SEABOARD CORP /DE/ - Quarter Report: 2015 April (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 April 4, 2015

 

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 1,170,550 shares of common stock, $1.00 par value per share, outstanding on April 24, 2015.

 

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
					April 4,						March 29,
					2015						2014
Net sales:
Products (includes sales to affiliates of $211,706 and $195,986)					$	1,176,927					$	1,213,755
Service revenues					249,109						212,033
Other					26,322						53,848
Total net sales					1,452,358						1,479,636
Cost of sales and operating expenses:
Products					1,118,663						1,105,583
Services					219,018						194,507
Other					21,513						53,958
Total cost of sales and operating expenses					1,359,194						1,354,048
Gross income					93,164						125,588
Selling, general and administrative expenses					65,325						60,385
Operating income					27,839						65,203
Other income (expense):
Interest expense					(4,530		)				(4,820		)
Interest income					3,329						7,080
Interest income from affiliates					7,060						6,356
Income from affiliates					11,227						6,644
Other investment income, net					6,548						573
Foreign currency gains (losses), net					1,412						(5,693		)
Miscellaneous, net					(4,427		)				140
Total other income, net					20,619						10,280
Earnings before income taxes					48,458						75,483
Income tax expense					(14,882		)				(27,034		)
Net earnings					$	33,576					$	48,449
Less: Net income attributable to noncontrolling interests					(226		)				(283		)
Net earnings attributable to Seaboard					$	33,350					$	48,166
Earnings per common share		$	28.49					$	40.55
Other comprehensive income (loss), net of income tax benefit of $142 and $9,663:
Foreign currency translation adjustment					(5,958		)				(26,775		)
Unrealized gain on investments					677						526
Unrealized gain on cash flow hedges					-						361
Unrecognized pension cost					1,282						320
Other comprehensive loss, net of tax					$	(3,999	)				$	(25,568	)
Comprehensive income					29,577						22,881
Less: Comprehensive income attributable to the noncontrolling interest					(303		)				(279		)
Comprehensive income attributable to Seaboard					$	29,274					$	22,602
Average number of shares outstanding					1,170,550						1,187,681

 

See accompanying notes to condensed consolidated financial statements.

 

2

 

SEABOARD CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Thousands of dollars)

(Unaudited)

 

		April 4,			December 31,
		2015			2014
Assets
Current assets:
Cash and cash equivalents		$	47,916		$	36,459
Short-term investments		597,619			490,566
Receivables, net of allowance		526,365			633,965
Inventories		716,084			736,302
Deferred income taxes		45,247			45,647
Other current assets		121,270			110,053
Total current assets		2,054,501			2,052,992
Net property, plant and equipment		849,185			846,757
Investments in and advances to affiliates		539,004			523,063
Notes receivable from affiliates		201,555			197,270
Other assets		70,419			57,238
Total assets		$	3,714,664		$	3,677,320
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable to banks		$	123,311		$	75,524
Accounts payable		165,036			214,218
Deferred revenue		69,724			51,158
Other current liabilities		292,623			293,932
Total current liabilities		650,694			634,832
Deferred income taxes		87,007			95,538
Other liabilities and deferred credits		227,262			226,677
Total non-current liabilities		314,269			322,215
Commitments and contingent liabilities
Stockholders’ equity:
Common stock of $1 par value,
Authorized 1,250,000 shares;
issued and outstanding 1,170,550 shares		1,171			1,171
Accumulated other comprehensive loss		(256,636		)	(252,637		)
Retained earnings		3,000,714			2,967,364
Total Seaboard stockholders’ equity		2,745,249			2,715,898
Noncontrolling interests		4,452			4,375
Total equity		2,749,701			2,720,273
Total liabilities and stockholders’ equity		$	3,714,664		$	3,677,320

 

