SEABOARD CORP /DE/ - Quarter Report: 2013 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

{ X }

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 30, 2013

 

OR

 

{    }

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from

to

 

Commission File Number 1-3390

 

(Exact name of registrant as specified in its charter)

 

Delaware				04-2260388
(State or other jurisdiction of			(I.R.S. Employer Identification No.)
incorporation or organization)

 

9000 W. 67th Street, Shawnee Mission, Kansas		66202
(Address of principal executive offices)		(Zip Code)

 

	(913) 676-8800
(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  X   No ___

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  X   No ___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ___   No  X .

 

There were 1,196,924 shares of common stock, $1.00 par value per share, outstanding on April 19, 2013.

 

1

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Thousands of dollars except share and per share amounts)

(Unaudited)

 

					Three Months Ended
					March 30,						March 31,
					2013						2012
Net sales:
Products (includes sales to affiliates of $182,535 and $168,348)					$	1,263,273					$	1,190,822
Service revenues					246,012						244,755
Other					73,011						35,536
Total net sales					1,582,296						1,471,113
Cost of sales and operating expenses:
Products					1,171,702						1,067,965
Services					224,995						220,517
Other					58,693						28,037
Total cost of sales and operating expenses					1,455,390						1,316,519
Gross income					126,906						154,594
Selling, general and administrative expenses					63,448						61,238
Operating income					63,458						93,356
Other income (expense):
Interest expense					(2,392)						(1,707)
Interest income					4,089						2,119
Interest income from affiliates					6,155						5,217
Income (loss) from affiliates					(2,850)						9,569
Other investment income, net					2,186						3,459
Foreign currency gains (losses), net					(1,145)						3,264
Miscellaneous, net					822						1,349
Total other income, net					6,865						23,270
Earnings before income taxes					70,323						116,626
Income tax expense					(12,566)						(34,626)
Net earnings					$	57,757					$	82,000
Less: Net loss (income) attributable to noncontrolling interests					(303)						209
Net earnings attributable to Seaboard					$	57,454					$	82,209
Earnings per common share		$	47.98					$	68.00
Other comprehensive income (loss), net of income tax benefit of $2,601 and $813:
Foreign currency translation adjustment					(6,122)						460
Unrealized gain on investments					429						1,484
Unrealized loss on cash flow hedges					-						(91)
Unrecognized pension cost					1,192						1,077
Other comprehensive income (loss), net of tax					$	(4,501)					$	2,930
Comprehensive income					53,256						84,930
Less: Comprehensive loss (income) attributable to the noncontrolling interest					(297)						153
Comprehensive income attributable to Seaboard					$	52,959					$	85,083
Average number of shares outstanding					1,197,516						1,208,905

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Thousands of dollars)

(Unaudited)

 

		March 30,			December 31,
		2013			2012
Assets
Current assets:
Cash and cash equivalents		$	43,285		$	47,651
Short-term investments		350,802			313,379
Receivables, net of allowance		500,517			521,892
Inventories		842,464			756,864
Deferred income taxes		24,586			24,586
Other current assets		117,481			118,391
Total current assets		1,879,135			1,782,763
Net property, plant and equipment		848,879			843,879
Investments in and advances to affiliates		404,322			410,542
Notes receivable from affiliate		124,811			202,931
Goodwill		43,218			43,218
Other intangible assets, net		19,364			19,843
Other assets		48,605			44,605
Total assets		$	3,368,334		$	3,347,781
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable to banks		$	51,571		$	28,786
Current maturities of long-term debt		22,927			25,138
Accounts payable		173,250			217,041
Deferred revenue		76,950			53,811
Deferred revenue from affiliates		17,183			24,131
Other current liabilities		316,079			327,668
Total current liabilities		657,960			676,575
Long-term debt, less current maturities		109,898			120,825
Deferred income taxes		29,992			33,929
Other liabilities and deferred credits		209,421			208,263
Total non-current liabilities		349,311			363,017
Commitments and contingent liabilities
Stockholders’ equity:
Common stock of $1 par value, Authorized 1,250,000 shares; issued and outstanding 1,197,513 and 1,197,660 shares		1,198			1,198
Accumulated other comprehensive loss		(176,045)			(171,544)
Retained earnings		2,531,983			2,474,896
Total Seaboard stockholders’ equity		2,357,136			2,304,550
Noncontrolling interests		3,927			3,639
Total equity		2,361,063			2,308,189
Total liabilities and stockholders’ equity		$	3,368,334		$	3,347,781

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Thousands of dollars)

(Unaudited)

 

