SEABOARD CORP /DE/ - Quarter Report: 2014 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 29, 2014

 

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.

 

Large Accelerated Filer [ X ]	Accelerated Filer [   ]
Non-Accelerated Filer   [   ] (Do not check if a smaller reporting company)	Smaller Reporting Company [   ]

 

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

 

There were 1,187,288 shares of common stock, $1.00 par value per share, outstanding on April 18, 2014.

 

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 29,						March 30,
					2014						2013
Net sales:
Products (includes sales to affiliates of $195,986 and $182,535)					$	1,213,755					$	1,263,273
Service revenues					212,033						246,012
Other					53,848						73,011
Total net sales					1,479,636						1,582,296
Cost of sales and operating expenses:
Products					1,105,583						1,171,702
Services					194,507						224,995
Other					53,958						58,693
Total cost of sales and operating expenses					1,354,048						1,455,390
Gross income					125,588						126,906
Selling, general and administrative expenses					60,385						63,448
Operating income					65,203						63,458
Other income (expense):
Interest expense					(4,820		)				(2,392		)
Interest income					7,080						4,089
Interest income from affiliates					6,356						6,155
Income (loss) from affiliates					6,644						(2,850		)
Other investment income, net					573						2,186
Foreign currency losses, net					(5,693		)				(1,145		)
Miscellaneous, net					140						822
Total other income, net					10,280						6,865
Earnings before income taxes					75,483						70,323
Income tax expense					(27,034		)				(12,566		)
Net earnings					$	48,449					$	57,757
Less: Net income attributable to noncontrolling interests					(283		)				(303		)
Net earnings attributable to Seaboard					$	48,166					$	57,454
Earnings per common share		$	40.55					$	47.98
Other comprehensive income (loss), net of income tax benefit of $9,663 and $2,601:
Foreign currency translation adjustment					(26,775		)				(6,122		)
Unrealized gain on investments					526						429
Unrealized gain on cash flow hedges					361						-
Unrecognized pension cost					320						1,192
Other comprehensive loss, net of tax					$	(25,568	)				$	(4,501	)
Comprehensive income					22,881						53,256
Less: Comprehensive income attributable to the noncontrolling interest					(279		)				(297		)
Comprehensive income attributable to Seaboard					$	22,602					$	52,959
Average number of shares outstanding					1,187,681						1,197,516

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Thousands of dollars)

(Unaudited)

 

		March 29,			December 31,
		2014			2013
Assets
Current assets:
Cash and cash equivalents		$	38,877		$	55,055
Short-term investments		392,222			290,649
Receivables, net of allowance		548,306			651,404
Inventories		650,440			698,998
Deferred income taxes		23,750			23,449
Other current assets		124,823			134,394
Total current assets		1,778,418			1,853,949
Net property, plant and equipment		858,010			863,573
Investments in and advances to affiliates		408,643			406,900
Notes receivable from affiliates		184,735			180,386
Goodwill		43,218			43,218
Other intangible assets, net		18,935			18,997
Other assets		47,855			51,025
Total assets		$	3,339,814		$	3,418,048
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable to banks		$	46,006		$	67,699
Current maturities of long-term debt		11,426			11,697
Accounts payable		143,305			200,242
Deferred revenue		72,691			46,192
Other current liabilities		248,985			289,497
Total current liabilities		522,413			615,327
Long-term debt, less current maturities		80,484			80,480
Deferred income taxes		67,629			73,336
Other liabilities and deferred credits		170,845			168,935
Total non-current liabilities		318,958			322,751
Commitments and contingent liabilities
Stockholders’ equity:
Common stock of $1 par value,
Authorized 1,250,000 shares;
issued and outstanding 1,187,288 and 1,188,955 shares		1,187			1,189
Accumulated other comprehensive loss		(207,365		)	(181,797		)
Retained earnings		2,699,621			2,655,857
Total Seaboard stockholders’ equity		2,493,443			2,475,249
Noncontrolling interests		5,000			4,721
Total equity		2,498,443			2,479,970
Total liabilities and stockholders’ equity		$	3,339,814		$	3,418,048

 

