,000,000 and $42,938,000, respectively. The $50,000,000
borrowing under the two-year committed line is classified in
current liabilities at December 31, 2005 as Seaboard has the
ability and intent to repay such borrowings during the next
year. At December 31, 2005, Seaboard's borrowing capacity
under its committed lines was reduced by letters of credit
(LCs) totaling $56,521,000, including $42,688,000 of LCs for
Seaboard's outstanding Industrial Development Revenue Bonds
(IDRBs) and $13,158,000 related to insurance coverages. The
weighted average interest rates for outstanding notes
payable were 5.39% and 11.26% at December 31, 2005 and 2004,
respectively. The 2004 average interest rates primarily
reflects only foreign subsidiaries local borrowings under
uncommitted lines as there were no amounts outstanding under
Seaboard's domestic committed or uncommitted lines.
The notes payable to banks under the credit lines are
unsecured. The lines of credit do not require compensating
balances. Facility fees on these agreements are not
material.
A summary of long-term debt at the end of each year is as
follows:
December 31,
(Thousands of dollars) 2005 2004
Private placements:
6.49% senior notes, due 2005 $ - $ 20,000
7.88% senior notes, due 2005 through 2007 50,000 75,000
5.80% senior notes, due 2005 through 2009 26,000 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
(3.60% at December 31, 2005) due 2014 through 2027 41,800 41,800
Bank debt, 5.79% - 8.58%, due 2006 through 2010 61,710 69,397
Foreign subsidiary obligations, 2.00% - 17.50%, due 2006
through 2010 3,276 4,762
Foreign subsidiary obligation, floating rate due 2006 311 314
Capital lease obligations and other 2,881 3,038
262,478 323,311
Current maturities of long-term debt (61,415) (60,756)
Long-term debt, less current maturities $201,063 $262,555
45
Of the 2005 foreign subsidiary obligations, $2,027,000 is
denominated in CFA francs, $927,000 is payable in Argentine
pesos, and the remaining $633,000 is denominated in
Mozambique metical. Of the 2004 foreign subsidiary
obligations, $2,396,000 is denominated in CFA francs,
$1,908,000 is payable in Argentine pesos and the remaining
$772,000 is denominated in Mozambique metical.
Seaboard consolidates certain limited liability companies
deemed to be VIEs. As a result, bank debt totaling
$27,918,000 and $29,837,000 as of December 31, 2005 and
2004, respectively, is included in the table above. This
bank debt is collateralized by fixed assets totaling
$27,834,000 as of December 31, 2005. The weighted average
interest rates were 7.54% at December 31, 2005 and 2004,
respectively.
At December 31, 2005, hog production facilities and
equipment with a depreciated cost of $59,323,000 secured
bank debt. At December 31, 2005, Argentine land, sugar
production facilities and equipment with a depreciated cost
of $4,467,000 secured certain foreign subsidiary
obligations.
During 2004, Seaboard used $1,289,000 of unexpended bond
proceeds held in trust to redeem a portion of and pay
interest on the related industrial development revenue bonds
(IDRBs).
The terms of the note agreements pursuant to which the
senior notes, IDRBs, bank debt and credit lines were issued
require, among other terms, the maintenance of certain
ratios and minimum net worth, the most restrictive of which
requires consolidated funded debt not to exceed 50% of
consolidated total capitalization; an adjusted leverage
ratio of less than 3.5 to 1.0; requires the maintenance of
consolidated tangible net worth, as defined, of not less
than $507,000,000 plus 25% of cumulative consolidated net
income beginning October 2, 2004; limits aggregate dividend
payments to $10.0 million plus 50% of consolidated net
income less 100% of consolidated net losses beginning
January 1, 2002 plus the aggregate amount of Net Proceeds of
Capital Stock for such period ($240,423,000 as of
December 31, 2005) or $15,000,000 per year under certain
circumstances; limits the sum of subsidiary indebtedness and
priority indebtedness to 10% of consolidated tangible net
worth; and limits Seaboard's ability to acquire investments
and sell assets under certain circumstances. Seaboard is in
compliance with all restrictive debt covenants relating to
these agreements as of December 31, 2005.
Annual maturities of long-term debt at December 31, 2005 are
as follows: $61,415,000 in 2006, $63,264,000 in 2007,
$11,981,000 in 2008, $47,285,000 in 2009, $2,002,000 in 2010
and $76,531,000 thereafter.
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, 2005 and 2004 are presented below.
December 31, 2005 2004
(Thousands of dollars) Cost Fair Value Cost Fair Value
Short-term investments $377,617 $377,874 $119,259 $119,259
Long-term debt 262,478 259,990 323,311 327,288
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, meal, hog, pork bellies and
fuel oil futures and options to manage its exposure to price
fluctuations for raw materials and other inventories,
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 primarily economic hedges although
they do not qualify as hedges for accounting purposes.
