Exhibit 13
SEABOARD CORPORATION
2006 Annual Report
Description of Business
Seaboard Corporation is a diversified international
agribusiness and transportation company. In the United
States, Seaboard is primarily engaged in pork production and
processing, and ocean transportation. Overseas, Seaboard is
primarily engaged in commodity merchandising, grain
processing, sugar production, and electric power generation.
Table of Contents
Letter to Stockholders 2
Division Summaries 4
Principal Locations 6
Summary of Selected Financial Data 7
Company Performance Graph 8
Quarterly Financial Data (unaudited) 9
Management's Discussion & Analysis of Financial Condition
and Results of Operations 10
Management's Responsibility for Financial Statements 26
Management's Report on Internal Control over Financial
Reporting 26
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statements 27
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting 27
Consolidated Statements of Earnings 29
Consolidated Balance Sheets 30
Consolidated Statements of Cash Flows 31
Consolidated Statements of Changes in Equity 32
Notes to Consolidated Financial Statements 33
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 sales
price or market conditions for pork, sugar and other products
and services, (iv) statements concerning management's
expectations of recorded tax effects under existing
circumstances, (v) the ability of the Commodity Trading and
Milling segment to successfully compete in the markets it
serves and the volume of business and working capital
requirements associated with the competitive trading
environment, (vi) the charter hire rates and fuel prices for
vessels, (vii) the stability of the Dominican Republic's
economy and demand for power, related spot market prices and
collection of receivables in the Dominican Republic,
(viii) the effect of the fluctuation in exchange rates for the
Dominican Republic peso, (ix) the potential impact of the EPA
consent decrees, and various environmental actions pending or
threatened against Seaboard, (x) statements concerning
profitability or sales volume of any of Seaboard's segments,
(xi) the impact of the 2005 Daily's acquisition in enhancing
Seaboard's ability to venture into other further processed
pork products, (xii) the timetable for the Triumph Foods pork
processing plant to reach full double shift operating
capacity, (xiii) the anticipated costs and completion
timetable for Seaboard's scheduled capital improvements, or
(xiv) other trends affecting Seaboard's financial condition or
results of operations, and statements of the assumptions
underlying or relating to any of the foregoing statements.
Forward-looking statements are not guarantees of future
performance or results. They involve risks, uncertainties and
assumptions. Actual results may differ materially from those
contemplated by the forward-looking statements due to a
variety of factors. The information contained in this report,
including without limitation the information under the
headings "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Letter to
Stockholders", identifies important factors which could cause
such differences.
Letter to Stockholders
2006 was a landmark year for Seaboard.
Harry Bresky has retired after 58 years of dedicated leadership
and service to Seaboard. Many stockholders, and certainly many
employees, customers and people associated with Seaboard, know
the enormous influence he has had throughout the years. He is
Seaboard, and the values he has instilled, and the culture and
philosophy he has brought to bear have had an indelible influence
on all of us. His work has led us in many directions over the
years, and at the same time has brought growth, opportunity and
financial success to Seaboard. Indeed, the seeds Harry Bresky
sowed many years ago in creating our major divisions are now
bearing financial fruit, and as importantly, his presence,
attitude, philosophy and values are those same elements which
make this Company what it is today: a professional,
free-thinking and customer driven organization. For those
long-term owners of Seaboard stock, you know the rich history,
the successes and failures and the somewhat unconventional
approach of our Company. I hope these defining qualities will
compel you to remain loyal and patient owners. It has been an
interesting journey to date, and I can speak for many in saying
that we have enjoyed the ride.
We don't usually highlight our financial accomplishments, but
because we have had a remarkable run over the last three years,
it gives me great pleasure to note a few highlights: since the
beginning of 2004, our combined operating income has exceeded our
previous 25 years combined, stockholder's equity has more than
doubled and our stock price has appreciated over 500 percent. It
would be nice to consider these highlights as reflecting a trend
but, realistically, it is more likely that they reflect a spike
within a trend.
Seaboard Foods performed well in 2006, with revenues only
slightly below 2005's record. Although we are beginning to see
softening in pork prices, we continue to implement our strategy
to produce more value-added products. Moving further down the
production chain is expected to result in products that command
higher margins, and should help insulate the Company from the
cyclical nature of market prices for pork. 2006 was the first
full year of operations for our Daily's acquisition, bringing
variety to our product offerings and higher revenue to the
Company. In addition, early in 2006, we began marketing products
from the newly-completed Triumph Foods plant, which provides us
additional scale and an alternative source of product. We look
forward to Triumph Foods' expansion of its processing capacity in
2007 and the opportunity to enhance and expand our marketing
efforts.
We continue to invest in our Pork Division in 2007. In
November 2006, we began construction on a new bio-diesel plant
that will provide alternative outlets for some of our by-products
and enhance our vertically integrated structure. We also
continue to make investments in production assets that are
designed to drive costs lower and allow for the growth in demand
we have experienced over the past few years.
Seaboard Marine achieved all-time record sales, cargo volumes and
operating income in 2006 despite volatile fuel and vessel charter
hire expenses. Through careful consideration of cargo flows and
customer requirements, over the past few years, we have been able
to introduce new routes and additional ports of call which have
added to our level of service and flexible structure. Quick
decision-making, creative solutions and a good feel for market
conditions have helped us achieve results which have, quite
frankly, exceeded our expectations. In 2007, we plan on making
significant investments in marine equipment, vessels, port
infrastructure and business systems which we believe will help us
solidify our cost structure and enhance customer service. If
stable political and economic conditions prevail, we expect to
enjoy another positive year in 2007.
2006 marked the third consecutive year of higher operating
margins for the Commodity Trading and Milling Division. We
continue to build on our grain processing and trading base. In
2006, we added another East African location to our flour milling
portfolio, and we have near term plans to add grain processing
and grain terminal locations in both Latin America and Africa,
including greenfield sites. On the commodity trading side, we
continue to build on our customer base, and are entering new
markets which will complement our milling activities and should
give us certain competitive advantages over conventional
commodity merchandising companies. In August of 2006,
David Dannov took over my responsibilities as President of the
Commodity Trading and Milling division. Dave has been a key
component in the division for 17 years and he is well-prepared to
bring further value to our trading and milling business.
Tabacal, our Sugar and Citrus division in Argentina, performed
well in 2006, with substantially higher sales and operating
income compared to the prior two years. International sugar
markets were strong, as the nexus with the energy markets was
established and sugar prices rose as a result. Despite the local
government restrictions placed on the price of domestic sugar,
our local selling prices also increased, albeit slightly. In
2007, we plan to expand our alcohol distillery operations at
Tabacal, as well as increase our production levels of sugar.
2
Since 2004, we have cautioned that these operating results are
extraordinary, and that going forward, we expect to return to
normalized levels of profitability which are more in line with
our commodity-driven businesses. At the risk of sounding like
"Chicken Little," there is no doubt that 2007 will present some
challenges not present in prior years.
First and foremost, we fully expect that our raw material costs
for grain will be significantly higher this year, and could have
a detrimental affect on the financial results of our Pork and
Commodity Trading and Milling Divisions. Many of you are aware
of the demand-driven fundamentals affecting the grain and oilseed
markets, namely the ethanol industry boom, the increased
participation of hedge and money funds in the derivative markets,
and the continued political and economic push toward a higher
degree of self-reliance for our energy needs in the
United States. Domestically, Seaboard uses about 1.4 million
tons of corn and protein meals in our animal rations, and
overseas, the Company processes and trades over 3 million tons of
wheat, corn and soybean meal. Commodity analysts are calling for
significant price increases in the grain markets this year
without corresponding price increases in meat prices. In
addition, in many of our overseas locations, elasticity in demand
will undoubtedly limit our ability to maintain or grow volumes in
wheat flour, maize meal and manufactured feeds as we attempt to
pass along our higher raw material costs. Our challenge this
year will be to pay particular attention to this area and do what
we can to manage our grain input costs and maximize their value.
Secondarily, the political landscape has changed in certain key
countries in the Americas and in Africa, which could have
financial repercussions for our international businesses,
including Seaboard Marine, our foreign milling operations and
Tabacal. We have enjoyed the benefits of a steady push toward
free market economics, however, in some locations, the momentum
has shifted in other directions. We are cautiously optimistic
that, given the basic and essential services and products we
provide in these countries undergoing political change, we will
be insulated from significant disruptions and will maintain and
perhaps increase our market share. As foreign investors in
sovereign lands, our best protection is to make ourselves
indispensable and invaluable in each and every country in which
we operate.
In 2006 Seaboard generated $284 million in operating cash flow,
paid down $91 million in debt, and added cash and additional
working capital to the balance sheet. As a result, we are well
positioned financially to take advantage of market opportunities
and business acquisitions as they arise. Interest rates are
relatively low and general market values are reasonable, which
should allow us to find and fund businesses which can add depth
and breadth to our Company. Obviously, we need to be cautious in
our approach and not only find the right economic investment, but
also the right mixture of people and assets which complement our
existing structure. It is critical for us to look beyond the
numbers and into the chemistry of any business combination.
On behalf of my father as Chairman and patriarch of Seaboard, I
would like to thank all of our employees who dedicate their days,
and oftentimes nights and weekends, to the Company and work as
much for personal and company pride as they do for monetary
compensation. I may be a bit biased, but I sincerely believe
that we have one of the most dynamic companies in operation
today.
/s/ Steven J. Bresky
Steven J. Bresky
President and
Chief Executive Officer
3
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 is located in Guymon, Oklahoma.
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 operators,
grocery stores and other retail outlets, and other distributors
throughout the United States. Internationally, Seaboard sells to
distributors in Japan, Mexico 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 approximately 3.8 million
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. These operations represent
Seaboard's recent expansion of its integrated pork model into
value-added products and are expected to enhance Seaboard's
ability to penetrate into other further processed pork products.
Seaboard's Pork Division also has an agreement with a similar
size pork processor, Triumph Foods LLC (Triumph), to market all
of the pork products produced at Triumph's plant in St. Joseph,
Missouri. Pursuant to this agreement, Seaboard is able to
provide the same quality ensured products to its customers.
Seaboard earns a commission for this service and is entitled to
be reimbursed for certain expenses. The plant began operations
in January 2006 and Seaboard began marketing the related pork
products for a fee primarily based on the number of head
processed by Triumph Foods.
Seaboard's vertically integrated system provides a number of
strategic advantages relative to other companies in the industry.
These advantages, which result largely from significant control
of the production and processing chain, allow Seaboard to produce
high quality, safe products. The consistency and quality of
Seaboard pork have allowed Seaboard to become one of the leading
exporters of pork products from the United States to Japan and
other foreign markets.
Commodity Trading & Milling Division
Seaboard's Commodity Trading & Milling Division markets grain and
oilseed products internationally to third party customers and
affiliated companies. These commodities are purchased worldwide
with primary destinations in Africa, South America, and the
Caribbean.
The division sources, transports and markets over three million
tons annually of wheat, corn, soybean meal and other related
commodities to the food and animal feed industries. The focus
remains on the efficient supply of quality products and reliable
services to industrial customers in selected markets. Seaboard
integrates the service of delivering commodities to its customers
primarily through the use of chartered bulk vessels and company
owned bulk carriers.
Seaboard's Commodity Trading and Milling Division has locations
in fifteen countries. The commodity trading business operates
through four offices in three countries. The grain processing
businesses operate through twenty-five locations in thirteen
countries consisting of six consolidated and seven non-
consolidated affiliates in Africa, South America, and the
Caribbean. These businesses produce over one and a 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, New Orleans, Louisiana and
approximately 38 foreign ports.
Seaboard's fleet consists of ten owned and approximately 29
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. Seaboard Marine 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 over 200,000 metric tons of sugar and over
four million gallons of alcohol per year. The mill is located in
the Salta Province of northern Argentina with administrative
offices in Buenos Aires, Argentina. Approximately 50,000 acres
of land is planted with sugar cane which supplies the majority of
the raw product processed by the mill. In addition,
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 which generates
electricity into the local power grid. Seaboard is not directly
involved in the transmission or distribution of electricity but
does have contracts to sell directly to third party users.
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
Corporate Office
Seaboard Corporation Mobeira, SARL Seaboard de Nicaragua,
Shawnee Mission, Kansas Mozambique Nicaragua
Pork Molinos del Ecuador, C.A.* Seaboard del Peru,
Ecuador S.A.
Seaboard Foods LP Peru
Pork Division Office National Milling Company
Shawnee Mission, Kansas of Guyana, Inc. Seaboard Freight &
Guyana Shipping Jamaica
Processing Plant Limited
Guymon, Oklahoma National Milling Jamaica
Corporation Limited
Live Production Operation Zambia Seaboard Honduras, S.
Offices de R.L. de C.V.
Julesburg, Colorado Honduras
Hugoton, Kansas Seaboard West Africa
Leoti, Kansas Limited Seaboard Marine
Liberal, Kansas Sierra Leone Bahamas Ltd.
Rolla, Kansas Bahamas
Guymon, Oklahoma Unga Holdings Limited*
Hennessey, Oklahoma Kenya and Uganda Seaboad Marine
Optima, Oklahoma (Trinidad) Ltd.
Marine Trinidad
Processed Meats
Salt Lake City, Utah Seaboard Marine Ltd. Seaboard Marine of
Missoula, Montana Marine Division Office Haiti, S.E.
Miami, Florida Haiti
Commodity Trading & Milling Port Operations SEADOM, S.A.
Fernandina Beach, Florida Dominican Republic
Commodity Trading Operations Houston, Texas
Bermuda Miami, Florida Sea Maritima S.A. de
Ecuador New Orleans, Louisiana C.V.
