EX-13 5 seb-20151231ex132e77929.htm EX-13 seb_EX_13

 

Exhibit 13

 

untitled

 

 

2015 Annual Report

 

 


 

Table of Contents

SEABOARD CORPORATION

 

Description of Business

Seaboard Corporation is a diverse global agribusiness and transportation company. In the United States (“U.S.”), 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 a turkey operation in the U.S.

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 timetables for Seaboard’s scheduled capital improvements, acquisitions and dispositions; (xi) the productive capacity of facilities that are planned or under construction, and the timing of the commencement of operations at such facilities; (xii) the increase in Seaboard's hog and other production capacity attributable to acquisitions; (xiii) Seaboard's ability to convert its Haiti port project loan to equity, including the satisfaction of the conditions for such conversion; (xiv) the amount of Seaboard's funding commitment for an Oklahoma refined coal processing plant; or (xv) 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 captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Letter to Stockholders” identifies important factors which could cause such differences.

 

 

2015 Annual Report   1


 

Table of Contents

SEABOARD CORPORATION

Letter to Stockholders

 

 

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

2 2015 Annual Report


 

Table of Contents

SEABOARD CORPORATION

Letter to Stockholders

 

 

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

2015 Annual Report   3


 

Table of Contents

SEABOARD CORPORATION

Letter to Stockholders

 

 

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

 

 

 

 

 

4 2015 Annual Report


 

 

SEABOARD CORPORATION

Principal Locations

 

 

 

 

 

 

Corporate Office

Seaboard Corporation

Merriam, Kansas

 

Pork

Seaboard Foods LLC

Pork Division Office

Merriam, Kansas

 

Processing Plant

Guymon, Oklahoma

 

High Plains Bioenergy, LLC

Guymon, Oklahoma

 

Seaboard de Mexico USA LLC

Mexico

 

Daily’s Premium Meats, LLC*

Salt Lake City, Utah

Missoula, Montana

 

Commodity Trading and Milling

Commodity Trading Operations

Atlanta, Georgia*

Australia*

Canada

Chapel Hill, North Carolina

Colombia

Ecuador

Greece

Isle of Man

Kenya

Peru*

Singapore

South Africa

Uruguay*

 

Africa Poultry Development Limited*

Kenya and Zambia

 

Bag Yaglari Sanayi ve Ticaret T.A.S.*

Turkey

 

Belarina Alimentos S.A.*

Brazil

 

Bolux Group Proprietary Limited*

Botswana

 

Compania Industrial de Productos

Agreopecuarios S.A.*

Rafael del Castillo & Cia. S.A.*

Colombia

 

Gambia Milling Corporation*

Gambia

 

National Milling Company of Guyana, Inc.

Guyana

    

Les Moulins d’Haiti S.E.M.*

Haiti

 

Lesotho Flour Mills Limited*

Lesotho

 

Flour Mills of Ghana

Ghana

 

Life Flour Mill Ltd.*

Nigeria

 

LMM Farine, S.A.

Madagascar

 

Congo Poultry Limited*

Minoterie de Matadi, S.A.*

Societe Africaine de Developpement

Industriel Alimentaire*

Democratic Republic of Congo

 

Minoterie du Congo, S.A.

Republic of Congo

 

Moderna Alimentos, S.A.*

Molinos Champion, S.A.*

Ecuador

 

Paramount Mills (Pty) Ltd.*

South Africa

 

National Milling Corporation Limited

Zambia

 

Unga Holdings Limited*

Kenya and Uganda

 

Marine

Seaboard Marine Ltd.

Marine Division Office

Miami, Florida

 

Port Operations

Brooklyn, New York

Houston, Texas

Miami, Florida

New Orleans, Louisiana

Philadelphia, Pennsylvania

 

Agencias Generales Conaven, C.A.

Venezuela

 

Agencia Maritima del Istmo, S.A.

Costa Rica

 

Cayman Freight Shipping Services, Ltd.

Cayman Islands

 

JacintoPort International LLC

Houston, Texas

 

Representaciones Maritimas y Aereas, S.A.

Guatemala

 

Sea Cargo, S.A. 

Panama

 

Seaboard de Colombia, S.A.

Colombia

    

Seaboard de Nicaragua, S.A.

Nicaragua

 

Seaboard del Peru, S.A.

Peru

 

Kingston Wharves Limited*

Seaboard Freight & Shipping Jamaica

Limited

Jamaica

 

Seaboard Honduras, S. de R.L. de C.V.

Honduras

 

Seaboard Marine (Trinidad) Ltd.

Trinidad

 

Seaboard Marine of Haiti, S.E.

Haiti

 

SEADOM, S.A.

Dominican Republic

 

SeaMaritima S.A. de C.V.

Mexico

 

Sugar

Alconoa S.R.L.

Ingenio y Refineria San Martin del

Tabacal S.R.L.

Argentina

 

Power

Transcontinental Capital Corp.

(Bermuda) Ltd.

La Compania de Electricidad de San

Pedro de Macoris*

Dominican Republic

 

Turkey

Butterball LLC*

Division Office

Garner, North Carolina

 

Processing Plants

Huntsville, Arkansas

Ozark, Arkansas

Carthage, Missouri

Mt. Olive, North Carolina

 

Further Processing Plants

Jonesboro, Arkansas

Montgomery, Illinois

Raeford, North Carolina

 

Other

Mount Dora Farms de Honduras,

S.R.L.

Honduras

 

Mount Dora Farms Inc.

Houston, Texas


*Represents a noncontrolled, non-consolidated affiliate

 

 

 

2015 Annual Report   5


 

Table of Contents

SEABOARD CORPORATION

Division Summaries

 

 

Pork Division

Seaboard is a vertically integrated pork producer and its Pork Division is one of the largest producers and processors in the U.S. 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 20,500 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. 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 U.S. 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 the Central U.S. 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 fuel 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. According to Successful Farming and Informa Economics, trade publications, Seaboard was ranked number three in pork production (based on sows in production) and number four (based on daily processing capacity) in processing in the U.S. (including Triumph volume) in 2015.

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% noncontrolling 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, and a third plant under construction in St. Joseph, Missouri, expected to commence operations in mid-2016. Seaboard and Triumph each supply raw product to Daily’s.