Since these derivatives are not accounted for as
46
hedges, fluctuations in the related commodity prices could
have a material impact on earnings in any given year. From
time to time, Seaboard may enter into speculative
derivative transactions related to its market risks.
At December 31, 2005 and 2004, Seaboard had open net
contracts to (sell) and purchase (1,511,616) and 7,553,000
bushels of grain with fair values of $3,715,000 and
$(383,000), respectively, and 61,800 and 98,600 tons of
soybean meal with fair values of $(904,000) and
$(1,592,000), respectively, included with other accrued
financial derivative liabilities or current assets on the
Consolidated Balance Sheets. In addition, at December 31,
2005 Seaboard also had net contracts to sell 440,000 pounds
of hogs with a fair value of $39,000 and contracts to buy
720,000 pounds of pork bellies with a fair value of
$(26,000). At December 31, 2004 Seaboard also had contracts
to sell 2,100,000 pounds of soybean oil with a fair value of
$11,000, and purchase 1,500 tons on fuel oil with a fair
value of $(52,000). For the years ended December 31, 2005,
2004 and 2003 Seaboard realized net gains (losses) of
$(1,156,000), $(11,886,000), and $4,882,000 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. Prior
to January 1, 2005 Seaboard accounted for its currency
exchange hedges of firm commitments and trade receivables
from third parties as fair value hedges through December 31,
2004. Exchange agreements related to firm commitments and
receivables from foreign affiliates were accounted for as
cash flow hedges through December 31, 2004. For foreign
currency exchange agreements designated as fair value
hedges, the derivative gains and losses were recognized in
operating income for 2004 and 2003 along with the change in
fair value of the related contract through December 31,
2004. 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 was recorded. As discussed in Note
1, as of January 1, 2005, Seaboard discontinued accounting
for the foreign currency exchange agreements as hedges for
all new agreements entered into by the commodity trading
business. As a result, for 2005 the change in value of only
the foreign exchange agreements are marked to market as a
component of cost of sales on the Consolidated Statements of
Earnings and are included on other current assets or accrued
financial derivatives liabilities on the Consolidated
Balance Sheets as of December 31, 2005 and 2004. The change
in value of third party firm commitments are included in
other current assets or accrued financial derivative
liabilities on the Consolidated Balance Sheets as of
December 31, 2004. The net gains and losses recognized in
the Consolidated Statements of Earnings from the exchange
agreements were not material for the year ended December 31,
2005. The net gains and losses recognized in the
Consolidated Statements of Earnings from the exchange
agreements and related firm commitments were not material
for the year ended December 31, 2004 and 2003.
At December 31, 2005, Seaboard had trading foreign exchange
contracts (receive $U.S./pay South African Rand (ZAR)) to
cover its firm sales commitments and trade receivables with
notional amounts of $56,596,000 with a fair value of
($1,046,000) included in accrued financial derivative
liabilities on the Consolidated Balance Sheet.
At December 31, 2005 and 2004, Seaboard had trading foreign
exchange contracts (receive $U.S./pay ZAR) to cover various
foreign currency working capital needs for notional amounts
of $1,259,000 and $21,709,000, respectively, with fair
values of $(11,000) and $90,000.
At December 31, 2004, Seaboard had hedged ZAR denominated
firm sales contracts and trade receivables from third
parties with historical values totaling $72,237,000 with
changes in fair values of $6,421,000, respectively. To
hedge the change in value of these firm contracts and trade
receivables, Seaboard entered into agreements to exchange
$72,237,000 of contracts denominated in ZAR, with derivative
fair values of $(6,505,000).
At December 31, 2004, Seaboard had hedged Euro denominated
sales contracts and trade receivables from third parties
totaling $779,000 with changes in fair value of $30,000. To
hedge the changes in values of the firm contracts and
receivables, at December 31, 2004 Seaboard had open
agreements to exchange $778,000 of contracts denominated in
Euros with derivative fair values of $(30,000).
47
At December 31, 2004, Seaboard had ZAR denominated firm
sales contracts with a foreign affiliate with historical
values totaling $4,530,000, and changes in fair values of
$188,000. To hedge the change in value of these contracts,
Seaboard entered into agreements to exchange $4,530,000 of
contracts denominated in ZAR with derivative fair values of
$(188,000), which are included as a component of other
comprehensive income at December 31, 2004.
Interest Rate Exchange Agreements
Seaboard entered 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, 2005 and 2004, deferred gains on
prior year's terminated interest rate exchange agreements
(net of tax) totaled $350,000 and $551,000, respectively,
relating to swaps that hedged variable rate debt. This
amount is included in accumulated other comprehensive loss
on the Consolidated Balance Sheets. For each of the years
ended December 31, 2005, 2004 and 2003, interest rate
exchange agreements accounted for as hedges decreased
interest expense by $329,000 resulting from amortization of
terminated proceeds.
