UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 29, 2012 |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to . |
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Commission file number 333-115164
U.S. PREMIUM BEEF, LLC
(Exact name of registrant as specified in its charter)
DELAWARE |
| 20-1576986 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. employer identification number) |
12200 North Ambassador Drive, Kansas City, MO 64163
(Address of principal executive offices)
Registrant’s telephone number, including area code: (866) 877-2525
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 þ 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 þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 ¨ Accelerated Filer ¨ Non-Accelerated Filer þ 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 þ
The registrant’s equity is not traded on any exchange or other public market; however, there have been private transactions. As of February 28, 2013, there were 735,385 Class A units and 755,385 Class B units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
| TABLE OF CONTENTS |
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| PART I. |
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| Page No. |
Item 1. | 4 | |
Item 1A. | 11 | |
Item 1B. | 15 | |
Item 2. | 15 | |
Item 3. | 15 | |
Item 4. | 15 | |
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| PART II. |
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Item 5. | 15 | |
Item 6. | 16 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 19 |
Item 7A. | 33 | |
Item 8. | 35 | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. | 35 |
Item 9A. | 35 | |
Item 9B. | 36 | |
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| PART III. |
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Item 10. | 36 | |
Item 11. | 40 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters. | 52 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence. | 53 |
Item 14. | 55 | |
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| PART IV. |
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Item 15. | 56 | |
| 60 |
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MARKET AND INDUSTRY DATA AND FORECASTS
Market data and certain industry forecasts used throughout this report were obtained from internal surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable, based upon our management’s knowledge of the industry, have not been independently verified. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements,” which are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements are typically identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions. Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including economic conditions generally and in our principal markets, the availability and prices of live cattle and commodities, food safety, livestock disease, including the identification of cattle with BSE, competitive practices and consolidation in the cattle production and processing industries, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers, loss of key employees, labor relations, and consolidation among our customers.
In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Please review Item 1A, Risk Factors, included in this report, for other important factors that could cause actual results to differ materially from those in any such forward-looking statements.
Unless the context indicates or otherwise requires, the terms “the Company”, “we”, “our” and “us” refer to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.) and its consolidated subsidiaries. As used in this report, the term “NBP” refers to National Beef Packing Company, LLC (formerly known as Farmland National Beef Packing Company, LP (FNB)), a Delaware limited liability company and “USPB” refers to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.) prior to consolidation. As used in this report, the terms “fiscal year” or “fiscal year ended” for the transition period and thereafter refers to our fiscal year which ends on the last Saturday in December.
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PART I
ITEM 1. BUSINESS
BUSINESS OF U.S. PREMIUM BEEF, LLC
Overview
U.S. Premium Beef, LLC (USPB) was organized in July 1996 as a Kansas cooperative by a steering committee of cattle producers. USPB’s goal is to provide market access and improve the marketing and processing of beef products requiring higher quality cattle for wholesale and retail customers and consumers while providing higher returns to cattle producers. USPB operates an integrated cattle processing and beef marketing enterprise where consumer and processor demands and requirements are implemented through changes in genetics, feeding, and management. USPB’s unitholders benefit from its supplier alliance with National Beef Packing Company, LLC (NBP) through (i) premiums received in excess of cash market prices for higher quality cattle, (ii) allocations of profits and losses and potential distributions, (iii) potential unit price appreciation, and (iv) information that permits unitholders to make informed production decisions.
On June 12, 2003, USPB entered into an agreement with Farmland Industries, Inc. (Farmland) to acquire all of the partnership interests in Farmland National Beef Packing Company (FNB) held by Farmland. USPB formed NB Acquisition, LLC (NB Acquisition) to consummate the acquisition. To finance the acquisition, USPB, NBPCo Holdings, LLC (NBPCo Holdings) and certain members of FNB’s management team purchased equity in NB Acquisition for $46.0 million in cash. FNB issued $160.0 million of senior notes, amended its credit facility and transferred a portion of the proceeds of the offering of the senior notes and borrowings under its amended credit facility to NB Acquisition. Subsequently, NB Acquisition merged into FNB, and FNB then converted into a limited liability company under Delaware law and became known as National Beef Packing Company, LLC. These transactions closed on August 6, 2003.
Effective August 29, 2004, the cooperative restructured into a limited liability company (LLC) under Delaware law (Conversion). The business of USPB, the cooperative, is being continued in the LLC form of business organization.
On December 5, 2011, USPB entered into a Membership Interest Purchase Agreement with Leucadia National Corporation (Leucadia), NBP, NBPCo Holdings, TKK Investments, LLC (TKK), TMKCo, LLC (TMKCo), and TMK Holdings, LLC (TMK Holdings) (the “Purchase Agreement”). The Purchase Agreement provided for (i) Leucadia to purchase 56.2415% of the membership interests in NBP (the “National Interests”) from the Company for approximately $646.8 million and 19.8775% of the National Interests from NBPCo for approximately $228.6 million; (ii) pursuant to pre-existing put rights, NBP to purchase from TKK and TMKCo all the National Interests owned by TKK and TMKCo for approximately $75.9 million; and (iii) Leucadia to sell to TMK Holdings 0.6522% of the National Interests for approximately $7.5 million (the “Leucadia Transaction”). The Leucadia Transaction closed on December 30, 2011. Following the close, the parties owned the following percentage membership interests in NBP: Leucadia 78.9477%; USPB 15.0729%; NBPCo 5.3272%; and TMK Holdings 0.6522%.
Due to the sale to Leucadia, beginning on December 31, 2011, USPB’s investment in NBP will be accounted for using the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operational control. Since USPB no longer has financial or operational control, NBP’s financial information will no longer be consolidated with USPB’s. NBP’s financial statements and footnotes will instead be attached as an exhibit to USPB’s 10-K.
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As USPB filed a registration statement with the Securities and Exchange Commission in connection with its 2004 Conversion from the cooperative form of business organization to an LLC structure, USPB is subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act), although USPB is not required to be registered under the Exchange Act. Accordingly, USPB files periodic reports and other information with the Securities and Exchange Commission (SEC). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports and information statements and other information regarding USPB and other issuers that file electronically.
Products and Production
USPB provides an integrated cattle production, processing and marketing system for the benefit of its unitholders and associates. As the basis of that system, USPB’s unitholders have a guaranteed right plus an obligation (on a one head per Class A unit per delivery year basis) to deliver cattle to USPB, pursuant to the Uniform Cattle Delivery and Marketing Agreement (see Cattle Delivery Arrangements). USPB facilitates the delivery of cattle to NBP for processing and subsequent product distribution and marketing. Shortly after the cattle are processed, cattle suppliers receive, at no extra charge, individual animal carcass data previously considered proprietary by many processors. This carcass data assists producers in refining production methodologies, thereby improving the product quality and subsequently enhancing the return to the producer.
We believe the primary advantage of USPB’s ownership in NBP centers around USPB’s ability to provide NBP with a consistent supply of quality beef from a verified source, allowing NBP to target higher margin value-added markets. Consumers have historically demonstrated their willingness and desire to buy branded products that offer better value in other consumer product markets, with the Certified Angus Beef® product line being an example in the beef industry.
Cattle Producers’ Uniform Cattle Delivery and Marketing Agreements
USPB facilitates the delivery of cattle from its unitholders and associates to NBP. Each unitholder is required to enter into a Uniform Cattle Delivery and Marketing Agreement (Delivery Agreement) with the company whereby the unitholder is committed to deliver a designated number of cattle on an annual basis. Each Class A unit held by a unitholder entitles and obligates that unitholder to deliver one head of cattle per delivery year to USPB. The Delivery Agreements are for a term of 5 years with an “evergreen” renewal provision that automatically renews annually in the beginning of USPB’s delivery year for a subsequent five year period. These arrangements are described in greater detail in Cattle Delivery Arrangements.
Company Background
USPB was originally organized as a tax exempt cooperative within the meaning of Section 521(b)(l) of the Internal Revenue Code. The cooperative began operations on December 1, 1997, when the cooperative acquired its initial interest in Farmland National Beef, now known as National Beef Packing Company, LLC. In connection with the cooperative’s purchase of its interest in Farmland National Beef, the cooperative owned the right and was subject to the obligation to deliver cattle annually to NBP. That arrangement continues following the Conversion. Under that arrangement, USPB has delivered more than 10.0 million head of cattle to NBP for processing since it commenced deliveries.
On August 6, 2003, USPB became the majority owner in NBP.
On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversion of the cooperative into a Delaware LLC. Patronage Refunds for Reinvestment in the cooperative were carried over at their face amount into the LLC as Patronage Notices. Under the new ownership structure, each share of common stock of the cooperative was converted to one unit of Class A interest and one unit of Class B interest. Immediately following the Conversion, there were 691,845 units of Class A interests and 691,845 units of Class B interests. Initially, each Class A unit was linked to its corresponding Class B unit and each pair of linked units, if transferred, were required to be transferred together. On March 27, 2010, the board of directors amended the USPB’s LLC Agreement to permit the Class A and Class B units to be transferred separately.
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When the Conversion occurred, holders of USPB Class A units were entitled to a pro rata share of 33% of the profits and losses; to receive distributions of USPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB’s assets if it dissolves or liquidates after payment of the Patronage Notices, and to vote on matters submitted to a vote of USPB’s members. On November 9, 2009, USPB members approved an amendment to USPB’s limited liability company agreement that changed the allocation of profits and losses to Class A unitholders to 10%. Holders of USPB Class A units, committed under Uniform Cattle Delivery and Marketing Agreements, have the right and obligation to deliver one head of cattle to USPB annually for each unit held.
When the Conversion occurred, holders of USPB Class B units were entitled to a pro rata share of 67% of the profits and losses; to receive distributions of USPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB’s assets if it dissolves or liquidates after the payment of the Patronage Notices, and to vote on matters submitted to a vote of USPB’s members. On November 9, 2009, USPB members approved an amendment to USPB’s limited liability company agreement that changed the allocation of profits and losses to Class B unitholders to 90%. Holders of USPB Class B units have no cattle delivery commitment.
On June 1, 2006, USPB’s majority owned subsidiary, NBP, completed the acquisition of substantially all of the assets of Brawley Beef. As a result of the acquisition, USPB issued 44,160 new Class A units and 44,160 new Class B units to Brawley Beef in exchange for 44,160 limited partnership units in National Beef California, LP (NBC), a subsidiary of NBP. USPB then exchanged the limited partnership units with NBP for a higher ownership percentage in NBP. After the acquisition, Brawley Beef, LLC changed its name to Desert Beef, LLC.
On April 14, 2009, NBP, then USPB’s majority owned subsidiary, redeemed all of the membership interests in NBP that were owned or controlled by its former Chief Executive Officer, John R. Miller, and an affiliate of its former General Counsel, Scott H. Smith, as well as 25% of the membership interests in NBP that were owned by affiliates of its current President and Chief Executive Officer, Timothy M. Klein. In order to partially finance such redemptions, USPB contributed cash of approximately $55.8 million in exchange for a higher ownership percentage in NBP.
On June 4, 2010, NBP redeemed 164,631 NBP Class B units held by affiliates of its President and Chief Executive Officer, Timothy M. Klein. As a result of the redemption, our ownership percentage in NBP increased.
On December 5, 2011, USPB entered into the Purchase Agreement. The Purchase Agreement provided for (i) Leucadia to purchase 56.2415% of the National Interests from the Company for $646.8 million and 19.8775% of the National Interests from NBPCo for $228.6 million; (ii) pursuant to pre-existing put rights, NBP to purchase from TKK and TMKCo all the National Interests owned by TKK and TMKCo for $75.9 million; and (iii) Leucadia to sell to TMK Holdings 0.6522% of the National Interests for $7.5 million. The Leucadia Transaction closed on December 30, 2011. Following the close, the parties own the following percentage membership interests in NBP: Leucadia 78.9477%; USPB 15.0729%; NBPCo 5.3272%; and TMK Holdings 0.6522%.
In connection with its approval of the Purchase Agreement, the Company’s Board of Directors adopted a change to the Company’s fiscal year, which became effective upon closing. The Leucadia Transaction closed on December 30, 2011 and the Company’s fiscal year-end changed from the last Saturday in August to the last Saturday in December.
Employees
USPB has eight employees. The complexity of USPB’s obligations under its various contracts with NBP require USPB to retain the services of key senior management personnel with the experience, skill and expertise necessary to manage an enterprise competitive with other sophisticated participants in the beef and meat industries. Each employee is compensated through the payment of a base salary with management being eligible for incentive and discretionary bonuses. In addition, each employee is eligible to participate in benefits programs maintained by USPB. These programs include group medical insurance, accidental death and dismemberment insurance and similar programs.
USPB’s employees are not unionized and USPB believes that its relationship with its employees is good.
Governmental Regulation and Environmental Matters
The Company does not operate any processing facilities itself and is therefore not subject to federal and state regulations relating to grading of animals, quality control, labeling, sanitary control and waste disposal. Operational activities are conducted through NBP and significant efforts with respect to governmental and environmental regulation are conducted by NBP. See Business of National Beef Packing Company, LLC - Government Regulation and Environmental Matters.
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Sales, Marketing, and Customers
USPB’s sole customer is NBP. The ultimate customers of and the market for the products resulting from the processing of cattle supplied by USPB’s unitholders and associates are described in Business of National Beef Packing Company, LLC .
Beef Industry, Markets, and Competition
As indicated above, USPB’s business activities are focused on facilitating the delivery of cattle produced by its unitholders and associates to NBP. Information regarding the beef industry, the market for beef and beef products and competition within the beef industry are described in Business of National Beef Packing Company, LLC.
Intellectual Property
USPB owns little intellectual property because USPB’s sales are transacted through NBP. However, USPB maintains a trademark on a U.S. Premium Beef logo that it uses periodically on certain, selected products.
Research and Development
USPB does not conduct any research and development activities.
CATTLE DELIVERY ARRANGEMENTS
Cattle Producers’ Uniform Cattle Delivery and Marketing Agreements and Payments to Unitholders and Associates for Cattle
USPB facilitates the delivery of cattle from its unitholders and associates to NBP. Each unitholder is required to enter into a Uniform Cattle Delivery and Marketing Agreement (Delivery Agreement) with the company whereby the unitholder is committed to deliver a designated number of cattle on an annual basis. Each Class A unit held by a unitholder entitles and obligates that unitholder to deliver one head of cattle per delivery year to USPB. The Delivery Agreements are for a term of 5 years with an “evergreen” renewal provision that automatically renews annually in the beginning of USPB’s delivery year for a subsequent five year period.
Cattle delivered by USPB’s unitholders and associates are delivered to NBP for processing (with the effect that NBP is USPB’s sole customer). The resulting beef and beef products are marketed by NBP. Each unitholder or associate is paid for the cattle delivered to USPB based on a market-based purchase price that is subject to the agreements between USPB and NBP.
Pursuant to the Uniform Cattle Delivery and Marketing Agreement, payment for cattle is based on the individual carcass quality of cattle delivered. As a limited liability company, allocations of profits and losses and potential distributions are not tied to cattle delivery, but rather to the number of Class A and Class B units held and the respective rights of those units.
BUSINESS OF NATIONAL BEEF PACKING COMPANY, LLC
General
NBP, headquartered in Kansas City, Missouri, is one of the largest beef processing companies in the U.S., accounting for approximately 14.5% of the federally inspected steer and heifer slaughter during 2012, as reported by the United States Department of Agriculture (USDA). NBP processes, packages and delivers fresh and frozen beef and beef by-products for sale to customers in the U.S. and international markets. NBP’s products include boxed beef, ground beef, hides, tallow, and other beef and beef by-products.
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Approximately 91% of NBP’s revenues are generated from the sale of fresh beef. In addition, NBP sells beef by-products to the variety meat, feed processing, fertilizer and pet food industries. NBP also owns 75% of Kansas City Steak Company, LLC (Kansas City Steak), which sells portioned beef and other products to customers in the food service and retail channels as well as direct to consumers through the internet and direct mail. NBP operates a wet blue tanning facility that sells processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries. Wet blue tanning refers to the first step in processing raw and brine-cured hides into tanned leather. NBP also owns a refrigerated and livestock transportation company that provides transportation services for NBP and third parties.
The demand for beef products is generally highest in the spring and summer months.
Beef Processing Services
NBP’s profitability is dependent, in large part, on the spread between its cost for live cattle, the primary raw material for its business, and the value received from selling boxed beef and other products. Because NBP operates in a large and liquid commodity market, it does not have much influence over the price it pays for cattle or the selling price it receives for the products it produces. NBP’s profitability typically fluctuates seasonally as well as cyclically, with relatively higher margins in the spring and summer months and during times of cattle herd expansion.
The USDA regularly reports market values for cattle, beef, offal and other products produced by ranchers, farmers and beef processors. Generally, NBP expects its profitability to improve as the ratio of the USDA comprehensive boxed beef cutout (a weekly reported measure of the total value of all USDA inspected beef primal cuts, grind and trim produced from fed cattle) to the USDA 5-area weekly average slaughter cattle price increases and for profitability to decline as the ratio decreases. The ratio during 2012 was the lowest ratio for the corresponding periods during the past ten years. Due in part to the declining U.S. cattle herd, which has been exacerbated by drought conditions across key cattle raising areas, during this period average cattle prices increased to record levels; however, NBP’s per head revenue did not increase as much as its per head cost for cattle, resulting in reduced margins.
During 2012, revenues from beef processing operations increased compared to the prior periods, principally due to price increases. However, gross margins declined due to the lower trending cutout ratio described above. Depreciation and amortization expenses include approximately $45.2 million of amortization expenses related to identifiable intangible assets recorded at the date of the Leucadia Transaction.
The drought across much of the country has caused prices for corn, hay and certain other cattle feedstuffs to increase and pastures to wither; as such some cattle producers have reduced and are continuing to reduce the size of their cow herds. NBP’s profitability is primarily dependent upon the spread between what it pays for fed cattle and the price it receives for its products, along with the efficiency of its processing facilities. The drought has contributed to a decline in the beef cow herd and affected the supply of fed cattle; this has caused the price NBP pays for fed cattle to increase more than it can pass along in the form of higher selling prices for its products, thus causing its profitability to be negatively impacted.