On May 13, 2015, Seaboard’s Pork Division and Triumph entered into a new joint venture, Seaboard Triumph Foods, LLC, which is constructing a new pork processing facility in Sioux City, Iowa. Construction is expected to be completed by mid-2017. The plant is designed to process about three million market hogs annually operating a single shift. As part of the operations, Seaboard’s Pork Division agreed to provide a portion of the hogs to be processed at the facility. In February 2016, the Pork Division, in combination with a newly formed limited liability partnership that will be consolidated with Seaboard, acquired hog inventory and related assets in the Central U.S. that are expected to increase Seaboard’s hog production capacity to meet the majority of such hog supply commitment for single shift processing at the new plant. Seaboard anticipates buying additional hog inventory and related assets during 2016 to fulfill the remaining amount of such hog supply commitment.

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, the Caribbean and Asia. Seaboard integrates the delivery of commodities to its customers through the use of company-owned and short-term chartered bulk carriers.

6 2015 Annual Report


 

Table of Contents

SEABOARD CORPORATION

Division Summaries

 

Seaboard’s Commodity Trading and Milling Division operates facilities in 28 countries. The commodity trading business has ten offices in nine countries, in addition to four non-consolidated affiliates in three other countries. The grain processing businesses operate facilities at 35 locations in 21 countries, and include 5 consolidated and 19 non-consolidated affiliates primarily in Africa, South America, the Caribbean and Asia. 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.

Marine Division

Seaboard’s Marine Division provides cargo shipping services between the U.S., 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 PortMiami. 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, Philadelphia, Pennsylvania, 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 PortMiami. 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 U.S., Canada, Latin America and the Caribbean Basin to sell freight at 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, which it uses to produce refined sugar and alcohol. The sugar is primarily marketed locally, with some exports to the U.S. 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, natural gas and other biomass when available.

Power Division

In the Dominican Republic, Seaboard is an independent power producer generating electricity for the local power grid from an owned floating power generating facility with a capacity to generate 108 megawatts. Seaboard primarily sells power on the spot market and is not directly involved in the transmission or distribution of electricity. Principal buyers are government-owned distribution companies and partially government-owned generation companies. In addition, Seaboard has a 29.9% noncontrolling interest in a business operating a 300 megawatt electricity generating facility in the Dominican Republic.

Other Divisions

Seaboard has a 50% noncontrolling 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 U.S. Butterball has four processing plants, three further processing plants and numerous live production and feed milling operations located in North Carolina, Arkansas, Missouri, Illinois and Kansas. Butterball produces over 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 U.S.

 

 

2015 Annual Report   7


 

Table of Contents

SEABOARD CORPORATION

Summary of Selected Financial Data

 

      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

(Millions of dollars except per share amounts)

    

2015

    

2014

    

2013

    

2012

    

2011

 

Net sales

 

$

5,594

 

$

6,473

 

$

6,670

 

$

6,189

 

$

5,747

 

Operating income

 

$

126

 

$

424

 

$

204

 

$

310

 

$

407

 

Net earnings attributable to Seaboard

 

$

171

 

$

367

 

$

212

 

$

287

 

$

349

 

Basic earnings per common share

 

$

146.44

 

$

311.44

 

$

177.53

 

$

238.24

 

$

287.28

 

Total assets

 

$

4,431

 

$

3,692

 

$

3,431

 

$

3,354

 

$

3,008

 

Long-term debt, less current maturities

 

$

518

 

$

 —

 

$

80

 

$

121

 

$

116

 

Stockholders’ equity

 

$

2,882

 

$

2,735

 

$

2,493

 

$

2,314

 

$

2,081

 

Dividends per common share

 

$

 —

 

$

 —

 

$

 —

 

$

12.00

 

$

 —

 

In the above table, prior years’ net earnings attributable to Seaboard, basic earnings per common share, total assets and stockholders’ equity have been adjusted to reflect the second quarter 2015 increased investment in a Power segment business, previously accounted for as a cost method investment, but retrospectively adjusted to reflect the equity method of accounting from the date of the initial investment. The impact was not material in any year presented as previously reported. See Note 1 to the Consolidated Financial Statements for further discussion.

In the fourth quarter of 2015, Seaboard recorded interest income of $23 million, net of taxes ($31 million before taxes), or $19.49 per common share, for interest recognized on certain outstanding customer receivable balances in its Power segment. This interest income related to amounts determined to be collectible as of December 31, 2015, but previously had been considered uncollectable in prior years. This amount was fully collected by Seaboard in January 2016.

As of September 27, 2014, Seaboard’s Pork segment sold to Triumph Foods, LLC a 50% interest in Daily’s Premium Meats. Included in net earnings attributable to Seaboard for 2014 is a gain on sale of controlling interest in subsidiary of $40 million, net of taxes ($66 million gain before taxes), or $34.14 per common share.

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 $8 million 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 million, 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 these transactions.

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 2016. Seaboard did not declare a dividend in 2015, 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 $53 million, or $43.56 per common share, included in operating income. There was no tax expense on this transaction.

 

 

 

8 2015 Annual Report


 

Table of Contents

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 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, 2010 and ending December 31, 2015. The information presented in the performance graph is historical in nature and is not intended to represent or guarantee future returns.

 

 

 

Picture 5

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

12/31/10

    

12/31/11

    

12/31/12

    

12/31/13

    

12/31/14

    

12/31/15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seaboard Corporation

 

$

100.00

 

$

102.26

 

$

127.70

 

$

141.08

 

$

211.90

 

$

146.12

 

NYSE MKT Composite

 

$

100.00

 

$

104.50

 

$

110.18

 

$

118.63

 

$

120.72

 

$

107.77

 

Peer Group

 

$

100.00

 

$

115.07

 

$

124.00

 

$

166.58

 

$

186.65

 

$

202.53

 

 

 

 

 

2015 Annual Report   9


 

Table of Contents

SEABOARD CORPORATION

Quarterly Financial Data (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(UNAUDITED)

 

1st

 

2nd

 

3rd

 

4th

 

Total for

 

(Millions of dollars except per share amounts)

    

Quarter

    

Quarter

    

Quarter

    

Quarter

    

the Year

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,452

 

$

1,428

 

$

1,411

 

$

1,303

 

$

5,594

 

Operating income

 

$

28

 

$

32

 

$

23

 

$

43

 

$

126

 

Net earnings attributable to Seaboard

 

$

33

 

$

32

 

$

3

 

$

103

 

$

171

 

Earnings per common share

 

$

28.11

 

$

27.04

 

$

2.59

 

$

88.70

 

$

146.44

 