At December 31, 2005 and 2004 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, 2005 and 2004, the
fair values of these contracts totaled $(5,311,000) and
$(12,354,000), respectively, and are included in accrued
financial derivative liabilities on the Consolidated Balance
Sheets. For the years ended December 31, 2005, 2004, and
2003 the net gain (loss) for interest rate exchange
agreements not accounted for as hedges were $2,996,000,
$(4,597,000) and $(2,296,000), respectively, and are
included in miscellaneous, net in the Consolidated
Statements of Earnings. Included in the gains and losses
for 2005, 2004 and 2003 are net payments of $4,047,000,
$6,403,000 and $6,155,000, respectively, during 2005, 2004
and 2003 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. The Plan
generally provides eligibility for participation after one
year of service upon attaining the age of 21. Benefits are
generally based upon the number of years of service and a
percentage of final average pay. Seaboard has historically
based 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. However, because of Seaboard's
liquidity position, in December 2004 Seaboard made a
$14,250,000 special contribution approximately equal to the
maximum deductible amount, resulting in an over-funding of
the Plan. As a result, management did not make any
contributions to the Plan during 2005. As a result of its
current liquidity and tax positions, in February 2006
Seaboard made a contribution of $3,811,000 which was the
maximum deductible contribution allowed for the 2005 plan
year. An additional contribution may be made during 2006
for the 2006 plan year but such amount is not yet known.
Plan assets are invested to achieve a diversified overall
portfolio consisting 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:
48
Actual Plan Composition at December 31,
Target Percentage
of Portfolio 2005 2004
Domestic Large Cap Equity 35% 36% 35%
Domestic Small and Mid Cap
Equity 15% 14% 16%
International Equity 15% 16% 16%
Domestic Fixed Income 35% 34% 33%
Seaboard also sponsors non-qualified, unfunded supplemental
executive plans. On November 5, 2004, Seaboard amended its
Executive Retirement Plan, which provides a supplemental
retirement benefit to officers and certain key employees of
Seaboard and its subsidiaries, to conform the benefit
calculation to the Plan discussed above by changing the
methodology for calculating the benefit to a percentage of
final average pay for all years of service. The amendment
also changes the normal form of the benefit to a lump sum
payment, provided the employee has at least 5 years of
service after the plan amendment was adopted. While this
amendment has no effect on the 2004 net periodic benefit
cost, it increased unrecognized prior service cost by
$8,697,000 and increased 2005 net periodic benefit cost by
$599,000. The unamortized prior service cost is being
amortized over the average remaining working lifetime of the
active participants for this plan.
Assumptions used in determining pension information for the
plans were:
Years ended December 31,
2005 2004 2003
Weighted-average assumptions
Discount rate used to determine obligations 5.50% 6.00% 6.25%
Discount rate used to determine net periodic
benefit cost 6.00% 6.25% 6.75%
Expected return on plan assets 7.50% 8.25% 8.45%
Long-term rate of increase in compensation
levels 4.00-5.00% 4.00-5.00% 4.00-5.00%
Management changed its assumptions basis for the discount
rate and excepted return on plan assets beginning in 2005 to
more accurately reflect its own estimated benefit payments
and specific past history. The change in assumptions did
not have a material impact on the results of operation for
2005. For 2005, management selected the discount rate based
on Moody's year-end published Aa corporate bond yield,
rounded to the nearest quarter percentage point. For 2004
and 2003, management selected the discount rate based on
Moody's year-end published Aa corporate bond yield plus 25
basis points. The expected return on Plan assets assumption
is based on the weighted average of asset class expected
returns that are consistent with historical returns. For
2005 the assumed rate was selected to match the 50th
percentile rounded to the nearest quarter percentage point
of model-based results that reflect the Plan's asset
allocation. For 2004 and 2003 the assumed rate was selected
to fall between the 50th and 75th percentiles rounded to the
nearest quarter percentage point. The measurement date for
the Plan is December 31. The unrecognized net actuarial
losses are amortized over the average remaining working
lifetime of the active participants for these plans.