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NBP has received notice from Walmart that it intends to discontinue using NBP as a provider of its case-ready products in 2013. NBP has two case-ready processing facilities, one of which is completely dedicated to Walmart’s business and the other substantially so dedicated, with an aggregate book value of approximately $45.7 million at December 31, 2012. Total case-ready revenues were approximately 7% of NBP consolidated revenues during 2012, but as a value-added product, case-ready products have historically constituted a higher percentage of NBP’s gross margin. Since 2008, case-ready products have represented from 10% to 26% of NBP’s total gross margin, and are at the higher end of that range in 2012 due, in part, to reduced gross margin from other NBP products. During the first quarter of 2013, the two case-ready facilities will begin to operate at reduced levels, resulting in an approximate 50% reduction in the number of personal employed at the facilities. In connection with the reduction in the labor force, NBP will record a charge estimated to be approximately $2.9 million during the first quarter of 2013.
NBP is currently pursuing replacement business for its case-ready facilities; however, it may not be able to fully replace the operating cash flow generated by these facilities in the near future, if at all. NBP has evaluated NBP’s tangible and intangible assets for impairment and has concluded that they are not impaired; its evaluation included an estimate of expected future cash flows to be generated by the case-ready facilities from prospective customers who have not, as yet, committed to purchase case-ready products from NBP. If NBP is unsuccessful in securing any new case-ready business, NBP does not believe it will need to record any impairment to its intangible assets or goodwill. However, if NBP concludes its best course of action is to close one or both case-ready facilities, impairment charges may be recorded if the fair value of those facilities on a held for sale basis is less than the book value.
Sales and Marketing
The sales office for NBP’s domestic operations is responsible for selling and coordinating the movement of approximately 47 million pounds per week of boxed beef products to customers. NBP markets its products to national and regional retailers, including supermarket chains, independent grocers, club stores, wholesalers and distributors, food service providers and distributors, further processors and the United States military. NBP exports products to more than 30 countries; export sales currently represent approximately 12% of annual revenues. In 2012, Walmart represented approximately 10% of NBP’s revenues, and its top 10 customers accounted for approximately 30% of revenues. Walmart purchases a substantial portion of NBP’s case-ready products.
NBP emphasizes the sale of higher-margin, value-added products, which include branded boxed beef, case-ready beef, portion control beef and further processed hides. NBP believes its value-added products can command higher prices than commodity products because of NBP’s ability to consistently meet product specifications, based on quality, trim, weight, size, breed or other factors, tailored to the needs of its customers. In addition to the value-added brands that NBP owns, NBP licenses the use of Certified Angus Beef®, a registered trademark of Certified Angus Beef LLC, and Certified Hereford Beef®, a registered trademark of Certified Hereford Beef LLC.
Raw Materials and Procurement
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On December 30, 2011, NBP entered into a new Cattle Purchase and Sale Agreement with USPB. Per the terms and conditions of the Agreement, NBP shall purchase through USPB from its owners and associates, and USPB shall cause to be sold and delivered from its owners and associates to NBP, on an annual basis, a base amount of 735,385 (subject to adjustment) head of cattle per year. In fiscal year 2012, USPB and NBP agreed to increase the number of cattle that USPB’s owners and associates could deliver during USPB’s delivery year by up to 10%. During fiscal year 2012, USPB’s owners and associates provided approximately 21% of NBP’s total cattle requirements. The purchase price for the cattle is determined by pricing grids, which shall at all times be no less favorable than any other pricing grid being utilized by NBP and the pricing grid shall be competitive with NBP’s major competitors for the purchase of cattle. NBP believes the pricing grids are based on terms that could be obtained from an unaffiliated party. The cattle supply agreement extends through December 31, 2017, with automatic one year extensions on each December 30, unless either party provides a notice not to extend sixty days prior to the annual anniversary date. NBP also purchased additional cattle from certain USPB unitholders and associates outside of the cattle supply agreement.
Cattle are also purchased through cash bids and other arrangements from cattle producers in primary and secondary markets. NBP purchases cattle from nearly 1,000 suppliers annually.
Processing Facilities
NBP owns three beef processing facilities located in Liberal, Kansas, Dodge City, Kansas, and Brawley, California. The Liberal and Dodge City facilities can each process approximately 6,000 cattle per day, and the Brawley facility approximately 2,000 cattle per day. NBP owns case-ready facilities in Hummels Wharf, Pennsylvania (approximately 79,000 square feet) and Moultrie, Georgia (approximately 114,000 square feet), and the wet blue tanning facility in St. Joseph, Missouri (approximately 221,000 square feet). The Kansas City Steak processing facility is located in Kansas City, Kansas (approximately 63,000 square feet).
The beef processing industry is highly competitive. Competition exists both in the purchase of live cattle, as well as in the sale of beef products. Beef products compete with other protein sources, including pork and poultry, but NBP’s principal competition comes from other beef processors. NBP believes the principal competitive factors in the beef processing industry are price, quality, food safety, customer service, product distribution, technological innovations (such as food safety interventions and packaging technologies) and brand loyalty. Some of NBP’s competitors have substantially larger beef operations, greater financial and other resources and wider brand recognition for their products.
Regulation and Environmental
NBP is subject to the Packers and Stockyards Act of 1921 (PSA). Among other things, this statute generally requires NBP to make full payment for livestock purchases not later than the close of business the day after the purchase and transfer of possession or determination of the purchase price. Under the PSA, NBP must hold in trust for the benefit of unpaid livestock suppliers all livestock purchased until the sellers have received full payment. At December 31, 2012, NBP has obtained from an insurance company a surety bond in the amount of approximately $45.6 million to satisfy these requirements.
The Dodge City and Liberal facilities are subject to Title V permitting pursuant to the federal Clean Air Act and the Kansas Air Quality Act. The Liberal permit expired on January 25, 2010, but has been administratively extended pending renewal by the Kansas Department of Health and Environment. The Brawley and St. Joseph facilities are subject to secondary air permits which are in place. The Dodge City, Liberal, Hummels Wharf, Moultrie and Brawley facilities are subject to Clean Air Act Risk Management Plan requirements relating to the use of ammonia as a refrigerant.
All of NBP’s plants are indirect dischargers of wastewater to publicly owned treatment works and are subject to requirements under the federal Clean Water Act, state and municipal laws, as well as agreements or permits with municipal or county authorities. Upon renewal of these agreements and permits, NBP is from time to time required to make capital expenditures to upgrade or expand wastewater treatment facilities to address new and more stringent discharge requirements imposed at the time of renewal. Storm water discharges from NBP’s plants are also regulated by state and local authorities.
All of NBP’s facilities generate solid wastestreams including small quantities of hazardous wastes. NBP is subject to laws that provide for strict, and in certain circumstances joint and several, liability for remediation of hazardous substances at contaminated sites; however, NBP has not received any demands that it has any liability at sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) or state counterparts. All plants are subject to community right to know reporting requirements under the Superfund Amendments and Reauthorization Act of 1986, which requires yearly filings as to the substances used on facility premises.
Employees
NBP has approximately 9,300 employees, of which approximately 6,600 are currently represented by collective bargaining agreements. Approximately 2,600 employees at the Liberal plant are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire in December 2017. Approximately 2,700 employees at the Dodge City plant are represented by the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire in December 2016. Approximately 1,100 employees at the Brawley plant are jointly represented by the United Food and Commercial Workers International Union and the Teamsters International Union under a collective bargaining agreement scheduled to expire in December 2013. Approximately 130 employees at the St. Joseph plant are represented by the United Cereal Workers of the United Food and Commercial Workers International Union under a collective bargaining agreement scheduled to expire in May 2014.
ITEM 1A. RISK FACTORS
As described throughout this document, USPB’s business involves the operation of an integrated cattle processing and beef marketing enterprise in which USPB’s unitholders and associates supply cattle that are processed at the facilities owned and operated by NBP. NBP markets and distributes the beef and beef products produced from both cattle supplied by USPB’s unitholders and associates and other cattle purchased by NBP from other sources. The financial results of NBP’s operations therefore are the single largest influence on USPB’s financial performance. Consequently, those factors and risks that impact the performance of NBP’s business have a direct and immediate influence on USPB’s performance. However, there are also some risks that are unique to USPB. This Risk Factors section is divided into two parts, with one subsection focusing on the risk factors that influence the performance of NBP and another subsection discussing certain risk factors that are directly applicable to USPB.
USPB’s business operations and the implementation of our business strategy are subject to significant risks inherent in our business, including, without limitation, the risks and uncertainties described below. The occurrence of any one or more of the risks or uncertainties described below could have a material adverse effect on our financial condition, results of operations, and cash flows. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position, and financial performance in the future.
Risk Factors Associated With Operations of NBP
The prices and availability of key raw materials affects the profitability of NBP’s beef processing operations.
The supply and market price of cattle purchased by NBP are dependent upon a variety of factors over which NBP has no control, including fluctuations in the size of herds maintained by producers, the relative cost of feed and energy, weather and livestock diseases. Although NBP is not currently experiencing any shortage of raw materials, if it experience shortages, revenues and profitability could decline.
Outbreaks of disease affecting livestock can adversely affect the supply of cattle and the demand for NBP’s products.
NBP is subject to risks relating to animal health and disease control. An outbreak of disease affecting livestock (such as foot-and-mouth disease or bovine spongiform encephalopathy (“BSE”), commonly referred to as mad cow disease) could result in restrictions on sales of products, restrictions on purchases of livestock from suppliers or widespread destruction of cattle. The discovery of BSE in the past caused certain countries to restrict or prohibit the importation of beef products. Outbreaks of diseases, or the perception by the public that an outbreak has occurred, or other concerns regarding diseases, can lead to inadequate supply, cancellation of orders by customers and create adverse publicity, any of which can have a significant negative impact on consumer demand and, as a result, on NBP’s consolidated financial position, cash flows and results of operations.
If NBP’s products or products made by others using its products become contaminated or are alleged to be contaminated, NBP may be subject to product liability claims that could adversely affect its business.
NBP may be subject to significant liability in excess of insurance policy limits if its products or products made by others using its products causes injury, illness or death. In addition, NBP could recall or be required to recall products that are, or are alleged to be, contaminated, spoiled or inappropriately labeled. Organisms producing food borne illnesses (such as E. coli) could be present in NBP’s products and result in illness or death if they are not eliminated through further processing or cooking. Contamination of NBP’s or its competitors’ products may create adverse publicity or cause consumers to lose confidence in the safety and quality of beef products. Allegations of product contamination may also be harmful even if they are untrue or result from third-party tampering. Any of these events may increase costs or decrease demand for beef products, any of which could have a significant adverse effect on the NBP’s consolidated financial condition, cash flows and results of operations.
NBP generally does not enter into long-term contracts with customers; as a result the volumes and prices at which beef products are sold are subject to market forces.
NBP’s customers generally place orders for products on an as-needed basis and, as a result, their order levels have varied from period to period in the past and may vary significantly in the future. The loss of one or more significant customers, a significant decline in the volume of orders from customers or a significant decrease in beef product prices for a sustained period of time could negatively impact cash flows and results of operations.
NBP’s international operations expose it to political and economic risks in foreign countries, as well as to risks related to currency fluctuations.
Approximately 12% of NBP’s annual sales are export sales, primarily to Mexico, Japan, South Korea, Canada, China (for hides), Hong Kong, Egypt, and Taiwan, and on average these sales have a higher margin than domestic sales of similar products. A reduction in international sales could adversely affect revenues and margins. Risks associated with international activities include inflation or deflation and changes in foreign currency exchange rates, including changes in currency exchange rates of other countries that may export beef products in competition with NBP; the closing of borders by foreign countries to product imports due to disease or other perceived health or food safety issues; exchange controls; changes in tariffs; changes in political or economic conditions; trade restrictions and changes in regulatory requirements. The occurrence of any of these events could increase costs, lower demand for products or limit operations, which could have a significant adverse effect on cash flows, results of operations and future prospects.
NBP’s operations are subject to extensive and increasingly stringent environmental regulations administered by the EPA and state, local and other authorities with regards to water usage, wastewater and storm water discharge, air emissions and odor, and waste management and disposal. Failure to comply with these laws and regulations could have serious consequences, including criminal, civil and administrative penalties and negative publicity. In addition, NBP incurs and will continue to incur significant capital and operating expenditures to comply with existing and new or more stringent regulations and requirements. All of NBP’s processing facilities procure wastewater treatment services from municipal or other regional governmental agencies that are in turn subject to environmental laws and permit limits regarding their water discharges. As permit limits are becoming more stringent, upgrades and capital improvements to these municipal treatment facilities are likely. In locations where NBP is a significant volume discharger, it could be asked to contribute toward the costs of such upgrades or to pay significantly increased water or sewer charges to recoup such upgrade costs. NBP may also be required to undertake upgrades and make capital improvements to its own wastewater pretreatment facilities, the cost of which could be significant. Compliance with environmental regulations has had and will continue to have a significant impact on NBP’s cash flows, margins and profitability. In addition, under most environmental laws, most notably the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and analogous state laws, NBP could be held liable for the cost to investigate or remediate any contamination at properties it owns or operates, or as to which it arranges for the disposal or treatment of hazardous substances, as such liability is imposed without regard to fault.
12 |
NBP’s operating results could be negatively impacted by hedging and derivative positions.
NBP uses derivative financial instruments and other strategies in an attempt to reduce exposure to various market risks, including changes in commodity prices. These positions do not qualify as hedges for financial reporting purposes and are marked to fair value with unrealized gains and losses reported in earnings. Losses on these instruments will negatively impact reported operating results and the use of such instruments may limit NBP’s ability to benefit from favorable commodity price movements.
Failure to replace Walmart’s case ready business would have a significant adverse effect on National Beef’s sales and profitability.
Sales to Walmart represented approximately 10% of NBP’s total net sales during its last fiscal year. NBP has been notified by Walmart that it intends to discontinue using NBP as a provider of its case-ready products in 2013. Total case-ready revenues were approximately 7% of NBP consolidated revenues during 2012, but as a value-added product, case-ready products have historically constituted a higher percentage of NBP’s gross margin. Since 2008, case-ready products have represented from 10% to 26% of NBP’s total gross margin, and were at the higher end of that range in 2012 due, in part, to reduced gross margin from other NBP products. NBP is currently pursuing replacement business for its case-ready facilities; however, it may not be able to fully replace the operating cash flow generated by these facilities in the near future, if at all.
NBP is subject to extensive governmental regulation and noncompliance with or changes in applicable requirements could adversely affect its business, financial condition, cash flows and results of operations.
NBP’s operations are subject to extensive regulation and oversight by the USDA, including its FSIS and GIPSA agencies, the FDA, and other federal, state, local and foreign authorities regarding the processing, packaging, storage, safety, distribution, advertising and labeling of its products. Recently, food safety practices and procedures in the meat processing industry have been subject to more intense scrutiny and oversight by the USDA. NBP is also subject to a variety of immigration, labor and worker safety laws and regulations, including those relating to the hiring and retention of employees. Failure to comply with existing or new laws and regulations could result in administrative penalties and injunctive relief, civil remedies, fines, interruption of operations, recalls of products or seizures of properties, potential criminal sanctions and personal injury or other damage claims. These remedies, changes in the applicable laws and regulations or discovery of currently unknown conditions could increase costs, limit business operations and reduce profitability.
NBP’s performance depends on favorable labor relations with its employees, in particular employees represented by collective bargaining agreements.
A substantial number of NBP’s employees are covered by collective bargaining agreements. A labor-related work stoppage by unionized employees, or employees who become unionized in the future, could limit NBP’s ability to process and ship products or could increase costs. Any significant increase in labor costs, deterioration of employee relations, slowdowns or work stoppages at any of NBP’s locations, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on the NBP’s financial condition, cash flows and results of operations.
Risk Factors Associated with USPB
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USPB facilitates the delivery of the cattle provided by its unitholders and associates to NBP and does not have arrangements for alternative markets for its unitholders and associates cattle.
USPB’s sole customer for the cattle provided by its unitholders and associates is NBP. USPB has not developed alternative customers for the cattle provided by USPB’s unitholders and associates. If events were to occur which would prevent NBP from purchasing and processing the cattle supplied by USPB’s unitholders and associates, USPB would need to exercise provisions in its agreements with both NBP and USPB’s unitholders that would permit USPB to reduce the number of cattle acquired from unitholders and sold to NBP. While such provisions would mitigate harm to USPB, it is likely that the value of the Class A and Class B units and the associated delivery rights held by USPB’s unitholders would be impaired.
The other members of NBP do not deliver cattle to NBP for processing, creating the possibility that the interests of those other members of NBP could conflict with the interests of USPB and its unitholders.
The other members of NBP do not deliver cattle to NBP for processing and marketing. As a result, conflicts of interest may arise between USPB and NBP relating to cattle purchases. If a dispute were to arise, the settlement of any such dispute may not be on terms as favorable to USPB as would be expected if all of the members of NBP were involved in the delivery of cattle to NBP for processing.
The Internal Revenue Service could assert that USPB should be treated as a corporation for federal income tax purposes.
Under applicable regulations, an unincorporated entity such as a limited liability company is treated as a partnership for federal income tax purposes unless the entity is considered a “publicly traded partnership” or the entity affirmatively elects to be taxed as a corporation. USPB has not elected to be taxed as a corporation, and USPB believes that it should be treated as a partnership not taxable as a corporation for federal income tax purposes. USPB has not requested and will not request any ruling from the IRS, however, with respect to its classification as a partnership for federal income tax purposes. If the IRS were to assert successfully that USPB were taxable as a corporation for federal income tax purposes in any taxable year, holders of Class A units and Class B units would not be required to report on their federal income tax returns their allocable share of USPB’s items of income, gain, deduction, and loss for that year and USPB would be subject to tax on its net income for that year at corporate tax rates. In addition, any distributions would be taxable to holders of Class A units and Class B units as dividend income. Taxation of USPB as a corporation could materially reduce the after−tax return on an investment in units and could substantially reduce the value of the units.
Failure to achieve and maintain effective internal controls could have a material adverse effect on USPB’s business, operating results and financial condition.
USPB documents and tests its internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of its internal controls over financial reporting. This process is both costly and challenging. If USPB fails to achieve and maintain the adequacy of its internal controls, as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude on an ongoing basis that it has effective internal controls over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for USPB to produce reliable financial reports and are important to helping prevent financial fraud. If USPB cannot provide reliable financial reports or prevent fraud, its business and operating results could be harmed, investors could lose confidence in its reported financial information, and its business, results of operation and financial condition could be adversely affected.
USPB depends on the service of key senior management personnel, the loss of which could materially harm its business.