		Three Months Ended
		March 30,			March 31,
		2013			2012
Cash flows from operating activities:
Net earnings		$	57,757		$	82,000
Adjustments to reconcile net earnings to cash from operating activities:
Depreciation and amortization		23,071			21,136
Gain from sale of fixed assets		(4,255)			(1,861)
Deferred income taxes		(1,336)			(1,291)
Pay-in-kind interest and accretion on note receivable from affiliate		(3,111)			(2,818)
Loss (income) from affiliates		2,850			(9,569)
Dividends received from affiliates		10,692			307
Other investment income, net		(2,186)			(3,459)
Other		(58)			840
Changes in assets and liabilities, net of business acquired:
Receivables, net of allowance		17,021			(36,015)
Inventories		(89,551)			(2,707)
Other current assets		2,416			3,910
Current liabilities, exclusive of debt		(37,193)			(27,600)
Other, net		2,824			3,989
Net cash from operating activities		(21,059)			26,862
Cash flows from investing activities:
Purchase of short-term investments		(212,621)			(237,924)
Proceeds from the sale of short-term investments		174,596			194,330
Proceeds from the maturity of short-term investments		756			9,816
Investments in and advances to affiliates, net		(7,865)			(3,631)
Capital expenditures		(34,888)			(28,969)
Proceeds from the sale of fixed assets		6,264			2,669
Principal payments received on long-term notes receivable from affiliate		81,231			564
Purchase of long-term investments		(2,578)			(2,046)
Acquisition of business, net of cash acquired		-			(2,825)
Other, net		2,878			176
Net cash from investing activities		7,773			(67,840)
Cash flows from financing activities:
Notes payable to banks, net		22,911			23,364
Proceeds from the issuance of long-term debt		-			5,476
Principal payments of long-term debt		(13,131)			(112)
Repurchase of common stock		(367)			(6,335)
Other, net		(748)			104
Net cash from financing activities		8,665			22,497
Effect of exchange rate change on cash		255			24
Net change in cash and cash equivalents		(4,366)			(18,457)
Cash and cash equivalents at beginning of year		47,651			71,510
Cash and cash equivalents at end of period		$	43,285		$	53,053

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

SEABOARD CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note 1 – Accounting Policies and Basis of Presentation

 

The Condensed Consolidated Financial Statements include the accounts of Seaboard Corporation and its domestic and foreign subsidiaries (“Seaboard”).  All significant intercompany balances and transactions have been eliminated in consolidation.  Seaboard’s investments in non-consolidated affiliates are accounted for by the equity method.  The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of Seaboard for the year ended December 31, 2012 as filed in its Annual Report on Form 10-K.  Seaboard’s first three quarterly periods include approximately 13 weekly periods ending on the Saturday closest to the end of March, June and September.  Seaboard’s year-end is December 31.

 

The accompanying unaudited Condensed Consolidated Financial Statements include all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows.  Results of operations for interim periods are not necessarily indicative of results to be expected for a full year.  As Seaboard conducts its commodity trading business with third parties, consolidated subsidiaries and non-consolidated affiliates on an interrelated basis, gross margin on non-consolidated affiliates cannot be clearly distinguished without making numerous assumptions primarily with respect to mark-to-market accounting for commodity derivatives.

 

Use of Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period.  Significant items subject to such estimates and assumptions include those related to allowance for doubtful accounts, valuation of inventories, impairment of long-lived assets, goodwill and other intangible assets, income taxes and accrued pension liability.  Actual results could differ from those estimates.

 

Supplemental Non-Cash Transactions

As discussed in Note 9, effective January 1, 2012, Seaboard began consolidation accounting and discontinued the equity method of accounting for their investment in PS International, LLC with Seaboard’s ownership interest increasing from 50% to 70% as a result of cash paid, net of cash acquired of $2,825,000 in January 2012. An additional payment was made in 2012 subsequent to first quarter of 2012 for this transaction upon final verification of certain balance sheet items as of December 31, 2011. On December 31, 2012, Seaboard further increased its ownership from 70% to 85%. Total cash paid during the first quarter 2012, net of cash acquired was $2,825,000, and increased working capital by $14,419,000, fixed assets by $163,000, goodwill by $2,590,000, intangible assets by $621,000, other long-term assets by $96,000, non-controlling interest by $5,649,000 and decreased investment in and advances to affiliates by $9,415,000. See Note 9 for additional information.

 

As discussed in Note 9, Seaboard had a note receivable from an affiliate which accrues pay-in-kind interest income. Seaboard recognized $3,111,000 and $2,818,000, respectively, of non-cash, pay-in-kind interest income and accretion of discount for the first quarter ended March 30, 2013 and March 31, 2012, respectively, related to this note receivable.

