EX-13 2 a12-2715_1ex13.htm EX-13

Exhibit 13

 

 

2011 Annual Report

 



 

SEABOARD CORPORATION

 

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. Seaboard also has an interest in turkey operations in the United States.

 

Table of Contents

 

Letter to Stockholders

2

Principal Locations

5

Division Summaries

6

Summary of Selected Financial Data

8

Company Performance Graph

9

Quarterly Financial Data (unaudited)

10

Management’s Discussion & Analysis of Financial Condition and Results of Operations

11

Management’s Responsibility for Consolidated Financial Statements

25

Management’s Report on Internal Control over Financial Reporting

25

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

26

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

27

Consolidated Statements of Earnings

28

Consolidated Balance Sheets

29

Consolidated Statements of Cash Flows

30

Consolidated Statements of Changes in Equity

31

Notes to Consolidated Financial Statements

32

Stockholder Information

59

 

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 the 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, turkey and other products and services; (iv) the 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 fuel costs and related spot market prices in the Dominican Republic; (viii) the effect of the fluctuation in foreign currency exchange rates; (ix) the profitability or sales volume of any of Seaboard’s segments; (x) the anticipated costs and completion timetable for Seaboard’s scheduled capital improvements, acquisitions and dispositions; or (xi) 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” and “Letter to Stockholders” identifies important factors which could cause such differences.

 

1



 

SEABOARD CORPORATION

Letter to Stockholders

 

Letter to Stockholders is intentionally omitted from Exhibit 13 and will be included in printed Annual Report.

 

2



 

SEABOARD CORPORATION

Letter to Stockholders

 

Letter to Stockholders is intentionally omitted from Exhibit 13 and will be included in printed Annual Report.

 

3



 

SEABOARD CORPORATION

Letter to Stockholders

 

Letter to Stockholders is intentionally omitted from Exhibit 13 and will be included in printed Annual Report.

 

4



 

SEABOARD CORPORATION

Principal Locations

 

Corporate Office

 

Life Flour Mill Ltd.*

 

Seaboard del Peru, S.A.

Seaboard Corporation

 

Premier Feeds Mills Company Limited*

 

Peru

Merriam, Kansas

 

Nigeria

 

 

 

 

 

 

Seaboard Freight & Shipping Jamaica Limited

Pork

 

LMM Farine, S.A.

 

Jamaica

Seaboard Foods LLC

 

Madagascar

 

 

Pork Division Office

 

 

 

Seaboard Honduras, S.de R.L. de C.V.

Merriam, Kansas

 

Minoterie de Matadi, S.A.R.L.*

 

Honduras

 

 

Democratic Republic of Congo

 

 

Processing Plant

 

 

 

Seaboard Marine Bahamas Ltd.

Guymon, Oklahoma

 

Minoterie du Congo, S.A.

 

Bahamas

 

 

Republic of Congo

 

 

Processed Meats

 

 

 

Seaboard Marine (Trinidad) Ltd.

Salt Lake City, Utah

 

Moderna Alimentos, S.A.*

 

Trinidad

Missoula, Montana

 

Molinos Champion, S.A.*

 

 

 

 

Ecuador

 

Seaboard Marine of Haiti, S.E.

High Plains Bioenergy, LLC

 

 

 

Haiti

Guymon, Oklahoma

 

National Milling Corporation Limited

 

 

 

 

Zambia

 

SEADOM, S.A.

Seaboard de Mexico USA LLC

 

 

 

Dominican Republic

Mexico

 

Seaboard West Africa Limited*

 

 

 

 

Sierra Leone

 

SeaMaritima S.A. de C.V.

 

 

 

 

Mexico

Commodity Trading and Milling

 

Unga Holdings Limited*

 

 

Commodity Trading Operations

 

Kenya and Uganda

 

Sugar

Australia*

 

 

 

Ingenio y Refineria San Martin del Tabacal SRL

Canada

 

Marine

 

Argentina

Chapel Hill, North Carolina

 

Seaboard Marine Ltd.

 

 

Colombia

 

Marine Division Office

 

Power

Ecuador

 

Miami, Florida

 

Transcontinental Capital Corp. (Bermuda) Ltd.

Greece

 

 

 

Dominican Republic

Isle of Man

 

Port Operations

 

 

Miami, Florida

 

Brooklyn, New York

 

Turkey

Peru*

 

Fernandina Beach, Florida

 

Butterball LLC*

South Africa

 

Houston, Texas

 

Division Office

Switzerland

 

Miami, Florida

 

Garner, North Carolina

 

 

New Orleans, Louisiana

 

 

African Poultry Development Limited*

 

 

 

Processing Plants

Democratic Republic of Congo,

 

Agencias Generales Conaven, C.A.

 

Huntsville, Arkansas

Kenya and Zambia

 

Venezuela

 

Jonesboro, Arkansas

 

 

 

 

Ozark, Arkansas

Compania Industrial de Productos Agreopecuarios SA*

 

Agencia Maritima del Istmo, S.A.

Costa Rica

 

Carthage, Missouri

Mt. Olive, North Carolina

Rafael del Castillo & Cia. S.A*

 

 

 

 

Colombia

 

Cayman Freight Shipping Services, Ltd.

 

Other

 

 

Cayman Islands

 

Mount Dora Farms de Honduras, S.R.L.

Fairfield Rice Inc.*

 

 

 

Honduras

National Milling Company of Guyana, Inc.

 

JacintoPort International LLC

 

 

Guyana

 

Houston, Texas

 

Mount Dora Farms Inc.

 

 

 

 

Houston, Texas

Les Moulins d’Haiti S.E.M.*

 

Representaciones Maritimas y Aereas, S.A.

 

 

Haiti

 

Guatemala

 

 

 

 

 

 

 

Lesotho Flour Mills Limited*

 

Sea Cargo, S.A.

 

 

Lesotho

 

Panama

 

 

 

 

 

 

 

Flour Mills of Ghana

 

Seaboard de Colombia, S.A.

 

 

Ghana

 

Colombia

 

 

 

 

 

 

 

 

 

Seaboard de Nicaragua, S.A.

 

 

 

 

Nicaragua

 

 

 

*Represents a non-controlled, non-consolidated affiliate

 

5



 

SEABOARD CORPORATION

Division Summaries

 

Pork Division

Seaboard’s Pork Division is one of the largest vertically integrated pork processors in the United States. Seaboard is able to control animal production and processing from research and development in nutrition and genetics, to the production of high quality meat products at our processing facilities.

 

Seaboard’s main processing facility is located in Guymon, Oklahoma. The facility has a daily double shift capacity to process approximately 19,400 hogs and generally operates at capacity, with additional weekend shifts depending on market conditions. Seaboard produces and sells fresh and frozen pork products to further processors, foodservice operators, grocery stores, distributors and retail outlets throughout the United States. Seaboard also sells to distributors, and further processors in Japan, Mexico and other foreign markets. Hogs processed at the plant are primarily Seaboard raised hogs. In addition, the remaining hogs processed are raised by third parties and purchased under contract or in the open market.

 

Seaboard’s hog production facilities consist of genetic and commercial breeding, farrowing, nursery and finishing buildings located in Oklahoma, Kansas, Texas and Colorado. These facilities have a capacity to produce over four million hogs annually. Seaboard owns and operates six centrally located feed mills to provide formulated feed to these hogs.

 

Seaboard’s Pork Division also owns two bacon processing plants located in Salt Lake City, Utah and Missoula, Montana. The processing plants produce sliced and pre-cooked bacon primarily for food service. These operations enable Seaboard to expand its integrated pork model into value-added products and to enhance its ability to extend production to include other further processed pork products.

 

Seaboard produces biodiesel at a facility in Guymon, Oklahoma. The biodiesel is primarily produced from pork fat from Seaboard’s Guymon pork processing plant and from animal fat supplied by non-Seaboard facilities. The biodiesel is sold to third parties. The facility can also produce biodiesel from vegetable oil.

 

Seaboard’s Pork Division has an agreement with a similar size pork processor, Triumph Foods LLC (Triumph), to market substantially 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 products to its customers that are produced in its own facilities. Seaboard markets the pork products for a fee primarily based on the number of head processed by Triumph Foods.

 

Commodity Trading and Milling Division

Seaboard’s Commodity Trading and Milling Division is an integrated grain trading, grain processing and logistics operation.  This division markets wheat, corn, soybean meal, rice and other similar commodities in bulk overseas 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 approximately seven million metric tons per year of wheat, corn, soybean meal, rice and other similar commodities to the food and animal feed industries. The division efficiently provides quality products and reliable services to industrial customers in selected markets. Seaboard integrates the delivery of commodities to its customers primarily through the use of company owned and chartered bulk carriers.

 

Seaboard’s Commodity Trading and Milling Division has facilities in 29 countries. The commodity trading business operates through ten offices in eight countries and three non-consolidated affiliates located in nine countries. One of these non-consolidated affiliates became a consolidated affiliate in January 2012. The grain processing businesses operate facilities at 28 locations in 14 countries, and include five consolidated and thirteen non-consolidated affiliates in Africa, South America and the Caribbean. These businesses produce approximately three million metric tons of finished product per year.

 

6



 

SEABOARD CORPORATION

Division Summaries

 

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 an off-port warehouse for cargo consolidation and temporary storage and a terminal at the Port of Miami. At the Port of Houston, Seaboard operates a cargo terminal facility that includes on-dock warehouse space for temporary storage of bagged grains, resins and other cargoes. Seaboard also makes scheduled vessel calls to Brooklyn, New York, Fernandina Beach, Florida, New Orleans, Louisiana and multiple foreign ports in the Caribbean Basin and Central and South America.

 

Seaboard’s marine fleet consists of owned and chartered vessels, as well as dry, refrigerated and specialized containers and other related equipment. Seaboard is the largest shipper in terms of cargo volume to and from the Port of Miami. Seaboard provides extended service from our domestic ports of call to and from multiple foreign destinations through a network of 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 capabilities, including agreements with a network of connecting carriers, allow transport by truck or rail of 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 to provide the most reliable and effective level of service throughout the United States, Latin America and the Caribbean Basin and between the countries it serves.

 

Other Divisions

In Argentina, Seaboard grows sugar cane, produces and refines sugar and produces alcohol.  The sugar is primarily marketed locally, with some exports to the United States and other South American countries. Seaboard’s mill, one of the largest in Argentina, has a processing capacity of approximately 250,000 metric tons of sugar and approximately 15 million gallons of alcohol per year. The mill is located in the Salta Province of Argentina, with administrative offices in Buenos Aires. Land owned by Seaboard in Argentina is planted with sugar cane, which supplies the majority of the raw product processed by the mill. Depending on local market conditions, sugar may also be purchased from third parties for resale.  In addition, this division sells dehydrated alcohol to certain oil companies under the Argentine government bio-ethanol program, which requires alcohol to be blended with gasoline.  During 2011, this division completed construction of a 38 megawatt co-generation power plant which became fully operational in October 2011.  The plant is powered by the burning of sugarcane byproducts during the harvest season, which is between May and November.