USPB’s success will depend, in part, on the efforts of its key senior management personnel. The market for qualified personnel is competitive and USPB’s future success will depend on its ability to attract and retain these personnel. USPB does not have long-term employment agreements with most of its senior management. USPB may not be able to negotiate either new contracts or renewals of any existing long-term employment agreements on terms favorable to USPB or at all. The loss of the services of any of USPB’s key senior management personnel or the failure to attract and retain highly skilled personnel in the future could have a material adverse effect on USPB’s business, results of operations and financial condition.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
USPB’s corporate office is located at 12200 Ambassador Drive, Suite 501, Kansas City, Missouri 64163, in proximity to the corporate offices of NBP. The Company leases its office space from the Kansas City Aviation Department, with offices at 601 Brasilia Avenue, Kansas City , Missouri 64153.
ITEM 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Note 15. Legal Proceedings.
ITEM 4. NOT USED.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for any class of common equity of U.S. Premium Beef, LLC. As of February 28, 2013, there were 477 record holders of Class A units and 482 record holders of Class B units. During fiscal year 2011, Class A and Class B units started trading independently. The per unit sales prices for the fiscal year 2012 and subsequent to fiscal year 2012, the transition period, and for fiscal year 2011 by quarter were as follows:
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| Affiliated Sales |
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| Third Party Sales |
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| Class B |
| Class A |
| Class B | ||||||||||||
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| Low | High |
| Low | High |
| Low | High |
| Low | High | ||||||||
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Fiscal Year 2012 |
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Quarter ending: |
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| March 31, 2012 | $ | 100.00 | $ | 100.00 |
| $ | 150.00 | $ | 150.00 |
| $ | - | $ | - |
| $ | - | $ | - |
| June 30, 2012 | $ | 105.90 | $ | 200.00 |
| $ | 105.90 | $ | 200.00 |
| $ | - | $ | - |
| $ | 175.00 | $ | 195.00 |
| September 29, 2012 | $ | 45.00 | $ | 50.00 |
| $ | 185.00 | $ | 200.00 |
| $ | 50.00 | $ | 50.00 |
| $ | 200.00 | $ | 200.00 |
| December 29, 2012 | $ | 45.00 | $ | 94.96 |
| $ | 94.96 | $ | 188.39 |
| $ | 94.50 | $ | 150.00 |
| $ | 188.00 | $ | 200.00 |
Subsequent to December 29, 2012 | $ | 91.99 | $ | 100.00 |
| $ | 188.39 | $ | 200.00 |
| $ | - | $ | - |
| $ | - | $ | - | |
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Transition Period |
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| 3 months ended November 26, 2011 | $ | 220.00 | $ | 220.00 |
| $ | 503.00 | $ | 525.00 |
| $ | - | $ | - |
| $ | 503.00 | $ | 504.00 |
| 1 month ended December 31, 2011 | $ | 1.00 | $ | 220.00 |
| $ | 1.00 | $ | 470.00 |
| $ | 200.00 | $ | 200.00 |
| $ | - | $ | - |
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Fiscal Year 2011 |
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Quarter ending: |
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| November 27, 2010 | $ | 20.00 | $ | 150.00 |
| $ | 40.00 | $ | 236.00 |
| $ | 165.00 | $ | 166.00 |
| $ | 311.00 | $ | 311.00 |
| February 26, 2011 | $ | 170.00 | $ | 170.00 |
| $ | 300.00 | $ | 451.00 |
| $ | 169.00 | $ | 200.00 |
| $ | 451.00 | $ | 505.00 |
| May 28, 2011 | $ | 1.00 | $ | 165.00 |
| $ | 1.00 | $ | 290.00 |
| $ | 203.00 | $ | 210.00 |
| $ | - | $ | - |
| August 27, 2011 | $ | 95.00 | $ | 178.68 |
| $ | 175.00 | $ | 397.22 |
| $ | 200.00 | $ | 225.00 |
| $ | 525.00 | $ | 550.00 |
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The affiliated sales represent sales for each of the periods shown above were not at arms-length and, therefore, the sales prices disclosed above are not necessarily indicative of the market value of the Class A and Class B units during the periods in question.
During fiscal year 2012, the transition period ended December 31, 2011, and fiscal year 2011, USPB’s Board of Directors approved the following per unit cash distributions to be made to its Class A and Class B unitholders:
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Fiscal Year 2012 |
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February 27, 2012 |
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| $ | 2.87 |
| $ | 25.18 |
April 10, 2012 |
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| $ | 0.32 |
| $ | 2.83 |
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Transition Period |
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September 9, 2011 |
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| $ | 14.97 |
December 30, 2011 |
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| $ | 616.82 |
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Fiscal Year 2011 |
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September 10, 2010 |
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| $ | 16.00 |
December 17, 2010 |
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| $ | 13.25 |
| $ | 116.11 |
January 13, 2011 |
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| $ | 2.24 |
| $ | 19.63 |
February 22, 2011 |
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| $ | 2.74 |
| $ | 24.03 |
April 4, 2011 |
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| $ | 1.72 |
| $ | 15.07 |
June 8, 2011 |
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| $ | 1.96 |
| $ | 17.14 |
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The payment of cash distributions are made only from assets legally available for that purpose and depend on the Company’s financial condition, results of operations, and other factors then deemed relevant by USPB’s board of directors. Cash distributions are paid to the holders of Class A and Class B units at the discretion of the board of directors and to the extent permitted by USPB’s senior lenders.
For a discussion of equity compensation plans, see Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters.
ITEM 6. SELECTED FINANCIAL DATA
In connection with the closing of the Leucadia Transaction on December 30, 2011, the Company’s fiscal year changed from the last Saturday in August to the last Saturday in December. Our financial results for the 18 week period ended December 31, 2011, are referred to as the “18 week period” or “transition period” throughout this report. Also, as a result of the Leucadia Transaction, the USPB investment in NBP is accounted for using the equity method of accounting as USPB has the ability to exercise significant influence but does not have financial or operational control. Consequently, the Company’s balance sheet as of December 29, 2012 and December 31, 2011 were not consolidated with NBP. In all periods prior to the Leucadia Transaction, NBP’s financial results were consolidated with the results of USPB.
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The following table sets forth selected unconsolidated statement of operations and balance sheet data for fiscal year ended December 29, 2012, selected consolidated statement of operations data for the 18 week period ended December 31, 2011 and selected unconsolidated balance sheet data as of December 31, 2011. The table also set forth selected consolidated statement of operations data for four fiscal years ended August 27, 2011 and selected balance sheet data as of the four fiscal years ended August 27, 2011, August 28, 2010, August 29, 2009, and August 30, 2008. The selected financial data has been derived from our audited unconsolidated and consolidated financial statements included elsewhere in this filing or from audited financial statements from prior years’ filings, as adjusted for the presentation requirements of Accounting Standards Codification (ASC) 810 – Consolidation, which was adopted by the Company as of August 30, 2009 with retrospective application to the historical years presented.
The Company identified immaterial errors in the manner in which expense has been recognized under its management phantom unit plan and the accounting for non-competition consideration included in the former CEO’s employment agreement. These phantom units vest over a 5 year period. Since February 2011, the Company has recorded the entire fair value of the phantom units as a liability rather than only the percentage of the fair value that had vested. The former CEO’s employment agreement provided for non-competition consideration in the form of salary and certain benefits, originally for an 18 month period when signed in September 2009. In conjunction with the Leucadia Transaction, this was expanded to a 10 year period and the employment agreement was modified accordingly. Since the CEO had unilateral ability to terminate at any time under the terms of his employment agreement and initiate this payment stream, the present value of the liability should have been recorded when the agreement was originally signed and then adjusted upon the amendment for the Leucadia Transaction. These matters impacted the selling, general and administrative expenses, accrued liabilities and members’ capital for the periods discussed below, but did not impact cash flows for any period presented. Of the $6.0 million adjustment to member's capital for the four months ended December 31, 2011, approximately $5.9 million relates to the four months ended December 31, 2011, the balance relates to expense in the prior fiscal year. The Company assessed the materiality of these items in all periods in accordance with the SEC’s guidance in Staff Accounting Bulletin 99 and concluded that the adjustments were not material to any period. These immaterial corrections impacted the selected financial data in the table below, see Note 3. Immaterial Prior Period Error.
The following table should be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data (including the accompanying notes) contained elsewhere in this report.
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| Ended (1) | Ended |
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| December | December | August 27, | August 28, | August 29, | August 30, | ||||||
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| 29, 2012 | 31, 2011 | 2011 | 2010 | 2009 | 2008 | ||||||
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Statement of Operations Data: |
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Net sales | $ | - | $ | 2,466.3 | $ | 6,849.5 | $ | 5,807.9 | $ | 5,449.3 | $ | 5,847.3 | ||
Costs and expenses: |
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| Cost of sales | - | 2,412.1 | 6,473.3 | 5,438.0 | 5,187.1 | 5,612.4 | |||||||
| Selling, general, and administrative | 5.7 | 31.9 | 60.7 | 55.5 | 49.1 | 51.7 | |||||||
| Depreciation and amortization | - | 15.4 | 54.6 | 53.0 | 45.7 | 36.4 | |||||||
Operating income | (5.7) | 6.8 | 260.9 | 261.4 | 167.4 | 146.8 | ||||||||
Other income (expense): |
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| Interest income | 0.1 | - | - | - | 0.3 | 1.4 | |||||||
| Interest expense | (0.3) | (3.3) | (11.7) | (14.9) | (23.6) | (34.2) | |||||||
| Equity in earnings of National Beef Packing Company, LLC | 8.6 |
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| interest in National Beef Packing Company, LLC | - | 777.7 | - | - | - | - | ||||||
| Termination fee | - | - | - | - | 14.6 | - | |||||||
| Other, net | 0.1 | 1.5 | 0.3 | (7.3) | (6.4) | 5.8 | |||||||
Total other expense | 8.5 | 775.9 | (11.4) | (22.2) | (15.1) | (27.0) | ||||||||
| Income tax expense | (0.1) | (0.7) | (2.6) | (0.9) | (1.0) | (1.8) | |||||||
Net income | 2.7 | 782.0 | 246.9 | 238.4 | 151.3 | 118.0 | ||||||||
Less: Net income attributable to non-controlling interest in: |
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| Kansas City Steak Company, LLC | - | (0.5) | (0.6) | (1.0) | (1.3) | (0.7) | |||||||
| National Beef Packing Company, LLC | - | (5.4) | (78.7) | (76.5) | (50.0) | (55.1) | |||||||
Net income attributable to U.S. Premium Beef, LLC | $ | 2.7 | $ | 776.1 | $ | 167.6 | $ | 160.9 | $ | 100.0 | $ | 62.2 | ||
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Selected Balance Sheet Data: |
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| Cash and cash equivalents | $ | 62.7 | $ | 642.7 | $ | 78.6 | $ | 35.4 | $ | 18.9 | $ | 77.4 | |
| Total assets | $ | 267.4 | $ | 848.1 | $ | 1,082.2 | $ | 986.7 | $ | 872.9 | $ | 927.1 | |
| Long-term debt, less current maturities | $ | - | $ | - | $ | 321.9 | $ | 225.1 | $ | 293.4 | $ | 376.3 | |
| Non-controlling interest in National Beef Packing |
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| Company, LLC and Kansas City Steak Company, LLC | $ | - | $ | - | $ | 354.2 | $ | 294.5 | $ | 185.8 | $ | 188.0 |
| Capital shares and equities | $ | 254.5 | $ | 275.3 | $ | 85.1 | $ | 166.9 | $ | 159.8 | $ | 126.5 | |
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| Units outstanding |
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| Class A units | 735,385 | 735,385 | 735,385 | 735,385 | 735,385 | 735,385 | ||||||
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| Class B units | 755,385 | 755,385 | 755,385 | 755,385 | 755,385 | 735,385 | ||||||
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Per Unit Data: |
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Earnings Per Unit |
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| Basic |
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| Class A Units | $ | 0.37 | $ | 105.46 | $ | 21.80 | $ | 29.24 | $ | 44.57 | $ | 27.92 |
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| Class B Units | $ | 3.25 | $ | 924.04 | $ | 190.98 | $ | 174.24 | $ | 90.29 | $ | 56.68 |
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| Class A Units | $ | 0.36 | $ | 103.68 | $ | 21.44 | $ | 28.78 | $ | 44.05 | $ | 27.51 |
|
| Class B Units | $ | 3.25 | $ | 924.04 | $ | 190.98 | $ | 174.24 | $ | 90.29 | $ | 55.86 |
|
|
|
|
|
|
|
|
| ||||||
Outstanding weighted-average units |
|
|
|
|
|
| ||||||||
| Basic |
|
|
|
|
|
| |||||||
|
| Class A Units | 735,385 | 735,385 | 735,385 | 735,385 | 735,385 | 735,385 | ||||||
|
| Class B Units | 755,385 | 755,385 | 755,385 | 755,385 | 737,052 | 735,385 | ||||||
| Diluted |
|
|
|
|
|
| |||||||
|
| Class A Units | 747,836 | 748,055 | 747,600 | 747,334 | 744,039 | 746,176 | ||||||
|
| Class B Units | 755,385 | 755,385 | 755,385 | 755,385 | 737,052 | 746,176 | ||||||
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
| ||||||
(1) | Effective December 30, 2011, USPB's fiscal year changed from the last Saturday in August to the last Saturday in December. Fiscal years 2012, 2011, 2010 and 2009 consisted of a 52 week year; and fiscal year 2008 consisted of a 53 week year.
| |||||||||||||
|
18 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1A, Risk Factors, Item 7, Disclosure Regarding Forward-Looking Statements and elsewhere in this report.
Overview
USPB was formed as a closed marketing cooperative on July 1, 1996. Its mission is to increase the quality of beef and long-term profitability of cattle producers by creating a fully integrated producer-owned beef processing system that is a global supplier of high quality, value-added beef products responsive to consumer desires.
On December 1, 1997, the cooperative became operational by acquiring 25.4966% of FNB, a partnership owned by the cooperative and Farmland Industries, Inc. (Farmland). The cooperative acquired an additional 3.29% partnership interest in February 1998, bringing its ownership to 28.7866% of FNB. Farmland then owned the remaining 71.2134%.
In December 1997, FNB acquired what became a 75% interest in Kansas City Steak Company, LLC (Kansas City Steak), a portion control steak cutting operation. In March 2003, FNB acquired National Carriers, Inc. (National Carriers), a refrigerated and livestock transportation company from Farmland.
On May 31, 2002, Farmland and four of its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. FNB was not a party of these filings. Provisions of FNB’s operating agreement and its financing agreement restricted partners’ access to FNB’s assets. In the fourth quarter of fiscal year 2003, as a result of the acquisition of Farmland’s interest by the cooperative and others, as more fully described below, the cooperative acquired a controlling interest in the former FNB, now NBP, and the assets, liabilities and operating results of NBP are consolidated with those of USPB effective August 7, 2003. Prior to the acquisition date, the cooperative accounted for its 28.7866% non-controlling interest in FNB under the equity method of accounting.
In connection with the cooperative’s purchase of its interest in FNB, the cooperative owned the right and was subject to the obligation to deliver cattle annually to NBP. The price received for cattle is based upon a price grid determined by USPB and NBP, which reflects current market conditions. The cattle purchase agreement is effective as long as USPB is an owner in NBP. Cattle delivered by USPB unitholders and associates are processed in NBP’s three processing plants.
USPB fulfills its annual obligation to deliver cattle to NBP through its unitholders and associates. Under Uniform Cattle Delivery and Marketing Agreements, unitholders are obligated to deliver a designated number of cattle to USPB. The original agreements were for a term of ten years; the renewal agreements carry a term of five years and have an evergreen renewal provision. Both agreements provide for minimum quality standards, delivery variances, and termination provisions, as defined. Cattle acquired pursuant to the agreements are delivered to NBP pursuant to the cattle purchase agreement. Sales transactions are based upon prevailing cash market prices, and purchases are on terms no less favorable to NBP than would be obtained from an unaffiliated party.
19 |
On June 12, 2003, the cooperative entered into an agreement with Farmland to acquire all of the partnership interests in FNB held by Farmland, which approximated 71.2%. As a result of this acquisition, the cooperative gained voting control of FNB and converted it to a limited liability company, National Beef Packing Company, LLC, under Delaware law. These transactions (Acquisition) closed on August 6, 2003. NBP assumed both the Uniform Delivery and Marketing Agreements and the cattle purchase agreement. NBP continues to hold all of the same assets as its predecessor held before the consummation of the transactions, including equity in subsidiaries, except that Farmland retained a 49% interest in a NBP subsidiary National Beef aLF, LLC, which holds a 47.5% interest in aLF Ventures, LLC. After the Acquisition, NBP held a 24.2% interest in aLF Ventures, LLC through its 51% interest retained in National Beef aLF, LLC.
On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the merger of the cooperative into a wholly-owned subsidiary, U.S. Premium Beef, Inc., a Delaware corporation. The merger was effective on August 29, 2004. The Delaware corporation then, in a statutory conversion authorized under Delaware law, converted into a Delaware limited liability company. Following the effective date of the merger and the statutory conversion, the business of the cooperative was continued in the limited liability company form of business organization. The Company was subsequently renamed U.S. Premium Beef, LLC.
Effective May 30, 2006, NBP completed the acquisition of substantially all of the assets of Brawley Beef, LLC (Brawley Beef), consisting of a state-of-the-art beef processing facility in Brawley, California pursuant to the Contribution Agreement with Brawley Beef and National Beef California, LP (NBC). NBC is a limited partnership formed with National Carriers, Inc., a wholly-owned subsidiary of NBP, acting as its general partner. Brawley Beef was an alliance of cattle producers in Arizona and California who supplied the beef processing facility. The facility commenced operations in December 2001.
National Beef Leathers, LLC, a wholly-owned subsidiary of NBP, purchased certain assets of a wet blue tannery located in St. Joseph, Missouri from Prime Tanning in March 2009.
On December 5, 2011, USPB entered into the Purchase Agreement. The Purchase Agreement provided for (i) Leucadia to purchase 56.2415% of the National Interests from the Company for $646.8 million and 19.8775% of the National Interests from NBPCo for $228.6 million; (ii) pursuant to pre-existing put rights, NBP to purchase from TKK and TMKCo all the National Interests owned by TKK and TMKCo for $75.9 million; and (iii) Leucadia to sell to TMK Holdings 0.6522% of the National Interests for $7.5 million. Upon consummation of the Leucadia Transaction, the parties own the following percentage membership interests in NBP: Leucadia 78.9477%; USPB 15.0729%; NBPCo 5.3272%; and TMK Holdings 0.6522%.
