10-Q 1 q30410q.txt SEABOARD CORPORATION 2004 3RD QTR 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 October 2, 2004 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 Seaboard Corporation (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) Not Applicable (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 a check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes X . No . There were 1,255,053.90 shares of common stock, $1.00 par value per share, outstanding on October 29, 2004. Total pages in filing - 19 pages PART I - FINANCIAL INFORMATION Item 1. Financial Statements SEABOARD CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Thousands of dollars) (Unaudited) October 2, December 31, 2004 2003 Assets Current assets: Cash and cash equivalents $ 18,282 $ 37,377 Short-term investments 64,510 58,022 Receivables, net 262,021 190,013 Inventories 299,707 276,033 Deferred income taxes 15,544 17,972 Other current assets 45,458 35,419 Total current assets 705,522 614,836 Investments in and advances to foreign affiliates 40,370 46,680 Net property, plant and equipment 612,632 643,968 Other assets 29,289 20,207 Total assets $1,387,813 $1,325,691 Liabilities and Stockholders' Equity Current liabilities: Notes payable to banks $ 11,352 $ 75,564 Current maturities of long-term debt 54,178 56,983 Accounts payable 77,284 61,817 Other current liabilities 160,318 149,726 Total current liabilities 303,132 344,090 Long-term debt, less current maturities 290,831 321,555 Deferred income taxes 118,884 85,295 Other liabilities 45,489 46,720 Total non-current and deferred liabilities 455,204 453,570 Minority and other noncontrolling interests 2,119 7,466 Stockholders' equity: Common stock of $1 par value, Authorized 4,000,000 shares; issued and outstanding 1,255,054 shares 1,255 1,255 Accumulated other comprehensive loss (60,091) (61,527) Retained earnings 686,194 580,837 Total stockholders' equity 627,358 520,565 Total liabilities and stockholders' equity $1,387,813 $1,325,691 See notes to condensed consolidated financial statements. 1 SEABOARD CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Earnings (Thousands of dollars except per share amounts) (Unaudited) Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, 2004 2003 2004 2003 Net sales: Products $ 522,422 $ 361,525 $1,563,177 $1,065,490 Services 132,272 105,793 388,375 315,161 Other 12,768 18,099 43,892 52,516 Total net sales 667,462 485,417 1,995,444 1,433,167 Cost of sales and operating expenses: Products 454,546 331,786 1,398,154 995,482 Services 101,466 95,960 301,871 280,805 Other 10,516 13,291 33,773 40,134 Total cost of sales and operating expenses 566,528 441,037 1,733,798 1,316,421 Gross income 100,934 44,380 261,646 116,746 Selling, general and administrative expenses 29,566 26,535 91,989 80,638 Operating income 71,368 17,845 169,657 36,108 Other income (expense): Interest expense (6,120) (6,844) (20,538) (20,393) Interest income 2,140 450 5,705 2,037 Income (loss) from foreign affiliates 103 (15,054) (128) (20,932) Minority and other noncontrolling interests (227) (344) (621) (452) Foreign currency gain (loss), net 5,040 (914) 3,536 (7,015) Miscellaneous, net (5,161) 5,448 (2,288) 6,780 Total other income (expense), net (4,225) (17,258) (14,334) (39,975) Earnings (loss) before income taxes and cumulative effect of changes in accounting principles 67,143 587 155,323 (3,867) Income tax benefit (expense) (20,595) 1,251 (47,142) 1,856 Earnings (loss) before cumulative effect of changes in accounting principles 46,548 1,838 108,181 (2,011) Cumulative effect of changes in accounting for asset retirement obligations and drydock accruals,net of income tax expense of $550 - - - 3,648 Net earnings $ 46,548 $ 1,838 $ 108,181 $ 1,637 Net earnings per common share: Earnings (loss) per share before cumulative effect of changes in accounting principles $ 37.09 $ 1.46 $ 86.20 $ (1.60) Cumulative effect of changes in accounting for asset retirement obligations and drydock accruals - - - 2.90 Net earnings per common share $ 37.09 $ 1.46 $ 86.20 $ 1.30 Dividends declared per common share $ 0.75 $ 0.75 $ 2.25 $ 2.25 Average number of shares outstanding 1,255,054 1,255,054 1,255,054 1,255,054 See notes to condensed consolidated financial statements. 2 SEABOARD CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Thousands of dollars) (Unaudited) Nine Months Ended October 2, September 27, 2004 2003 Cash flows from operating activities: Net earnings $ 108,181 $ 1,637 Adjustments to reconcile net earnings to cash from operating activities: Depreciation and amortization 48,590 47,715 Loss from foreign affiliates 128 20,932 Foreign currency exchange gains (246) (3,891) Cumulative effect of accounting changes, net - (3,648) Deferred income taxes 35,613 (4,427) Changes in current assets and liabilities: Receivables, net of allowance (84,497) 18,801 Inventories (17,983) (8,292) Other current assets (10,632) 9,065 Current liabilities exclusive of debt 24,089 (39) Other, net (63) (3,068) Net cash from operating activities 103,180 74,785 Cash flows from investing activities: Purchase of short-term investments (144,874) (32,036) Proceeds from the sale or maturity of short-term investments 138,592 29,671 Investments in and advances to foreign affiliates, net 3,014 (393) Capital expenditures (21,768) (25,050) Other, net 4,089 3,848 Net cash from investing activities (20,947) (23,960) Cash flows from financing activities: Notes payable to banks, net (64,212) (16,070) Principal payments of long-term debt (32,297) (30,655) Repurchase of minority interest in a controlled subsidiary (5,000) - Dividends paid (2,824) (2,824) Bond construction fund 1,200 655 Other, net (152) (1,611) Net cash from financing activities (103,285) (50,505) Effect of exchange rate change on cash 1,957 2,341 Net change in cash and cash equivalents (19,095) 2,661 Cash and cash equivalents at beginning of year 37,377 23,242 Cash and cash equivalents at end of period $ 18,282 $ 25,903 See notes to condensed consolidated financial statements. 3 SEABOARD CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements 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- controlled affiliates are accounted for by the equity method. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of Seaboard for the year ended December 31, 2003 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. Interest Rate Exchange Agreements Seaboard's interest rate exchange agreements do not qualify as hedges for accounting purposes. During the three and nine months ended October 2, 2004 Seaboard recorded losses of $4,172,000 and $4,016,000, respectively, related to these agreements compared to gains totaling $4,768,000 for the 2003 three month period and losses of $2,926,000 for the 2003 nine month period. The gains and losses are included in miscellaneous, net on the Condensed Consolidated Statements of Earnings and reflect changes in fair market value, net of interest paid or received. During the 2004 three and nine month periods, Seaboard made net payments of $2,142,000 and $5,409,000, respectively, compared to payments made of $2,175,000 and $5,118,000 during the same periods of 2003 resulting from the difference between the fixed rate paid and variable rate received on these agreements. Supplemental Non-cash Disclosures The fluctuation of the Argentine peso has affected the U.S. dollar value of the peso-denominated assets and liabilities of the Sugar and Citrus segment. During the nine months ended October 2, 2004, this segment recorded non-cash gains of $246,000 caused by the revaluation of certain dollar denominated net assets compared to gains of $3,891,000 during the nine months ended September 27, 2003. The following table shows the non-cash impact of the change in exchange rates on various balance sheet categories for the peso denominated assets and liabilities. Nine Months Ended October 2, September 27, Increase (decrease) (thousands of dollars) 2004 2003 Working capital $1,744 $7,555 Fixed assets (45) 6,949 Other long-term net assets (14) 62 Accounting Changes and New Accounting Standards Effective January 1, 2003, Seaboard adopted Statement of Financial Accounting Standard No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations," which required Seaboard to record a long- lived asset and related liability for asset retirement obligation costs associated with the closure of the hog lagoons it is legally obligated to close. Accordingly, on January 1, 2003, Seaboard recorded the cumulative effect of the change in accounting principle with a charge to earnings of $2,195,000 ($1,339,000 net of tax, or $1.07 per common share). The following table shows the changes in the asset retirement obligation during each year. Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Thousands of dollars) 2004 2003 2004 2003 Beginning balance $6,449 $5,909 $6,086 $5,416 Accretion expense 116 109 345 309 Liability for additional lagoons placed in service - - 134 293 Ending balance $6,565 $6,018 $6,565 $6,018 4 Through December 31, 2002, costs expected to be incurred during regularly scheduled drydocking of vessels were accrued ratably prior to the drydock date. Effective January 1, 2003, Seaboard changed its method of accounting for these costs from the accrual method to the direct-expense method. Under the new accounting method, drydock maintenance costs are recognized as expense when maintenance services are performed. Seaboard believes the newly adopted accounting principle is preferable in these circumstances because the maintenance expense is not recorded until the maintenance services are performed and, accordingly, the direct-expense method eliminates significant estimates and judgments inherent under the accrual method. As a result, on January 1, 2003, the balance of the accrued liability for drydock maintenance as of December 31, 2002 for its Commodity Trading and Milling, Marine, and Power segments was reversed, resulting in an increase in earnings of $6,393,000 ($4,987,000 net of related tax expense or $3.97 per common share) as a cumulative effect of a change in accounting principle. As of December 31, 2003, Seaboard adopted Financial Accounting Standards Board Interpretation No. 46, revised December 2003 (FIN 46), "Consolidation of Variable Interest Entities". FIN 46 applies to an entity if its total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated support or if the equity investors lack certain characteristics of a controlling financial interest. If an entity has these characteristics, FIN 46 requires a test to identify the primary beneficiary based on expected losses and expected returns associated with the variable interest. The primary beneficiary is then required to consolidate the entity. Based on its evaluations, Seaboard consolidated certain limited liability companies as of December 31, 2003, which own certain of the facilities used in connection with Seaboard's vertically integrated hog production because Seaboard was determined to be the primary beneficiary. If the consolidation requirements would have been applied retroactively to January 1, 2003, operating income, net earnings, and net earnings per common share during 2003 would have decreased by $48,000, $29,000 and $0.02, respectively, for the third quarter and $180,000, $110,000 and $0.09, respectively, for the nine month period. Note 2 - Repurchase of Minority Interest In connection with the December 2001 sale of a 10% minority interest in one of the two power barges in the Dominican Republic, the buyer was given a three-year option to sell the interest back to Seaboard for the book value at the time of sale, pending collections of outstanding receivables. During January 2004, the buyer provided notice to exercise the option valued at $5,709,000. An initial payment of $5,000,000 was paid during the second quarter of 2004 to reacquire this interest with the remaining balance payable upon collection of the remaining outstanding receivables. In addition, Seaboard has historically paid commissions to a related entity of the above party relative to the performance of the other power barge. During the second quarter of 2004 Seaboard agreed to terminate that relationship by making a one-time payment of $2,000,000, included in selling, general and administrative expenses. Note 3 - Comprehensive Income (Loss) Components of total comprehensive income (loss), net of related taxes, are summarized as follows: Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Thousands of dollars) 2004 2003 2004 2003 Net earnings $46,548 $1,838 $108,181 $ 1,637 Other comprehensive income (loss) net of applicable taxes: Foreign currency translation adjustment (470) 30 1,457 9,175 Unrealized gains on investments 37 79 111 117 Unrealized gains (losses) on cash flow hedges 80 (19) 18 (94) Amortization of deferred gain on interest rate swaps (50) (51) (150) (151) Total comprehensive income $46,145 $1,877 $109,617 $10,684 5 The components of and changes in accumulated other comprehensive loss for the nine months ended October 2, 2004 are as follows: Balance Balance December 31, Period October 2, (Thousands of dollars) 2003 Change 2004 Foreign currency translation adjustment $(56,490) $1,457 $(55,033) Unrealized gain on investments 14 111 125 Unrecognized pension cost (5,772) - (5,772) Net unrealized loss on cash flow hedges (30) 18 (12) Deferred gain on interest rate swaps 751 (150) 601 Accumulated other comprehensive loss $(61,527) $1,436 $(60,091) The unrecognized pension cost is calculated and adjusted annually during the fourth quarter. However, as a result of an anticipated lower discount rate used in the calculation of unrecognized pension cost and the retirement plan amendment discussed in Note 5, management expects the 2004 calculation will result in additional comprehensive loss during the fourth quarter. With the exception of the foreign currency translation loss to which a 35% federal tax rate is applied, income taxes for components of accumulated other comprehensive loss were recorded using a 39% effective tax rate. Note 4 - Inventories The following is a summary of inventories at October 2, 2004 and December 31, 2003: October 2, December 31, (Thousands of dollars) 2004 2003 At lower of LIFO cost or market: Live hogs & materials $146,469 $142,396 Dressed pork & materials 20,261 22,220 166,730 164,616 LIFO allowance (3,450) (7,608) Total inventories at lower of LIFO cost or market 163,280 157,008 At lower of FIFO cost or market: Grain, flour and feed 99,559 87,831 Sugar produced & in process 15,746 14,807 Other 21,122 16,387 Total inventories at lower of FIFO cost or market 136,427 119,025 Total inventories $299,707 $276,033 Note 5 - Employee Benefits Seaboard maintains a defined benefit pension plan (the Plan) for its domestic salaried and clerical employees and also sponsors non- qualified, unfunded supplemental executive plans, and unfunded supplemental retirement agreements with certain executive employees. As a result of recently passed pension relief legislation and finalization of Plan data, in order to meet the minimum funding standards to avoid the Pension Benefit Guaranty Corporation variable rate premiums established by the Employee Retirement Income Security Act of 1974, Seaboard revised its original schedule of contributions for 2004 from $7,000,000 to $5,763,000. During 2004, payments of $1,922,000, $562,000 and $3,279,000 were made on April 15, July 15, and September 15, respectively. On November 5, 2004, Seaboard amended its Executive Retirement Plan, which provides a supplemental retirement benefit to officers and certain key employees of Seaboard and its subsidiaries, to conform the benefit calculation to the Plan discussed above by changing the methodology for calculating the benefit to a percentage of final average pay for all years of service. The amendment also changes the normal