The changes in the plans' benefit obligations and fair value
of assets for the Plan and other plans for the years ended
December 31, 2005 and 2004, and a statement of the funded
status as of December 31, 2005 and 2004 are as follows:
49
December 31 2005 2004
Assets exceed Accumulated Assets exceed Accumulated
Accumulated benefits Accumulated benefits
(Thousands of dollars) Benefits exceed assets Benefits exceed assets
Reconciliation of benefit obligation:
Benefit obligation at
beginning of year $53,118 $ 21,871 $47,401 $ 12,633
Service cost 2,497 1,219 2,203 923
Interest cost 3,136 1,270 2,925 694
Actuarial gains (losses) 3,812 1,457 2,277 (959)
Benefits paid (1,560) (141) (1,688) (116)
Plan amendments - - - 8,696
Benefit obligation at
end of year 61,003 25,676 53,118 21,871
Reconciliation of fair value of plan assets:
Fair value of plan assets
at beginning of year 55,896 - 33,194 -
Actual return on plan
assets 3,047 - 4,378 -
Employer contributions - 141 20,012 116
Benefits paid (1,560) (141) (1,688) (116)
Fair value of plan assets
at end of year 57,383 - 55,896 -
Funded status (3,620) (25,676) 2,778 (21,871)
Unrecognized transition
obligation - 97 82 113
Unamortized prior service
cost (389) 8,097 (527) 8,697
Unrecognized net actuarial
losses 16,939 4,865 12,619 3,463
Prepaid (accrued) benefit
cost $12,930 $(12,617) $14,952 $ (9,598)
The accumulated benefit obligation for the Plan was
$57,342,000 and $47,286,000 and for the other plans was
$17,763,000 and $14,816,000 at December 31, 2005 and 2004,
respectively.
Amounts recognized in the Consolidated Balance Sheets as of
December 31, 2005 and 2004 consist of:
December 31 2005 2004
Assets exceed Accumulated Assets exceed Accumulated
Accumulated benefits Accumulated benefits
(Thousands of dollars) Benefits exceed assets Benefits exceed assets
Prepaid benefit cost $12,930 $ - $14,952 $ -
Accrued benefit liability - (17,866) - (14,926)
Intangible asset - 5,249 - 5,328
Prepaid (accrued) benefit
cost $12,930 $(12,617) $14,952 $ (9,598)
The net periodic benefit cost of these plans was as follows:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Components of net periodic benefit cost:
Service cost $ 3,716 $ 3,126 $ 2,892
Interest cost 4,406 3,619 3,407
Expected return on plan assets (4,115) (2,873) (2,128)
Amortization and other 1,176 729 913
Net periodic benefit cost $ 5,183 $ 4,601 $ 5,084
50
Expected future net benefit payments for all plans during
each of the next five years and in aggregate for the five
year period beginning with the sixth year are as follows:
$3,807,000, $8,220,000, $3,220,000, $3,286,000, $4,008,000,
and $24,301,000, respectively.
Seaboard also has certain individual, non-qualified,
unfunded supplemental retirement agreements for certain
executive employees. Pension expense for these agreements
was $634,000, $666,000 and $697,000 for the years ended
December 31, 2005, 2004 and 2003, respectively. Included in
other liabilities at December 31, 2005 and 2004 is
$11,309,000 and $10,362,000, respectively, representing the
accrued benefit obligation for these agreements. As of
December 31, 2005 and 2004, the unrecognized pension cost
related to these agreements of $1,706,986 and $615,000,
respectively, was included in accumulated other
comprehensive loss, net of related tax. During the next
five years and for the aggregate five year period beginning
with the sixth year, management expects future net benefits
payments under these agreements to be $791,000, $1,192,000,
$1,182,000, $1,170,000, $1,156,000, and $5,527,000,
respectively.
Seaboard participates in a multi-employer pension fund,
which covers certain union employees under a collective
bargaining agreement. Seaboard is required to make
contributions to this plan in amounts established under the
collective bargaining agreement. Contribution expense for
this plan was $452,000, $346,000 and $321,000 for the years
ended December 31, 2005, 2004 and 2003, respectively. The
applicable portion of the total plan benefits and net assets
of this plan is not separately identifiable although in 2005
Seaboard received notice the pension fund is under funded.
Seaboard could, under certain circumstances, be liable for
unfunded vested benefits or other expenses of this jointly
administered union plan. The plan's administrators do not
provide sufficient information to enable Seaboard to
determine its share, if any, of unfunded vested benefits.
As a result, Seaboard has not established any liabilities
for potential future withdrawal as such withdrawal from this
plan is not probable.
Seaboard maintains a defined contribution plan covering most
of its domestic salaried and clerical employees. Seaboard
primarily contributes to the plans 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 for the significant plan. Contribution expense for
this plan was $1,604,000, $1,445,000 and $1,471,000 for the
years ended December 31, 2005, 2004 and 2003, respectively.
In addition, Seaboard maintains a defined contribution plan
covering most of its hourly, non-union employees and in 2005
assumed responsibility for and sponsorship of two defined
contribution plans covering most of Daily's employees.