South Africa Philadelphia, Pennsylvania Mexico
Les Moulins d'Haiti S.E.M.* Agencias Generales
Haiti Conaven, C.A. Sugar and Citrus
Venezuela
Les Moulins de Madagascar, Ingenio y Refineria
S.A.R.L. San Martin del
Madagascar Agencia Maritima del Tabacal SRL
Istmo, S.A. Argentina
Lesotho Flour Mills Limited* Costa Rica
Lesotho
Cayman Freight Shipping Power
Life Flour Mill Ltd.* Services, Ltd.
Top Feeds Limited* Cayman Islands Transcontinental
Nigeria Capital Corp.
JacintoPort International LP (Bermuda) Ltd.
Minoterie de Matadi, Houston, Texas Dominican Republic
S.A.R.L.*
Democratic Republic of Representaciones
Congo Maritimas y Aereas, S.A. Other
Guatemala
Minoterie du Congo, S.A. Mount Dora Farms de
Republic of Congo Sea Cargo, S.A. Honduras, S.R.L.
Panama Honduras
Seaboard de Colombia, S.A. Mount Dora Farms Inc.
Colombia Houston, Texas
*Represents a non-controlled, non-consolidated affiliate
6
Summary of Selected Financial Data
Years ended December 31,
(Thousands of dollars except per share amounts)
2006 2005 2004 2003 2002
Net sales $2,707,397 $2,688,894 $2,683,980 $1,981,340 $1,829,307
Operating income $ 296,995 $ 320,045 $ 251,254 $ 68,786 $ 47,125
Net earnings $ 258,689 $ 266,662 $ 168,096 $ 31,842 $ 13,507
Basic earnings per
common share $ 205.09 $ 212.20 $ 133.94 $ 25.37 $ 9.38
Diluted earnings per
common share $ 205.09 $ 211.94 $ 133.94 $ 25.37 $ 9.38
Total assets $1,961,433 $1,816,321 $1,436,694 $1,325,691 $1,281,141
Long-term debt, less
current maturities $ 137,817 $ 201,063 $ 262,555 $ 321,555 $ 318,746
Stockholders' equity $1,203,307 $ 977,870 $ 692,682 $ 520,565 $ 486,731
Dividends per common
share $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 2.50
As of December 31, 2006, Seaboard adopted Statement of Financial
Accounting Standard No. 158 (SFAS 158), "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans." The
adoption of SFAS 158 reduced stockholders equity by $25,014,000
as an adjustment to Accumulated Other Comprehensive Loss. See
Note 10 to the Consolidated Financial Statements for further
discussion.
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 $9,387,000, or $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 or $14.37 per share. The gain was not
subject to tax. During 2003, Seaboard recorded its share of
losses related to its investment in Fjord totaling $15,546,000,
or $12.38 per share including $12,421,000 for asset impairment
charges. Seaboard's share of losses from Fjord during 2002
totaled $10,158,000, or $7.06 per share.
Also during 2003, Seaboard adopted SFAS 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, or $9.93 per share. 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.
7
The Securities and Exchange Commission requires a five-year
comparison of stock performance for Seaboard with that of an
appropriate broad equity market index and similar industry index.
Seaboard's common stock is traded on the American Stock Exchange,
and one appropriate comparison is with the American Stock
Exchange Market Value Index. Because there is no single industry
index to compare stock performance, the companies comprising the
Dow Jones Food and Marine Transportation Industry indices (the
"Peer Group") were chosen as the second comparison.
The following graph shows a five-year comparison of cumulative
total return for Seaboard, the American Stock Exchange Market
Value Index and the companies comprising the Dow Jones Food and
Marine Transportation Industry indices weighted by market
capitalization for the five fiscal years commencing
December 31, 2001, and ending December 31, 2006. The information
presented in the performance graph is historical in nature and is
not intended to represent or guarantee future returns.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Seaboard Corporation, The AMEX Composite Index
and a Peer Group
The graph depicts data points below.
*$100 invested on 12/31/01 in stock or index-including
reinvestment of dividends. Fiscal year ending December 31.
The comparison of cumulative total returns presented in the above
graph was plotted using the following index values and common
stock price values:
12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
Seaboard Corporation $100.00 $ 79.91 $ 94.32 $335.84 $509.59 $596.48
AMEX Market Value $100.00 $100.08 $144.57 $178.46 $220.35 $262.17
(U.S. & Foreign)
Peer Group $100.00 $101.80 $112.19 $135.96 $130.63 $157.77
8
Quarterly Financial Data (unaudited)
(UNAUDITED)
(Thousands of dollars except per share amounts)
1st 2nd 3rd 4th Total for
Quarter Quarter Quarter Quarter the Year
2006
Net sales $ 635,573 $ 688,937 $ 678,382 $ 704,505 $2,707,397
Operating income $ 60,857 $ 78,068 $ 75,668 $ 82,402 $ 296,995
Net earnings $ 51,540 $ 69,190 $ 61,189 $ 76,770 $ 258,689
Earnings per common share:
Basic $ 40.86 $ 54.85 $ 48.51 $ 60.86 $ 205.09
Diluted $ 40.86 $ 54.85 $ 48.51 $ 60.86 $ 205.09
Dividends per common share $ 0.75 $ 0.75 $ 0.75 $ 0.75 $ 3.00
Market price range per common share:
High $1,594.00 $1,721.00 $1,460.00 $1,798.00
Low $1,223.00 $1,259.00 $1,140.00 $1,197.00
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
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.
9
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's reporting segments are based
on information used by Seaboard's Chief Executive Officer in his
capacity as chief operating decision maker to determine
allocation of resources and assess performance.
Pork Segment
The Pork segment is primarily a domestic business with some
export sales to Japan and other foreign markets. Revenues from
the sale of pork products are primarily generated from a single
hog processing plant in Guymon, Oklahoma, which operates at
double shift capacity and two bacon further processing plants
located in Salt Lake City, Utah and Missoula, Montana. In 2006,
Seaboard raised approximately 80% of the hogs processed at the
Guymon plant with the remaining hog requirements purchased
primarily under contracts from independent producers.
This segment is Seaboard's most capital intensive segment with
approximately 37% of consolidated assets, including approximately
67% 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 past few years' operating results.
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 plans to expand its processed meat capabilities by
constructing a separate processing plant primarily for bacon and
sausage processing. Construction of this facility is expected to
begin in late 2007 and be completed in early 2009. Seaboard is
constructing additional finishing space at an approximate cost of
$16 million in 2007 to expand its live production facilities to
support the Guymon plant. In addition, Seaboard is constructing
a biodiesel processing plant to utilize by-product from its
Guymon processing plant. Construction of this plant began in
2006 and is expected to be completed in 2007. 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.
During 2006, Triumph Foods began production at its new pork
processing plant located in St. Joseph, Missouri, and Seaboard
began marketing the related pork products for a fee primarily
based on the number of head processed by Triumph Foods. This
plant has similar capacity to Seaboard's Guymon plant with the
business based upon a similar integrated model as Seaboard's.
Triumph Foods expects its plant to reach full double shift
operating capacity during 2007. Seaboard's sales prices for its
pork products are primarily based on an average sales price and
mix of products sold from both Seaboard's and Triumph Food's hog
processing plants.
10
Commodity Trading and Milling Segment
The Commodity Trading and Milling segment 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, local government
policies, economic and industry 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. The commodity trading
portion of the business sources grain and delivers to many
international locations, which affects the timing of completion
of voyages, and the availability of and rates for bulk cargo
shipping. As a result, these factors can significantly affect
sales volumes, operating income, working capital and related cash
flows from quarter-to-quarter.
After selling some components of its third party commodity
trading operations in 2005, during 2006 Seaboard re-established
its commodity trading business in markets associated with the
sale. Seaboard concentrates on the supply of raw materials to
its core milling operations and to third party commodity trades
in support of these milling operations. Seaboard continues to
seek opportunities in trading and milling businesses in order to
achieve greater scale, volumes and profitability.
Marine Segment
The Marine 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, when certain
countries have experienced such instability, Seaboard's volumes
and operating profits have been significantly impacted.
In recent years, Seaboard has been able to increase cargo rates
in most markets, which has helped offset higher charter hire
rates and fuel costs. Assuming this segment continues to expand
its cargo volumes, needs for vessels, cargo carrying and handling
equipment will continue to increase over the next couple of
years. Seaboard continues to explore ways to increase volumes on
existing routes while seeking opportunities to broaden its route
structure in the region.
Sugar and Citrus Segment
Seaboard's Sugar and Citrus segment operates a vertically
integrated sugar and citrus production and processing complex in
Argentina. 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 and prices. Depending on
local harvest and market conditions, this business also 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.
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 will increase
for this operation as a result of planned expansion of sugar and
alcohol production
11
along with the payment of debt. 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. This segment's
financing needs have been minimal for the existing operations.
During the past few years, operating cash flows have fluctuated
from inconsistent customer collections. Seaboard has contracts
to sell approximately 50% 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 primarily to three wholly or
partially-government-owned distribution companies or other power
producers 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.
At times during 2006, Seaboard's power production was restricted
by the regulatory authorities in the Dominican Republic. The
regulatory body schedules production based on the amount of funds
available to pay for the power produced and the relative costs of
the power produced. During the last half of 2005, management
decided to produce at near capacity as a result of a more stable
payment performance from all customers, while during 2004
Seaboard curtailed its level of power production from time to
time due to lack of payments from spot sales. Certain
receivables from 2004 spot sales are still outstanding. 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, 2006 increased
$97.7 million from December 31, 2005 primarily reflecting $283.8
million of cash generated from operations partially offset by
capital expenditures of $85.9 million, reductions in notes
payable to banks of $30.0 million and scheduled payments of long-
term debt of $61.2 million. Cash from operating activities for
2006 decreased $47.4 million compared to 2005, primarily
reflecting increases in working capital needs in the Commodity
Trading and Milling segment resulting from re-establishing its
commodity trading operations in markets along with the
timing of normal transactions for trade payables and voyage
settlements, and decreased earnings for the Pork segment.
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 and as a result of improved collections of receivables
for the Power segment.
Capital Expenditures, Acquisitions and Other Investing Activities
During 2006 Seaboard invested $85.9 million in property, plant
and equipment, of which $30.3 million was expended in the Pork
segment, $4.0 million in the Commodity Trading and Milling
segment, $30.4 million in the Marine segment, $18.4 million in
the Sugar and Citrus segment and $2.8 million in the remaining
businesses. For the Pork segment, $12.9 million was spent on the
construction of a biodiesel plant discussed below, improvements
to the Guymon processing plant and expanding the further
processing capacity acquired from Daily's. For the Marine
segment, $23.1 million was spent to purchase cargo carrying and
hauling equipment, expansion of port facilities and
12
to purchase two containerized cargo vessels previously chartered.
In the Sugar and Citrus segment, the capital expenditures were
primarily used for the purchase of land, expansion of the
alcohol distillery operations, improvements to the mill, and
plantation 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.
During 2006, the Pork segment began construction of a processing
plant to utilize by-products from its Guymon pork processing
plant to produce biodiesel which will be marketed to third
parties. This plant is expected to be completed in late 2007 at
a total cost of $34.0 million with approximately $28.0 million to
be spent in 2007. The Pork segment is also 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 $45.0 million.
Construction of this facility is expected to begin in late 2007
and be completed in early 2009 with approximately $22.5 million
to be spent in 2007. In addition, the Pork segment is also
currently constructing additional hog finishing space to expand
its live production facilities to support the Guymon plant.
These facilities are expected to be completed in 2007 with
approximately $16.0 million to be spent in 2007.
The total 2007 capital expenditures budget is $212.9 million. In
addition to the projects detailed above, the Pork segment plans
to spend an additional $22.3 million primarily for improvements
to existing hog facilities, upgrades to the Guymon processing
plant and additional facility upgrades and related equipment.
The Commodity Trading and Milling segment plans to spend $5.7
million primarily for milling facility upgrades and related
equipment. The Marine segment has budgeted $95.8 million
primarily for additional cargo carrying and handling equipment,
expansion of existing port facilities, and the purchase of two
containerized cargo vessels, one of which is currently chartered.
The Sugar and Citrus segment plans to spend $21.6 million
primarily for expansion of the alcohol distillery operations, the
purchase of land and costs associated with clearing land and
expanding planted sugar cane, and improvements to the mill. The
balance of $1.0 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, 2006
Seaboard had commitments of $57.9 million to spend on
construction projects, purchase equipment, and make facility
improvements.
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.
During the fourth quarter of 2006 Seaboard invested $4.6 million,
plus $0.7 million previously placed in escrow in 2004 for a total
of $5.3 million, for a less than 20% ownership interest in a
company operating a 300 megawatt electricity generating facility
in the Dominican Republic. See Note 3 to the consolidated
Financial Statements for further discussion.
Seaboard is part of a consortium that has been awarded the right
to construct two coal-fired 305 megawatt electric generating
plants in the Dominican Republic. The amount of equity required
for the project is uncertain but Seaboard's 50% or less share of
the investment could range from $25.0 to $75.0 million depending
on the amount of financing obtained by the group and the timing
of the construction of the second plant. The timing of the
project and Seaboard's ultimate involvement cannot yet be
determined.
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
13
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.
In January 2007, Seaboard repurchased the 4.74% equity interest
in its subsidiary, Seaboard Foods LP, from the former owners of
Daily's. As part of the Purchase Agreement, on January 2, 2007
Seaboard paid $30 million of the purchase price for the 4.74%
equity interest to the former owners of Daily's. Seaboard will
pay the balance of the purchase price in August, 2007, currently
estimated based on a formula determined value to be an additional
$10-$40 million depending on operating results and certain net
cash flows through June 30, 2007. See Note 2 to the
consolidated Financial Statements for further discussion.
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. During 2006, Seaboard re-
established its commodity trading business in markets associated
with the sale in 2005 of some components of its third party
commodity trading operations.
During 2004 Seaboard invested $33.6 million in property, plant
and equipment, of which $11.8 million was expended in the Pork
segment, $4.9 million in the Commodity Trading and Milling
segment, $10.3 million in the Marine 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.
