EX-13 2 a14-24467_1ex13.htm EX-13

Exhibit 13

 

 

 

2014 Annual Report

 



 

SEABOARD CORPORATION

 

 

Description of Business

 

Seaboard Corporation is a diverse global 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 Comprehensive Income

28

Consolidated Balance Sheets

29

Consolidated Statements of Cash Flows

30

Consolidated Statements of Changes in Equity

31

Notes to Consolidated Financial Statements

32

Stockholder Information

60

 

This report, including information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Seaboard Corporation and its subsidiaries (Seaboard). Forward-looking statements generally may be identified as statements that are not historical in nature and statements preceded by, followed by or that include the words: “believes,” “expects,” “may,” “will,” “should,” “could,” “anticipates,” “estimates,” “intends,” or similar expressions. In more specific terms, forward-looking statements, include, without limitation: statements concerning 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 and changes in tax laws; (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.

 

 

2014 Annual Report

1

 

 



 

SEABOARD CORPORATION

Letter to Stockholders

 

 

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

 

 

2

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Letter to Stockholders

 

 

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

 

 

 

2014 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

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Principal Locations

 

 

Corporate Office

 

Flour Mills of Ghana

 

Seaboard de Nicaragua, S.A.

Seaboard Corporation

 

Ghana

 

Nicaragua

Merriam, Kansas

 

Life Flour Mill Ltd.*

 

Seaboard del Peru, S.A.

Pork

 

Nigeria

 

Peru

Seaboard Foods LLC

 

LMM Farine, S.A.

 

Kingston Wharves Limited*

Pork Division Office

 

Madagascar

 

Seaboard Freight & Shipping Jamaica

Merriam, Kansas

 

Congo Poultry Limited*

 

Limited

Processing Plant

 

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

 

Jamaica

Guymon, Oklahoma

 

Societe Africaine de Developpement

 

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

High Plains Bioenergy, LLC

 

Industriel Alimentaire*

 

Honduras

Guymon, Oklahoma

 

Democratic Republic of Congo

 

Seaboard Marine (Trinidad) Ltd.

Seaboard de Mexico USA LLC

 

Minoterie du Congo, S.A.

 

Trinidad

Mexico

 

Republic of Congo

 

Seaboard Marine of Haiti, S.E.

Daily’s Premium Meats, LLC*

 

Moderna Alimentos, S.A.*

 

Haiti

Salt Lake City, Utah

 

Molinos Champion, S.A.*

 

SEADOM, S.A.

Missoula, Montana

 

Ecuador

 

Dominican Republic

Commodity Trading and Milling

 

Paramount Mills (Pty) Ltd.*

 

SeaMaritima S.A. de C.V.

Commodity Trading Operations

 

South Africa

 

Mexico

Australia*

 

National Milling Corporation Limited

 

Sugar

Canada

 

Zambia

 

Alconoa S.R.L.

Chapel Hill, North Carolina

 

Unga Holdings Limited*

 

Ingenio y Refineria San Martin del

Colombia

 

Kenya and Uganda

 

Tabacal SRL

Ecuador

 

Marine

 

Argentina

Greece

 

Seaboard Marine Ltd.

 

Power

Isle of Man

 

Marine Division Office

 

Transcontinental Capital Corp.

Kenya

 

Miami, Florida

 

(Bermuda) Ltd.

Peru*

 

Port Operations

 

Dominican Republic

Singapore

 

Brooklyn, New York

 

Turkey

South Africa

 

Houston, Texas

 

Butterball LLC*

Africa Poultry Development Limited*

 

Miami, Florida

 

Division Office

Kenya and Zambia

 

New Orleans, Louisiana

 

Garner, North Carolina

Belarina Alimentos S.A.*

 

Agencias Generales Conaven, C.A.

 

Processing Plants

Brazil

 

Venezuela

 

Huntsville, Arkansas

Compania Industrial de Productos

 

Agencia Maritima del Istmo, S.A.

 

Ozark, Arkansas

Agreopecuarios SA*

 

Costa Rica

 

Carthage, Missouri

Rafael del Castillo & Cia. S.A*

 

Cayman Freight Shipping Services, Ltd.

 

Mt. Olive, North Carolina

Colombia

 

Cayman Islands

 

Further Processing Plants

Gambia Milling Corporation*

 

JacintoPort International LLC

 

Jonesboro, Arkansas

Gambia

 

Houston, Texas

 

Montgomery, Illinois

National Milling Company

 

Representaciones Maritimas y Aereas, S.A.

 

Other

of Guyana, Inc.

 

Guatemala

 

Mount Dora Farms de Honduras,

Guyana

 

Sea Cargo, S.A.

 

S.R.L.

Les Moulins d’Haiti S.E.M.*

 

Panama

 

Honduras

Haiti

 

Seaboard de Colombia, S.A.

 

Mount Dora Farms Inc.

Lesotho Flour Mills Limited*

 

Colombia

 

Houston, Texas

Lesotho

 

 

 

 

 

*Represents a non-controlled, non-consolidated affiliate

 

 

 

2014 Annual Report

5

 

 



 

SEABOARD CORPORATION

Division Summaries

 

 

Pork Division

Seaboard was a pioneer in the vertical integration of the U.S. pork industry and its Pork Division is one of the largest producers and processors in the United States. Seaboard is able to efficiently control pork production across the entire life cycle of the hog, beginning with research and development in nutrition and genetics and extending to the production of high quality meat products at our processing and further processing facilities.

 

Seaboard’s hog processing facility is located in Guymon, Oklahoma. The facility is a double shift operation that processes approximately 20,000 hogs per day and generally operates at capacity.  Weekend shifts are added as market conditions dictate. 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 occasionally in the open market. Seaboard produces and sells fresh and frozen pork products to further processors, food service operators, grocery stores, distributors and retail outlets throughout the United States. Seaboard also sells to distributors, trading companies and further processors in Japan, Mexico and numerous other foreign markets.

 

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 five centrally located feed mills to provide formulated feed to these hogs.

 

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 blenders for distribution and in the retail markets. 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. The agreement enhances the efficiency of Seaboard’s sales and marketing efforts and expands Seaboard’s geographic footprint. Seaboard receives a fee on a per head basis on all Triumph products.  In 2014, Seaboard was ranked number 3 in pork production and number 4 in processing in the U.S. (including Triumph volume).

 

As of September 27, 2014, Seaboard’s Pork Division sold to Triumph a 50% interest in its processed meats division, Daily’s Premium Meats (Daily’s).  As a result, Seaboard’s Pork Division now has a 50% non-controlling interest in Daily’s. Daily’s produces and markets raw and pre-cooked bacon, ham and sausage primarily for the food service industry and, to a lesser extent, retail markets.  Daily’s has two further processing plants located in Salt Lake City, Utah and Missoula, Montana. Seaboard and Triumph each supply raw product to Daily’s.

 

Commodity Trading and Milling Division

Seaboard’s Commodity Trading and Milling Division is an integrated agricultural commodity trading and processing and logistics operation.  This division sources, transports and markets approximately nine million metric tons per year of wheat, corn, soybean meal and other commodities primarily to third party customers and affiliated companies. These commodities are purchased worldwide, with primary destinations in Africa, South America and the Caribbean. Seaboard integrates the delivery of commodities to its customers through the use of company owned and short-term chartered bulk carriers.

 

Seaboard’s Commodity Trading and Milling Division operates facilities in 23 countries. The commodity trading business has ten offices in nine countries in addition to two non-consolidated affiliates in two other countries. The grain processing businesses operate facilities at 31 locations in 16 countries, and include five consolidated and fourteen non-consolidated affiliates primarily in Africa, South America and the Caribbean. Seaboard and its affiliates produce approximately four million metric tons of wheat flour, maize meal and manufactured feed per year in addition to other related grain based products.

 

6

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Division Summaries

 

 

Marine Division

Seaboard’s Marine Division provides cargo shipping services 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 Port 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, New Orleans, Louisiana and various foreign ports in the Caribbean Basin and Central and South America.

 

This Division’s fleet consists of chartered and, to a lesser extent, owned vessels, and includes dry, refrigerated and specialized containers and other cargo related equipment. Seaboard is the largest shipper in terms of cargo volume in Port Miami. Seaboard provides extensive service between our domestic ports of call and multiple foreign destinations.

 

To maximize fleet utilization, Seaboard uses a network of offices and agents throughout the United States, Canada, Latin America and the Caribbean Basin to sell freight to and from multiple points. Seaboard’s full service capabilities 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 allow customers to coordinate manufacturing schedules and maintain inventories at cost-efficient levels.

 

Sugar Division

In Argentina, Seaboard grows sugarcane, 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 sugar processing plant, one of the largest in Argentina, has an annual capacity to produce 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 primarily with sugarcane, which supplies the majority of the raw material processed. 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 governmental bio-ethanol program, which requires alcohol to be blended with gasoline.  This division also owns a 51 megawatt cogeneration power plant.  The plant is fueled by the burning of sugarcane by-products during the harvest season, which is typically between May and November.

 

Power Division

In the Dominican Republic, Seaboard is an independent power producer generating electricity for the local power grid from one owned floating power generating facility with a capacity to generate 108 megawatts. Seaboard previously leased another facility under a short-term lease which was canceled during 2014.  Seaboard is not directly involved in the transmission or distribution of electricity.  Seaboard primarily sells power on the spot market.  Principal buyers are government-owned distribution companies and partially government-owned generation companies.

