UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2010
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission File Number 1-3390
Seaboard Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-2260388
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9000 W. 67th Street, Shawnee Mission, Kansas 66202
(Address of principal executive offices) (Zip Code)
(913) 676-8800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes __ No __
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or
a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes . No X .
There were 1,215,879 shares of common stock, $1.00 par value per
share, outstanding on October 29, 2010.
Total pages in filing - 25 pages
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Thousands of dollars except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
2010 2009 2010 2009
Net sales:
Products (includes sales to
foreign affiliates of $120,670, $ 849,049 $ 647,256 $2,403,174 $1,990,553
$138,396, $363,891 and $399,296,
respectively)
Services 231,029 176,906 681,659 575,611
Other 31,735 30,463 95,719 75,859
Total net sales 1,111,813 854,625 3,180,552 2,642,023
Cost of sales and operating expenses:
Products 795,722 619,824 2,160,084 1,911,566
Services 196,379 162,272 584,637 503,339
Other 25,738 26,049 78,776 65,955
Total cost of sales and operating
expenses 1,017,839 808,145 2,823,497 2,480,860
Gross income 93,974 46,480 357,055 161,163
Selling, general and administrative
expenses 52,332 49,159 146,700 145,031
Operating income (loss) 41,642 (2,679) 210,355 16,132
Other income (expense):
Interest expense (1,731) (3,493) (5,647) (10,592)
Interest income 2,945 3,734 10,263 11,878
Income from affiliates 4,851 5,273 16,275 12,865
Foreign currency gain, net 5,552 1,130 2,623 325
Other investment income, net 7,819 5,574 8,704 12,953
Gain on disputed sale, net of
expenses - 16,787 - 16,787
Miscellaneous, net (3,843) 164 (6,479) 6,358
Total other income, net 15,593 29,169 25,739 50,574
Earnings before income taxes 57,235 26,490 236,094 66,706
Income tax benefit (expense) (17,752) 9,758 (56,591) 12,248
Net earnings $ 39,483 $ 36,248 $ 179,503 $ 78,954
Less: Net losses attributable
to noncontrolling interests 386 467 748 653
Net earnings attributable to
Seaboard $ 39,869 $ 36,715 $ 180,251 $ 79,607
Earnings per common share $ 32.74 $ 29.69 $ 146.93 $ 64.32
Dividends declared per common
share $ 0.75 $ 0.75 $ 2.25 $ 2.25
Average number of shares
outstanding 1,217,828 1,236,758 1,226,780 1,237,675
See accompanying notes to condensed consolidated financial statements.
2
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Thousands of dollars)
(Unaudited)
October 2, December 31,
2010 2009
Assets
Current assets:
Cash and cash equivalents $ 57,422 $ 61,857
Short-term investments 536,137 407,351
Receivables, net of allowance 326,594 270,647
Inventories 468,248 498,587
Deferred income taxes 18,845 10,490
Deferred costs 82,040 95,788
Other current assets 130,941 80,582
Total current assets 1,620,227 1,425,302
Investments in and advances to affiliates 117,494 82,232
Net property, plant and equipment 701,900 691,343
Goodwill 40,628 40,628
Intangible assets, net 19,927 20,676
Other assets 59,676 76,952
Total assets $2,559,852 $2,337,133
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 79,408 $ 81,262
Current maturities of long-term debt 1,683 2,337
Accounts payable 118,301 141,193
Deferred revenue 164,673 112,889
Other current liabilities 231,692 180,359
Total current liabilities 595,757 518,040
Long-term debt, less current maturities 75,162 76,532
Deferred income taxes 65,911 59,546
Other liabilities 134,055 137,596
Total non-current and deferred liabilities 275,128 273,674
Stockholders' equity:
Common stock of $1 par value, Authorized
1,250,000 shares;
issued and outstanding 1,215,879 and
1,236,758 shares 1,216 1,237
Accumulated other comprehensive loss (117,888) (114,786)
Retained earnings 1,802,746 1,655,222
Total Seaboard stockholders' equity 1,686,074 1,541,673
Noncontrolling interests 2,893 3,746
Total equity 1,688,967 1,545,419
Total liabilities and stockholders' equity $2,559,852 $2,337,133
See accompanying notes to condensed consolidated financial statements.
3
SEABOARD CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Thousands of dollars)
(Unaudited)
Nine Months Ended
October 2, October 3,
2010 2009
Cash flows from operating activities:
Net earnings $ 179,503 $ 78,954
Adjustments to reconcile net earnings to cash
from operating activities:
Depreciation and amortization 65,648 69,111
Income from affiliates (16,275) (12,865)
Dividends received from affiliates 1,389 1,937
Other investment income, net (8,704) (12,953)
Foreign currency exchange (gain) loss (117) 6,166
Deferred income taxes (1,148) (12,836)
Loss (gain) from sale of fixed assets (2,573) 472
Gain on disputed sale, net of expenses - (16,787)
Changes in current assets and liabilities:
Receivables, net of allowance (53,182) 58,904
Inventories 26,152 17,300
Other current assets (15,460) (56,762)
Current liabilities, exclusive of debt 64,618 62,658
Other, net 12,134 2,752
Net cash from operating activities 251,985 186,051
Cash flows from investing activities:
Purchase of short-term investments (590,925) (267,244)
Proceeds from the sale of short-term investments 402,625 180,692
Proceeds from the maturity of short-term investments 62,837 57,055
Acquisition of business, net of cash acquired (5,578) -
Investments in and advances to affiliates, net (19,009) 76
Capital expenditures (77,897) (39,140)
Proceeds from the sale of fixed assets 4,812 2,931
Payment received for the potential sale of power barges - 15,000
Net proceeds from disputed sale - 16,787
Other, net 2,159 (3,524)
Net cash from investing activities (220,976) (37,367)
Cash flows from financing activities:
Notes payable to banks, net (1,856) (97,622)
Principal payments of long-term debt (2,088) (46,669)
Repurchase of common stock (29,994) (3,370)
Dividends paid (2,756) (2,783)
Other, net 238 212
Net cash from financing activities (36,456) (150,232)
Effect of exchange rate change on cash 1,012 (2,869)
Net change in cash and cash equivalents (4,435) (4,417)
Cash and cash equivalents at beginning of year 61,857 60,594
Cash and cash equivalents at end of period $ 57,422 $ 56,177
See accompanying notes to condensed consolidated financial statements.
4
SEABOARD CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 - Accounting Policies and Basis of Presentation
The condensed consolidated financial statements include the accounts
of Seaboard Corporation and its domestic and foreign subsidiaries
("Seaboard"). All significant intercompany balances and
transactions have been eliminated in consolidation. Seaboard's
investments in non-consolidated affiliates are accounted for by the
equity method. The unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated
financial statements of Seaboard for the year ended
December 31, 2009 as filed in its Annual Report on Form 10-K.
Seaboard's first three quarterly periods include approximately 13
weekly periods ending on the Saturday closest to the end of March,
June and September. Seaboard's year-end is December 31.
The accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of financial position, results of
operations and cash flows. Results of operations for interim
periods are not necessarily indicative of results to be expected for
a full year. As Seaboard conducts its commodity trading business
with third parties, consolidated subsidiaries and non-consolidated
affiliates on an interrelated basis, gross margin on non-
consolidated affiliates cannot be clearly distinguished without
making numerous assumptions primarily with respect to mark-to-market
accounting for commodity derivatives.
Use of Estimates
The preparation of the condensed consolidated financial statements
in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the condensed
consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Net cash from operating activities was increased and net cash from
investing activities was decreased from prior year presentation by
$1,937,000 for the first nine months of 2009 to conform to the 2010
presentation of dividends received from affiliates.
Supplemental Noncash Transactions
As discussed in Note 10, during the third quarter of 2010, Seaboard
acquired a majority interest in a commodity origination, storage and
processing business in Canada. The purchase price allocation is
preliminary as management has not yet received the third party
valuation to determine the fair value for fixed assets and goodwill.