Financing Activities, Debt and Related Covenants
During the second quarter of 2006, Seaboard terminated a $50.0
million committed line of credit that had been entered into in
December 2005 in connection with a one-time qualifying
intercompany dividend paid. Seaboard terminated this line as
foreign subsidiaries generated sufficient cash to repay the
facility in its entirety during 2006. During the fourth quarter
of 2006, a foreign subsidiary of Seaboard entered into a new
uncommitted credit line denominated in Japanese Yen
(approximately $54.6 million at December 31, 2006) to refinance
intercompany debt.
The following table represents a summary of Seaboard's available
borrowing capacity as of December 31, 2006. Borrowings
outstanding under committed and uncommitted lines as of
December 31, 2006 totaled $0.0 million and $63.0 million,
respectively. Letters of credit of $56.5 million reduced
Seaboard's borrowing capacity under its committed credit line
primarily representing $42.7 million for Seaboard's outstanding
Industrial Development Revenue Bonds and $13.2 million related to
insurance coverages.
Total amount
(Thousands of dollars) available
Long-term credit facilities - committed $100,000
Short-term uncommitted demand notes 159,699
Total borrowing capacity 259,699
Amounts drawn against lines 62,975
Letters of credit reducing borrowing availability 56,521
Available borrowing capacity at December 31, 2006 $140,203
Seaboard currently has capacity under existing covenants to
undertake additional debt financings of approximately $900.0
million. As of December 31, 2006, Seaboard is in compliance with
all restrictive covenants relating to these arrangements. 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.
Scheduled long-term debt maturities range from $12.0 million to
$63.4 million per year, for a total of $122.7 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,
14
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 existing liquidity and available borrowing capacity, currently
has no plans to pursue other financing alternatives.
In January 2006, Seaboard paid $2.1 million to purchase the
equity of a variable interest entity (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. The difference between the purchase price and non-
controlling interest resulted in an increase in fixed assets.
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.
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.
Contractual Obligations and Off-Balance-Sheet Arrangements
A summary of Seaboard's contractual cash obligations as of
December 31, 2006 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 $ 81,401 $ 68,089 $ 13,312 $ - $ -
Contract grower finishing
agreements 120,054 11,948 23,782 22,968 61,356
Other operating lease payments 30,009 10,252 11,005 4,417 4,335
Total lease obligations 231,464 90,289 48,099 27,385 65,691
Long-term debt 201,232 63,415 59,253 3,510 75,054
Short-term notes payable 62,975 62,975 - - -
Other purchase commitments 548,606 399,213 115,867 33,526 -
Total contractual cash obligations
and commitments $1,044,277 $615,892 $223,219 $64,421 $140,745
The Marine segment enters into contracts to time-charter vessels
for use in its operations. 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. 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 and ocean freight 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 $2.4 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, 2006 increased to
$2,707.4 million from $2,688.9 million in 2005 and $2,684.0
million for 2004. The increase in net sales in 2006 was
primarily the result of higher cargo volumes and higher average
rates for marine cargo services and, to a lesser degree, the
acquisition of Daily's in July of 2005, higher sales volume and
prices of sugar, and higher sales volumes at certain African
milling locations. Substantially offsetting the increase was
lower commodity trading volumes as the result of the sale of some
components of
15
Seaboard's third party commodity trading operations in May 2005,
and lower sales prices for pork products. 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.
Operating income decreased to $297.0 million in 2006, down from
$320.0 million in 2005 and up from $251.3 million in 2004. The
2006 decrease compared to 2005 primarily reflects the lower pork
prices partially offset by higher cargo volumes and higher
average rates for marine cargo services and, to a lesser degree,
higher sugar prices. 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.
Seaboard's operations primarily involve commodity based
industries, which typically have cyclical upswings and
downswings. For the past three years, 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
significant cyclical downswing in the Pork or Marine industries
or other industries in which Seaboard operates, Seaboard's
results from operations will be adversely affected.
Pork Segment
(Dollars in millions) 2006 2005 2004
Net sales $1,002.7 $1,023.9 $ 961.6
Operating income $ 138.3 $ 182.7 $ 147.4
Net sales for the Pork segment decreased $21.2 million for the
year ended December 31, 2006 compared to 2005, primarily as a
result of lower sales prices for pork products and, to a lesser
extent, decreased sales volumes of pork products. Sales volumes
decreased as a result of fewer weekend production shifts in 2006
compared to 2005. Partially offsetting the decrease was sales
contributed from the acquisition of Daily's in July 2005 as
discussed in Note 2 to the Consolidated Financial Statements.
Operating income decreased $44.4 million for the year ended
December 31, 2006 compared with 2005 primarily as a result of
lower prices for pork products. This decrease was partially
offset by 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. Also during 2006, Seaboard was
able to partially offset market increases in the price of corn, a
primary feed ingredient for hogs, with commodity derivative
gains.
Management is unable to predict future market prices for pork
products or the cost of feed and third party hogs. During the
last half of 2006, the price of corn began to rise significantly
as the demand for corn increased due to, among other things,
expansion plans for ethanol plants. Although Seaboard was able
to partially offset these increases during 2006 with commodity
derivative gains, management cannot predict to what extent it
will be able to do so in 2007. Also, over the past three years,
especially 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 cannot be
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 2007 although
significantly lower than 2006.
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. The increases were partially offset
by lower prices for pork products in the domestic markets.
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
16
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.
Commodity Trading and Milling Segment
(Dollars in millions) 2006 2005 2004
Net sales $ 735.6 $ 835.7 $1,066.5
Operating income $ 37.2 $ 34.4 $ 29.3
Income from foreign affiliates $ 6.3 $ 8.1 $ 5.8
Net sales for the Commodity Trading and Milling segment decreased
$100.1 million for the year ended December 31, 2006 compared to
2005. The decrease primarily reflects the sale of some
components of Seaboard's third party commodity trading operations
in May 2005. Partially offsetting the decrease was Seaboard re-
establishing its commodity trading operations in markets
associated with the sale discussed above and increased sales
volumes at certain African milling operations primarily as a
result of expanding existing businesses. As worldwide commodity
price fluctuations cannot be predicted, management is unable to
predict the level of future sales.
Operating income for this segment increased $2.8 million for 2006
compared to 2005. This increase primarily reflects the positive
fluctuation of $2.3 million in 2006 compared to 2005 of marking
to market derivative contracts, as discussed below. The
increase was also the result of improved income from higher sales
volume at certain African milling operations as noted above. The
increase was partially offset by the lower sales volume as a
result of the sale discussed above. 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
2007. However, rising prices in the grain markets during the
last half of 2006 reached levels that management believes could
have an adverse effect on operating income in 2007.
Had Seaboard not applied mark-to-market accounting to its
derivative instruments, operating income for 2006 and 2005 would
have been lower by $6.2 million and $3.9 million, respectively,
whereas operating income for 2004 would have been higher by $5.4
million. While management believes its commodity futures and
options and foreign exchange contracts are primarily 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 realized margins as revenue is recognized.
Income from foreign affiliates for the year ended December 31,
2006 decreased $1.8 million from 2005. The decrease primarily
reflects better local operating conditions in 2005 compared to
2006 for certain African affiliates. Based on the uncertainty of
local political and economic situations in the countries in which
the flour and feed mills operate, and increasing grain prices
discussed above, management cannot predict future results.
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.
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 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.
17
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.
Marine Segment
(Dollars in millions) 2006 2005 2004
Net sales $ 741.6 $ 638.3 $ 498.5
Operating income $ 106.0 $ 90.9 $ 63.9
Net sales for the Marine segment increased $103.3 million for the
year ended December 31, 2006, compared to 2005 as a result of
higher cargo volumes in most markets and higher average cargo
rates in certain markets. Cargo volumes were higher as a result
of favorable economic conditions in most markets served. Cargo
rates were higher as a result of general rate increases across
many markets and higher cost-recovery surcharges for fuel.
Operating income for the Marine segment increased by $15.1
million over 2005, primarily reflecting the increased rates and
volumes discussed above, partially offset by higher costs of
fuel, inland transportation costs, charter hire, and selling
expenses. Although management cannot predict changes in future
cargo rates, fuel related costs, charter hire expenses or to what
extent changes in competition and economic conditions will impact
net sales or operating income, it does expect this segment to
remain profitable in 2007 although lower than 2006.
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.
Sugar and Citrus Segment
(Dollars in millions) 2006 2005 2004
Net sales $123.4 $ 89.0 $ 72.9
Operating income $ 19.2 $ 11.9 $ 12.2
Income (loss) from foreign affiliates $ (1.1) $ 0.1 $ 0.7
Net sales for the Sugar and Citrus segment increased $34.4
million for the year ended December 31, 2006 compared to 2005.
The increase primarily reflects overall higher sales volume of
sugar from increased purchases of sugar from third parties for
resale and overall higher sugar prices, especially for export
sales. Export prices increased significantly during 2006 while
Argentine prices only increased slightly as governmental
authorities are attempting to control inflation by limiting the
price of basic commodities, including sugar. Accordingly,
management cannot predict future sugar prices. However, Seaboard
expects to maintain its historical sales volume to Argentinean
customers.
Operating income increased $7.3 million during 2006 compared to
2005 primarily as a result of higher sugar prices discussed
above. The higher sales volume of purchased sugar did not
significantly increase operating income as additional income was
primarily offset by increased selling costs. The increase is
also the result of, but to a lesser extent, decreased losses in
the citrus operations as a result of improved prices for citrus
products sold. Management expects positive operating income for
2007.
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. 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.
18
The loss from foreign affiliates in 2006 primarily represents the
expense of canceling a franchisee agreement incurred during the
first quarter of 2006.
Power Segment
(Dollars in millions) 2006 2005 2004
Net sales $ 87.8 $ 77.7 $ 56.4
Operating income $ 8.5 $ 9.6 $ 4.4
Net sales for the Power segment increased $10.1 million for the
year ended December 31, 2006 compared to 2005 primarily
reflecting higher rates partially offset by lower power
production levels. Rates increased during 2006 primarily as a
result of higher fuel costs, a component of pricing. At times
during 2006, Seaboard's power production was restricted by the
regulatory authorities in the Dominican Republic (DR). The DR
regulatory body schedules production based on the amount of funds
available to pay for the power produced and the relative costs of
the power produced.
Operating income decreased $1.1 million during 2006 compared to
2005. The decrease was primarily the result of lower production
levels while fuel costs, transmission and other regulatory fees
charged to Seaboard increased more than rates increased.
Management cannot predict future fuel costs, transmission and
other regulatory fees, or the extent to which the regulatory
authority will restrict Seaboard's future production of power,
although management expects to remain profitable for 2007.
Based on prior year liquidity problems within the 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.
During 2006, Seaboard was able to reduce these receivable amounts
by $9.3 million as a result of payments received. As of December
31, 2006, Seaboard's net receivable exposure from remaining
customers with significant past due balances totaled $4.3
million, including $2.8 million classified in other long-term
assets on the Consolidated Balance Sheet. In January 2007,
Seaboard collected an additional $1.5 million related to these
past due amounts. The DR Government is working with businesses
in the power sector to create a plan for companies to recover the
remaining past due amounts although it is uncertain if Seaboard
will be able to fully collect all such amounts.
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 increased during 2005 primarily
as a result of higher fuel costs, a component of pricing.
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.
All Other Segments
(Dollars in millions) 2006 2005 2004
Net sales $ 16.4 $ 24.4 $ 28.0
Operating income $ 1.5 $ 2.6 $ 3.2
Loss from foreign affiliate $ (1.2) $ (7.9) $ (8.5)
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.
Operating income also decreased during 2006 as a result of
increased transportation costs in the jalapeno pepper operations.
For 2007, management expects operating income for All Other
Segments to remain positive.
Operating income for all other businesses decreased for the year
ended December 31, 2005 compared to 2004 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 as
discussed above.
19
The loss from foreign affiliate reflects Seaboard's share of
losses from its equity method investment in a Bulgarian wine
business (the Business). In 2006 Seaboard recorded 50% of the
losses from the Business compared to 100% in 2005, and 37% for
the first three quarters of 2004 and 73% for the last 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. The loss in 2004 for the Business also 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 2007. See Notes 5 and 13 to the Consolidated
Financial Statements for further discussion of the Business and
Seaboard's intention to sell the Business.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses for the year
ended December 31, 2006 increased by $18.0 million over 2005 to
$157.2 million 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, to
a lesser extent, additional selling costs related to higher sales
volume in the Sugar and Citrus segment. As a percentage of
revenues, SG&A increased to 5.8% for 2006 compared to 5.2% for
2005 primarily as a result of the sale of some components of
Seaboard's third party commodity trading operations in May 2005
discussed above.
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.
Interest Expense
Interest expense totaled $18.8 million, $22.2 million and
$26.4 million for the years ended December 31, 2006, 2005 and
2004, respectively. Interest expense decreased for 2006 compared
to 2005, primarily reflecting a lower average level of short-term
and long-term borrowings outstanding during 2006. 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 Income
Interest income totaled $25.3 million, $14.2 million and
$8.1 million for the years ended December 31, 2006, 2005 and
2004, respectively. The increase for 2006 primarily reflects the
higher level of average funds invested during 2006, 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 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.
Minority and Other Noncontrolling Interests
Minority and other noncontrolling interests expense increased
$2.4 million in 2006 compared to 2005, primarily reflecting the
acquisition of Daily's in July of 2005, as discussed in Note 2 of
the Consolidated Financial Statements.
Foreign Currency Gains (Losses)
Foreign currency gains (losses) totaled $1.2 million, $(1.0)
million and $1.6 million for the years ended December 31, 2006,
2005 and 2004, respectively. The fluctuations primarily relate
to changes in the 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.
20
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 $4.4 million, $2.0 million
and $1.6 million for the years ended December 31, 2006, 2005 and
2004, respectively. The increase for 2006 primarily reflects the
gain realized on a sale of domestic equity securities.