 

In the Dominican Republic, Seaboard is an independent power producer generating electricity for the local power grid.  Seaboard is not directly involved in the transmission or distribution of electricity.  Seaboard primarily sells on the spot market but does have some contracts to sell directly to third party users.  Through early 2011, this division operated two floating electric power generating facilities consisting of a system of diesel engines mounted onto barge-type vessels located on the Ozama River in Santo Domingo.  On April 8, 2011, Seaboard closed the sale of its two power generating facilities. On April 20, 2011, Seaboard signed a short-term lease agreement that allowed Seaboard to resume operations of one of the facilities (72 megawatts) through approximately March 31, 2012.  In addition, Seaboard retained all other physical properties of this business and constructed a new 106 megawatt floating power generating facility.  This new facility was delivered in January 2012 and is anticipated to begin commercial operations in March 2012.

 

On December 6, 2010, Seaboard purchased a 50 percent non-controlling voting interest in Butterball, LLC (Butterball). Butterball is a vertically integrated producer, processor and marketer of branded and non-branded turkeys and other turkey products. Butterball has five processing plants and numerous live production and feed milling operations located in North Carolina, Arkansas, Missouri and Kansas. Butterball produces approximately one billion pounds of turkey each year, and supplies its products to more than 30 countries. Butterball is a national supplier to retail and foodservice outlets, and also exports products to Mexico and other countries.

 

Seaboard processes jalapeño 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.

 

7



 

SEABOARD CORPORATION

Summary of Selected Financial Data

 

 

 

Years ended December 31,

 

(Thousands of dollars except per share amounts)

 

2011

 

2010

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

5,746,902

 

$

4,385,702

 

$

3,601,308

 

$

4,267,804

 

$

3,213,301

 

Operating income

 

$

407,204

 

$

321,066

 

$

 23,723

 

$

 121,809

 

$

 169,915

 

Net earnings attributable to Seaboard

 

$

345,847

 

$

283,611

 

$

 92,482

 

$

 146,919

 

$

 181,332

 

Basic earnings per common share

 

$

284.66

 

$

 231.69

 

$

 74.74

 

$

 118.19

 

$

 144.15

 

Total assets

 

$

3,006,728

 

$

 2,734,086

 

$

 2,337,133

 

$

 2,331,361

 

$

 2,093,699

 

Long-term debt, less current maturities

 

$

116,367

 

$

 91,407

 

$

 76,532

 

$

 78,560

 

$

 125,532

 

Stockholders’ equity

 

$

2,079,467

 

$

 1,778,249

 

$

 1,545,419

 

$

 1,463,578

 

$

 1,355,199

 

Dividends per common share

 

$

 

$

9.00

 

$

3.00

 

$

3.00

 

$

3.00

 

 

In 2011, Seaboard closed the sale of its two floating power generating facilities in the Dominican Republic resulting in a gain on sale of assets of $52,923,000, or $43.56 per share, included in operating income.  There was no tax expense on these transactions.  See Note 13 to the Consolidated Financial Statements for further discussion.

 

In December 2010, Seaboard declared and paid a dividend of $6.75 per share on the common stock.  The increased amount of the dividend (which has historically been $0.75 per share on a quarterly basis or $3.00 per share on an annual basis) represented payment of the regular fourth quarter dividend of $0.75 per share and a prepayment of the annual 2011 and 2012 dividends ($3.00 per share per year). Seaboard did not declare a dividend in 2011 and currently does not intend to declare any further dividends in 2012. Basic and diluted earnings per common share are the same for all periods presented.

 

Seaboard Corporation, and affiliated companies in its Commodity Trading and Milling segment, resolved a dispute with a third party related to a 2005 transaction.  As a result, Seaboard Overseas Limited received $16,787,000, net of expenses, or $13.57 per common share, in 2009 included in other income.  There was no tax expense on this transaction. See Note 11 to the Consolidated Financial Statements for further discussion.

 

8



 

SEABOARD CORPORATION

Company Performance Graph

 

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 NYSE Amex Equities and provides an appropriate comparison for Seaboard’s stock performance.  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 NYSE Amex Equities 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, 2006 and ending December 31, 2011.  The information presented in the performance graph is historical in nature and is not intended to represent or guarantee future returns.

 

 

The comparison of cumulative total returns presented in the above graph was plotted using the following index values and common stock price values:

 

 

 

12/31/06

 

12/31/07

 

12/31/08

 

12/31/09

 

12/31/10

 

12/31/11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaboard Corporation

 

$

100.00

 

$

83.41

 

$

67.91

 

$

76.93

 

$

114.09

 

$

116.67

 

NYSE Amex Equities Composite

 

$

100.00

 

$

122.46

 

$

73.97

 

$

100.19

 

$

127.31

 

$

128.98

 

Peer Group

 

$

100.00

 

$

108.88

 

$

84.49

 

$

100.82

 

$

116.07

 

$

132.87

 

 

9



 

SEABOARD CORPORATION

Quarterly Financial Data (unaudited)

 

(UNAUDITED)

 

1st

 

2nd

 

3rd

 

4th

 

Total for

 

(Thousands of dollars except per share amounts)

 

Quarter

 

Quarter

 

Quarter

 

Quarter

 

the Year

 

 

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,468,179

 

$

1,398,587

 

$

1,476,718

 

$

1,403,418

 

$

5,746,902

 

Operating income

 

$

130,276

 

$

136,965

 

$

66,989

 

$

72,974

 

$

407,204

 

Net earnings attributable to Seaboard

 

$

116,864

 

$

113,486

 

$

36,560

 

$

78,937

 

$

345,847

 

Earnings per common share

 

$

96.11

 

$

93.34

 

$

30.07

 

$

65.12

 

$

284.66

 

Dividends per common share

 

$

 

$

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Closing market price range per common share:

 

 

 

 

 

 

 

 

 

 

 

High

 

$

2,413.00

 

$

2,443.00

 

$

2,704.00

 

$

2,307.00

 

 

 

Low

 

$

1,965.00

 

$

2,160.00

 

$

1,801.99

 

$

1,684.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,020,276

 

$

1,048,463

 

$

1,111,813

 

$

1,205,150

 

$

4,385,702

 

Operating income

 

$

67,466

 

$

101,247

 

$

41,642

 

$

110,711

 

$

321,066

 

Net earnings attributable to Seaboard

 

$

62,778

 

$

77,604

 

$

39,869

 

$

103,360

 

$

283,611

 

Earnings per common share

 

$

50.84

 

$

63.21

 

$

32.74

 

$

85.01

 

$

231.69

 

Dividends per common share

 

$

0.75

 

$

0.75

 

$

0.75

 

$

6.75

 

$

9.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Closing market price range per common share:

 

 

 

 

 

 

 

 

 

 

 

High

 

$

1,430.00

 

$

1,610.00

 

$

1,795.00

 

$

2,006.00

 

 

 

Low

 

$

1,195.00

 

$

1,261.00

 

$

1,387.05

 

$

1,750.01

 

 

 

 

In April 2011, Seaboard closed the sale of its two floating power generating facilities in the Dominican Republic.  Seaboard recognized a gain on sale of assets of $51,423,000, or $42.29 per share, included in operating income in the second quarter of 2011.  In July 2011, Seaboard received $1,500,000 of the $3,000,000 in escrow for potential dry dock costs of these facilities.  The $1,500,000, or $1.23 per share, was recognized as a gain on sale of assets in operating income in the third quarter of 2011.  There was no tax expense on these transactions.  See Note 13 to the Consolidated Financial Statements for further discussion.

 

In December 2010, Seaboard declared and paid a dividend of $6.75 per share on the common stock. The increased amount of the dividend (which has historically been $0.75 per share on a quarterly basis or $3.00 per share on an annual basis) represented payment of the regular fourth quarter dividend of $0.75 per share and a prepayment of the annual 2011 and 2012 dividends ($3.00 per share per year). Seaboard did not declare a dividend in 2011 and currently does not intend to declare any dividends in 2012.

 

During 2011, Seaboard repurchased 600 common shares in the third quarter and 4,682 shares in the fourth quarter.  During 2010, Seaboard repurchased 5,452 common shares in the first quarter, 6,680 shares in the second quarter and 8,747 shares in the third quarter, as authorized by Seaboard’s Board of Directors. See Note 12 to the Consolidated Financial Statements for further discussion.

 

10



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Seaboard is a diverse agribusiness and transportation company, with global operations in several industries. Most of the sales and costs of Seaboard’s segments are significantly influenced by worldwide fluctuations in commodity prices and 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 distinct 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, Mexico, and other foreign markets. Revenues from the sale of pork products are primarily generated from a single hog processing plant in Guymon, Oklahoma, which generally operates at daily double shift processing capacity of 19,400 hogs, two bacon further processing plants located in Salt Lake City, Utah and Missoula, Montana, and a ham boning and processing plant in Mexico. In 2011, Seaboard raised approximately 76% 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 47% of Seaboard’s total fixed assets and also has material amounts of inventories.

 

Of Seaboard’s businesses, management believes the Pork segment 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 changes in the 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. As the Guymon plant generally operates at capacity, to improve operating income Seaboard is constantly working towards improving the efficiencies of the operations, as well as considering ways to increase margins by expanding product offerings.

 

The Pork segment also produces biodiesel which is sold to third parties. Biodiesel is produced from pork fat obtained from Seaboard’s pork processing plant and from animal fat purchased from third parties. The processing plant also can produce biodiesel from vegetable oil. Seaboard is also a majority-owner of a ham-boning and processing plant in Mexico.

 

The Pork segment has an agreement with Triumph Foods LLC (Triumph) to market substantially all of the pork products produced at Triumph’s plant in St. Joseph, Missouri. The Pork segment markets the related pork products for a fee primarily based on the number of head processed by Triumph Foods. This plant has a capacity similar to that of Seaboard’s Guymon plant and operates upon an integrated model similar to that of Seaboard’s. Seaboard’s sales prices for its pork products are primarily based on a margin sharing arrangement that considers the average sales price and mix of products sold from both Seaboard’s and Triumph Food’s hog processing plants.

 

Commodity Trading and Milling Segment

The Commodity Trading and Milling segment, which is managed under the name of Seaboard Overseas and Trading Group, primarily operates overseas and is an integrated grain trading, grain processing and logistics operation with locations in Africa, South America, the Caribbean and Europe. 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 of various commodities, such as wheat, corn, soybean meal and rice. Although this segment owns eight ships, the majority of the third party trading business is transacted with chartered ships. Freight rates, influenced by available charter capacity for worldwide trade in bulk cargoes, and related fuel costs affect business volumes and margins. The milling businesses, both consolidated and non-consolidated affiliates, operate in 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. This segment is Seaboard’s most working capital intensive segment, with approximately 34% of Seaboard’s total working capital at December 31, 2011, primarily consisting of inventories and receivables.