In connection with its approval of the Purchase Agreement, the Company’s Board of Directors adopted a change to the Company’s fiscal year, which became effective upon closing. The Leucadia Transaction closed on December 30, 2011 and the Company’s fiscal year-end changed from the last Saturday in August to the last Saturday in December.
Due to the sale to Leucadia, beginning on December 31, 2011, USPB’s investment in NBP will be accounted for using the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operational control. Since USPB no longer has financial or operational control, NBP’s financial information will no longer be consolidated with USPB’s. NBP’s financial statements and footnotes will instead be attached as an exhibit to USPB’s 10-K.
NBP is one of the largest beef processing companies in the U.S., accounting for approximately 14.5% of the federally inspected steer and heifer slaughter during 2012, as reported by the USDA. NBP processes, packages and delivers fresh and frozen beef and beef by-products for sale to customers in the U.S. and international markets. NBP’s products include boxed beef, ground beef, hides, tallow and other beef and beef by-products. In addition, NBP sells value-added beef products including branded boxed beef, case-ready beef, portion control beef, and further processed hides. NBP markets its products to retailers, food service providers, distributors, further processors and the U.S. military. USPB believes that its relationship with NBP is a competitive advantage within the industry and provides NBP with a consistent and dependable supply of high-quality cattle, including for processing in value-added and other programs.
In November 2012, USPB’s CEO, Steven Hunt, notified the Company’s Board of Directors of his plans to resign from his employment with the Company effective as of January 28, 2013. Stanley Linville, USPB’s Chief Operating Officer, was named the Company’s new CEO.
Financial Statement Accounts
The financial statement accounts, Net Sales and Cost of Sales, relate solely to NBP operations.
20 |
Net Sales. NBP’s net sales are generated from sales of boxed beef, case-ready beef, chilled and frozen export beef, portion control beef and beef by-products. NBP’s net sales are affected by the volume of animals processed and the value extracted from each animal. The value NBP extracts from cattle processed, referred to as the cut-out value, is affected by beef prices and product mix, as value-added products and export sales typically generate higher prices and operating margins. NBP’s value-added products contribute significantly more, in terms of profits, than its traditional boxed beef products and are an important component of NBP’s profitability. Wholesale beef prices fluctuate seasonally because of higher demand during the summer months. Wholesale beef prices also fluctuate because of changes in supply and demand for competing proteins and other foods, as well as changes in cattle supply, which have typically followed a ten to twelve year cycle, consisting of about six to seven years of expansion followed by one to two years of consolidation and three to four years of contraction. While NBP expects the supply of cattle to expand at some point in the next few years, it does not expect any growth in the near term. In addition, beef and by-product sales are affected by the general economic environment and other factors.
Cost of Sales. NBP’s cost of sales is comprised of the cost of livestock and plant costs such as labor, packaging, and utilities, and other facility expenses. Total livestock costs are a function of the volume of animals processed and the price paid for each animal. Cattle prices vary over time and are affected by production cycles, weather, feed prices and other factors that affect the supply of and demand for livestock. Cut-out value is a measure of the sales value of a beef carcass expressed on a per hundred weight basis. Historically, changes in cut-out values and corresponding livestock costs have been positively correlated.
Selling, General and Administrative Expenses. Selling expenses consist primarily of salaries, trade promotions, advertising, commissions and other marketing costs. General and administrative costs consist primarily of general management, insurance and professional expenses.
Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates and revises its estimates based on historical experience and other assumptions we believe are reasonable under the circumstances. Actual results may differ from those estimates. Changes in our estimates could materially affect our results of operations and financial condition for any particular period. With the closing of the Leucadia Transaction, our fiscal year will end on the last Saturday in December. For fiscal year 2011 and prior, our fiscal year ended on the last Saturday in August. Unless otherwise noted, the critical account policies noted below refer to fiscal year 2011 and prior. We believe USPB’s most critical accounting policy is as follows:
Accounting for Investment in NBP. On December 30, 2011, USPB sold the majority of its ownership interest in NBP to Leucadia. On that date, USPB’s investment in NBP was measured at fair value and has since been carried under the equity method of accounting. For fiscal year 2011 and prior, NBP’s financial position and results of operations were consolidated into our financial statements and all transactions between the two companies were eliminated in the consolidation. A non-controlling interest was presented which represents the earnings of NBP attributable to those holding a non-controlling interest in NBP.
We believe NBP’s most critical accounting policies are as follows:
Allowance for Returns and Doubtful Accounts. The allowance for returns and doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance, and anticipated customer performance. Specific accounts are also reviewed for collectability. While management believes these processes effectively address its exposure to doubtful accounts, changes in the economy, industry or specific customer conditions may require adjustment to the recorded allowance for doubtful accounts. Management uses significant judgment in estimating amounts expected to be returned. Management considers factors such as historical performance and customer conditions in estimating return amounts.
21 |
Inventory Valuation. Inventories consist primarily of meat products and supplies. Product inventories are considered commodities and are based on quoted commodity prices, which approximate net realizable value. Supply and other inventories are valued on the basis of first-in, first-out, specific or average cost methods. Product inventories are relieved from inventory utilizing the first-in, first-out method. Management periodically reviews inventory balances and purchase commitments to estimate if inventories will be sold at amounts (net of estimated selling costs) less than their carrying amounts. If actual results differ from management estimates with respect to the selling of inventories at amounts less than their carrying amounts, NBP would adjust its inventory balances accordingly.
Goodwill and Other Intangible Assets. We recognize excess cost over the fair value of the net tangible and identifiable intangible assets acquired in a reporting unit, and record this excess as goodwill. We calculate the fair value of the applicable reporting unit using estimates of future cash flows. In accordance with the provisions included within Intangibles – Goodwill and Other under ASC 350, we assess goodwill and other indefinite life intangible assets annually for impairment. If there is impairment, the carrying amount of goodwill and other intangible assets is written down to the implied fair value. For goodwill, this test involves comparing the fair value of each reporting unit to the unit’s book value to determine if any impairment exists. Goodwill and other indefinite life intangible assets were tested for impairment, and, as of December 31, 2011, management determined there was no impairment.
Workers’ Compensation Accrual. NBP incurs certain expenses associated with workers’ compensation. In order to measure the expense associated with these costs, management must make a variety of estimates including employee accidents incurred but not yet reported. The estimates used by management incorporate actuarial assumptions and are based on NBP’s historical experience as well as current facts and circumstances.
Automobile Liability Accrual. NBP incurs certain expenses associated with automobile liability. In order to measure the expense associated with these costs, management must make a variety of estimates to determine the ultimate cost to NBP related to incurred accidents. The estimates used by management are based on actuarial assumptions and are based on NBP’s historical experience as well as current facts and circumstances.
In May 2011, the FASB issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS under ASU 2011-04, or ASU 2011-04. ASU 2011-04 amends ASC 820, Fair Value Measurements (ASC 820), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 was effective for annual and interim periods beginning after December 31, 2011. The amendments in ASU 2011-04 are to be applied prospectively. The adoption of ASU 2011-04 did not have a material effect on USPB's consolidated financial statements or disclosures.
In June 2011, the FASB issued Presentation of Comprehensive Income under ASU 2011-05 or ASU 2011-05. ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for annual and interim periods beginning after December 31, 2011. The adoption of ASU 2011-05 resulted in USPB presenting the consolidated statement of comprehensive income as a separate but consecutive statement following the statement of operations as presented in these financial statements.
22 |
In September 2011, the FASB issued Testing Goodwill for Impairment under ASU 2011-08, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities with the option of performing a qualitative assessment to determine whether impairment testing is necessary. The revised standard is effective for annual and interim periods beginning after December 15, 2011, with early adoption permitted under certain circumstances. USPB’s adoption of this standard did not have a material impact on its financial statements.
Results of Operations
As a result of the Purchase Agreement, which is discussed further in Item1 Business above, USPB’s financial statements were not consolidated with NBP’s for the fifty-two week period ended December 29, 2012. Unless otherwise indicated, all changes in financial statement line items between fiscal years 2012 and 2011 are due to this change in reporting.
The following table presents the historical consolidated statements of operations data for USPB for the periods indicated:
|
|
| 52 weeks |
| 52 weeks |
| 52 weeks | |||
|
|
| ended |
| ended |
| ended | |||
|
|
| December |
| August 27, |
| August 28, | |||
|
|
| 29, 2012 |
| 2011 |
| 2010 | |||
|
|
| (millions of dollars) | |||||||
Net sales | $ | - |
| $ | 6,849.5 |
| $ | 5,807.9 | ||
|
|
|
|
|
|
|
| |||
Costs and expenses: |
|
|
|
|
| |||||
|
| Cost of sales | - |
| 6,473.3 |
| 5,438.0 | |||
|
| Selling, general, and administrative | 5.7 |
| 60.7 |
| 55.5 | |||
|
| Depreciation and amortization | - |
| 54.6 |
| 53.0 | |||
|
| Operating (loss) income | (5.7) |
| 260.9 |
| 261.4 | |||
|
|
|
|
|
|
|
| |||
| Other income (expense): |
|
|
|
|
| ||||
|
| Interest income | 0.1 |
| - |
| - | |||
|
| Interest expense | (0.3) |
| (11.7) |
| (14.9) | |||
|
| Equity in earnings of National Beef Packing Company, LLC | 8.6 |
| - |
| - | |||
|
| Other, net | 0.1 |
| 0.3 |
| (7.3) | |||
Total other expense, net | 8.5 |
| (11.4) |
| (22.2) | |||||
|
| Income tax expense | (0.1) |
| (2.6) |
| (0.9) | |||
Net income | 2.7 |
| 246.9 |
| 238.4 | |||||
Less: Net income attributable to noncontrolling interest in: |
|
|
|
|
| |||||
|
| Kansas City Steak Company, LLC | - |
| (0.6) |
| (1.0) | |||
|
| National Beef Packing Company, LLC | - |
| (78.7) |
| (76.5) | |||
Net income attributable to U.S. Premium Beef, LLC | $ | 2.7 |
| $ | 167.6 |
| $ | 160.9 | ||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
The results of operations of NBP for the fiscal years ended August 27, 2011, and August 28, 2010 are consolidated in the respective periods and transactions between USPB and NBP have been eliminated.
Fiscal Year Ended December 29, 2012 compared to August 27, 2011
Net Sales. Net sales were $0.0 million for the fiscal year ended December 29, 2012 compared to approximately $6,849.5 million for the fiscal year ended August 27, 2011.
Cost of Sales. Cost of sales were $0.0 million for the fiscal year ended December 29, 2012 compared to approximately $6,473.3 million for the fiscal year ended August 27, 2011.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $5.7 million for the fifty-two weeks ended December 29, 2012 compared to approximately $60.7 million for the fifty-two weeks ended August 27, 2011, a decrease of approximately $55.0 million. The $60.7 million in the prior year included $8.6 million in selling, general and administrative expenses attributable to USPB. From that perspective, USPB’s selling, general and administrative expenses were $2.9 million less than the same period a year ago. That decrease is primarily due to lower compensation expense on the phantom unit plans and lower legal expenses.
23 |
Depreciation and Amortization Expense. Depreciation and amortization expenses were approximately $0.0 million for the fifty-two weeks ended December 29, 2012 compared to approximately $54.6 million for the fifty-two weeks ended August 27, 2011.
Operating (Loss) Income. Operating loss was approximately $5.7 million for the fifty-two weeks ended December 29, 2012 compared to operating income of approximately $260.9 million for the fifty-two weeks ended August 27, 2011, a decrease of approximately $266.6 million.
Interest Expense. Interest expense was $0.3 million for the fifty-two weeks ended December 29, 2012 compared to $11.7 million for the fifty-two weeks ended August 27, 2011.
Equity Interest in Earnings of National Beef Packing Company, LLC. Equity in NBP was income of $8.6 million for the fifty-two weeks ended December 29, 2012 compared to $0.0 million for the fifty-two weeks ended August 27, 2011. As of December 31, 2011, USPB is carrying its 15.0729% investment in NBP under the equity method of accounting.
Income Tax Expense. Income tax expense was $0.1 million and $2.6 million for the fifty-two weeks ended December 29, 2012 and August 27, 2011, respectively. Income tax expense in the prior year period was recorded on taxable income from National Carriers, which is organized as a C Corporation and the apportioned taxable income of NBP by certain states which impose privilege taxes.
Net Income. Net income for the fifty-two-week period ended December 29, 2012 was approximately $2.7 million compared to net income of approximately $246.9 million for the fifty-two-week period ended August 27, 2011, a decrease of approximately $244.2 million. The decrease in net income is primarily due to the Company’s sale of a majority of its ownership interest in NBP to Leucadia and due to lower gross margins at NBP.
Net Income Attributable to Noncontrolling Interest in NBP. Noncontrolling interest in the net income of NBP for the fifty-two weeks ended December 29, 2012 was $0.0 million compared to $78.7 million in the fifty-two week period ended August 27, 2011. The noncontrolling interest in NBP represented the minority owners’ interest in NBP’s earnings while USPB was consolidating NBP.
Net Income Attributable to USPB. Net income attributable to USPB for the fifty-two-week period ended December 29, 2012 was approximately $2.7 million compared to net income of approximately $167.6 million for the fifty-two-week period ended August 27, 2011, a decrease of approximately $164.9 million.
Fiscal Year Ended August 27, 2011 compared to August 28, 2010
Net Sales. Net sales were approximately $6,849.5 million for the fiscal year ended August 27, 2011 compared to approximately $5,807.9 million for the fiscal year ended August 28, 2010, an increase of approximately $1,041.6 million, or 17.9%. The increase in net sales resulted primarily from a 16.7% increase in the net sales per head during the fiscal year ended August 27, 2011 compared to the same period in the prior year, as the demand for beef products remained strong, and price of beef products increased during the period.
24 |
Cost of Sales. Cost of sales was approximately $6,473.3 million for the fiscal year ended August 27, 2011 compared to approximately $5,438.0 million for the fiscal year ended August 28, 2010, an increase of approximately $1,035.3 million, or 19.0%. The increase was primarily a result of an approximately 19.1% increase in average cattle prices during the period compared to the prior period. Cost of sales, as a percentage of net sales, was 94.5% and 93.6% for fiscal years 2011 and 2010, respectively.
Selling, General, and Administrative Expenses. Selling, general and administrative expenses were approximately $60.7 million for the fiscal year ended August 27, 2011 compared to approximately $55.5 million for the fiscal year ended August 28, 2010, an increase of approximately $5.2 million, or 9.4%. This increase is primarily the result of an approximate $2.2 million increase in compensation expense on phantom options, $1.9 million increase in salaries, and approximately $1.0 million increase in travel related expenditures, offset by an approximate $0.8 million reduction in bad debt expense. Selling, general and administrative expenses, as a percentage of net sales, were 0.9% and 1.0% in fiscal years 2011 and 2010, respectively.
Depreciation and Amortization Expense. Depreciation and amortization expenses were approximately $54.6 million for the fiscal year ended August 27, 2011 compared to approximately $53.0 million for the fiscal year ended August 28, 2010, an increase of approximately $1.6 million, or 3.0%. Depreciation expense increased due to assets being placed into service during fiscal year 2011, primarily at NBP’s three beef plants and two case ready plants.
Operating Income. Operating income was approximately $260.9 million for the fiscal year ended August 27, 2011 compared to operating income of approximately $261.4 million for the fiscal year ended August 28, 2010, a decrease of approximately $0.5 million. Operating income, as a percentage of net sales, was 3.8% and 4.5% for fiscal years 2011 and 2010, respectively.
Interest Expense. Interest expense was $11.7 million for fiscal year 2011 compared to $14.9 million for fiscal year 2010, a decrease of $3.2 million, or 21.5%. The decrease in interest expense during fiscal year 2011 as compared to the fiscal year 2010 was due primarily to a decrease of approximately 1.39% of the average daily interest rate during the period.
Other, net. Other, net non-operating income was $0.3 million in the fiscal year ended August 27, 2011 compared to other, net non-operating expense of $7.3 million in the fiscal year ended August 28, 2010, an increase of $7.6 million. Other non-operating income, net for fiscal year 2011 primarily includes approximately $1.5 million of income related to gains on the sale of fixed assets, which was partially offset by $0.8 million in expenses related to an abandoned IPO effort. Other non-operating expense, net for fiscal year 2010 primarily includes approximately $2.4 million related to tannery litigation and approximately $2.2 million related to an abandoned IPO effort. In addition, other non-operating expense, net includes approximately $3.3 million NBP accrued for a potential settlement of a dispute with the city of Dodge City, Kansas pertaining to the transfer of certain water rights.
Income Tax Expense. Income tax expense was $2.6 million for the fiscal year ended August 27, 2011 compared to income tax expense of $0.9 million for the same period of fiscal year 2010, an increase of $1.7 million resulting from an increase in taxable income at NCI. Income tax expense is recorded on taxable income from NCI, which is organized as a C Corporation, and the apportioned taxable income of NBP by certain states which impose privilege taxes.
Net Income. As a result of the factors described above, net income for fiscal year 2011 was approximately $246.9 million compared to net income of approximately $238.4 million for fiscal year 2010, an increase of approximately $8.5 million.
Net Income Attributable to Non-controlling Interest in NBP. Non-controlling interest in the net income of NBP for fiscal year 2011 was $78.7 million compared to non-controlling interest in the net income of NBP for fiscal year 2010 of $76.5 million, an increase of $2.2 million. The non-controlling interest in NBP represents the minority owners’ interest in NBP’s earnings.
Net Income Attributable to USPB. Net income attributable to USPB for fiscal year 2011 was $167.6 million compared to net income attributable to USPB of $160.9 million for fiscal year 2010, an increase of $6.7 million.