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
		April 4,			March 29,
		2015			2014
Cash flows from operating activities:
Net earnings		$	33,576		$	48,449
Adjustments to reconcile net earnings to cash from operating activities:
Depreciation and amortization		23,706			22,963
Gain from sale of fixed assets		(144		)	(1,392		)
Deferred income taxes		(8,002		)	2,872
Pay-in-kind interest and accretion on notes receivable from affiliates		(4,360		)	(3,628		)
Income from affiliates		(11,227		)	(6,644		)
Dividends received from affiliates		9,735			1,088
Other investment income, net		(6,548		)	(573		)
Other, net		1,158			(14		)
Changes in assets and liabilities, net of business acquired:
Receivables, net of allowance		106,353			105,170
Inventories		17,665			27,522
Other current assets		(10,334		)	6,060
Current liabilities, exclusive of debt		(30,665		)	(60,822		)
Other, net		2,190			2,919
Net cash from operating activities		123,103			143,970
Cash flows from investing activities:
Purchase of short-term investments		(225,017		)	(429,011		)
Proceeds from the sale of short-term investments		119,458			326,826
Proceeds from the maturity of short-term investments		4,082			1,038
Capital expenditures		(28,515		)	(38,030		)
Proceeds from the sale of fixed assets		334			1,676
Investments in and advances to affiliates, net		(17,976		)	(41		)
Principal payments received on long-term notes receivable from affiliates		75			-
Purchase of long-term investments		(3,194		)	(2,290		)
Other, net		(9,412		)	324
Net cash from investing activities		(160,165		)	(139,508		)
Cash flows from financing activities:
Notes payable to banks, net		48,830			(15,923		)
Repurchase of common stock		-			(4,404		)
Other, net		(226		)	(127		)
Net cash from financing activities		48,604			(20,454		)
Effect of exchange rate change on cash		(85		)	(186		)
Net change in cash and cash equivalents		11,457			(16,178		)
Cash and cash equivalents at beginning of year		36,459			55,055
Cash and cash equivalents at end of period		$	47,916		$	38,877

 

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, 2014 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, potential write-down related to investments in and advances to affiliates and notes receivable from affiliates, income taxes and accrued pension liability.  Actual results could differ from those estimates.

 

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 $4,360,000 and $3,628,000, respectively, of non-cash, pay-in-kind interest income and accretion of discount for the first quarter ended April 4, 2015 and March 29, 2014, respectively, related to these notes receivable.

 

Recently Issued Accounting Standards Not Yet Adopted

 

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

 

Subsequent Event

 

Subsequent to April 4, 2015, Seaboard invested $10,000,000 in a business operating a 300 megawatt electricity generating facility in the Dominican Republic.  This investment increased Seaboard’s ownership interest to 29.9% from less than 20%.  Seaboard’s previous investment of $5,910,000 in this business was made in 2006 and was accounted for using the cost method.  As a result of this additional investment in 2015, Seaboard will be required to change its accounting method for this investment to the equity method in the Power segment beginning in the second quarter of 2015.  As a result of this change in accounting method, Seaboard will be required to adjust retroactively as if the equity method had been in effect during all previous periods since Seaboard’s initial investment in 2006.  Had this accounting change occurred as of April 4, 2015, net income for quarters ended April 4, 2015 and March 29, 2014 would not have been materially affected and total investment in affiliates and equity at April 4, 2015 would increase by $19,382,000.  There is no tax impact to Seaboard on these amounts.

 

5

 

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 April 4, 2015, money market funds included $13,132,000 denominated in Euros and $2,849,000 denominated in Canadian dollars.

 

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 April 4, 2015 and December 31, 2014.

 

		2015						2014
		Amortized			Fair			Amortized			Fair
(Thousands of dollars)		Cost			Value			Cost			Value
Money market funds		$	236,974		$	236,974		$	142,432		$	142,432
Corporate bonds		11,652			11,757			11,000			11,015
U.S. Government agency securities		9,287			9,354			9,684			9,666
Asset backed debt securities		2,521			2,554			2,260			2,291
U.S. Treasury securities		1,990			1,996			523			522
Collateralized mortgage obligations		819			816			1,150			1,170
Total available-for-sale short-term investments		263,243			263,451			167,049			167,096
High yield trading debt securities		178,466			175,390			187,491			181,483
Equity mutual fund		86,309			86,268			83,809			82,542
Domestic equity ETF		59,157			61,806			31,307			32,651
Money market funds held in trading accounts		6,362			6,362			21,401			21,401
Emerging markets trading debt mutual fund		3,323			2,550			3,323			2,614
Other trading investments		1,870			1,792			2,850			2,779
Total trading short-term investments		335,487			334,168			330,181			323,470
Total short-term investments		$	598,730		$	597,619		$	497,230		$	490,566

 

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 April 4, 2015.