The following table summarizes the non-cash transactions resulting
from this acquisition:
Nine Months Ended
(Thousands of dollars) October 2, 2010
Increase in net working capital $ 1,254
Increase in fixed assets 5,515
Increase in intangible assets and other assets 175
Increase in deferred taxes (1,116)
Increase in non-controlling interest (250)
Cash paid, net of cash acquired, subject to final adjustments $ 5,578
Recently Adopted Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Codification (ASC) Topic 810-10 (formerly
Financial Accounting Standard No. 167 "Amendments to FASB
Interpretation No. 46(R)"). This Topic amends Interpretation 46(R)
and requires an enterprise to perform an analysis to determine
whether the enterprise's variable interest or interests give it a
controlling financial interest in a variable interest entity (VIE).
This analysis identifies the primary beneficiary of a VIE as the
enterprise that has both the power to direct the most significant
activities of a VIE and the obligation to absorb losses or the right
to receive benefits from the VIE.
This Topic eliminates the quantitative approach previously required
for determining the primary beneficiary of the VIE, which was based
on determining which enterprise absorbs the majority of the entity's
expected losses, receives a majority of the entity's expected
residual returns, or both. This Topic also amends Interpretation
46(R) to require ongoing reassessments of whether an enterprise is
the primary beneficiary of a
5
VIE and requires certain additional disclosures about the VIE.
Seaboard adopted this Topic as of January 1, 2010. The adoption
of this Topic did not have a material impact on Seaboard's financial
position or net earnings.
Note 2- Investments
Seaboard's short-term investments are treated as either available-
for-sale securities or trading securities. All of Seaboard's
available-for-sale and trading securities are classified as current
assets as they are readily available to support Seaboard's current
operating needs. Available-for-sale securities are recorded at
their estimated fair market values with unrealized gains and losses
reflected, net of tax, as a separate component of accumulated other
comprehensive income. Trading securities are recorded at their
estimated fair market values with unrealized gains and losses
reflected in the statement of earnings.
As of October 2, 2010 and December 31, 2009, the available-for-sale
investments primarily consisted of money market funds, fixed rate
municipal notes and bonds, corporate bonds and fixed income mutual
funds. At October 2, 2010, money market funds include $43,456,000
denominated in Euros. At October 2, 2010 and December 31, 2009,
amortized cost and estimated fair market value were not materially
different for these investments.
As of October 2, 2010, the trading securities primarily consisted of
high yield debt securities. Unrealized net gains related to trading
securities for the three and nine months ended October 2, 2010 were
$1,292,000 and $2,116,000, respectively, and $1,238,000 and
$1,779,000 for the three and nine months ended October 3, 2009,
respectively.
The following is a summary of the amortized cost and estimated fair
value of short-term investments for both available-for-sale and
trading securities at October 2, 2010 and December 31, 2009.
2010 2009
Amortized Fair Amortized Fair
(Thousands of dollars) Cost Value Cost Value
Money market funds $229,841 $229,841 $153,699 $153,699
Corporate bonds 107,628 109,638 34,663 35,449
Fixed income mutual funds 60,161 60,295 - -
Fixed rate municipal notes and bonds 45,700 46,018 144,794 148,609
Variable rate demand notes 29,900 29,900 1,900 1,900
U.S. Government agency securities 15,369 15,478 15,907 16,272
Asset backed debt securities 8,819 8,815 8,447 8,484
U.S. Treasury securities 3,589 3,651 - -
Other 2,360 2,363 3,060 3,069
Foreign government debt securities - - 10,300 10,210
Total available-for-sale short-term
investments 503,367 505,999 372,770 377,692
High yield trading debt securities 24,751 26,570 24,784 26,771
Other trading debt securities 3,271 3,568 2,669 2,888
Total available-for-sale and trading
short-term Investments $531,389 $536,137 $400,223 $407,351
The following table summarizes the estimated fair value of fixed
rate securities designated as available-for-sale classified by the
contractual maturity date of the security as of October 2, 2010.
(Thousands of dollars) 2010
Due within one year $ 45,288
Due after one year through three years 108,750
Due after three years 15,795
Total fixed rate securities $169,833
6
In addition to its short-term investments, Seaboard also has trading
securities related to Seaboard's deferred compensation plans
classified in other current assets on the Condensed Consolidated
Balance Sheets. See Note 5 to the Condensed Consolidated Financial
Statements for information on the types of trading securities held
related to the deferred compensation plans.
Note 3 - Inventories
The following is a summary of inventories at October 2, 2010 and
December 31, 2009:
October 2, December 31,
(Thousands of dollars) 2010 2009
At lower of LIFO cost or market:
Live hogs and materials $179,507 $192,999
Fresh pork and materials 23,070 22,398
202,577 215,397
LIFO adjustment (22,486) (22,807)
Total inventories at lower of LIFO cost or market 180,091 192,590
At lower of FIFO cost or market:
Grains and oilseeds 179,044 174,508
Sugar produced and in process 34,336 47,429
Other 48,315 46,804
Total inventories at lower of FIFO cost or market 261,695 268,741
Grain, flour and feed at lower of weighted average cost
or market 26,462 37,256
Total inventories $468,248 $498,587
As of October 2, 2010, Seaboard had $3,235,000 recorded in grain
inventories related to its commodity trading business that are
committed to various customers in foreign countries for which customer
contract performance is a heightened concern. If Seaboard is unable
to collect amounts from these customers as currently estimated or
Seaboard is forced to find other customers for a portion of this
inventory, it is possible that Seaboard could incur a material write-
down in the value of this inventory if Seaboard is not successful in
selling at the current carrying value. For similar inventories that
existed prior to December 31, 2009, Seaboard incurred a write-down in
the first quarter of 2009 in the amount of $8,801,000 (with no tax
benefit recognized), or $7.10 per share.
Note 4 - Income Taxes
Seaboard's tax returns are regularly audited by federal, state and
foreign tax authorities, which may result in adjustments.
Seaboard's U.S. federal income tax returns have been reviewed
through the 2004 tax year. There have not been any material changes
in unrecognized income tax benefits since December 31, 2009.
Interest related to unrecognized tax benefits and penalties was not
material for the nine months ended October 2, 2010.
The change to income tax expense in 2010 from income tax benefit in
2009 is the result of projected domestic earnings during 2010
compared to projected domestic losses in 2009. The higher income
tax expense rate for the three month period of 2010 compared to the
nine month period of 2010 resulted from increasing the projected
domestic income relative to projected total income for 2010 during
the third quarter.
Note 5 -Derivatives and Fair Value of Financial Instruments
U.S. GAAP discusses valuation techniques, such as the market
approach (prices and other relevant information generated by market
conditions involving identical or comparable assets or liabilities),
the income approach (techniques to convert future amounts to single
present amounts based on market expectations including present value
techniques and option-pricing), and the cost approach (amount that
would be required to replace the service capacity of an asset which
is often referred to as replacement cost). U.S. GAAP utilizes a
fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels. The
following is a brief description of those three levels:
7
Level 1: Observable inputs such as unadjusted quoted prices in
active markets for identical assets or liabilities that the Company
has the ability to access at the measurement date.
Level 2: Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs that reflect the reporting entity's own
assumptions.
The following table shows assets and liabilities measured at fair
value on a recurring basis as of October 2, 2010 and also the level
within the fair value hierarchy used to measure each category of
assets. Seaboard uses the end of the reporting period to determine
if there were any transfers between levels. There were no transfers
between levels that occurred in the first nine months of 2010. The
trading securities classified as other current assets below are
assets held for Seaboard's deferred compensation plans.
Balance
October 2,
(Thousands of dollars) 2010 Level 1 Level 2 Level 3
Assets:
Available-for-sale securities -
short-term investments:
Money market funds $229,841 $229,841 $ - $ -
Corporate bonds 109,638 - 109,638 -
Fixed income mutual funds 60,295 60,295 - -
Fixed rate municipal notes and
bonds 46,018 - 46,018 -
Variable rate demand notes 29,900 - 29,900 -
U.S. Government agency securities 15,478 - 15,478 -
Asset backed debt securities 8,815 - 8,815 -
U.S. Treasury securities 3,651 - 3,651 -
Other 2,363 - 2,363 -
Trading securities - short-term
investments:
High yield debt securities 26,570 - 26,570 -
Other debt securities 3,568 - 3,568 -
Trading securities - other current
assets:
Domestic equity securities 11,779 11,779 - -
Foreign equity securities 7,651 3,790 3,861 -
Fixed income mutual funds 3,625 3,625 - -
Money market funds 3,225 3,225 - -
U.S. Treasury securities 2,535 - 2,535 -
U.S. Government agency securities 1,615 - 1,615 -
Other 172 153 19 -
Derivatives:
Commodities 2,790 2,790 - -
Foreign currencies 28 - 28 -
Total Assets $569,557 $315,498 $254,059 $ -
Liabilities:
Derivatives:
Commodities (1) 50,464 50,464 - -
Interest rate swaps 6,367 - 6,367 -
Foreign currencies 6,235 - 6,235 -
Total Liabilities $ 63,066 $ 50,464 $ 12,602 $ -
(1) Excludes $30,718 of option proceeds resulting in a net liability
of $19,746 as of October 2, 2010.