Miscellaneous, Net
Miscellaneous, net totaled $10.2 million, $5.7 million and
$(3.6) million for the years ended December 31, 2006, 2005 and
2004, respectively. Miscellaneous, net includes the impact of
changing interest rates on interest rate swap agreements. During
the second quarter of 2006, Seaboard terminated all interest rate
exchange agreements by making a payment in the amount of $1.0
million to unwind these swaps. Seaboard paid a weighted average
fixed rate of 5.51% on the notional amount of $150.0 million and
received a variable interest rate in return before termination.
These contracts were marked-to-market. During 2006, Seaboard
recorded a gain of $3.4 million compared to a gain of $3.0
million in 2005, and a loss of $4.6 million in 2004,
respectively, related to these swaps, reflecting the difference
between the contracted fixed rate compared to variable rates
during those years. These swap agreements did not qualify as
hedges for accounting purposes and accordingly, changes in the
market value were recorded to earnings as interest rates change.
See Note 9 to the Consolidated Financial Statements for
additional discussion. Also included in 2006 and 2005 is income
of $5.4 million and $1.3 million, respectively, of put option
value change as discussed in Note 2 to the Consolidated Financial
Statements. Also included in 2004 are gains of $0.7 million 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 increased for 2006 compared to 2005
primarily reflecting favorable tax settlements in 2005. Also,
during the second quarter of 2006, Seaboard recorded a $2.8
million tax benefit related to a settlement with the Internal
Revenue Service. See Note 7 to the Consolidated Financial
Statements for additional discussion of these items.
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 further discussion.
OTHER FINANCIAL INFORMATION
Seaboard is subject to various federal and state regulations
regarding environmental protection and land and water use. Among
other things, these regulations affect the disposal of livestock
waste and corporate farming matters in general. Management
believes it is in compliance, in all material respects, with all
such regulations. Laws and regulations in the states where
Seaboard currently conducts its pork operations are restrictive.
Future changes in environmental or corporate farming laws could
adversely affect the manner in which Seaboard operates its
business and its cost structure.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN
48), "Accounting for Uncertainty in Income Taxes", which defines
the threshold for recognizing the benefits of tax-return
positions in the financial statements as "more-likely-than-not"
to be sustained by the taxing authority. FIN 48 also prescribes
a method for computing the tax benefit of such tax positions to
recognize in the financial statements. In addition, FIN 48
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. Management believes the adoption of FIN 48 will not
have a material impact on Seaboard's financial position or net
earnings. Seaboard will be required to adopt FIN 48 as of
January 1, 2007.
21
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 157
(SFAS 157), "Fair Value Measurements." This statement
establishes a single authoritative definition of fair value when
accounting rules require the use of fair value, sets out a
framework for measuring fair value, and requires additional
disclosures about fair-value measurements. For Seaboard, SFAS
157 is effective for the fiscal year beginning January 1, 2008.
Management believes the adoption of SFAS 157 will not have a
material impact on Seaboard's financial position or net earnings.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159 (SFAS 159), "The Fair Value Option
for Financial Assets and Financial Liabilities." This statement
provides companies with an option to report selected financial
assets and liabilities at fair value. Seaboard will be required
to adopt this statement as of January 1, 2008. Seaboard is
currently evaluating its options under SFAS 159.
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 ($195.3 million or 64.8% at
December 31, 2006), including receivables from foreign affiliates
as discussed below and long term receivables in 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, 2006, 2005 and 2004 was $2.5 million, $4.0 million
and $2.5 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
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, 2006 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
22
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, 2006, the total investment in and
advances to foreign affiliates was $42.5 million. See Note 5
to the Consolidated Financial Statements for further discussion.
Accrued Pension Liability - The measurement of Seaboard's pension
liability and related expense is dependent on a variety of
assumptions and estimates regarding future events. These
assumptions include discount rates, assumed rate of return on
plan assets, compensation increases, turnover rates, mortality
rates and retirement rates. The discount rate and return on plan
assets are important elements of liability and expense
measurement and are reviewed on an annual basis. The effect of
changing the discount rate and assumed rate of return on plan
assets by 50 basis points would increase pension expense by
approximately $1.2 million per year. The effects of actual
results differing from the assumptions are primarily accumulated
in accrued pension liability and amortized over future periods
and, therefore, generally affect Seaboard's recognized pension
expense in such future periods.
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, 2006, Seaboard has deferred tax assets of
$36.6 million, net of the valuation allowance of $22.6 million,
and deferred tax liabilities of $143.6 million. For the years
ended December 31, 2006, 2005 and 2004, income tax expense
included $6.5 million, $5.4 million and $40.1 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, 2006. 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.
Inventories that are sensitive to changes in commodity prices,
including carrying amounts at December 31, 2006 and 2005, are
presented in Note 4 to the Consolidated Financial Statements.
Raw material requirements, finished
23
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, 2006.
Contract Volumes Wtd.-avg. Fair Value
Trading: Quantity Units Price/Unit Maturity (000's)
Futures Contracts:
Corn purchases-long 12,485,000 bushels $ 3.78 2007 $1,539
Corn sales-short 1,318,136 bushels 3.74 2007 (385)
Wheat purchases-long 2,774,010 bushels 5.16 2007 55
Wheat sales-short 1,462,936 bushels 5.48 2007 26
Soybean sales-short 165,000 bushels 6.76 2007 (13)
Soybean meal purchases-long 68,200 tons 187.86 2007 518
Soybean meal sales-short 60,100 tons 194.56 2007 (26)
Hog purchases-long 15,560,000 pounds .69 2007 (83)
Options Contracts:
Corn puts written-short 5,000 bushels .07 2007 -
Wheat puts written-short 200,000 bushels .10 2007 (1)
Wheat calls purchased-long 100,000 bushels $ .33 2007 $ 2
At December 31, 2005, Seaboard had net trading contracts to
purchase (sell) 1,512,000 bushels of grain with a fair value of
$3,715,000, (61,800) tons of meal with a fair value of
($904,000), 720,000 pounds of pork bellies with a fair value of
($26,000) and (440,000) pounds of hog with a fair value of
$39,000.
The table below provides information about the forward currency
exchange agreements entered into and financial instruments
sensitive to foreign currency exchange rates at
December 31, 2006. 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
2007. The table presents the contract amounts in fair values and
weighted average contractual exchange rate.
December 31, 2006 Contract
(Dollars in thousands) Amounts Fair Values
Trading:
Forward exchange agreements (receive $U.S./pay
South African Rand (ZAR)) $ 42,777 $(639)
Related weighted average contractual exchange rates:
Forward exchange agreements (receive $U.S./pay ZAR) 7.17
Forward exchange agreement, including projected
Interest due at maturity (receive Japanese Yen/pay
$U.S.) $ 58,435 $(783)
Related weighted average contractual exchange rates:
Forward exchange agreements (receive Japanese Yen/pay
$U.S.) 114.30
24
At December 31, 2005, Seaboard had net agreements to exchange the
equivalent of $57.9 million of South African rand at an average
contractual exchange rate of 6.47 ZAR to one U.S. dollar and a
fair value of $(1.1) million.
The table below provides information about Seaboard's non-trading
financial instruments sensitive to changes in interest rates at
December 31, 2006. For debt obligations, the table presents
principal cash flows and related weighted average interest rates
by expected maturity dates. At December 31, 2006, long-term debt
included foreign subsidiary obligations of $1.8 million
denominated in CFA francs (a currency used in several central
African countries), $0.3 million payable in Argentine pesos, and
$0.6 million denominated in Mozambique metical. At
December 31, 2005, long-term debt included foreign subsidiary
obligations of $2.0 million denominated in CFA francs,
$0.9 million payable in Argentine pesos, and $0.6 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) 2007 2008 2009 2010 2011 Thereafter Total
Long-term debt:
Fixed rate $63,127 $11,979 $47,274 $ 2,033 $ 1,477 $33,254 $159,144
Average interest rate 7.50% 6.81% 6.29% 11.15% 8.87% 7.22% 7.09%
Variable rate $ 288 $ - $ - $ - $ - $41,800 $ 42,088
Average interest rate 7.00% - - - - 3.98% 4.00%
Non-trading financial instruments sensitive to changes in
interest rates at December 31, 2005 consisted of fixed rate long-
term debt totaling $220.4 million with an average interest rate
of 5.54%, and variable rate long-term debt totaling $42.1 million
with an average interest rate of 3.63%.
During the second quarter of 2006, Seaboard terminated all
interest rate exchange agreements with a total notional value of
$150.0 million. Seaboard made payments in the amount of $1.0
million to unwind these swaps. Seaboard had originally entered
into these five, ten-year interest rate exchange agreements
during 2001 in which Seaboard paid a stated fixed rate and
received 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.
25
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 Rule 13a-15(f). 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, 2006.
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.
26
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, 2006 and 2005, 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, 2006.
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, 2006 and 2005, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 10 to the Consolidated Financial Statements,
the Company adopted Statement of Financial Accounting Standards
No. 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans, in 2006.
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, 2006, 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 5, 2007 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 5, 2007
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, 2006, 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 whether effective internal control
over financial reporting was maintained in all material respects.
Our audit included
27
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, 2006, 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,
2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
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, 2006 and 2005, 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, 2006, and our report dated March 5, 2007 expressed
an unqualified opinion on those consolidated financial
statements.
/s/KPMG LLP
Kansas City, Missouri
March 5, 2007
28
SEABOARD CORPORATION
Consolidated Statement of Earnings
(Thousands of dollars except per share amounts) 2006 2005 2004
Net sales:
Products $1,858,588 $1,950,896 $2,088,030
Service revenues 760,964 660,313 539,564
Other 87,845 77,685 56,386
Total net sales 2,707,397 2,688,894 2,683,980
Cost of sales and operating expenses:
Products 1,591,146 1,654,390 1,844,693
Services 586,142 511,394 416,132
Other 75,870 63,793 44,177
Total cost of sales and operating expenses 2,253,158 2,229,577 2,305,002
Gross income 454,239 459,317 378,978
Selling, general and administrative expenses 157,244 139,272 127,724
Operating income 296,995 320,045 251,254
Other income (expense):
Interest expense (18,774) (22,165) (26,406)
Interest income 25,257 14,186 8,132
Income (loss) from foreign affiliates 4,022 362 (2,045)
Minority and other noncontrolling interests (6,883) (4,521) (625)
Foreign currency gain (loss), net 1,210 (1,032) 1,616
Loss from the sale of a portion of operations - (1,748) -
Other investment income, net 4,381 1,962 1,629
Miscellaneous, net 10,216 5,723 (3,644)
Total other income (expense), net 19,429 (7,233) (21,343)
Earnings before income taxes 316,424 312,812 229,911
Income tax expense (57,735) (46,150) (61,815)
Net earnings $ 258,689 $ 266,662 $ 168,096
Basic earnings per common share $ 205.09 $ 212.20 $ 133.94
Diluted earnings per common share $ 205.09 $ 211.94 $ 133.94
Weighted average shares outstanding
Basic 1,261,367 1,256,645 1,255,054
Diluted 1,261,367 1,258,202 1,255,054
Dividends declared per common share $ 3.00 $ 3.00 $ 3.00
See accompanying notes to consolidated financial statements.
29
SEABOARD COPORATION
Consolidated Balance Sheets
December 31,
(Thousands of dollars except per share amounts) 2006 2005
Assets
Current assets:
Cash and cash equivalents $ 31,369 $ 34,622
Short-term investments 478,859 377,874
Receivables:
Trade 202,112 171,044
Due from foreign affiliates 52,416 45,240
Other 37,158 22,895
291,686 239,179
Allowance for doubtful accounts (14,638) (16,155)
Net receivables 277,048 223,024
Inventories 341,366 331,133
Deferred income taxes 12,894 9,743
Other current assets 55,033 70,814
Total current assets 1,196,569 1,047,210
Investments in and advances to foreign affiliates 42,457 39,992
Net property, plant and equipment 637,813 626,580
Goodwill 28,372 28,372
Intangible assets, net 28,760 30,120
Other assets 27,462 44,047
Total Assets $1,961,433 $1,816,321
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 62,975 $ 92,938
Current maturities of long-term debt 63,415 61,415
Accounts payable 103,429 112,177
Accrued compensation and benefits 78,818 61,466
Accrued voyage costs 30,860 31,940
Income taxes payable 2,525 2,407
Accrued financial derivative liabilities 1,422 6,368
Other accrued liabilities 45,798 50,678
Total current liabilities 389,242 419,389
Long-term debt, less current maturities 137,817 201,063
Deferred income taxes 119,861 124,749
Accrued pension liability 44,279 29,134
Other liabilities 27,824 28,082
Total non-current and deferred liabilities 329,781 383,028
Minority and other noncontrolling interests 39,103 36,034
Commitments and contingent liabilities
Stockholders' equity:
Common stock of $1 par value. Authorized 4,000,000
shares; issued and outstanding 1,261,367 shares 1,261 1,261
Additional paid-in capital 21,574 21,574
Accumulated other comprehensive loss (82,493) (53,025)
Retained earnings 1,262,965 1,008,060
Total stockholders' equity 1,203,307 977,870
Total Liabilities and Stockholders' Equity $1,961,433 $1,816,321
See accompanying notes to consolidated financial statements.