form of the benefit to a lump sum payment, provided the employee has at least 5 years of service after the plan amendment was 6 adopted. Seaboard has also established a Rabbi Trust in order to provide a mechanism to provide discretionary funding for the benefit. While this amendment has no effect on the 2004 net periodic benefit cost, it will impact the amount of future benefit costs. Had this amendment been in effect at the beginning of 2004, the 2004 annual net periodic benefit cost would have increased by $1,179,000 ($719,000 after tax, or $0.57 per share). Seaboard is considering providing funding for a portion of the liability to a trust during the fourth quarter of 2004 for this plan. As the Executive Retirement Plan is a non-qualified plan, the assets will remain on the books of Seaboard as a long-term asset. The net periodic benefit cost of these plans was as follows: Three months ended Nine months ended October 2, September 27, October 2, September 27, (Thousands of dollars) 2004 2003 2004 2003 Components of net periodic benefit cost: Service cost $ 854 $ 735 $2,467 $2,283 Interest cost 1,021 841 2,877 2,724 Expected return on plan assets (847) (522) (2,414) (1,781) Amortization and other 210 231 605 733 Net periodic benefit cost $1,238 $1,285 $3,535 $3,959 Note 6 - Contingencies Seaboard reached an agreement in 2002 to settle litigation brought by the Sierra Club. Under the terms of the settlement, Seaboard is conducting an environmental investigation to determine the source of elevated nitrates at three farms and potentially will be required to take remedial actions at the farms if conditions so warrant. Seaboard is subject to regulatory actions and an investigation by the United States Environmental Protection Agency and the State of Oklahoma. One such action involves five properties utilized in Seaboard's hog production operations which were purchased from PIC International Group, Inc. (PIC). Seaboard has undertaken an extensive investigation, and has had significant discussions with the EPA and the State of Oklahoma, proposing to take a number of corrective actions with respect to the farms, and one additional farm, in order to attempt to settle the action. In connection with these discussions, EPA and the State of Oklahoma each stated that any settlement must include a civil fine of $1,200,000 for EPA and $500,000 for the State of Oklahoma. Seaboard believes that the EPA has no authority to impose a civil fine and so advised the EPA as a part of a settlement proposal. The EPA initially advised Seaboard that it rejected its most recent settlement proposal and settlement discussions terminated. The EPA recently requested a meeting with Seaboard Farms to reinstate settlement discussions. If the matter is not settled, the EPA could bring an action against Seaboard, although Seaboard believes it has meritorious defenses to any such action, or the EPA could determine to take no further action. Settlement discussions are continuing with the State of Oklahoma, and Seaboard intends to proceed with its proposed corrective actions with respect to the farms. PIC is indemnifying Seaboard with respect to the action pursuant to an indemnification agreement which has a $5 million limit. If the settlement being discussed with the State of Oklahoma is agreed to, the estimated cumulative costs which will be expended will total approximately $6.2 million, not including the additional legal costs required to negotiate the settlement or the $500,000 penalty demanded by the State of Oklahoma. If the measures taken pursuant to the settlement are not effective, other measures with additional costs may be required. PIC has advised Seaboard that it is not responsible for the costs in excess of $5 million. Seaboard disputes PIC's determination of the costs to be included in the calculation and believes that the costs to be considered are less than $5 million, such that PIC is responsible for all such costs and penalties, except for approximately $180,000 of estimated costs that would be incurred over 5 years subsequent to the settlement for certain testing and sampling. Seaboard has agreed to conduct such testing and sampling as a part of the sampling it conducts in the normal course of operations and believes that the incremental costs incurred to conduct such testing and sampling will be less than $180,000. Seaboard also believes that a more general indemnity agreement would require indemnification of a liability in excess of $5 million (excluding the estimated $180,000 cost for testing and sampling), although PIC disputes this. With respect to other actions and the investigation, neither is expected to have a material adverse effect on Seaboard's consolidated financial statements. 7 From time to time bills have been introduced in the United States Senate and House of Representatives which include provisions to prohibit meat packers, such as Seaboard, from owning or controlling livestock intended for slaughter. If passed, such bills could prohibit Seaboard from owning or controlling hogs, and thus would require divestiture of our operations, possibly at prices which are below the carrying value of such assets on the balance sheet, or otherwise restructure its ownership and operation. Such bills could also be construed as prohibiting or restricting Seaboard from engaging in various contractual arrangements with third party hog producers, such as traditional contract finishing arrangements. To date, none have been passed into law nor does Seaboard expect any to be passed in 2004. However, Seaboard cannot assure such legislation will not be adopted in the future. Seaboard, along with industry groups and other similarly situated companies, continues to vigorously lobby against enactment of any such legislation. Seaboard is subject to various other 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 have a material adverse effect on Seaboard's consolidated financial statements. 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. The following table sets forth the terms of guarantees as of October 2, 2004. Guarantee beneficiary Maximum exposure Maturity Foreign non-consolidated affiliate grain $1,000,000 Annual renewal processor-Uganda Foreign non-consolidated affiliate food $ 400,000 August 2005 product distributor-Ecuador Various hog contract growers $1,585,000 Annual renewal Seaboard guaranteed a bank borrowing for a subsidiary of a non- consolidated foreign affiliate grain processor in Kenya, Unga Holdings Limited (Unga), to facilitate bank financing used for the rehabilitation and expansion of a milling facility in Uganda. This guarantee was a part of the original purchase agreement with Unga when Seaboard first invested in this company in 2000. The guarantee can be drawn upon in the event of non-payment of a bank borrowing by Unga's subsidiary. While the guarantee may be cancelled by Seaboard annually, the bank has the right to draw on the guarantee in the event it is advised that the guarantee will be cancelled. The guarantee renews annually until the debt expires in 2007. During the second quarter of 2004, Seaboard renewed the guarantee for an additional year but reduced it from $1,300,000 to $1,000,000. Unga has provided a reciprocal guarantee to Seaboard. As of October 2, 2004, this affiliate had $905,000 of borrowings outstanding related to this guarantee. The non-consolidated affiliate food product distributor in Ecuador purchases certain products from a U.S. domiciled vendor. Seaboard has guaranteed the payments for these purchases in order to secure normal credit terms for this affiliate. Seaboard has guaranteed a portion of the bank debt for certain farmers, which debt proceeds were used to construct facilities to raise hogs for Seaboard's Pork division. The guarantees enabled the farmers to obtain favorable financing terms. These bank guarantees renew annually until the underlying debt is fully repaid in 2013-2014. The maximum exposure to Seaboard from these guarantees is $1,585,000. Seaboard has not accrued a liability for any of the third party or affiliate guarantees as management considered the likelihood of loss to be remote. As of October 2, 2004, Seaboard had outstanding $10,642,000 of letters of credit with various banks that reduced Seaboard's borrowing capacity under its committed credit facilities. The largest letter of credit of $8,700,000 is for workers compensation insurance. Also included is a letter of credit for $211,000 to support purchases for a non-controlled affiliate mill expansion project. While this affiliate has sufficient liquidity to pay for the improvements, the mill is located in Haiti and the letter of credit was posted in lieu of advance vendor payments for the purchases. 