8
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 fair value of long-term debt is estimated by comparing interest
rates for debt with similar terms and maturities. The amortized cost
and estimated fair values of investments and long-term debt at
October 2, 2010 and December 31, 2009 are presented below.
2010 2009
(Thousands of dollars) Amortized Fair Amortized Fair
Cost Value Cost Value
Short-term investments,
available-for-sale $503,367 $505,999 $372,770 $377,692
Short-term investments,
trading debt securities 28,022 30,138 27,453 29,659
Long-term debt 76,845 79,507 78,869 82,415
While management believes its derivatives are primarily economic
hedges of its firm purchase and sales contracts or anticipated sales
contracts, Seaboard does not perform the extensive record-keeping
required to account for these types of transactions as hedges for
accounting purposes. Since these derivatives and interest rate
exchange agreements discussed below, are not accounted for as
hedges, fluctuations in the related commodity prices, currency
exchange rates and interest rates could have a material impact on
earnings in any given period. The nature of Seaboard's market risk
exposure has not changed materially since December 31, 2009.
Commodity Instruments
Seaboard uses various grain, meal, hog, pork bellies and energy
resource related futures and options to manage its risk to price
fluctuations for raw materials and other inventories, finished
product sales and firm sales commitments. At October 2, 2010,
Seaboard had open net derivative contracts to purchase 17,495,000
bushels of grain and 22,000 tons of soybean meal and open net
derivative contracts to sell 1,596,000 gallons of heating oil and
38,040,000 pounds of hogs. At December 31, 2009, Seaboard had open
net derivative contracts to sell 13,955,000 bushels of grain,
1,344,000 gallons of heating oil, 87,900 tons of soybean meal and
open net derivative contracts to purchase 2,720,000 pounds of hogs.
From time to time, Seaboard may enter into speculative derivative
transactions not directly related to its raw material requirements.
Commodity derivatives are recorded at fair value with any changes in
fair value being marked to market as a component of cost of sales on
the Condensed 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. Foreign exchange
agreements that were primarily related to the underlying commodity
transaction were recorded at fair value with changes in value marked
to market as a component of cost of sales on the Condensed
Consolidated Statements of Earnings. Foreign exchange agreements
that were not related to an underlying commodity transaction were
recorded at fair value with changes in value marked to market as a
component of foreign currency gain (loss) on the Condensed
Consolidated Statements of Earnings.
At October 2, 2010, Seaboard had trading foreign exchange contracts
to cover its firm sales and purchase commitments and related trade
receivables and payables with net notional amounts of $159,033,000
primarily related to the South African Rand.
At December 31, 2009, Seaboard had trading foreign exchange
contracts to cover its firm sales and purchase commitments and
related trade receivables and payables with net notional amounts of
$193,379,000 primarily related to the South African Rand and the
Euro.
Interest Rate Exchange Agreements
In May 2010, Seaboard entered into three ten-year interest rate
exchange agreements which involve the exchange of fixed-rate and
variable-rate interest payments over the life of the agreements
without the exchange of the underlying notional amounts to mitigate
the effects of fluctuations in interest rates on variable rate debt.
Seaboard pays a fixed rate and receives a variable rate of interest
on three notional amounts of $25,000,000 each. In August 2010,
Seaboard entered into another ten-year interest rate exchange
agreement with a notional amount of $25,000,000 that has terms
similar to those for the other three interest rate exchange
agreements referred to above. While Seaboard has certain variable
rate debt, these interest rate exchange
9
agreements do not qualify as hedges for accounting purposes.
Accordingly, the changes in fair value of these agreements are
recorded in Miscellaneous, net in the Condensed Consolidated
Statement of Earnings.
In December 2008 and again in March 2009, Seaboard entered into ten-
year interest rate exchange agreements with notional amounts of
$25,000,000 each to mitigate the effects of fluctuations in interest
rates, each with similar terms to agreements discussed above. In
June 2009, Seaboard terminated both interest rate exchange
agreements. Seaboard received payments in the amount of $3,981,000
to unwind these agreements.
Counterparty Credit Risk
Seaboard is subject to counterparty credit risk related to its
foreign currency exchange agreements. The maximum amount of loss
due to the credit risk of the counterparties for these agreements,
should the counterparties fail to perform according to the terms of
the contracts, was $28,000 as of October 2, 2010. Seaboard does not
hold any collateral related to these agreements.
The following table provides the amount of gain or (loss) recognized
for each type of derivative and where it was recognized in the
Condensed Consolidated Statement of Earnings for the three and nine
months ended October 2, 2010 and October 3, 2009.
(Thousands of dollars)
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
2010 2009 2010 2009
Amount of Amount of Amount of Amount of
Location of Gain or Gain or Gain or Gain or
Gain or (Loss) (Loss) (Loss) (Loss) (Loss)
Recognized Recognized Recognized Recognized Recognized
in Income in Income in Income in Income in Income
Commodities Cost of sales $(29,417) $ 7,528 $ (6,290) $ 13,648
Foreign currencies Cost of sales (17,267) (6,148) (8,191) (19,330)
Foreign currencies Foreign currency 257 3,898 (914) 332
Interest rate Miscellaneous, net (4,072) - (7,197) 5,312
The following table provides the fair value of each type of
derivative held as of October 2, 2010 and December 31, 2009 and
where each derivative is included on the Condensed Consolidated
Balance Sheets.
(Thousands of dollars) Asset Derivatives Liability Derivatives
Balance Fair Value Balance Fair Value
Sheet October 2, December 31, Sheet October 2, December 31,
Location 2010 2009 Location 2010 2009
Commodities Other current assets $2,790 $4,610 Other current liabilities $50,464 (1) $ 2,288
Foreign currencies Other current assets 28 430 Other current liabilities 6,235 5,943
Interest rate Other current assets - - Other current liabilities 6,367 -
(1) Excludes $30,718 of option proceeds resulting in a net liability of
$19,746 as of October 2, 2010.
Note 6 - Employee Benefits
Seaboard maintains a defined benefit pension plan ("the Plan") for
its domestic salaried and clerical employees. Effective January 1,
2010, Seaboard split a portion of employees from the Plan into a new
defined benefit pension. However, the split did not change the
employees' benefit and thus pension expense should not be materially
impacted. At this time, no contributions are expected to be made in
2010. Seaboard also sponsors non-qualified, unfunded supplemental
executive plans, and unfunded supplemental retirement agreements
with certain executive employees. Management has no plans to
provide funding for these supplemental plans in advance of when the
benefits are paid.
10
The net periodic benefit cost of these plans was as follows:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Thousands of dollars) 2010 2009 2010 2009
Components of net periodic benefit cost:
Service cost $ 1,586 $ 1,509 $ 4,755 $ 4,520
Interest cost 2,166 2,046 6,493 6,127
Expected return on plan assets (1,556) (1,197) (4,663) (3,579)
Amortization and other 999 1,252 2,995 3,747
Net periodic benefit cost $ 3,195 $ 3,610 $ 9,580 $10,815
Note 7 - Commitments and Contingencies
In July 2009, Seaboard Corporation, and affiliated companies in its
Commodity Trading and Milling segment, resolved a dispute with a
third party related to a 2005 transaction in which a portion of its
trading operations was sold to a firm located abroad. As a result of
this action, Seaboard Overseas Limited received approximately
$16,787,000, net of expenses, in the third quarter of 2009. There
was no tax expense on this transaction.