 

 

(Thousands of dollars)		2015
Due within one year		$	984
Due after one year through three years		11,077
Due after three years		12,093
Total fixed rate securities		$	24,154

 

 

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 April 4, 2015 and December 31, 2014:

 

		April 4,			December 31,
(Thousands of dollars)		2015			2014
At lower of LIFO cost or market:
Live hogs and materials		$	216,500		$	208,641
Fresh pork and materials		39,459			28,573
		255,959			237,214
LIFO adjustment		(33,676		)	(36,560		)
Total inventories at lower of LIFO cost or market		222,283			200,654
At lower of FIFO cost or market:
Grains, oilseeds and other commodities		281,286			320,066
Sugar produced and in process		49,574			48,863
Other		62,118			57,344
Total inventories at lower of FIFO cost or market		392,978			426,273
Grain, flour and feed at lower of weighted average cost or market		100,823			109,375
Total inventories		$	716,084		$	736,302

 

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. The Internal Revenue Service (IRS) examination of Seaboard’s 2010 U.S. income tax return has been finalized.  There have not been any material changes in unrecognized income tax benefits since December 31, 2014.  Interest related to unrecognized tax benefits and penalties was not material for the three months ended April 4, 2015.

 

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 April 4, 2015 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 2015.  The trading securities classified as other current assets below are assets held for Seaboard’s deferred compensation plans.

 

		Balance
		April 4,
(Thousands of dollars)		2015			Level 1			Level 2			Level 3
Assets:
Available-for-sale securities - short-term investments:
Money market funds		$	236,974		$	236,974		$	-		$	-
Corporate bonds		11,757			-			11,757			-
U.S. Government agency securities		9,354			-			9,354			-
Asset backed debt securities		2,554			-			2,554			-
U.S. Treasury securities		1,996			-			1,996			-
Collateralized mortgage obligations		816			-			816			-
Trading securities - short-term investments:
High yield debt securities		175,390			-			175,390			-
Equity mutual fund		86,268			86,268			-			-
Domestic equity ETF		61,806			61,806			-			-
Money market funds held in trading accounts		6,362			6,362			-			-
Emerging markets trading debt mutual fund		2,550			2,550			-			-
Other trading investments		1,792			-			1,792			-
Trading securities - other current assets:
Domestic equity securities		35,600			35,600			-			-
Foreign equity securities		6,780			6,780			-			-
Fixed income mutual funds		4,415			4,415			-			-
Other		2,959			2,511			448			-
Derivatives:
Commodities(1)		4,147			4,147			-			-
Foreign currencies		1,039			-			1,039			-
Total Assets		$	652,559		$	447,413		$	205,146		$	-
Liabilities:
Derivatives:
Commodities(1)		$	9,722		$	9,722		$	-		$	-
Interest rate swaps		9,256			-			9,256			-
Foreign currencies		424			-			424			-
Total Liabilities		$	19,402		$	9,722		$	9,680		$	-

(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 April 4, 2015, the commodity derivatives had a margin account balance of $21,752,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $16,612,000 and other current liabilities of $435,000.

 

8

 

The following table shows assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 and also the level within the fair value hierarchy used to measure each category of assets.

 

		Balance
		December 31,
(Thousands of dollars)		2014			Level 1			Level 2			Level 3
Assets:
Available-for-sale securities - short-term investments:
Money market funds		$	142,432		$	142,432		$	-		$	-
Corporate bonds		11,015			-			11,015			-
U.S. Government agency securities		9,666			-			9,666			-
Asset backed debt securities		2,291			-			2,291			-
Collateralized mortgage obligations		1,170			-			1,170			-
U.S. Treasury securities		522			-			522			-
Trading securities - short term investments:
High yield debt securities		181,483			-			181,483			-
Equity mutual fund		82,542			82,542			-			-
Domestic equity ETF		32,651			32,651			-			-
Money market funds held in trading accounts		21,401			21,401			-			-
Emerging markets trading debt mutual fund		2,614			2,614			-			-
Other trading investments		2,779			-			2,779			-
Trading securities - other current assets:
Domestic equity securities		33,857			33,857			-			-
Foreign equity securities		6,532			6,532			-			-
Fixed income mutual funds		4,570			4,570			-			-
Other		2,676			2,405			271			-
Derivatives:
Commodities(1)		6,136			6,136			-			-
Foreign currencies		1,675			-			1,675			-
Total Assets		$	546,012		$	335,140		$	210,872		$	-
Liabilities:
Derivatives:
Commodities(1)		$	1,779		$	1,779		$	-		$	-
Interest rate swaps		7,715			-			7,715			-
Foreign currencies		407			-			407			-
Total Liabilities		$	9,901		$	1,779		$	8,122		$	-