30
SEABOARD CORPORATION
Consolidated Statement of Cash Flows
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Cash flows from operating activities:
Net earnings $ 258,689 $ 266,662 $ 168,096
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 71,258 65,106 64,620
Loss (income) from foreign affiliates (4,022) (362) 2,045
Put option value change (5,400) (1,300) -
Other investment income, net (4,381) (1,962) (1,629)
Minority and noncontrolling interest 6,883 4,521 625
Loss from the sale of a portion of operations - 1,748 -
Deferred income taxes 6,358 5,371 39,566
Gain from sale of fixed assets (705) (2,081) (1,350)
Changes in current assets and liabilities,
net of portion of operations sold and
business acquired:
Receivables, net of allowance (49,613) 37,247 (70,133)
Inventories (11,349) (46,283) (18,744)
Other current assets 17,915 (25,417) (12,266)
Current liabilities, exclusive of debt (1,815) 15,678 30,851
Other, net (61) 12,204 (7,586)
Net cash from operating activities 283,757 331,132 194,095
Cash flows from investing activities:
Purchase of short-term investments (2,560,280) (819,643) (317,479)
Proceeds from the sale of short-term
investments 2,462,561 561,291 256,448
Purchase of long-term investments (4,585) - (1,722)
Proceeds from the sale of a portion of operations - 26,471 -
Acquisition of business - (47,993) -
Investments in and advances to foreign
affiliates, net 1,144 (399) 3,037
Capital expenditures (85,886) (64,241) (33,622)
Proceeds from the sale of fixed assets 3,498 4,933 9,254
Other, net (2,954) 3,988 2,090
Net cash from investing activities (186,502) (335,593) (81,994)
Cash flows from financing activities:
Notes payable to banks, net (29,963) 91,149 (73,775)
Principal payments of long-term debt (61,270) (60,580) (54,236)
Repurchase of minority interest in a controlled
subsidiary - (762) (5,000)
Dividends paid (3,784) (3,770) (3,765)
Bond construction fund - - 1,289
Dividends paid to minority and noncontrolling
interests (2,741) (2,073) (232)
Other, net (2,419) - (1,125)
Net cash from financing activities (100,177) 23,964 (136,844)
Effect of exchange rate change on cash (331) 499 1,986
Net change in cash and cash equivalents (3,253) 20,002 (22,757)
Cash and cash equivalents at beginning of year 34,622 14,620 37,377
Cash and cash equivalents at end of year $ 31,369 $ 34,622 $ 14,620
See accompanying notes to consolidated financial statements.
31
SEABOARD CORPORATION
Consolidated Statement of Changes in Equity
Accumulated
Other
(Thousands of dollars Common Additional Comprehensive Retained
except per share amounts) Stock Capital Loss Earnings Total
Balances, January 1, 2004 $ 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 taxes benefit of $606:
Foreign currency translation adjustment 757 757
Unrealized gain on investments 671 671
Unrecognized pension cost (666) (666)
Unrealized loss 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
Comprehensive income
Net earnings 258,689 258,689
Other comprehensive income net
of income tax benefit of $2,117:
Foreign currency translation adjustment (2,582) (2,582)
Unrealized gain on investments 433 433
Unrecognized pension cost (2,085) (2,085)
Unrealized loss on cash flow hedges (22) (22)
Amortization of deferred
gains on interest rate swaps (198) (198)
Comprehensive income 254,235
Adjustment to initially apply FASB
Statement No. 158, net of tax benefit of $11,253 (25,014) (25,014)
Dividends on common stock (3,784) (3,784)
Balances, December 31, 2006 $ 1,261 $21,574 $ (82,493) $1,262,965 $1,203,307
<FN>
See accompanying notes to consolidated financial statements.
32
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.
In the United States, Seaboard is primarily engaged
in pork production and processing, and ocean transporation.
Overseas, Seaboard is primarily engaged in commodity
merchandising, grain processing, 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, municipal debt
securities, corporate bonds and U.S. government obligations and,
on a limited basis, foreign government bonds, high yield bonds,
currency futures and domestic equity securities. 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. Gains and losses on sale of
investments are generally based on the specific identification
method.
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. Grain, flour and feed inventories
at foreign milling operations are valued at the lower of weighted
average cost or market. 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 and planned major maintenance,
repairs, and minor renewals are expensed as incurred while major
renewals and improvements are capitalized.
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.
33
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, or more frequently if
certain indicators arise. 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, 2006.
Accrued Self-Insurance
Seaboard is self-insured for certain levels of general and
vehicle liability, property, workers' compensation, product
recall and health care coverage. The cost of these self-
insurance programs is accrued based upon estimated settlements
for known and anticipated claims. Any resulting adjustments to
previously recorded reserves are reflected in current operating
results.
Deferred Grants
Included in other liabilities at December 31, 2006 and 2005 is
$7,740,000 and $8,164,000, respectively, of deferred grants. The
deferred grants represent economic development funds contributed
by government entities that were limited to construction of a
pork processing facility in Guymon, Oklahoma. Deferred grants
are being amortized as a reduction of depreciation expense over
the life of the assets acquired with the funds.
Asset Retirement Obligation
Seaboard has recorded long-lived assets and a related liability
for the asset retirement obligation costs associated with the
closure of the hog lagoons it is legally obligated to close in
the future should Seaboard cease operations or plan to close such
lagoons voluntarily in accordance with a changed operating plan.
Based on detailed assessments and appraisals obtained to estimate
the future retirement costs, Seaboard has determined and recorded
the present value of the projected costs with the retirement
asset depreciated over the economic life of the related asset.
The following table shows the changes in the asset retirement
obligation during 2006 and 2005.
Years ended December 31,
(Thousands of dollars) 2006 2005
Beginning balance $6,730 $6,266
Accretion expense 499 464
Ending balance $7,229 $6,730
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 with expenses associated
with containerized cargo service being recognized as incurred.
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
delivered in accordance with shipping terms, or services
rendered, the customer takes ownership and assumes risk of loss,
collection is reasonably assured and the sales price is fixed or
determinable. As a result of a marketing agreement with Triumph
Foods, beginning in 2006 Seaboard's sales prices for its pork
products included in product revenues are primarily based on an
average sales price and mix of products sold from both Seaboard's
and Triumph Foods' hog processing plants. Seaboard earns a fee
for marketing the pork products of Triumph Foods and recognizes
this fee as service revenue primarily based on the number of head
processed by Triumph Foods.
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
34
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.
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 the same for the years ended December 31, 2006 and
2004. 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.
Reclassification
Certain reclassifications have been made to prior year amounts on
the balance sheet to conform to the current year presentation.
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 bank overdrafts related to foreign subsidiaries in the
amounts of $438,000 and $59,000, at December 31, 2006 and 2005,
respectively. The amounts paid for interest and income taxes are
as follows:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Interest (net of amounts capitalized) $19,461 $23,116 $26,179
Income taxes (net of refunds) 47,515 68,243 11,752
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
35
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.
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. Included in foreign currency gain (loss),
net for the year ended December 31, 2006 is a foreign currency
gain of $1,695,000 recorded in December 2006. This gain reflects
the re-measurement as of December 31, 2006 of a note payable
denominated in Japanese Yen, as discussed in Note 8, of a foreign
consolidated subsidiary accounted for on a one month lag except
for this re-measurement of this note payable. This currency gain
was primarily offset by a mark-to-market currency loss at
December 31, 2006 from a foreign currency derivative contract
discussed in Note 9.
Seaboard's Sugar and Citrus segment and three non-controlled, non-
consolidated foreign affiliates (a Bulgarian wine business and
two milling businesses in Kenya and Lesotho), use local currency
as their functional currency. Assets and liabilities of these
subsidiaries are translated to U.S. dollars at year-end exchange
rates, and income and expense items are translated at average
rates. 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, 2006 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.
36
Accounting Changes and New Accounting Standards
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN
48), "Accounting for Uncertainty in Income Taxes", which defines
the threshold for recognizing the benefits of tax-return
positions in the financial statements as "more-likely-than-not"
to be sustained by the taxing authority. FIN 48 also prescribes
a method for computing the tax benefit of such tax positions to
recognize in the financial statements. In addition, FIN 48
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. Management believes the adoption of FIN 48 will not
have a material impact on Seaboard's financial position or net
earnings. Seaboard will be required to adopt FIN 48 as of
January 1, 2007.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 157
(SFAS 157), "Fair Value Measurements". This statement establishes
a single authoritative definition of fair value when accounting
rules require the use of fair value, sets out a framework for
measuring fair value, and requires additional disclosures about
fair-value measurements. For Seaboard, SFAS 157 is effective for
the fiscal year beginning January 1, 2008. Management believes
the adoption of SFAS 157 will not have a material impact on
Seaboard's financial position or net earnings.
In September 2006, the Securities and Exchange Commission (SEC)
staff issued Staff Accounting Bulletin No. 108 (SAB 108),
"Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements."
Traditionally, there have been two widely-recognized methods for
quantifying the effects of financial statement misstatements: the
"roll-over" method and the "iron curtain" method. In SAB 108,
the SEC staff established an approach that is commonly referred
to as a "dual approach" because it now requires quantification of
errors under both the iron curtain and the roll-over methods.
During the fourth quarter of 2006, Seaboard adopted SAB 108. The
adoption of SAB 108 did not have an effect on Seaboard's
financial position, net earnings or prior year financial
statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158 (SFAS 158), "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans". As
of December 31, 2006, Seaboard adopted SFAS 158. See Note 10 for
further discussion.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159 (SFAS 159), "The Fair Value Option
for Financial Assets and Financial Liabilities." This statement
provides companies with an option to report selected financial
assets and liabilities at fair value. Seaboard will be required
to adopt this statement as of January 1, 2008. Seaboard is
currently evaluating its options under SFAS 159.
As of January 1, 2006, Seaboard adopted Financial Accounting
Standards No. 151, "Inventory Costs" (SFAS 151), which amended
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.
The adoption of SFAS 151 did not have a material impact on
Seaboard's financial position or net earnings.
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 (Foods, 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 value of the 4.74% ownership interest issued to
the Sellers was based on an earnings multiple of the business
which approximates fair value. 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.
37
The sellers of Daily's had an option to put their 4.74% equity
interest in Foods 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 expired
after five years. Likewise, Seaboard had 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. On December 27, 2006, Seaboard entered into a
Purchase Agreement to repurchase the 4.74% equity interest in
Foods from the former owners of Daily's effective January 1,
2007. As part of the Purchase Agreement, on January 2, 2007
Seaboard paid $30 million of the purchase price for the 4.74%
equity interest to the former owners of Daily's. Seaboard will
pay the balance of the purchase price in August 2007, currently
estimated based on the formula to be an additional $10-$40
million depending on operating results and certain net cash flows
through June 30, 2007. The total purchase price for the 4.74%
equity interest is equal to the greater of $40 million or the
same formula-determined value of the original put option,
determined as of June 30, 2007; less the amount of interest which
accrues on the initial $30 million portion of the purchase from
January 2, 2007 through the date on which the balance of the
purchase price is paid.
The agreement to repurchase the 4.74% equity interest resulted in
the put option obligation being reduced to zero, as the purchase
price is representative of the fair value of the 4.74% equity
interest, with the offset to income as of December 31, 2006.
Included in other liabilities at December 31, 2005 is the value
of the put option obligation in the amount of $5,400,000, which
primarily represented the exposure that Seaboard could be forced
to repurchase the 4.74% minority interest at a price that
exceeded fair value at the exercise date. The decrease of the
put option obligation was primarily the result of the passage of
time decreasing this exposure to Seaboard. Included in
Miscellaneous, net for the years ended December 31, 2006 and 2005
is the change in fair value of the put option obligation for each
year since the date of acquisition of approximately $5,400,000
and $1,300,000, respectively.
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.
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) 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 factors that contributed to a
purchase price that resulted in the recognition of goodwill were
the expansion of Pork's integrated model into value-added
products allowing further realization from Pork's existing
products and enhancing Pork's ability to venture into other
further processed pork products and access to an expanded base of
industry knowledge and expertise. The following table is a
summary of goodwill and intangible assets acquired from Daily's
at December 31, 2006 and 2005.
38
December 31,
(Thousands of dollars) 2006 2005
Intangibles subject to amortization:
Gross carrying amount:
Customer relationships $ 5,300 $ 5,300
Covenants not to compete 1,500 1,500
6,800 6,800
Accumulated amortization:
Customer relationships (1,590) (530)
Covenants not to compete (450) (150)
(2,040) (680)
Net carrying amount:
Customer relationships 3,710 4,770
Covenants not to compete 1,050 1,350
Intangibles subject to amortization, net 4,760 6,120
Intangibles not subject to amortization:
Carrying amount-trade names and registered trademarks 24,000 24,000
Total intangible assets, net 28,760 30,120
Goodwill 28,372 28,372
Total goodwill and intangible assets, net $57,132 $58,492
The amortization expense of amortizable intangible assets for the
years ended December 31, 2006 and 2005 was approximately
$1,360,000 and $680,000, respectively. Amortization expense for
the four succeeding years is $1,360,000 for each of the next
three years and $680,000 in the fourth and final year of
amortizing these assets.
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. The counterparty to this
transaction is a South African company. During 2006, Seaboard re-
established its commodity trading business in markets associated
with the sale in 2005 of some components of its third party
commodity trading operations. Seaboard continues 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.
Since Seaboard does not use hedge accounting for its commodity
and foreign exchange derivative instruments, the derivative
instruments included in the sale 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.
Since Seaboard has conducted its commodity trading business with
third parties, consolidated subsidiaries, and foreign affiliates
on an interrelated basis and continues 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.
In January 2006, Seaboard paid $2,107,000 to purchase the equity
of a Variable Interest Entity (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. The
difference between the purchase price and non-controlling
interest resulted in an increase in fixed assets.
39
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 $72,000 as of
December 31, 2006 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 investments are treated as available-for-
sale securities and are stated at their fair market values. As
of December 31, 2006 and 2005, the short-term investments
primarily consisted of fixed rate municipal notes and bonds,
auction rate securities (ARS), variable rate demand notes (VRDN)
and money market funds. At December 31, 2006 and 2005, cost and
fair market value were not materially different for these
investments. The ARS have maturities over one year but provide
liquidity through a periodic auction typically held every 7, 28
or 35 days at which time the rate is reset. The VRDNs have
maturities over one year, however, liquidity is provided with a
put feature to the tender agent which allows the holder to sell
the VRDN at par plus accrued interest with a seven day notice.