Seaboard is subject to various 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 Seaboard's
business objectives. Seaboard does not issue guarantees of third
parties for compensation. As of October 2, 2010, Seaboard had
guarantees outstanding to two third parties with a total maximum
exposure of $1,354,000. 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 October 2, 2010, Seaboard had outstanding letters of credit
("LCs") with various banks which reduced its borrowing capacity
under its committed and uncommitted credit facilities by $42,720,000
and $6,518,000, respectively. Included in these amounts are LCs
totaling $26,385,000, which support the Industrial Development
Revenue Bonds included as long-term debt and $17,802,000 of LCs
related to insurance coverages.
Note 8 - Stockholders' Equity and Accumulated Other Comprehensive
Loss
Components of total comprehensive income, net of related taxes, are
summarized as follows:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Thousands of dollars) 2010 2009 2010 2009
Net earnings $39,483 $36,248 $179,503 $ 78,954
Other comprehensive income
net of applicable taxes:
Foreign currency translation adjustment (879) (579) (3,920) (11,003)
Unrealized gain on investments, net (669) 1,575 (1,371) 1,364
Unrecognized pension cost 704 860 2,189 2,581
Total comprehensive income $38,639 $38,104 $176,401 $ 71,896
11
The components of and changes in accumulated other comprehensive
loss for the nine months ended October 2, 2010 are as follows:
Balance Balance
December 31, Period October 2,
(Thousands of dollars) 2009 Change 2010
Foreign currency translation adjustment $ (77,576) $(3,920) $ (81,496)
Unrealized gain on investments, net 2,579 (1,371) 1,208
Unrecognized pension cost (39,789) 2,189 (37,600)
Accumulated other comprehensive loss $(114,786) $(3,102) $(117,888)
The foreign currency translation adjustment primarily represents the
effect of the Argentine peso currency exchange fluctuation on the net
assets of the Sugar segment. At October 2, 2010, the Sugar segment
had $177,326,000 in net assets denominated in Argentine pesos and
$36,456,000 in net liabilities denominated in U.S. dollars.
With the exception of the foreign currency translation adjustment to
which a 35% federal tax rate is applied, income taxes for components
of accumulated other comprehensive loss were recorded using a 39%
effective tax rate. In addition, the unrecognized pension cost
includes $11,808,000 related to employees at certain subsidiaries
for which no tax benefit has been recorded.
On November 6, 2009, the Board of Directors authorized Seaboard to
repurchase from time to time prior to October 31, 2011 up to
$100,000,000 market value of its Common Stock in open market or
privately negotiated purchases which may be above or below the
traded market price. Such purchases may be made by Seaboard or
Seaboard may from time to time enter into a 10b5-1 plan authorizing
a third party to make such purchases on behalf of Seaboard. The
stock repurchase will be funded by cash on hand. Shares repurchased
will be retired and shall resume the status of authorized and
unissued shares. Any stock repurchases will be made in compliance
with applicable legal requirements and the timing of the repurchases
and the number of shares to be repurchased at any given time may
depend on market conditions, Securities and Exchange Commission
regulations and other factors. The Board's stock repurchase
authorization does not obligate Seaboard to acquire a specific
amount of common stock and the stock repurchase program may be
suspended at any time at Seaboard's discretion. For the nine months
ended October 2, 2010, Seaboard repurchased 20,879 shares of common
stock at a cost of $29,994,000.
Note 9 - Segment Information
During the first half of 2008, Seaboard started operations at its
newly constructed biodiesel plant. The ongoing profitability of
this plant is primarily based on future sales prices, the price of
alternative inputs, enforcement of government usage mandates and
reinstituting federal tax credits, which expired at the end of 2009.
Currently, the federal tax credits have not been extended by the
U.S. Congress along with several other non-related tax credits that
have a recent history of being renewed annually. However, during
2010 Federal regulations were published to support the EPA mandates
for biodiesel and biodiesel prices have increased over the past few
months which management believes to be in response to these mandates
and non-extension of the tax credit. As of October 2, 2010,
Seaboard performed an impairment evaluation of this plant and
determined there was no impairment based on management's current
assumptions of future production volumes, sales prices, cost inputs
and the probabilities of the combination of federal usage mandates
and tax credits being renewed. However, if future market conditions
do not produce projected sales prices or expected cost inputs or
there is a material change in the enforcement of government usage
mandates or other available tax credits, there is a possibility that
some amount of the recorded value of this processing plant could be
deemed impaired during some future period including 2010, which may
result in a charge to earnings. The net book value of these assets
as of October 2, 2010 was $41,199,000.
During the second quarter of 2009, Seaboard started operations at
its newly constructed ham-boning and processing plant in Mexico.
Since that time, this plant has experienced certain difficulties
including challenges facing many U.S. border towns in Mexico.
Despite being in operation for over one year and reaching near-
capacity production levels, overall margins remain below
expectations. As a result, management is currently implementing
various changes related to this operation and evaluating its long-
term viability. As of October 2, 2010, Seaboard performed an
impairment evaluation of this plant and determined there was no
impairment based on management's current cash flow assumptions and
probabilities of outcomes. However, if margins
12
from this operation do not improve to acceptable levels there is
a possibility that management may consider other alternatives
for this facility, including closing the plant. Thus there is a
possibility that some amount of the recorded value of this facility
could be deemed impaired during some future period including 2010,
which may result in a charge to earnings. The net book value of
these assets as of October 2, 2010 was $10,116,000.
Prior to the first quarter of 2009, the Sugar segment was named
Sugar and Citrus reflecting the citrus and related juice operations
of this business. During the first quarter of 2009, management
reviewed its strategic options for the citrus business in light of a
continually difficult operating environment. In March 2009,
management decided not to process, package or market the 2009
harvest for the citrus and related juice operations. As a result,
during the first quarter of 2009, a charge to earnings of $2,803,000
was recorded primarily to write-down the value of related citrus and
juice inventories to net realizable value, considering such
remaining inventory will not be marketed similar to prior years but
instead liquidated. In the second quarter of 2009, management
decided to integrate and transform the land previously used for
citrus production into sugar cane production and thus incurred an
additional charge to earnings of approximately $2,497,000 during the
second quarter of 2009 in connection with this change in business.
The remaining fixed assets from the citrus operations, primarily
buildings and equipment, have either been sold under long-term
agreements or integrated into the sugar business. However, since
such sale agreements are long-term and collection of the sales price
is not reasonably assured, the sale is being recognized under the
cost recovery method and thus the gain on sale, which is not
material, will not be recognized until proceeds collected exceed the
net book value of the assets sold.
The Power segment sells approximately 34% of its power generation to
a government-owned distribution company under a short-term contract
for which Seaboard bears a concentrated credit risk as this
customer, from time to time, has significant past due balances.
This contract expired at the end of March 2010 but was renewed in
May 2010 for one year, subject to early cancellation by either
party.
On March 2, 2009, an agreement became effective under which Seaboard
will sell its two power barges in the Dominican Republic for
$70,000,000. The agreement calls for the sale to occur on or around
January 1, 2011. During March 2009, $15,000,000 was paid to
Seaboard (recorded as deferred revenue in current liabilities as of
October 2, 2010) and the $55,000,000 balance of the purchase price
was paid into escrow and will be paid to Seaboard at the closing of
the sale. The net book value of the two barges was $20,090,000 as of
October 2, 2010 and is classified as held for sale in other current
assets. Accordingly, Seaboard ceased depreciation on the two barges
as of January 1, 2010 but will continue to operate these two barges
until a few weeks prior to the closing date of the sale. Seaboard
will be responsible for the wind down and decommissioning costs of
the barges. Completion of the sale is dependent upon several
issues, including meeting certain baseline performance and emission
tests, which will be performed during the fourth quarter of 2010.
Failure to satisfy or cure any deficiencies could result in the
agreement being terminated and the sale abandoned. Seaboard could
be responsible to pay liquidated damages of up to approximately
$15,000,000 should it fail to perform its obligations under the
agreement, after expiration of applicable cure and grace periods.
Seaboard will retain all other physical properties of this business
and is currently building a 106 megawatt power barge for use in the
Dominican Republic for approximately 83,573,000 Euros (approximately
US $107,650,000) plus additional project costs for a total of
approximately $125,000,000. Operations are anticipated to begin in
early 2012 resulting in minimal sales during 2011 for this segment.