Contribution expense for these plans was $440,000, $250,000
and $223,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
Seaboard has an Investment Option Plan which allowed certain
employees to reduce their compensation in exchange for
options to buy shares of certain mutual funds and/or pooled
separate accounts. However, as a result of U.S. tax
legislation passed in October 2004, reductions to
compensation earned after 2004 is no longer allowed. 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 contributed 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 $1,433,000, $1,602,000
and $2,127,000 for the years ended December 31, 2005, 2004
and 2003, respectively. Included in other liabilities at
December 31, 2005 and 2004 are $15,250,000 and $11,896,000,
respectively, representing the market value of the payable
to the employees upon exercise. In conjunction with this
plan, Seaboard 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, 2005 and 2004, $19,094,000 and $15,103,000 were
included in other current assets on the Consolidated Balance
Sheets. Investment income related to the mark-to-market of
these investments for 2005, 2004, and 2003 totaled
$1,376,000, $1,537,000 and $2,061,000, respectively.
Note 11
Commitments and Contingencies
Seaboard Foods LP (Seaboard Foods) reached an agreement in
2002 to settle litigation brought by the Sierra Club. Under
the terms of the settlement, Seaboard Foods 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 concluded that the lagoon at this farm is a likely
source of elevated nitrates in the ground water.
51
Seaboard Foods advised the Oklahoma Department of
Agriculture, Food & Forestry as to this fact, and is in the
process of getting approval for and making the necessary
corrective action, which will include constructing a
replacement lagoon. The cost of the lagoon and any other
implications is not known with certainty, but the cost is
expected to be approximately $1,500,000. Seaboard Foods
has given notice to PIC International Group, Inc. (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 Foods is subject to regulatory actions and an
investigation by the United States Environmental Protection
Agency and the State of Oklahoma. One such action involves
five properties utilized in Seaboard Foods' hog production
operations which were purchased from PIC. Seaboard Foods
has undertaken an extensive investigation, and has had
significant discussions with the EPA and the State of
Oklahoma, proposing to take a number of corrective actions
with respect to the farms, and one additional farm, in order
to attempt to settle the actions.
Originally, the EPA advised Seaboard Foods that any such
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 $305,000. 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 Foods with respect to the
action pursuant to an indemnification agreement which has a
$5,000,000 limit. To date, the $5,000,000 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 $6,900,000,
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 Foods that it is not
responsible for the costs in excess of $5,000,000.
Seaboard Foods disputes PIC's determination of the costs to
be included in the calculation to determine whether the
$5,000,000 limit will be exceeded, and believes that the
costs to be considered are less than $5,000,000, 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 Foods has agreed to
conduct such testing and sampling as 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 Foods
also believes that a more general indemnity agreement would
require indemnification of liability in excess of $5,000,000
(excluding the estimated $180,000 cost for testing and
sampling), although PIC disputes this.
During the fourth quarter, Seaboard's subsidiary, Seaboard
Marine, received a notice of violation letter from U.S.
Customs and Border Protection demanding payment of a
significant penalty for an alleged failure to manifest
narcotics in connection with Seaboard Marine's shipping
operations, in violation of a federal statute and
regulation. Seaboard is in the process of responding to the
allegations and cannot currently estimate a possible range
of loss, however, management believes that the resolution of
the matter will not have any material adverse effect on the
financial position of Seaboard.
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.
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, 2005.
52
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 $1,572,000 Annual renewal
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 December 31, 2005, $543,000 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 $1,572,000.
Seaboard has not accrued a liability for any of the third
party or affiliate guarantees as management considers the
likelihood of loss to be remote.
As of December 31, 2005, Seaboard had outstanding
$57,283,000 of letters of credit (LCs) with various banks.
Included in this amount are LCs that reduced Seaboard's
borrowing capacity under its committed credit facilities as
discussed in Note 8 totaling $42,688,000 which support the
IDRBs included as long-term debt and $13,158,000 of LCs
related to insurance coverages.
Commitments
As of December 31, 2005 Seaboard had various firm
noncancelable purchase commitments and commitments under
other agreements, arrangements and operating leases as
described in the table below.
Purchase commitments Years ended December 31,
(Thousands of dollars) 2006 2007 2008 2009 2010Thereafter
Hog procurement contracts $111,919 $ 75,152 $ - $ - $ - $ -
Grain and feed ingredients 30,603 - - - - -
Grain purchase contracts
for resale 77,669 - - - - -
Fuel purchase contract 13,412 - - - - -
Equipment purchases
and facility improvements 1,623 - - - - -
Other purchase commitments 2,356 - - - - -
Total firm purchase
commitments 237,582 5,152 - - - -
Vessel time-charter
arrangements 65,080 27,588 6,009 - - -
Contract grower finishing
agreements 11,996 11,938 11,894 11,862 11,860 72,672
Other operating lease
payments 8,996 7,561 5,803 2,161 2,105 6,196
Total unrecognized firm
commitments $323,654 $122,239 $ 23,706 $ 14,023 $ 13,965 $ 78,868
53
Seaboard has contracted with third parties for the purchase
of live hogs to process at its pork processing plant and has
entered into grain and feed ingredient purchase contracts to
support its live hog operations. The commitment amounts
included in the table are based on projected market prices
as of December 31, 2005. During 2005, 2004 and 2003, this
segment paid $182,386,000, $177,107,000 and $155,012,000,
respectively for live hogs purchased under contracts.