 

(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, 2014, the commodity derivatives had a margin account balance of $4,314,000 resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $9,267,000 and other current liabilities of $596,000.

 

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 amortized cost and estimated fair values of investments at April 4, 2015 and December 31, 2014 are presented in Note 2.

 

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 the 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, 2014.

 

9

 

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 April 4, 2015, Seaboard had open net derivative contracts to purchase 33,775,000 bushels of grain, 24,200,000 pounds of hogs, 9,390,000 pounds of sugar, 960,000 pounds of soybean oil, 365,000 tons of soybean meal, 264,000 pounds of dry whey powder and 40,000 pounds of cheese.  At December 31, 2014, Seaboard had open net derivative contracts to purchase 19,800,000 pounds of hogs, 19,620,000 pounds of soybean oil, 15,551,000 pounds of sugar, 10,697,000 bushels of grain, 88,000 pounds of dry whey powder and 85,000 tons of soybean meal and open net derivative contracts to sell 4,326,000 gallons of heating oil.  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 April 4, 2015 and December 31, 2014, 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 $92,901,000 and $143,961,000, respectively, primarily related to the South African Rand.

 

Interest Rate Exchange Agreements

 

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 interest rate exchange agreements were terminated and replaced, each with a mandatory early termination date which coincides with the revised anticipated delivery dates in 2015 and have similar terms as the original agreements terminated.  Payments made by Seaboard to unwind these agreements were not material. These four exchange agreements, still outstanding as of April 4, 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 four dry bulk vessel leases in 2015. Seaboard pays a fixed rate and receives a variable rate of interest on these four notional amounts of $22,000,000 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 these three notional amounts of $25,000,000 each. All seven of these interest rate exchange agreements do not qualify as hedges for accounting purposes. Accordingly, the changes in fair value of these agreements are recorded in miscellaneous, net in the Condensed Consolidated Statements of Comprehensive Income. At both April 4, 2015 and December 31, 2014, Seaboard had seven interest rate exchange agreements outstanding with a total notional value of $163,000,000.

 

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 April 4, 2015, Seaboard’s foreign currency exchange agreements have a maximum amount of loss due to credit risk in the amount of $1,039,000 with five counterparties and no such exposures related to the interest rate swaps.  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 April 4, 2015 and March 29, 2014.

 

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(Thousands of dollars)
			Three Months Ended
			April 4,			March 29,
			2015			2014
Commodities	Cost of sales		$	(5,948)		$	(6,584)
Foreign currencies	Cost of sales		(494)			485
Foreign currencies	Foreign currency		1,533			765
Interest rate	Miscellaneous, net		(4,691)			(602)

 

The following table provides the fair value of each type of derivative held as of April 4, 2015 and December 31, 2014 and where each derivative is included on the Condensed Consolidated Balance Sheets.

 

(Thousands of dollars)				Asset Derivatives								Liability Derivatives
				April 4,			December 31,					April 4,			December 31,
				2015			2014					2015			2014
Commodities(1)		Other current assets		$	4,147		$	6,136		Other current liabilities		$	9,722		$	1,779
Foreign currencies		Other current assets		1,039			1,675			Other current liabilities		424			407
Interest rate		Other current assets		-			-			Other current liabilities		9,256			7,715

 

(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 April 4, 2015 and December 31, 2014, the commodity derivatives had a margin account balance of $21,752,000 and $4,314,000, respectively, resulting in a net other current asset on the Condensed Consolidated Balance Sheets of $16,612,000 and $9,267,000, respectively and other current liabilities of $435,000 and $596,000, respectively.