The following tables set forth specific financial information about
each segment as reviewed by Seaboard's management. Operating income
for segment reporting is prepared on the same basis as that used for
consolidated operating income. Operating income, along with income
or losses from affiliates for the Commodity Trading and Milling
segment, is used as the measure of evaluating segment performance
because management does not consider interest, other investment
income and income tax expense on a segment basis.
13
Sales to External Customers:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Thousands of dollars) 2010 2009 2010 2009
Pork $ 354,524 $260,608 $1,020,714 $ 793,583
Commodity Trading and Milling 458,310 364,146 1,272,046 1,105,158
Marine 214,247 165,675 633,285 548,360
Sugar 49,170 28,970 148,028 106,174
Power 31,735 30,463 95,719 75,859
All Other 3,827 4,763 10,760 12,889
Segment/Consolidated Totals $1,111,813 $854,625 $3,180,552 $2,642,023
Operating Income (Loss):
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Thousands of dollars) 2010 2009 2010 2009
Pork $ 54,266 $ (1,998) $ 139,308 $ (15,123)
Commodity Trading and Milling (28,250) 6,466 13,907 24,917
Marine 12,635 (4,108) 31,938 13,323
Sugar 3,669 (659) 24,491 498
Power 4,474 2,767 12,208 5,419
All Other 79 478 665 1,370
Segment Totals 46,873 2,946 222,517 30,404
Corporate Items (5,231) (5,625) (12,162) (14,272)
Consolidated Totals $ 41,642 $ (2,679) $ 210,355 $ 16,132
Income from Affiliates:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Thousands of dollars) 2010 2009 2010 2009
Commodity Trading and Milling $ 4,817 $ 5,079 $ 15,667 $ 12,287
Sugar 34 194 608 578
Segment/Consolidated Totals $ 4,851 $ 5,273 $ 16,275 $ 12,865
Total Assets:
October 2, December 31,
(Thousands of dollars) 2010 2009
Pork $ 745,679 $ 774,718
Commodity Trading and Milling 605,583 521,618
Marine 258,951 236,382
Sugar 218,037 205,155
Power 87,706 75,348
All Other 7,812 8,988
Segment Totals 1,923,768 1,822,209
Corporate Items 636,084 514,924
Consolidated Totals $2,559,852 $2,337,133
14
Investments in and Advances to Affiliates:
October 2, December 31,
(Thousands of dollars) 2010 2009
Commodity Trading and Milling $ 114,882 $ 79,883
Sugar 2,612 2,349
Segment/Consolidated Totals $ 117,494 $ 82,232
Administrative services provided by the corporate office allocated
to the individual segments represent corporate services rendered to
and costs incurred for each specific segment 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, fixed assets,
deferred tax amounts and other miscellaneous items. Corporate
operating losses represent certain operating costs not specifically
allocated to individual segments.
Note 10 - New Investments in Affiliates, Acquisition of Business and
Pending Transactions
In late March 2010, Seaboard acquired a 50% non-controlling interest
in an international commodity trading business located in North
Carolina for approximately $7,650,000. There was an initial payment
of $6,000,000 made in March 2010 with the remaining $1,650,000
recorded as a holdback payable over the next year upon verification
of the balance sheet as of the date of closing and collection of
certain receivables outstanding. This investment is accounted for
using the equity method.
In late July, Seaboard finalized an agreement to invest in a bakery
to be built in Central Africa. Seaboard will have a 50% non-
controlling interest in this business. The total project cost is
estimated to be $58,000,000 but Seaboard's total investment has not
yet been determined pending finalization of third party financing
alternatives for a significant portion of the project. The bakery
is not anticipated to be fully operational until the second half of
2011. As of October 3, 2010, Seaboard had invested $8,525,000 in
this project. This investment is accounted for using the equity
method.
During the third quarter of 2010, Seaboard acquired a majority
interest in a commodity origination, storage and processing business
in Canada for approximately $6,747,000, including $1,169,000 of cash
acquired, subject to final working capital adjustments. This
transaction was accounted for using the purchase method and would
not have significantly affected net earnings or earnings per share
on a pro forma basis.
On September 9, 2010, Seaboard Corporation entered into a Purchase
Agreement (the "Purchase Agreement") with Maxwell Farms, LLC,
Goldsboro Milling Company, and GM Acquisition LLC (collectively, the
"Maxwell Group"). Pursuant to the Purchase Agreement, Seaboard will
acquire a 50 percent non-controlling interest in Butterball, LLC
("Butterball"), for a cash purchase price equal to approximately
$177,500,000, subject to adjustment for any changes in working
capital at the time of closing. Butterball is a vertically
integrated producer, processor and marketer of branded turkeys,
turkey meat and parts. The other 50 percent ownership interest in
Butterball will continue to be owned by the Maxwell Group. In
connection with the purchase, Butterball will acquire the live
turkey growing and related assets of the Maxwell Group (which
presently owns a 51 percent interest in Butterball) and of
Murphy-Brown LLC ("Murphy Brown"), a subsidiary of Smithfield Foods,
Inc., which presently owns a 49 percent interest in Butterball (the
"Murphy Brown Ownership Interest"). Butterball currently purchases
a portion of the turkeys it processes from the Maxwell Group and
Murphy Brown. This investment will be accounted for using the
equity method.
In connection with the closing of the purchase, Seaboard has
committed to provide Butterball $100,000,000 of subordinated
financing with interest of 15% per annum, comprised of 5% payable in
cash semi-annually plus 10% pay-in-kind interest, with a seven year
maturity. Seaboard intends to fund this commitment with existing
cash and short-term investment balances. As part of the
subordinated financing, Seaboard will receive detachable warrants
representing 5% of the fully diluted equity units in Butterball with
a strike price of $0.01 per unit. Upon exercise, Seaboard would be
entitled to an additional economic interest, but all significant
corporate governance matters would continue to be shared equally
between Seaboard and the Maxwell group unless Seaboard already owns
a majority of the voting units. In addition, if Seaboard can not
arrange for third party financing to refinance the existing
Butterball debt, Seaboard is committed to provide an additional
$300,000,000 in senior secured credit facilities comprised of a term
loan facility of $150,000,000 and a revolving credit facility of
$150,000,000 with a five year maturity. As part of these financing
commitments, Seaboard will receive an underwriting fee of $8,000,000
and, if third party financing is arranged, will be required to pay
any arrangement fees associated with the financing. This
underwriting fee will be amortized
15
over the term of the related debt. Seaboard has existing liquidity,
combination of cash and short-term investment balances plus
existing financing sources, to fund this debt if third party
financing cannot be arranged for Butterball.
The closing for the purchase and the financing is scheduled to occur
on or before December 10, 2010 and is subject to the satisfaction of
certain closing conditions, including the closing of the sale of the
Murphy Brown Ownership Interest and the live turkey growing and
related assets currently owned by Murphy Brown to an affiliate of
the Maxwell Group pursuant to a separate agreement and the
contribution of those assets to Butterball.
During the fourth quarter of 2010, Seaboard acquired for $5,000,000
a 25% non-controlling interest in a commodity trading business in
Australia. Also during the fourth quarter of 2010, Seaboard
combined its existing investment in poultry operations in Africa
with another existing African based poultry business. Seaboard
invested an additional $10,500,000 in this newly combined poultry
business for a total investment of $16,988,000, which represents a
50% non-controlling interest. This newly combined business has
operations in parts of Eastern and Southern Africa and is also
expanding by building new operations in Central Africa. These
investments will be accounted for using the equity method.
_______________________________________________________
16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Summary of Sources and Uses of Cash
Cash and short-term investments as of October 2, 2010 increased
$124.4 million to $593.6 million from December 31, 2009. The
increase was the result of cash generated by operating activities of
$252.0 million. During this same time, cash was primarily used for
capital expenditures of $77.9 million, repurchases of common stock
in the amount of $30.0 million and investments in two new affiliates
and acquisition of a business of $21.7 million, as discussed below.
Cash from operating activities increased $65.9 million for the nine
months ended October 2, 2010 compared to the same period in 2009,
primarily as a result of higher net earnings for the nine months
ended October 2, 2010 compared to the same period in 2009.