25 |
The following table shows consolidated statements of operations data for the periods indicated:
|
|
| 18 weeks |
| 17 weeks | ||
|
|
| ended |
| ended | ||
|
|
| December |
| December | ||
|
|
| 31, 2011 |
| 25, 2010 | ||
|
|
| (millions of dollars) | ||||
Net sales | $ | 2,466.3 |
| $ | 2,102.9 | ||
|
|
|
|
|
| ||
Costs and expenses: |
|
|
| ||||
| Cost of sales | 2,412.1 |
| 1,995.2 | |||
| Selling, general, and administrative | 31.9 |
| 18.6 | |||
| Depreciation and amortization | 15.4 |
| 17.2 | |||
|
|
|
|
|
| ||
| Operating income | 6.8 |
| 71.8 | |||
|
|
|
|
|
| ||
Other income (expense): |
|
|
| ||||
| Interest income | 0.0 |
| 0.0 | |||
| Interest expense | (3.3) |
| (3.7) | |||
| Gain on deconsolidation and sale of majority of ownership |
|
|
| |||
|
| interest in National Beef Packing Company, LLC | 777.7 |
| 0.0 | ||
| Other, net | 1.5 |
| 0.6 | |||
Total other expense, net | 775.9 |
| (3.1) | ||||
| Income tax expense | (0.7) |
| (0.4) | |||
Net income | 782.0 |
| 68.3 | ||||
Less: Net income attributable to noncontrolling interest in: |
|
|
| ||||
| Kansas City Steak Company, LLC | (0.5) |
| (0.9) | |||
| National Beef Packing Company, LLC | (5.4) |
| (21.1) | |||
Net income attributable to U.S. Premium Beef, LLC | $ | 776.1 |
| $ | 46.3 | ||
|
|
|
|
|
|
The results of operations of NBP for the 18 weeks ended December 31, 2011 and the 17 weeks ended December 25, 2010 are consolidated in the respective periods and transactions between USPB and NBP have been eliminated.
18 weeks ended December 31, 2011 compared to 17 weeks ended December 25, 2010
The 18 week period December 31, 2011 was revised for immaterial errors identified by the Company in the manner in which expense has been recognized under its management phantom unit plan and the accounting for non-competition consideration included in the former CEO’s employment agreement. These revisions are discussed in further detail in Item 6. Selected Financial Data above.
Net Sales. Net sales were approximately $2,466.3 million for the 18 weeks ended December 31, 2011 compared to approximately $2,102.9 million for the 17 weeks ended December 25, 2010, an increase of approximately $363.4 million, or 17.3%. The increase in net sales resulted primarily from a 15.9% increase in the net sales per head during the 18 weeks ended December 31, 2011 compared to the same period in the prior year, as the demand for beef products remained strong, and price of beef products increased during the period.
Cost of Sales. Cost of sales was approximately $2,412.1 million for the 18 weeks ended December 31, 2011 compared to approximately $1,995.2 million for the 17 weeks ended December 25, 2010, an increase of approximately $416.9 million, or 20.9%. The increase was primarily a result of an approximately 21.1% increase in average cattle prices during the period compared to the prior period.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $31.9 million for the 18 weeks ended December 31, 2011 compared to approximately $18.6 million for the 17 weeks ended December 25, 2010, an increase of approximately $13.3 million, or 71.5%. This increase is primarily the result of an approximate $5.9 million increase due to accruing for non-competition payments, a $4.0 million increase in compensation expense related to the companies phantom unit plans and a $1.6 million increase in salaries.
Depreciation and Amortization Expense. Depreciation and amortization expenses were approximately $15.4 million for the 18 weeks ended December 31, 2011 compared to approximately $17.2 million for the 17 weeks ended December 25, 2010 a decrease of approximately $1.8 million, or 10.6%. Depreciation expense decreased primarily due to approximately $102.1 million of machinery and equipment becoming fully depreciated during the period.
Operating Income. Operating income was approximately $6.8 million for the 18 weeks ended December 31, 2011 compared to operating income of approximately $71.8 million for the 17 weeks ended December 25, 2010, a decrease of approximately $65.0 million,.
Interest Expense. Interest expense was $3.3 million for the 18 weeks ended December 31, 2011 compared to $3.7 million for the 17 weeks ended December 25, 2010, a decrease of $0.4 million, or 10.8%. The decrease in interest expense was due primarily to a decrease of approximately 0.75% of the average daily interest rate during the period.
Gain on Sale. On December 30, 2011, USPB sold a majority of its ownership interest in National Beef Packing Company, LLC to Leucadia National Corporation (LUK). As a result of the sale, USPB deconsolidated NBP and recognized a gain of approximately $777.7 million.
Other, net. Other, net non-operating income was $1.5 million in the 18 weeks ended December 31, 2011 compared to $0.6 million in the 17 weeks ended December 25, 2010, an increase of $0.9 million.
Income Tax Expense. Income tax expense was $0.7 million for the 18 weeks ended December 31, 2011 compared to $0.4 million for the 17 weeks ended December 25, 2010, an increase of $0.3 million resulting from an increase in taxable income at National Carriers, Inc. (National Carriers). Income tax expense is recorded on taxable income from National Carriers, which is organized as a C-Corp and the apportioned taxable income of certain states which impose privilege taxes.
Net Income. As a result of the factors described above, net income for the 18 weeks ended December 31, 2011 was approximately $782.0 million compared to net income of approximately $68.3 million for the 17 weeks ended December 25, 2010, an increase of approximately $713.7 million.
Net Income Attributable to Non-controlling Interest in NBP. Non-controlling interest in the net income of NBP was approximately $5.4 million for the 18 week period ended December 31, 2011 compared to approximately $21.1 million for the 17 week period ended December 25, 2010, a decrease of approximately $15.7 million, or 74.4%. The non-controlling interest in NBP represents the minority owners’ interest in NBP’s earnings.
Net Income Attributable to USPB. Net income attributable to USPB was approximately $776.1 million for the 18 week period ended December 31, 2011 compared to approximately $46.3 million for the 17 week period ended December 25, 2010, an increase of approximately $729.8 million.
NBP Results of Operations
The following table presents the historical consolidated statements of operations data for NBP for the periods indicated:
27 |
|
| 52 weeks |
| 52 weeks | ||
|
| ended |
| ended | ||
|
| August 27, |
| August 28, | ||
|
| 2011 |
| 2010 | ||
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| (millions of dollars) | ||||
Net sales | $ | 6,849.5 |
| $ | 5,807.9 | |
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|
|
|
| ||
Costs and expenses: |
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|
| |||
| Cost of sales | 6,473.3 |
| 5,438.0 | ||
| Selling, general, and administrative | 52.0 |
| 49.3 | ||
| Depreciation and amortization | 51.2 |
| 49.6 | ||
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|
|
| ||
| Operating income | 273.0 |
| 271.0 | ||
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|
|
| ||
Other income (expense): |
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|
| |||
| Interest income | - |
| - | ||
| Interest expense | (11.7) |
| (14.8) | ||
| Other, net | 0.3 |
| (7.3) | ||
Total other expense, net | (11.4) |
| (22.1) | |||
| Income tax expense | (2.5) |
| (0.9) | ||
Net income | 259.1 |
| 248.0 | |||
Less: Net income attibutable to non-controlling interest in: |
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|
| |||
| Kansas City Steak Company, LLC | (0.6) |
| (0.9) | ||
Net income attributable to National Beef Packing Company, LLC | $ | 258.5 |
| $ | 247.1 | |
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NBP’s net income for the fiscal year 2011 was $259.1 million compared to $248.0 million for the fiscal year 2010, an increase of $11.1 million. Net sales were approximately $6,849.5 million for the fiscal year ended August 27, 2011 compared to approximately $5,807.9 million for the fiscal year ended August 28, 2010, an increase of approximately $1,041.6 million, or 17.9%. The increase in net sales resulted primarily from a 16.7% increase in the net sales per head during the fiscal year ended August 27, 2011 compared to the same period in the prior year, as the demand for beef products remained strong, and price of beef products increased during the period. Cost of sales was approximately $6,473.3 million for the fiscal year ended August 27, 2011 compared to approximately $5,438.0 million for the fiscal year ended August 28, 2010, an increase of approximately $1,035.3 million, or 19.0%. The increase was primarily a result of an approximate 19.1% increase in average cattle prices during the period compared to the prior period. Operating income increased $2.0 million over the prior year. As a percent of sales, operating income was 4.0% and 4.7% for fiscal years 2011 and 2010, respectively.
The following table presents the consolidated statements of operations data for NBP for the transition period and the same period in the prior year:
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| 18 weeks |
| 17 weeks | |||
|
| ended |
| ended | |||
|
| December 31, |
| December 25, | |||
|
| 2011 |
| 2010 | |||
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|
| (millions of dollars) | ||||
Net sales |
| $ | 2,466.3 |
| $ | 2,102.9 | |
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|
|
|
|
| ||
Costs and expenses: |
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|
|
| |||
| Cost of sales |
| 2,412.1 |
| 1,995.2 | ||
| Selling, general, and administrative |
| 18.8 |
| 16.8 | ||
| Depreciation and amortization |
| 14.3 |
| 16.1 | ||
|
|
|
|
|
| ||
| Operating income |
| 21.1 |
| 74.8 | ||
|
|
|
|
|
| ||
Other income (expense): |
|
|
|
| |||
| Interest income |
| - |
| - | ||
| Interest expense |
| (3.2) |
| (3.7) | ||
| Other, net |
| 1.5 |
| 0.6 | ||
Total other expense, net |
| (1.7) |
| (3.1) | |||
| Income tax expense |
| (0.7) |
| (0.4) | ||
Net income |
| 18.7 |
| 71.3 | |||
Less: Net income attibutable to non-controlling interest in: |
|
|
|
| |||
| Kansas City Steak Company, LLC |
| (0.5) |
| (0.9) | ||
Net income attributable to National Beef Packing Company, LLC |
| $ | 18.2 |
| $ | 70.4 | |
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|
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| ||
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NBP’s net income for the 18 weeks ended December 31, 2011 was $18.7 million compared to $71.3 million for the 17 weeks ended December 25, 2010, a decrease of $52.6 million, or 73.8%. Net sales were approximately $2,466.3 million for the 18 weeks ended December 31, 2011 compared to approximately $2,102.9 million for the 17 weeks ended December 25, 2010, an increase of approximately $363.4 million, or 17.3%. The increase in net sales resulted primarily from a 15.9% increase in the net sales per head during the 18 weeks ended December 31, 2011 compared to the same period in the prior year, as the demand for beef products remained strong, and price of beef products increased during the period. Cost of sales was approximately $2,412.1 million for the 18 weeks ended December 31, 2011 compared to approximately $1,995.2 million for the 17 weeks ended December 25, 2010, an increase of approximately $416.9 million, or 20.9%. The increase was primarily a result of an approximately 21.1% increase in average cattle prices during the period compared to the prior period. As a percent of sales, operating income was 0.9% and 3.6% for the 18 weeks ended December 31, 2011 compared to the 17 weeks ended December 25, 2010, respectively.
Liquidity and Capital Resources
As of December 29, 2012, we had net working capital (the excess of current assets over current liabilities) of approximately $57.8 million, which included cash and cash equivalents of $62.7 million, with $0.2 million in distributions payable and $0.1 million in patronage notices payable. As of December 31, 2011, we had net working capital of approximately $81.4 million, which included cash and cash equivalents of $642.7 million, with $508.9 million in distributions payable and $42.2 million in patronage notices payable. As of August 27, 2011, we had net working capital of approximately $272.7 million, which included cash and cash equivalents of $78.6 million, with $8.2 million in distributions payable. Our primary sources of liquidity for fiscal year 2012 were cash flow from operations and available borrowings under the Master Loan Agreement. Our primary sources of liquidity in the transition period and fiscal year 2011 were cash flow from operations and available borrowings under NBP’s amended and restated credit facility (Credit Facility).
As of December 29, 2012, USPB had no long-term debt outstanding. We had a $15.0 million revolving term loan with CoBank all of which was available. USPB was in compliance with all of the financial covenants under its Master Loan Agreement as of December 29, 2012.
USPB believes available borrowings under the Master Loan Agreement and cash provided by operating activities will be sufficient to support its working capital and cash flow requirements. For a review of the obligations that affect USPB’s liquidity, please see the ‘‘Cash Payment Obligations’’ table below.
Operating Activities
USPB’s financial statements were not consolidated with NBP’s for the fifty-two week period ended December 29, 2012. Unless otherwise indicated, all changes in financial statement line items between fiscal years 2012 and 2011 are due to this change in reporting.
Net cash provided by operating activities was $3.2 million in fiscal year 2012 as compared to $266.5 million in the 52 week period ended August 27, 2011. The $263.3 million decrease was primarily due to the transaction with Leucadia, which is discussed further in the Overview section above. As a result of the transaction with Leucadia, the company’s operating activities were not consolidated with NBP’s for the fifty-two week period ended December 29, 2012.
Net cash used in operating activities was approximately $4.4 million in the 18 week period ended December 31, 2011 as compared to net cash provided by operating activities of $50.4 million for the 17 week period ended December 25, 2010. The $46.0 million change was primarily due to a $727.2 million increase in net income from operating activities, of which $785.3 million was due to USPB’s sale of a majority of its ownership interest in NBP. Contributing to the decrease was a $21.5 million decrease in the change in other accrued expenses and liabilities. Offsetting those decreases was an increase of $33.4 million in the change in accounts receivable.
Net cash provided by operating activities was $266.5 million in fiscal year 2011 as compared to $236.4 million in fiscal year 2010. The $30.1 million increase was primarily due to approximately $8.5 million of additional net income in fiscal year 2011 as compared to fiscal year 2010, and an increase in the change in other assets and inventories by approximately $50.5 million and $13.8 million, respectively. These increases were offset by a decrease in the change in accrued compensation and benefits and other accrued expenses of approximately $25.3 million and $21.0 million, respectively.
29 |
Investing Activities
Net cash used in investing activities was $0.0 million in fiscal year 2012 as compared to $63.2 million in the 52 week period ended August 27, 2011. The $63.2 million decrease was primarily due to the transaction with Leucadia, which is discussed further in the Overview section above. As a result of the transaction with Leucadia, the Company’s operating activities were not consolidated with NBP’s for the fifty-two week period ended December 29, 2012.
Net cash provided by investing activities was $575.0 million in the 18 week period ended December 31, 2011 as compared to net cash used by investing activities of $19.8 million in the 17 week period ended December 25, 2010, an increase of $555.2 million. The increase was primarily due to the net cash received from USPB’s sale of a majority of its ownership interest in NBP to Leucadia.
Net cash used in investing activities was $63.2 million in fiscal year 2011 as compared to $48.1 million in fiscal year 2010, an increase of $15.1 million. The increase was primarily due to an increase in capital expenditures of approximately $18.8 million during fiscal year 2011, which was offset by an increase in proceeds from the sale of property, plant and equipment of approximately $3.7 million in fiscal year 2011.
Financing Activities
Net cash used in financing activities was approximately $583.1 million in fiscal year 2012 as compared to $160.2 million in the 52 week period ended August 27, 2011. The $422.9 million increase was primarily due to the distribution of the proceeds from the transaction with Leucadia and tax distributions to the unitholders and the redemption of the patronage notices. Partially offsetting the increase was a decrease due to the transaction with Leucadia. As a result of the transaction with Leucadia, the company’s operating activities were not consolidated with NBP’s for the fifty-two week period ended December 29, 2012.
Net cash used in financing activities was approximately $15.3 million in 18 week period ended December 31, 2011 compared to $14.1 million in the 17 week period ended December 25, 2010. The increase in cash used in financing activities was attributable to approximate $170.2 million reduction in borrowings, and a $13.7 million increase in the redemption of patronage notices. These items were offset by a $151.4 million reduction in distributions and a $31.7 million increase in overdraft balances.
Net cash used in financing activities was approximately $160.2 million in fiscal year 2011 compared to net cash used in financing activities of $171.7 million in fiscal year 2010. The decrease in cash used in financing activities was primarily attributable to an approximate $119.2 million decrease in net payments on NBP’s term loan, and a $66.9 million purchase and cancellation of senior notes during fiscal year 2010. These changes are offset by an increase in revolver payments of $19.8 million, as well as an increase in member and non-controlling interests’ distributions of approximately $143.3 million.
CoBank Debt
On July 28, 2011, USPB and CoBank entered into a Master Loan Agreement, Revolving Term Loan Supplement to the Master Loan Agreement, and Pledge Agreement. These agreements replace the Amended and Restated Credit Agreement and Security Agreement dated June 22, 2009.
The Master Loan Agreement and the Revolving Term Loan Supplement provide for a $15 million revolving credit commitment. That commitment carries a term of three years, maturing on June 30, 2014. The Pledge Agreement provides CoBank with a first-priority security interest in USPB’s membership interests in, and distributions from, NBP.
30 |
On December 30, 2011, in connection with the closing of the Leucadia Transaction, the Company and CoBank entered into the Consent and First Amendment to Pledge Agreement and Security Agreement, by which CoBank agreed to (i) consent to the Membership Interest Sale and the PA Distribution, (ii) release its security interest in, and liens on, the Membership Interests being sold pursuant to the Membership Interest Sale, (iii) consent to the National Beef Pledge and (iv) consent to the amendments and restatements of the National Beef Operating Agreement and the PA Newco Operating Agreement. The National Beef Pledge grants National Beef a perfected security interest in and to USPB’s membership interests in, and distributions from, NBP, subject only to the prior first priority security interest held by CoBank.
Credit Facility
Effective as of June 4, 2010, our Credit Facility was amended and restated to: (1) increase the borrowings under the Credit Facility by providing for a term loan facility of up to $375 million and a revolving line of credit of up to $250 million; (2) reduce the applicable margin on the rates of interest of the term loan and revolving line of credit; (3) revise the payment schedule of the term loan; (4) extend the maturity date of the Credit Facility to June 4, 2015; (5) remove limitations on capital expenditures; (6) add new financial covenants regarding adjusted net worth and a fixed charge coverage ratio; and (7) add two wholly owned subsidiaries, National Beef California, LP and National Carriers, Inc., as loan parties and guarantors
On June 10, 2011, NBP’s Credit Facility was amended and restated to (1) reduce the applicable margin by up to 0.75% for “LIBOR Rate” advances and “Base Rate” advances, (2) revise the “fixed charge coverage ratio” covenant provisions to provide NBP credit of up to $30 million for maintaining net asset borrowing base levels that exceed the lenders’ aggregate credit commitments under the Credit Facility in the calculation of the fixed charge coverage ratio and (3) extend the maturity date of the Credit Facility to June 4, 2016.
On December 5, 2011, NBP’s Credit Facility was amended and restated to (1) permit the Leucadia Transaction, (2) adjust the Company’s fiscal year, and (3) allow for the updated distribution percentage.
The borrowings under the Credit Facility bear interest at LIBOR or the Base Rate, plus the applicable margin. The applicable margin for the revolving line of credit and the term loan will be as set forth on a grid based on different ratios of funded debt to EBITDA.