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 29,			March 30,
		2014			2013
Cash flows from operating activities:
Net earnings		$	48,449		$	57,757
Adjustments to reconcile net earnings to cash from operating activities:
Depreciation and amortization		22,963			23,071
Gain from sale of fixed assets		(1,392		)	(4,255		)
Deferred income taxes		2,872			(1,336		)
Pay-in-kind interest and accretion on notes receivable from affiliates		(3,628		)	(3,111		)
Loss (income) from affiliates		(6,644		)	2,850
Dividends received from affiliates		1,088			10,692
Other investment income, net		(573		)	(2,186		)
Other		(14		)	(58		)
Changes in current assets and liabilities, net of business acquired:
Receivables, net of allowance		105,170			17,021
Inventories		27,522			(89,551		)
Other current assets		6,060			2,416
Current liabilities, exclusive of debt		(60,822		)	(37,193		)
Other, net		2,919			2,824
Net cash from operating activities		143,970			(21,059		)
Cash flows from investing activities:
Purchase of short-term investments		(429,011		)	(212,621		)
Proceeds from the sale of short-term investments		326,826			174,596
Proceeds from the maturity of short-term investments		1,038			756
Capital expenditures		(38,030		)	(34,888		)
Proceeds from the sale of fixed assets		1,676			6,264
Investments in and advances to affiliates, net		(41		)	(7,865		)
Principal payments received on long-term notes receivable from affiliates		-			81,231
Purchase of long-term investments		(2,290		)	(2,578		)
Other, net		324			2,878
Net cash from investing activities		(139,508		)	7,773
Cash flows from financing activities:
Notes payable to banks, net		(15,923		)	22,911
Principal payments of long-term debt		(127		)	(13,131		)
Repurchase of common stock		(4,404		)	(367		)
Other, net		-			(748		)
Net cash from financing activities		(20,454		)	8,665
Effect of exchange rate change on cash		(186		)	255
Net change in cash and cash equivalents		(16,178		)	(4,366		)
Cash and cash equivalents at beginning of year		55,055			47,651
Cash and cash equivalents at end of period		$	38,877		$	43,285

 

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, 2013 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

Seaboard has notes receivable from affiliates which accrue pay-in-kind interest income, primarily from one affiliate as discussed in Note 9. Seaboard recognized $3,628,000 and $3,111,000, respectively, of non-cash, pay-in-kind interest income and accretion of discount for the first quarter ended March 29, 2014 and March 30, 2013, respectively, related to these notes 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, net.  At March 29, 2014 and December 31, 2013, amortized cost and estimated fair value were not materially different for these investments. At March 29, 2014, money market funds included $6,329,000 denominated in Euros and $3,359,000 denominated in Canadian dollars.

 

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 29, 2014 and December 31, 2013.

 

		2014						2013
		Amortized			Fair			Amortized			Fair
(Thousands of dollars)		Cost			Value			Cost			Value
Money market funds		$	216,623		$	216,623		$	88,430		$	88,430
Corporate bonds		49,044			49,482			69,591			70,258
U.S. Government agency securities		47,620			47,554			27,299			27,147
Asset backed debt securities		11,949			11,938			8,446			8,477
Collateralized mortgage obligations		6,441			6,451			7,597			7,600
U.S. Treasury securities		2,808			2,770			5,258			5,223
Emerging markets debt mutual fund		-			-			17,693			16,941
Total available-for-sale short-term investments		334,485			334,818			224,314			224,076
High yield trading debt securities		50,696			51,923			49,352			50,428
Emerging markets trading debt mutual fund		3,238			2,856			3,202			2,858
Money market funds held in trading accounts		1,287			1,287			11,033			11,033
Emerging markets trading debt securities		712			729			1,300			1,336
Other trading investments		555			609			841			918
Total available-for-sale and trading short-term investments		$	390,973		$	392,222		$	290,042		$	290,649

 

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 29, 2014.