 

Note 2– Investments

 

Seaboard’s short-term investments are treated as either available-for-sale securities or trading securities.  All of Seaboard’s available-for-sale and trading securities are classified as current assets as they are readily available to support Seaboard’s current operating needs.  Available-for-sale securities are recorded at their estimated fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive loss.  Trading securities are recorded at their estimated fair value with unrealized gains and losses reflected in other investment income (loss), net.  At March 30, 2013 and December 31, 2012, amortized cost and estimated fair value were not materially different for these investments.

 

At March 30, 2013, money market funds included $7,747,000 denominated in Euros and $7,184,000 denominated in Canadian dollars.  As of March 30, 2013, the trading securities primarily consisted of high yield debt securities.

 

5

 

The following is a summary of the amortized cost and estimated fair value of short-term investments for both available-for-sale and trading securities at March 30, 2013 and December 31, 2012.

 

		2013						2012
		Amortized			Fair			Amortized			Fair
(Thousands of dollars)		Cost			Value			Cost			Value
Money market funds		$	138,756		$	138,756		$	126,537		$	126,537
Corporate bonds		65,071			66,661			67,275			69,214
Enhanced cash mutual fund		25,000			25,011			-			-
U.S. Government agency securities		22,276			22,336			23,647			23,775
U.S. Treasury securities		20,821			20,855			17,165			17,169
Emerging markets debt mutual fund		17,693			18,750			17,693			18,734
Collateralized mortgage obligations		14,622			14,716			15,059			15,162
Asset backed debt securities		12,485			12,544			12,180			12,238
Total available-for-sale short-term investments		316,724			319,629			279,556			282,829
High yield trading debt securities		22,604			24,190			21,839			23,406
Emerging markets trading debt mutual fund		3,079			3,237			3,046			3,237
Emerging markets trading debt securities		2,563			2,761			2,361			2,600
Other trading investments		935			985			1,262			1,307
Total available-for-sale and trading short-term investments		$	345,905		$	350,802		$	308,064		$	313,379

 

The following table summarizes the estimated fair value of fixed rate securities designated as available-for-sale classified by the contractual maturity date of the security as of March 30, 2013.

 

(Thousands of dollars)		2013
Due within one year		$	4,254
Due after one year through three years		42,457
Due after three years		63,702
Total fixed rate securities		$	110,413

 

In addition to its short-term investments, Seaboard also has trading securities related to Seaboard’s deferred compensation plans classified in other current assets on the Condensed Consolidated Balance Sheets.  See Note 5 to the Condensed Consolidated Financial Statements for information on the types of trading securities held related to the deferred compensation plans.

 

6

 

Note 3 – Inventories

 

The following is a summary of inventories at March 30, 2013 and December 31, 2012:

 

		March 30,			December 31,
(Thousands of dollars)		2013			2012
At lower of LIFO cost or market:
Live hogs and materials		$	249,976		$	258,638
Fresh pork and materials		38,749			31,495
		288,725			290,133
LIFO adjustment		(80,926)			(90,730)
Total inventories at lower of LIFO cost or market		207,799			199,403
At lower of FIFO cost or market:
Grains, oilseeds and other commodities		406,747			317,573
Sugar produced and in process		61,603			65,986
Other		71,152			73,606
Total inventories at lower of FIFO cost or market		539,502			457,165
Grain, flour and feed at lower of weighted average cost or market		95,163			100,296
Total inventories		$	842,464		$	756,864

 

Note 4 – Income Taxes

 

Seaboard’s tax returns are regularly audited by federal, state and foreign tax authorities, which may result in adjustments.  Seaboard’s U.S. federal income tax years’ are closed through 2009. Seaboard’s 2010 U.S. income tax return is currently under IRS examination.  There have not been any material changes in unrecognized income tax benefits since December 31, 2012.  Interest related to unrecognized tax benefits and penalties was not material for the three months ended March 30, 2013.

 

On January 2, 2013, the American Taxpayer Relief Act of 2012 (the Tax Act) was signed into law.  The Tax Act extended many expired corporate income tax provisions that impact current and deferred taxes for financial reporting purposes.  In accordance with U.S. GAAP, the determination of current and deferred taxes is based on the provisions of the enacted law as of the balance sheet date; the effects of future changes in tax law are not anticipated.  The effects of changes in tax laws, including retroactive changes, are recognized in the financial statements in the period that the changes are enacted.  Accordingly, as the Tax Act was signed into law in 2013, the effects of the retroactive provisions in the new law on current and deferred tax assets and liabilities for Seaboard were recorded in the first quarter of 2013.  The total impact was a one-time tax benefit of $7,945,000 recorded in the first quarter of 2013 related to certain 2012 income tax credits.  In addition to this amount is a one-time credit of approximately $11,260,000 for 2012 Federal blender’s credits that was recognized as revenues in the first quarter of 2013.  See Note 9 for further discussion of this Federal blender’s credit.