8 Note 7 - Segment Information The Bulgarian wine business (the Business), in which Seaboard has an equity investment has obtained the necessary working capital resources during the third quarter of 2004 to support its inventory purchases for the fall 2004 vintage. However, this affiliate has continued to incur losses from its operations. As a result of sustained losses, Seaboard's common stock investment has been reduced to zero and Seaboard began applying losses against its remaining investment, consisting of preferred stock and debt, based on the change in Seaboard's claim on the Business' book value. Accordingly, Seaboard increased its share of losses from this Business from 37% to 73% in the third quarter of 2004. Annually during the fourth quarter, the Business evaluates the recoverability of its long-lived assets based on projected cash flows. Seaboard will consider this evaluation, among other things, and determine whether there is an other-than- temporary decline in value for this investment. Such a determination could have a material affect on the results of operations for 2004. As of October 2, 2004, Seaboard's investments in and advances to the Business totaled $13,274,000. Seaboard's share of losses from the Business, included in All Other below, included a provision for inventory write-downs totaling $800,000 during the second quarter of 2004. During the fourth quarter of 2003, Seaboard sold its equity investment in Fjord, a non-consolidated affiliate included in the All Other segment. Seaboard's share of Fjord's losses recognized during the three and nine months ended September 27, 2003 totaled $13,420,000 and $16,256,000, respectively, including third quarter charges totaling $12,421,000 reflecting Fjord's asset impairment charges to write down licenses, inventory and fixed assets. 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 foreign affiliates for the Commodity Trading and Milling Division, is used as the measure when evaluating segment performance because management does not consider interest and income tax expense on a segment basis. Sales to External Customers: Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Thousands of dollars) 2004 2003 2004 2003 Pork $241,538 $186,125 $ 716,667 $ 531,238 Commodity Trading and Milling 255,808 151,830 805,859 478,971 Marine 124,994 99,301 354,143 295,625 Sugar and Citrus 25,749 22,710 54,600 53,305 Power 12,768 18,099 43,892 52,516 All Other 6,605 7,352 20,283 21,512 Segment/Consolidated Totals $667,462 $485,417 $1,995,444 $1,433,167 Operating Income: Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Thousands of dollars) 2004 2003 2004 2003 Pork $ 38,765 $ 3,954 $ 98,119 $ 2,250 Commodity Trading and Milling 9,395 5,445 15,855 10,002 Marine 17,153 (1,394) 41,202 42 Sugar and Citrus 3,285 5,899 9,404 15,237 Power 2,089 3,309 3,316 8,250 All Other 980 832 2,375 1,642 Segment Totals 71,667 18,045 170,271 37,423 Corporate Items (299) (200) (614) (1,315) Consolidated Totals $ 71,368 $ 17,845 $ 169,657 $ 36,108 9 Income (loss) from Foreign Affiliates: Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Thousands of dollars) 2004 2003 2004 2003 Commodity Trading and Milling $ 1,365 $ 788 $ 3,953 $ (871) All Other (1,262) (15,842) (4,081) (20,061) Segment/Consolidated Totals $ 103 $(15,054) $ (128) $ (20,932) Total Assets: October 2, December 31, (Thousands of dollars) 2004 2003 Pork $ 666,828 $ 670,288 Commodity Trading and Milling 288,005 243,065 Marine 115,764 114,375 Sugar and Citrus 90,666 75,674 Power 83,003 76,920 All Other 16,934 13,953 Segment Totals 1,261,200 1,194,275 Corporate Items 126,613 131,416 Consolidated Totals $1,387,813 $1,325,691 Administrative services provided by the corporate office are primarily allocated to the individual segments based on the size and nature of their operations. Corporate assets include short-term investments, certain investments in and advances to foreign affiliates, fixed assets, deferred tax amounts and other miscellaneous items. Corporate operating losses represent certain operating costs not specifically allocated to individual segments. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES Summary of Sources and Uses of Cash Cash and short-term investments decreased $12.6 million from December 31, 2003. While Seaboard generated $103.2 million of cash from operating activities, $32.3 million was used for scheduled payments on long-term debt, $64.2 million was used to repay notes payable to banks, and $21.8 million was used for capital expenditures. Cash from operating activities for the nine months ended October 2, 2004 increased $28.4 million compared to the same period one year earlier, primarily reflecting increased earnings, partially offset by the increased working capital needs of the Pork, Commodity Trading and Milling and Power segments. Receivables in the Pork segment increased reflecting strong sales while inventory levels increased reflecting the recently populated new hog production facilities. For the Commodity Trading and Milling segment, the overall increase in trading activity caused increases in accounts receivable and inventories. Working capital needs also increased for the Power segment as a result of continuing slow collections of accounts receivable. 10 Capital Expenditures Seaboard invested $21.8 million in property, plant and equipment during 2004, of which $8.7 million was expended in the Pork segment, $4.7 million in the Marine segment, $3.9 million in the Commodity Trading and Milling segment, $4.0 million in the Sugar and Citrus segment and $0.5 million in the remaining businesses. The capital expenditures for 2004 have primarily been of a normal recurring nature including replacements of machinery and equipment, and general facility modernizations and upgrades. There are no material commitments for capital expenditures, nor are any major expansions currently planned for the next year. For the remainder of 2004, management has budgeted additional capital expenditures of $2.5 million in the Pork segment, $1.4 million in the Commodity Trading and Milling segment, $2.4 million in the Marine segment, $1.5 million in the Sugar and Citrus segment and $0.3 million in all other businesses. Management anticipates financing these capital expenditures from internally generated cash and the use of available short-term investments. Financing Activities and Debt During 2004, Seaboard entered into two new, one-year committed credit lines totaling $45.0 million and extended for one year a $20.0 million committed credit facility. In addition, Seaboard combined, increased, and extended its committed subsidiary credit facilities from a total of $80.0 million to $95.0 million expiring on April 30, 2005. This facility is denominated in U.S. dollars. As of October 2, 2004, Seaboard had committed lines of credit totaling $185.0 million and uncommitted lines totaling $32.0 million. As of October 2, 2004 Seaboard had $10.0 million of borrowings outstanding under the committed credit lines and $1.4 million borrowed under its uncommitted credit lines. Outstanding standby letters of credit totaling $10.6 million reduced