 

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 2015.  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
		April 4,			March 29,
(Thousands of dollars)		2015			2014
Components of net periodic benefit cost:
Service cost		$	2,447		$	1,856
Interest cost		2,550			2,403
Expected return on plan assets		(2,115)			(2,185)
Amortization and other		749			470
Net periodic benefit cost		$	3,631		$	2,544

 

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Note 7 – Commitments and Contingencies

 

Contingencies

 

On April 29, 2015, Seaboard received from the Department of Justice, Asset Forfeiture and Money Laundering Section (“AFMLS”), a Grand Jury Subpoena issued by the United States District Court for the District of Columbia (the “DC District Court”) requesting records related to 37 specified foreign companies and five individuals.  Seaboard has previously produced documents responsive to Grand Jury subpoenas dated September 18, 2014 and October 17, 2014.  The Subpoena issued September 18, 2014 requested records related to nine entities and one individual, and the Subpoena issued October 17, 2014 requested records with respect to eight additional entities and one additional individual. The companies and individuals as to which the requested records relate to are not affiliated with Seaboard. The AFMLS attorney conducting the investigation has advised Seaboard that it is not a target of the investigation. Seaboard has retained outside counsel and is cooperating with the government’s investigation.  It is impossible at this stage either to determine the probability of a favorable or unfavorable outcome or to estimate the amount of potential loss, if any, resulting from the government’s inquiry.

 

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 recipients, certain health care providers in the Guymon area, and Seaboard’s health plan and certain personnel issues.  The United States Attorney’s Office for the Western District of Oklahoma (“USAO”), which has been leading the investigation, previously advised Seaboard that it intended to close its investigation and that no charges would be brought against Seaboard.  However, discussions with the USAO continue regarding the status of the investigation and the possibility of proceedings by the USAO, ICE and/or the Oklahoma Attorney General’s office remains.  No proceedings have been filed or brought as of the date of this report.  It is not possible at this time to determine whether any agencies will continue to pursue an investigation or whether Seaboard will incur any material fines, penalties or liabilities in connection with this matter.

 

Seaboard is subject to various administrative and judicial proceedings and other legal matters related to the normal conduct of its business.  In the opinion of management, the ultimate resolutions of these items are not expected to have a material 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 in order to further Seaboard’s business objectives.  Seaboard does not issue guarantees of third parties for compensation.  As of April 4, 2015, 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 April 4, 2015, Seaboard’s borrowing capacity under its committed and uncommitted lines was reduced by letters of credit totaling $10,000 and $1,531,000, respectively.  The notes payable to banks under the committed and uncommitted credit lines are unsecured.  These lines of credit do not require compensating balances.

 

Note 8 – Stockholders’ Equity and Accumulated Other Comprehensive Loss

 

Seaboard has a share repurchase program in place which was initially approved by its Board of Directors in November 2009, and is in effect through October 31, 2015. As of April 4, 2015, $50,846,000 remained available for repurchases under the share repurchase program.  For the three months ended April 4, 2015, Seaboard did not repurchase any shares of common stock.  Under this share repurchase program, Seaboard is authorized to repurchase its common stock from time to time 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 repurchases are being funded by cash on hand, and shares repurchased are being retired and resume the status of authorized and unissued shares.  All stock repurchases are being made in compliance with applicable legal requirements and the timing of the repurchases and the number of shares repurchased at any given time 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.

 

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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 did not declare or pay a dividend in 2013 and 2014. Seaboard does not currently intend to declare any further dividends for the years 2015 and 2016.