Acquisitions, Capital Expenditures and Other Investing Activities
During the nine months ended October 2, 2010, Seaboard invested
$77.9 million in property, plant and equipment, of which $5.9
million was expended in the Pork segment, $27.1 million in the
Marine segment, $21.9 million in the Sugar segment and $20.6 million
in the Power segment. The Pork segment expenditures were primarily
for improvements to existing facilities and related equipment. The
Marine segment expenditures were primarily for purchases of cargo
carrying and handling equipment. In the Sugar segment, the capital
expenditures were primarily for the continued development of the
cogeneration plant with the remaining amount for normal upgrades to
existing operations. The Power segment expenditures were primarily
used for the construction of a 106 megawatt power barge for use in
the Dominican Republic. The total cost of the project is estimated
to be approximately $125.0 million. Operations are anticipated to
begin in early 2012. All other capital expenditures are of a normal
recurring nature and primarily include replacements of machinery and
equipment, and general facility modernizations and upgrades.
For the remainder of 2010, management has budgeted capital
expenditures totaling $49.2 million. The Pork segment plans to
spend $5.8 million for improvements to existing facilities and
related equipment. The Marine segment has budgeted $5.3 million
primarily for the purchase of additional cargo carrying and handling
equipment. In addition, management will be evaluating whether to
purchase additional containerized cargo vessels for the Marine
segment and dry bulk vessels for the Commodity Trading and Milling
segment during 2010. The Sugar segment plans to spend a total of
$3.8 million consisting of $2.5 million for the continued
development of a 40 megawatt cogeneration plant, with the remaining
amount for normal upgrades to existing operations. The cogeneration
plant is expected to be operational by the first half of 2011. The
Power segment plans to spend a total of $30.6 million primarily for
the continued development of a 106 megawatt power barge which is
expected to be operational by early 2012. See Note 9 to the
Condensed Consolidated Financial Statements for further discussion.
The balance of $3.7 million is planned to be spent in all other
businesses. Management anticipates paying for these capital
expenditures from available cash, the use of available short-term
investments or Seaboard's available borrowing capacity.
On March 2, 2009, an agreement became effective under which Seaboard
agreed to sell its two power barges in the Dominican Republic on or
around January 1, 2011 for $70.0 million. During March 2009, $15.0
million was paid to Seaboard and the $55.0 million balance of the
purchase price was paid into escrow and will be paid to Seaboard at
the closing of the sale. See Note 9 to the Condensed Consolidated
Financial Statements for further discussion.
In late March 2010, Seaboard acquired a 50% non-controlling interest
in an international commodity trading business located in North
Carolina for approximately $7.7 million. In late July, Seaboard
finalized an agreement to invest in a bakery to be built in Central
Africa for a 50% non-controlling interest in this business. As of
October 3, 2010, Seaboard had $8.5 million invested in this project.
See Note 10 to the Condensed Consolidated Financial Statements for
further discussion of these investments.
During the third quarter of 2010, Seaboard acquired a majority
interest in a commodity origination, storage and processing business
in Canada for approximately $6.7 million, including $1.2 million of
cash acquired, subject to final working capital adjustments.
On September 9, 2010, Seaboard Corporation entered into a Purchase
Agreement to acquire a 50 percent non-controlling interest in
Butterball, LLC ("Butterball") for a cash purchase price equal to
approximately $177.5 million, subject to adjustment for any changes
in working capital at the time of closing. In connection with the
closing of the purchase, Seaboard has committed to provide
Butterball $100 million of subordinated financing. Seaboard intends
to fund this commitment with existing cash and short-term investment
balances. In addition, if Seaboard can not arrange for third party
financing to refinance the existing Butterball debt, Seaboard is
committed to provide an additional $300 million in senior secured
credit facilities comprised of a
17
term loan facility of $150 million and a revolving credit facility
of $150 million. Seaboard has existing liquidity, consisting of
a combination of cash and short-term investment balances plus
existing financing sources, to fund this debt if third party
financing cannot be arranged for Butterball. The closing for
the purchase and the financing is scheduled to occur on or before
December 10, 2010 and is subject to the satisfaction of certain
closing conditions. See Note 10 to the Condensed Consolidated
Financial Statements for further discussion of this transaction.
During the fourth quarter of 2010, Seaboard acquired for $5.0
million a 25% non-controlling interest in a commodity trading
business in Australia. Also during the fourth quarter of 2010,
Seaboard invested $10.5 million in a newly combined poultry business
in Africa for a 50% non-controlling interest. See Note 10 to the
Condensed Consolidated Financial Statements for further discussion
of these investments.
Financing Activities and Debt
As of October 2, 2010, Seaboard had committed lines of credit
totaling $300.0 million and uncommitted lines totaling $168.5
million. As of October 2, 2010, there were no borrowings
outstanding under the committed lines of credit and borrowings under
the uncommitted lines of credit totaled $31.9 million. Outstanding
standby letters of credit reduced Seaboard's borrowing capacity
under its committed and uncommitted credit lines by $42.7 million
and $6.5 million, respectively, primarily representing $26.4 million
for Seaboard's outstanding Industrial Development Revenue Bonds and
$17.8 million related to insurance coverage. Also included in notes
payable as of October 2, 2010 was a term note of $47.5 million
denominated in U.S. dollars.
On September 17, 2010, Seaboard entered into a credit agreement for
$114.0 million at a fixed rate of 5.34% for the financing of the
construction of the new power barge, which will operate in the
Dominican Republic as discussed above. This credit facility has a
term of ten years commencing upon achievement of commercial
operation which is expected to take place on or prior to April 24,
2012. The credit facility will mature no later than April 24, 2022
and is secured by the barge. At October 2, 2010, no amounts had
been borrowed from this credit facility.
Seaboard's remaining 2010 scheduled long-term debt maturities total
$0.3 million. As of October 2, 2010, Seaboard had cash and short-
term investments of $593.6 million with total net working capital of
$1,024.5 million. Accordingly, management believes Seaboard's
combination of internally generated cash, liquidity, capital
resources and borrowing capabilities will be adequate for its
existing operations and any currently known potential plans for
expansion of existing operations or business segments for 2010,
including the Butterball transaction discussed above. Management
does, however, periodically review various alternatives for future
financing to provide additional liquidity for future operating plans
as noted above for current proposed projects. Management intends to
continue seeking opportunities for expansion in the industries in
which Seaboard operates, utilizing existing liquidity, available
borrowing capacity, and other financing alternatives.
On November 6, 2009, the Board of Directors authorized up to $100.0
million for a new share repurchase program. For the nine months
ended October 2, 2010, Seaboard used cash to repurchase 20,879
shares of common stock at a total price of $30.0 million. See Note 8
to the Condensed Consolidated Financial Statements for further
discussion.
See Note 7 to the Condensed Consolidated Financial Statements for a
summary of Seaboard's contingent obligations, including guarantees
issued to support certain activities of non-consolidated affiliates
or third parties who provide services for Seaboard.
RESULTS OF OPERATIONS
Net sales for the three and nine month periods of 2010 increased by
$257.2 million and $538.5 million, respectively, over the same
periods in 2009, which primarily reflected an increase in sale
prices for pork products, increased commodities trading volumes and
higher cargo volumes for the Marine segment.
Operating income increased by $44.3 million and $194.2 million for
the three and nine month periods of 2010, respectively, compared to
the same periods in 2009. The increases primarily reflect higher
Pork segment margins and, to a lesser extent, increased margins for
the Sugar segment and the Marine segment as discussed below. The
increases were partially offset by a $26.9 million and $9.2 million
fluctuation of marking to market Commodity Trading and Milling
segment derivative contracts, as discussed below, for the three and
nine month periods of 2010 compared to the same periods in 2009.
18
Pork Segment
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Dollars in millions) 2010 2009 2010 2009
Net sales $354.5 $260.6 $1,020.7 $793.6
Operating income (loss) $ 54.3 $ (2.0) $ 139.3 $(15.1)
Net sales for the Pork segment increased $93.9 million and $227.1
million for the three and nine month periods of 2010, respectively,
compared to the same periods in 2009. The increases primarily
reflect an increase in overall sales prices for pork products.