 

11



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

The majority of the Commodity Trading and Milling segment’s sales pertain to the commodity trading business. Grain is sourced from multiple origins and delivered to third party and affiliate customers in various international locations. The execution of these purchase and delivery transactions have long cycles of completion which may extend for several months with a high degree of price volatility. As a result, these factors can significantly affect sales volumes, operating income, working capital and related cash flows from quarter to quarter.

 

Effective, January 1, 2012, Seaboard increased its ownership from 50% to 70% in PS International, LLC, a specialty grain trading business located in Chapel Hill, North Carolina.  Seaboard invested in several entities in recent years and continues to seek opportunities to expand its trading and milling businesses.

 

Marine Segment

The Marine segment provides containerized cargo shipping services primarily between the United States and 25 countries in the Caribbean Basin, Central and South America. As a result, fluctuations in economic conditions or unstable political situations in the regions or countries in which Seaboard operates can affect trade volumes and operating profits. 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 thus affected by fluctuations in charter hire rates, as well as fuel costs.

 

Seaboard continues to explore ways to increase volumes on existing routes, while seeking opportunities to broaden its route structure in the regions it serves.

 

Sugar Segment

Seaboard’s Sugar segment operates a vertically integrated sugar and alcohol production facility in Argentina. This segment’s sales and operating income are significantly affected 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 in the world market can affect local sugar prices and export sales volumes and prices. Depending on local market conditions, this business purchases sugar from third parties for resale. Over the past several years, Seaboard made numerous improvements to this business to increase the efficiency of its operations and expand its sugar and alcohol production capabilities. In the first quarter of 2010, this segment began sales of dehydrated alcohol to certain oil companies under an Argentine government bio-ethanol program, which mandates alcohol to be blended with gasoline.  In the fourth quarter of 2011, this segment completed construction of a 38 megawatt co-generation power plant which is powered by the burning of sugarcane byproducts during the harvest season, which is between May and November.

 

The functional currency of the Sugar segment is the Argentine peso. The currency exchange rate can have an impact on reported U.S. dollar sales, operating income and cash flows. Historically, the cash needs were relatively high for this operation as a result of ongoing expansion of sugar production and construction of a 38 megawatt co-generation power plant. However, with improved operational performance and the completion of the co-generation power plant in October 2011, financing needs for this segment should be minimal in 2012. 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 is an independent power producer in the Dominican Republic (DR) generating electricity from a system of diesel engines mounted on floating barges for the local power grid.  As discussed in Note 13 to the Consolidated Financial Statements, in April, 2011, Seaboard closed the sale of its two existing power generating facilities but signed a short-term lease that allowed Seaboard to resume operations of one of the facilities (72 megawatts) through March 31, 2012.  During 2011, Seaboard also completed the construction of a new floating power generating facility with a rated capacity of 106 megawatts.  This facility was delivered in January 2012 and is anticipated to begin operations in March 2012.  The total cost of the project is estimated to be approximately $133.0 million, including capitalized interest, and is primarily being financed with a $114.0 million financing agreement.  After the completion of this new facility in the first quarter of 2012, financing needs for this segment should be minimal for the remainder of 2012.  During the past few years, operating cash flows have fluctuated from inconsistent customer collections.

 

The DR regulatory body schedules power production based on the amount of funds available to pay for the power produced and the relative costs of the power produced. Fuel is the largest cost component, but increases in fuel prices generally have been passed on to customers. In addition, from time to time Seaboard may pursue additional investment opportunities in the power industry.

 

12



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Turkey Segment

On December 6, 2010, Seaboard purchased a 50 percent non-controlling voting interest in Butterball, LLC (Butterball). Butterball is a vertically integrated producer, processor and marketer of branded and non-branded turkeys and other turkey products. Butterball has five processing plants and numerous live production and feed milling operations located in North Carolina, Arkansas, Missouri and Kansas. Sales prices are directly affected by both domestic and worldwide supply and demand for turkey products and other proteins. Feed costs are the most significant single component of the cost of raising turkeys, and can be materially affected by prices for corn and soybean meal. The turkey business is seasonal only on the whole bird side, with Thanksgiving and Christmas holidays driving the majority of those sales.

 

LIQUIDITY AND CAPITAL RESOURCES

Summary of Sources and Uses of Cash

Cash and short-term investments as of December 31, 2011 increased $21.4 million from December 31, 2010. The increase was primarily the result of $220.0 million in net cash from operating activities, $65.0 million in proceeds from issuance of long-term debt and $59.6 million of proceeds received from the sale of power generating facilities. Partially offsetting the increase was cash used for capital expenditures of $183.7 million, decreases in notes payable to banks of $62.5 million, notes receivable issued to affiliates, net of $40.3 million, investments in and advances to affiliates of $18.5 million and repurchases of common stock of $10.0 million.  Cash from operating activities for 2011 decreased $119.8 million compared to 2010, primarily as a result of changes in net working capital needs in the Commodity Trading and Milling segment for increases in receivables and inventories and also timing of payments for current liabilities.

 

Cash and short-term investments as of December 31, 2010 decreased $95.9 million from December 31, 2009. The decrease was primarily the result of investing $177.5 million for a 50 percent non-controlling voting interest in Butterball, plus $100.0 million financing provided to Butterball in subordinated debt. Also during 2010, cash was used for capital expenditures of $103.3 million, investments in four new non-consolidated affiliates and acquisitions of a business of $33.3 million, as discussed below, repurchases of common stock in the amount of $30.0 million and dividends paid of $11.0 million. Partially offsetting the decrease was cash generated by operating activities of $339.8 million. Cash from operating activities for 2010 increased $93.5 million compared to 2009, primarily as a result of higher net earnings in 2010 compared to 2009, partially offset by a prior year increase in net working capital that did not repeat in 2010.

 

Capital Expenditures, Acquisitions and Other Investing Activities

During 2011, Seaboard invested $183.7 million in property, plant and equipment, of which $39.9 million was expended in the Pork segment, $31.2 million in the Marine segment, $22.6 million in the Sugar segment and $84.0 million in the Power segment.  The Pork segment expenditures were primarily for additional finishing barns, tractor-trailers and 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 completion of the cogeneration plant with the remaining amount for normal upgrades to existing operations.  The cogeneration plant became fully operational in October 2011.  The Power segment expenditures were primarily used for the construction of a 106 megawatt power generating facility, which will operate in the Dominican Republic.  The power generating facility is anticipated to begin commercial operations in March 2012.  The total cost of the project is estimated to be approximately $133.0 million, including capitalized interest.  All other capital expenditures were of a normal recurring nature and primarily included replacements of machinery and equipment, and general facility modernizations and upgrades.

 

The total 2012 capital expenditures budget is $166.2 million. The Pork segment plans to spend $50.3 million primarily for additional finishing barns, a new feed mill and improvements to existing facilities and related equipment.  The Marine segment has budgeted $40.1 million primarily for 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 2012.  The Sugar segment plans to spend $40.4 million primarily for expansion of cane growing operations and normal upgrades to existing operations. The Power segment plans to spend $19.6 million primarily for the completion of the new power generating facility project discussed above. The balance of $15.8 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 and/or Seaboard’s available borrowing capacity.

 

13



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

During 2010, Seaboard invested $103.3 million in property, plant and equipment, of which $9.6 million was expended in the Pork segment, $28.4 million in the Marine segment, $30.6 million in the Sugar segment, $31.7 million in the Power segment and $3.0 million in the remaining businesses. The capital expenditures for the Pork segment were primarily for improvements to existing facilities and related equipment. Capital expenditures for the Marine segment included $23.5 million spent to purchase cargo carrying and handling equipment. The capital expenditures for the Sugar segment were primarily for construction of the co-generation power plant with the remaining capital expenditures for normal upgrades to existing operations. Capital expenditures for the Power segment were primarily used for the construction of the power generation facility discussed above All other capital expenditures were primarily of a normal recurring nature and primarily included replacement of machinery and equipment, and general facility modernizations and upgrades.

 

During 2009 Seaboard invested $54.3 million in property, plant and equipment, of which $15.2 million was expended in the Pork segment, $14.7 million in the Marine segment, $21.6 million in the Sugar segment and $2.8 million in the remaining businesses. Capital expenditures for the Pork segment were primarily for improvements to existing hog facilities, upgrades to the Guymon pork processing plant and construction of the ham boning and processing plant in Mexico. The ham boning and processing plant was completed in the second quarter of 2009. Capital expenditures for the Marine segment included $10.3 million spent to purchase cargo carrying and handling equipment. Capital expenditures for the Sugar segment included $13.8 million for the development of the co-generation power plant, with the remaining capital expenditures primarily being used for expansion of cane growing operations. All other capital expenditures were primarily of a normal recurring nature and primarily included replacement of machinery and equipment, and general facility modernizations and upgrades.

 

Effective, January 1, 2012, Seaboard increased its ownership interest in PS International, LLC (PSI), a specialty grain trading business located in Chapel Hill, North Carolina, from 50% to 70% by making an initial cash payment of $3.7 million in January 2012.  During the fourth quarter of 2011, Seaboard provided a $35.0 million line of credit to this then 50% owned, non-consolidated affiliate.  Seaboard initially acquired a 50% non-controlling interest in PSI in late March 2010 for $7.7 million.  See Note 4 to the Consolidated Financial Statements for further discussion of these transactions.

 

In December 2011, Seaboard made an $8.5 million advance capital lease payment to begin operations in 2012 of a flour mill in Ghana.  See Note 13 to the Consolidated Financial Statements for further discussion.

 

During the third quarter of 2011, Seaboard provided a term loan of $13.0 million to its non-consolidated affiliate, Butterball, LLC (Butterball).  Also during the third quarter of 2011, Seaboard made an additional capital contribution of $5.6 million in Butterball.  On December 6, 2010, Seaboard acquired its 50 percent non-controlling voting interest in Butterball for a cash purchase price of $177.5 million.  In connection with this investment, Seaboard provided to Butterball $100.0 million of subordinated financing.  See Note 4 to the Consolidated Financial Statements for further discussion of these transactions.

 

On April 8, 2011, Seaboard closed the sale of its two power generating facilities in the Dominican Republic for $73.1 million.  See Note 13 to the Consolidated Financial Statements for further discussion.

 

During the fourth quarter of 2010, Seaboard acquired a 25 percent non-controlling interest in a commodity trading business in Australia for $5.0 million. Also during the fourth quarter of 2010, Seaboard invested $10.5 million in a newly-combined poultry business in Africa for a 50 percent non-controlling interest.

 

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.  The assets acquired included cash of $1.2 million. Also during the third quarter of 2010, Seaboard finalized an agreement to invest in a bakery to be built in Central Africa for a 50 percent non-controlling interest in this business. During 2011 and 2010, Seaboard invested $11.4 million and $10.1 million, respectively, for a total of $21.5 million as of December 31, 2011 in this project.  The total project cost is estimated to be $60.5 million, but Seaboard’s total investment has not yet been determined pending finalization of third party financing alternatives for a portion of the project.  The bakery is not anticipated to be fully operational until the second half of 2012.