 

The changes in the components of other comprehensive loss (OCL), net of related taxes, are as follows:

 

		Three Months Ended
		April 4,			March 29,
(Thousands of dollars)		2015			2014
Foreign currency translation adjustment		$	(5,958	)	$	(26,775	)
Investments:
Unrealized gain (loss)		736			15
Amounts reclassified from OCL to net earnings		(59		) (1)	511		(1)
Unrealized gain (loss) on investments		677			526
Unrealized gain on cash flow hedges		-			361
Pension cost:
Unrealized gain		299			-
Amounts reclassified from OCL to net earnings		983		(2)	320		(2)
Unrecognized pension cost		1,282			320
Other Comprehensive Loss, Net of Tax		$	(3,999	)	$	(25,568	)

 

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

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

 

The components of accumulated other comprehensive loss, net of related taxes, are as follows:

 

		April 4,		December 31,
(Thousands of dollars)		2015		2014
Cumulative Foreign Currency Translation Adjustment:		$ (199,995)		$ (194,037)
Unrealized Gain on Investments:		2,011		1,334
Unrecognized Pension Cost:		(58,652)		(59,934)
Total Accumulated Other Comprehensive Loss		$ (256,636)		$ (252,637)

 

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 April 4, 2015, the Sugar segment had $119,734,000 in net assets denominated in Argentine pesos and $1,199,000 in net assets denominated in U.S. dollars.  Management anticipates that the Argentine peso could continue to weaken against the U.S. dollar and thus it is anticipated that Seaboard could incur additional foreign currency translation adjustment losses in other comprehensive loss during the remainder of 2015.

 

At April 4, 2015 and March 29, 2014, income taxes for cumulative foreign currency translation adjustments were recorded using a 35% effective tax rate except for $60,076,000 and $49,411,000, respectively, related to certain subsidiaries for which no tax benefit was recorded. At April 4, 2015 and March 29, 2014, income taxes for all other components of accumulated other comprehensive loss were recorded using a 39% effective rate except for unrecognized pension cost of $19,960,000 and $8,580,000, respectively, related to employees at certain subsidiaries for which no tax benefit has been recorded.

 

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Note 9 - Segment Information

 

As of September 27, 2014, Seaboard’s Pork segment sold to Triumph Foods LLC (Triumph) a 50% interest in Daily’s.  Daily’s produces and markets raw and pre-cooked bacon, ham and sausage and has two further processing plants located in Salt Lake City, Utah and Missoula, Montana.  The Pork segment currently has a business relationship with Triumph under which Seaboard markets substantially all of the pork products produced at Triumph’s plant in St. Joseph, Missouri.  Through September 27, 2014, Seaboard consolidated the operating results of Daily’s as part of its Pork segment operations. As a result of this transaction, Seaboard deconsolidated Daily’s from its Condensed Consolidated Balance Sheet as of September 27, 2014.   Seaboard’s remaining 50% investment in Daily’s is accounted for in the Pork segment by using the equity method of accounting. Both Seaboard and Triumph supply raw product to Daily’s.

 

The Commodity Trading and Milling segment has a 50% non-controlling interest in a bakery located in the Democratic Republic of Congo (DRC) which began start-up operations in the fourth quarter of 2012.  As part of its investment in this bakery, Seaboard has an interest bearing long-term note receivable from this bakery the terms of which require periodic principal payments with the first payment due in June 2015 and a final maturity date of December 2020.  Repayment of this note is primarily dependent upon this business improving existing operations to generate adequate future cash flows to make scheduled payments when due.  The bakery has been incurring operating losses since it began operations as it continues to resolve equipment problems and attempts to gain market share.  As a result of the continuing equipment problems, other production challenges and unfavorable local market conditions causing challenges in gaining market share, Seaboard’s management determined achieving improved operating results would take significantly longer than anticipated.  As a result, Seaboard’s management determined there was a decline in value considered other than temporary as of December 31, 2014 and thus Seaboard recorded a write-down in the fourth quarter of 2014, which represented the remaining equity investment in this business and suspended the use of the equity method as of December 31, 2014.  Seaboard discontinued recognizing interest income on the note receivable during the fourth quarter of 2014.  As of April 4, 2015, the recorded balance of this Note Receivable and previous accrued interest from Affiliates was $34,556,000, all classified as long-term given uncertainty of the timing of payments in the future.  If the future cash flows of this bakery do not improve, there is a possibility that some of the recorded value of the Note Receivable from Affiliate could be deemed uncollectible in the future, which may result in a material charge to earnings.  Including this business, as of April 4, 2015 Seaboard had a total of $56,939,000 of investments in, advances to and notes receivable from all of its affiliates in the DRC, which represents the single largest foreign country risk exposure for Seaboard’s equity method investments.  One of the other affiliates in the DRC, to which Seaboard sells wheat, is the only supplier of flour to this bakery.