The borrowings under the revolving loan are available for NBP’s working capital requirements, capital expenditures and other general corporate purposes. The advance rates under the borrowing base are 90% on eligible accounts and 70% on eligible inventory. The Credit Facility is secured by a first priority lien on substantially all of NBP’s assets and the assets of its subsidiaries.
Effective as of the June 10, 2011 amendment, the principal amount outstanding under the term loan is due and payable in equal quarterly installments of $9.25 million. All outstanding loan amounts are due and payable on June 4, 2016. Prepayment of the loans is allowed at any time.
The Credit Facility contains customary affirmative covenants relating to NBP and its subsidiaries, including, without limitation, conduct of business, maintenance of insurance, compliance with laws, maintenance of properties, keeping of books and records, and the furnishing of financial statements. The facility also contains customary negative covenants relating to NBP and its subsidiaries, including, without limitation, restrictions on: distributions, mergers, asset sales, investments and acquisitions, encumbrances, affiliate transactions, and ERISA matters. The ability of NBP and its subsidiaries to engage in other business, incur debt or grant liens is also restricted.
The Credit Facility contains customary events of default, including, without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of NBP’s property, changes in control of NBP, failure of any of the loan documents to remain in full force, and NBP’s failure to properly fund its employee benefit plans. The Credit Facility also includes customary provisions protecting the lenders against increased costs or loss of yield resulting from changes in tax, reserve, capital adequacy and other requirements of law.
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Industrial Revenue Bonds
Effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, designed to provide NBP property tax savings. Under the transaction, the City issued $102.3 million in bonds due in December 2019, used the proceeds to purchase the Dodge City facility (facility) and leased the facility to NBP for an identical term under a capital lease. NBP purchased the City’s bonds with proceeds of its term loan under the Credit Facility. Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP effectively controls enforcement of the lease against itself. As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments will be eliminated in consolidation. The transaction provides NBP with property tax exemptions for the leased facility, that, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%. The facility remains subject to a prior mortgage and security interest in favor of the lenders under the Credit Facility. Additional revenue bonds may be issued to cover the costs of certain improvements to this facility. The total amount of revenue bonds authorized for issuance is $120.0 million.
The cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on NBP’s behalf to fund the purchase of equipment and construction of improvements at NBP’s facilities in those cities. These bonds were issued in 1999 and 2000 in four series of $1.0 million, $1.0 million, $6.0 million and $5.9 million and are due on demand or on February 1, 2029, March 1, 2027, March 1, 2015 and October 1, 2009, respectively. Because each series of bonds is backed by a letter of credit under NBP’s Credit Facility, these due on demand bonds have been presented as non-current obligations until twelve months prior to their maturity. The $5.9 million series were paid at maturity on October 1, 2009. Pursuant to a lease agreement, we lease the facilities, equipment and improvements from the respective cities and make lease payments in the amount of principal and interest due on the bonds.
The bonds issued in 1999 and 2000 are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. The average per annum interest rate for each series of bonds was 0.5% as of December 31, 2011. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.
In connection with the Brawley Beef acquisition, NBP assumed the obligation under a Trust Indenture securing $6.8 million in California Pollution Control Financing Authority Tax-Exempt variable rate demand solid waste disposal revenue bonds dated as of October 1, 2001. The bonds bear a rate that is adjusted weekly, which rate will not exceed 12% per annum. The average per annum interest rate for this series of bonds for the 18 weeks ended December 31, 2011 was 0.2%. These bonds have a maturity date of October 1, 2016. NBP has the option to redeem all or a portion of the bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.
On December 17, 2010, National Beef Leathers, LLC (NBL), a subsidiary of NBP, entered into various agreements with the city of St. Joseph, Missouri, designed to provide NBP property tax savings. Under the transaction, the city of St. Joseph issued $14.5 million in bonds due in December 2022, used the proceeds to purchase NBP’s equipment within the NBL facility and subsequently leased the equipment back to NBP for an identical term under a capital lease. NBP purchased the city of St. Joseph bonds with proceeds of the term loan under the Credit Facility. Because the city of St. Joseph has assigned the lease to the bond trustee for NBP’s benefit as the sole bondholder, NBP effectively controls enforcement of the lease against itself. As a result of the capital lease treatment, the equipment will remain a component of property, plant and equipment in NBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments will be eliminated in consolidation.
Utilities Commitment
Effective December 30, 2004, NBP finalized an agreement with the City of Dodge City, Kansas, whereby in consideration of certain improvements made to the city water and wastewater systems, NBP committed to make a series of service charge payments totaling $19.3 million over a 20 year period, of which $0.7 million, $0.8 million, and $1.7 million was paid in each of the 18 weeks ended December 31, 2011 and fiscal years 2011 and 2010, respectively.
32 |
Cash Payment Obligations
The following table describes the cash payment obligations as of December 29, 2012 (thousands of dollars):
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| Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year |
| |||||||
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|
| Total | 2013 (Year 1) | 2014 (Year 2) | 2015 (Year 3) | 2016 (Year 4) | 2017 (Year 5) | After Year 5 | |||||||
Term loan facility |
|
| $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |
Revolving credit facility |
|
| $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |
Interest on long-term debt (1) |
| $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||
Non-competition and consulting payments | $ | 7,130 | $ | 1,280 | $ | 850 | $ | 850 | $ | 850 | $ | 850 | $ | 2,450 | |||
Operating leases |
|
| $ | 341 | $ | 57 | $ | 57 | $ | 57 | $ | 57 | $ | 57 | $ | 57 | |
| Total |
|
| $ | 7,471 | $ | 1,337 | $ | 907 | $ | 907 | $ | 907 | $ | 907 | $ | 2,507 |
(1) | Computed based on scheduled maturities and current effective interest rates. |
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(2) | Reflects payments to be made to CEO's pursuant to employment agreements. |
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Off-Balance Sheet Arrangements
As of December 29, 2012, we did not have any significant off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Inflation
We believe our results of operations are not materially affected by moderate changes in the inflation rate. Inflation and changing prices did not have a material effect on our operations in fiscal year 2012, the 18 week period ended December 31, 2011 and fiscal years 2011, and 2010. Severe increases in inflation, however, could affect the global and U.S. economies and could have an adverse effect on our business, financial condition and results of operations.
Seasonality and Fluctuations in Operating Results
The Company’s operating results are influenced by seasonal factors in the beef industry. These factors affect the price NBP pays for livestock as well as the ultimate price at which NBP sells its products. The seasonal demand for beef products is highest in the summer and spring months as weather patterns permit more outdoor activities and there is an increased demand for higher value items that are grilled, such as steaks. Both live cattle prices and boxed beef prices tend to be at seasonal highs during the summer and fall. Because of higher consumption, more favorable growing conditions and the housing of animals in feedlots for the winter months, there are generally more cattle available in the summer and fall.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Disclosure Regarding Forward-Looking Statements, Item 1A. Risk Factors, and elsewhere in this report.
Market Risk Disclosures
USPB was not subject to market risk in fiscal year 2012. The market risk disclosure below relates to NBP for the period ended December 31, 2011 and prior.
The principal market risks affecting NBP’s business are exposure to changes in prices for commodities, such as livestock and boxed beef, and interest rate risk.
33 |
Commodities. NBP uses various raw materials, many of which are commodities. Raw materials are generally available from several different sources, and NBP presently believes it can obtain them as needed. Commodities are subject to price fluctuations that may create price risk. From time to time, NBP may hedge commodities in order to mitigate this price risk. While this may tend to limit its ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity prices. To the extent the contracts are not designated as normal purchases, NBP reflects commodity contract gains and losses as adjustments to the basis of underlying commodities purchased; gains or losses are recognized in the statement of operations as a component of costs of goods sold.
NBP purchases cattle for use in its processing businesses. From time to time, NBP enters into forward purchase contracts at prices determined prior to the delivery of cattle. The commodity price risk associated with these activities can be hedged by selling (or buying) the underlying commodity, or by using an appropriate commodity derivative instrument. The particular hedging instrument NBP uses depends on a number of factors, including availability of appropriate derivative instruments.
NBP sells commodity beef products in its business. Commodity beef products are subject to price fluctuations that may create price risk. From time to time, NBP enters into forward sales contracts at prices determined prior to shipment. NBP may hedge the commodity price risk associated with these activities in order to mitigate this price risk. While this may tend to limit its ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity beef prices. To the extent the contracts are not designated as normal sales, NBP reflects commodity contract gains and losses as adjustments to the basis of underlying commodities sold; gains or losses are recognized in the statement of operations as a component of net sales.
From time to time, NBP purchases cattle futures and options contracts. NBP’s primary use of these contracts is to partially determine its future input costs when NBP has committed forward sales purchase orders from customers at a specified fixed price. The longest duration futures contract owned is sixteen months. In accordance with ASC 815 Derivatives and Hedging, as amended, NBP accounts for futures contracts and their related firm purchase commitments at fair value. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as “normal purchases and sales” and not marked to market. ASC 815 imposes extensive recordkeeping requirements in order to treat a derivative instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction is settled. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.
While NBP’s management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under ASC 815 as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.
NBP uses a sensitivity analysis to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments. NBP feels the sensitivity analysis more appropriately reflects the potential market value exposure associated with the use of derivative instruments. As of December 31, 2011 and December 25, 2010, the potential change in the fair value of applicable commodity derivative instruments, assuming a hypothetical 10% decrease in the underlying commodity price in each year, was $1.4 million and $7.4 million, respectively.
Interest Rates. As a result of NBP’s normal borrowing and leasing activities, its operating results are exposed to fluctuations in interest rates, which are managed primarily through regular financing activities. We generally maintain limited investments in cash and cash equivalents.
NBP has long-term debt with variable interest rates. Short-term debt is primarily comprised of the current portion of long-term debt maturing twelve months from the balance sheet date. NBP’s variable interest expense is sensitive to changes in the general level of interest rates. As of August 27, 2011, the weighted average interest rate on NBP’s $354.5 million of variable interest debt was approximately 1.90%. As of August 28, 2010, the weighted average interest rate on NBP’s $240.2 million of variable rate debt was approximately 2.77%.
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We had total interest expense of approximately $0.3 million, $3.3 million, $11.7 million and $14.9 million, in fiscal year 2012, the 18 weeks ended December 31, 2011 and fiscal years 2011, and 2010, respectively. The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $0.0 million, $2.5 million, $7.4 million, and $5.6 million in fiscal year 2012, the 18 weeks ended December 31, 2011 and fiscal years 2011, and 2010, respectively.
Foreign Operations. Transactions denominated in a currency other than an entity’s functional currency may expose that entity to currency risk. Although NBP operates in international markets including Japan, South Korea and China, product sales are predominately made in United States dollars, and therefore, currency risks are limited.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes thereto, and other information required by this Item 8 are included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the consolidated financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in alerting them, in a timely manner, to material information required to be included in our periodic Securities and Exchange Commission filings. There have been no changes in our internal control over financial reporting during the thirteen weeks ended December 29, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.
For periods ending after December 30, 2011, USPB is not responsible for NBP’s internal controls related to financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
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Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and managers of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 29, 2012. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.
Based on the Company’s processes and assessment, as described above, management has concluded that, as of December 29, 2012, the Company’s internal control over financial reporting was operating effectively.
This annual report does not include a report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION
The Company may purchase a portion of its outstanding Class A and Class B units from time to time in accordance with the limits imposed under the CoBank Master Loan Agreement.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
U.S. Premium Beef’s business and affairs are governed by its board of directors. The board of directors currently consists of seven directors. The board of directors has full authority to act on behalf of USPB. The board of directors’ act collectively through meetings, committees and executive officers it appoints. In addition, USPB employs a staff of professionals to manage the day-to-day business of USPB. The members of the board of directors, nominees to the board of directors and the executive officers are identified below. There are no arrangements or understandings pursuant to which any director, nominee to become a director or executive officer was elected or appointed.
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Directors, Director Nominee and Executive Officers |
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| Term Expires | |
Name |
| Age |
| Positions and Offices with Registrant |
| After FY | ||
Mark R. Gardiner |
| 52 |
| Chairman of the Board |
| 2013 | ||
Duane K. Ramsey |
| 76 |
| Vice Chairman of the Board |
| 2012 | ||
Joe M. Morgan |
| 61 |
| Secretary |
| 2013 | ||
Jerry L. Bohn |
| 63 |
| Director |
| 2012 | ||
Douglas A. Laue |
| 61 |
| Director |
| 2013 | ||
Rex W. McCloy |
| 58 |
| Director |
| 2014 | ||
Jeff H. Sternberger |
| 52 |
| Director |
| 2014 | ||
Steven D. Hunt |
| 54 |
| Chief Executive Officer |
| — | ||
Scott J. Miller |
| 48 |
| Chief Financial Officer |
| — | ||
Stanley D. Linville |
| 54 |
| Chief Operating Officer |
| — | ||
Danielle D. Imel |
| 38 |
| Treasurer |
| — | ||
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Mark R. Gardiner. Mr. Gardiner is President of Gardiner Angus Ranch, Inc. (GAR), a family owned purebred and commercial Angus operation headquartered at Ashland, Kansas, with 10 seedstock satellite cowherds across the United States and Australia. Mr. Gardiner has been involved with the management of GAR since 1983. GAR markets over 2,000 bulls and 700 females per year to both commercial and seedstock beef producers throughout the United States. GAR also runs an embryo transfer program that makes more than 3,500 transfers per year, including more than 60% of GAR’s 1,500-plus head of registered Angus calves born each year. A percentage of its calves are finished at commercial feedlots to provide carcass data on all Gardiner sires. In addition to a native range program, GAR operates a significant dryland farming enterprise. Mr. Gardiner is a member of the National Cattlemen’s Beef Association, Kansas Livestock Association, American Angus Association, Kansas Angus Association and the Beef Improvement Federation. He also serves on the Board of Irsik & Doll Company, a privately held company primarily involved in cattle feeding, grain and feed merchandising. Mr. Gardiner has served as a member of the Company’s Board of Directors since 1996. He was elected Secretary/Treasurer of the Company’s Board in 2003, Vice Chairman of the Board in 2004 and Chairman of the Board in 2006. Mr. Gardiner holds a Bachelor’s degree from Kansas State University in Animal Sciences and Industry. As a member of USPB’s board of directors, Mr. Gardiner and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
Duane K. Ramsey. Mr. Ramsey is Chairman of Security Bancshares Inc., a $300 million multi-bank holding company. In addition, he has held an ownership interest in a commercial feedlot in southwest Kansas and a cow calf operation. He has spent 45 years in banking in Scott County, KS, and was involved in the organization and development of USPB as a founding stockholder through his feedlot and in financing numerous USPB stockholders. Mr. Ramsey is familiar with accounting, finance, audit, risk management and compensation matters. He holds a degree in Agricultural Economics from Kansas State University. He also graduated from the Graduate School of Banking, Boulder, CO. Mr. Ramsey has served as a member of the Company’s board since 2006. Mr. Ramsey also serves as a director of three banks, one of which he has been a director of for more than 35 years. As a member of USPB’s board of directors, Mr. Ramsey is considered an affiliate of USPB.
Joe M. Morgan. Mr. Morgan has been managing commercial feedyards since 1983. He has been Manager of Poky Feeders since 1985 and part owner since 1987. Mr. Morgan has been involved with employee issues and the growth of Poky Feeders (starting with a capacity of 2,500 head to today of over 70,000 head), plus ranches in eight states. Mr. Morgan has had responsibility for all banking of Poky Feeders for over 25 years and has responsibility for risk management of all feeding entities. He also has farming interests in Iowa and is a member of the National Cattlemen’s Beef Association and the Kansas Livestock Association. Mr. Morgan holds a Bachelor’s degree in Animal Science from Iowa State University. Mr. Morgan has served as a member of the Company’s board since 2007 and as a Nominating Committee member prior to 2007. As a member of USPB’s board of directors, Mr. Morgan and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
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Jerry L. Bohn. Mr. Bohn has served as the General Manager of Pratt Feeders since 1982. Pratt Feeders has a one-time capacity of 115,000 head in four feedlots in Kansas and Oklahoma. In this capacity he oversees more than 100 employees. Mr. Bohn also owns and manages a 2,000 to 3,000 head cattle operation which includes grazing and finishing cattle. Throughout Mr. Bohn has 38 years of agricultural business management experience, he has worked with complex banking and financial data and is required to make decisions involving several hundred thousand dollars, on a daily basis. Mr. Bohn previously was employed as Director of Market Analysis for Cattle-Fax, an industry market analysis firm. Mr. Bohn has served as president of the Kansas Livestock Association. He has been a Board member of the Kansas Beef Council, the National Cattlemen’s Beef Association (NCBA) and Feeders Advantage, a private animal health product distribution company. Mr. Bohn has also served on the NCBA’s Executive Committee and as chairman of NCBA’s Live Cattle Marketing. Mr. Bohn served on USPB’s Board from 2004 through 2007 and was reelected in 2009. He was elected Secretary of USPB’s Board in 2006. He holds a Bachelor’s degree in Animal Sciences and Industry from Kansas State University. As a member of USPB’s board of directors, Mr. Bohn and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
Douglas A. Laue. Mr. Laue runs a grazing program in the Kansas Flint Hills. Mr. Laue has been involved in every sector of cattle feeding for over twenty-five years. He is a member of the National Cattlemen’s Beef Association and Kansas Livestock Association (KLA). Mr. Laue previously served as the chairman of the KLA Feeders Council. Mr. Laue has been a member of the Company’s Board of Directors since 1996 and served as vice chairman of the Board of Directors from 1996 through 2002. Mr. Laue holds a Bachelor’s degree in Animal Sciences and Industry from Kansas State University. As a member of USPB’s board of directors, Mr. Laue and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
Rex W. McCloy. Mr. McCloy has 34 years of experience in the cattle business and is manager and part-owner of McLeod Farms Inc., a family-owned business headquartered in Morse, Texas. The operation includes a 6,500 head capacity feed yard, a 7,000 acre irrigated farm, a backgrounding operation and a 20,000 acre ranch in Harding Co., New Mexico. Mr. McCloy is a member of the National Cattlemen’s Beef Association, the Texas Cattle Feeder's Association (TCFA) and the Texas Southwestern Cattle Raisers Association. He is a past Board member and marketing committee chairman of TCFA. In addition he is a former member of U.S. Premium Beef’s Nominating Committee. Mr. McCloy holds a Bachelor’s degree in Agricultural Economics from Texas Tech University. Mr. McCloy has served as a member of the Company’s board since 2005. Mr. McCloy is a former board member of the Hutchinson County Hospital District and is presently on the Board of Managers at Adobe Walls Cotton Gin. As a member of USPB’s board of directors, Mr. McCloy and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
Jeff H. Sternberger. Mr. Sternberger is the manager and part owner of Midwest Feeders, Inc. Mr. Sternberger has been the manager of Midwest Feeders, Inc. since 1992 and has overseen large growth in his company and directed the acquisition of other business to add to their holdings. Mr. Sternberger has been the direct contact during that time frame for all banking and accounting relationships. He also owns and operates a farming and cattle operation in Oklahoma as well as a personal cattle feeding operation. He serves as a director of Midwest Feeders, Inc., CRI Feeders of Guymon LLC, and Brookover Cattle Co. of Scott City LLC. Mr. Sternberger holds a Bachelor of Science Degree in Agricultural Economics from Oklahoma State University. As a member of USPB’s board of directors, Mr. Sternberger and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
Steven D. Hunt. Mr. Hunt was named Chief Executive Officer in July 1996 and was instrumental in the development and establishment of U.S. Premium Beef. Prior to his employment with U.S. Premium Beef, Mr. Hunt owned and operated SDH Cattle Company at Winfield, Kansas, until 1996. As Vice President of Corporate Lending with CoBank, ACB from January 1987 to October 1988, Mr. Hunt became experienced in many areas of commercial banking. In previous banking positions, Mr. Hunt also gained experience in direct agricultural lending, commercial lending, finance, business analysis, training, marketing and personnel. Mr. Hunt has served on the Board of National Beef Packing Company, LLC, (NBP) since 1997 and served as the chairman of NBP’s Board from 2003 to 2011. Mr. Hunt holds a Bachelor’s degree in Agricultural Economics from Kansas State University. In November 2012, Mr. Hunt notified the Company’s Board of directors that he was resigning his position as Chief Executive Officer on January 28, 2013.