 

During 2010, Seaboard agreed to invest in various limited partnerships as a limited partner that are expected to enable Seaboard to obtain certain low income housing tax credits over a period of approximately ten years.  The total commitment is approximately $17.5 million.  As of December 31, 2011, Seaboard had invested a total of $4.7 million in these partnerships with the remaining investment anticipated to be made in 2012.

 

14



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Financing Activities, Debt and Related Covenants

The following table presents a summary of Seaboard’s available borrowing capacity as of December 31, 2011.  At December 31, 2011, there were no borrowings outstanding under the committed line of credit and borrowings under the uncommitted lines of credit totaled $16.2 million, all related to foreign subsidiaries.  Letters of credit reduced Seaboard’s borrowing capacity under its committed and uncommitted credit lines by $48.1 million and $25.0 million, respectively, primarily representing $26.4 million for Seaboard’s outstanding Industrial Development Revenue Bonds and $21.5 million related to insurance coverage.

 

 

 

Total amount

 

(Thousands of dollars)

 

available

 

 

 

 

 

Long-term credit facility – committed

 

$

300,000

 

Short-term uncommitted demand notes

 

182,966

 

Total borrowing capacity

 

482,966

 

Amounts drawn against lines

 

(16,219

)

Letters of credit reducing borrowing availability

 

(73,123

)

Available borrowing capacity at December 31, 2011

 

$

393,624

 

 

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 generating facility in the Dominican Republic, as discussed above.  The credit agreement will mature in December 2021 and is secured by the power generating facility.  During 2011, Seaboard borrowed $65.0 million from the credit agreement.  At December 31, 2011, $81.3 million had been borrowed from this credit facility.  It is currently anticipated the remaining $32.7 million will be borrowed during 2012.

 

Seaboard has capacity under existing loan covenants to undertake additional debt financings of approximately $1,883.0 million.  As of December 31, 2011, Seaboard was in compliance with all restrictive covenants related to these loans and facilities.  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 are $40.9 million, $8.7 million and $16.1 million over the three years ending December 31, 2014.  As of December 31, 2011, Seaboard had cash and short-term investments of $394.8 million, total working capital of $1,070.6 million and a $300.0 million committed line of credit maturing on July 10, 2013.  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 2012.  Management does, however, periodically review various alternatives for future financing to provide additional liquidity for future operating plans.  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.

 

As of December 31, 2011, $100.8 million of the $394.8 million of cash and short-term investments were held by Seaboard’s foreign subsidiaries and Seaboard could be required to accrue and pay taxes to repatriate these funds if needed for Seaboard’s operations in the U.S.  However, Seaboard’s intent is to permanently reinvest these funds outside the U.S. and current plans do not demonstrate a need to repatriate them to fund Seaboard’s U.S. operations.

 

As of December 31, 2011, Seaboard believes its exposure to the current potential European sovereign debt problems is not material. Seaboard monitors these exposures and currently does not believe there is a significant risk.

 

On November 6, 2009, the Board of Directors authorized up to $100.0 million for a new share repurchase program, which was extended by the Board of Directors through October 31, 2012.  Seaboard used cash to repurchase 5,282 shares of common stock at a total price of $10.0 million in 2011, 20,879 shares of common stock at a total price of $30.0 million in 2010 and 3,668 shares of common stock at a total price of $3.4 million in 2009. See Note 12 to the Consolidated Financial Statements for further discussion.  Seaboard did not pay any dividends in 2011 and currently does not intend to declare or pay any dividends during 2012 as there was a prepayment of the annual 2011 and 2012 dividends in December 2010.

 

15



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Contractual Obligations and Off-Balance Sheet Arrangements

The following table provides a summary of Seaboard’s contractual cash obligations as of December 31, 2011.

 

 

 

Payments due by period

 

 

 

 

 

Less than

 

1-3

 

3-5

 

More than

 

(Thousands of dollars)

 

Total

 

1 year

 

years

 

years

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Vessel time and voyage-charter commitments

 

$

321,350

 

$

101,087

 

$

76,355

 

$

44,947

 

$

98,961

 

Contract grower finishing agreements

 

66,089

 

11,673

 

19,765

 

17,732

 

16,919

 

Other operating lease payments

 

261,509

 

17,920

 

29,263

 

26,560

 

187,766

 

Total lease obligations

 

648,948

 

130,680

 

125,383

 

89,239

 

303,646

 

Long-term debt

 

157,252

 

40,885

 

24,773

 

16,264

 

75,330

 

Other long-term liabilities

 

86,209

 

8,309

 

4,389

 

11,242

 

62,269

 

Short-term notes payable

 

16,219

 

16,219

 

 

 

 

Other purchase commitments

 

1,336,309

 

827,134

 

235,281

 

200,153

 

73,741

 

Total contractual cash obligations and commitments

 

$

2,244,937

 

$

1,023,227

 

$

389,826

 

$

316,898

 

$

514,986

 

 

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 contract grower finishing agreements in place with farmers to raise a portion of Seaboard’s hogs. 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 enters into commodity purchase contracts and ocean freight contracts, primarily to support sales commitments. Seaboard also leases various facilities and equipment under non-cancelable operating lease agreements. See Note 11 to the Consolidated Financial Statements for a further discussion and for a more detailed listing of other purchase commitments.

 

Other long-term liabilities in the table above represent expected benefit payments for various non-qualified pension plans and supplemental retirement arrangements as discussed in Note 10 to the Consolidated Financial Statements, which are unfunded obligations that are deemed to be employer contributions. No contributions are planned at this time to the two qualified pension plans. Non-current deferred income taxes and certain other long-term liabilities on the Consolidated Balance Sheet are not included in the table above as management is unable to reliably estimate the timing of the payments for these items. In addition, deferred revenues and other deferred credits included in other long-term liabilities on the Consolidated Balance Sheet have been excluded from the table above since they do not represent contractual obligations.

 

Seaboard has issued $1.3 million of guarantees to support certain activities of non-consolidated affiliates and 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 years ended December 31, 2011, 2010 and 2009 were $5,746.9 million, $4,385.7 million and $3,601.3 million, respectively. The increase in net sales for 2011 compared to 2010 primarily reflected increased prices for and volumes of commodities traded and also an increase in overall sale prices for pork products. The increase in net sales for 2010 compared to 2009 primarily reflected an increase in sale prices for pork products, increased commodities trading volumes and higher cargo volumes for the Marine segment.

 

Operating income for the years ended December 31, 2011, 2010 and 2009 were $407.2 million, $321.1 million and $23.7 million, respectively. The increase for 2011 compared to 2010 reflects a one-time gain on sale of power generating facilities of $52.9 million. The increase also reflected $33.8 million fluctuation of marking to market Commodity Trading and Milling derivative contracts, as discussed below, higher sugar prices and higher pork prices.  The increases were partially offset by write-downs of $15.4 million in 2011 for certain grain inventories for customer contract performance issues as discussed below and declining performance in the Marine segment from higher operating costs.  The 2010 increase compared to 2009 primarily reflected higher Pork segment margins and, to a lesser extent, increased margins for the Sugar segment and the Marine segment, as discussed below.

 

16



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Pork Segment

 

(Dollars in millions)

 

2011

 

2010

 

2009

 

Net sales

 

$

1,744.6

 

$

1,388.3

 

$

1,065.3

 

Operating income (loss)

 

$

259.3

 

$

213.3

 

$

(15.0

)

 

Net sales for the Pork segment increased $356.3 million for the year ended December 31, 2011 compared to 2010.  The increase primarily reflected an increase in overall sales prices for pork products and, to a lesser extent, increased sales prices for and volume of biodiesel, and also higher volume of pork products sold.

 

Operating income for the Pork segment increased $46.0 million for the year ended December 31, 2011 compared to 2010.  The increase was primarily a result of higher sales prices and, to a lesser extent, higher volumes of pork products sold and an increase in payments received from the U.S. Government for biodiesel production in 2011 compared to 2010.  Partially offsetting the increase was higher feed costs primarily from higher corn prices and to a lesser degree, higher costs for hogs purchased from third parties and the impact of using the LIFO method for determining certain inventory costs.  LIFO decreased operating income $33.7 million in 2011 compared to $1.3 million in 2010 primarily as a result of higher costs to purchase corn during 2011.  Also, during the third quarter of 2011, a $5.6 million impairment charge was incurred related to the ham boning plant in Mexico.  See Note 13 to the Consolidated Financial Statements for further discussion of the impairment charge.

 

Management is unable to predict future market prices for pork products or the cost of feed and hogs purchased from third parties.  The Federal tax credits for biodiesel produced by Seaboard expired on December 31, 2011 and currently management does not anticipate these credits to be renewed for 2012.  However, management anticipates positive operating income for this segment for 2012, although at a lower level than 2011.

 

Net sales of the Pork segment increased $323.0 million for the year ended December 31, 2010, compared to 2009. The increase primarily reflected an increase in overall sales prices for pork products.  Operating income increased $228.3 million for the year ended December 31, 2010, compared with 2009.  The increase was primarily a result of higher sales prices, partially offset by higher costs for hogs purchased from third parties.

 

Commodity Trading and Milling Segment

 

(Dollars in millions)

 

2011

 

2010

 

2009

 

Net sales

 

$

2,689.8

 

$

1,808.9

 

$

1,531.6

 

 

 

 

 

 

 

 

 

Operating income as reported

 

$

43.2

 

$

34.4

 

$

24.8

 

Less mark-to-market adjustments

 

(16.6

)

17.2

 

14.5

 

Operating income excluding mark-to-market adjustments

 

$

26.6

 

$

51.6

 

$

39.3

 

 

 

 

 

 

 

 

 

Income from affiliates

 

$

13.4

 

$

21.0

 

$

19.1

 

 

Net sales for the Commodity Trading and Milling segment increased $880.9 million for the year ended December 31, 2011 compared to 2010.  The increase is primarily the result of increased prices for wheat and corn, and increased volumes of commodities sold to both third parties and non-consolidated affiliates.  In addition, $101.1 million in net sales were recognized in the first quarter of 2011 related to previously deferred costs and deferred revenues under contracts for which the final sale prices were not fixed and determinable until the first quarter of 2011. As worldwide commodity price fluctuations cannot be predicted, management is unable to predict the level of future sales.

 

Operating income increased $8.8 million for the year ended December 31, 2011, compared to 2010.  The increase primarily reflects the $33.8 million fluctuation of marking to market the derivative contracts in 2011, as discussed below.  Excluding the effects of these derivative contracts, operating income decreased $25.0 million for 2011 compared to 2010.  The decrease was primarily the result of certain grain inventory write-downs of $15.4 million in 2011 for various customer contract performance issues. The decrease was also the result of, but to a lesser extent, higher selling, general and administrative expenses primarily from higher personnel costs and bad debt expense.

 

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 for this segment. However, management anticipates positive operating income for this segment in 2012, excluding the potential effects of marking to market derivative contracts.