 

Note 5 –Derivatives and Fair Value of Financial Instruments

 

U.S. GAAP discusses valuation techniques, such as the market approach (prices and other relevant information generated by market conditions involving identical or comparable assets or liabilities), the income approach (techniques to convert future amounts to single present amounts based on market expectations including present value techniques and option-pricing), and the cost approach (amount that would be required to replace the service capacity of an asset which is often referred to as replacement cost).  U.S. GAAP utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.  The following is a brief description of those three levels:

 

Level 1: Observable inputs such as unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2:   Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

7

 

Level 3:    Unobservable inputs that reflect the reporting entity’s own assumptions.

 

The following table shows assets and liabilities measured at fair value on a recurring basis as of March 30, 2013 and also the level within the fair value hierarchy used to measure each category of assets.  Seaboard uses the end of the reporting period to determine if there were any transfers between levels.  There were no transfers between levels that occurred in the first quarter of 2013.  The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

 

		Balance
		March 30,
(Thousands of dollars)		2013			Level 1			Level 2			Level 3
Assets:
Available-for-sale securities - short-term investments:
Money market funds		$	138,756		$	138,756		$	-		$	-
Corporate bonds		66,661			-			66,661			-
Enhanced cash mutual fund		25,011			25,011			-			-
U.S. Government agency securities		22,336			-			22,336			-
U.S. Treasury securities		20,855			-			20,855			-
Emerging markets debt mutual fund		18,750			18,750			-			-
Collateralized mortgage obligations		14,716			-			14,716			-
Asset backed debt securities		12,544			-			12,544
Trading securities - short-term investments:
High yield debt securities		24,190			-			24,190			-
Emerging markets trading debt mutual fund		3,237			3,237			-			-
Emerging markets trading debt securities		2,761			-			2,761			-
Other trading investments		985			453			532			-
Trading securities - other current assets:
Domestic equity securities		20,360			20,360			-			-
Foreign equity securities		7,371			5,011			2,360			-
Fixed income mutual funds		6,956			6,956			-			-
Money market funds		2,594			2,594			-			-
U.S. Treasury securities		1,984			-			1,984			-
U.S. Government agency securities		1,687			-			1,687			-
Corporate bonds		94			-			94			-
Other		245			202			43			-
Derivatives:
Commodities(1)		4,253			4,253			-			-
Foreign currencies		5,766			-			5,766			-
Total Assets		$	402,112		$	225,583		$	176,529		$	-
Liabilities:
Derivatives:
Commodities(1)		$	9,989		$	9,989		$	-		$	-
Interest rate swaps		8,803			-			8,803			-
Foreign currencies		-			-			-			-
Total Liabilities		$	18,792		$	9,989		$	8,803		$	-

 

(1) Seaboard’s commodities derivative assets and liabilities are presented in the Condensed Consolidated Balance Sheets on a net basis, including netting the derivatives with the related margin accounts.  As of March 30, 2013, the commodity derivatives had a margin account balance of $15,222,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $9,486,000.

 

8

 

The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and also the level within the fair value hierarchy used to measure each category of assets.

 

		Balance
		December 31,
(Thousands of dollars)		2012			Level 1			Level 2			Level 3
Assets:
Available-for-sale securities - short-term investments:
Money market funds		$	126,537		$	126,537		$	-		$	-
Corporate bonds		69,214			-			69,214			-
U.S. Government agency securities		23,775			-			23,775			-
Emerging markets debt mutual fund		18,734			18,734			-			-
U.S. Treasury securities		17,169			-			17,169			-
Collateralized mortgage obligations		15,162			-			15,162			-
Asset backed debt securities		12,238			-			12,238			-
Trading securities - short term investments:
High yield debt securities		23,406			-			23,406			-
Emerging markets trading debt mutual fund		3,237			3,237			-			-
Emerging markets trading debt securities		2,600			-			2,600			-
Other trading investments		1,307			822			485			-
Trading securities - other current assets:
Domestic equity securities		15,864			15,864			-			-
Fixed income mutual funds		7,153			7,153			-			-
Foreign equity securities		6,831			4,218			2,613			-
Money market funds		3,157			3,157			-			-
U.S. Government agency securities		2,117			-			2,117			-
U.S. Treasury securities		1,567			-			1,567			-
Corporate bonds		60			-			60			-
Other		239			187			52			-
Derivatives:
Commodities(1)		6,916			6,699			217			-
Foreign currencies		-			-			-			-
Total Assets		$	357,283		$	186,608		$	170,675		$	-
Liabilities:
Derivatives:
Commodities(1)		$	7,112		$	7,112		$	-		$	-
Interest rate swaps		9,810			-			9,810			-
Foreign currencies		4,157			-			4,157			-
Total Liabilities		$	21,079		$	7,112		$	13,967		$	-

 

(1) Seaboard’s commodities derivative assets and liabilities are presented in the Condensed Consolidated Balance Sheets on a net basis, including netting the derivatives with the related margin accounts.  As of December 31, 2012, the commodity derivatives had a margin account balance of $14,063,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $13,867,000.