Seaboard's borrowing capacity under its committed credit lines. In addition to funding Seaboard's planned capital expenditures as discussed above, Seaboard's scheduled long-term debt maturities total $54.2 million over the next year with $23.0 million maturing during the fourth quarter of 2004. Management believes that Seaboard's current combination of internally generated cash, liquidity, capital resources and borrowing capabilities will be adequate to make these scheduled debt payments and support existing operations during the next year. Management does, however, periodically review various alternatives for future financing to provide additional liquidity for future operating plans. As management intends to continue seeking opportunities for expansion in the industries in which Seaboard operates, management may have to pursue financing alternatives at that time. During 2004, the 10% minority interest owner of one of the power barges located in the Dominican Republic exercised a put option for the equity interest. See Note 2 to the Condensed Consolidated Financial Statements for further discussion. See Note 6 to the Condensed Consolidated Financial Statements for a summary of Seaboard's contingent obligations, including guarantees issued to support certain activities of non-consolidated affiliates or third parties who provide services for Seaboard. RESULTS OF OPERATIONS Net sales for the three and nine months ended October 2, 2004 increased by $182.0 and $562.3 million, respectively, compared to the same periods of 2003. The increase in net sales was primarily the result of higher market prices and, to a lesser extent, sales volumes for pork products, increased trading volumes and commodity prices, and, to a lesser extent, increased level of marine cargo service with improved rates. Operating income increased by $53.5 and $133.5 million for the 2004 three and nine month periods compared to same periods of 2003. The increase in sales also contributed to higher operating income. 11 Pork Segment Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Dollars in millions) 2004 2003 2004 2003 Net sales $ 241.5 $ 186.1 $ 716.7 $ 531.2 Operating income $ 38.8 $ 4.0 $ 98.1 $ 2.3 Net sales for the Pork segment increased $55.4 and $185.5 million for the three and nine months of 2004 compared to the same periods of 2003, primarily as a result of higher market prices for pork products and, to a lesser extent, higher sales volumes. The demand for pork products has remained strong during 2004. The excess domestic meat supplies experienced in early 2003 resulted in lower sales prices through the first quarter of 2003. Prices generally improved throughout the remainder of 2003 and further improved through 2004 as a result of the increasing demand for pork products. Sales volumes also increased as Seaboard operated additional weekend processing shifts during 2004 to take advantage of the favorable market conditions, and had an additional three business days in the 2004 year- to-date period compared to 2003. Operating income for the Pork segment increased $34.8 and $95.8 million for the third quarter and year-to-date periods of 2004 compared with the same periods of 2003 primarily as a result of the higher sales prices and volumes discussed above, partially offset by higher overall hog costs. Overall hog costs increased primarily as a result of higher costs for third-party hogs, partially offset by a decrease in the cost of internally-raised hogs and an increase in the percentage of lower cost internally-raised hogs. The third-quarter of 2004 includes charges of $1.4 million for abandoned land development costs at certain potential hog production sites and a potential second plant site that Seaboard has decided not to pursue at this time. The year-to-date 2003 period also includes charges totaling $1.6 million for abandoned land development costs of potential hog production sites that Seaboard decided not to pursue. Management is unable to predict future market prices for pork products, feed costs and third party hogs, or for how long the relatively strong overall market conditions will be sustained. However, management expects these operations to remain profitable for the fourth quarter of 2004. Commodity Trading and Milling Segment Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Dollars in millions) 2004 2003 2004 2003 Net sales $ 255.8 $ 151.8 $ 805.9 $ 479.0 Operating income $ 9.4 $ 5.4 $ 15.9 $ 10.0 Income (loss) from foreign affiliates $ 1.4 $ 0.8 $ 4.0 $ (0.9) Net sales for the Commodity Trading and Milling segment increased $104.0 and $326.9 million for the three and nine month periods of 2004 compared to the same periods of 2003. This increase is primarily the result of increased trading volumes to third parties and affiliates, primarily for wheat and soybean meal, and world-wide increased commodity and freight prices. However, commodity prices decreased significantly during the third quarter of 2004 compared to commodity prices the first half of 2004. Operating income for this segment increased $4.0 and $5.9 million for the 2004 quarter and year-to-date periods compared to the prior year reflecting the increased sales volumes in the trading business discussed above. However, the impact of mark-to-market accounting for commodity futures and options contracts partially offset the improvement. While management believes its commodity futures and options are economic hedges of its firm purchase and sales contracts, Seaboard does not perform the extensive record-keeping required to account for commodity transactions as hedges for accounting purposes. As a result, operating income for the three and nine month periods of 2004 includes losses of $0.4 and $10.8 million, respectively, compared to gains of $0.3 and $2.0 million for the comparable 2003 periods for these mark-to-market adjustments. If commodity prices stabilize for the fourth quarter of 2004, management anticipates that a significant portion of the negative impact of the mark-to-market accounting noted above will reverse as products are delivered to customers resulting in higher operating income at that time. In addition, charter hire rates continue to be significantly higher during 2004 compared to 2003 although a portion of the increased expense was offset by increased freight rates charged. Seaboard had entered into some longer term charter contracts in 2003, allowing it to take advantage of higher freight market rates during the second and third quarters of 2004. However, management expects higher freight rates to continue during the remainder of 2004 and 2005 while the long-term charters expire, thus reducing freight opportunities and potentially operating income. Due to the uncertain political and economic conditions in the countries in which Seaboard operates, management is unable to predict future sales and operating results, but anticipates positive operating income for the remainder of 2004. 