The Commodity Trading and Milling segment enters into grain
purchase contracts primarily to support firm sales
commitments. These contracts are valued based on projected
commodity prices as of December 31, 2005. This segment also
has short-term freight contracts in place for delivery of
future grain sales.
The Power segment has entered into a contract for the supply
of substantially all fuel required through June 2006 at
market-based prices. The fuel commitment shown above
reflects the average price per barrel at December 31, 2005
for the minimum number of barrels specified in the
agreement.
The Marine segment enters into contracts to time-charter
vessels for use in its operations. Historically, these
commitments have been short-term. However, as a result of
increased demand for vessels and increasing charter-hire
rates, this segment has entered into long-term commitments
ranging from one to three years. In addition to its long-
term lease agreements, the short-term time-charter contracts
of $591,500 for 2006 are included above in vessel time-
charter arrangements. This segment's charter hire expenses
during 2005, 2004 and 2003 totaled $76,668,000, $51,064,000
and $47,533,000, respectively.
To support the operations of the Pork segment, Seaboard has
contract grower finishing 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, total
approximately $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. During the years ended
2005, 2004 and 2003, Seaboard paid $12,970,000, $10,099,000
and $5,981,000, respectively under contract grower finishing
agreements.
Seaboard also leases various 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 46R in 2003,
amounted to $9,314,000, $8,761,000 and $7,237,000 in 2005,
2004 and 2003, respectively.
Note 12
Stockholders' Equity and Accumulated Other Comprehensive Loss
In a 2002 transaction (the Transaction) between Seaboard and
its parent company, Seaboard Flour LLC (the Parent Company),
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. As a
part of the Transaction, the Parent Company 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 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
$8,317,000. 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 December 31, 2005,
Seaboard had not received any cash payments from the
subsidiary of its Parent Company. The right to receive such
payments expires September 17, 2007.
54
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 in the third quarter
and the entire period in the fourth quarter for the basic
earnings per share calculation and for the entire third and
fourth quarter for the diluted earnings per share
calculation. The following table reconciles the number of
shares utilized in the earnings per share calculations:
Years ended December 31,
2005 2004 2003
Weighted-average number of shares
Common shares - basic 1,256,645 1,255,054 1,255,054
Effect of dilutive securities
Stock issuance to Parent 1,557 - -
Common shares - diluted 1,258,202 1,255,054 1,255,054
As discussed in Note 2, as a result of issuing a 4.74%
equity interest in Seaboard Foods LP in connection with the
acquisition of Daily's during 2005, the difference between
the fair value of this equity interest compared to the book
value was recorded as additional paid-in capital in the
amount of $13,263,000.
The components of accumulated other comprehensive loss, net
of related taxes, are summarized as follows:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Cumulative foreign currency translation
adjustment $(53,229) $(53,986) $(56,490)
Unrealized gain on investments 928 257 14
Unrecognized pension cost (1,041) (375) (5,772)
Net unrealized loss on cash flow hedges (33) (188) (30)
Deferred gain on interest rate swaps 350 551 751
Accumulated other comprehensive loss $(53,025) $(53,741) $(61,527)
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. When the Argentine government lifted the
one to one parity of the peso to the U.S. dollar at the end
of 2001, the peso lost significant value against the dollar.
At December 31, 2005, the Sugar and Citrus segment has
$92,780,000 in net assets denominated in Argentine pesos and
$7,930,000 in net assets denominated in U.S. dollars in
Argentina.
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.
Note 13
Segment Information
Seaboard Corporation had five reportable segments through
December 31, 2005: Pork, Commodity Trading and Milling,
Marine, Sugar and Citrus, and Power, each offering a
specific product or service. Seaboard determined its
segments based on information provided to the chief
operating decision maker which is used to determine
allocation of resources and assess performance. Each of the
five main segments is separately managed and each was
started or acquired independent of the other segments. The
Pork segment produces and sells fresh, frozen and further
processed pork products to further processors, foodservice
outlets, grocery stores and other retail outlets, and other
distributors throughout the United States, and to Japan and
to certain other foreign markets. The Commodity Trading and
Milling segment internationally markets wheat, corn, soybean
meal and other commodities in bulk to third party customers
and to non-consolidated foreign affiliates, and operates
flour, maize and feed mills in foreign countries.
55
The Marine segment, based in Miami, Florida, 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 system of diesel engines mounted on two barges.
Revenues for the All Other segment are primarily derived
from the jalapeno pepper processing and domestic trucking
transportation operations.
The Pork segment derives between ten to fifteen percent of
its revenues from three customers in Japan through one
agent. In addition, approximately all of its hourly
employees at its Guymon processing plan are covered by a
collective bargaining agreement.
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.