Dividends per common share

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Closing market price range per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

$

4,640.00

 

$

4,005.00

 

$

3,675.00

 

$

3,441.00

 

 

 

 

Low

 

$

3,705.00

 

$

3,253.00

 

$

2,971.95

 

$

2,892.00

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,480

 

$

1,694

 

$

1,623

 

$

1,676

 

$

6,473

 

Operating income

 

$

65

 

$

135

 

$

96

 

$

128

 

$

424

 

Net earnings attributable to Seaboard

 

$

49

 

$

94

 

$

105

 

$

119

 

$

367

 

Earnings per common share

 

$

41.09

 

$

79.28

 

$

89.83

 

$

101.72

 

$

311.44

 

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

 

 

 

 

 

In the above table, net earnings attributable to Seaboard and earnings per common share have been adjusted to reflect the second quarter 2015 increased investment in a Power segment business, previously accounted for as a cost method investment, but retrospectively adjusted to reflect the equity method of accounting from the date of the initial investment.  The impact was not material in any quarter of 2014 or to the first quarter of 2015 as previously reported.

On December 18, 2015, the Protecting Americans from Tax Hikes Act of 2015 (the “2015 Tax Act”) was signed into law. The 2015 Tax Act reinstated and made permanent certain expired corporate income tax provisions that impact current and deferred taxes for financial reporting purposes. The annual effects of the provisions in the new law on current and deferred tax assets and liabilities for Seaboard were recorded in the fourth quarter of 2015. The impact was a tax benefit of $13 million, or $10.92 per common share, primarily related to certain income tax credits. In addition to this amount was a credit of $17 million, or $14.88 per common share, for the 2015 Federal blender’s credits (extended by the 2015 Tax Act through December 31, 2016) that was recognized as revenues in the fourth quarter of 2015. There was no tax expense on these transactions.

In the fourth quarter of 2015, Seaboard recorded interest income of $23 million, net of taxes ($31 million before taxes), or $19.49 per common share, for interest recognized on certain outstanding customer receivable balances in its Power segment. This interest income related to amounts determined to be collectible as of December 31, 2015, but previously had been considered uncollectable in prior years. This amount was fully collected by Seaboard in January 2016.

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 million, or $9.75 per common share, primarily related to certain income tax credits. In addition to this amount was a credit of $15 million, 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 these transactions.

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 million and $1 million, respectively, net of taxes ($66 million total gain before taxes), or $33.56 per common share and $0.82 per common share, respectively.

No dividends were paid during 2015 or 2014 as they were declared and prepaid in December 2012. During 2015, Seaboard did not repurchase any common shares. During 2014, Seaboard repurchased 1,667 and 16,738 common shares in the first and second quarters, respectively.

 

 

 

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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 20,500 hogs, and a ham boning and processing plant in Mexico. In 2015, Seaboard raised approximately 76% of the hogs processed at the Guymon plant, with the remaining hog requirements purchased primarily under contracts from independent producers. This segment is Seaboard’s most capital intensive segment, representing approximately 48% 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.

The Pork segment has a 50% noncontrolling interest in Daily’s Premium Meats (“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, and a third plant under construction in St. Joseph, Missouri, expected to commence operations in mid-2016. Seaboard and Triumph each supply raw product to Daily’s.

On May 13, 2015, Seaboard’s Pork segment and Triumph entered into a new joint venture, Seaboard Triumph Foods, LLC, which is constructing a new pork processing facility in Sioux City, Iowa. Construction is expected to be completed by mid-2017. The plant is designed to process about three million market hogs annually operating a single shift. As part of the operations, Seaboard’s Pork segment agreed to provide a portion of the hogs to be processed at the facility. In February 2016, the Pork segment, in combination with a newly formed limited liability partnership that will be consolidated with Seaboard, acquired hog inventory and related assets in the Central U.S. that are expected to increase Seaboard’s hog production capacity to meet the majority of such hog supply commitment for single shift processing at the new plant. Seaboard anticipates buying additional hog inventory and related assets during 2016 to fulfill the remaining amount of such hog supply.

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Management’s Discussion & Analysis

 

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, soybeans and, to a lesser degree, various other agricultural commodity products. Although this segment owns three 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 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 15% of Seaboard’s total working capital at December 31, 2015, 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, milling and agro-processing businesses.

Marine Segment

The Marine segment provides cargo shipping services primarily between the U.S. and 26 countries in the Caribbean Basin and Central and South America. Fluctuations in economic conditions and political instability in the regions or countries in which Seaboard operates 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, natural gas and other biomass when available. 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. Seaboard continues to explore various ways to improve and expand this segment, investing in efficiency improvements and production capacity increases. The Sugar segment plans to spend $42 million in 2016 primarily for increasing the milling capacity, effluent treatment, and irrigation projects.

Power Segment

The Power segment is an independent power producer in the Dominican Republic generating electricity from a system of diesel engines mounted on a floating power generating facility for the local power grid. Seaboard 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 Dominican Republic is determined by a government body and is subject to fluctuations based on government budgetary

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Management’s Discussion & Analysis

 

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. In 2015, Seaboard invested an additional $10 million in a business operating a 300 megawatt electricity generating facility in the Dominican Republic, increasing Seaboard’s ownership interest to 29.9%. See Note 4 to the Consolidated Financial Statements for further discussion. Seaboard may pursue further power industry investments in the future.

Turkey Segment

In December 2010, Seaboard purchased a 50% noncontrolling 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, three further processing plants and numerous live production and feed milling operations located in North Carolina, Arkansas, Missouri, Illinois and Kansas. Sales prices are directly 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, 2015 increased $777 million from December 31, 2014. The increase was primarily the result of net cash from proceeds related to issuance of long-term debt of $522 million, operating activities of $416 million, notes payable borrowings of $83 million and proceeds from sale of fixed assets of $48 million. Partially offsetting the increase was cash used for capital expenditures of $139 million, investments in affiliates of $119 million and purchase of long-term investments of $28 million. Cash from operating activities increased $42 million for 2015 primarily as a result of decreases in accounts receivable and increases in current liabilities, principally in the Commodity Trading and Milling segment, partially offset by lower net earnings.

Cash and short-term investments as of December 31, 2014 increased $181 million from December 31, 2013. The increase was primarily the result of net cash used for operating activities of $374 million, proceeds from sale of controlling interest in subsidiary of $74 million and increases in notes payable of $17 million. Partially offsetting the increase was cash used for capital expenditures of $121 million, principal payments of long-term debt of $91 million, repurchases of common stock of $53 million and investment in affiliates of $31 million. Cash from operating activities increased $249 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.