12 Income from foreign affiliates for the three and nine months ended October 2, 2004 improved $0.6 and $4.9 million, respectively, from the comparable 2003 periods primarily reflecting improved operating results from most African milling operations. Based on current political and economic situations in the countries in which the flour and feed mills operate, management cannot predict whether the foreign affiliates will remain profitable for the remainder of 2004. Marine Segment Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Dollars in millions) 2004 2003 2004 2003 Net sales $ 125.0 $ 99.3 $ 354.1 $ 295.6 Operating income (loss) $ 17.2 $ (1.4) $ 41.2 $ 0.0 Net sales for the Marine segment increased $25.7 and $58.5 million for the three and nine month periods of 2004 compared to the same periods of 2003 reflecting higher average cargo rates, especially in the third quarter, and higher cargo volumes. Average cargo rates for 2004 improved over 2003 reflecting improved market conditions and improved cargo mixes in certain markets. The 2003 periods were significantly negatively impacted by the general strike in Venezuela which began in 2002 and continued into February of 2003, resulting in the discontinuance of all port calls to that country. While the political and economic instability remains in Venezuela and that market has not yet fully recovered, cargo volumes have continued to increase during 2004 compared to 2003. In addition, cargo volumes also increased in most other markets. Partially offsetting these increases for the nine month period, in 2003 Seaboard earned revenue from chartering certain company-owned vessels to carry military cargo to the Middle East. Operating income for the Marine segment increased $18.6 and $41.2 million during the 2004 three and nine month periods compared to the same periods in 2003, primarily reflecting the increased rates and volumes discussed above. Although management cannot predict changes in future cargo rates or to what extent economic conditions will continue to improve for the Venezuelan and related markets, it does anticipate these operations to remain profitable for the fourth quarter of 2004. The U.S. Maritime Transportation Security Act and corresponding international regulations under The International Ship and Port- facility Security Code were effective July 1, 2004. These regulations require comprehensive security assessments and plans for vessels and facilities in the U.S. and throughout the world. Management believes Seaboard is in compliance and, to date, has not experienced any trade disruptions from these regulations, although it cannot predict if any disruptions could occur in the future if foreign ports do not fully comply. Sugar and Citrus Segment Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Dollars in millions) 2004 2003 2004 2003 Net sales $ 25.7 $ 22.7 $ 54.6 $ 53.3 Operating income $ 3.3 $ 5.9 $ 9.4 $ 15.2 Net sales for the Sugar and Citrus segment increased in the three and nine month periods of 2004 compared to the same periods of 2003. The increase was due to higher seasonal citrus trading volumes during the third quarter. This increase was partially offset by lower sugar prices during 2004 resulting from the abundant 2003 harvest in Argentina which resulted in large sugar supplies. While unable to predict future sales prices, management does not expect sales prices to increase significantly for the remainder of 2004. Operating income decreased $2.6 and $5.8 million during the three and nine month periods of 2004 compared to the prior year periods primarily due to lower sugar prices as discussed above and higher costs of sales from the previously inventoried 2003 sugar harvest and production. During 2003, the peso price of sugar increased at a higher rate than the related peso costs, but that trend reversed and expenses have increased. The higher citrus sales volumes had a negligible impact on operating income. Management expects operating income for the fourth quarter of 2004 will remain positive although lower than 2003. 13 Power Segment Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Dollars in millions) 2004 2003 2004 2003 Net sales $ 12.8 $ 18.1 $ 43.9 $ 52.5 Operating income $ 2.1 $ 3.3 $ 3.3 $ 8.3 The economic environment of the Dominican Republic (DR) has remained unstable throughout 2004. Multilateral credit agencies have not provided sufficient funding to the DR government to restore liquidity; consequently the economic problems still exist and this segment has experienced difficulty in collecting amounts owed from certain generating and distribution companies. As of October 2, 2004, Seaboard's net receivable exposure from customers with significant past due balances totaled $16.0 million, including $9.3 million classified in other long-term assets on the Condensed Consolidated Balance Sheet. Seaboard is continuing to contract directly with large power users, which reduces the exposure to changes in spot market rates, currency fluctuations and collection risks. However, a significant exposure to the partially government-owned distribution companies still exists. Despite the continued liquidity problems, during the three and nine months ended October 2, 2004 the Dominican Republic peso strengthened against the U.S. dollar, resulting in foreign exchange gains of $5.1 and $2.5 million, respectively, related to the peso-denominated net assets, compared to a gain of $0.7 million and loss of $6.1 million for the same periods in 2003. The exchange gains and losses are included in other income (expense) on the Condensed Consolidated Statements of Earnings and are not a component of operating income. Net sales for the Power segment decreased $5.3 and $8.6 million for the three and nine month periods of 2004 compared to the same periods of 2003 primarily due to lower production. Periodically during 2004, Seaboard has curtailed production due to management's concerns about the collectibility of revenues. In addition, approximately $1.5 million of spot market sales were not recognized during the third quarter of 2004 as collectibility is not reasonably assured. Management may continue to impose further curtailments if it determines that liquidity conditions warrant. Operating income decreased $1.2 and $5.0 million for the three and nine months of 2004 compared to the same periods of 2003. In addition to lower sales, commission expenses increased by $2.4 million for the 2004 nine month period. However, as a result of recent collections of a previously reserved accounts receivable, during the third quarter of 2004 $1.0 million of bad debt expense was reversed. As discussed in Note 2 to the Condensed Consolidated Financial Statements, during the second quarter Seaboard made a one-time commission payment of $2 million to terminate a business relationship. Absent improvement to the economic problems in the country including the related receivable collection issues, management cannot predict whether this segment will be profitable for the remainder of 2004. All Other Three Months Ended Nine Months Ended October 2, September 27, October 2, September 27, (Dollars in millions) 2004 2003 2004 2003 Net sales $ 6.6 $ 7.4 $ 20.3 $ 21.5 Operating income $ 1.0 $ 0.8 $ 2.4 $ 1.6 Loss from foreign affiliates $ (1.3) $ (15.8) $ (4.1) $ (20.1) Net sales for All Other decreased $0.8 and $1.2 million for the three and nine months of 2004 compared with the same periods of 2003 while operating income increased slightly. The increase in operating income primarily reflects improved operations for the pepper processing business. The loss from foreign affiliates in 2004 represents Seaboard's share of losses from its equity method investment in a Bulgarian wine business including losses of $0.8 million recorded in the second quarter for Seaboard's share of inventory write-downs. See Note 7 to the Condensed Consolidated Financial Statements for further discussion of this business. The 2003 foreign affiliate losses also include Seaboard's share of Fjord Seafood ASA (Fjord) losses which totaled $13.4 and $16.3 million for three and nine month periods, respectively. Seaboard's share of third quarter losses included impairment charges of $12.4 million reflecting Fjord's write down of licenses, inventory and fixed assets. The equity investment in Fjord was sold during the fourth quarter of 2003. 