 

Financial instruments consisting of cash and cash equivalents, net receivables, notes payable, and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments.

 

The fair value of long-term debt is estimated by comparing interest rates for debt with similar terms and maturities. If Seaboard’s debt was measured at fair value on its Condensed Consolidated Balance Sheets, it would have been classified as level 2 in the fair value hierarchy. The amortized cost and estimated fair values of investments and long-term debt at March 30, 2013 and December 31, 2012 are presented below.

 

9

 

		2013						2012
(Thousands of dollars)		Amortized Cost			Fair Value			Amortized Cost			Fair Value
Short-term investments, available-for-sale		$	316,724		$	319,629		$	279,556		$	282,829
Short-term investments, trading debt securities		29,181			31,173			28,508			30,550
Long-term debt		132,825			136,175			145,963			149,333

 

While management believes its derivatives are primarily economic hedges of its firm purchase and sales contracts or anticipated sales contracts, Seaboard does not perform the extensive record-keeping required to account for these types of transactions as hedges for accounting purposes.  Since these derivatives and interest rate exchange agreements discussed below are not accounted for as hedges, fluctuations in the related commodity prices, currency exchange rates and interest rates could have a material impact on earnings in any given period.  Seaboard also enters into speculative derivative transactions not directly related to its raw material requirements.  The nature of Seaboard’s market risk exposure has not changed materially since December 31, 2012.

 

Commodity Instruments

 

Seaboard uses various derivative futures and options to manage its risk to price fluctuations for raw materials and other inventories, finished product sales and firm sales commitments.  At March 30, 2013, Seaboard had open net derivative contracts to purchase 27,776,000 pounds of sugar, 14,359,000 bushels of grain and 40,000 pounds of cheese and open net derivative contracts to sell 19,880,000 pounds of hogs, 1,764,000 gallons of heating oil and 41,000 tons of soybean meal.  At December 31, 2012, Seaboard had open net derivative contracts to purchase 28,896,000 pounds of sugar, 15,403,000 bushels of grain and 120,000 pounds of cheese and open net derivative contracts to sell 21,080,000 pounds of hogs, 546,000 gallons of heating oil, 220,000 pounds of dry whey powder and 53,000 tons of soybean meal.  Commodity derivatives are recorded at fair value with any changes in fair value being marked to market as a component of cost of sales on the Condensed Consolidated Statements of Comprehensive Income.

 

Foreign Currency Exchange Agreements

 

Seaboard enters into foreign currency exchange agreements to manage the foreign currency exchange rate risk with respect to certain transactions denominated in foreign currencies.  Foreign exchange agreements that were primarily related to an underlying commodity transaction were recorded at fair value with changes in value marked to market as a component of cost of sales on the Condensed Consolidated Statements of Comprehensive Income.  Foreign exchange agreements that were not related to an underlying commodity transaction were recorded at fair value with changes in value marked to market as a component of foreign currency gain (loss) on the Condensed Consolidated Statements of Comprehensive Income.

 

At March 30, 2013 and December 31, 2012, Seaboard had trading foreign exchange contracts to cover its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $199,417,000 and $243,563,000, respectively, primarily related to the South African Rand.

 

Interest Rate Exchange Agreements

 

In May 2010, Seaboard entered into three ten-year interest rate exchange agreements which involve the exchange of fixed-rate and variable-rate interest payments over the life of the agreements without the exchange of the underlying notional amounts to mitigate the effects of fluctuations in interest rates on variable rate debt.  Seaboard pays a fixed rate and receives a variable rate of interest on three notional amounts of $25,000,000 each.  In August 2010, Seaboard entered into another ten-year interest rate exchange agreement with a notional amount of $25,000,000 that has terms similar to those for the other three interest rate exchange agreements referred to above.  In September 2012, Seaboard terminated one interest rate exchange agreement with a notional value of $25,000,000. Seaboard made a payment in the amount of $3,861,000 to unwind this agreement. While Seaboard has certain variable rate debt, these interest rate exchange agreements do not qualify as hedges for accounting purposes. Accordingly, the changes in fair value of these agreements are recorded in Miscellaneous, net in the Condensed Consolidated Statements of Comprehensive Income. At March 30, 2013 and December 31, 2012, Seaboard had three interest rate exchange agreements outstanding with a total notional value of $75,000,000.