Since the last half of 2003, the power industry in the
Dominican Republic (DR), where Seaboard's Power segment
operates as a generation company, has suffered from a cash
flow imbalance that began when the government did not allow
retail electricity rates charged by the distribution
companies to increase sufficiently to cover the significant
peso devaluation and increase in the dollar-denominated fuel
costs. Historically, the DR government funded electricity
collection shortfalls with cash payments to the distribution
companies. In recent years, the government has not fully
funded the collection shortfalls. Consequently, this
segment has continued to experience difficulty collecting
amounts owed from certain generating and distribution
companies. During 2004, as a result of management's concern
over its ability to collect certain customer accounts,
Seaboard curtailed power production from time to time to
avoid spot market sales to troubled companies or entities
that were not making timely payments. In addition,
approximately $1,932,000 of spot market sales were not
recorded during the second half of 2004 as collectibility
was not reasonably assured. During the latter half of 2003,
certain customers did not make any payments for electric
power sold to them by Seaboard. 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 those nonpaying customers. As
of December 31, 2005, Seaboard's net receivable exposure
from customers with significant past due balances totaled
$13,620,000, including $8,866,000 classified in other long-
term assets on the Consolidated Balance Sheets.
As discussed above, the Dominican peso has fluctuated
significantly against the U.S. dollar over the past few
years. Foreign exchange gains (losses) included in other
income (expense) for this segment totaled $(1,569,000),
$2,460,000 and $(6,735,000) for 2005, 2004 and 2003,
respectively.
Seaboard's produce division, representing the majority of
sales in the All Other segment, derives almost all of its
revenues from one customer.
As a result of the 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,
as discussed below, Seaboard's common stock investment and
subordinated debt was reduced to zero. During 2005,
Seaboard began applying losses 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 from this Business to
100% in 2005. In February 2005, the Board of Directors and
the majority of the owners of this Business, including
Seaboard, agreed to pursue the sale of the entire Business
or all of its assets. Accordingly, Seaboard assessed the
fair value of this Business 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. The result of
this assessment indicated a fair value less than the
recorded cost basis of as of December 31, 2004. As a
result, in the fourth quarter of 2004, Seaboard recognized a
$3,592,000 decline in value considered other than temporary
in its investment in this Business as a charge to losses
from foreign affiliates in the All Other segment.
As a result of the additional advances made during 2005, as
discussed in Note 5, Seaboard is entitled to receive
approximately 50% of any net sale proceeds of this Business'
equity after all third party bank debt has been repaid.
Seaboard anticipates incurring additional losses from the
operations of this Business until the sale of this Business
is completed. The investment and losses from the Business
are included in the All Other segment.
During the third quarter of 2003, the Business negotiated a
refinancing of certain of its debt after it was unable to
make a scheduled principal payment in 2002 to a bank
syndication. As part of the refinancing, the bank
syndication
56
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.
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 as
a loss from foreign affiliates totaled $15,546,000.
Included in 2003 losses is $12,421,000 for asset impairment
charges primarily related to inventory, license, and fixed
assets caused by sustained low worldwide salmon prices and
an unfavorable U.S. Court ruling restricting Fjord from the
use of its genetic material.
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 income (loss) 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:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Pork $1,023,885 $ 961,614 $ 735,662
Commodity Trading and Milling 835,662 1,066,545 667,869
Marine 638,296 498,504 408,971
Sugar and Citrus 88,969 72,940 70,740
Power 77,685 56,386 69,622
All Other 24,397 27,991 28,476
Segment/Consolidated Totals $2,688,894 $2,683,980 $1,981,340
Operating Income:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Pork $ 182,749 $ 147,428 $ 26,367
Commodity Trading and Milling 34,374 29,269 17,980
Marine 90,922 63,929 8,523
Sugar and Citrus 11,884 12,225 18,674
Power 9,561 4,409 6,986
All Other 2,604 3,196 2,054
Segment Totals 332,094 260,456 80,584
Corporate (12,049) (9,202) (11,798)
Consolidated Totals $ 320,045 $ 251,254 $ 68,786
Investment in and Advances to Foreign Affiliates:
December 31,
(Thousands of dollars) 2005 2004
Commodity Trading and Milling $ 34,013 $ 26,762
Sugar and Citrus 1,987 2,050
All Other 3,992 9,189
Segment/Consolidated Totals $ 39,992 $ 38,001
57
Depreciation and Amortization:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Pork $ 41,098 $ 40,017 $ 37,173
Commodity Trading and Milling 3,344 2,945 3,261
Marine 11,047 11,504 13,264
Sugar and Citrus 5,176 4,214 3,817
Power 3,831 5,363 5,348
All Other 375 360 936
Segment Totals 64,871 64,403 63,799
Corporate 235 217 404
Consolidated Totals $ 65,106 $ 64,620 $ 64,203
Capital Expenditures:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Pork $ 8,070 $ 11,807 $ 15,756
Commodity Trading and Milling 13,811 4,862 2,741
Marine 30,028 10,345 7,651
Sugar and Citrus 11,195 5,485 4,435
Power 277 198 396
All Other 820 847 235
Segment Totals 64,201 33,544 31,214
Corporate 40 78 258
Consolidated Totals $ 64,241 $ 33,622 $ 31,472
Income (Loss) from Foreign Affiliates:
Years ended December 31,
(Thousands of dollars) 2005 2004 2003
Commodity Trading and Milling $ 8,138 $ 5,806 $ (384)
Sugar and Citrus 111 687 (337)
All Other (7,887) (8,538) (20,553)
Segment/Consolidated Totals $ 362 $ (2,045) $ (21,274)
Total Assets:
December 31,
(Thousands of dollars) 2005 2004
Pork $ 731,422 $ 655,551
Commodity Trading and Milling 282,160 278,324
Marine 150,797 138,238
Sugar and Citrus 112,882 90,035
Power 77,206 77,978
All Other 8,991 13,924
Segment Totals 1,363,458 1,254,050
Corporate 452,863 182,644
Consolidated Totals $1,816,321 $ 1,436,694
58
For 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 certian operating expenses not specifically allocated
to individual segments. Operating income for each segment
presented above for periods ended December 31, 2004 and 2003
have been adjusted 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.