14 Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses for the three and nine month periods of 2004 increased by $3.0 and $11.4 million over the same periods of 2003 primarily due to increased selling costs in the Marine and Commodity Trading and Milling segments related to the growth of these businesses. The 2004 nine-month period also reflects the increased commissions in the Power segment. Partially offsetting the increase in SG&A for the 2004 quarter, the Power segment reversed $1.0 million of bad debt expense reflecting the collection of a previously reserved receivable. As a percentage of revenues, SG&A decreased to 4.4% and 4.6% for the 2004 quarter and year-to-date periods, respectively, compared to 5.5% and 5.6% for the same periods of 2003 as a result of increased sales in the Pork, Commodity Trading and Milling, and Marine segments. Interest Expense Interest expense decreased for the quarter but increased slightly for the nine month period of 2004 compared to the same 2003 periods. During the second quarter of 2004, Seaboard repaid a significant portion of the notes payable to banks with cash from operations. Interest Income Interest income increased $1.7 and $3.7 million for the three and nine month periods of 2004 compared to the same periods of 2003 primarily reflecting larger amounts of interest received from past due customer accounts receivable in the Power and Commodity Trading and Milling segments. In addition, Seaboard had higher average levels of short- term investments during the 2004 periods. Foreign Currency Gains (Losses) Seaboard realized net foreign currency gains of $5.0 and $3.5 million during the three and nine month periods of 2004 respectively, compared to losses of $0.9 and $7.0 million for each respective period of 2003. The strengthening of the Dominican Republic peso during the third quarter of 2004 created gains of $5.1 and $2.5 million for the three and nine months ended October 2, 2004 compared to a gain of $0.7 million for the 2003 three month period and a loss of $6.1 million during the 2003 nine month period. Seaboard operates in many developing countries throughout the world. The political and economic conditions of these markets cause volatility in currency exchange rates and expose Seaboard to the risk of exchange loss. Miscellaneous, Net Miscellaneous, net for the three and nine month periods of 2004 includes losses from the mark-to-market of interest rate swap agreements totaling $4.2 and $4.0 million, respectively, compared to a 2003 third quarter gain of $4.8 and year to date losses of $2.9 million. These swap agreements do not qualify as hedges for accounting purposes and accordingly, changes in the market value are recorded to earnings as interest rates change. Miscellaneous, net for the three and nine months ended October 2, 2004 also includes losses of $1.6 and $1.3 million, respectively, from the mark-to-market of commodity futures and options contracts that management does not view as direct economic hedges of its operations. In addition, miscellaneous, net for the 2004 nine month period includes a gain of $0.5 million from the settlement of antitrust litigation compared to antitrust litigation gains of $0.4 and $7.0 million for the 2003 three and nine month periods, respectively. Income Tax Expense The effective tax rate increased to 30.4% for 2004 primarily as a result of increased domestic taxable income and lower amounts of permanently deferred foreign earnings. Other Financial Information On October 22, 2004, President Bush signed into law H.R. 4520, the American Jobs Creation Act ("Act"). The Act is a significant and complicated reform of U.S. income tax law. Management is currently reviewing the new law to determine the impact on Seaboard. The Act contains several provisions which initially appear to be favorable for Seaboard. These include: phasing out the Extraterritorial Income Exclusion and replacing it with an income tax deduction for U.S. manufacturers, simplifying the U.S. foreign tax credit calculation by reducing the foreign tax credit baskets, reforming the interest allocation rules and allowing for recharacterization of overall domestic losses, and repealing the alternative minimum tax limitation on the use of foreign tax credits. The carryover period for foreign tax credits was generally extended from 5 to 10 years. More importantly, the Act repeals the prior law treatment of shipping income as a component of subpart F income. This change will allow Seaboard's post-2004 shipping income to avoid current taxation in the U.S. and should have a material impact on Seaboard's future effective tax rate and cash tax payments. The Act would also allow Seaboard a one-time election to repatriate permanently invested foreign earnings at a 5.25% effective U.S. income tax rate rather than the statutory 35% rate, if certain domestic reinvestment requirements are met. Management is evaluating this provision and has not determined whether to utilize the one-time repatriation opportunity. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk Seaboard is exposed to various types of market risks from its day-to- day operations. Primary market risk exposures result from changing commodity prices, foreign currency exchange rates and interest rates. Changes in commodity prices impact the cost of necessary raw materials, finished product sales and firm sales commitments. Seaboard uses various grain and meal futures and options purchase contracts to manage certain risks of increasing prices of raw materials and firm sales commitments. Short sales contracts are then used to offset any open purchase derivatives when the related commodity inventory is purchased in advance of the derivative maturity, effectively canceling the initial futures or option purchase contract. From time to time, hog futures are used to manage risks of increasing prices of live hogs acquired for processing. Because changes in foreign currency exchange rates impact the cash paid or received on foreign currency denominated receivables and payables, Seaboard manages certain of these risks through the use of foreign currency forward exchange agreements. Changes in interest rates impact the cash required to service variable rate debt. From time to time, Seaboard uses interest rate swaps to manage risks of increasing interest rates. Seaboard's market risk exposure related to these items has not changed materially since December 31, 2003. Item 4. Controls and Procedures Seaboard's management has evaluated, under the direction of our chief executive and chief financial officers, the effectiveness of Seaboard's disclosure controls and procedures as of October 2, 2004. Based upon and as of the date of that evaluation, Seaboard's chief executive and chief financial officers concluded that Seaboard's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports it files and submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all potential future conditions, regardless of how remote. There has been no change in Seaboard's internal control over financial reporting that occurred during the fiscal quarter ended October 2, 2004 that has materially affected, or is reasonably likely to materially affect, Seaboard's internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings Environmental Protection Agency (EPA) and State of Oklahoma Claims Concerning Farms in Major and Kingfisher County, Oklahoma Seaboard Farms, Inc. (Seaboard Farms), is subject to an ongoing Unilateral Administrative Order (the "RCRA Order") pursuant to Section 7003 of the Resource Conservation and Recovery Act, as amended, 42 U.S.C. section 6973 ("RCRA"), filed by the EPA on June 29, 2001 against Seaboard Farms, Shawnee Funding, Limited Partnership and PIC International Group, Inc. ("PIC") (collectively, "Respondents") related to five swine farms located in Major County and Kingfisher County, Oklahoma purchased from PIC. These same farms are the subject of a Notice of Violation letter received from the State of Oklahoma, alleging that Seaboard Farms has violated various provisions of state law and the operating permits based on the same conditions which gave rise to the RCRA Order. Seaboard Farms disputes the RCRA Order and the State of Oklahoma's contentions on legal and factual grounds, and advised the EPA that it won't comply with the RCRA Order, as written. Notwithstanding, Seaboard Farms has undertaken an extensive investigation under the RCRA Order, and has had significant discussions with the EPA