 

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Counterparty Credit Risk

 

Seaboard is subject to counterparty credit risk related to its foreign currency exchange agreements and interest rate swaps, should the counterparties fail to perform according to the terms of the contracts.  As of March 30, 2013, Seaboard’s foreign currency exchange agreements have a maximum amount of loss due to credit risk in the amount of $5,766,000 with nine counterparties.  Seaboard does not hold any collateral related to these agreements.

 

The following table provides the amount of gain or (loss) recognized for each type of derivative and where it was recognized in the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 30, 2013 and March 31, 2012.

 

(Thousands of dollars)
		Location of		March 30, 2013		March 31, 2012
		Gain or (Loss)		Amount of Gain or (Loss)		Amount of Gain or (Loss)
		Recognized in Income		Recognized in Income		Recognized in Income
Commodities		Cost of sales		$   (4,808)		$   (2,415)
Foreign currencies		Cost of sales		11,506		(5,417)
Foreign currencies		Foreign currency		4,067		(3,713)
Interest rate		Miscellaneous, net		472		648

 

The following table provides the fair value of each type of derivative held as of March 30, 2013 and December 31, 2012 and where each derivative is included on the Condensed Consolidated Balance Sheets.

 

(Thousands of dollars)		Asset Derivatives								Liability Derivatives
		Balance		Fair Value						Balance		Fair Value
		Sheet		March 30,			December 31,			Sheet		March 30,			December 31,
		Location		2013			2012			Location		2013			2012
Commodities		Other current assets		$	4,253	(1)	$	6,916		Other current assets		$	9,989	(1)	$	7,112
Foreign currencies		Other current assets		5,766			-			Other current liabilities		-			4,157
Interest rate		Other current assets		-			-			Other current liabilities		8,803			9,810

 

 

Note 6 – Employee Benefits

 

Seaboard maintains two defined benefit pension plans for its domestic salaried and clerical employees.  At this time, no contributions are expected to be made to these plans in 2013.  Seaboard also sponsors non-qualified, unfunded supplemental executive plans, and has certain individual, non-qualified, unfunded supplemental retirement agreements for certain retired employees.  Management has no plans to provide funding for these supplemental plans in advance of when the benefits are paid.

 

The net periodic benefit cost for all of these plans was as follows:

 

		Three Months Ended
		March 30,		March 31,
(Thousands of dollars)		2013		2012
Components of net periodic benefit cost:
Service cost		$   2,421		$   2,226
Interest cost		2,068		2,258
Expected return on plan assets		(1,612)		(1,592)
Amortization and other		1,636		1,530
Net periodic benefit cost		$   4,513		$   4,422

 

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Note 7 – Notes Payable, Long-Term Debt, Commitments and Contingencies

 

In April 2013, Seaboard provided notice of call for early redemption to holders of certain Industrial Development Revenue Bonds (IDRBs) effective May 13, 2013.  As a result, $10,800,000 of IDRBs were reclassified from long-term debt to current maturities of long-term debt as of March 30, 2013.

 

In February 2013, Seaboard refinanced its committed bank line for $200,000,000 and also extended the maturity date to February 20, 2018. The refinancing of the committed bank line revised the terms by increasing the tangible net worth to $1,870,445,000, plus 25% of cumulative consolidated net income beginning after December 31, 2012, increasing the dividend payment limit to $25,000,000 per year, increasing the subsidiary and priority indebtedness to 20% and eliminated the required consolidated funded debt to consolidated total capitalization ratio.

 

In December 2012, Seaboard provided notice of call for early redemption to holders of certain IDRBs effective January 14, 2013.  As a result, $13,000,000 of IDRBs were reclassified from long-term debt to current maturities of long-term debt as of December 31, 2012.  A payment of $13,000,000 was made in the first quarter of 2013.

 

Contingencies

 

On September 19, 2012, the United States Immigration and Customs Enforcement (“ICE”) executed three search warrants authorizing the seizure of certain records from Seaboard’s offices in Merriam, Kansas and at the Seaboard Foods employment office and the human resources department in Guymon, Oklahoma.  The warrants generally called for the seizure of employment-related files, certain e-mails and other electronic records relating to Medicaid and Medicaid recipient, certain health care providers in the Guymon area, and Seaboard’s health plan and certain personnel issues.  This investigation is being handled by the United States Attorney’s Office for the Western District of Oklahoma (“USAO”).  Seaboard is cooperating with the USAO in connection with this investigation.  No civil or criminal proceedings or charges have been filed or brought.  It is not possible at this time to determine whether Seaboard will incur any fines, penalties or material liabilities in connection with this matter.