Corporate operating losses represent certain operating costs
not specifically allocated to individual segments.
Geographic Information
Seaboard had sales in South Africa totaling $167,748,000,
$355,475,000, and $200,310,000 for the years ended December
31, 2005, 2004 and 2003, respectively, representing
approximately 6%, 13% and 10% 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) 2005 2004 2003
United States $ 992,322 $ 951,650 $ 758,325
Caribbean, Central and South America 839,305 713,921 555,680
Afica 570,975 744,552 485,619
Pacific Basin and Far East 164,584 133,307 93,568
Canada/Mexico 74,788 70,208 72,051
Eastern Mediterranean 29,312 51,786 9,301
Europe 17,608 18,556 6,796
Totals $2,688,894 $2,683,980 $1,981,340
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) 2005 2004
United States $ 526,938 $ 505,489
Dominican Republic 35,566 39,644
Argentina 44,231 38,760
All other 20,835 21,105
Totals $ 627,570 $ 604,998
At December 31, 2005 and 2004, Seaboard had approximately
$111,801,000 and $146,261,000, 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.
59
Stockholder Information
Board of Directors
H.H. Bresky Steven J. Bresky
Chairman of the Board, President and Director
Chief Executive Officer Senior Vice President,
International Operations
David A. Adamsen Kevin M. Kennedy
Director Director
Vice President-Wholesale/Franchise & Chief Financial Officer,
Manufacturing, The Penn Traffic Company Seaspan Corporation
Douglas W. Baena Joseph E. Rodrigues
Director Director
Chief Executive Officer, Credit America, Inc. Retired Executive Vice President
and Treasurer
Officers
H.H. Bresky Barry E. Gum
Chairman of the Board, President and Vice President, Finance
Chief Executive Officer
James L. Gutsch
Steven J. Bresky Vice President, Engineering
Senior Vice President, International
Operations Ralph L. Moss
Vice President, Governmental
Robert L. Steer Affairs
Senior Vice President, Treasurer and
Chief Financial Officer David S. Oswalt
Vice President, Taxation and
David M. Becker Business Development
Vice President, General Counsel and
Secretary John A. Virgo
Vice President, Corporate
Controller and Chief
Accounting Officer
Chief Executive Officers of Principal Seaboard Operations
Rodney K. Brenneman Edward A. Gonzalez
Pork Marine
Steven J. Bresky
Commodity Trading and Milling
Stock Transfer Agent and Registrar of Stock Availability of 10-K Report
UMB Bank, n.a. Seaboard files its Annual Report
Securities Transfer Division on Form 10-K with the Securities
P.O. Box 410064 and Exchange Commission. Copies
Kansas City, Missouri 64141-0064 of the Form 10-K for fiscal 2005
(800) 884-4225 are available without charge by
writing Seaboard Corporation,
9000 West 67th Street, Shawnee
Auditors Mission, Kansas 66202,
Attention: Shareholder Relations
KPMG LLP or via the Internet at
1000 Walnut, Suite 1000 www.seaboardcorp.com. Seaboard
Kansas City, Missouri 64106 provides access to its most
recent Form 10-K, 10-Q and 8-K
reports on its Internet website,
Stock Listing free of charge, as soon as
reasonably practicable after
Seaboard's common stock is traded on the those reports are electronically
American Stock Exchange under the symbol filed with the Securities and
SEB. Seaboard had 185 shareholders of Exchange Commission.
record of shares of its common stock as
of December 31, 2005.
60