 

17



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Had Seaboard not applied mark-to-market accounting to its derivative instruments, operating income for this segment in 2011 would have been lower by $16.6 million and in 2010 and 2009 would have been higher by $17.2 million and $14.5 million, respectively.  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 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 existing mark-to-market adjustments should be primarily offset by realized margins or losses as revenue is recognized over time and thus, these mark-to-market adjustments could reverse in fiscal 2012.  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 year ended December 31, 2011 decreased by $7.6 million from 2010.  The decrease primarily represents unfavorable market conditions for certain affiliates.  Partially offsetting this decrease was a $5.1 million gain (Seaboard’s proportionate share) recognized in the fourth quarter of 2011 as a result of Seaboard’s non-consolidated affiliate in Haiti’s final insurance settlement for the 2010 earthquake.  Based on the uncertainty of local political and economic environments in the countries in which these businesses operate, management cannot predict future results.

 

Net sales of the Commodity Trading and Milling segment increased $277.3 million for the year ended December 31, 2010, compared to 2009.  The increase is primarily the result of increased volumes of commodities sold to third parties, principally corn, soybean meal and soybeans and, to a lesser extent, increased prices for wheat and corn during the fourth quarter of 2010. Partially offsetting this increase was a decrease in commodity trading volumes to non-consolidated affiliates.

 

Operating income increased $9.6 million for 2010, compared to 2009. The increase primarily reflects the write-down of $8.8 million of certain grain inventories for various customer contract performance issues and related lower of cost or market adjustments, as discussed further in Note 3 to the Consolidated Financial Statements. Also, the increase reflects the $2.7 million fluctuation of marking to market the derivative contracts, as discussed above.

 

Income from affiliates for the year ended December 31, 2010 increased $1.9 million from 2009, primarily as a result of favorable market conditions for certain affiliates.

 

Marine Segment

 

(Dollars in millions)

 

2011

 

2010

 

2009

 

Net sales

 

$

928.5

 

$

853.6

 

$

737.6

 

Operating income (loss)

 

$

(3.9

)

$

47.6

 

$

24.1

 

 

Net sales of the Marine segment increased $74.9 million for the year ended December 31, 2011, compared to 2010 primarily as the result of increased rates in most markets served during 2011 and, to a lesser extent higher cargo volumes as economic activity generally increased in 2011 compared to 2010.

 

Operating income decreased by $51.5 million for the year ended December 31, 2011, compared to 2010.  The decrease was primarily the result of cost increases for fuel, trucking and charterhire on a per unit shipped basis. Partially offsetting the decrease was higher cargo rates as discussed above. 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 2012. Based on higher fuel and trucking costs, management currently cannot predict if this segment will be profitable in 2012.

 

Net sales of the Marine segment increased $116.0 million for the year ended December 31, 2010, compared to 2009 primarily as a result of higher cargo volumes in most markets served during 2010 as economic activity increased.  The growth in volume was partially offset by overall lower cargo rates 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 remained fairly constant during 2010 but increased slightly during the second half of 2010 compared to the same period in 2009.

 

18



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Operating income increased by $23.5 million for the year ended December 31, 2010, compared to 2009. The increase was primarily the result of cost decreases for charter hire and, to a lesser extent, certain terminal and other operating costs on a per unit shipped basis. Partially offsetting the increase were lower cargo rates, as discussed above, and higher fuel costs for vessels and increased trucking costs on a per unit shipped basis.

 

Sugar Segment

 

(Dollars in millions)

 

2011

 

2010

 

2009

 

Net sales

 

$

259.8

 

$

196.0

 

$

143.0

 

Operating income (loss)

 

$

65.1

 

$

31.7

 

$

(0.9

)

Income from affiliates

 

$

0.4

 

$

1.0

 

$

1.0

 

 

Net sales of the Sugar segment increased $63.8 million for the year ended December 31, 2011 compared to 2010.  The increase primarily reflects increased domestic sugar prices partially offset by lower volumes.  Management cannot predict sugar prices for 2012.  The cogeneration plant, discussed above, became fully operational in October 2011 and it is not anticipated to generate significant revenues until the sugar harvest season, which is between May and November.

 

Operating income increased $33.4 million for the year ended December 31, 2011 compared to 2010.  The increase primarily represents higher margins resulting from the increase in sugar prices discussed above.  Management anticipates positive operating income for this segment for 2012, although at a lower level than in 2011.

 

Net sales of the Sugar segment increased $53.0 million for the year ended December 31, 2010, compared to 2009.  The increase primarily reflects increased domestic sugar and alcohol prices and, to a lesser extent, increased alcohol volumes, partially offset by lower sugar volumes produced and sold.  During the first quarter of 2010, Seaboard began sales of dehydrated alcohol under the Argentine government bio-ethanol program, which requires alcohol to be blended with gasoline.

 

Operating income increased $32.6 million during 2010, compared to 2009.  The increase primarily represents higher margins from the increase in alcohol and sugar prices discussed above and, to a lesser extent, increased alcohol volumes. In addition, the increase reflected a $5.3 million charge to earnings in 2009 related to the write-down of citrus inventories, the integration and transformation of land previously used for citrus production into sugar cane production and related costs, as discussed in Note 13 to the Consolidated Financial Statements, which did not occur in 2010.

 

Power Segment

 

(Dollars in millions)

 

2011

 

2010

 

2009

 

Net sales

 

$

111.4

 

$

124.0

 

$

107.1

 

Operating income

 

$

60.8

 

$

13.4

 

$

8.2

 

 

Net sales of the Power segment decreased $12.6 million for the year ended December 31, 2011 compared to 2010 primarily reflecting lower production levels, partially offset by higher rates.  The lower production levels are the result of the sale of the power generating facilities as noted below which eliminated production for part of April 2011 and also because only one of the two facilities was subsequently leased and operated.  The higher rates were attributable primarily to higher fuel costs, a component of pricing.

 

Operating income increased $47.4 million for the year ended December 31, 2011 compared to 2010. This increase was primarily a result of the gain on sale of power generating facilities of $52.9 million, partially offset by lower production levels discussed above.  See Note 13 to the Consolidated Financial Statements for the sale of certain assets of this business on April 8, 2011, subsequent leasing of one power generating facility and the construction of a new replacement power generating facility.

 

Management anticipates that sales volumes will be higher for 2012 as a result of the reduced operations in 2011 and the start-up of commercial electricity production from the new power generating facility anticipated in March 2012.  Management cannot predict future fuel costs or the extent to which rates will fluctuate compared to fuel costs.  However, management anticipates positive operating income for this segment for 2012 although lower than 2011, which included the gain on sale discussed above.

 

19



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Net sales of the Power segment increased $16.9 million for 2010, compared to 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, especially during the first half of 2010. Operating income increased $5.2 million during 2010, compared to 2009, primarily as a result of higher rates being in excess of higher fuel costs partially offset by lower production levels.  There was no depreciation expense in 2010 related to the assets classified as held for sale, although this was principally offset by increases in certain other production costs.

 

Turkey Segment

 

(Dollars in millions)

 

2011

 

2010

 

Income (loss) from affiliate

 

$

12.7

 

$

(1.0

)

 

The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball. See Note 4 to the Consolidated Financial Statements for discussion of Seaboard’s investment in Butterball, which occurred on December 6, 2010.  Accordingly, the loss from affiliate for 2010 above represents the period from December 6, 2010 to December 31, 2010.  During the third quarter of 2011, management of Butterball announced the closing of its Longmont, Colorado facilities by December 31, 2011, resulting in an impairment of fixed assets charge and accrued severance charges.  Seaboard’s proportionate share of these charges in the second half of 2011 was $3.0 million recognized in income from affiliate for 2011.  Also included in the income from affiliate for 2011 is a $2.6 million loss (Seaboard’s proportionate share) from interest rate exchange agreements as a result of fluctuating interest rates.  Management anticipates positive income for 2012, excluding the potential effects of marking to market commodity derivative contracts and interest rate exchange agreements.

 

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses for the year ended December 31, 2011 increased by $15.8 million over 2010 to $220.7 million.  This increase was primarily the result of increased personnel costs in most segments partially offset by lower costs related to Seaboard’s deferred compensation programs (which are offset by the mark-to-market investments recorded in Other Investment Income, Net discussed below).  As a percentage of revenues, SG&A decreased to 3.8% for 2011 compared to 4.7% for 2010 primarily as a result of increased sales in the Commodity Trading and Milling and Pork segments.

 

SG&A expenses for the year ended December 31, 2010 increased by $11.0 million over 2009 to $204.9 million.  This increase was primarily due to increased personnel costs in most segments and, to a lesser extent, project development costs including the Butterball transaction.  As a percentage of revenues, SG&A decreased to 4.7% for 2010, compared to 5.4% for 2009, primarily as a result of increased sales in the Pork and Commodity Trading and Milling segments.

 

Interest Expense

Interest expense totaled $6.9 million, $5.6 million and $13.2 million for the years ended December 31, 2011, 2010 and 2009, respectively. Interest expense increased for 2011 compared to 2010, primarily from higher average interest rates on total borrowings outstanding.  Interest expense decreased for 2010 compared to 2009, primarily as a result of a lower average level of total borrowings outstanding during 2010 and, to a lesser extent, lower average interest rates on total borrowings outstanding during 2010.  In addition, interest expense decreased for 2010, compared to 2009 as a result of more capitalized interest in 2010, compared to 2009.

 

Interest Income

Interest income totaled $10.0 million, $11.1 million and $16.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.  The decrease for 2011 primarily reflected a decrease in average funds invested.  The decrease for 2010 primarily reflected lower average interest rate on funds invested.

 

Interest Income from Affiliates

Interest income from affiliates totaled $17.8 million, $1.5 million and $1.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.  The increase for 2011 compared to 2010 primarily represents interest from notes receivable from Butterball.  Seaboard invested in Butterball in December 2010, as noted above.

 

20



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Other Investment Income, Net

Other investment income, net totaled $0.2 million, $14.1 million and $15.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease for 2011 compared to 2010 primarily reflected a loss of $1.6 million in 2011 compared to a gain of $4.2 million in 2010 from the mark-to-market value of Seaboard’s investments related to the deferred compensation programs and realized gains of $0.7 million on short-term investments in 2011 compared to $6.6 million of realized gains for 2010.  Other investment income for 2010 also included $2.2 million in syndication fees recognized from the Butterball investment transaction, as noted above.

 

Foreign Currency Gains, Net

Foreign currency gains, net totaled $0.7 million, $1.3 million and $2.4 million for the years ended December 31, 2011, 2010 and 2009, respectively.  Foreign currency gains, net primarily reflected foreign currency fluctuations from net assets denominated in the Euro Zone euro and the South African rand.  These amounts also include foreign currency losses for the Sugar segment from dollar based net liabilities related to foreign currency changes in the Argentine peso.  As such local dollar based debt was paid off during December 2011, such losses should not continue in 2012.  Seaboard operates in many developing countries.  The political and economic conditions of these markets, along with fluctuations in the value of the U.S. dollar, cause volatility in currency exchange rates which exposes Seaboard to fluctuating foreign currency gains and losses which cannot be predicted by Seaboard.