and the State of Oklahoma, proposing to take a number of corrective actions with respect to the farms in order to attempt to settle the RCRA Order and the Oklahoma Notice of Violation. As a part of those discussions, the EPA and the State of Oklahoma, advised Seaboard Farms that one additional farm in Kingfisher County must be included in any settlement, although neither agency has filed any formal claims with respect to that farm. The EPA recently advised Seaboard Farms that any such settlement must include a civil fine of $1,200,000. Seaboard Farms believes that the EPA has no authority to impose a civil fine and so advised the EPA as a part of a settlement proposal. The EPA initially advised Seaboard Farms that it rejected its most recent settlement proposal and settlement discussions terminated. The EPA recently requested a meeting with Seaboard Farms to reinstate settlement discussions. If the matter is not settled, the EPA could bring an action 16 against Seaboard Farms to enforce the RCRA Order, although Seaboard Farms believes it has meritorious defenses to any such action, or the EPA could determine to take no further action. The State of Oklahoma recently advised Seaboard Farms that any settlement with it must include a civil fine of approximately $500,000. Settlement discussions are continuing with the State of Oklahoma, and Seaboard Farms intends to proceed with its proposed corrective actions with respect to the farms. The farms at issue were previously owned by PIC and PIC is indemnifying Seaboard Farms with respect to the RCRA Order (reserving its right to contest the obligation to do so), pursuant to an indemnification agreement which has a $5 million limit. If the settlement being discussed with the State of Oklahoma is agreed to, the estimated cumulative costs which will be expended pursuant to the settlement will total approximately $6.2 million, not including the additional legal costs required to negotiate the settlement and not including the approximately $500,000 penalty suggested by the State of Oklahoma. If the measures taken pursuant to the settlement are not effective or if certain additional issues arise at the farms after the settlement, other measures with additional costs may be required. PIC has advised Seaboard Farms that it is not responsible for the costs in excess of $5 million. Seaboard Farms disputes PIC's determination of the costs to be included in the calculation. Seaboard Farms believes that the costs to be considered are less than $5 million, such that PIC is responsible for all such costs and penalties, except for approximately $180,000 of estimated costs that would be incurred over 5 years subsequent to the settlement for certain testing and sampling. Seaboard Farms has agreed to conduct such testing and sampling as a part of the sampling it conducts in the normal course of operations and believes that the incremental costs incurred to conduct such testing and sampling will be less than $180,000. Seaboard Farms also believes that a more general indemnity agreement would require indemnification of liability in excess of $5 million (excluding the estimated $180,000 cost for testing and sampling), although PIC disputes this. Other On January 26, 2004, the U.S. Department of Justice sent Seaboard Marine, Ltd. a letter stating that it was investigating possible violations of 49 U.S.C. sections 5104-5124 and 49 C.F.R. sections 171-173 relating to the transportation, storage and discharge of hazardous materials. On September 21, 2004, Seaboard Marine pled guilty to the violations. In conjunction with this guilty plea, Seaboard Marine entered into a Plea Agreement agreeing to pay a fine, restitution and other costs totaling approximately $300,000, to implement a compliance plan, and to conduct training of employees. At the sentencing, the US attorney will recommend that the judge impose the sentence set forth in the Plea Agreement, although the judge has discretion to impose a fine of up to $500,000. Item 5. Other Information (a) As discussed in Note 5 to the Condensed Consolidated Financial Statements, on November 5, 2004, Seaboard amended its Executive Retirement Plan, which provides a supplemental retirement benefit to officers and certain key employees of Seaboard and its subsidiaries. In addition, Seaboard has established a Rabbi Trust in order to provide a mechanism to provide discretionary funding for the benefit. The amendment to the Executive Retirement Plan and Rabbi Trust document are included as exhibits 10.1 and 10.2 of this Form 10-Q. 17 Item 6. Exhibits Exhibits 10.1 Seaboard Corporation Executive Retirement Plan dated November 5, 2004, amending and restating the Seaboard Corporation Executive Retirement Plan dated January 1, 1997 as amended and restated February 28, 2001. The addendums to the Executive Retirement Plan have been omitted from the filing, but will be provided supplementally upon request of the Commission. 10.2 Seaboard Corporation Executive Retirement Plan Trust dated November 5, 2004 between Seaboard Corporation and Robert L. Steer, as trustee. 31.1 Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 This Form 10-Q contains forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Seaboard Corporation and its subsidiaries (Seaboard). Forward-looking statements generally may be identified as: statements that are not historical in nature; and statements preceded by, followed by or that include the words "believes," "expects," "may," "will," "should," "could," "anticipates," "estimates," "intends," or similar expressions. In more specific terms, forward-looking statements, include, without limitation: statements concerning projection of revenues, income or loss, capital expenditures, capital structure or other financial items, including the impact of mark-to-market accounting on operating income; statements regarding the plans and objectives of management for future operations; statements of future economic performance; statements regarding the intent, belief or current expectations of Seaboard and its management with respect to: (i) the cost and timing of the completion of new or expanded facilities, (ii) Seaboard's ability to obtain adequate financing and liquidity, (iii) the price of feed stocks and other materials used by Seaboard, (iv) the sale price for pork products from such operations, (v) the price for other products and services, (vi) the charter hire rates and fuel prices for vessels, (vii) the demand for power, related spot market prices and collectibility of receivables in the Dominican Republic, (viii) the effect of the devaluation of the Argentine and Dominican Republic pesos, (ix) the potential effect of the proposed meat packer ban legislation on the Pork Division, (x) the effect of the Venezuelan economy on the Marine Division, (xi) the potential effect of Seaboard's investment in a wine business on the consolidated financial statements, (xii) the potential impact of various environmental actions pending or threatened against Seaboard, (xiii) the potential impact of the American Jobs Creation Act, or (xiv) other trends affecting Seaboard's financial condition or results of operations, and statements of the assumptions underlying or relating to any of the foregoing statements. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward- looking statements due to a variety of factors. The information contained in this report, including without limitation the information under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," identifies important factors which could cause such differences. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: November 5, 2004 Seaboard Corporation by: /s/ Robert L. Steer Robert L. Steer, Senior Vice President, Treasurer and Chief Financial Officer (principal financial officer) by: /s/ John A. Virgo John A. Virgo, Vice President, Corporate Controller and Chief Accounting Officer (principal accounting officer) 19