 

Other Divisions

Seaboard has a 50 percent non-controlling voting interest in Butterball, LLC (Butterball). Butterball is the largest vertically integrated producer, processor and marketer of branded and non-branded turkey and other products in the United States. Butterball has four processing plants, two further processing plants and numerous live production and feed milling operations located in North Carolina, Arkansas, Missouri, Illinois and Kansas. Butterball produces approximately one billion pounds of turkey each year. Butterball is a national supplier to retail and foodservice outlets, and also exports products to Mexico and numerous other foreign markets.

 

Seaboard processes jalapeño peppers at its plant in Honduras, which are primarily shipped to and sold in the United States.

 

 

 

2014 Annual Report

7

 

 



 

SEABOARD CORPORATION

Summary of Selected Financial Data

 

 

 

 

Years ended December 31,

 

(Thousands of dollars except per share amounts)

 

2014

 

2013

 

2012

 

2011

 

2010

 

Net sales

 

$

6,473,076

 

$

6,670,414

 

$

6,189,133

 

$

5,746,902

 

$

4,385,702

 

Operating income

 

$

423,559

 

$

204,864

 

$

309,661

 

$

407,204

 

$

321,066

 

Net earnings attributable to Seaboard

 

$

365,270

 

$

205,236

 

$

282,311

 

$

345,847

 

$

283,611

 

Basic earnings per common share

 

$

309.96

 

$

171.92

 

$

234.54

 

$

284.66

 

$

231.69

 

Total assets

 

$

3,677,320

 

$

3,418,048

 

$

3,347,781

 

$

3,006,728

 

$

2,734,086

 

Long-term debt, less current maturities

 

$

-

 

$

80,480

 

$

120,825

 

$

116,367

 

$

91,407

 

Stockholders’ equity

 

$

2,720,273

 

$

2,479,970

 

$

2,308,189

 

$

2,079,467

 

$

1,778,249

 

Dividends per common share

 

$

-

 

$

-

 

$

12.00

 

$

-

 

$

9.00

 

 

As of September 27, 2014, Seaboard’s Pork segment sold to Triumph Foods LLC a 50% interest in Daily’s Premium Meats, its processed meats division.  Included in net earnings attributable to Seaboard for 2014 is a gain on sale of controlling interest in subsidiary of $40,233,000 net of taxes, or $34.14 per common share ($65,955,000 gain before taxes).

 

On January 2, 2013, the American Taxpayer Relief Act of 2012 (the Tax Act) was signed into law.  As the Tax Act was signed into law in 2013, the effects of the retroactive provisions in the new law on current and deferred taxes assets and liabilities for Seaboard were recorded in the first quarter of 2013.  The total impact was a tax benefit of $7,945,000, or $6.66 per common share, recorded in the first quarter of 2013 related to certain 2012 income tax credits.  In addition to this amount was a credit of approximately $11,260,000, or $9.43 per common share, for 2012 Federal blender’s credits that was recognized as revenues in the first quarter of 2013.  There was no tax expense on this transaction.

 

In December 2012, Seaboard declared and paid a dividend of $12.00 per common share.  The increased amount of the dividend (which has historically been $0.75 per common share on a quarterly basis or $3.00 per common share on an annual basis) represented a prepayment of the annual 2013, 2014, 2015 and 2016 dividends ($3.00 per common share per year).  Seaboard does not currently intend to declare any further dividends for the years 2015 and 2016. Seaboard did not declare a dividend in 2014, 2013 and 2011. In 2010, Seaboard declared and paid dividends of $9.00 per common share, which included a prepayment of the annual 2011 and 2012 dividends ($3.00 per common share per year). Basic and diluted earnings per common share are the same for all periods presented.

 

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 common share, included in operating income.  There was no tax expense on this transaction.

 

8

 

2014 Annual Report

 

 



 

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 MKT (formerly 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 MKT 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, 2009 and ending December 31, 2014.  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:

 

 

 

12/31/09

 

12/31/10

 

12/31/11

 

12/31/12

 

12/31/13

 

12/31/14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaboard Corporation

 

$ 100.00

 

$ 148.31

 

$ 151.66

 

$ 189.39

 

$ 209.23

 

$ 314.26

 

NYSE MKT Composite

 

$ 100.00

 

$ 129.56

 

$ 133.75

 

$ 140.87

 

$ 150.79

 

$ 153.24

 

Peer Group

 

$ 100.00

 

$ 113.14

 

$ 130.19

 

$ 140.29

 

$ 188.47

 

$ 211.18

 

 

 

2014 Annual Report

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

 

2014

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,479,636

 

$

1,694,591

 

$

1,622,641

 

$

1,676,208

 

$

6,473,076

 

Operating income

 

$

65,203

 

$

134,339

 

$

96,086

 

$

127,931

 

$

423,559

 

Net earnings attributable to Seaboard

 

$

48,166

 

$

93,677

 

$

104,749

 

$

118,678

 

$

365,270

 

Earnings per common share

 

$

40.55

 

$

79.01

 

$

89.49

 

$

101.39

 

$

309.96

 

Dividends per common share

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closing market price range per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

2,771.00

 

$

3,069.45

 

$

3,097.60

 

$

4,197.95

 

 

 

 

Low

 

$

2,455.01

 

$

2,356.00

 

$

2,480.15

 

$

2,606.00

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,582,296

 

$

1,684,039

 

$

1,648,105

 

$

1,755,974

 

$

6,670,414

 

Operating income

 

$

63,458

 

$

53,549

 

$

33,770

 

$

54,087

 

$

204,864

 

Net earnings attributable to Seaboard

 

$

57,454

 

$

39,547

 

$

30,969

 

$

77,266

 

$

205,236

 

Earnings per common share

 

$

47.98

 

$

33.07

 

$

25.99

 

$

64.91

 

$

171.92

 

Dividends per common share

 

$

-

 

$

-

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closing market price range per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

2,881.94

 

$

2,825.92

 

$

2,945.00

 

$

2,874.99

 

 

 

 

Low

 

$

2,504.00

 

$

2,594.78

 

$

2,680.00

 

$

2,695.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On December 19, 2014, the Tax Increase Prevention Act of 2014 (the 2014 Tax Act) was signed into law.  The 2014 Tax Act extended for 2014 only many expired corporate income tax provisions that impact current and deferred taxes for financial reporting purposes. The total annual effects of the provisions in the new law on current and deferred taxes assets and liabilities for Seaboard were recorded in the fourth quarter of 2014.  The impact was a tax benefit of $11,410,000, or $9.75 per common share, primarily related to certain income tax credits.  In addition to this amount was a credit of $15,450,000, or $13.20 per common share, for the 2014 Federal blender’s credits that was recognized as revenues in the fourth quarter of 2014.  There was no tax expense on this transaction.

 

As of September 27, 2014, Seaboard’s Pork segment sold to Triumph Foods LLC a 50% interest in Daily’s Premium Meats, its processed meats division.  Included in net earnings attributable to Seaboard for third and fourth quarters of 2014 is a gain on sale of controlling interest in subsidiary of $39,279,000 and $954,000, respectively, net of taxes, or $33.56 per common share and $0.82 per common share, respectively ($65,955,000 total gain before taxes).

 

On January 2, 2013, the American Taxpayer Relief Act of 2012 (the Tax Act) was signed into law.  As the Tax Act was signed into law in 2013, the effects of the retroactive provisions in the new law on current and deferred taxes assets and liabilities for Seaboard were recorded in the first quarter of 2013.  The total impact was a tax benefit of $7,945,000, or $6.63 per common share, recorded in the first quarter of 2013 related to certain 2012 income tax credits.  In addition to this amount was a credit of approximately $11,260,000, or $9.40 per common share, for 2012 Federal blender’s credits that was recognized as revenues in the first quarter of 2013.  There was no tax expense on this transaction.

 

No dividends were paid during 2014 or 2013 as they were declared and prepaid in December 2012.  During 2014, Seaboard repurchased 1,667 and 16,738 common shares in the first and second quarters, respectively.  During 2013, Seaboard repurchased 147, 4,945, 1,338 and 2,275 common shares in the first, second, third and fourth quarters, respectively.

 

10

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

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

 

OVERVIEW

Seaboard is a diverse global agribusiness and transportation company, with 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 U.S. business, with some export sales to Japan, Mexico, and numerous 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 approximately 20,000 hogs and a ham boning and processing plant in Mexico. In 2014, Seaboard raised approximately 75% 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, representing approximately 49% of Seaboard’s total fixed assets in addition to material amounts of inventories.

 

Within the portfolio of Seaboard’s businesses, management believes profitability of the Pork segment is most susceptible 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 accounts for the largest input cost in raising hogs and is materially affected by price changes for corn and soybean meal. Market prices for hogs purchased from third parties for processing at the plant also represent a major cost factor. With the Guymon plant generally operating at capacity, Seaboard is constantly looking for ways to enhance the facility’s operational efficiency while also looking to increase margins by introducing new, higher value products.

 

The Pork segment also produces biodiesel which is sold to third parties. Biodiesel is produced from pork fat from Seaboard’s pork processing plant and from animal fat purchased from third parties. The processing plant also is capable of producing biodiesel from vegetable oil.

 

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. Triumph has processing capacity similar to that of Seaboard’s Guymon plant and operates with an integrated model similar to 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’s hog processing plants.