Capital Expenditures, Acquisitions and Other Investing Activities

During 2015, Seaboard invested $139 million in property, plant and equipment, of which $40 million was in the Pork segment, $40 million in the Commodity Trading and Milling segment and $43 million in the Marine segment. The Pork segment expenditures were primarily for improvements to existing facilities and related equipment and additional hog finishing barns. Of the Commodity Trading and Milling segment expenditures, $30 million was for the construction of dry bulk vessels, two of which were delivered and then sold and leased back by Seaboard at book value of $44 million in 2015. The Marine segment expenditures were primarily for purchases of cargo carrying and handling equipment and $8 million for the purchase of a containerized cargo vessel. 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 2016 capital expenditures budget is $232 million. The Pork segment plans to spend $73 million primarily for improvements to existing facilities and related equipment and additional hog finishing barns. The Commodity Trading and Milling segment plans to spend $68 million primarily for final payments of $29 million for two dry bulk vessels being built for a total estimated cost of $45 million, $24 million for a new wheat mill in Zambia, and other improvements to existing facilities and related equipment. However, Seaboard currently anticipates selling and leasing back the two 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. One vessel was delivered in January 2016, and the final vessel is expected to be delivered during the first half of 2016. The Marine segment has budgeted $47 million primarily for additional cargo carrying and handling equipment. In addition, management will be evaluating whether to purchase additional containerized cargo vessels for

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Management’s Discussion & Analysis

 

the Marine segment during 2016. The Sugar segment plans to spend $42 million primarily for increasing the milling capacity, effluent treatment, and irrigation projects. The balance of $2 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 2014, Seaboard invested $121 million in property, plant and equipment, of which $54 million was in the Pork segment, $21 million in the Commodity Trading and Milling segment and $29 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. 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.

During 2013, Seaboard invested $150 million in property, plant and equipment, of which $80 million was in the Pork segment, $24 million in the Commodity Trading and Milling segment, $23 million in the Marine segment, $17 million in the Sugar segment and $4 million in the Power segment. The Pork segment expenditures were primarily for additional finishing barns, semi-tractors, 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 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.

During the fourth quarter of 2015, Seaboard contributed $13 million in cash,  a small amount of other assets,  certain employees and rights to sell certain agricultural commodities that Seaboard had previously sold through its subsidiary, PS International, LLC, for a 40% noncontrolling interest in a commodity trading business in Atlanta, Georgia.

On May 13, 2015, Seaboard agreed to contribute to a new joint venture with Triumph up to $207 million to jointly develop and operate a pork processing facility in Sioux City, Iowa. As of December 31, 2015, $26 million had been contributed. Approximately $97 million is expected to be contributed in 2016, with the remainder due through 2019. The facility is expected to begin operations in mid-2017. As part of the operations, Seaboard agreed to provide a portion of the hogs to be processed at the facility. In February 2016, the Pork Segment, in combination with a newly formed limited liability partnership that will be consolidated with Seaboard, acquired hog inventory and related assets in the Central U.S. for a purchase price of $148 million that are expected to increase Seaboard’s hog production capacity to meet the majority of such hog supply commitment for single shift processing at the new plant. Seaboard anticipates buying additional hog inventory and related assets during 2016 to fulfill the remaining amount of such hog supply commitment.

In the second quarter of 2015, Seaboard invested $10 million in a business operating a 300 megawatt electricity generating facility in the Dominican Republic, increasing Seaboard’s ownership interest to 29.9%. See Note 4 to the Consolidated Financial Statements for further discussion.

Also, in the second quarter of 2015, Seaboard invested $8 million in a flour milling business in Botswana for a 49% noncontrolling interest and $10 million for a 45% noncontrolling interest in a commodity trading and flour milling business in Uruguay. In March 2015, Seaboard invested $10 million in an oilseed crushing business in the Republic of Turkey for a 25% noncontrolling interest. In the second quarter of 2015, Seaboard also invested $18 million for a 12% noncontrolling interest in a grain trading and poultry business in Morocco, which is accounted for using the cost method.

During the second quarter of 2015, Seaboard provided an additional $4 million short-term loan to a port project in Haiti consisting primarily of a marine terminal operation, electric power generating plant and free trade zone development. This loan, which totals $8 million when combined with the $4 million loaned in 2014, is convertible into equity by Seaboard once certain business operating conditions are met in Haiti. Seaboard does anticipate these conditions being met in 2016, at which time it intends to convert the loan to equity and invest an additional $7 million for a total minority equity investment of less than 25%.

In February 2015, Seaboard committed to invest in a limited liability company that operates 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 between

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Management’s Discussion & Analysis

 

$4 million and $9 million per year until 2021, for a total estimate of approximately $53 million. Seaboard invested $9 million in this company during 2015.

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 million. In September 2014, Seaboard invested $17 million in a cargo terminal business in Jamaica for a 21% noncontrolling interest. See Note 4 to the Consolidated Financial Statements for further discussion.

In September 2013, Seaboard invested $17 million in a flour production business in Brazil for a 50% noncontrolling equity interest and provided a $13 million long-term loan to this business. During 2015, Seaboard provided $28 million of additional investments and advances to this business. See Note 4 to the Consolidated Financial Statements for further discussion. Also in September 2013, Seaboard invested $7 million in a flour milling business located in South Africa for a 49% noncontrolling interest. In July 2013, Seaboard acquired a 50% noncontrolling interest in a flour milling business located in Gambia by making a total investment in and advances to this affiliate of $9 million during 2013.

On December 31, 2012, Seaboard provided a loan of $81 million to its non-consolidated affiliate, Butterball to fund its purchase of assets from Gusto Packing Company, Inc. On March 28, 2013, Butterball repaid in full this 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 (“DRC”) for a 50% noncontrolling interest in this business. During 2014 and 2013, Seaboard invested an additional $3 million and $5 million, respectively, in equity, long-term advances and long-term notes receivable for a total investment of $53 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.

Financing Activities, Debt and Related Covenants

The following table presents a summary of Seaboard’s available borrowing capacity as of December 31, 2015. At December 31, 2015, there were no committed lines of credit, and borrowings under the uncommitted lines of credit totaled $141 million, with all such borrowings related to foreign subsidiaries. See Note 7 to the Consolidated Financial Statements for further discussion.