Because the ARS and VRDN investments are frequently re-priced,
they trade in the market on par-in, par-out basis. In addition,
Seaboard has investments in domestic equity securities with a
cost basis of $3,960,000 and $5,056,000 at December 31, 2006 and
2005, respectively. All available-for-sale securities are
classified as current assets as they are readily available to
support Seaboard's current operating needs. At December 31, 2006
and 2005, short-term investments included $10,309,000 and
$7,491,000, respectively, 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, 2006 and 2005.
December 31,
(Thousands of dollars) 2006 2005
Auction rate securities $199,325 $103,815
Fixed rate municipal notes and bonds 192,753 -
Variable rate demand notes 51,872 154,795
Money market funds 25,193 113,951
Domestic equity securities 5,361 5,313
Other 4,355 -
Total short-term investments $478,859 $377,874
The following table summarizes the estimated fair value of fixed
rate municipal notes and bonds designated as available-for-sale
classified by the contractual maturity date of the security as of
December 31, 2006.
(Thousands of dollars) 2006
Due within one year $ 17,273
Due after one year through three years 93,606
Due after three years 81,874
Total fixed rate municipal notes and bonds $192,753
In addition to its short-term investments, as of December 31,
2006 and 2005 Seaboard also had long-term investments totaling
$8,010,000 and $4,100,000, respectively, included in other assets
on the Consolidated Balance Sheets. Included in this amount is
an investment in the power industry in the Dominican Republic.
As a result of receiving all final local government, regulatory,
and banking approvals and requisite consents, during the fourth
40
quarter of 2006 Seaboard invested $4,585,000 million, plus
$728,000 million previously placed in escrow in 2004, for a total
of $5,313,000 million, for a less than 20% ownership interest in
a company operating a 300 megawatt electricity generating
facility in the Dominican Republic. This investment is accounted
for using the cost method of accounting. Also, see Note 10 for a
discussion of assets held in conjunction with investments related
to Seaboard's deferred compensation plans.
Other investment income for each year is as follows:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Realized gain on sale of securities $1,703 $ 4 $ 196
Other 2,678 1,958 1,433
Other investment income, net $4,381 $1,962 $1,629
Note 4
Inventories
A summary of inventories at the end of each year is as follows:
December 31,
(Thousands of dollars) 2006 2005
At lower of LIFO cost or market:
Live hogs and materials $149,521 $146,661
Fresh pork and materials 19,443 22,987
168,964 169,648
LIFO adjustment 1,458 571
Total inventories at lower of LIFO cost or
market 170,422 170,219
At lower of FIFO cost or market:
Grain, primarily wheat, corn and soybeans 80,068 75,441
Sugar produced and in process 25,124 26,559
Other 29,016 27,282
Total inventories at lower of FIFO cost or
market 134,208 129,282
Grain, flour and feed at lower of weighted average cost or
market 36,736 31,632
Total inventories $341,366 $331,133
The use of the LIFO method increased 2006, 2005 and 2004 net
earnings by $541,000 ($0.43 per common share), $67,000 ($0.05 per
common share), and $4,922,000 ($3.92 per common share),
respectively. If the FIFO method had been used for certain
inventories of the Pork segment, inventories would have been
$1,458,000 and $571,000 lower as of December 31, 2006 and 2005,
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 the fourth quarter of 2006, Seaboard's remaining
individual investments in and advances to the Nigerian non-
consolidated foreign affiliates of $1,048,000 were written down
to zero as a result of Seaboard's proportionate share of
operating losses for these entities. Accordingly, Seaboard has
discontinued the use of the equity method of
41
accounting for these non-consolidated foreign affiliates until
such time Seaboard's share of the investee's net income equals
the share of net losses not recognized during the period the
equity method is suspended.
During 2005, milling operations ceased at Seaboard's non-
controlled, non-consolidated foreign affiliate in Angola.
Seaboard is exploring various alternatives to reopen the
operation. 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.
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, 2006, Seaboard had
advanced 2,240,000 Euros (approximately $2,718,000). As a result
of these additional advances, 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,
2006, the remaining carrying value of Seaboard's investments in
and advances to this Business total $3,073,000, including
$2,684,000 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 at December 31, 2006 is limited to
its remaining carrying value.
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.
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, 2006,
2005 and 2004 amounted to $242,442,000, $232,864,000, and
$229,422,000, respectively. At December 31, 2006 and 2005,
Seaboard had $38,748,000 and $34,013,000, respectively, of
investments in and advances to, and $51,227,000 and $44,459,000,
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 are as follows:
Commodity Trading and Milling Segment December 31,
(Thousands of dollars) 2006 2005 2004
Net sales $516,471 501,972 442,064
Net income $ 10,511 19,995 8,450
Total assets $234,212 215,269 202,788
Total liabilities $151,562 138,670 141,867
Total equity $ 82,650 76,599 60,921
42
Other Businesses December 31,
(Thousands of dollars) 2006 2005 2004
Net sales $ 29,096 28,611 33,230
Net loss $ (4,548) (7,427) (8,143)
Total assets $ 38,590 45,668 52,827
Total liabilities $ 42,160 44,266 43,969
Total equity $ (3,570) 1,402 8,858
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 2006 2005
Land and improvements 15 years $ 127,101 $ 115,334
Buildings and improvements 30 years 290,377 286,057
Machinery and equipment 3-20 years 617,738 596,257
Vessels and vehicles 3-18 years 136,350 127,419
Office furniture and fixtures 5 years 20,061 17,679
Construction in progress 25,609 8,644
1,217,236 1,151,390
Accumulated depreciation and amortization (579,423) (524,810)
Net property, plant and equipment $ 637,813 $ 626,580
Note 7
Income Taxes
Income taxes attributable to continuing operations for the years
ended December 31, 2006, 2005 and 2004 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) 2006 2005 2004
Computed "expected" tax expense $110,749 $109,484 $ 80,468
Adjustments to tax expense attributable to:
Foreign tax differences (48,630) (46,184) (18,585)
Tax-exempt investment income (4,276) (1,046) (221)
State income taxes, net of federal benefit 7,310 6,202 1,461
Change in valuation allowance (3,890) 4,290 (3,540)
Repatriation - 11,586 -
Federal and foreign audit settlements (2,509) (26,405) (14,356)
Other (1,019) (11,777) 16,588
Total income tax expense $ 57,735 $ 46,150 $ 61,815
43
Earnings before income taxes consists of the following:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
United States $139,725 $156,551 $120,398
Foreign $176,699 $156,261 $109,513
Total $316,424 $312,812 $229,911
The components of total income taxes are as follows:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Current:
Federal $ 40,032 $ 28,885 $ 16,132
Foreign 6,795 5,578 4,271
State and local 4,438 6,314 1,317
Deferred:
Federal (570) 1,287 39,249
Foreign 847 37 -
State and local 6,193 4,049 846
Income tax expense 57,735 46,150 61,815
Unrealized changes in other comprehensive
income (13,370) (606) 4,329
Total income taxes $ 44,365 $ 45,544 $ 66,144
Components of the net deferred income tax liability at the end of
each year are as follows:
December 31,
(Thousands of dollars) 2006 2005
Deferred income tax liabilities:
Cash basis farming adjustment $ 12,852 $ 12,418
Deferred earnings of foreign subsidiaries 1,079 347
Depreciation 96,525 93,159
LIFO 31,585 27,054
Other 1,525 2,423
143,566 135,401
Deferred income tax assets:
Reserves/accruals 38,678 20,013
Tax credit carryforwards 4,179 6,533
Net operating and capital loss carryforwards 15,769 35,076
Other 619 -
59,245 61,622
Valuation allowance 22,646 41,227
Net deferred income tax liability $106,967 $115,006
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 contained several provisions which benefit Seaboard. Of
particular note, the Act repealed the prior law treatment of
shipping income as a component of subpart F income. This change
means Seaboard will no longer accrue U.S. tax on its post-2004
shipping income, as such income is now deemed to be permanently
deferred foreign earnings, and had a material impact on
Seaboard's
44
2006 and 2005 results and future effective tax rate and cash
tax payments. This change decreased income tax expense
approximately $34,609,000 and $30,298,000, respectively, for the
years ended December 31, 2006 and 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. As of December 31, 2006, Seaboard
has not provided for U.S. Federal Income and foreign withholding
taxes on $239,209,000 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.
Seaboard's tax returns are regularly audited by federal, state
and foreign tax authorities, which may result in adjustments. In
the second quarter of 2006, Seaboard reached a settlement with
the Internal Revenue Service on its audit of Seaboard's 2004 and
2003 U.S. Federal Tax Returns. The favorable resolution of these
tax issues resulted in a tax benefit of $2,786,000 for items
previously reserved which was recorded in the second quarter of
2006. Also, 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.
Seaboard currently has tax holidays in three foreign countries
resulting in tax savings of approximately $3,969,000, $4,311,000
and $3,376,000 respectively, or $3.15, $3.43 and $2.69 per
diluted earnings per common share for the years ended December
31, 2006, 2005 and 2004, respectively. These tax holidays are
set to expire in 2007, 2008, and 2012 for each 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. The decrease
in the valuation allowance for 2006 was primarily the result of
lower foreign deferred tax assets, while in 2005 was the result
of additional capital losses and additional foreign deferred tax
assets, which management does not believe are more likely than
not to be realized. At December 31, 2006, Seaboard had foreign
net operating loss carryforwards (NOLs) of approximately
$36,465,000, a portion of which expire in varying amounts between
2007 and 2011, and others that have indefinite expiration
periods. At December 31, 2006, Seaboard had federal capital loss
carryforwards of approximately $12,178,000 expiring in varying
amounts in 2007 and 2008.
45
At December 31, 2006, Seaboard had state tax credit carry
forwards of approximately $6,420,000 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.
Note 8
Notes Payable and Long-term Debt
Notes payable amounting to $ 62,975,000 and $92,938,000 at
December 31, 2006 and 2005, respectively, consisted of
obligations due banks on demand or based on Seaboard's ability
and intent to repay within one year. During the second quarter
of 2006, Seaboard terminated a $50,000,000 committed line of
credit that had been entered into in December, 2005 in connection
with a one time qualifying foreign intercompany dividend paid as
discussed in Note 7. Seaboard terminated this line as foreign
subsidiaries generated sufficient cash to repay the facility in
its entirety during 2006. During the fourth quarter of 2006, a
foreign subsidiary of Seaboard entered into a new uncommitted
credit line denominated in Japanese Yen (approximately
$54,626,000 at December 31, 2006) to refinance intercompany debt.
At December 31, 2006, Seaboard had a committed line totaling
$100,000,000 and uncommitted lines totaling approximately
$159,699,000 of which $135,199,000 of the uncommitted lines
relate to foreign subsidiaries. At December 31, 2006, there were
no borrowings outstanding under the committed line and borrowings
totaled $62,975,000 under the uncommitted lines related to
foreign subsidiaries. The borrowings outstanding at December 31,
2006 related to foreign subsidiaries primarily included
$54,626,000 denominated in Japanese Yen and $7,931,000
denominated in South African Rand. At December 31, 2006,
Seaboard's borrowing capacity under its committed line 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 2.63% and 5.39% at
December 31, 2006 and 2005, respectively.
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) 2006 2005
Private placements:
7.88% senior notes, due 2007 $ 25,000 $ 50,000
5.80% senior notes, due 2007 through 2009 19,500 26,000
6.21% senior notes, due 2009 38,000 38,000
6.21% senior notes, due 2007 through 2012 6,429 7,500
6.92% senior notes, due 2012 31,000 31,000
Industrial Development Revenue Bonds, floating rates
(3.97% - 3.99% at December 31, 2006) due 2014
through 2027 41,800 41,800
Bank debt, 6.41% - 8.58%, due 2007 through 2010 34,075 61,710
Foreign subsidiary obligations, 2.00%-17.50%,
due 2009 through 2010 2,443 3,276
Foreign subsidiary obligation, floating rate due 2007 288 311
Capital lease obligations and other 2,697 2,881
201,232 262,478
Current maturities of long-term debt (63,415) (61,415)
Long-term debt, less current maturities $137,817 $201,063
Of the 2006 foreign subsidiary obligations, $1,847,000 is
denominated in CFA francs, $288,000 is payable in Argentine
pesos, and the remaining $596,000 is denominated in Mozambique
metical. 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.
46
Seaboard consolidates a limited liability company deemed to be a
VIE. As a result, bank debt totaling $24,803,000 and $27,918,000
as of December 31, 2006 and 2005, respectively, is included in
the table above. This bank debt is collateralized by fixed
assets with a net book value of $24,133,000 as of December 31,
2006. The weighted average interest rates were 7.54% at December
31, 2006 and 2005, respectively.
At December 31, 2006, Seaboard had additional bank debt secured
by hog production facilities and equipment with a net book value
of $35,419,000.
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 ($362,905,000 as of
December 31, 2006) 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, 2006.
Annual maturities of long-term debt at December 31, 2006 are as
follows: $63,415,000 in 2007, $11,979,000 in 2008, $47,274,000
in 2009, $2,033,000 in 2010, $1,477,000 in 2011 and $75,054,000
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, 2006 and 2005 are presented below.
December 31, 2006 2005
(Thousands of dollars) Cost Fair Value Cost Fair Value
Short-term investments $477,019 $478,859 $377,617 $377,874
Long-term debt 201,232 200,489 262,478 259,990
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 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 not directly related to its
raw material requirements.