 

At the end of the third quarter of 2014, Seaboard’s Pork segment sold to Triumph a 50% interest in its processed meats division, Daily’s Premium Meats (Daily’s).  As a result, Seaboard’s Pork segment now has a 50% non-controlling interest in Daily’s. Daily’s produces and markets raw and pre-cooked bacon, ham and sausage primarily for the food service industry and, to a lesser extent, retail markets.  Daily’s has two further processing plants located in Salt Lake City, Utah and Missoula, Montana. Seaboard and Triumph each supply raw product to Daily’s.

 

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 agricultural commodity trading and processing and logistics operation with locations in Africa, South America, the Caribbean, Europe and Asia. These foreign operations can be significantly impacted by changes in local crop production, political instability and local government policies, as well as fluctuations in 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, to a lesser degree, various other agricultural commodity products. Although this segment owns four ships, the majority of the third party trading business is transacted with short-term 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 grain processing businesses, both consolidated and non-consolidated affiliates, operate in foreign and, in most cases, lesser developed countries. Flour exports of various countries can exacerbate volatile market conditions that

 

 

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

may 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, representing approximately 39% of Seaboard’s total working capital at December 31, 2014, and primarily consisted of inventories and receivables.

 

The majority of the Commodity Trading and Milling segment’s sales derive from its commodity trading business in which agricultural commodities are 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.  Profit margins are sometimes protected by using commodity derivatives and other risk management practices. 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 cargo shipping services primarily between the United States and 26 countries in the Caribbean Basin, Central and South America. Fluctuations in economic conditions and political instability in the regions or countries in which Seaboard operates, most notably Venezuela in recent years, may affect trade volumes and operating profits. In addition, 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

The 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. Domestic sugar production levels in Argentina may affect the local price.  Global sugar price fluctuations, to a lesser extent, have an impact in Argentina as well.  Depending on local market conditions, this business purchases sugar from third parties for resale. Over the past several years, Seaboard has taken a number of steps to enhance the efficiency of its operations and expand its sugar and alcohol production capacity. This segment sells dehydrated alcohol to certain oil companies under an Argentine government bio-ethanol program, which mandates alcohol to be blended with gasoline.  This segment also owns a 51 megawatt cogeneration power plant which is fueled by the burning of sugarcane by-products during the harvest season, which is typically 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. Following several years of heavy capital investment in this segment to expand production capacity and to construct a 51 megawatt cogeneration power plant, financing needs for this segment were minimal in 2014 and should remain minimal in 2015. Seaboard continues to explore various ways to improve and expand this segment.

 

Power Segment

The Power segment is an independent power producer in the Dominican Republic (DR) generating electricity from a system of diesel engines mounted on a floating power generating facility for the local power grid. Seaboard previously leased another facility under a short-term lease which was canceled during 2014.  Seaboard primarily sells power on the spot market primarily to government-owned distribution companies and partially government-owned generation companies.  This segment is subject to delays in obtaining timely collections from sales to these government related entities.  In some prior years, operating cash flows have fluctuated from inconsistent customer collections.

 

Supply of power in the DR is determined by a government body and is subject to fluctuations based on government budgetary constraints. While fuel is this segment’s largest cost component and is subject to price swings, higher fuel costs generally have been passed on to customers.  Seaboard may pursue further power industry investments in the future.

 

Turkey Segment

In December 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 turkey and other products. Butterball has four processing plants, two further processing plants and numerous live production and feed milling operations located in North Carolina, Arkansas, Missouri, Illinois and Kansas. Sales prices are directly

 

12

 

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

affected by both domestic and worldwide supply and demand for turkey products and other proteins. Feed accounts for the largest input cost in raising turkeys and is materially affected by price changes for corn and soybean meal. As a result, commodity price fluctuations can significantly affect the profitability and cash flows of Butterball. 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, 2014 increased $181.3 million from December 31, 2013.  The increase was primarily the result of net cash from operating activities of $374.1 million, proceeds from sale of controlling interest in subsidiary of $74.1 million and increases in notes payable of $16.9 million.  Partially offsetting the increase was cash used for capital expenditures of $121.2 million, principal payments of long-term debt of $91.4 million, repurchases of common stock of $53.8 million and investments in affiliates of $31.4 million. Cash from operating activities increased $249.1 million for 2014 primarily as a result of changes in working capital, principally from changes in receivables.  Receivables were relatively unchanged for 2014 compared to 2013, principally related to significant collections of past due amounts in the Power segment offsetting other segments’ increases, while receivables increased significantly in 2013 compared to 2012 for the Power segment and U.S. income tax receivables.

 

Cash and short-term investments as of December 31, 2013 decreased $15.3 million from December 31, 2012. The decrease was primarily the result of cash used for capital expenditures of $149.7 million, principal payments of long-term debt of $53.8 million, investments in and advances to affiliates discussed below of $39.5 million, and repurchases of common stock of $23.6 million. Partially offsetting the decrease was net cash from operating activities of $125.0 million, principal repayments received on notes receivable from affiliate of $81.4 million and an increase in notes payable of $41.1 million.  Cash from operating activities for 2013 decreased $136.7 million compared to 2012, primarily as a result of timing of payments related to certain current liabilities in the Commodity Trading and Milling and, to a lesser degree, Power segments as total current liabilities decreased in 2013 while they increased in 2012.

 

Capital Expenditures, Acquisitions and Other Investing Activities

During 2014, Seaboard invested $121.2 million in property, plant and equipment, of which $54.2 million was expended in the Pork segment, $21.4 for the Commodity Trading and Milling segment and $29.4 million in the Marine segment.  The Pork segment expenditures were primarily for improvements to existing facilities and related equipment, additional finishing barns and compressed natural gas semi-tractors and related refueling stations.  The Commodity Trading and Milling segment expenditures were primarily for payments related to building four vessels as discussed below.  The Marine segment expenditures were primarily for purchases of cargo carrying and handling equipment.  All other capital expenditures were of a normal recurring nature and primarily included replacements of machinery and equipment, and general facility modernizations and upgrades.

 

The total 2015 capital expenditures budget is $229.1 million. The Pork segment plans to spend $71.3 million primarily for improvements to existing facilities and related equipment, additional finishing barns and compressed natural gas semi-tractors and related refueling stations. The Commodity Trading and Milling segment plans to spend $75.2 million primarily for payments of $58.8 million for four dry bulk vessels being built for a total estimated cost of $90.0 million and improvements to existing facilities and related equipment. However, Seaboard currently anticipates selling and leasing back these four vessels as they are completed which would result in Seaboard receiving back the amounts spent to build at each individual lease inception with no gain or loss on sale.  Payments under the lease agreements will be finalized upon delivery of the vessels.  The four vessels are scheduled for delivery in 2015.  The Marine segment has budgeted $62.1 million primarily for additional cargo carrying and handling equipment and purchase of an additional containerized cargo vessel. In addition, management will be evaluating whether to purchase additional containerized cargo vessels for the Marine segment during 2015.  The balance of $20.5 million is planned to be spent in all other businesses primarily for normal upgrades to existing operations. Management anticipates paying for these capital expenditures from a combination of available cash, the use of available short-term investments and Seaboard’s available borrowing capacity.

 

During 2013, Seaboard invested $149.7 million in property, plant and equipment, of which $79.6 million was expended in the Pork segment, $24.2 million in the Commodity Trading and Milling segment, $22.8 million in the Marine segment, $17.1 million in the Sugar segment and $4.2 million in the Power segment.  The Pork segment expenditures were primarily for additional finishing barns, semi-tractors, improvements to existing facilities and

 

 

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

related equipment and construction of a new feed mill.  The Commodity Trading and Milling segment expenditures were primarily for the purchase of two dry bulk vessels 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 normal upgrades to existing operations, including cane re-planting.  All other capital expenditures were of a normal recurring nature and primarily included replacements of machinery and equipment, and general facility modernizations and upgrades.

 

During 2012, Seaboard invested $158.8 million in property, plant and equipment, of which $52.3 million was expended in the Pork segment, $22.8 million in the Commodity Trading and Milling segment, $35.4 million in the Marine segment, $22.1 million in the Sugar segment and $25.0 million in the Power segment.  The Pork segment expenditures were primarily for additional finishing barns, improvements to existing facilities and related equipment and construction of a new feed mill.  The Commodity Trading and Milling segment expenditures were primarily for the purchase of a dry bulk vessel and for a down payment of $8.3 million made in July 2012 on four dry bulk vessels being built as discussed above. The Marine segment expenditures were primarily for purchases of cargo carrying and handling equipment and the purchase of a cargo vessel.  In the Sugar segment, the capital expenditures were primarily for expansion of cane growing operations and normal upgrades to existing operations.  The Power segment expenditures were primarily used to complete the construction in the Dominican Republic of a 108 megawatt power generating facility, which began commercial operations in March 2012.  The total cost of the project was $136.0 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.

 

As of September 27, 2014, Seaboard’s Pork segment sold to Triumph Foods, LLC a 50% interest in its Daily’s Premium Meats division for cash of $74.1 million.  In September 2014, Seaboard invested $17.3 million in a cargo terminal business in Jamaica for a 21% non-controlling interest.  See Note 4 to the Consolidated Financial Statements for further discussion.