 

Although Seaboard does not utilize hedge accounting, the commodity trading business does utilize foreign currency exchange contracts to manage its risks and exposure to foreign currency fluctuations primarily related to the South African rand and the Euro Zone euro.  Management believes these gains and losses, including the mark-to-market effects, of these foreign currency contracts relate to the underlying commodity transactions and classifies such gains and losses in cost of sales.

 

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.

 

Miscellaneous, Net

Miscellaneous, net totaled $(13.1) million, $(0.4) million and $6.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. Miscellaneous, net included a loss of $14.5 million in 2011 compared to a loss of $1.3 million in 2010 and a gain of $5.3 million in 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 domestic earnings during 2010, compared to domestic losses in 2009.

 

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 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.

 

Management does not believe its businesses have been materially adversely affected by inflation.

 

CRITICAL ACCOUNTING ESTIMATES

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 estimates include:

 

21



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

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 total current and long-term receivables are heavily weighted toward foreign receivables ($315.2 million or 55.0% at December 31, 2011), including foreign receivables due from affiliates ($93.6 million at December 31, 2011), which generally represent more of a collection risk than its domestic receivables.  Receivables due from affiliates are generally associated with entities located in foreign countries considered underdeveloped, as discussed below, which can experience conditions causing sudden changes to their ability to repay such receivables on a timely basis or in full.  Future collections of receivables 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.  Bad debt expense for the years ended December 31, 2011, 2010 and 2009 was $4.4 million, $2.8 million and $2.1 million, respectively.

 

Valuation of Inventories – Inventories are generally valued at the lower of cost or market. In determining market, management makes assumptions regarding replacement costs, estimated sales prices, estimated costs to complete, estimated disposal costs and normal profit margins. For commodity trading inventories, when contract performance by a customer becomes a concern, management must also evaluate available options to dispose of the inventory, including assumptions about potential negotiated changes to sales contracts, sales prices in alternative markets in various foreign countries and potentially additional transportation costs.  At times, management must consider probability weighting various viable alternatives in its determination of the net realizable value of the inventories. These assumptions and probabilities are subjective in nature, and are based on management’s best estimates and judgments existing at the time of preparation. Changes in future market prices of grains or facts and circumstances could result in a material write-down in value of inventory or decreased future margins on the sale of inventory.  See Note 13 to the Consolidated Financial Statements for further discussion on the Commodity Trading and Milling segment and its $15.4 million and $8.8 million in write-downs of inventories in 2011 and 2009, respectively.

 

Impairment of Long-Lived Assets – At each balance sheet date, long-lived assets, primarily property, plant and equipment, 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 group. 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. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales prices and estimated costs. In some cases, judgment is also required in assigning probability weighting to the various future cash flow scenarios. The probability weighting percentages used and the various future projected cash flow models prepared by management are based on facts and circumstances existing at the time of preparation and management’s best estimates and judgment of future operating results. Seaboard cannot predict the occurrence of certain future events that might adversely affect the reported value of long-lived assets, which include, but are not limited to, a change in the business climate, government incentives, a negative change in relationships with significant customers, and changes to strategic decisions made in response to economic and competitive conditions. Changes in these facts, circumstances and management’s estimates and judgment could result in an impairment of fixed assets resulting in a material charge to earnings.  See Note 5 to the Consolidated Financial Statements for further discussion on the Pork Segment and its $5.6 million impairment charge recorded in cost of sales in 2011 related to its ham-boning and processing plant in Mexico.

 

Goodwill and Other Intangible Assets – Goodwill and other indefinite-life intangible assets, not subject to amortization, are evaluated annually for impairment at the quarter end closest to the anniversary date of the acquisition, or more frequently if circumstances indicate that impairment is possible. The impairment tests require management to make judgments in determining what assumptions to use in estimating fair value. One of the methods used by Seaboard to determine fair value is the income approach using discounted future projected cash flows. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future sales prices and costs, and future capital expenditures requirements. In some cases, judgment is also required in assigning probability weighting to the various future cash flow scenarios. The probability weighting percentages used and the various future projected cash flow models prepared by management are based on facts and circumstances existing at the time of preparation and management’s best estimates and judgment of future operating results. Seaboard cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill and indefinite-life intangible assets that may include, but are not limited to, a change

 

22



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, including decisions to expand made in response to economic and competitive conditions. Changes in these facts, circumstances and management’s estimates and judgment could result in an impairment of goodwill and/or other intangible assets resulting in a material charge to earnings. At December 31, 2011, Seaboard had goodwill of $40.6 million and other intangible assets not subject to amortization of $17.0 million.

 

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, 2011, Seaboard has deferred tax assets of $109.2 million, net of the valuation allowance of $16.3 million, and deferred tax liabilities of $152.3 million. For the years ended December 31, 2011, 2010 and 2009, income tax expense included $(1.9) million, $13.4 million and $(11.5) million, respectively, for deferred taxes to federal, foreign, state and local taxing jurisdictions.

 

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 decreasing both the discount rate and assumed rate of return on plan assets by 50 basis points would be an increase in pension expense of approximately $1.7 million per year. The effects of actual results differing from the assumptions (i.e., gains or losses) are primarily accumulated in accrued pension liability and amortized over future periods if it exceeds the 10 percent corridor and, therefore, could affect Seaboard’s recognized pension expense in such future periods, as permitted under U.S. GAAP.  Accordingly, accumulated gains or losses in excess of the 10 percent corridor are amortized over the average future service of active participants. See Note 10 to the Consolidated Financial Statements for further discussion of management’s assumptions.

 

DERIVATIVE INFORMATION

Seaboard is exposed to various types of market risks in its day-to-day operations. Primary market risk exposures result from changing commodity prices, foreign currency exchange rates and interest rates. Derivatives are used to manage these overall market risks; however, Seaboard does not perform the extensive record-keeping required to account for derivative transactions as hedges. Management believes it uses derivatives primarily as 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 prices could have a material impact on earnings in any given year. Seaboard also enters into speculative derivative transactions related to its market risks.

 

Changes in commodity prices affect the cost of necessary raw materials and other inventories, finished product sales and firm sales commitments. Seaboard uses various grain and oilseed futures and options purchase contracts to manage certain risks of increasing prices of raw materials and firm sales commitments or anticipated sales contracts.  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, and hog futures are used to manage risks of fluctuating prices of pork product inventories and related future sales.  From time to time, Seaboard may enter into short positions in energy related resources (i.e., heating oil, crude oil, etc.) to manage certain exposures related to bio-energy margins. Inventories that are sensitive to changes in commodity prices, including carrying amounts at December 31, 2011 and 2010, are presented in Note 3 to the Consolidated Financial Statements. Raw material requirements, finished product sales and firm sales commitments are also sensitive to changes in commodity prices.

 

Because changes in foreign currency exchange rates affect 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 affect the cash required to service variable rate debt. From time to time, Seaboard uses interest rate swaps to manage risks of increasing interest rates.

 

23



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

During 2010, Seaboard entered into four 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 four notional amounts of $25.0 million each. While Seaboard has certain variable rate debt, these interest rate exchange 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 Consolidated Statement of Earnings.

 

The following table presents the sensitivity of the fair value of Seaboard’s open net commodity future and option contracts, foreign currency contracts and interest rate exchange agreements to a hypothetical 10 percent adverse change in market prices or in foreign exchange rates and interest rates as of December 31, 2011 and December 31, 2010. For all open derivatives, the fair value of such positions is a summation of the fair values calculated for each item by valuing each net position at quoted market prices as of the applicable date.

 

(Thousands of dollars)

 

December 31, 2011

 

December 31, 2010

 

Grains and oilseeds

 

$

6,628

 

$

3,787

 

Hogs and pork bellies

 

201

 

3,809

 

Energy related resources

 

478

 

459

 

Foreign currencies

 

17,885

 

22,415

 

Interest rates

 

1,393

 

2,636

 

 

The table below provides information about Seaboard’s non-trading financial instruments sensitive to changes in interest rates at December 31, 2011.  For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates.  At December 31, 2011, long-term debt included foreign subsidiary obligations of $81.3 million payable in U.S. dollars and $0.2 million payable in Argentine pesos.  At December 31, 2010, long-term debt included foreign subsidiary obligations of $16.4 million denominated in U.S. dollars and $0.2 million payable in Argentine pesos.  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)

 

2012

 

2013

 

2014

 

2015

 

2016

 

Thereafter

 

Total

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

40,679

 

$

8,688

 

$

8,285

 

$

8,132

 

$

8,132

 

$

41,330

 

$

115,246

 

Average interest rate

 

6.69

%

6.02

%

5.54

%

5.34

%

5.34

%

5.52

%

5.95

%

Variable rate

 

$

206

 

$

 

$

7,800

 

$

 

$

 

$

34,000

 

$

42,006

 

Average interest rate

 

7.00

%

 

1.27

%

 

 

1.66

%

1.61

%

 

Non-trading financial instruments sensitive to changes in interest rates at December 31, 2010 consisted of fixed rate long-term debt totaling $51.1 million, with an average interest rate of 6.66 percent and variable rate long-term debt totaling $42.0 million, with an average interest rate of 1.70 percent.

 

24



 

SEABOARD CORPORATION

Management’s Reports

 

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 independent registered public accounting firm have unrestricted access to the audit committee, with or without the presence of management.

 

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, 2011.

 

Seaboard’s registered independent public accounting firm, that audited the consolidated financial statements included in the annual report, has issued an audit report on the effectiveness of Seaboard’s internal control over financial reporting.  Their report is included herein.

 

25



 

SEABOARD CORPORATION

Report of Independent Registered Public Accounting Firm

 

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, 2011 and 2010 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, 2011. 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 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 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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Seaboard Corporation’s internal control over financial reporting as of December 31, 2011, 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 February 28, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

 

 

 

 

 

Kansas City, Missouri

 

February 28, 2012

 

 

26



 

SEABOARD CORPORATION

Report of Independent Registered Public Accounting Firm

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Seaboard Corporation:

 

We have audited Seaboard Corporation’s internal control over financial reporting as of December 31, 2011, 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, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on 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 obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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, Seaboard Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

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, 2011 and 2010, 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, 2011, and our report dated February 28, 2012 expressed an unqualified opinion on those consolidated financial statements.