 

Seaboard is subject to various legal proceedings related to the normal conduct of its business, including various environmental related actions.  In the opinion of management, none of these actions is expected to result in a judgment having a materially adverse effect on the Condensed Consolidated Financial Statements of Seaboard.

 

Contingent Obligations

 

Certain of the non-consolidated affiliates and third party contractors who perform services for Seaboard have bank debt supporting their underlying operations.  From time to time, Seaboard will provide guarantees of that debt allowing a lower borrowing rate or facilitating third party financing in order to further Seaboard’s business objectives.  Seaboard does not issue guarantees of third parties for compensation.  As of March 30, 2013, guarantees outstanding to third parties were not material. Seaboard has not accrued a liability for any of the third party or affiliate guarantees as management considers the likelihood of loss to be remote.

 

As of March 30, 2013, Seaboard had outstanding letters of credit (“LCs”) with various banks which reduced its borrowing capacity under its committed and uncommitted credit facilities by $39,960,000 and $3,744,000, respectively.  These LCs included $18,397,000 of LCs, which support the IDRBs included as long-term debt and $21,801,000 of LCs related to insurance coverages.

 

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Note 8 – Stockholders’ Equity and Accumulated Other Comprehensive Loss

 

The components of and changes in accumulated other comprehensive loss, net of tax, for the three months ended March 30, 2013 are as follows:

		Cumulative
		Foreign			Unrealized			Unrealized
		Currency			Gain (Loss)			Loss on			Unrecognized
		Translation			on			Cash Flow			Pension
(Thousands of dollars)		Adjustment			Investments			Hedges			Cost			Total
Balance December 31, 2012		$	(109,457	)	$	2,232		$	(113	)	$	(64,206	)	$(171,544	)
Other comprehensive income (loss) before reclassifications		(6,122		)	639			-			-			(5,483	)
Amounts reclassified from accumulated other comprehensive loss		-			(210		)(1)	-			1,192		(2)	982
Net current-period other comprehensive income (loss)		(6,122		)	429			-			1,192			(4,501	)
Balance March 30, 2013		$	(115,579	)	$	2,661		$	(113	)	$	(63,014	)	$(176,045	)

(1) This represents realized gains on the sale of available-for-sale securities and are recorded in other investment income, net.

(2) This primarily represents the amortization of actuarial losses that are included in net periodic pension cost and are recorded in operating income.  See Note 6 for further discussion.

 

The foreign currency translation adjustment primarily represents the effect of the Argentine peso currency exchange fluctuation on the net assets of the Sugar segment.  At March 30, 2013, the Sugar segment had $197,474,000 in net assets denominated in Argentine pesos and $4,234,000 in net assets denominated in U.S. dollars.  Management anticipates that the Argentine peso may continue to weaken against the U.S. dollar and thus it is anticipated that Seaboard will incur additional foreign currency translation adjustment losses in other comprehensive loss during the remainder of 2013.

 

With the exception of the foreign currency translation adjustment to which a 35 percent federal tax rate is applied, income taxes for components of accumulated other comprehensive loss were recorded using a 39 percent effective tax rate.  In addition, the unrecognized pension cost includes $20,737,000 related to employees at certain subsidiaries for which no tax benefit has been recorded.

 

On October 19, 2012, the Board of Directors extended through October 31, 2015 the share repurchase program initially approved on November 6, 2009. Under this share repurchase program, Seaboard was originally authorized to repurchase from time to time up to $100,000,000 market value of its Common Stock in open market or privately negotiated purchases which may be above or below the traded market price.  During the period that the share repurchase program remains in effect, from time to time, Seaboard may enter into a 10b5-1 plan authorizing a third party to make such purchases on behalf of Seaboard.  The stock repurchase will be funded by cash on hand.  Shares repurchased will be retired and resume the status of authorized and unissued shares.  All stock repurchased will be made in compliance with applicable legal requirements and the timing of the repurchases and the number of shares repurchased at any given time will depend upon market conditions, compliance with Securities and Exchange Commission regulations and other factors.  The Board’s stock repurchase authorization does not obligate Seaboard to acquire a specific amount of common stock and the stock repurchase program may be suspended at any time at Seaboard’s discretion. As of March 30, 2013, $32,838,000 remained available for repurchases under this program.  For the three months ended March 30, 2013, Seaboard repurchased 147 shares of common stock at a total cost of $367,000.

 

In December 2012, Seaboard declared and paid a dividend of $12.00 per share on the common stock.  The increased amount of the dividend (which has historically been $0.75 per share on a quarterly basis or $3.00 per share on an annual basis) represented a prepayment of the annual 2013, 2014, 2015 and 2016 dividends ($3.00 per share per year).  Seaboard does not currently intend to declare any further dividends for the years 2013-2016.