 

In September 2013, Seaboard invested $17.0 million in a flour production business in Brazil for a 50% non-controlling equity interest and provided a $13.0 million long-term loan to this business.  See Note 4 to the Consolidated Financial Statements for further discussion. Also in September 2013, Seaboard invested $7.4 million in a flour milling business located in South Africa for a 49% non-controlling interest.  In July 2013, Seaboard acquired a 50% non-controlling interest in a flour milling business located in Gambia by making a total investment in and advances to this affiliate of $9.1 million during 2013.

 

On December 31, 2012, Seaboard provided a loan of $81.2 million to its non-consolidated affiliate, Butterball, LLC (Butterball) to fund its purchase of assets from Gusto Packing Company, Inc.  On March 28, 2013, Butterball repaid in full this $81.2 million loan.  See Note 4 to the Consolidated Financial Statements for further discussion of these transactions.

 

Beginning in 2010, Seaboard invested in a bakery built in the Democratic Republic of Congo for a 50 percent non-controlling interest in this business. During 2014, 2013 and 2012, Seaboard invested $2.6 million, $4.5 million, and $24.8 million, respectively, in equity, long-term advances and long-term notes receivable for a total investment of $53.4 million in this business. The bakery began operations in the fourth quarter of 2012. See Note 4 to the Consolidated Financial Statements for further discussion of this investment.

 

Starting in 2011, Seaboard began 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.  During 2014, 2013 and 2012, Seaboard invested $0.1 million, $3.8 million and $8.4 million, respectively.  Additional investments are required to be made in future years but are not deemed material in total.

 

In February 2015, Seaboard committed to invest in a limited liability company that will operate a refined coal processing plant in Oklahoma.  Production of refined coal generates federal income tax credits.  Seaboard’s funding commitment for this company can vary depending on production and, based on current production estimates, is anticipated to be approximately $7.0 million in 2015 with anticipated future annual contributions of between $4.0 million and $9.0 million per year until 2021, for a total estimate of approximately $53.0 million.

 

14

 

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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, 2014.  At December 31, 2014, there were no borrowings outstanding under the committed lines of credit and borrowings under the uncommitted lines of credit totaled $75.5 million, with all such borrowings related to foreign subsidiaries.  On October 24, 2014, Seaboard entered into a Credit Agreement for a committed line of credit totaling $50.0 million related to a foreign subsidiary for the Commodity Trading and Milling segment.  This credit facility matures on October 23, 2015.  See Note 7 to the Consolidated Financial Statements for further discussion.

 

 

 

Total amount

 

(Thousands of dollars)

 

available

 

Long-term credit facility – committed

 

$

200,000

 

Short-term credit facility – committed

 

50,000

 

Short-term uncommitted demand notes

 

243,620

 

Total borrowing capacity

 

493,620

 

Amounts drawn against lines

 

(75,524

)

Letters of credit reducing borrowing availability

 

(1,544

)

Available borrowing capacity at December 31, 2014

 

$

416,552

 

 

 

 

 

 

In July 2014, Seaboard provided notice of optional prepayment to its lenders related to a credit agreement with an original maturity date of 2021.  The total principal payment of $85.5 million was made on August 29, 2014.  During 2012, Seaboard borrowed $32.7 million from this credit agreement. In November 2013, Seaboard provided notice of call for early redemption to holders of certain Industrial Development Revenue Bonds (IDRBs) effective December 20, 2013 and paid $18.0 million in the fourth quarter of 2013.  In April 2013, Seaboard provided notice of call for early redemption to holders of certain IDRBs effective May 13, 2013 and paid $10.8 million in the second quarter of 2013.  In December 2012, Seaboard provided notice of call for early redemption to holders of certain IDRBs effective January 14, 2013 and paid $13.0 million in the first quarter of 2013. See Note 7 to the Consolidated Financial Statements for further discussion.

 

As of December 31, 2014, Seaboard has capacity under existing loan covenants to undertake additional debt financings of approximately $2,185.5 million.  As of December 31, 2014, Seaboard was in compliance with all restrictive covenants related to these loans and facilities.  See Note 7 to the Consolidated Financial Statements for a summary of the material terms of Seaboard’s credit facilities, including financial ratios and covenants.

 

As of December 31, 2014, Seaboard had cash and short-term investments of $527.0 million, additional total working capital of $891.1 million and a $200.0 million long-term committed line of credit maturing on February 20, 2018.  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 2015.  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, 2014, $76.7 million of the $527.0 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.

 

Seaboard used cash to repurchase 18,405, 8,705 and 12,937 shares of common stock at a total price of $53.8 million, $23.6 million and $26.8 million in 2014, 2013 and 2012, respectively. See Note 11 to the Consolidated Financial Statements for further discussion.

 

In December 2012, Seaboard declared and paid a dividend of $12.00 per share on the common stock which represented a prepayment of the annual 2013, 2014, 2015 and 2016 dividends ($3.00 per share per year).  Seaboard does not currently intend to declare any further dividends for the years 2015 and 2016.  Seaboard did not declare or pay any dividends in 2014, 2013 and 2011.  In December 2010, Seaboard declared and prepaid the 2012 and 2011 dividends of $3.00 per share per year.

 

 

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

The following table provides a summary of Seaboard’s contractual obligations as of December 31, 2014.

 

 

 

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

 

$

174,529

 

$

58,223

 

$

38,366

 

$

36,500

 

$

41,440

 

Contract grower finishing agreements

 

41,455

 

11,124

 

20,622

 

9,687

 

22

 

Other operating lease payments

 

332,626

 

25,407

 

47,479

 

47,351

 

212,389

 

Total lease obligations

 

548,610

 

94,754

 

106,467

 

93,538

 

253,851

 

Other long-term liabilities

 

87,746

 

4,283

 

12,968

 

15,217

 

55,278

 

Short-term notes payable

 

75,524

 

75,524

 

-

 

-

 

-

 

Interest payments

 

7,739

 

4,288

 

2,257

 

1,050

 

144

 

Other purchase commitments

 

1,055,414

 

786,288

 

212,902

 

56,158

 

66

 

Total contractual cash obligations and commitments

 

$

1,775,033

 

$

965,137

 

$

334,594

 

$

165,963

 

$

309,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, primarily to support sales commitments. Seaboard also leases various facilities and equipment under non-cancelable operating lease agreements. Seaboard guarantees to third parties were not material as of December 31, 2014. See Note 10 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 9 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 Sheets 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 Sheets have been excluded from the table above since they do not represent contractual obligations.

 

Interest payments in the table above include the net payments for interest rate exchange agreements based on the fixed amounts paid and the variable amount received, which is estimated using the projected yield as of December 31, 2014.

 

RESULTS OF OPERATIONS

Net sales for the years ended December 31, 2014, 2013 and 2012 were $6,473.1 million, $6,670.4 million and $6,189.1 million, respectively. The decrease in net sales for 2014 compared to 2013 primarily reflected lower sales volume for the Power segment, lower cargo volumes in certain markets for the Marine segment and lower volumes of sugar sold for the Sugar segment. The increase in net sales for 2013 compared to 2012 primarily reflected higher sales for commodity trading from increased volumes to third parties and, to a lesser extent, increased sale prices as discussed below.

 

Operating income for the years ended December 31, 2014, 2013 and 2012 were $423.6 million, $204.9 million and $309.7 million, respectively. The increase for 2014 compared to 2013 primarily reflected higher prices for pork products sold.  The decrease for 2013 compared to 2012 primarily reflected increased operating costs and lower cargo rates for the Marine segment, lower sale prices and increased production costs for the sugar segment, and lower margins on wheat sales to a non-consolidated affiliate in Africa and, to a lesser extent, to third parties for the Commodity Trading and Milling segment.  Partially offsetting the decrease was higher biodiesel margins primarily from increased government payments for the Pork segment.

 

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Management’s Discussion & Analysis

 

 

Pork Segment

(Dollars in millions)

 

2014

 

2013

 

2012

 

Net sales

 

$

1,717.3

 

$

1,713.1

 

$

1,638.4

 

Operating income

 

$

349.0

 

$

147.7

 

$

122.6

 

Income from affiliate

 

$

3.7

 

$

-

 

$

-

 

 

Net sales for the Pork segment increased $4.2 million for the year ended December 31, 2014 compared to 2013.  The increase was primarily the result of higher prices for pork products sold.  Partially offsetting the increase was lower sales volume of pork products from processing fewer internally grown hogs, lower sales prices and volumes for biodiesel, decreased payments received from the U.S. Government for biodiesel production, and the decrease in fourth quarter sales from the sale of a 50% interest in Daily’s as discussed in Note 4 to the Consolidated Financial Statements.  In December 2014, the Federal blender’s credit that Seaboard is entitled to receive for biodiesel it blends was reinstated for 2014, retroactive to January 1, 2014.  As a result, the 2014 Federal blender’s credit of $15.5 million was recorded as revenues in the fourth quarter of 2014.  See Note 12 to the Consolidated Financial Statements for further discussion of the Federal blender’s credit.

 

Operating income increased $201.3 million for the year ended December 31, 2014 compared to 2013.  The increase was primarily the result of higher prices for pork products sold and, to a lesser extent, lower feed costs for hogs internally grown.  Partially offsetting the increase was lower margins for biodiesel from items discussed above and increased costs for third party hogs.