Operating income for the Pork segment increased $56.3 million and
$154.4 million for the three and nine month periods of 2010,
respectively, compared to the same periods in 2009. The increases
primarily relate to higher sales prices, partially offset by higher
costs for hogs purchased from third parties. Management is unable
to predict future market prices for pork products or the cost of
feed and hogs purchased from third parties. However, management
anticipates positive operating income for the remainder of 2010.
In addition, as discussed in Note 9 to the Condensed Consolidated
Financial Statements, there is a possibility that some amount of
either the biodiesel plant or ham-boning plant in Mexico, or both,
could be deemed impaired during some future period including fiscal
2010, which may result in a charge to earnings if current
projections are not met.
Commodity Trading and Milling Segment
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Dollars in millions) 2010 2009 2010 2009
Net sales $458.3 $364.1 $1,272.0 $1,105.2
Operating income (loss) as reported $(28.3) $ 6.5 $ 13.9 $ 24.9
Less mark-to-market adjustments 37.7 9.3 18.2 7.6
Operating income excluding mark-to-
market adjustments $ 9.4 $ 15.8 $ 32.1 $ 32.5
Income from affiliates $ 4.8 $ 5.1 $ 15.7 $ 12.3
Net sales for the Commodity Trading and Milling segment increased
$94.2 million and $166.8 million for the three and nine month
periods of 2010, respectively, compared to the same periods in 2009.
The increases are primarily the result of increased volumes of
commodities sold to third parties, principally corn, soybean meal
and wheat.
Operating income for this segment decreased $34.8 million and $11.0
million for the three and nine month periods of 2010, respectively,
compared to the same periods in 2009. The decreases for the three
and nine month period primarily reflect the $28.4 million and $10.6
million fluctuation of marking to market the derivative contracts,
as discussed below, and lower margins on third party trades. In
addition, the nine month period of 2009 also reflects the write-
downs of $8.8 million in the first quarter of 2009 for certain grain
inventories for customer contract performance issues and related
lower of cost or market adjustments, as discussed further in Note 3
to the Condensed Consolidated Financial Statements.
Due to the uncertain political and economic conditions in the
countries in which Seaboard operates and the current volatility in
the commodity markets, management is unable to predict future sales
and operating results. However, management anticipates positive
operating income for the remainder of 2010, excluding the potential
effects of marking to market derivative contracts. In addition, see
Note 3 to the Condensed Consolidated Financial Statements for
discussion regarding certain grain inventories.
Had Seaboard not applied mark-to-market accounting to its derivative
instruments, including intercompany Euro foreign exchange agreements
with Corporate, operating income for this segment would have been
higher by $37.7 million and $18.2 million (including intercompany
Euro foreign exchange agreements with Corporate in the amount of
$1.5 million for both periods), respectively, for the three and nine
month periods of 2010, while operating income would have been higher
by $9.3 million and $7.6 million for the three and nine month
periods in 2009. While management believes its commodity futures
and options and foreign exchange contracts are primarily economic
hedges of its firm purchase and sales contracts or anticipated sales
contracts, Seaboard does not perform the extensive record-keeping
required to account for these types of
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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 should be primarily offset by realized
margins or losses as revenue is recognized and thus, these mark-
to-market adjustments could reverse in fiscal 2010. Management
believes eliminating these adjustments, as noted in the table above,
provides a more reasonable presentation to compare and evaluate
period-to-period financial results for this segment.
Income from affiliates for the three and nine month periods of 2010
decreased by $0.3 million and increased $3.4 million, respectively,
from the same periods in 2009. Based on the uncertainty of local
political and economic situations in the countries in which the
flour and feed mills operate, management cannot predict future
results.
Marine Segment
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Dollars in millions) 2010 2009 2010 2009
Net sales $214.2 $165.7 $633.3 $548.4
Operating income (loss) $ 12.6 $ (4.1) $ 31.9 $ 13.3
Net sales for the Marine segment increased $48.5 million and $84.9
million for the three and nine month periods of 2010, respectively,
compared to the same periods in 2009 primarily as a result of higher
cargo volumes in most markets served during 2010 as economic
activity continued to increase. The growth in volume was partially
offset by overall lower cargo rates for the nine month period in
2010 as cargo rates in the first quarter of 2009 had just started to
decline from the impacts of the slow economic conditions and
continued to decline for most of 2009. Overall, cargo rates have
remained fairly constant during 2010 but increased slightly during
the third quarter of 2010 compared to the same period in 2009.
Operating income for the Marine segment increased $16.7 million and
$18.6 million for the three and nine month periods of 2010,
respectively, compared to the same periods in 2009. For the three
month period, the increase was primarily the result of cost
decreases for charterhire and the increase in rates, as discussed
above, partially offset by increased trucking costs on a per unit
shipped basis. The increase for the nine month period was primarily
the result of cost decreases for charterhire and, to a lesser
extent, certain terminal and other operating costs on a per unit
shipped basis. Partially offsetting the nine month increase were
lower cargo rates, as discussed above, and higher fuel costs for
vessels and increased trucking costs on a per unit shipped basis.
Management cannot predict changes in future cargo volumes and cargo
rates or to what extent changes in economic conditions in markets
served will affect net sales or operating income during the
remainder of 2010. However, management anticipates this segment
will be profitable for the remainder of 2010.
Sugar Segment
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Dollars in millions) 2010 2009 2010 2009
Net sales $ 49.2 $ 29.0 $ 148.0 $ 106.2
Operating income (loss) $ 3.7 $ (0.7) $ 24.5 $ 0.5
Income from affiliates $ - $ 0.2 $ 0.6 $ 0.6
Net sales for the Sugar segment increased $20.2 million and $41.8
million for the three and nine month periods of 2010, respectively,
compared to the same periods in 2009. The increases primarily
reflect increased sugar and alcohol prices and, to a lesser extent
increased alcohol volumes. During the first quarter of 2010,
Seaboard began sales of dehydrated alcohol to certain oil companies
under the Argentine government bio-ethanol program which requires
alcohol to be blended with gasoline. As a result, Seaboard
anticipates continued higher sales for 2010 compared to 2009.
However, Argentine governmental authorities continue to attempt to
control inflation by limiting the price of basic commodities,
including sugar. Accordingly, management cannot predict sugar
prices for the remainder of 2010.
Operating income increased $4.4 million and $24.0 million for the
three and nine month periods of 2010, respectively, compared to the
same periods in 2009. The increases primarily represent higher
margins from the increase in sugar and alcohol prices discussed
above. In addition, the increase for the nine month period
reflected a $5.3 million charge to earnings in 2009 related to the
write-down of citrus inventories, the
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integration and transformation of land previously used for citrus
production into sugar cane production and related costs as discussed
in Note 9 to the Condensed Consolidated Financial Statements which
did not occur in 2010. Management expects this segment to be
profitable for the remainder of 2010 although not at the same level
as the first nine months of 2010.
Power Segment
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(Dollars in millions) 2010 2009 2010 2009
Net sales $ 31.7 $ 30.5 $ 95.7 $ 75.9
Operating income $ 4.5 $ 2.8 $ 12.2 $ 5.4
Net sales for the Power segment increased $1.2 million and $19.8
million for the three and nine month periods of 2010, respectively,
compared to the same periods in 2009 primarily reflecting higher
rates, partially offset by lower production levels. The higher
rates were attributable primarily to higher fuel costs, a component
of pricing. Operating income increased $1.7 million and $6.8
million for the three and nine month periods of 2010, respectively,
compared to the same periods in 2009 primarily as a result of higher
rates being in excess of higher fuel costs. There was no
depreciation expense in 2010 related to the assets classified as
held for sale although this was principally offset by increases in
other production costs. See Note 9 to the Condensed Consolidated
Financial Statements for the pending sale of certain assets of this
business and construction of a new power barge. As a result of the
transactions discussed in Note 9, for most of 2011 there will be
minimal sales from operations. Management cannot predict future
fuel costs or the extent to which rates will fluctuate compared to
fuel costs, although management anticipates this segment will remain
profitable for the remainder of 2010.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased by
$3.2 million and $1.7 million for the three and nine month periods
of 2010 compared to the same periods in 2009. The increases are
primarily due to increased personnel costs, primarily related to
Seaboard's deferred compensation programs for the three month period
(which are offset by the effect of the mark-to-market investments
recorded in other investment income discussed below). As a
percentage of revenues, SG&A decreased to 4.7% and 4.6% for the
three and nine month periods of 2010 compared to 5.8% and 5.5% for
the same periods in 2009 primarily as a result of increased sales
principally in the Pork and Commodity Trading and Milling segments.