 

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Note 9 - Segment Information

 

The Tax Act signed into law in January 2013 as discussed in Note 4, renewed and extended the Federal blender’s credits that Seaboard is entitled to receive for biodiesel it blends which had previously expired on December 31, 2011 and renewed retroactively to January 1, 2012 with an expiration of December 31, 2013.  As a result, in the first quarter of 2013 the Pork segment recognized a one-time credit of approximately $11,260,000 as revenues related to this Federal blender’s tax incentive for gallons produced and sold in fiscal 2012.  The impact for the remainder of 2013 is not expected to be as significant as market prices for biodiesel are anticipated to adjust downward as a result of the renewed credit.

 

In January 2012, Seaboard made a payment of $2,825,000, net of cash acquired, to increase its ownership interest from 50% to 70% in PS International, LLC (PSI), an international specialty grain trading business headquartered in North Carolina. As a result, effective January 1, 2012, Seaboard began consolidation accounting and discontinued the equity method of accounting for this investment. An additional payment was made in 2012 subsequent to first quarter of 2012 for this transaction upon final verification of certain balance sheet items as of December 31, 2011. On December 31, 2012, Seaboard further increased its ownership from 70% to 85%.  Total cash paid for these two transactions in 2012, net of cash acquired was $3,186,000 and $3,045,000, respectively.  Pro forma results of operations are not presented, as the effects of consolidation are not material to Seaboard’s results of operations.

 

On April 8, 2011, Seaboard closed the sale of its two floating power generating facilities in the Dominican Republic.  On April 20, 2011, Seaboard signed a short-term lease agreement that allowed Seaboard to resume operations of one of the facilities (72 megawatts).  Seaboard and the purchaser also agreed to defer the sale to the purchaser of the inventory related to the leased facility until the end of the lease term.  Seaboard continues to operate this facility under a short-term lease agreement that may be canceled by either party. Also, as of March 30, 2013, $1,500,000 of the original sale price for this power generating facility remained in escrow for potential dry dock costs. Seaboard retained all other physical properties of this business and constructed a new 106 megawatt floating power generating facility for use in the Dominican Republic, which began commercial operations in March 2012.

 

The Turkey segment, accounted for using the equity method, represents Seaboard’s investment in Butterball, LLC (Butterball).  Butterball had total net sales for the three months ended March 30, 2013 and March 31, 2012 of $370,570,000 and $301,616,000, respectively. Butterball had operating income (loss) for the three months ended March 30, 2013 and March 31, 2012 of $(2,103,000) and $23,365,000, respectively.  In the first quarter of 2013, Butterball incurred additional charges for impairment of fixed assets related to the planned sale of its Longmont, Colorado facility of which Seaboard’s proportionate share of these charges represented $(2,704,000) recognized in loss from affiliate.  As of March 30, 2013 and December 31, 2012, the Turkey segment had total assets of $981,149,000 and $871,945,000, respectively.

 

On December 31, 2012, Seaboard provided a loan of $81,231,000 to Butterball and was included in Notes Receivable from Affiliate.  This loan was made to fund Butterball’s purchase of assets from Gusto Packing Company, Inc., a pork and turkey further processor located in Montgomery, Illinois. In late March 2013, Butterball renegotiated its third party financing and on March 28, 2013 repaid in full this loan from Seaboard.

 

In conjunction with Seaboard’s initial investment in Butterball on December 6, 2010, Seaboard has a long-term note receivable from Butterball which had a balance of $115,740,000 as of March 30, 2013.  Part of the interest earned on this note is pay-in-kind interest, which accumulates and is paid at maturity.  During the third quarter of 2011, Seaboard provided a term loan of $13,037,000 to Butterball to pay off capital leases for certain fixed assets which originally were financed with third parties.  The effective interest rate on the term loan is approximately 12%.  Although the term loan expires on January 31, 2018, Seaboard anticipates that Butterball will pay off the term loan prior to such expiration date as Butterball is expected to sell all of the related assets and is required to remit the proceeds from such sale to Seaboard to repay the loan.  As of March 30, 2013, the balance of the term loan recorded in long-term notes receivable from affiliate was $9,071,000.

 

The following tables set forth specific financial information about each segment as reviewed by Seaboard’s management. Operating income for segment reporting is prepared on the same basis as that used for consolidated operating income.  Operating income, along with income or losses from affiliates for the Commodity Trading and Milling segment, is used as the measure of evaluating segment performance because management does not consider interest, other investment income and income tax expense on a segment basis.

 

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