 

(Thousands of dollars)		2014
Due within one year		$	5,378
Due after one year through three years		44,186
Due after three years		48,331
Total fixed rate securities		$	97,895

 

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 29, 2014 and December 31, 2013:

 

		March 29,					December 31,
(Thousands of dollars)			2014					2013
At lower of LIFO cost or market:
Live hogs and materials			$	210,875				$	207,310
Fresh pork and materials			34,439					33,485
			245,314					240,795
LIFO adjustment			(56,371		)			(62,236		)
Total inventories at lower of LIFO cost or market			188,943					178,559
At lower of FIFO cost or market:
Grains, oilseeds and other commodities			284,115					299,229
Sugar produced and in process			37,685					53,325
Other			65,122					74,289
Total inventories at lower of FIFO cost or market			386,922					426,843
Grain, flour and feed at lower of weighted average cost or market			74,575					93,596
Total inventories			$	650,440				$	698,998

 

Note 4 – Income Taxes

 

Seaboard’s tax returns are regularly audited by federal, state and foreign tax authorities, which may result in material 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, 2013.  Interest related to unrecognized tax benefits and penalties was not material for the three months ended March 29, 2014.

 

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.

 

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

 

7

 

The following table shows assets and liabilities measured at fair value on a recurring basis as of March 29, 2014 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 2014.  The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

		Balance
		March 29,
(Thousands of dollars)		2014			Level 1			Level 2			Level 3
Assets:
Available-for-sale securities - short-term investments:
Money market funds		$	216,623		$	216,623		$	-		$			-
Corporate bonds		49,482			-			49,482			-
U.S. Government agency securities		47,554			-			47,554			-
Asset backed debt securities		11,938			-			11,938			-
Collateralized mortgage obligations		6,451			-			6,451			-
U.S. Treasury securities		2,770			-			2,770			-
Trading securities - short-term investments:
High yield debt securities		51,923			-			51,923			-
Emerging markets trading debt mutual fund		2,856			2,856			-			-
Money market funds held in trading accounts		1,287			1,287			-			-
Emerging markets trading debt securities		729			-			729			-
Other trading investments		609			-			609			-
Trading securities - other current assets:
Domestic equity securities		28,210			28,210			-			-
Foreign equity securities		7,943			5,676			2,267			-
Fixed income mutual funds		4,909			4,909			-			-
Money market funds		2,102			2,102			-			-
Other		3,641			1,702			1,939			-
Derivatives:
Commodities(1)		19,402			19,402			-			-
Interest rate swaps		388			-			388			-
Foreign currencies		59			-			59			-
Total Assets		$	458,876		$	282,767		$	176,109		$	-
Liabilities:
Derivatives:
Commodities(1)		$	43,271		$	42,386		$	885		$		-
Interest rate swaps		4,551			-			4,551			-
Foreign currencies		2,043			-			2,043			-
Total Liabilities		$	49,865		$	42,386		$	7,479		$	-

 

(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 29, 2014, the commodity derivatives had a margin account balance of $42,622,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $19,638,000 and an other current liability of $885,000.

8

 

The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and also the level within the fair value hierarchy used to measure each category of assets.

		Balance
		December 31,
(Thousands of dollars)		2013			Level 1			Level 2				Level 3
Assets:
Available-for-sale securities - short-term   investments:
Money market funds		$	88,430		$	88,430		$	-		$		-
Corporate bonds		70,258			-			70,258			-
U.S. Government agency securities		27,147			-			27,147			-
Emerging markets debt mutual fund		16,941			16,941			-			-
Asset backed debt securities		8,477			-			8,477			-
Collateralized mortgage obligations		7,600			-			7,600			-
U.S. Treasury securities		5,223			-			5,223			-
Trading securities - short-term investments:
High yield debt securities		50,428			-			50,428			-
Money market funds held in trading accounts		11,033			11,033			-			-
Emerging markets trading debt mutual fund		2,858			2,858			-			-
Emerging markets trading debt securities		1,336			-			1,336			-
Other trading investments		918			-			918			-
Trading securities - other current assets:
Domestic equity securities		26,672			26,672			-			-
Foreign equity securities		9,570			7,317			2,253			-
Fixed income mutual funds		3,974			3,974			-			-
Money market funds		1,931			1,931			-			-
Other		3,203			1,628			1,575			-
Derivatives:
Commodities(1)		2,331			2,331			-			-
Foreign currencies		2,763			-			2,763			-
Total Assets		$	341,093		$	163,115		$	177,978		$		-
Liabilities:
Derivatives:
Commodities(1)		$	16,014		$	15,422		$	592		$		-
Interest rate swaps		4,103			-			4,103			-
Foreign currencies		101			-			101			-
Total Liabilities		$	20,218		$	15,422		$	4,796		$		-

(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, 2013, the commodity derivatives had a margin account balance of $29,822,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $16,731,000 and an other current liability of $592,000.