 

 

 

 

 

 

 

 

 

 

 

    

Total amount

 

(Millions of dollars)

 

available

 

Short-term uncommitted demand notes

 

$

298

 

Amounts drawn against lines

 

 

(141)

 

Letters of credit reducing borrowing availability

 

 

(3)

 

Available borrowing capacity at December 31, 2015

 

$

154

 

On December 4, 2015, Seaboard’s wholly-owned subsidiary, Seaboard Foods LLC, obtained a $500 million unsecured term loan with a maturity date of December 4, 2022. In 2015, Seaboard’s Argentine subsidiary obtained long-term debt financing of $23 million, comprised of five loans denominated in Argentine pesos. See Note 7 to the Consolidated Financial Statements for further discussion.

In the fourth quarter of 2015, a $50 million foreign committed line expired, and Seaboard cancelled its $200 million long-term committed credit facility effective October 28, 2015. 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 $86 million was made on August 29, 2014. 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 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 $11 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 million in the first quarter of 2013.

As of December 31, 2015, Seaboard has capacity under existing loan covenants to undertake additional debt financings of approximately $1,581 million. As of December 31, 2015, 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.

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

As of December 31, 2015, Seaboard had cash and short-term investments of $1,304 million and additional total working capital of $594 million. Accordingly, management believes Seaboard’s combination of internally generated cash, liquidity, capital resources and borrowing capabilities will be adequate for its existing operations and any currently known potential plans for expansion of existing operations or business segments for 2016. 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, 2015, $281 million of the $1,304 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 and 8,705 common stock shares at a total price of $53 million and $24 million in 2014 and 2013, respectively. There was no common stock repurchased in 2015. See Note 11 to the Consolidated Financial Statements for further discussion. There were no dividends declared or paid in 2015, 2014 and 2013.

Contractual Obligations and Off-Balance Sheet Arrangements

The following table provides a summary of Seaboard’s contractual obligations as of December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

    

    

 

    

Less than

    

1-3

    

3-5

    

More than

 

(Millions of dollars)

 

Total

1 year

 

years

 

years

 

5 years

 

Vessel, time and voyage-charter commitments

 

$

186

 

$

51

 

$

45

 

$

44

 

$

46

 

Contract grower finishing agreements

 

 

29

 

 

11

 

 

16

 

 

2

 

 

 —

 

Other operating lease payments

 

 

321

 

 

28

 

 

54

 

 

49

 

 

190

 

Total lease obligations

 

 

536

 

 

90

 

 

115

 

 

95

 

 

236

 

Long-term debt

 

 

523

 

 

4

 

 

38

 

 

77

 

 

404

 

Other long-term liabilities

 

 

85

 

 

7

 

 

16

 

 

15

 

 

47

 

Short-term notes payable

 

 

141

 

 

141

 

 

 —

 

 

 —

 

 

 —

 

Interest payments

 

 

87

 

 

19

 

 

32

 

 

22

 

 

14

 

Investment in pork processing facility joint venture

 

 

181

 

 

97

 

 

68

 

 

16

 

 

 —

 

Other purchase commitments

 

 

853

 

 

669

 

 

150

 

 

34

 

 

 —

 

Total contractual cash obligations and commitments

 

$

2,406

 

$

1,027

 

$

419

 

$

259

 

$

701

 

The Marine and Commodity Trading and Milling segments enter into contracts to time-charter vessels for use in 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 third-party guarantees were not material as of December 31, 2015. See Note 10 to the Consolidated Financial Statements for 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, 2015.  

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Interest payments also include cash payments for interest on variable rate long-term debt based on interest rates as of December 31, 2015.

 

RESULTS OF OPERATIONS

Net sales for the years ended December 31, 2015, 2014 and 2013 were $5,594 million, $6,473 million and $6,670 million, respectively. The decrease for 2015 compared to 2014 primarily reflected lower prices for pork products sold and the deconsolidation of Daily’s in the Pork segment as discussed in Note 4 to the Consolidated Financial Statements, lower sales prices for almost all commodities sold and lower sales volume of corn for the Commodity Trading and Milling segment, and lower spot market rates and sales volume for the Power segment. The decreases were partially offset by higher cargo volumes for the Marine segment. The decrease 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.

Operating income for the years ended December 31, 2015, 2014 and 2013 were $126 million, $424 million and $204 million, respectively. The decrease for 2015 compared to 2014 primarily reflected lower prices for pork products sold, lower margins on commodity trades to third parties, and higher production costs for sugar and alcohol. The increase for 2014 compared to 2013 primarily reflected higher prices for pork products sold.

Pork Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

    

    

 

2015

    

2014

    

2013

 

Net sales

 

 

 

$

1,332

 

$

1,717

 

$

1,713

 

Operating income

 

 

 

$

116

 

$

349

 

$

148

 

Income from affiliates

 

 

 

$

11

 

$

4

 

$

 —

 

Net sales for the Pork segment decreased $385 million for the year ended December 31, 2015 compared to 2014. The decrease was primarily the result of lower prices for pork products sold and the deconsolidation of Daily’s. The decreases were partially offset by an increase in related sales volume.

Operating income decreased $233 million for the year ended December 31, 2015 compared to 2014. The decrease was primarily the result of lower prices for pork products and, to a lesser degree, the deconsolidation of Daily’s. Partially offsetting the decreases were lower costs for third party hogs and lower feed costs for hogs internally grown. In December 2015, the Federal blender’s credit that Seaboard is entitled to receive for biodiesel it blends was reinstated for 2015 and 2016, retroactive to January 1, 2015. As a result, the 2015 Federal blender’s credit of $17 million was recorded as revenues in the fourth quarter of 2015. See Note 12 to the Consolidated Financial Statements for further discussion of the Federal blender’s credit.

Management is unable to predict future market prices for pork products, the cost of feed or cost of third party hogs. However, management anticipates positive operating income for this segment in 2016, although lower than 2015.

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

Net sales for the Pork segment increased $4 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 were 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 million was recorded as revenues in the fourth quarter of 2014.

Operating income increased $201 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.