 

Management is unable to predict future market prices for pork products or the cost of feed.  In addition, the Federal blender’s credit expired December 31, 2014.  However, management anticipates positive operating income for this segment in 2015, although significantly lower than 2014.

 

Income from affiliate is from Seaboard’s 50% proportionate share of 2014 fourth quarter earnings from Daily’s, accounted for using the equity method, as discussed in Note 4 to the Consolidated Financial Statements.

 

Net sales for the Pork segment increased $74.7 million for the year ended December 31, 2013 compared to 2012.  The increase primarily reflected higher prices for pork products sold in the domestic market and increased payments received from the U.S. government for biodiesel production in 2013 compared to 2012.  Partially offsetting the increase were lower sales volume of pork products in the domestic market and lower prices for biodiesel sold in 2013 compared to 2012.  U.S. Government payments included credits of $11.3 million recorded as revenues in the first quarter of 2013 related to the Tax Act, for the total Federal blender’s credits for 2012.  See Note 12 to the Consolidated Financial Statements for further discussion of the Federal blender’s credit.

 

Operating income increased $25.1 million for the year ended December 31, 2013 compared to 2012.  The increase was the result of higher biodiesel margins primarily from increased government payments, including the credit of $11.3 million, discussed above.  Higher prices for pork products were offset by increased costs, principally for hogs internally grown and, to a lesser extent, for third party hogs.  However, higher feed costs were offset by positive changes from using the LIFO method for determining certain inventory costs.

 

Commodity Trading and Milling Segment

(Dollars in millions)

 

2014

 

2013

 

2012

 

Net sales

 

$

3,499.3

 

$

3,501.5

 

$

3,023.5

 

Operating income as reported

 

$

53.9

 

$

38.3

 

$

71.9

 

Mark-to-market adjustments

 

(12.5

)

 

3.7

 

0.9

 

Operating income excluding mark-to-market adjustments

 

$

41.4

 

$

42.0

 

$

72.8

 

Income (loss) from affiliates

 

$

(23.7

)

$

(0.6

)

$

10.5

 

 

 

 

 

 

 

 

 

 

Net sales for the Commodity Trading and Milling segment decreased $2.2 million for the year ended December 31, 2014 compared to 2013.  Lower sales prices for various commodities were principally offset by higher sales volumes for such commodities, especially corn.

 

Operating income increased $15.6 million for the year ended December 31, 2014, compared to 2013.  The increase primarily reflected fluctuations of $16.2 million of marking to market derivative contracts as discussed below.  Excluding the effects of mark-to-market adjustment for derivatives contracts as discussed below, operating income

 

 

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Management’s Discussion & Analysis

 

 

decreased $0.6 million.  The decrease primarily reflected recoveries of $5.2 million in 2013 of inventory write-downs for customer contract performance issues recognized in prior years partially offset by improved operating income at certain milling locations.

 

Due to worldwide commodity price fluctuations, 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 2015, excluding the effects of marking to market derivative contracts.

 

Had Seaboard not applied mark-to-market accounting to its derivative instruments, operating income for this segment in 2014 would have been lower by $12.5 million and in 2013 and 2012 would have been higher by $3.7 million and $0.9 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 2015.  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.

 

Loss from affiliates for the year ended December 31, 2014 increased by $23.1 million from 2013.  The increase primarily reflected a $10.8 million write-down recorded in the fourth quarter of 2014 as a result of a decline in value considered other than temporary for Seaboard’s investment in a bakery located in the Democratic Republic of Congo and losses incurred in 2014 from an affiliate in Brazil newly invested by Seaboard during the latter part of 2013.  See Note 4 to the Consolidated Financial Statements for further discussion of the write-down and investments in these affiliates.  Based on the uncertainty of local political and economic environments in the countries in which Seaboard’s affiliates operate, management cannot predict future results.

 

Net sales for the Commodity Trading and Milling segment increased $478.0 million for the year ended December 31, 2013 compared to 2012.  The increase primarily reflected higher sales for commodity trading from increased volumes to third parties for wheat, soybean meal and various agricultural commodities and, to a lesser extent, increased sale prices for soybean meal and soybeans.

 

Operating income decreased $33.6 million for the year ended December 31, 2013, compared to 2012.  The decrease primarily reflected certain unfavorable market conditions which resulted in lower margins on wheat sales to a non-consolidated affiliate in Africa and, to a lesser extent, to third parties.  Partially offsetting the decrease were recoveries of $5.2 million in 2013 of the inventory write-downs for customer contract performance issues recognized in prior years.  Excluding the effects of the mark-to-market adjustments for derivative contracts as discussed below, operating income decreased $30.8 million for 2013 compared to 2012.

 

Income from affiliates for the year ended December 31, 2013 decreased by $11.1 million from 2012.  The decrease was primarily the result of certain unfavorable market conditions for an affiliate in Africa.  Based on the uncertainty of local political and economic environments in the countries in which the flour and feed mills operate, management cannot predict future results.

 

Marine Segment

(Dollars in millions)

 

2014

 

2013

 

2012

 

Net sales

 

$

852.7

 

$

913.8

 

$

969.6

 

Operating income (loss)

 

$

(2.7

)

$

(25.8

)

$

26.1

 

 

Net sales for the Marine segment decreased $61.1 million for the year ended December 31, 2014, compared to 2013.  The decrease was primarily the result of lower cargo volumes in certain markets, most notably Venezuela, during 2014 compared to 2013.

 

Operating loss decreased by $23.1 million for the year ended December 31, 2014, compared to 2013.  The decrease, which occurred during the second half of 2014, was primarily the result of lower voyage costs, such as fuel costs and, to a lesser extent, charter hire, on a per unit shipped basis partially offset by lower operating results related to the Venezuela operations.  Management cannot predict

changes in future cargo volumes and cargo rates or to what

 

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

extent changes in economic conditions in markets served will affect net sales or operating income during 2015. However, based on recent improved market conditions, management anticipates this segment will be profitable in 2015.

 

Net sales for the Marine segment decreased $55.8 million for the year ended December 31, 2013, compared to 2012.  The decrease was primarily the result of lower volumes in certain markets, most notably Venezuela, and, to a lesser extent, decreased cargo rates in certain markets served during 2013 compared to 2012.

 

Operating income decreased by $51.9 million for the year ended December 31, 2013, compared to 2012.  The decrease was primarily the result of increased trucking costs and certain terminal operating costs on a per unit shipped basis impacted by the decreased volumes and, to a lesser extent, decreased cargo rates noted above.

 

Sugar Segment

(Dollars in millions)

 

2014

 

2013

 

2012

 

Net sales

 

$

199.5

 

$

245.5

 

$

288.3

 

Operating income

 

$

26.6

 

$

24.5

 

$

60.2

 

Income from affiliates

 

$

0.7

 

$

0.6

 

$

0.1

 

 

Net sales for the Sugar segment decreased $46.0 million for the year ended December 31, 2014 compared to 2013.  The decrease primarily reflected lower volumes of sugar sold and, to a much lesser extent, lower sales prices for sugar.  Sugar sales are denominated in Argentine pesos and the lower sales prices for sugar in terms of U.S. dollars was the result of the exchange rate changes as the Argentine peso continued to weaken against the U.S. dollar in 2014, especially in the first quarter of 2014.  Management cannot predict sugar and alcohol prices for 2015, but management anticipates that the Argentine peso may continue to weaken against the U.S. dollar.

 

Operating income increased $2.1 million for the year ended December 31, 2014 compared to 2013.  The increase primarily represents a $4.3 million gain recorded in the second quarter of 2014 from a final insurance settlement for property damage and business interruption claims related to prior years and lower selling, general and administrative expenses from the exchange rate changes discussed above.  Partially offsetting the increase was lower income from sugar sales as a result of lower volumes of sugar sold and lower sales prices as noted above.  Management anticipates positive operating income for this segment in 2015, although lower than 2014.

 

Net sales for the Sugar segment decreased $42.8 million for the year ended December 31, 2013 compared to 2012.  The decrease primarily reflects lower sales prices for sugar and, to a lesser extent, lower volumes of sugar sold.  Sugar sales are denominated in Argentine pesos and the lower sales prices for sugar in terms of U.S. dollars were primarily the result of the exchange rate differences as the Argentine peso continued to weaken against the U.S, dollar in 2013.  Partially offsetting the decrease in net sales was increased sales volume of alcohol.

 

Operating income decreased $35.7 million for the year ended December 31, 2013 compared to 2012.  The decrease primarily represents lower income from sugar sales as a result of lower sale prices as noted above and, to a lesser extent, increased costs of production. Partially offsetting this decrease was higher income from alcohol sales from increased sales volume as noted above.

 

Power Segment

(Dollars in millions)

 

2014

 

2013

 

2012

 

Net sales

 

$

189.1

 

$

283.8

 

$

255.4

 

Operating income

 

$

19.0

 

$

42.9

 

$

55.0

 

 

Net sales for the Power segment decreased $94.7 million for the year ended December 31, 2014 compared to 2013.  The decrease primarily reflected lower volumes and, to a lesser extent, lower spot market rates.  Although management cannot predict future spot market rates, sales volumes for 2015 are anticipated to be lower than 2014 as a result of cancelling the short-term leasing of a power generating facility on September 3, 2014 as discussed in Note 12 to the Consolidated Financial Statements.