 

 

 

 

 

 

 

Kansas City, Missouri

 

February 28, 2012

 

 

27



 

SEABOARD CORPORATION

Consolidated Statement of Earnings

 

 

 

Years ended December 31,

 

(Thousands of dollars except per share amounts)

 

2011

 

2010

 

2009

 

Net sales:

 

 

 

 

 

 

 

Products (includes sales to affiliates of $808,834, $500,265 and $543,066)

 

4,666,172

 

3,354,348

 

2,718,736

 

Service revenues

 

969,339

 

907,320

 

775,498

 

Other

 

111,391

 

124,034

 

107,074

 

Total net sales

 

5,746,902

 

4,385,702

 

3,601,308

 

Cost of sales and operating expenses:

 

 

 

 

 

 

 

Products

 

4,196,360

 

2,980,606

 

2,619,396

 

Services

 

879,199

 

775,637

 

671,598

 

Gain on sale of power generating facilities

 

(52,923

)

 

 

Other

 

96,383

 

103,465

 

92,701

 

Total cost of sales and operating expenses

 

5,119,019

 

3,859,708

 

3,383,695

 

Gross income

 

627,883

 

525,994

 

217,613

 

Selling, general and administrative expenses

 

220,679

 

204,928

 

193,890

 

Operating income

 

407,204

 

321,066

 

23,723

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(6,868

)

(5,632

)

(13,158

)

Interest income

 

10,004

 

11,088

 

16,213

 

Interest income from affiliates

 

17,826

 

1,543

 

1,123

 

Income from affiliates

 

26,621

 

20,965

 

20,158

 

Other investment income, net

 

249

 

14,145

 

15,500

 

Foreign currency gain, net

 

651

 

1,254

 

2,432

 

Gain on disputed sale, net of expenses

 

 

 

16,787

 

Miscellaneous, net

 

(13,079

)

(384

)

6,463

 

Total other income, net

 

35,404

 

42,979

 

65,518

 

Earnings before income taxes

 

442,608

 

364,045

 

89,241

 

Income tax benefit (expense)

 

(99,051

)

(81,033

)

2,276

 

Net earnings

 

$

343,557

 

$

283,012

 

$

91,517

 

Less: Net loss attributable to noncontrolling interests

 

2,290

 

599

 

965

 

Net earnings attributable to Seaboard

 

$

345,847

 

$

283,611

 

$

92,482

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$

284.66

 

$

231.69

 

$

74.74

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

1,214,934

 

1,224,092

 

1,237,452

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

$

9.00

 

$

3.00

 

 

See accompanying notes to consolidated financial statements.

 

28



 

SEABOARD CORPORATION

Consolidated Balance Sheets

 

 

 

December 31,

 

(Thousands of dollars except per share amounts)

 

2011

 

2010

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

71,510

 

$

41,124

 

Short-term investments

 

323,256

 

332,205

 

Receivables:

 

 

 

 

 

Trade

 

280,279

 

243,786

 

Due from affiliates

 

126,616

 

75,771

 

Other

 

81,255

 

48,557

 

 

 

488,150

 

368,114

 

Allowance for doubtful accounts

 

(10,941

)

(8,170

)

Net receivables

 

477,209

 

359,944

 

Inventories

 

644,930

 

533,761

 

Deferred income taxes

 

23,203

 

18,393

 

Deferred costs

 

 

84,141

 

Other current assets

 

91,934

 

115,844

 

Total current assets

 

1,632,042

 

1,485,412

 

Investments in and advances to affiliates

 

364,840

 

331,322

 

Net property, plant and equipment

 

796,822

 

701,131

 

Notes receivable from affiliate

 

110,903

 

90,109

 

Goodwill

 

40,628

 

40,628

 

Intangible assets, net

 

19,496

 

19,746

 

Other assets

 

41,997

 

65,738

 

Total Assets

 

$

3,006,728

 

$

2,734,086

 

Liabilities and Stockholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable to banks

 

$

16,219

 

$

78,729

 

Current maturities of long-term debt

 

40,885

 

1,697

 

Accounts payable

 

151,869

 

146,265

 

Accrued compensation and benefits

 

114,323

 

102,003

 

Deferred revenue

 

29,147

 

122,344

 

Deferred revenue from affiliates

 

27,806

 

38,719

 

Accrued voyage costs

 

46,399

 

39,515

 

Accrued commodity inventory

 

54,357

 

34,099

 

Other accrued liabilities

 

80,404

 

74,824

 

Total current liabilities

 

561,409

 

638,195

 

Long-term debt, less current maturities

 

116,367

 

91,407

 

Deferred income taxes

 

66,300

 

75,695

 

Accrued pension liability

 

106,673

 

78,817

 

Other liabilities and deferred credits

 

76,512

 

71,723

 

Total non-current liabilities

 

365,852

 

317,642

 

Commitments and contingent liabilities

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Common stock of $1 par value. Authorized 1,250,000 shares;
issued and outstanding 1,210,597 and 1,215,879 shares

 

1,211

 

1,216

 

Accumulated other comprehensive loss

 

(156,065

)

(123,907

)

Retained earnings

 

2,233,778

 

1,897,897

 

Total Seaboard stockholders' equity

 

2,078,924

 

1,775,206

 

Noncontrolling interests

 

543

 

3,043

 

Total equity

 

2,079,467

 

1,778,249

 

Total Liabilities and Stockholders' Equity

 

$

3,006,728

 

$

2,734,086

 

 

See accompanying notes to consolidated financial statements.

 

29



 

SEABOARD CORPORATION

Consolidated Statement of Cash Flows

 

 

 

Years ended December 31,

 

(Thousands of dollars)

 

2011

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net earnings

 

$

343,557

 

$

283,012

 

$

91,517

 

Adjustments to reconcile net earnings to cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

81,223

 

86,802

 

91,841

 

Gain on sale of power generating facilities

 

(52,923

)

 

 

Loss (gain) from sale of fixed assets

 

(1,566

)

(2,555

)

530

 

Fixed asset impairment charge

 

5,600

 

 

 

Deferred income taxes

 

(1,558

)

12,506

 

(15,298

)

Pay-in-kind interest and accretion on note receivable from affiliate

 

(10,584

)

(695

)

 

Income from affiliates

 

(26,621

)

(20,965

)

(20,158

)

Dividends received from affiliates

 

1,813

 

1,843

 

7,906

 

Other investment income, net

 

(249

)

(14,145

)

(15,500

)

Foreign currency exchange (gain) loss

 

(336

)

(140

)

6,578

 

Gain on disputed sale, net of expenses

 

 

 

(16,787

)

Changes in assets and liabilities, net of business acquired:

 

 

 

 

 

 

 

Receivables, net of allowance

 

(88,434

)

(86,205

)

93,861

 

Inventories

 

(118,731

)

(40,053

)

1,552

 

Other current assets

 

85,856

 

(2,570

)

(58,823

)

Current liabilities, exclusive of debt

 

(36,875

)

107,482

 

69,738

 

Other, net

 

39,824

 

15,495

 

9,400

 

Net cash from operating activities

 

219,996

 

339,812

 

246,357

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of short-term investments

 

(233,431

)

(687,335

)

(346,522

)

Proceeds from the sale of short-term investments

 

220,823

 

695,384

 

211,403

 

Proceeds from the maturity of short-term investments

 

19,255

 

69,534

 

66,842

 

Short-term note receivable issued to affiliate, net

 

(30,096

)

 

 

Investments in and advances to affiliates, net

 

(18,533

)

(217,578

)

71

 

Capital expenditures

 

(183,748

)

(103,336

)

(54,276

)

Proceeds from the sale of fixed assets

 

4,882

 

7,655

 

3,255

 

Proceeds from the sale of power generating facilities

 

59,603

 

 

15,000

 

Advance payment on capital lease

 

(8,493

)

 

 

Long-term notes receivable issued to affiliate

 

(13,037

)

(100,000

)

 

Principal payments received on long-term notes receivable from affiliate

 

2,827

 

 

 

Proceeds from syndication and subordinated loan fees

 

 

6,525

 

 

Sale (purchase) of long-term investments

 

(4,696

)

552

 

(3,108

)

Acquisition of business, net of cash acquired

 

 

(5,578

)

 

Net proceeds from disputed sale

 

 

 

16,787

 

Other, net

 

1,394

 

1,140

 

46

 

Net cash from investing activities

 

(183,250

)

(333,037

)

(90,502

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Notes payable to banks, net

 

(62,510

)

(2,535

)

(95,072

)

Proceeds from the issuance of long-term debt

 

64,967

 

16,352

 

 

Principal payments of long-term debt

 

(1,476

)

(2,179

)

(46,914

)

Repurchase of common stock

 

(9,971

)

(29,994

)

(3,370

)

Dividends paid

 

 

(10,963

)

(3,711

)

Dividends paid to noncontrolling interests

 

(148

)

(36

)

(112

)

Other, net

 

452

 

370

 

(291

)

Net cash from financing activities

 

(8,686

)

(28,985

)

(149,470

)

Effect of exchange rate change on cash

 

2,326

 

1,477

 

(5,122

)

Net change in cash and cash equivalents

 

30,386

 

(20,733

)

1,263

 

Cash and cash equivalents at beginning of year

 

41,124

 

61,857

 

60,594

 

Cash and cash equivalents at end of year

 

$

71,510

 

$

41,124

 

$

61,857

 

 

See accompanying notes to consolidated financial statements.

 

30



 

SEABOARD CORPORATION

Consolidated Statement of Changes in Equity

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common

 

Additional

 

Comprehensive

 

Retained

 

Noncontrolling

 

 

 

(Thousands of dollars except per share amounts)

 

Stock

 

Capital

 

Loss

 

Earnings

 

Interest

 

Total

 

Balances, January 1, 2009

 

$

1,240

 

$

 

$

(111,703

)

$

1,569,818

 

$

4,223

 

$

1,463,578

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

92,482

 

(965

)

91,517

 

Other comprehensive income net of income tax benefit of $3,206:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

(9,365

)

 

 

 

 

(9,365

)

Unrealized gain on investments

 

 

 

 

 

798

 

 

 

 

 

798

 

Unrecognized pension cost

 

 

 

 

 

5,484

 

 

 

 

 

5,484

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

88,434

 

Purchase of noncontrolling interests

 

 

 

 

 

 

 

 

 

600

 

600

 

Dividends paid to noncontrolling interests

 

 

 

 

 

 

 

 

 

(112

)

(112

)

Repurchase of common Stock

 

(3

)

 

 

 

 

(3,367

)

 

 

(3,370

)

Dividends on common stock

 

 

 

 

 

 

 

(3,711

)

 

 

(3,711

)

Balances, December 31, 2009

 

1,237

 

 

(114,786

)

1,655,222

 

3,746

 

1,545,419

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

283,611

 

(599

)

283,012

 

Other comprehensive income net of income tax benefit of $5,443:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

(3,704

)

 

 

 

 

(3,704

)

Unrealized gain on investments

 

 

 

 

 

(2,134

)

 

 

 

 

(2,134

)

Unrecognized pension cost

 

 

 

 

 

(3,283

)

 

 

 

 

(3,283

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

273,891

 

Addition of noncontrolling interests

 

 

 

 

 

 

 

 

 

(68

)

(68

)

Dividends paid to noncontrolling interests

 

 

 

 

 

 

 

 

 

(36

)

(36

)

Repurchase of common Stock

 

(21

)

 

 

 

 

(29,973

)

 

 

(29,994

)

Dividends on common stock

 

 

 

 

 

 

 

(10,963

)

 

 

(10,963

)

Balances, December 31, 2010

 

1,216

 

 

(123,907

)

1,897,897

 

3,043

 

1,778,249

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

345,847

 

(2,290

)

343,557

 

Other comprehensive income net of income tax benefit of $12,604:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

(12,389

)

 

 

(9

)

(12,398

)

Unrealized loss on investments

 

 

 

 

 

(756

)

 

 

 

 

(756

)

Unrecognized pension cost

 

 

 

 

 

(19,013

)

 

 

(52

)

(19,065

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

311,338

 

Dividends paid to noncontrolling interests

 

 

 

 

 

 

 

 

 

(149

)

(149

)

Repurchase of common Stock

 

(5

)

 

 

 

 

(9,966

)

 

 

(9,971

)

Balances, December 31, 2011

 

$

1,211

 

$

 

$

(156,065

)

$

2,233,778

 

$

543

 

$

2,079,467

 

 

See accompanying notes to consolidated financial statements.