Scott J. Miller. Mr. Miller has served as the Company’s Chief Financial Officer since January 2010. Prior to this appointment, he served as the Company’s Chief Reporting and Compliance Officer, a position he held since joining the Company in 2005. He oversees the finance and treasury functions and is directly responsible for financial reporting and ensuring compliance with internal policies and regulatory requirements. Before joining U.S. Premium Beef, he worked as the Manager, Capital Markets for Sprint Corporation from 2001 to 2005 and, prior to that, in various finance and accounting positions with Farmland Industries, Inc. Mr. Miller earned a Bachelor’s degree in Accounting from Benedictine College and an MBA with an emphasis in Finance from the University of Missouri-Kansas City. He has passed the Certified Public Accounting exam and the Certified Cash Managers exam.
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Stanley D. Linville. Mr. Linville is the Company’s Chief Operating Officer and joined the Company in 1997. He oversees cattle scheduling and technical operations. Before joining U.S. Premium Beef, he operated a family farming operation near Holcomb, Kansas. He also worked in the cattle division of Brookover Enterprises at Garden City, Kansas, and as a grain merchandiser for Bartlett Grain Co. in Kansas City. Mr. Linville holds a Bachelor’s degree in Agricultural Economics from Kansas State University. Effective January 28, 2013, Mr. Linville was named the Company’s Chief Executive Officer.
Danielle D. Imel. Ms. Imel is the Company’s Treasurer and joined the Company in 1998. She oversees the Company’s finance functions and is directly responsible for Company treasury activities. She was employed by the CPA firm of Kennedy, McKee and Co., LLC of Dodge City, Kansas, prior to joining USPB. Ms. Imel earned a Bachelor’s degree in Accounting and a second Bachelor’s degree in Agricultural Economics from Kansas State University.
Board of Directors
Under USPB’s limited liability company agreement, the number of directors is set by the board of directors but may not be less than seven directors. Directors must be unitholders of USPB. Seven directors will always be elected by unitholders holding Class A units.
The directors are elected at the annual meeting of the unitholders and hold office for a term of three years. The terms of the directors are staggered in such a manner that approximately one-third of the directors will be elected each year. All directors will hold office until their successors are elected and qualified. Any vacancy in the board, other than a vacancy resulting from expiration of a term of office, will be filled by a majority vote of the remaining directors. In case a vacancy in the board of directors extends beyond the next annual meeting, the vacancy will be filled by the remaining directors until such meeting, at which meeting a director will be chosen by the unitholders for the unexpired term of such vacancy.
In the discretion of the board of directors, the number of directors may be increased by up to an additional five directors. Those additional directors will represent the Class B unitholders and may be elected or appointed by either the board of directors or by the holders of Class B units.
Compensation of Directors
The board of directors meets from time to time at such time and place as may be fixed by resolution adopted by a majority of the whole board of directors. Members of the board of directors receive a per diem payment of $250 for each activity on behalf of USPB, as well as direct reimbursement of travel expenses related to service on the board of directors.
Audit Committee
The board of directors has an Audit Committee consisting of Messrs. Gardiner, Ramsey, McCloy and Laue. Subject to the qualifications in the section headed “Directors who are unitholders” in Item 13 below, all members of the Audit Committee are considered independent within the meaning of the listing standards of the NASDAQ. Mr. Gardiner is Chairman of the Audit Committee. The Board has identified Mr. Ramsey as an “audit committee financial expert”. The Audit Committee selects and retains independent auditors and assists the board of directors in its oversight of the integrity of U.S. Premium Beef’s financial statements, including the performance of our independent auditors in their audit of our annual financial statements. The Audit Committee meets with management and the independent auditors, as may be required. The independent auditors have full and free access to the Audit Committee without the presence of management.
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Code of Ethics
USPB has adopted a corporate Code of Conduct that is enforced throughout all levels of management and a Code of Ethics For Financial Officers for its chief executive officer, chief financial officer, and treasurer within the meaning of the rules and regulations of the Securities and Exchange Commission. The Code of Ethics are intended to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. A copy of the Code of Conduct may be obtained, without charge, upon written request to Scott J. Miller, Chief Financial Officer, U.S. Premium Beef, LLC, P. O. Box 20103, Kansas City, Missouri 64195.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Overview of Compensation Program
This Compensation Discussion and Analysis describes the material elements of compensation paid to our named executive officers as well as the objectives and material factors underlying our compensation program. The compensation program places emphasis on USPB’s financial performance and the benefits received by USPB’s unitholders.
The Compensation Committee (Committee) is responsible for developing and administering the compensation program for USPB’s named executive officers and professional staff.
Compensation Philosophy and Objectives
USPB’s compensation program is a key element in attracting, retaining, and motivating named executive officers with the skills necessary to create value for the unitholders. To achieve this goal, we have designed the compensation program with the following objectives:
• Attracting and retaining top talent—The compensation of USPB’s executive officers must be commensurate with the competitive regional marketplace taking into consideration job responsibilities and supply of competent employees with the education and background to perform at the highest levels in their field.
• Paying for financial and operational performance—The compensation of USPB’s executive officers should motivate them to achieve strong financial and operational results. USPB must achieve specific levels of financial and operational performance to allow executives to earn this portion of their compensation.
• Alignment with the equity interests of our unitholders—A management phantom unit plan, approved in September 2010, aligns management’s interest with the equity interests of USPB’s unitholders.
Each element of our compensation program is designed to achieve one or more of these objectives. The structure of a particular executive’s compensation may vary depending on the scope and level of that executive’s responsibilities.
Determining Executive Compensation
The CEO makes recommendations to the Committee regarding the salaries and bonus programs for the executive officers. The Committee reviews the recommendations, taking into account each element of total compensation. Based on the foregoing, the Committee uses its judgment in making compensation decisions that will best carry out USPB’s philosophy and objectives for executive compensation.
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Fiscal Year 2012 Executive Compensation Elements
The elements of our named executive officers total compensation package are as follows:
base salary;
annual cash bonuses;
long-term cash bonus;
full-term cash bonus;
discretionary cash bonuses;
retirement plans; and
limited personal benefits.
Elements of Our Compensation Program
Base Salary. Base salaries are intended to provide a level of compensation sufficient to attract and retain an effective management team, when considered in combination with the other components of our executive compensation program. The relative levels of base salary for named executive officers are designed to reflect each executive officer’s scope of responsibility and accountability with USPB. Except for the CEO’s salary, base salaries are reviewed annually to determine if they are consistent with the performance of the individual executive and equitable relative to USPB’s other executive officers and professional staff. Salary surveys summarizing the compensation packages for positions of equivalent responsibility in related industries were used to establish the CEO’s base salary.
CEO Steven Hunt’s base salary is paid in accordance with the amended and restated employment agreement effective September 1, 2009 through December 31, 2015 (Hunt Employment Agreement), which provides for the CEO to be paid an annual base salary of $775,000 for employment years 2010 (FY 2010 - September 1, 2009 through August 28, 2010); 2011 (FY 2011 - August 29, 2010 through August 27, 2011); and 2012 (FY 2012 - January 1 through December 31, 2012); an annual base salary of $266,406 for the transition period (TP 2011 - August 28, 2011 through December 31, 2011); and an annual base salary of $825,000 for employment years 2013 (FY 2013 - January 1 through December 31, 2013); 2014 (FY 2014 - January 1 through December 31, 2014); and 2015 (FY 2015 - January 1 through December 31, 2015).
Annual Cash Incentive/Bonuses. Cash incentive and bonus plans were designed to provide the financial incentive to the CEO and other named executive officers to influence USPB unitholder benefits and are only paid after certain levels of benefits have been achieved.
Under the terms of the Hunt Employment Agreement, if CEO Steven Hunt is employed by USPB on the last day of any employment year or the transition period (except as otherwise provided in the agreement) during the term of the Hunt Employment Agreement, Mr. Hunt shall be paid an annual incentive compensation, equal to two percent (2.0%) of the sum of the total financial benefits to USPB (USPB Total Benefits) that exceed $25,000,000 ($8,333,333 for the transition period). USPB Total Benefits are: (1) audited fiscal year-end or Transition Period USPB earnings before tax. The gain from the transaction with Leucadia National Corporation (LUK) shall be allocated four-sixteenths to the Transition Period and twelve-sixteenths to FY 2012; and (2) two times the fiscal year or Transition Period USPB grid premiums, which is the net sum of all USPB unitholder and associate grid premiums and discounts calculated through all USPB grids at all plants as outlined in the Hunt Employment Agreement.
For FY 2012, named executive officers and the professional staff who were employed on the last day of the fiscal year will be paid his or her proportionate share of the Management Bonus Pool. The Management Bonus Pool is: (1) the audited FY 2012 USPB earnings before tax plus twelve-sixteenths of the gain realized from the LUK transaction plus USPB grid premiums during the fiscal year, less (2) $25,000,000, multiplied by (3) management bonus factor. The bonus plan payments are vested over a two-year period to provide an added incentive to remain with USPB. The maximum Management Bonus Pool for a given bonus plan year is equal to 150% of the sum of the qualifying participants’ salaries in effect at the end of such year, pro-rated for periods that are less than a full fiscal year.
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Long-term Cash Bonuses. Under the Hunt Employment Agreement, if he is employed by USPB through the end of employment year 2012, he is to be paid long-term incentive compensation equal to one and one-quarter percent (1.25%) of the amount by which USPB’s Total Benefits from FY 2010, FY 2011, the TP 2011 and FY 2012, exceed $111,111,111 but are equal to or less than $144,444,444; plus seventy-five one hundredths of a percent (0.75%) of the amount by which USPB’s Total Benefits from FY 2010, FY 2011, TP 2011 and FY 2012 exceed $144,444,444. If Mr. Hunt is employed by USPB as of the end of employment year 2015, he is to be paid long-term incentive compensation equal to one and one-quarter percent (1.25%) of the amount by which USPB’s Total Benefits from FY 2013, FY 2014, and FY 2015 exceed $100,000,000 but are equal to or less than $130,000,000; plus seventy-five one hundredths of a percent (0.75%) of the amount by which USPB’s Total Benefits from FY 2013, FY 2014, and FY 2015 exceed $130,000,000.
Full Term Cash Bonus. Under the Hunt Employment Agreement, Mr. Hunt shall be paid full-term incentive compensation in the amount of $861,111, if he is employed under the Hunt Employment Agreement through the end of FY 2012, and additionally, $825,000 if he is employed under the Hunt Employment Agreement through the end of FY 2015.
Under the Hunt Employment Agreement effective September 1, 2009 through December 31, 2015, the compensation from annual cash incentive, long term cash bonuses and full term cash bonuses shall be subject to a cumulative annual cap pro-rated over the term of the agreement not to exceed $2 million per employment year ($666,667 for the transition period) averaged over the term (as provided in the agreement) (Incentive Cap).
Discretionary Cash Bonuses. Discretionary bonuses are sometimes paid to named executive officers, other than the CEO, and professional staff to compensate for extraordinary cases of individual or Company performance.
Retirement Plans. Qualifying employees are encouraged to participate in a Company sponsored 401(k) savings plan. Under USPB’s plan, employees may contribute up to the maximum amount permissible by IRS limits. USPB matches 100% of each dollar contributed by a participant up to a maximum of 4% of his or her qualifying compensation.
Limited Personal Benefits. We also provide certain benefits to all salaried employees that are not included as perquisites in the Summary Compensation Table for the named executives because they are broadly available. These include health and welfare benefits, and disability and life insurance.
Equity Compensation
The Board implemented a phantom stock option plan for Mr. Hunt when USPB was formed in 1997 to provide the CEO the incentive to create and grow share price in the new business venture. The Board established 20,000 phantom shares, representing 2.7% of the total shares outstanding, and a strike price of $55 per share, the initial offering price for USPB. In fiscal year 2004, when USPB converted to a limited liability company, the 20,000 phantom shares converted to 20,000 Class A units, with an exercise price of $55 per unit, and 20,000 phantom Class B Units, with an exercise price of $0 per unit. The options vested over a 4 year period and are now fully vested. In fiscal year 2009, Mr. Hunt exercised the 20,000 phantom Class B units.
In September 2010, USPB’s Board of Directors approved a management phantom unit plan. The phantom unit plan provides for the award of unit appreciation rights to certain management employees of USPB. USPB’s CEO administers the phantom unit plan and awards “Phantom Units” (Class A and Class B Units) to employees in amounts determined by the CEO, subject to the total Phantom Unit amount approved by the Board of Directors of USPB. During fiscal year 2011, a total of 5,000 Class A phantom units and 5,000 Class B phantom units were awarded to management employees. At the end of fiscal year 2012, the management employees were 40% vested in these phantom units. The remaining phantom units will vest over the next three year period. In November 2012, USPB’s Board of Directors approved the issuance of an additional 1,500 Class A phantom units and 1,500 Class B phantom units to certain members of management, to be effective on January 28, 2013. These phantom units will vest over a five year period.
Employment Agreements
With the exception of the CEO, all of our executive officers are employed at-will, without employment agreements, severance payment agreements or payment arrangements that would be triggered by a “change in control” of USPB.
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CEO Employment Agreement for Steven Hunt
USPB entered into the Hunt Employment Agreement, with CEO Steven Hunt that provides for his base salary, annual cash bonus, long-term cash bonus, full-term cash bonus, all of which are discussed above. The Hunt Employment Agreement also provides for post termination compensation. If Mr. Hunt terminates the agreement for any or no reason, USPB need only pay salary earned to the date of the termination, and the noncompetition compensation, unless termination is the result of death or permanent disability. If USPB terminates the agreement for any reason other than cause, death or disability, or if Mr. Hunt terminates the Hunt Employment Agreement for good reason, Mr. Hunt shall be entitled to salary and benefits through employment year 2015; payment of certain fringe benefits through employment year 2015; the annual incentive bonus for the year in which the termination occurs and each subsequent year through employment year 2015; the long-term incentive bonus that would have accrued had Mr. Hunt been employed through employment year 2015; the payment of the full-term bonuses that would have accrued if Mr. Hunt had remained employed through employment year 2015; and the payment of the noncompetition compensation.
Under the Hunt Employment Agreement effective September 1, 2009 through December 31, 2015, the compensation from annual cash incentive, long term cash bonuses and full term cash bonuses shall be subject to a cumulative annual cap pro-rated over the term of the agreement not to exceed $2 million per employment year ($666,667 for the transition period) averaged over the term (as provided in the agreement) (Incentive Cap).
The Hunt Employment Agreement contains provisions that require the agreement to be renegotiated in the event certain circumstances occur.
In September 2010, the Hunt Employment Agreement in effect at that time was amended and restated to provide clarity to the CEO’s rights to exercise the phantom unit rights and options to purchase Class A units and the procedures required and times at which the CEO may exercise such rights. The amendment also established and clarified the CEO’s rights with respect to the phantom unit rights upon the occurrence of certain events that would dilute the CEO’s phantom unit rights.
In December 2011, the Hunt Employment Agreement in effect at that time was amended and restated as a result of the LUK transaction. First, the Hunt Employment Agreement provided that its terms are subject to renegotiation upon the occurrence of certain events, including the Company’s involvement in a joint venture by acquisition, merger or otherwise, in which the Company does not remain as the majority owner of such joint venture. Under the Hunt Employment Agreement, if the terms of the Hunt Employment Agreement are renegotiated, the renegotiated terms will apply for the final three years (2013 through 2015) of the term of the Hunt Employment Agreement. Under the amendment, which became effective upon completion of the LUK transaction, Mr. Hunt and the Company agreed that the terms of the Hunt Employment Agreement will not be renegotiated. Second, the Hunt Employment Agreement provided that if Mr. Hunt’s employment with the Company (or its affiliated entities) is terminated for reasons other than death, disability or cause, Mr. Hunt will not participate in the management or control of a competitor in the beef packing or processing industry during an 18 month period beginning upon termination of Mr. Hunt’s employment with the Company. During that 18 month period, the Company is required to pay Mr. Hunt monthly payments equal to Mr. Hunt’s monthly base salary during the term of the Hunt Employment Agreement and to allow Mr. Hunt to participate in the group benefits plans available to Company employees. One of the conditions to the completion of the LUK transaction was Mr. Hunt’s agreement to enter into a non-competition agreement that carries a term of 10 years. Under the amendment of the Hunt Employment Agreement, which became effective upon completion of the LUK transaction, the Company is required to pay Mr. Hunt the monthly payments and provide the group benefits described above during the 10 year period of the non-competition agreement entered into by Mr. Hunt.