At December 31, 2006 and 2005, Seaboard had open net contracts to
purchase and (sell) 12,313,000 and (1,512,000) bushels of grain
with fair values of $1,222,000 and $3,715,000, respectively, and
8,000 and (62,000) tons of soybean meal with fair values of
$492,000 and $(904,000), respectively, included with other
accrued financial derivative liabilities or current assets on the
Consolidated Balance Sheets. In addition, at December 31, 2006
Seaboard had net contracts to purchase 15,560,000 pounds of hogs
with fair values of $(83,000). At December 31, 2005, Seaboard
also had contracts to sell 440,000 pounds of hogs with a fair
value of $39,000 and contracts to
47
purchase 720,000 pounds of pork bellies with fair values of
$(26,000). For the years ended December 31, 2006, 2005 and
2004 Seaboard realized net gains (losses) of $12,157,000,
$(1,156,000), and $(11,886,000) 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. 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 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 2006 and
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, 2006 and 2005.
The net gains and losses recognized in the Consolidated
Statements of Earnings from the exchange agreements were not
material for the years ended December 31, 2004.
At December 31, 2006 and 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 $41,458,000 and $56,596,000, respectively,
with a fair value of $(644,000) and $(1,046,000), respectively,
included in accrued financial derivative liabilities on the
Consolidated Balance Sheet.
At December 31, 2006 and 2005, Seaboard had trading foreign
exchange contracts (receive $U.S./pay ZAR) to cover various
foreign currency working capital needs for notional amounts of
$1,319,000 and $1,259,000 respectively, with fair values of
$5,000 and $(11,000).
At December 31, 2006, Seaboard had trading foreign exchange
contracts (receive Japanese Yen/pay $U.S.) to cover note payable
borrowings for an uncommitted line of credit denominated in
Japanese Yen for notional amounts of $58,435,000 with a fair
value of $(783,000).
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, 2006 and 2005, deferred gains on prior year's
terminated interest rate exchange agreements (net of tax) totaled
$152,000 and $350,000, 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, 2006, 2005 and
2004, interest rate exchange agreements accounted for as hedges
decreased interest expense by $324,000 resulting from
amortization of terminated proceeds.
At December 31, 2005 Seaboard had five, ten-year interest rate
exchange agreements outstanding that were not paired with
specific variable rate contracts, whereby Seaboard paid a stated
fixed rate and received a variable rate of interest on a total
notional amount of $150,000,000. While Seaboard had certain
variable rate debt, these interest rate exchange agreements did
not qualify as hedges for accounting purposes. During the second
quarter of 2006, Seaboard terminated all interest rate exchange
agreements with a total notional value of $150,000,000. Seaboard
made payments in the amount of $1,028,000 to unwind these swaps.
At December 31, 2005, the fair values of these contracts totaled
$(5,311,000), and were included in accrued financial derivative
liabilities on the Consolidated Balance Sheets. For the years
ended December 31, 2006, 2005, and 2004 the net gain (loss) for
interest rate exchange agreements not accounted for as hedges
were $3,374,000, $2,996,000 and $(4,597,000), respectively, and
are included in Miscellaneous, net in the Consolidated Statements
of Earnings. Included in the gains and losses for 2006, 2005 and
2004 are net payments of $909,000, $4,047,000 and $6,403,000,
respectively, during 2006, 2005 and 2004 for the difference
between the fixed rate paid and variable rate received on these
contracts.
48
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 positive liquidity position for the past three years,
management authorized additional contributions to be made. In
December 2004 Seaboard made a $14,250,000 contribution
approximately equal to the maximum deductible amount for the 2004
plan year. In February 2006 Seaboard made a contribution of
$3,811,000 which was the maximum deductible contribution allowed
for the 2005 plan year. In March 2007, Seaboard may make a
deductible contribution of $10,000,000 for the 2006 plan year.
Although the maximum deductible amount for 2006 is $28,445,000,
at this time management does not plan on making any additional
contributions in 2007 for the 2006 plan year and currently does
not anticipate making any contributions during 2007 for the 2007
plan year.
Plan assets are invested to achieve a diversified overall
portfolio consisting primarily of individual stocks, bonds and
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:
Actual Plan Composition at December 31,
Target Percentage
of Portfolio 2006 2005
Domestic Large Cap Equity 35% 37% 36%
Domestic Small and Mid Cap
Equity 15% 14% 14%
International Equity 15% 17% 16%
Fixed Income 35% 32% 34%
Seaboard also sponsors non-qualified, unfunded supplemental
executive plans and has certain individual, non-qualified,
unfunded supplemental retirement agreements for certain retired
employees. 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 changed 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 had no effect on the 2004 net periodic benefit
cost, it increased unrecognized prior service cost by $8,697,000
at December 31, 2004, and increased net periodic benefit cost by
$599,000 for each of the years ended December 31, 2006 and 2005.
The unamortized prior service cost is being amortized over the
average remaining working lifetime of the active participants for
this plan. Management is considering funding options but
currently has no plans to provide funding for these supplemental
executive plans in advance of when the benefits are paid.
Assumptions used in determining pension information for the plans
were:
Years ended December 31,
2006 2005 2004
Weighted-average assumptions
Discount rate used to determine obligations 5.75% 5.50% 6.00%
Discount rate used to determine net periodic
benefit cost 5.50% 6.00% 6.25%
Expected return on plan assets 7.50% 7.50% 8.25%
Long-term rate of increase in compensation
levels 4.00-5.00% 4.00-5.00% 4.00-5.00%
49
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 2006
and 2005, management selected the discount rate based on Moody's
year-end published Aa corporate bond yield, rounded to the
nearest quarter percentage point and compared this rate for
reasonableness to a model-based result which the timing and
amount of cash outflows approximates the estimated payouts. For
2004, 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 2006 and 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, 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.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158 (SFAS 158), "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans".
This statement required companies to fully recognize, as an asset
or liability, the overfunded or underfunded status of its benefit
plan(s) with the offset to accumulated other comprehensive
income, a component of stockholders' equity. This statement
requires employers to recognize previously disclosed but
unrecognized gains/losses, prior service costs/credits, and
transition assets/obligations when recognizing a plan's funded
status as a component of shareholders' equity in accumulated
other comprehensive income. As of December 31, 2006, Seaboard
adopted SFAS 158. The adoption of SFAS 158 increased pension
liabilities by $15,427,000, reduced prepaid pension assets by
$13,342,000, reduced intangible pension assets by $7,498,000 and
reduced total shareholders' equity by $25,014,000, net of a
deferred tax asset of $11,253,000. SFAS 158 did not have an
effect on 2006 net earnings or prior year financial statements.
The changes in the plans' benefit obligations and fair value of
assets for the Plan, supplemental executive plans and retirement
agreements for the years ended December 31, 2006 and 2005, and a
statement of the funded status as of December 31, 2006 and 2005
are as follows:
December 31, 2006 2005
Accumulated Assets exceed Accumulated
benefits accumulated benefits
(Thousands of dollars) exceed assets benefits exceed assets
Reconciliation of benefit obligation:
Benefit obligation at beginning of year $100,706 $ 53,118 $ 34,664
Service cost 4,415 2,497 1,416
Interest cost 5,902 3,136 2,001
Actuarial gains 15,131 3,812 2,618
Benefits paid (4,824) (1,560) (996)
Benefit obligation at end of year $121,330 $ 61,003 $ 39,703
Reconciliation of fair value of plan
assets:
Fair value of plan assets at beginning
of year $ 57,383 $ 55,896 $ -
Actual return on plan assets 7,996 3,047 -
Employer contributions 6,583 - 996
Benefits paid (4,824) (1,560) (996)
Fair value of plan assets at end of
year $ 67,138 $ 57,383 $ -
Funded status (54,192) (3,620) (39,703)
Unrecognized transition obligation - - 97
Unamortized prior service cost - (389) 8,974
Unrecognized net actuarial losses - 16,939 6,989
Prepaid (accrued) benefit cost $(54,192) $ 12,930 $(23,643)
50
The funded status for the Plan was $(1,812,000) and $(3,620,000)
at December 31, 2006 and 2005, respectively. The accumulated
benefit obligation for the Plan was $62,950,000 and $57,342,000
and for the other plans was $39,346,000 and $31,790,000 at
December 31, 2006 and 2005, respectively. 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: $13,383,000, $5,954,000, $4,825,000,
$6,076,000, $5,252,000, and $41,545,000, respectively.
Amounts recognized in the Consolidated Balance Sheets as of
December 31, 2006 and 2005 consist of:
December 31 2006 2005
Accumulated Assets exceed Accumulated
benefits accumulated benefits
(Thousands of dollars) exceed assets benefits exceed assets
Prepaid benefit cost $ - $ 12,930 $ -
Accrued benefit liability (54,192) - (30,599)
Intangible asset - - 5,249
Accumulated other comprehensive income - - 1,707
Prepaid (accrued) benefit cost $(54,192) $ 12,930 $(23,643)
The amounts not reflected in net periodic benefit cost and
included in accumulated other comprehensive income (AOCI) at
December 31, 2006 was as follows:
(Thousands of dollars) 2006
Accumulated loss, net of gain $(33,379)
Prior service cost, net of credit (7,931)
Transitional obligation (81)
Total Accumulated Other Comprehensive Income $(41,391)
The net periodic benefit cost of these plans was as follows:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Components of net periodic benefit cost:
Service cost $ 4,415 $ 3,913 $ 3,310
Interest cost 5,902 5,137 4,370
Expected return on plan assets (4,462) (4,115) (2,873)
Amortization and other 2,815 1,323 838
Net periodic benefit cost $ 8,670 $ 6,258 $ 5,645
The amounts in AOCI expected to be recognized as components of
net periodic benefit cost in 2007 are as follows:
(Thousands of dollars) 2007
Accumulated loss, net of gain $ 1,628
Prior service cost, net of credit 590
Transition obligation 16
Settlement loss 3,671
Estimated net periodic benefit cost $ 5,905
Effective July 6, 2006, Mr. H. H. Bresky retired as President and
CEO of Seaboard, remaining as Chairman of the Board. As a result
of Mr. Bresky's retirement, he was entitled to a lump sum payment
of $8,709,000 from Seaboard's Executive Retirement Plan as of
December 31, 2006. Under the Act discussed in Note 7 above,
there is a six month delay of benefit payments for key employees
and thus Mr. Bresky was not paid his lump sum until February
2007. This lump sum payment exceeded the Company's service and
interest cost components under this plan and thus
51
required Seaboard to recognize a portion of its actuarial losses.
However, Seaboard was not relieved of its obligation until the
settlement was paid in 2007. Accordingly, the settlement loss of
$3,671,000 was deferred as of December 31, 2006 and recognized in
February 2007 in accordance with SFAS No. 88, "Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension for Termination Benefits."
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 $442,000,
$452,000 and $346,000 for the years ended December 31, 2006, 2005
and 2004, respectively. The applicable portion of the total plan
benefits and net assets of this plan is not separately
identifiable although Seaboard has 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. 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 $1,643,000, $1,604,000 and
$1,445,000 for the years ended December 31, 2006, 2005 and 2004,
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 $554,000,
$440,000 and $250,000 for the years ended December 31, 2006, 2005
and 2004, respectively.
Beginning in 2006, Seaboard established a deferred compensation
plan which allows certain employees to reduce their compensation
in exchange for values in two investments. Seaboard has an
Investment Option Plan which allowed certain employees to reduce
their compensation in exchange for an option to acquire interests
measured by reference to two investments. However, as a result
of U.S. tax legislation passed in October 2004, reductions to
compensation earned after 2004 is no longer allowed under the
Investment Option Plan. The exercise price for each investment
option was established based upon the fair market value of the
underlying investment on the date of grant. Under both plans,
Seaboard contributed 3% of the employees reduced compensation.
Seaboard's expense for these two deferred compensation plans,
which primarily includes amounts related to the change in fair
value of the underlying investment accounts, was $2,466,000,
$1,433,000 and $1,602,000 for the years ended December 31, 2006,
2005 and 2004, respectively. Included in other liabilities at
December 31, 2006 and 2005 are $19,009,000 and $15,250,000,
respectively, representing the market value of the payable to the
employees upon exercise for both plans. In conjunction with
these plans, Seaboard purchased the specified number of units of
the employee-designated investment plus the applicable option
price for the Investment Option Plan. These investments are
treated as trading securities and are stated at their fair market
values. Accordingly, as of December 31, 2006 and 2005,
$22,787,000 and $19,094,000 were included in other current assets
on the Consolidated Balance Sheets. Investment income related to
the mark-to-market of these investments for 2006, 2005, and 2004
totaled $2,358,000, $1,376,000 and $1,537,000, respectively.
Note 11
Commitments and Contingencies
Seaboard Foods has been subject to an ongoing Unilateral
Administrative Order ("RCRA Order") filed by the United States
Environmental Protection Agency ("EPA") on June 29, 2001. The
RCRA Order relates to five swine farms located in Oklahoma
purchased by Seaboard Foods from PIC International Group, Inc.
("PIC"), which is also a party to the RCRA Order. On
September 11, 2006, Seaboard Foods and PIC signed a Consent
Decree with the United States to resolve the RCRA Order, which
Consent Decree was approved by the U.S. District Court on
December 8, 2006. Pursuant to the Consent Decree, Seaboard Foods
and PIC agreed to a civil penalty totaling $240,000, which PIC
has paid. In addition to payment of the civil penalty,
Seaboard Foods and PIC agreed to take a number of remedial
actions with respect to the five farms subject to the RCRA Order,
and Seaboard Foods agreed to take additional remedial actions
with respect to one additional farm. Seaboard Foods' share of
the costs for future remediation actions are not expected to be
material.
52
In March 2006, Seaboard Foods entered into a Settlement Agreement
with the State of Oklahoma to resolve a regulatory action with
respect to the same properties involved in the EPA RCRA Order.
Pursuant to this Settlement Agreement, Seaboard Foods paid a fine
of $100,000, agreed to undertake certain supplemental
environmental projects at a cost of $80,000, and agreed to take
remedial actions that are substantially identical to those
provided for in the Consent Decree with the United States
discussed above.