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

Commodity Trading and Milling Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

    

 

2015

    

2014

    

2013

 

Net sales

 

 

$

3,022

 

$

3,499

 

$

3,501

 

Operating income as reported

 

 

$

2

 

$

54

 

$

38

 

Mark-to-market adjustments

 

 

 

(5)

 

 

(13)

 

 

4

 

Operating income (loss) excluding mark-to-market adjustments

 

 

$

(3)

 

$

41

 

$

42

 

Loss from affiliates

 

 

$

(50)

 

$

(24)

 

$

(1)

 

Net sales for the Commodity Trading and Milling segment decreased $477 million for the year ended December 31, 2015 compared to 2014. The decrease primarily reflected lower sales prices for almost all commodities sold and, to a lesser extent, lower sales volume primarily for corn.

Operating income decreased $52 million for the year ended December 31, 2015, compared to 2014. The decrease primarily reflected certain unfavorable market conditions, which resulted in lower margins on commodity trades to third parties. The decrease also reflected an increase in bad debt expense primarily attributable to trade receivables with an affiliate in Brazil (See Note 4 to the Consolidated Financial Statements for further discussion) and fluctuations of $8 million of mark-to-market derivative contracts as discussed below. Excluding the effects of mark-to-market adjustments for derivatives contracts, operating income decreased $44 million.

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 2016, 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 2015 and 2014 would have been lower by $5 million and $13 million, respectively, and in 2013 higher by $4 million. While management believes its commodity futures, 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 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 2016. Management believes eliminating these mark-to-market adjustments 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, 2015 increased by $26 million from 2014. The increase primarily reflected operating and currency losses recorded against the investment and reserves for notes receivable and advances from an affiliate in Brazil totaling $60 million. Partially offsetting the increase was an $11 million write-down recorded in 2014 and a decrease in losses in 2015 compared to 2014 in a bakery business discussed below. Based on the uncertainty of local political and economic environments in the countries in which Seaboard’s affiliates operate, management cannot predict future results. However, management anticipates continuing losses from its affiliate in Brazil for 2016 although lower than 2015. See Note 4 to the Consolidated Financial Statements for further discussion of this affiliate.

Net sales for the Commodity Trading and Milling segment decreased $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 $16 million for the year ended December 31, 2014 compared to 2013. The increase primarily reflected fluctuations of $17 million of marking to market derivative contracts. Excluding the effects of mark-to-market adjustments for derivatives contracts as discussed above, operating income decreased $1 million. The decrease primarily reflected recoveries of $5 million in 2013 of inventory write-downs for customer contract performance issues recognized in prior years partially offset by improved operation income at certain milling locations.

Loss from affiliates for the year ended December 31, 2014 increased by $23 million from 2013. The increase primarily reflected a $11 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 DRC and losses incurred in 2014 from an

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

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.

Marine Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

    

 

2015

    

2014

    

2013

 

Net sales

 

 

$

940

 

$

853

 

$

914

 

Operating income (loss)

 

 

$

19

 

$

(3)

 

$

(26)

 

Income from affiliate

 

 

$

2

 

$

 —

 

$

 —

 

Net sales for the Marine segment increased $87 million for the year ended December 31, 2015 compared to 2014. The increase was primarily the result of higher cargo volumes, partially offset by lower cargo rates in certain markets during 2015 compared to 2014.

Operating income increased $22 million for the year ended December 31, 2015 compared to 2014. The increase was primarily the result of lower voyage costs, principally fuel costs, on a per unit shipped basis, partially offset by lower cargo rates. Management cannot predict changes in future cargo volumes, cargo rates and fuel costs, or to what extent changes in economic conditions in markets served will affect net sales or operating income during 2016. However, management anticipates this segment will have positive operating income for 2016.

Net sales for the Marine segment decreased $61 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 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.

Sugar Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

    

 

2015

    

2014

    

2013

 

Net sales

 

 

$

188

 

$

200

 

$

245

 

Operating income

 

 

$

2

 

$

27

 

$

24

 

Income from affiliates

 

 

$

1

 

$

1

 

$

1

 

Net sales for the Sugar segment decreased $12 million for the year ended December 31, 2015 compared to 2014. The decrease primarily reflected lower volumes of sugar sold. Sugar and alcohol sales are denominated in Argentine pesos and an increase in local sales prices in terms of U.S. dollars were principally offset by exchange rate changes as the Argentine peso continued to weaken against the U.S. dollar in 2015. Management cannot predict local sugar and alcohol prices for 2016, but management anticipates that the Argentine peso will continue to weaken against the U.S. dollar based on the devaluation of the Argentine peso in December 2015, which should result in lower sale prices in terms of U.S. dollars in 2016. Also, see Note 12 to the Consolidated Financial Statements for discussion of this devaluation’s impact on stockholders’ equity in the first quarter of 2016.

Operating income decreased $25 million for the year ended December 31, 2015 compared to 2014. The decrease primarily reflected higher production costs for sugar and alcohol. To a lesser extent, the decrease in operating income was also the result of higher selling, general and administrative expenses principally from increased personnel related costs and lower volume of sugar sold. Also, operating income in 2014 included a $4 million gain as discussed below. Based on recent market conditions, management currently cannot predict if this segment will be profitable for 2016.

Net sales for the Sugar segment decreased $45 million for the year ended December 31, 2014 compared to 2013. The decrease primarily reflected lower volumes for sugar 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 were primarily the result of the exchange rate changes as the Argentine peso continued to weaken against the U.S, dollar in 2014.

Operating income increased $3 million for the year ended December 31, 2014 compared to 2013. The increase primarily represents a $4 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

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Management’s Discussion & Analysis

 

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.

Power Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

    

 

2015

    

2014

    

2013

 

Net sales

 

 

$

97

 

$

189

 

$

284

 

Operating income

 

 

$

7

 

$

19

 

$

43

 

Income from affiliate

 

 

$

3

 

$

2

 

$

6

 

Net sales for the Power segment decreased $92 million for the year ended December 31, 2015 compared to 2014. The decrease primarily reflected lower spot market rates and lower volumes. The lower spot market rates were attributable primarily to lower fuel costs, a component of pricing. The lower volumes were 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 $12 million for the year ended December 31, 2015 compared to 2014. The decrease primarily reflected lower spot market rates and lower volumes, partially offset by lower fuel costs per kilowatt hour generated and lower other production costs. Also, operating income in 2014 included a gain on sale of assets of $5 million as noted below. 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 2016.

Net sales for the Power segment decreased $95 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.

Operating income decreased $24 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 million as discussed in Note 12 to the Consolidated Financial Statements.