 

Operating income decreased $23.9 million for the year ended December 31, 2014 compared to 2013. The decrease primarily reflected lower spot market rates and lower volumes partially offset by lower fuel costs per kilowatt hour generated and a gain on sale of assets of $5.0 million as discussed in Note 12 to the Consolidated Financial

 

 

2014 Annual Report

19

 

 



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

Statements.  Management cannot predict future fuel costs or the extent that spot market rates will fluctuate compared to fuel costs.  However, management anticipates positive operating income for this segment in 2015.

 

Net sales for the Power segment increased $28.4 million for the year ended December 31, 2013 compared to 2012.  The increase primarily reflected increased volumes from operating the new power generating facility the entire first quarter in 2013.  The new power generating facility started operating in March 2012.

 

Operating income decreased $12.1 million for the year ended December 31, 2013 compared to 2012. The decrease primarily reflected higher operating costs and higher fuel costs per kilowatt hour generated, partially offset by higher production volumes noted above.

 

Turkey Segment

(Dollars in millions)

 

2014

 

2013

 

2012

 

Income (loss) from affiliate

 

$

54.7

 

$

(10.3)

 

$

20.2 

 

 

The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball.  The increase in income from affiliate for 2014 compared to 2013 was primarily the result of lower feed costs and higher prices of turkey products sold.  In addition, Butterball incurred charges in 2013 for impairment of fixed assets related to the planned sale of its closed processing plant in Longmont, Colorado.  Seaboard’s proportionate share was $3.7 million recognized in loss from affiliate for 2013.  This plant was sold in the second quarter of 2014 for approximately the remaining net book value. Management anticipates positive income for this segment in 2015.

 

The decrease in income from affiliate for 2013 compared to 2012 was primarily the result of higher feed costs and, to a lesser extent, various production inefficiencies experienced especially during the fourth quarter of 2013 related to the Montgomery, Illinois operation acquired in December 2012.  In addition, Butterball incurred additional charges in 2013 for impairment of fixed assets related to the Longmont, Colorado facility as discussed above.

 

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses for the year ended December 31, 2014 decreased by $9.5 million over 2013 to $254.5 million.  The decrease was primarily the result of lower expenses for the Sugar segment from the exchange rate changes discussed above and lower bad debt expense.  As a percentage of revenues, SG&A decreased to 3.9% for 2014 compared to 4.0% for 2013.

 

SG&A expenses for the year ended December 31, 2013 increased by $12.6 million over 2012 to $264.0 million.  The increase was primarily the result of increased administrative expenses and personnel costs in most segments.  As a percentage of revenues, SG&A decreased to 4.0% for 2013 compared to 4.1% for 2012.

 

Interest Expense

Interest expense totaled $20.2 million, $11.4 million and $11.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.  The increase in 2014 compared to 2013 primarily reflected higher interest rates on notes payable related to foreign subsidiaries and a $3.8 million charge for early payment of debt, as discussed in Note 7.

 

Interest Income

Interest income totaled $14.0 million, $17.6 million and $11.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.  The decrease for 2014 compared to 2013 primarily reflected a decrease in interest received on outstanding customer receivable balances in the Power segment.  The increase for 2013 compared to 2012 primarily reflected an increase in interest received on outstanding customer receivable balances in the Power segment.

 

Interest Income from Affiliates

Interest income from affiliates totaled $27.4 million, $24.7 million and $20.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.  The increases primarily represented increased interest income from notes receivable from Butterball.

 

Other Investment Income, Net

Other investment income, net totaled $2.1 million, $7.8 million and $8.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.  The fluctuations primarily reflect mark-to-market fluctuations from investments, especially high yield trading debt securities in 2014.

 

20

 

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

Foreign Currency Gains (Losses), Net

Foreign currency gains (losses), net totaled $(9.3) million, $0.1 million and $0.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.  The increase in foreign currency losses, net in 2014 compared to 2013 reflects increased losses related to multiple currencies with the more significant changes related to the Euro Zone euro, Zambian kwacha and South African rand.  Seaboard operates in many foreign countries which are less developed than the U.S.  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 Sale of Controlling Interest in Subsidiary

Seaboard’s Pork segment sold to Triumph Foods, LLC a 50% interest in its Daily’s Premium Meats division resulting in a pre-tax gain of $66.0 million recognized in the third quarter of 2014 related to this transaction. See Note 4 to the Consolidated Financial Statements for further discussion.

 

Miscellaneous, Net

Miscellaneous, net totaled $(5.1) million, $5.9 million and $(3.0) million for the years ended December 31, 2014, 2013 and 2012, respectively. Miscellaneous, net primarily reflected mark-to-market fluctuations on interest rate exchange agreements.

 

Income Tax Expense

The effective tax rate for 2014 was higher than 2013 primarily as the mix of domestic and foreign earnings for 2014 fluctuated from prior year resulting in more income taxed at a higher tax rate and because the 2013 rate included two years of tax benefits due to the retroactive nature of the Tax Act as discussed below.  The effective tax rate for 2013 was lower than 2012 primarily from tax-exempt income related to biodiesel production recognized in 2013 and a one-time tax benefit of $7.9 million recorded in 2013 related to certain 2012 income tax credits as further discussed in Note 6 to the Consolidated Financial Statements.  Excluding these tax benefits, the effective tax rate for 2013 was higher than 2012 as the mix of domestic and foreign earnings fluctuated.  Certain U.S. income tax provisions expired on December 31, 2014.  Seaboard’s effective tax rate could increase in 2015 compared to 2014 related to domestic earnings if the expired income tax provisions are not retroactively extended.

 

OTHER FINANCIAL INFORMATION

In May 2014, the Financial Accounting Standards Board issued guidance to develop a single, comprehensive revenue recognition model for all contracts with customers. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Seaboard is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures.  Seaboard will be required to adopt this guidance on January 1, 2017 and it is currently anticipated that Seaboard will apply this guidance using the cumulative effect transition method.

 

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:

 

 

2014 Annual Report

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 at 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 receivables are heavily weighted toward foreign receivables ($456.8 million or 77.3% at December 31, 2014), including foreign receivables due from affiliates ($190.3 million at December 31, 2014), 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 less developed than the U.S., which can experience conditions causing sudden changes to their ability to pay such receivables on a timely basis or in full.  Although in recent years collections have been fairly stable, based on various historical experiences 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, 2014, 2013 and 2012 was $0.4 million, $3.4 million and $3.1 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.

 

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 undiscounted 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.

 

Investments in and advances to Affiliates and Notes Receivable from Affiliates – Seaboard has numerous investments in and advances to various businesses that it owns 50% or less for a non-controlling interest and are accounted for using the equity method.  In addition, for some of these investments, Seaboard also has Notes Receivable for loans Seaboard provided to these businesses.  For the Commodity Trading and Milling segment, these investments are primarily in various foreign countries which are less developed than the U.S. and thus expose Seaboard to various greater financial risks.  At certain times when there are ongoing operating losses, local economies are depressed, commodity based markets are less stable, or foreign governments cause challenging business conditions, the fair value of the equity method investment is evaluated by management.  The fair value of these investments is not readily determinable as almost all of these investments are not publicly traded.  Management will use other methods to determine fair value such as estimated future cash flows, including assumptions on growth rates, for the business and consideration of other local business conditions as applicable.  If the fair value of the investment is determined to be less than the carrying value and the decline in value is considered to be other than temporary, an appropriate write-down is recorded to income (loss) from affiliate based on the excess of the carrying value over the best estimate of fair value of the investment.  In addition, if based on current information and events it is probable that Seaboard will be unable to collect all amounts due according to the contractual terms of the Notes Receivable from Affiliates and an amount can be reasonably estimated, Seaboard will write down the amounts to estimated realizable

 

22

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

value.  Information and events creating uncertainty about the realization of recorded amounts for notes from affiliates include, but are not limited to, the estimated cash flows generated by the affiliates’ business, the sufficiency of collateral securing the amounts, the creditworthiness of the counterparties involved, and consideration of other local business conditions as applicable.  Changes in facts, circumstances and management’s estimates and judgment could result in a material charge to earnings. See Note 4 to the Consolidated Financial Statements for further discussion on the Commodity Trading and Milling segment and its $10.8 million write-down recorded in loss from affiliates in 2014 related to its investment in a bakery located in the Democratic Republic of Congo.

 

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, 2014, Seaboard had deferred tax assets of $162.1 million, net of the valuation allowance of $20.6 million, and deferred tax liabilities of $212.0 million. For the years ended December 31, 2014, 2013 and 2012, income tax expense included $25.4 million, $35.0 million and $(22.4) 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 $2.7 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 9 to the Consolidated Financial Statements for further discussion.

 

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, oilseed and other commodity 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, 2014 and 2013, 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.

 

 

2014 Annual Report

23

 

 



 

SEABOARD CORPORATION

Management’s Discussion & Analysis

 

 

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. Seaboard uses interest rate swaps to manage risks of increasing interest rates.