 

In September 2013, Seaboard invested $17,000,000 in a flour production business in Brazil for a 50% non-controlling equity interest and provided a $13,000,000 long-term loan to this business.  Half of the interest on this long-term note receivable from affiliate is paid currently in cash and the other half accrues as pay-in-kind interest. This note receivable matures in September 2020 but can be repaid with Seaboard having the option to convert the note receivable to equity and the other equity holders having the option to match such conversion with a purchase of new shares to avoid dilution.  In addition, at the time of Seaboard’s initial investment in this business, plans included potential future equal additional investments by the owners to improve existing operations and expand operations to improve long-term operating results.  Seaboard’s share of additional investments totaled $2,502,000 and $3,886,000 in 2015 and 2014, respectively.  This business also incurred significant operating losses in 2014 and the first quarter of 2015.  Discussions are ongoing between the owners to determine the extent and timing of future additional investments or loans, by either or both parties, for possible expansion plans to improve operating results.  As of April 4, 2015 and December 31, 2014, the recorded balance of this Note Receivable from Affiliates was $14,018,000 and $13,849,000, respectively and Seaboard’s equity investment in this business was $1,950,000 and $11,669,000, respectively.  As of April 4, 2015 and December 31, 2014, Seaboard also had a receivable due from affiliates of $14,207,000 and $13,969,000, respectively from sales of grain and supplies related to this business. During the first quarter of 2015, Seaboard recorded losses from affiliates of $11,666,000 related to this investment, which included $5,846,000 for its proportionate share of a deferred income tax asset allowance related to 2014 and 2013.

 

In September 2014, Seaboard invested $17,333,000 in a cargo terminal business in Jamaica for a 21% non-controlling interest. This investment is accounted for in the Marine segment using the equity method reported on a three-month lag basis and thus Seaboard’s first proportionate share of earnings was recognized in the first quarter of 2015.

 

The Power segment had been operating a floating power generating facility (72 megawatts) in the Dominican

 

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Republic under a short-term lease agreement.  On April 1, 2014, Seaboard provided notice to cancel the lease.  Seaboard ceased operation of the leased facility on September 3, 2014.

 

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 April 4, 2015 and March 29, 2014 of $397,698,000 and $355,763,000, respectively. Butterball had operating income for the three months ended April 4, 2015 and March 29, 2014 of $42,597,000 and $20,748,000, respectively.  As of April 4, 2015 and December 31, 2014, Butterball had total assets of $1,008,592,000 and $1,021,182,000, respectively.

 

In conjunction with Seaboard’s initial investment in Butterball in December 2010, Seaboard has a long-term note receivable from Butterball which had a balance of $145,450,000 as of April 4, 2015.  Part of the interest earned on this note is pay-in-kind interest, which accumulates and is paid at maturity in December 2017.

 

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.

 

Sales to External Customers:

 

		Three Months Ended
		April 4,			March 29,
(Thousands of dollars)		2015			2014
Pork		$	320,888		$	382,090
Commodity Trading and Milling		820,588			789,390
Marine		236,660			200,464
Sugar		45,259			50,356
Power		25,131			53,848
All Other		3,832			3,488
Segment/Consolidated Totals		$	1,452,358		$	1,479,636

 

Operating Income (Loss):

 

		Three Months Ended
		April 4,			March 29,
(Thousands of dollars)		2015			2014
Pork		$	16,396		$	60,477
Commodity Trading and Milling		4,482			11,930
Marine		6,779			(7,392		)
Sugar		3,999			6,761
Power		2,634			(1,684		)
All Other		108			337
Segment Totals		34,398			70,429
Corporate Items		(6,559		)	(5,226		)
Consolidated Totals		$	27,839		$	65,203

 

Income (Loss) from Affiliates:

 

		Three Months Ended
		April 4,			March 29,
(Thousands of dollars)		2015			2014
Pork		$	2,653		$	-
Commodity Trading and Milling		(9,249		)	(35		)
Marine		653			-
Sugar		416			305
Turkey		16,754			6,374
Segment/Consolidated Totals		$	11,227		$	6,644

 

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