Turkey Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

    

 

2015

    

2014

    

2013

 

Income (loss) from affiliate

 

 

$

103

 

$

54

 

$

(10)

 

The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball. The increase in income from affiliate for 2015 compared to 2014 was primarily the result of lower feed costs and higher prices of turkey products sold. Management is unable to predict future market prices for turkey products, the cost of feed or the impact from avian influenza. However, management anticipates positive income for this segment in 2016.

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 $4 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.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the year ended December 31, 2015 increased by $16 million over 2014 to $270 million. The increase was primarily the result of bad debt expense in the Commodity Trading and Milling segment and increased personnel related costs in most segments. As a percentage of revenues, SG&A increased to 5% for 2015 compared to 4% for 2014.

SG&A expenses for the year ended December 31, 2014 decreased by $10 million over 2013 to $254 million. The decrease was primarily the result of lower expenses for the Sugar segment from exchange rate changes discussed above and lower bad debt expense. As a percentage of revenues, SG&A was 4% for 2014 and 2013.

Interest Expense

Interest expense totaled $18 million, $20 million and $11 million for the years ended December 31, 2015, 2014 and 2013, respectively. The decrease in 2015 compared to 2014 primarily related to a $4 million charge in 2014 as discussed below. The increase in 2014 compared to 2013 primarily reflected higher interest rates on notes payable related to

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

foreign subsidiaries and a $4 million charge for early payment of debt as discussed in Note 7 to the Consolidated Financial Statements.

Interest Income

Interest income totaled $40 million, $14 million and $18 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increase for 2015 compared to 2014 primarily reflected an increase in interest recognized on outstanding customer receivable balances in the Power segment. See Note 12 to the Consolidated Financial Statements for further discussion. The decrease for 2014 compared to 2013 primarily reflected a decrease in interest received on outstanding customer receivable balances in the Power segment.

Interest Income from Affiliates

Interest income from affiliates totaled $29 million, $27 million and $25 million for the years ended December 31, 2015, 2014 and 2013, respectively. The increases primarily represented additional interest income from the Butterball note receivable related to the pay-in-kind interest component.

Other Investment Income (Loss), Net

Other investment income (loss), net totaled $(5) million,  $2 million and $8 million for the years ended December 31, 2015, 2014 and 2013, respectively. The decrease for 2015 compared to 2014 primarily reflects Seaboard’s losses associated with its investment in a refined coal processing plant, of which a portion are offset by tax credits in income tax expense. The fluctuation from 2014 to 2013 primarily reflects mark-to-market fluctuations from investments, especially high yield trading debt securities.

Foreign Currency Gains (Losses), Net

Foreign currency gains (losses), net totaled $1 million, $(9) million and $0 million for the years ended December 31, 2015, 2014 and 2013, respectively. The decrease in foreign currency losses, net in 2015 compared to 2014 primarily reflect gains in the South African rand, partially offset during the year by fluctuations of other currency exchange rates in several foreign countries. 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, Zambian kwacha and South African rand. The political and economic conditions of the countries in which Seaboard operates and does business, 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 that cannot be predicted by Seaboard. Although Seaboard does not utilize hedge accounting, Seaboard does utilize foreign currency exchange contracts to manage its risks and exposure to foreign currency fluctuations primarily related to the South African rand. Management believes gains and losses on commodity transactions, including the mark-to-market effects, of such foreign currency contracts relate to the underlying commodity transactions and classifies such gains and losses in cost of sales. All other gains and losses on foreign currency exchange agreements are included in foreign currency gains (losses), net.

Gain on Sale of Controlling Interest in Subsidiary

During the third quarter of 2014, Seaboard’s Pork segment sold to Triumph a 50% interest in Daily’s resulting in a pre-tax gain of $66 million. See Note 4 to the Consolidated Financial Statements for further discussion.

Miscellaneous, Net

Miscellaneous, net totaled $(2) million, $(5) million and $6 million for the years ended December 31, 2015, 2014 and 2013, respectively. Miscellaneous, net primarily reflected mark-to-market fluctuations on interest rate exchange agreements.

Income Tax Expense

The effective tax rate for 2015 was lower than 2014 primarily due to a change in the mix of domestic and foreign earnings from prior year. 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 in Note 6 to the Consolidated Financial Statements.

OTHER FINANCIAL INFORMATION

See Note 1 to the Consolidated Financial Statements for a discussion of recently issued accounting standards. Management does not believe its businesses have been materially adversely affected by inflation.

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

CRITICAL ACCOUNTING ESTIMATES

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S. 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.

Allowance for Doubtful Accounts – Seaboard primarily uses a specific identification approach 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 ($356 million or 73% at December 31, 2015), including foreign receivables due from affiliates ($81 million at December 31, 2015), 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. 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. For example, the Commodity Trading and Milling segment has an investment in a non-consolidated affiliate in Brazil that resulted in a $9 million bad debt expense for Seaboard in 2015. See Note 12 to the Consolidated Financial Statements for further discussion. Bad debt expense for the years ended December 31, 2015, 2014 and 2013 was $13 million, $0 million and $3 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 property, plant and equipment 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 noncontrolling interest and are accounted for using the equity method. In addition, for some of these investments, Seaboard also has notes receivable for loans it 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

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SEABOARD CORPORATION

Management’s Discussion & Analysis

 

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 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 $22 million reserve recorded in loss from affiliates in 2015 related to its investment in a flour production business in Brazil and its $11 million write-down recorded in loss from affiliates in 2014 related to its investment in a bakery located in the DRC.

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, 2015, Seaboard had deferred tax assets of $153 million, net of the valuation allowance of $19 million, and deferred tax liabilities of $194 million. For the years ended December 31, 2015, 2014 and 2013, income tax expense included $(9) million, $25 million and $35 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 $3 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% corridor and, therefore, could affect Seaboard’s recognized pension expense in such future periods, as permitted under U.S. generally accepted accounting principles (“GAAP”). Accordingly, accumulated gains or losses in excess of the 10% 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

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Management’s Discussion & Analysis

 

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, 2015 and 2014, are presented in Note 3 to the Consolidated Financial Statements. Raw material requirements, finished product sales and firm sales commitments are also sensitive to changes in commodity prices.

Because changes in foreign currency exchange rates affect the cash paid or received on foreign currency denominated receivables and payables, Seaboard manages certain of these risks through the use of foreign currency forward exchange agreements. Changes in interest rates affect the cash required to service variable rate debt. Seaboard uses interest rate swaps to manage risks of increasing interest rates.