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 29, 2014 and December 31, 2013 are presented below.

 

9

 

		2014				2013
(Thousands of dollars)		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Short-term investments, available-for-sale		$      334,485		$    334,818		$      224,314		$    224,076
Short-term investments, trading debt securities		56,488		57,404		65,728		66,573
Long-term debt		91,910		94,341		92,177		94,578

 

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, 2013.

 

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 29, 2014, Seaboard had open net derivative contracts to purchase 49,560,000 pounds of hogs, 264,000 pounds of dry whey powder, 220,000 pounds of milk powder and 200,000 pounds of cheese and open net derivative contracts to sell 8,960,000 pounds of sugar, 4,692,000 bushels of grain and 108,000 tons of soybean meal.  At December 31, 2013, Seaboard had open net derivative contracts to purchase 51,184,000 pounds of sugar, 32,440,000 pounds of hogs, 6,540,000 bushels of grain, 440,000 pounds of cheese and 308,000 pounds of dry whey powder and open net derivative contracts to sell 12,125,000 pounds of palm oil and 76,000 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 currency 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 losses, net on the Condensed Consolidated Statements of Comprehensive Income.

 

At March 29, 2014 and December 31, 2013, Seaboard had trading foreign currency exchange agreements to cover its firm sales and purchase commitments and related trade receivables and payables with net notional amounts of $23,939,000 and $127,389,000, respectively, primarily related to the South African Rand.

 

Interest Rate Exchange Agreements

 

In March 2014, Seaboard entered into three approximately eight-year interest rate exchange agreements with mandatory early termination dates in the second half of 2014. These exchange agreements involve the exchange of fixed-rate and variable-rate interest payments without the exchange of the underlying notional amounts to mitigate the effects of fluctuations in interest rates on potential future dry bulk vessel leases. Seaboard pays a fixed rate and receives a variable rate of interest on three notional amounts of $22,000,000 each.  In 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. 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 29, 2014 and December 31, 2013, Seaboard had six and three interest rate exchange agreements outstanding with a total notional value of $141,000,000 and $75,000,000, respectively.  In April 2014, Seaboard entered into an interest rate exchange agreement with a notional amount of $22,000,000 with similar terms and dates as the interest rate exchange agreements entered into in March 2014 noted above.

 

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Counterparty Credit Risk

 

From time to time 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 29, 2014, Seaboard’s foreign currency exchange agreements have a maximum amount of loss due to credit risk in the amount of $59,000 with three counterparties and the interest rate swaps have a maximum amount of loss due to credit risk in the amount of $388,000 with one counterparty.  Seaboard does not hold any collateral related to these agreements.

 

The following table provides the amount of gain or (loss) recognized in income for each type of derivative and where it was recognized in the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2014 and March 30, 2013.

(Thousands of dollars)
			Three Months Ended
			March 29,			March 30,
			2014			2013
Commodities	Cost of sales		$ (6,584	)		$  (4,808	)
Foreign currencies	Cost of sales		485			11,506
Foreign currencies	Foreign currency		765			4,067
Interest rate	Miscellaneous, net		(602	)		472

 

The following table provides the fair value of each type of derivative held as of March 29, 2014 and December 31, 2013 and where each derivative is included on the Condensed Consolidated Balance Sheets.

 

(Thousands of dollars)		Asset Derivatives								Liability Derivatives
		March 29,		December 31,						March 29,			December 31,
		2014		2013						2014			2013
Commodities	Other current assets	$ 19,402	(1)	$   2,331		Other current liabilities				$ 43,271	(1)		$  16,014
Foreign currencies	Other current assets	59		2,763		Other current liabilities				2,043			101
Interest rate	Other current assets	388		-		Other current liabilities				4,551			4,103

 

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 for the remainder of 2014.  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 29,			March 30,
(Thousands of dollars)		2014			2013
Components of net periodic benefit cost:
Service cost		$ 1,856			$ 2,421
Interest cost		2,403			2,068
Expected return on plan assets		(2,185	)		(1,612	)
Amortization and other		470			1,636
Net periodic benefit cost		$ 2,544			$ 4,513

 

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