 

During 2014, Seaboard put into place four, approximately eight-year interest rate exchange agreements with mandatory early termination dates in the second half of 2014 and 2015 for one of the agreements. Three of these agreements have since been terminated that had mandatory early termination dates in 2014.  Payments made by Seaboard to unwind these agreements were not material. Also in 2014, Seaboard entered into three new interest rate exchange agreements to replace the three that were terminated as noted above, each with a mandatory early termination date in 2015 and similar terms as the interest rate exchange agreements terminated. These four exchange agreements, still outstanding as of December 31, 2014, involve the exchange of fixed-rate and variable-rate interest payments without the exchange of the underlying notional amounts to mitigate the potential effects of fluctuations in interest rates on the anticipated dry bulk vessel leases in 2015. Seaboard pays a fixed rate and receives a variable rate of interest on these four notional amounts of $22.0 million each. During 2010, Seaboard entered into three ten-year interest rate exchange agreements which involve the exchange of fixed-rate and variable-rate interest payments over the life of the agreements without the exchange of the underlying notional amounts to mitigate the effects of fluctuations in interest rates on variable rate debt. Seaboard pays a fixed rate and receives a variable rate of interest on three notional amounts of $25.0 million each. All seven of 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 Statements of Comprehensive Income.

 

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 change in market prices or in foreign exchange rates and interest rates as of December 31, 2014 and December 31, 2013. 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, 2014

 

December 31, 2013

 

Grains and oilseeds

 

$              8,108

 

$             14,281

 

Hogs

 

1,652

 

3,275

 

Energy related resources

 

786

 

-

 

Vegetable oils

 

629

 

453

 

Sugar

 

466

 

994

 

Dry dairy products

 

3

 

102

 

Foreign currencies

 

19,016

 

19,629

 

Interest rates

 

1,203

 

830

 

 

Seaboard does not have any long-term debt outstanding as of December 31, 2014.  At December 31, 2013, long-term debt included foreign subsidiary obligations payable in U.S. dollars $91.2 million.  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.

 

Non-trading financial instruments sensitive to changes in interest rates at December 31, 2013 consisted of fixed rate long-term debt totaling $92.2 million, with an average interest rate of 5.44 percent.

 

24

 

2014 Annual Report

 

 



 

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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under the framework in Internal Control - Integrated Framework (2013), management concluded that Seaboard’s internal control over financial reporting was effective as of December 31, 2014.

 

Seaboard’s independent registered 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.

 

 

2014 Annual Report

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, 2014 and 2013 and the related consolidated statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

 

 

 

Kansas City, Missouri

February 26, 2015

 

26

 

2014 Annual Report

 

 



 

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, 2014, based on criteria established in Internal Control - Integrated Framework (2013) 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, 2014, based on criteria established in Internal Control - Integrated Framework (2013) 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, 2014 and 2013, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2014, and our report dated February 26, 2015 expressed an unqualified opinion on those consolidated financial statements.

 

 

 

 

 

 

 

Kansas City, Missouri

 

February 26, 2015

 

 

 

2014 Annual Report

27

 

 



 

SEABOARD CORPORATION

Consolidated Statements of Comprehensive Income

 

 

 

 

 

Years ended December 31,

 

(Thousands of dollars except per share amounts)

 

 

 

2014

 

 

 

2013

 

 

 

2012

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products (includes sales to affiliates of $846,076, $744,965 and $747,064)

 

 

 

$

5,372,547

 

 

 

$

5,431,402

 

 

 

$

4,916,322

 

Service revenues

 

 

 

906,402

 

 

 

952,596

 

 

 

1,015,481

 

Other

 

 

 

194,127

 

 

 

286,416

 

 

 

257,330

 

Total net sales

 

 

 

6,473,076

 

 

 

6,670,414

 

 

 

6,189,133

 

Cost of sales and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Products

 

 

 

4,818,242

 

 

 

5,089,959

 

 

 

4,536,582

 

Services

 

 

 

813,179

 

 

 

877,848

 

 

 

896,062

 

Other

 

 

 

163,633

 

 

 

233,758

 

 

 

195,431

 

Total cost of sales and operating expenses

 

 

 

5,795,054

 

 

 

6,201,565

 

 

 

5,628,075

 

Gross income

 

 

 

678,022

 

 

 

468,849

 

 

 

561,058

 

Selling, general and administrative expenses

 

 

 

254,463

 

 

 

263,985

 

 

 

251,397

 

Operating income

 

 

 

423,559

 

 

 

204,864

 

 

 

309,661

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

(20,178

)

 

 

(11,422

)

 

 

(11,049

)

Interest income

 

 

 

14,009

 

 

 

17,580

 

 

 

11,050

 

Interest income from affiliates

 

 

 

27,399

 

 

 

24,695

 

 

 

20,570

 

Income (loss) from affiliates

 

 

 

35,356

 

 

 

(10,292

)

 

 

30,707

 

Other investment income, net

 

 

 

2,146

 

 

 

7,846

 

 

 

8,461

 

Foreign currency gains (losses), net

 

 

 

(9,319

)

 

 

77

 

 

 

352

 

Gain on sale of controlling interest in subsidiary

 

 

 

65,955

 

 

 

-

 

 

 

-

 

Miscellaneous, net

 

 

 

(5,128

)

 

 

5,867

 

 

 

(2,974

)

Total other income, net

 

 

 

110,240

 

 

 

34,351

 

 

 

57,117

 

Earnings before income taxes

 

 

 

533,799

 

 

 

239,215

 

 

 

366,778

 

Income tax expense

 

 

 

(167,799

)

 

 

(32,450

)

 

 

(84,190

)

Net earnings

 

 

 

$

366,000

 

 

 

$

206,765

 

 

 

$

282,588

 

Less: Net income attributable to noncontrolling interests

 

 

 

(730

)

 

 

(1,529

)

 

 

(277

)

Net earnings attributable to Seaboard

 

 

 

$

365,270

 

 

 

$

205,236

 

 

 

$

282,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$

309.96

 

 

 

$

171.92

 

 

 

$

234.54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of income tax benefit (expense) of $26,835, $(10,318) and $9,197:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

(38,624

)

 

 

(45,956

)

 

 

(15,788

)

Unrealized gain (loss) on investments

 

 

 

853

 

 

 

(1,751

)

 

 

2,543

 

Unrealized gain (loss) on cash flow hedges

 

 

 

113

 

 

 

-

 

 

 

(113

)

Unrecognized pension cost

 

 

 

(33,182

)

 

 

37,454

 

 

 

(2,121

)

Other comprehensive loss, net of tax

 

 

 

$

(70,840

)

 

 

$

(10,253

)

 

 

$

(15,479

)

Comprehensive income

 

 

 

295,160

 

 

 

196,512

 

 

 

267,109

 

Less: Comprehensive income attributable to the noncontrolling interest

 

 

 

(718

)

 

 

(1,561

)

 

 

(279

)

Comprehensive income attributable to Seaboard

 

 

 

$

294,442

 

 

 

$

194,951

 

 

 

$

266,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

 

 

1,178,441

 

 

 

1,193,801

 

 

 

1,203,698

 

See accompanying notes to consolidated financial statements.

 

28

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Consolidated Balance Sheets

 

 

 

December 31,

 

(Thousands of dollars except per share amounts)

 

2014

 

2013

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

36,459

 

$

55,055

 

Short-term investments

 

490,566

 

290,649

 

Receivables:

 

 

 

 

 

Trade

 

328,015

 

419,598

 

Due from affiliates

 

201,870

 

145,041

 

Other

 

116,041

 

99,597

 

 

 

645,926

 

664,236

 

Allowance for doubtful accounts

 

(11,961

)

(12,832

)

Net receivables

 

633,965

 

651,404

 

Inventories

 

736,302

 

698,998

 

Deferred income taxes

 

45,647

 

23,449

 

Other current assets

 

110,053

 

134,394

 

Total current assets

 

2,052,992

 

1,853,949

 

Net property, plant and equipment

 

846,757

 

863,573

 

Investments in and advances to affiliates

 

523,063

 

406,900

 

Notes receivable from affiliates

 

197,270

 

180,386

 

Goodwill

 

14,846

 

43,218

 

Other intangible assets, net

 

3,872

 

18,997

 

Other assets

 

38,520

 

51,025

 

Total Assets

 

$

3,677,320

 

$

3,418,048

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable to banks

 

$

75,524

 

$

67,699

 

Current maturities of long-term debt

 

-

 

11,697

 

Accounts payable

 

181,686

 

186,468

 

Payables due to affiliates

 

32,532

 

13,774

 

Accrued compensation and benefits

 

126,513

 

127,212

 

Deferred revenue

 

51,158

 

46,192

 

Accrued voyage costs

 

45,092

 

49,621

 

Accrued commodity inventory

 

29,532

 

29,248

 

Other current liabilities

 

92,795

 

83,416

 

Total current liabilities

 

634,832

 

615,327

 

Long-term debt, less current maturities

 

-

 

80,480

 

Accrued pension liability

 

135,673

 

80,918

 

Deferred income taxes

 

95,538

 

73,336

 

Other liabilities and deferred credits

 

91,004

 

88,017

 

Total non-current liabilities

 

322,215

 

322,751

 

Commitments and contingent liabilities

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock of $1 par value. Authorized 1,250,000 shares; issued and outstanding 1,170,550 and 1,188,955 shares

 

1,171

 

1,189

 

Accumulated other comprehensive loss

 

(252,637

)

(181,797

)

Retained earnings

 

2,967,364

 

2,655,857

 

Total Seaboard stockholders’ equity

 

2,715,898

 

2,475,249

 

Noncontrolling interests

 

4,375

 

4,721

 

Total equity

 

2,720,273

 

2,479,970

 

Total Liabilities and Stockholders’ Equity

 

$

3,677,320

 

$

3,418,048

 

See accompanying notes to consolidated financial statements.