During 2014, Seaboard initially put into place four, approximately eight-year interest rate exchange agreements with mandatory early termination dates in the second half of 2014 and early 2015 for one of the agreements. During 2014 and 2015, these agreements were terminated and replaced, each with a mandatory early termination date, which coincided with the revised anticipated delivery dates in 2015 and 2016 of dry bulk vessels to be leased, and have similar terms as the original agreements terminated. Payments made by Seaboard to unwind these agreements were not material. The two exchange agreements, still outstanding as of December 31, 2015, 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 2016. Seaboard pays a fixed rate and receives a variable rate of interest on the notional amounts of $22 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 million each. All five of these interest rate exchange agreements outstanding as of December 31, 2015, 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% change in market prices, foreign exchange rates and interest rates as of December 31, 2015 and December 31, 2014. 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

    

December 31, 2015

    

December 31, 2014

 

Grains and oilseeds

 

$

12

 

$

8

 

Hogs

 

 

2

 

 

2

 

Energy related resources

 

 

 —

 

 

1

 

Vegetable oils

 

 

 —

 

 

1

 

Foreign currencies

 

 

13

 

 

19

 

Interest rates

 

 

1

 

 

1

 

 

The table below provides information about Seaboard’s non-trading financial instruments sensitive to changes in interest rates at December 31, 2015. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. At December 31, 2015, long-term debt included foreign subsidiary obligations payable in Argentine Pesos of $23 million. There was no long-term debt outstanding at December 31, 2014. 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Millions of dollars)

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

Thereafter

 

 

Total

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable rate

 

$

4

 

$

17

 

$

21

 

$

34

 

$

43

 

$

404

 

$

523

 

Average interest rate

 

 

9.58%

 

 

9.57%

 

 

8.93%

 

 

6.70%

 

 

6.00%

 

 

1.92%

 

 

3.16%

 

 

 

 

 

24 2015 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 the Securities Exchange Act of 1934 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, 2015.

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.

 

 

2015 Annual Report   25


 

Table of Contents

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, 2015 and 2014 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, 2015. 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, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, 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, 2015, 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 25, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

 

 

Picture 2

 

 

Kansas City, Missouri

February 25, 2016

26 2015 Annual Report


 

Table of Contents

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, 2015, 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, 2015, 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, 2015 and 2014, 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, 2015, and our report dated February 25, 2016 expressed an unqualified opinion on those consolidated financial statements.

 

 

 

Picture 1

 

 

Kansas City, Missouri

 

February 25, 2016

 

 

 

 

 

2015 Annual Report   27


 

SEABOARD CORPORATION

Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

(Millions of dollars except share and per share amounts)

 

2015

    

2014

    

2013

 

Net sales:

 

 

 

 

 

 

 

 

 

 

Products (includes sales to affiliates of $835, $846 and $745)

 

$

4,515

 

$

5,373

 

$

5,431

 

Services revenues

 

 

973

 

 

906

 

 

953

 

Other

 

 

106

 

 

194

 

 

286

 

Total net sales

 

 

5,594

 

 

6,473

 

 

6,670

 

Cost of sales and operating expenses:

 

 

 

 

 

 

 

 

 

 

Products

 

 

4,244

 

 

4,818

 

 

5,090

 

Services

 

 

866

 

 

813

 

 

878

 

Other

 

 

88

 

 

164

 

 

234

 

Total cost of sales and operating expenses

 

 

5,198

 

 

5,795

 

 

6,202

 

Gross income

 

 

396

 

 

678

 

 

468

 

Selling, general and administrative expenses

 

 

270

 

 

254

 

 

264

 

Operating income

 

 

126

 

 

424

 

 

204

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(18)

 

 

(20)

 

 

(11)

 

Interest income

 

 

40

 

 

14

 

 

18

 

Interest income from affiliates

 

 

29

 

 

27

 

 

25

 

Income (loss) from affiliates

 

 

70

 

 

37

 

 

(4)

 

Other investment income (loss), net

 

 

(5)

 

 

2

 

 

8

 

Foreign currency gains (losses), net

 

 

1

 

 

(9)

 

 

 —

 

Gain on sale of controlling interest in subsidiary

 

 

 —

 

 

66

 

 

 —

 

Miscellaneous, net

 

 

(2)

 

 

(5)

 

 

6

 

Total other income, net

 

 

115

 

 

112

 

 

42

 

Earnings before income taxes

 

 

241

 

 

536

 

 

246

 

Income tax expense

 

 

(69)

 

 

(168)

 

 

(32)

 

Net earnings

 

$

172

 

$

368

 

$

214

 

Less: Net income attributable to noncontrolling interests

 

 

(1)

 

 

(1)

 

 

(2)

 

Net earnings attributable to Seaboard

 

$

171

 

$

367

 

$

212

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

$

146.44

 

$

311.44

 

$

177.53

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of income tax benefit of $0, $27 and $(10):

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(34)

 

 

(39)

 

 

(46)

 

Unrealized gain (loss) on investments

 

 

 —

 

 

1

 

 

(1)

 

Unrecognized pension cost

 

 

9

 

 

(33)

 

 

37

 

Other comprehensive loss, net of tax

 

$

(25)

 

$

(71)

 

$

(10)

 

Comprehensive income (loss)

 

 

147

 

 

297

 

 

204

 

Less: Comprehensive loss (income) attributable to the noncontrolling interests

 

 

(1)

 

 

(1)

 

 

(2)

 

Comprehensive income (loss) attributable to Seaboard

 

$

146

 

$

296

 

$

202

 

 

 

 

 

 

 

 

 

 

 

 

Average number of shares outstanding

 

 

1,170,550

 

 

1,178,441

 

 

1,193,801

 

See accompanying notes to consolidated financial statements.

 

 

 

28 2015 Annual Report


 

SEABOARD CORPORATION

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

December 31,

 

(Millions of dollars except share and per share amounts)

 

2015

    

2014

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

50

 

$

36

 

Short-term investments

 

 

1,254

 

 

491

 

Receivables:

 

 

 

 

 

 

 

Trade

 

 

330

 

 

328

 

Due from affiliates

 

 

86

 

 

202

 

Other

 

 

115

 

 

116

 

Total receivables

 

 

531

 

 

646

 

Allowance for doubtful accounts

 

 

(21)

 

 

(12)

 

Net receivables

 

 

510

 

 

634

 

Inventories

 

 

739

 

 

736

 

Deferred income taxes

 

 

 —

 

 

46

 

Other current assets

 

 

111