Interest Expense
Interest expense decreased $1.8 million and $4.9 million for the
three and nine month periods of 2010 compared to the same periods in
2009. The decreases are primarily the result of lower average level
of both short and long-term borrowings.
Foreign Currency Gains, Net
The fluctuations in foreign currency gains (losses), net for the
three and nine months of 2010 compared to the same periods in 2009
primarily reflected foreign currency gains for the three and nine
month periods of 2010 from Euro cash and short-term investment
positions and Euro currency derivatives.
Other Investment Income, Net
Other investment income increased $2.2 million and decreased $4.2
million for the three and nine month periods of 2010 compared to the
same periods in 2009. The fluctuations reflect unrealized and
realized gains on short-term investments of $4.3 million and $5.6
million for the three and nine month periods of 2010 compared to
gains of $1.4 million and $2.8 million for the same periods in 2009.
Also, the fluctuations reflect gains of $3.0 million and $1.8
million for the three and nine month periods of 2010 in the mark-to-
market value of Seaboard's investments related to the deferred
compensation programs in the first nine months of 2010 compared to
gains of $1.9 million and $3.0 million for the same periods in 2009.
In addition, the three and nine month periods of 2009 included
income of $1.9 million and $5.6 million from the Power segment
related to the settlement of a receivable, not directly related to
its business and purchased at a discount.
Gain on Disputed Sale, Net
In July 2009, Seaboard Corporation, and affiliated companies in its
Commodity Trading and Milling segment, resolved a dispute with a
third party related to a 2005 transaction in which a portion of its
trading operations was sold to a firm located abroad. As a result of
this action, Seaboard Overseas Limited received $16.8 million, net
of expenses, in the third quarter of 2009. There was no tax expense
on this transaction.
21
Miscellaneous, Net
The decreases in miscellaneous, net income for the three and nine
month periods of 2010 compared to the same periods in 2009 primarily
reflected losses of $4.1 million and $7.2 million for the three and
nine month periods in 2010 compared to a gain of $5.3 million for
the nine month period of 2009 on interest rate exchange agreements.
Income Tax Expense
The change to income tax expense in 2010 from income tax benefit in
2009 is the result of projected domestic earnings during 2010
compared to projected domestic losses in 2009. The higher income
tax expense rate for the three month period of 2010 compared to the
nine month period of 2010 resulted from increasing the projected
domestic income relative to projected total income for 2010 during
the third quarter. The higher benefit rate for the three month
period of 2009 compared to the nine month period of 2009 resulted
from increasing the projected total domestic loss for the year
during the third quarter of 2009.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Seaboard is exposed to various types of market risks in its day-to-
day operations. Seaboard utilizes derivative instruments to
mitigate some of these risks including both purchases and sales of
futures and options to hedge inventories, forward purchase and sale
contracts and forward purchases. Primary market risk exposures
result from changing commodity prices, foreign currency exchange
rates and interest rates. From time to time, Seaboard may also
enter into speculative derivative transactions not directly related
to its raw material requirements. The nature of Seaboard's market
risk exposure related to these items has not changed materially
since December 31, 2009. See Note 5 to the Condensed Consolidated
Financial Statements for further discussion.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - Seaboard's
management evaluated, under the direction of our Chief Executive and
Chief Financial Officers, the effectiveness of Seaboard's disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) as
of October 2, 2010. Based upon and as of the date of that
evaluation, Seaboard's Chief Executive and Chief Financial Officers
concluded that Seaboard's disclosure controls and procedures were
effective to ensure that information required to be disclosed in the
reports it files and submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported as and when
required. It should be noted that any system of disclosure controls
and procedures, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any system of disclosure
controls and procedures is based in part upon assumptions about the
likelihood of future events. Due to these and other inherent
limitations of any such system, there can be no assurance that any
design will always succeed in achieving its stated goals under all
potential future conditions.
Change in Internal Controls - There has been no change in Seaboard's
internal control over financial reporting required by Exchange Act
Rule 13a-15 that occurred during the fiscal quarter ended October 2,
2010 that has materially affected, or is reasonably likely to
materially affect, Seaboard's internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
There have been no material changes in the risk factors as
previously disclosed in Seaboard's Annual Report on Form 10-K for
the year ended December 31, 2009.
22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains information regarding Seaboard's
purchase of its common stock during the quarter.
Issuer Purchases of Equity Securities
Approximate
Total Dollar
Number Value
of Shares of Shares
Purchased that May
as Part Yet Be
Total Average of Publicly Purchased
Number of Price Announced Under the
Shares Paid per Plans Plans or
Period Purchased Share or Programs Programs
July 4 to July 31, 2010 5,991 1,499.16 5,991 74,383,835
August 1 to August 31, 2010 2,756 1,588.47 2,756 70,005,999
September 1 to October 2, 2010 - - - 70,005,999
Total 8,747 1,527.30 8,747 70,005,999
All purchases during the quarter were made under the authorization
from our Board of Directors to purchase up to $100 million market
value of Seaboard common stock announced on November 6, 2009. An
expiration date of October 31, 2011 has been specified for this
authorization. All purchases were made through open-market
purchases and all the repurchased shares have been retired.
Item 6. Exhibits
10.1 Engineering, Procurement and Construction Contract dated as of
August 17, 2010 by and between Seaboard Corporation and
Wartsila Finland OY
31.1 Certification of the Chief Executive Officer Pursuant to
Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer Pursuant to
Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
This Form 10-Q contains forward-looking statements with respect to
the financial condition, results of operations, plans, objectives,
future performance and business of Seaboard Corporation and its
subsidiaries (Seaboard). Forward-looking statements generally may
be identified as statements that are not historical in nature; and
statements preceded by, followed by or that include the words
"believes," "expects," "may," "will," "should," "could,"
"anticipates," "estimates," "intends," or similar expressions. In
more specific terms, forward-looking statements, include, without
limitation: statements concerning projection of revenues, income or
loss, capital expenditures, capital structure or other financial
items, 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, grains, sugar
and other products and services, (iv) statements concerning
management's expectations of recorded tax effects under certain
circumstances, (v) the volume of business and working capital
requirements associated with the competitive trading environment for
the Commodity Trading and Milling segment, (vi) the charter hire
rates and fuel prices for vessels, (vii) the stability of the
Dominican Republic's economy, fuel costs and related spot market
prices and collection of receivables in the Dominican Republic,
(viii) the ability of Seaboard to sell certain grain inventories in
foreign countries at current cost basis and the related contract
performance by customers, (ix) the effect of the fluctuation in
foreign
23
currency exchange rates, (x) statements concerning profitability or
sales volume of any of Seaboard's segments, (xi) the anticipated
costs and completion timetable for Seaboard's scheduled capital
improvements, acquisitions and dispositions, (xii) the anticipated
renewal of federal tax credits for biodiesel or (xiii) other trends
affecting Seaboard's financial condition or results of operations,
and statements of the assumptions underlying or relating to
any of the foregoing statements.
This list of forward-looking statements is not exclusive. Seaboard
undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future
events, changes in assumptions or otherwise. Forward-looking
statements are not guarantees of future performance or results.
They involve risks, uncertainties and assumptions. Actual results
may differ materially from those contemplated by the forward-looking
statements due to a variety of factors. The information contained
in this report, including without limitation the information under
the headings "Management's Discussion and Analysis of Financial
Condition and Results of Operations," identifies important factors
which could cause such differences.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SEABOARD CORPORATION
by: /s/Robert L. Steer
Robert L. Steer, Senior Vice President,
Chief Financial Officer
(principal financial officer)
Date: November 5, 2010
by: /s/John A. Virgo
John A. Virgo, Vice President,
Corporate Controller
and Chief Accounting Officer
(principal accounting officer)
Date: November 5, 2010
25