PIC is jointly responsible for the remedial obligations under the
EPA Consent Decree and has been indemnifying Seaboard Foods with
respect thereto, pursuant to an indemnification agreement which
has a $5,000,000 limit. PIC previously advised Seaboard Foods
that it is not responsible for the expenditures in excess of
$5,000,000, which Seaboard Foods disputes. Although there has
been no formal resolution of this dispute with PIC, the amounts
expended to date by PIC total in excess of $5,000,000, and PIC
has continued to pay substantially all expenditures required to
comply with the EPA Consent Decree and thus no accrual for such
costs has been recorded by Seaboard. Moreover, as noted above,
PIC is jointly responsible for the remedial obligations and
substantially all other obligations under the EPA Consent Decree.
As such, Seaboard believes that PIC will continue to take the
actions necessary and to pay the costs of complying with the EPA
Consent Decree and thus no accrual for such costs has been
recorded by Seaboard. Seaboard Foods also believes that a more
general indemnity agreement would require indemnification of
liability in excess of $5,000,000 although PIC disputes this.
Accordingly, management does not believe there is any future
material exposure for Seaboard related to these remediation
actions and the related PIC indemnification.
During the fourth quarter of 2005, 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 has
responded to the allegations and is engaged in discussions with
U.S. Customs and Border Protection regarding the matter.
Management believes that the resolution of the matter will not
have a material adverse effect on the consolidated financial
statements 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 of Seaboard.
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. As of December 31, 2006,
Seaboard had three guarantees outstanding with a total maximum
exposure of $2,403,000. 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, 2006, Seaboard had outstanding $61,782,000 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, 2006 Seaboard had various firm noncancelable
purchase commitments and commitments under other agreements,
arrangements and operating leases as described in the table
below.
53
Purchase commitments Years ended December 31,
(Thousands of dollars) 2007 2008 2009 2010 2011 Thereafter
Hog procurement contracts $108,092 $ 82,608 $32,564 $33,526 $ - $ -
Grain and feed ingredients 50,112 695 - - - -
Grain purchase contracts for
resale 162,262 - - - - -
Fuel purchase contract 13,175 - - - - -
Equipment purchases
and facility improvements 57,852 - - - - -
Other purchase commitments 7,720 - - - - -
Total firm purchase
commitments 399,213 83,303 32,564 33,526 - -
Vessel time-charter
arrangements 68,089 13,312 - - - -
Contract grower finishing
agreements 11,948 11,909 11,873 11,870 11,098 61,356
Other operating lease payments 10,252 7,655 3,350 2,505 1,912 4,335
Total unrecognized firm
commitments $489,502 $116,179 $47,787 $47,901 $13,010 $65,691
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, 2006. During 2006, 2005 and 2004, this segment paid
$114,921,000, $155,406,000 and $177,107,000, respectively for
live hogs purchased under committed contracts.
The Commodity Trading and Milling segment enters into grain
purchase contracts and ocean freight contracts, primarily to
support firm sales commitments. These contracts are valued based
on projected commodity prices as of December 31, 2006. 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 2007 at market-based
prices. The fuel commitment shown above reflects the average
price per barrel at December 31, 2006 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. These contracts range from short-term
time-charter for a few months and long-term commitments ranging
from one to three years. In addition to its long-term lease
agreements, the short-term time-charter contracts of $112,000 for
2007 are included above in vessel time-charter arrangements.
This segment's charter hire expenses during 2006, 2005 and 2004
totaled $91,747,000, $76,668,000 and $51,064,000, 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 service agreements. 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 2006,
2005 and 2004, Seaboard paid $13,646,000, $12,970,000 and
$10,099,000, respectively, under contract grower finishing
agreements.
Seaboard also leases various facilities and equipment under
noncancelable operating lease agreements. Rental expense for
operating leases amounted to $13,132,000, $11,542,000 and
$10,420,000 in 2006, 2005 and 2004, respectively.
54
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, 2006, Seaboard had not received any cash
payments from the subsidiary of its Parent Company and does not
currently expect to receive any material amount of cash prior to
the expiring of the right to receive such payments on September
17, 2007.
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,
2006 2005 2004
Weighted-average number of shares
Common shares - basic 1,261,367 1,256,645 1,255,054
Effect of weighted average dilutive securities
for common stock issued to Parent - 1,557 -
Common shares - diluted 1,261,367 1,258,202 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) 2006 2005 2004
Cumulative foreign currency translation
adjustment $(55,811) $(53,229) $(53,986)
Unrealized gain on investments 1,361 928 257
Unrecognized pension cost (28,140) (1,041) (375)
Net unrealized loss on cash flow hedges (55) (33) (188)
Deferred gain on interest rate swaps 152 350 551
Accumulated other comprehensive loss $(82,493) $(53,025) $(53,741)
55
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, 2006, the Sugar and
Citrus segment had $107,156,000 in net assets denominated in
Argentine pesos, $13,604,000 in net assets denominated in U.S.
dollars and $54,626,000 of liabilities denominated in Japanese
Yen in Argentina.
As discussed in Note 10, as of December 31, 2006 Seaboard adopted
SFAS 158 resulting in a $25,014,000 increase in unrecognized
pension cost net of a deferred tax benefit of $11,253,000.
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. For 2006, the unrecognized pension cost includes
$7,413,000 related to employees at certain subsidiaries for which
no tax benefit has been recorded.
Note 13
Segment Information
Seaboard Corporation had five reportable segments through
December 31, 2006: Pork, Commodity Trading and Milling, Marine,
Sugar and Citrus, and Power, each offering a specific product or
service. Seaboard's reporting segments are based on information
used by Seaboard's Chief Executive Officer in his capacity as
chief operating decision maker 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. 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, citrus and alcohol 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
operations.
The Pork segment derives between 10% to 13% percent of its
revenues from three customers in Japan through one agent. In
addition, approximately all of its hourly employees at its Guymon
processing plant are covered by a collective bargaining
agreement. During the first quarter of 2006, Triumph Foods began
production at its new pork processing plant and Seaboard began
marketing the related pork products for a fee primarily based on
the number of head processed by Triumph Foods. The Triumph Foods
plant is expected to reach full double shift operating capacity
during 2007.
At times during 2006, Seaboard's power production was restricted
by the regulatory authorities in the Dominican Republic. The
regulatory body schedules production based on the amount of funds
available to pay for the power produced and the relative costs of
the power produced. During the last half of 2005, management
decided to produce at near capacity as a result of a more stable
payment performance from all customers, while during 2004
Seaboard curtailed its level of power production from time to
time due to lack of payments from spot sales. In addition,
approximately $1,932,000 of spot market sales were not recorded
during the second half of 2004 as collection was not reasonably
assured. Certain receivables from 2004 spot sales are still
outstanding. As of December 31, 2006, Seaboard's net receivable
exposure from customers with significant past due balances
totaled $2,775,000, which represents receivables from two
customers classified in other long-term assets on the
Consolidated Balance Sheets.
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
$741,000, $(1,569,000) and $2,460,000 for 2006, 2005 and 2004,
respectively.
Seaboard's produce division, representing the majority of sales
in the All Other segment, derives almost all of its revenues from
one customer.
56
Seaboard's investment in a Bulgarian wine business (the Business)
and related losses from this Business are included in the All
Other Segment. As a result of an agreement for additional
advances made discussed in Note 5 which changed distribution
priorities, 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. As a result, Seaboard decreased
its share of the losses from 100% in 2005 to 50% in 2006. During
2005, based on a change in Seaboard's claim on the Business' book
value, Seaboard increased its share of losses from this Business
to 100% in 2005 from 37% in 2004. 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.
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) 2006 2005 2004
Pork $1,002,656 $1,023,885 $ 961,614
Commodity Trading and Milling 735,583 835,662 1,066,545
Marine 741,563 638,296 498,504
Sugar and Citrus 123,378 88,969 72,940
Power 87,845 77,685 56,386
All Other 16,372 24,397 27,991
Segment/Consolidated Totals $2,707,397 $2,688,894 $2,683,980
Operating Income:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Pork $ 138,303 $ 182,749 $ 147,428
Commodity Trading and Milling 37,225 34,374 29,269
Marine 106,033 90,922 63,929
Sugar and Citrus 19,184 11,884 12,225
Power 8,471 9,561 4,409
All Other 1,530 2,604 3,196
Segment Totals 310,746 332,094 260,456
Corporate (13,751) (12,049) (9,202)
Consolidated Totals $ 296,995 $ 320,045 $ 251,254
57
Income (Loss) from Foreign Affiliates:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Commodity Trading and Milling $ 6,323 $ 8,138 $ 5,806
Sugar and Citrus (1,060) 111 687
All Other (1,241) (7,887) (8,538)
Segment/Consolidated Totals $ 4,022 $ 362 $ (2,045)
Depreciation and Amortization:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Pork $ 43,744 $ 41,098 $ 40,017
Commodity Trading and Milling 3,974 3,344 2,945
Marine 13,502 11,047 11,504
Sugar and Citrus 5,800 5,176 4,214
Power 3,763 3,831 5,363
All Other 192 375 360
Segment Totals 70,975 64,871 64,403
Corporate 283 235 217
Consolidated Totals $ 71,258 $ 65,106 $ 64,620
Total Assets:
December 31, December 31,
(Thousands of dollars) 2006 2005
Pork $ 721,514 $ 731,422
Commodity Trading and Milling 301,672 282,160
Marine 176,673 150,797
Sugar and Citrus 133,971 112,882
Power 66,978 77,206
All Other 8,464 8,991
Segment Totals 1,409,272 1,363,458
Corporate 552,161 452,863
Consolidated Totals $ 1,961,433 $ 1,816,321
Investment in and Advances to Foreign Affiliates:
December 31,
(Thousands of dollars) 2006 2005
Commodity Trading and Milling $ 38,748 $ 34,013
Sugar and Citrus 636 1,987
All Other 3,073 3,992
Segment/Consolidated Totals $ 42,457 $ 39,992
58
Capital Expenditures:
Years ended December 31,
(Thousands of dollars) 2006 2005 2004
Pork $ 30,324 $ 8,070 $ 11,807
Commodity Trading and Milling 4,024 13,811 4,862
Marine 30,429 30,028 10,345
Sugar and Citrus 18,379 11,195 5,485
Power 107 277 198
All Other 1,033 820 847
Segment Totals 84,296 64,201 33,544
Corporate 1,590 40 78
Consolidated Totals $ 85,886 $ 64,241 $ 33,622
Administrative services provided by the corporate office
allocated to the individual segments represent corporate services
rendered to and costs incurred for each specific division with no
allocation to individual segments of general corporate management
oversight costs. Corporate assets include short-term
investments, other current assets related to deferred
compensation plans, 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 $172,067,000,
$167,748,000 and $355,475,000 for the years ended December 31,
2006, 2005 and 2004, respectively, representing approximately 6%,
6% and 13% 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) 2006 2005 2004
United States $1,027,295 $ 992,322 $ 951,650
Caribbean, Central and South America 845,577 839,305 713,921
Africa 588,050 570,975 744,552
Pacific Basin and Far East 147,560 164,584 133,307
Canada/Mexico 78,044 74,788 70,208
Eastern Mediterranean 3,979 29,312 51,786
Europe 16,892 17,608 18,556
Totals $2,707,397 $2,688,894 $2,683,980
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) 2006 2005
United States $ 520,215 $ 526,938
Dominican Republic 31,251 35,566
Argentina 55,386 44,231
All other 31,325 20,835
Totals $ 638,177 $ 627,570
At December 31, 2006 and 2005, Seaboard had approximately
$142,848,000 and $111,801,000, 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 accounts is adequate.
59
Board of Directors
H.H. Bresky Steven J. Bresky
Chairman of the Board Director
Retired, former President and President and Chief Executive Officer
Chief Executive Officer
David A. Adamsen Kevin M. Kennedy
Director Director
Vice President - Chief Financial Officer,
Wholesale & Manufacturing, Seaspan Corporation
The Penn Traffic Company
Joseph E. Rodrigues
Director
Douglas W. Baena Retired, former Executive Vice
Director President and Treasurer
Chief Executive Officer,
CreditAmerica, Inc.
Officers
Steven J. Bresky Ralph L. Moss
President and Chief Executive Vice President, Governmental
Officer Affairs
Robert L. Steer David S. Oswalt
Senior Vice President, Chief Vice President, Taxation and
Financial Officer Business Development
David M. Becker John A. Virgo
Vice President, General Counsel Vice President, Corporate
and Secretary Controller and Chief Accounting
Officer
Barry E. Gum
Vice President, Finance and Adriana N. Hoskins
Treasurer Assistant Treasurer
James L. Gutsch
Vice President, Engineering
Chief Executive Officers of Principal Seaboard Operations
Rodney K. Brenneman Richard A. Watt
Pork Sugar & Citrus
David M. Dannov Armando G. Rodriguez
Commodity Trading and Milling Power
Edward A. Gonzalez
Marine
Stock Transfer Agent and Availability of 10-K Report
Registrar of Stock
Seaboard files its Annual
UMB Bank, n.a. Report on Form 10-K with the
Securities Transfer Division Securities and Exchange
P.O. Box 410064 Commission. Copies of the
Kansas City, Missouri 64141-0064 Form 10-K for fiscal 2006 are
(800) 884-4225 available without charge by
writing Seaboard Corporation,
9000 West 67th Street, Shawnee
Auditors Mission, Kansas 66202,
Attention: Shareholder
KPMG LLP Relations or via the Internet
1000 Walnut, Suite 1000 at www.seaboardcorp.com.
Kansas City, Missouri 64106 Seaboard provides access to its most
recent Form 10-K, 10-Q and 8-K
Stock Listing reports on its Internet website,
free of charge, as soon as
Seaboard's common stock is reasonably practicable after
traded on the American Stock those reports are electronically
Exchange under the symbol SEB. filed with the Securities and
Seaboard had 169 shareholders Exchange Commission.
of record of shares of its
common stock as of February
16, 2007.
60