 

 

2014 Annual Report

29

 

 



 

SEABOARD CORPORATION

Consolidated Statements of Cash Flows

 

 

 

Years ended December 31,

 

(Thousands of dollars)

 

2014

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net earnings

 

$

366,000

 

$

206,765

 

$

282,588

 

Adjustments to reconcile net earnings to cash from operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

92,385

 

93,077

 

90,216

 

Gain from sale of fixed assets

 

(2,832

)

(4,433

)

(8,710

)

Gain from sale of power generating facility assets

 

(4,953

)

-

 

-

 

Deferred income taxes

 

25,900

 

30,233

 

(24,560

)

Pay-in-kind interest and accretion on notes receivable from affiliates

 

(15,837

)

(13,642

)

(11,936

)

(Income) loss from affiliates

 

(35,356

)

10,292

 

(30,707

)

Dividends received from affiliates

 

14,444

 

11,340

 

785

 

Other investment income, net

 

(2,146

)

(7,846

)

(8,461

)

Gain on sale of controlling interest in a subsidiary

 

(65,955

)

-

 

-

 

Foreign currency exchange gain

 

(239

)

(222

)

(244

)

Other, net

 

(296

)

1,585

 

3,614

 

Changes in assets and liabilities, net of business acquired:

 

 

 

 

 

 

 

Receivables, net of allowance

 

(6,730

)

(154,036

)

(66,583

)

Inventories

 

(81,280

)

35,600

 

(64,943

)

Other current assets

 

23,833

 

(12,642

)

(18,167

)

Current liabilities, exclusive of debt

 

44,165

 

(73,210

)

93,246

 

Other, net

 

22,999

 

2,137

 

25,565

 

Net cash from operating activities

 

374,102

 

124,998

 

261,703

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of short-term investments

 

(1,096,681

)

(611,737

)

(773,111

)

Proceeds from the sale of short-term investments

 

876,313

 

625,414

 

755,141

 

Proceeds from the maturity of short-term investments

 

18,058

 

5,612

 

36,693

 

Capital expenditures

 

(121,178

)

(149,652

)

(158,755

)

Proceeds from the sale of fixed assets

 

7,663

 

14,538

 

15,906

 

Proceeds from the sale of power generating facility assets

 

8,115

 

-

 

-

 

Investments in and advances to affiliates, net

 

(31,368

)

(39,485

)

(24,927

)

Long-term notes receivable issued to affiliates

 

(1,179

)

(17,531

)

(81,231

)

Principal payments received on long-term notes receivable from affiliates

 

1,300

 

81,397

 

1,139

 

Principal payments received on notes receivable

 

1,709

 

19,483

 

1,499

 

Purchase of long-term investments

 

(2,597

)

(4,357

)

(9,789

)

Proceeds from the sale of controlling interest in a subsidiary

 

74,142

 

-

 

-

 

Other, net

 

1,200

 

(1,695

)

(3,836

)

Net cash from investing activities

 

(264,503

)

(78,013

)

(241,271

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Notes payable to banks, net

 

16,917

 

41,092

 

12,592

 

Proceeds from the issuance of long-term debt

 

-

 

-

 

32,682

 

Principal payments of long-term debt

 

(91,403

)

(53,756

)

(43,947

)

Repurchase of common stock

 

(53,781

)

(23,578

)

(26,830

)

Dividends paid

 

-

 

-

 

(14,376

)

Other, net

 

(913

)

(1,416

)

(2,589

)

Net cash from financing activities

 

(129,180

)

(37,658

)

(42,468

)

Effect of exchange rate change on cash

 

985

 

(1,923

)

(1,823

)

Net change in cash and cash equivalents

 

(18,596

)

7,404

 

(23,859

)

Cash and cash equivalents at beginning of year

 

55,055

 

47,651

 

71,510

 

Cash and cash equivalents at end of year

 

$

36,459

 

$

55,055

 

$

47,651

 

See accompanying notes to consolidated financial statements.

 

30

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Consolidated Statements of Changes in Equity

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common

 

Comprehensive

 

Retained

 

Noncontrolling

 

 

 

(Thousands of dollars except per share amounts)

 

Stock

 

Loss

 

Earnings

 

Interests

 

Total

 

Balances, January 1, 2012

 

$

1,211

 

$

(156,065

)

$

2,233,778

 

$

543

 

$

2,079,467

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

282,311

 

277

 

282,588

 

Other comprehensive loss, net of tax

 

 

 

(15,479

)

 

 

2

 

(15,477

)

Repurchase of common stock

 

(13

)

 

 

(26,817

)

 

 

(26,830

)

Dividends on common stock

 

 

 

 

 

(14,376

)

 

 

(14,376

)

Addition of noncontrolling interests

 

 

 

 

 

 

 

2,853

 

2,853

 

Dividends paid to noncontrolling interests

 

 

 

 

 

 

 

(36

)

(36

)

Balances, December 31, 2012

 

1,198

 

(171,544

)

2,474,896

 

3,639

 

2,308,189

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

205,236

 

1,529

 

206,765

 

Other comprehensive loss, net of tax

 

 

 

(10,253

)

 

 

32

 

(10,221

)

Repurchase of common stock

 

(9

)

 

 

(23,569

)

 

 

(23,578

)

Reduction to noncontrolling interests

 

 

 

 

 

(706

)

(254

)

(960

)

Dividends paid to noncontrolling interests

 

 

 

 

 

 

 

(225

)

(225

)

Balances, December 31, 2013

 

 

1,189

 

 

 

(181,797

)

 

2,655,857

 

 

4,721

 

 

2,479,970

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

365,270

 

730

 

366,000

 

Other comprehensive loss, net of tax

 

 

 

(70,840

)

 

 

(12

)

(70,852

)

Repurchase of common stock

 

(18

)

 

 

(53,763

)

 

 

(53,781

)

Reduction to noncontrolling interests

 

 

 

 

 

-

 

(386

)

(386

)

Dividends paid to noncontrolling interests

 

 

 

 

 

 

 

(678

)

(678

)

Balances, December 31, 2014

 

$

1,171

 

$

 

(252,637

)

$

2,967,364

 

$

4,375

 

$

2,720,273

 

 

See accompanying notes to consolidated financial statements.

 

 

2014 Annual Report

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 diverse global 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 76.4 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 foreign subsidiaries and affiliates is reported on a one- to three-month lag, depending on the specific entity.

 

Short-Term Investments

Short-term investments are retained for future use in the business and may include money market funds, corporate bonds, U.S. government agency securities, high yield debt securities, equity mutual funds, domestic equity ETFs and, on a limited basis, 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 (loss).  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, net on the Consolidated Statements of Comprehensive 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.

 

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.

 

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.

 

32

 

2014 Annual Report

 

 



 

SEABOARD CORPORATION

Notes to Consolidated Financial Statements

 

 

Notes Receivable from Affiliates

Seaboard monitors the credit quality of notes receivable from its 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. If based on current information and events it is probable that Seaboard will be unable to collect all amounts due according to the contractual terms of the Notes Receivable from Affiliates and an amount can be reasonably estimated, Seaboard will write down the Notes Receivable to estimated realizable value.

 

Goodwill and Other Intangible Assets

Goodwill is assessed annually for impairment by each reporting unit 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. Goodwill is primarily related to the repurchase in 2007 of a non-controlling interest of Seaboard Foods LLC in the Pork segment for a total of $12,256,000 as of December 31, 2014 and 2013. Both goodwill and other intangible assets, net decreased in 2014 as a result of a transaction in the Pork segment discussed in Supplemental Non—Cash Transactions below. Based on the annual assessments conducted by each reporting unit during 2014, there were no impairment charges recorded for the year ended December 31, 2014.

 

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.

 

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 Sheets, 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 2014 and 2013:

 

 

 

Years ended December 31,

 

(Thousands of dollars)

 

2014

 

2013

 

Beginning balance

 

$

15,578

 

$

14,315

 

Accretion expense

 

1,263

 

1,177

 

Disposals

 

(114

)

-

 

Liability for additional lagoons placed in service

 

-

 

86

 

Ending balance

 

$

16,727

 

$

15,578

 

 

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. generally accepted accounting principles (GAAP), Seaboard will recognize the benefit or cost of this change in the future.

 

Revenue Recognition

As a result of a marketing agreement with Triumph Foods LLC (Triumph), 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’s hog processing plants. Seaboard earns a fee for marketing the pork products of Triumph, and recognizes this fee as service revenue primarily based

 

 

2014 Annual Report

33

 

 



 

SEABOARD CORPORATION

Notes to Consolidated Financial Statements

 

 

on the number of head processed by Triumph. Revenues for the commodity trading business are recognized when the commodity is delivered to the customer, collection is reasonably assured and the sales price is fixed or determinable. Revenues for cargo services are recognized ratably over the transit time for each voyage, with expenses associated with cargo services recognized as incurred. Revenues for 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. GAAP 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, potential write-down related to investments in and advances to affiliates and notes receivable from affiliates, 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.

 

Reclassifications

Prior year amounts for accounts payable were increased and payables due to affiliates decreased by $10,552,000 on the consolidated balance sheet as of December 31, 2013 to properly reflect the obligations.

 

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)

 

2014

 

2013

 

2012

 

Interest

 

$

20,177

 

$

11,119

 

$