 

31



 

SEABOARD CORPORATION

Notes to Consolidated Financial Statements

 

Note 1

Summary of Significant Accounting Policies

Operations of Seaboard Corporation and its Subsidiaries

Seaboard Corporation and its subsidiaries (Seaboard) is a diversified international agribusiness and transportation company. 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.  Seaboard also has an interest in turkey operations in the United States. Seaboard Flour LLC and SFC Preferred LLC (Parent Companies) are the owners of 73.8 percent 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 inter-company balances and transactions have been eliminated in consolidation. Investments in non-controlled affiliates are accounted for by the equity method. Financial information from certain 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, corporate bonds, mutual funds, municipal debt securities and U.S. government obligations and, on a limited basis, high yield bonds, domestic equity securities and foreign government bonds. Investments held by Seaboard that are categorized as available-for-sale are reported at their estimated fair value with any related unrealized gains and losses reported net of tax, as a component of accumulated other comprehensive income.  Investments held by Seaboard that are categorized as trading securities are reported at their estimated fair value with any unrealized gains and losses included in other investment income on the Consolidated Statement of Earnings. Debt securities that are categorized as held to maturity are recorded at amortized cost, which 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 in certain countries due to local market conditions. The allowance for doubtful accounts is Seaboard’s best estimate of the amount of probable credit losses. For most operating segments, Seaboard uses a specific identification approach to determine, in management’s judgment, the collection value of certain past due accounts based on contractual terms. 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.

 

Deferred Costs

Deferred costs represent inventory delivered to customers and related shipping costs incurred for certain commodity trades that Seaboard has received the majority of payments for the trades (which are recorded as deferred revenues) but has not yet recognized as revenue, as the final sale price is not yet fixed and determinable. The corresponding deferred margin on such trades is not deemed material.

 

Property, Plant and Equipment

Property, plant and equipment are carried at cost and are being depreciated 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.

 

32



 

SEABOARD CORPORATION

Notes to Consolidated Financial Statements

 

Impairment of Long-Lived Assets

Long-lived assets, primarily property, plant and equipment, 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 undiscounted net cash flows expected to be generated by the asset. If such assets are determined to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated 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.

 

Notes Receivable from Affiliates

Seaboard monitors the credit quality of notes receivable from affiliates by obtaining and reviewing financial information for these affiliates on a monthly basis and by having Seaboard representatives serve on the Board of Directors of these affiliates.

 

Goodwill and Other Intangible Assets

Goodwill and other indefinite-life intangible assets are evaluated by reporting unit annually for impairment at the quarter end closest to the anniversary date of the acquisition, or more frequently if circumstances indicate that impairment is likely. Separable intangible assets with finite lives are amortized over their estimated useful lives. Any one event or a combination of events such as change in the business climate, a negative change in relationships with significant customers and changes to strategic decisions, including decisions to expand made in response to economic or competitive conditions could require an interim assessment prior to the next required annual assessment. The most recent impairment tests performed and current market conditions indicated goodwill and other intangible assets are not impaired as of December 31, 2011.

 

Accrued Self-Insurance

Seaboard is self-insured for certain levels of workers’ compensation, health care coverage, property damage and general, vehicle and product recall liability. The cost of these self-insurance programs is accrued based upon estimated settlements for known and anticipated claims. Changes in estimates to previously recorded reserves are reflected in current operating results.

 

Deferred Grants

Included in other liabilities at December 31, 2011 and 2010 was $5,631,000 and $6,047,000, 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 in non-current other liabilities on the Consolidated Balance Sheet, 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 2011 and 2010:

 

 

 

Years ended December 31,

 

(Thousands of dollars)

 

2011

 

2010

 

Beginning balance

 

$

12,028

 

$

11,090

 

Accretion expense

 

1,007

 

938

 

Liability for additional lagoons placed in service

 

74

 

 

Ending balance

 

$

13,109

 

$

12,028

 

 

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 U.S. GAAP, Seaboard will recognize the benefit or cost of this change in the future.

 

33



 

SEABOARD CORPORATION

Notes to Consolidated Financial Statements

 

Revenue Recognition

As a result of a marketing agreement with Triumph Foods, Seaboard’s sales prices for its pork products included in product revenues are primarily based on a margin sharing arrangement that considers the 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. Revenue of the commodity trading business is recognized when the commodity is delivered to the customer, collection is reasonably assured and the sales price is fixed or determinable. 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. 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.

 

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include those related to allowance for doubtful accounts, valuation of inventories, impairment of long-lived assets, goodwill and other intangible assets, income taxes and accrued pension liability. 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 all periods presented.

 

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, management considers all demand deposits and overnight investments as cash equivalents. The following table shows the amounts paid for interest and income taxes:

 

 

 

Years ended December 31,

 

(Thousands of dollars)

 

2011

 

2010

 

2009

 

Interest (net of amounts capitalized)

 

$

6,786

 

$

8,377

 

$

13,845

 

Income taxes (net of refunds)

 

126,730

 

69,626

 

(10,542

)

 

Included in property, plant and equipment is capitalized interest in the amount of $6,723,000, $3,350,000 and $702,000 for 2011, 2010 and 2009, respectively.

 

Supplemental Non-Cash Transactions

As discussed in Note 13, during the third quarter of 2010, Seaboard acquired a majority interest in a commodity origination, storage and processing business in Canada. Total cash paid, net of cash acquired, was $5,578,000, and increased working capital by $1,254,000, fixed assets by $4,637,000, other long-term assets in the amount of $833,000, deferred tax liabilities by $896,000 and non-controlling interest by $250,000.

 

As discussed in Note 4, as of December 31, 2011 and 2010, Seaboard had a note receivable from an affiliate which accrues pay-in-kind interest income.  Non-cash, pay-in-kind interest income and accretion of discount recognized on this note receivable for the years ended December 31, 2011 and 2010 was $10,584,000 and 695,000, respectively.

 

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.

 

34



 

SEABOARD CORPORATION

Notes to Consolidated Financial Statements

 

Included in foreign currency gain (loss), net for the years ended December 31, 2009, was a foreign currency gain of $4,794,000. This gain reflected the re-measurement of a note payable denominated in Japanese Yen of a foreign consolidated subsidiary accounted for on a one-month lag, except for this re-measurement of this note payable. The currency gain for 2009 was primarily offset by a mark-to-market currency loss for December in 2009 from a foreign currency derivative contract. The note payable and related foreign currency derivative were terminated in December 2009.

 

Seaboard’s Sugar segment, a consolidated subsidiary in Canada (Commodity Trading and Milling segment) and seven non-controlled, non-consolidated affiliates (Commodity Trading and Milling segment businesses in Australia, Colombia, Guyana, Kenya, Lesotho and Zambia), 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. For these entities, U.S. dollar denominated net asset or liability conversions to the local currency are recorded through income.

 

Derivative Instruments and Hedging Activities

Seaboard recognizes 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 and foreign currency exchange agreements, and from time to time, 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, 2011, none of the derivatives are designated and accounted for as hedges, primarily as a result of the extensive record-keeping requirements. Seaboard also enters into speculative derivative transactions related to its market risks.

 

Recent Accounting Standards Not Yet Adopted

In May 2011, the Financial Accounting Standards Board (FASB) issued guidance to amend the requirements related to fair value measurement which changed the wording used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The amended guidance was effective for Seaboard on January 1, 2012.  The adoption of this guidance is not expected to have a material impact on Seaboard’s financial position or net earnings.

 

In June 2011, the FASB issued guidance to revise the manner in which entities present comprehensive income in the financial statements.  The new guidance removes the footnote presentation option currently used by Seaboard and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements.  Seaboard will be required to make this change in presentation in the first quarter of 2012.  The adoption of this guidance will not have an impact on Seaboard’s financial position or net earnings.

 

In September 2011, the FASB issued guidance to allow entities the option of performing a qualitative assessment to test goodwill for impairment.  This guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value.  If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test.  Otherwise, the two-step goodwill impairment test is not required.  Seaboard adopted this guidance on January 1, 2012.  The adoption of this guidance will not have an impact on Seaboard’s financial position or net earnings.

 

35



 

SEABOARD CORPORATION

Notes to Consolidated Financial Statements

 

Note 2

Investments

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.  As of December 31, 2011 and 2010, the available-for-sale investments primarily consisted of money market funds, corporate bonds, fixed rate municipal notes and bonds and U.S. Government obligations. At December 31, 2011 and 2010, amortized cost and estimated fair market value were not materially different for these investments. At December 31, 2011 and 2010, money market funds included $25,755,000 and $78,338,000 denominated in euros. As of December 31, 2011 and 2010, the trading securities primarily consisted of high yield debt securities. As of December 31, 2011 and 2010, unrealized gains related to trading securities were $376,000 and $1,571,000, 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 December 31, 2011 and 2010:

 

 

 

2011

 

2010

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

(Thousands of dollars)

 

Cost

 

Value

 

Cost

 

Value

 

Money market funds

 

$

139,420

 

$

139,420

 

$

110,164

 

$

110,164

 

Corporate bonds

 

88,589

 

89,146

 

81,214

 

82,351

 

Fixed rate municipal notes and bonds

 

17,718

 

17,788

 

20,564

 

20,648

 

Emerging markets debt mutual fund

 

17,693

 

16,399

 

 

 

Collateralized mortgage obligations

 

14,915

 

15,011

 

12,329

 

12,380

 

U.S. Government agency securities

 

9,720

 

9,757

 

10,142

 

10,184

 

U.S. Treasury securities

 

4,848

 

4,905

 

7,139

 

7,148

 

Asset backed debt securities

 

3,533

 

3,533

 

2,847

 

2,848

 

Enhanced cash mutual fund

 

 

 

60,256

 

60,302

 

Other

 

1,480

 

1,484

 

2,360

 

2,355

 

Total available-for-sale short-term investments