In April 2012, the Hunt Employment Agreement was amended and restated to align the employment years for the agreement with the change in the fiscal year which resulted from the transaction with LUK. The Hunt Employment Agreement, which originally expired on August 29, 2015, was extended through December 31, 2015.
43 |
Mr. Hunt notified the Company’s Board of Directors in November 2012 of his plans to resign from his employment with the Company effective as of January 28, 2013. The Hunt Employment Agreement provides that for his services performed prior to January 28, 2013, Mr. Hunt will continue to receive his current salary and coverage under the Company’s health and benefit plans. Mr. Hunt will also receive annual bonus and other payments with respect to the Company’s operations during fiscal year 2012 pursuant to the terms of the Hunt Employment Agreement. In addition, Mr. Hunt will receive payments pursuant to the non-competition agreement entered into in connection with the Leucadia Transaction. However, Mr. Hunt will not be entitled to receive the full-term cash bonus described in the Hunt Employment Agreement or any bonus or incentive payments related to periods following termination of Mr. Hunt’s employment with USPB.
CEO Employment Agreement for Stanley Linville
On November 23, 2012, USPB entered into an employment agreement with Mr. Linville, which became effective on January 28, 2013 (Linville Employment Agreement). Pursuant to the Linville Employment Agreement, Mr. Linville now serves as USPB’s Chief Executive Officer for a term that started on January 28, 2013 and expires on December 31, 2015, subject to earlier termination as provided in the Linville Employment Agreement.
Mr. Linville’s annual base salary is $300,000. Mr. Linville will be eligible for an annual incentive compensation payment based on the financial performance of USPB and the benefits received by USPB’s unitholders; that incentive compensation will only be paid to Mr. Linville after certain levels of benefits have been achieved. Under the terms of the Linville Employment Agreement, if Mr. Linville is employed by USPB on the last day of any employment year (except as otherwise provided in the agreement) during the term of the Linville Employment Agreement, he shall be paid annual incentive compensation equal to 0.75% of the sum of the total financial benefits to USPB (“USPB Total Benefits”) that exceed $25,000,000. USPB Total Benefits are: (1) audited fiscal year-end USPB earnings before tax; and (2) the fiscal year USPB grid premiums, which is the net sum of all USPB unitholder and associate grid premiums and discounts calculated through all USPB grids at all plants as outlined in the Linville Employment Agreement. Mr. Linville is also eligible for a long-term incentive payment under the Linville Employment Agreement. If he is employed by USPB on December 31, 2015, he is to be paid long-term incentive compensation equal to fifty one hundredths of a percent (0.50%) of the amount by which USPB’s Total Benefits from January 1, 2013 to December 31, 2015 exceed $75,000,000. The Linville Employment Agreement provides for a cumulative annual cap of $450,000 for payments to Mr. Linville for annual and long-term incentive amounts. As of the effective date of the Linville Employment Agreement, Mr. Linville was granted an additional 1,000 Class A and 1,000 Class B Phantom Units under USPB’s existing Management Phantom Units Plan.
The Linville Employment Agreement also provides for post termination compensation. In addition to the amounts described below that will be payable upon termination of the Linville Employment Agreement, Mr. Linville has agreed to a noncompetition provision that, for twelve (12) months following the termination of Mr. Linville’s employment with USPB, prohibits him from participating in the management or control of any beef industry business or enterprise that competes with the business of USPB and its various affiliates. During such period, Mr. Linville will receive a monthly payment equal to one twelfth of Mr. Linville’s annual salary at the time of termination.
If Mr. Linville terminates the agreement for any or no reason, USPB need only pay salary earned to the date of the termination, and the noncompetition compensation, unless termination is the result of death or permanent disability. If USPB terminates the agreement for any reason other than cause, death or disability, or if Mr. Linville terminates the Linville Employment Agreement for good reason, Mr. Linville shall be entitled to salary and benefits through employment year 2015; payment of certain fringe benefits through employment year 2015; the annual incentive bonus for the year in which the termination occurs and each subsequent year through employment year 2015; the long-term incentive bonus that would have accrued had Mr. Linville been employed through employment year 2015; and the payment of the noncompetition compensation.
Impact of Tax and Accounting Treatments
We believe the compensation paid to our named executive officers is fully deductible under the Internal Revenue Code at the time it is paid. We further believe ASC 718 Compensation – Stock Compensation does not have a material effect on our financial statements.
44 |
Unit Ownership Guidelines
USPB does not allow its named executive officers to own USPB’s Class A units. As of December 29, 2012, CEO Steven Hunt owns 20,000 Class A phantom unit options as discussed above and certain members of management own a total of 5,000 Class A and 5,000 Class B phantom unit rights awarded under the management phantom unit plan also discussed above. The USPB Board of Directors has approved the issuance of an additional 1,500 Class A and 1,500 Class B phantom unit rights that were awarded effective January 28, 2013 under the management phantom unit plan to certain members of management.
Compensation Committee Report
The Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with USPB’s management. Based on the Committee’s review and discussions with management, the Committee has recommended to the Board that this Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
Compensation Committee |
Mark Gardiner – Chairman |
Duane Ramsey |
Joe Morgan |
45 |
Summary Compensation Table
The table below sets forth information regarding compensation for our named executive officers for fiscal year 2012, the 2011 transition period, and fiscal years 2011 and 2010. Non-Equity Incentive Plan Compensation amounts reflected in this table are performance based awards and include amounts earned under our annual and long term cash bonus plans.
Non-Equity | ||||||||||||||||||||||
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| Option |
| Compensation | Compensation |
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Name and Principal Position |
| Period (1) |
| Salary ($) |
| Bonus ($) |
| Awards ($) |
| ($) | ($) | Total ($) | ||||||||||
Steven D. Hunt |
|
| FY 2012 |
|
| 791,365 |
| - |
| - |
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| 2,000,000 | (6) | 1,428,788 (2) |
| 4,220,153 | |||||
Chief Executive Officer |
| TP 2011 |
|
| 296,100 |
| - |
| - |
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| 666,667 | (6) | - (2) |
| 962,767 | ||||||
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| FY 2011 |
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| 784,232 |
| - |
| - |
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| 2,000,000 | (6) | 11,592 (2) |
| 2,795,824 | |||||
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| FY 2010 |
|
| 802,077 |
| 700,000 | (5) | - |
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| 2,000,000 | (6) | 11,595 (2) |
| 3,513,672 | |||||
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Scott J. Miller |
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| FY 2012 |
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| 143,799 |
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| 110,752 | (8) |
| 208,500 | (4) | 12,429 (2) |
| 475,481 | |||||
Chief Financial Officer |
| TP 2011 |
|
| 53,130 |
| - |
| - |
|
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| 67,500 | (4) | 500,920 (2) |
| 621,551 | |||||
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| FY 2011 |
|
| 139,724 |
| - |
| 122,172 | (7) |
| 202,500 | (4) | - (2) |
| 464,396 | |||||
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| FY 2010 |
|
| 133,084 |
| 10,000 | (3) | - |
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| 135,000 | (4) | 10,093 (2) |
| 288,177 | |||||
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Stanley D. Linville |
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| FY 2012 |
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| 145,661 |
|
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| 221,503 | (8) |
| 216,000 | (4) | 12,633 (2) |
| 595,797 | |||||
Chief Operating Officer |
| TP 2011 |
|
| 51,075 |
| - |
| - |
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| 70,000 | (4) | 542,011 (2) |
| 663,086 | |||||
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| FY 2011 |
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| 143,283 |
| - |
| 132,353 | (7) |
| 210,000 | (4) | - (2) |
| 485,636 | |||||
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| FY 2010 |
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| 136,116 |
| - |
| - |
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| 140,000 | (4) | 13,104 (2) |
| 289,220 | |||||
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Danielle D. Imel | FY 2012 | 123,978 |
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| - |
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| 185,250 | (4) | 12,023 (2) |
| 321,251 | |||||||||
Treasurer | TP 2011 | 43,779 |
| - |
| - |
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| 60,000 | (4) | 418,870 (2) |
| 522,649 | ||||||||
| FY 2011 | 120,968 |
| - |
| 101,810 | (7) |
| 180,000 | (4) | - (2) |
| 402,778 | |||||||||
| FY 2010 | 117,860 |
| - |
| - |
|
| 120,000 | (4) | - (2) |
| 237,860 |
(1) TP 2011 refers to the four month Transition Period from August 28, 2011 through December 31, 2011. The FY 2012, FY 2011,and FY 2010 amounts include compensation earned during fiscal years 2012, 2011 and 2010.
(2) Mr. Hunt - Amount for Mr. Hunt includes the non - dilution payment resulting from the transaction with LUK, Company match under our 401(k) plan and cost of excess life insurance, $1,417,000, $9,962 and $1,826, respectively in fiscal year 2012, $0, $9,766 and $1,826, respectively, in fiscal year 2011, and $0, $9,769 and $1,826, respectively, in fiscal year 2010. None of the perquisites and other benefits paid to Mr. Hunt in the 2011 transition period exceeded $10,000.
Mr. Miller - Amounts for Mr. Miller include Company match under our 401(k) plan, the payment resulting from the transaction with LUK and non -dilution payments resulting from excess tax distributions, $9,979, $0, $2,450, respectively in fiscal year 2012, $6,256, $494,664, and $0,respectively in transition period 2011, and $10,093, $0, and $0, respectively in fiscal year 2010. None of the benefits paid to Mr. Miller in fiscal year 2011 exceeded $10,000.
Mr. Linville - Amounts for Mr. Linville include Company match under our 401(k) plan, the payment resulting from the transaction with LUK and non - dilution payments resulting from excess tax distributions, $9,978, $0, $2,655, respectively in fiscal year 2012, $6,125, $535,886, and $0,respectively in transition period 2011, and $13,104, $0, and $0, respectively in fiscal year 2010. None of the benefits paid to Mr. Linville in fiscal year 2011 exceeded $10,000.
Ms. Imel- Amounts for Ms. Imel include Company match under our 401(k) plan, the payment resulting from the transaction with LUK and non -dilution payments resulting from excess tax distributions, $9,981, $0, $2,042, respectively in fiscal year 2012 and $6,650, $412,220, and $0,respectively in transition period 2011. None of the benefits paid to Ms. Imel in fiscal years 2010 and 2011 exceeded $10,000 .
(3) This amount represents a discretionary bonus earned by the named executive officer.
(4) This amount represents the executive's proportionate share of the Management Bonus Pool. One half of this amount will not be paid unless the executive is employed at the end of following fiscal year in regards to the FY 2012, FY 2011 and FY 2010 non-equity incentive compensation. Regarding TP 2011, one half of this non-equity incentive compensation will not be paid unless the executive is employed on December 31, 2012.
(5) This amount represents a full - term cash bonus earned pursuant to the terms of Mr. Hunt's employment agreement effective Sept ember 1, 2003 through August 31, 2009.
(6) The amount of non-equity incentive plan compensation, which is to include the annual cash bonus and amounts earned for the Transition Period and fiscal years ending December 29, 2012, August 27, 2011 and August 28, 2010 pursuant to the long - term cash bonus plan , has been limited due to the cumulative annual - cap of $2,000,000 per fiscal year and $666,667 for the Transition Period pursuant to Mr. Hunt's amended and restated employment agreement. The limited amounts represent annual cash bonus earned by Mr. Hunt for the Transition Period and fiscal years 2012, 2011 and 2010.
(7) Certain executive officers were granted phantom Class A and phantom Class B units on August 29, 2010. The phantom units under this plan provide for the award of unit appreciation rights only. Mr. Miller was granted 1,200 Class A and 1,200 Class B phantom units; Mr. Linville was granted 1,300 Class A and 1,300 Class B phantom units;and Ms. Imel was granted 1,000 Class A and 1,000 Class B phantom units. This amount was determined using a Black Scholes Pricing Model and represents the grant date fair value.
(8) On November 16, 2012, the Board of Directors approved issuing certain executive officers additional phantom Class A and phantom Class Bunits, the issuance to be effective on January 28, 2013. These phantom units provide for the award of unit appreciation rights only. Mr. Linville was granted 1,000 Class A and 1,000 Class B phantom units and Mr. Miller was granted 500 Class A and 500 Class B phantom units. This amount was determined using a Black Scholes Pricing Model and represents the grant date fair value. The units vest over a five year period and at the end of fiscal year 2012 were 0% vested.
46 |
Grants of Plan-Based Awards in the Fiscal Year 2012
The table below sets forth information regarding grants of a non-equity incentive plan-based award made to our named executive officers during fiscal year 2012.
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| Estimated Future Payouts under Non-Equity Incentive Plan Awards |
| All Other |
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| Option Awards; |
| Exercise or |
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| Number of |
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| Fair Value of | ||||
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| Securitis |
| Options |
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| Underlying |
| Awards |
| Option | ||||
Name and Principal Position |
| Grant Date |
| Threshold ($) |
| Target ($) |
| Maximum ($) |
| Options (#) |
| ($/unit) |
| Awards (6) | ||||||||
Steven D. Hunt (1) |
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| n/a |
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Chief Executive Officer |
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Scott J. Miller |
| 11/13/2012 |
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| - |
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| 208,500 | (2) | 262,500 |
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Chief Financial Officer |
| 11/16/2012 | (7) |
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| 500 Class A | (5) | $ | 66.04 |
| $ | 35,267 | ||||
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| 11/16/2012 | (7) |
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| 500 Class B | (5) | $ | 73.70 |
| $ | 75,485 | |||
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Stanley D. Linville (1) |
| 11/23/2012 |
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| - | (4) |
| - | (4) | 1,350,000 | (3) |
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Chief Operating Officer |
| 11/16/2012 | (7) |
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| 1,000 Class A | (5) | $ | 66.04 |
| $ | 70,534 | ||||
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| 11/16/2012 | (7) |
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| 1,000 Class B | (5) | $ | 73.70 |
| $ | 150,969 | |||
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Danielle D. Imel |
| 11/13/2012 |
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| - |
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| 185,250 | (2) | 189,000 |
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Treasurer |
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(1) | In November 2012, Mr. Hunt notified USPB's Board of Directors of his intent to resign as Chief Executive Officer effective January 28, 2013. The Board of Directors appointed Mr. Linville, currently Chief Operating Officer, as the Chief Executive Officer effective January 28, 2013. |
(2) | The target amount reflects the actual management annual cash bonus plan award for fiscal year 2012. The amount is reflected in the "Non-Equity Incentive Plan Compensation" column in the Summary Compensation Table. |
(3) | On November 23, 2012, USPB has entered into an employment agreement, effective January 28, 2013 through December 31, 2015, with Mr. Linville that provides for non-equity incentive plan awards of annual cash bonuses and long-term cash bonuses. The compensation provided to Mr. Linville in the form of annual cash and long-term cash bonuses shall be subject to a cumulative annual cap pro-rated over the term of his contract not to exceed $450,000 per year averaged over the term. |
(4) | Threshold and target compensation under these incentive plan awards are not determinable and actual compensation will be based on company earnings, cattle deliveries and grid premiums over the term of the contract. |
(5) | The Classs A and Class B phantom units provide for unit appreciation rights only. |
(6) | The Grant Date Fair Value was determined using a Black Scholes Pricing Model. |
(7) | The USPB Board of Directors approved granting these phantom units on November 16, 2012 to be effective on January 28, 2013. |
Discussion of Summary Compensation Table and Grants of Plan-Based Awards
Performance Based Annual Cash Bonuses
Our executive officers earn bonus awards made pursuant to various annual cash bonus plans. The awards utilize formulas set by the Compensation Committee. The bonuses earned pursuant to the plans appear in the Non-Equity Incentive Plan Compensation in the Summary Compensation Table. Annual incentive bonuses awarded to executives, excluding Mr. Hunt, also appear in the Grants of Plan Based Awards table. The formulas used to calculate the annual performance-based bonus awards to the Named Executive Officers were as follows:
Name | Bonus Formula | |
Steven D. Hunt | For fiscal year 2012: two percent of the sum of the total financial benefits to USPB (USPB Total Benefits) that exceed $25,000,000 for fiscal year 2012. USPB Total Benefits are: (1) fiscal year 2012 earnings before tax (the gain from the transaction with Leucadia National Corporation (LUK) shall be allocated 4/16th to the Transition Period and 12/16th to fiscal year 2012); and (2) two times the fiscal year 2012 USPB grid premiums which is the net sum of all USPB unitholder and associate grid premiums and discounts calculated through all USPB grids at all plants as outlined in the amended and restated employment agreement. | |
Scott J. Miller, | For fiscal year 2012: The executive's proportionate share of the Management Bonus Pool, which is (1) the audited fiscal year 2012 USPB earnings before tax plus twelve-sixteeenths of the gain realized from the LUK transaction plus USPB grid premiums during fiscal year 2012, less (2) $25,000,000, multiplied by (3) management bonus factor. The bonus plan payments are vested over a two-year period to provide an added incentive to remain with USPB. The maximum Management Bonus Pool for a given bonus plan year is equal to 150% of the sum of the qualifying participants' salaries in effect at the end of such year. | |
Stanley D. Linville, | ||
Danielle D. Imel | ||
47 |
Other Bonuses
We also pay discretionary cash bonuses to executive officers from time to time to reward elements of performance that are not reflected in the criteria for performance based cash bonuses. Mr. Miller was paid such bonus in fiscal year 2010. No such bonuses were paid in fiscal year 2012, the 2011 transition period or fiscal year 2011. The bonuses are disclosed in the Bonus column in the Summary Compensation Table.
Outstanding Equity Awards at Fiscal Year End 2012
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| Option Exercise |
| Option Expiration |
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Name and Principal Position |
| Unexercised Options |
| Price ($) |
| Date |
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Steven D. Hunt |
| 20,000 Class A Units | (1) |
| $ | 55.00 |
| None | (2) | ||
Chief Executive Officer |
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Scott J. Miller |
| 1,200 Class A Units | (3) |
| $ | 0.00 | (4) | None |
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Chief Financial Officer |
| 1,200 Class B Units | (3) |
| $ | 0.00 | (4) | None |
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Stanley D. Linville |
| 1,300 Class A Units | (3) |
| $ | 0.00 | (4) | None |
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Chief Operating Officer |
| 1,300 Class B Units | (3) |
| $ | 0.00 | (4) | None |
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Danielle D. Imel |
| 1,000 Class A Units | (3) |
| $ | 0.00 | (4) | None |
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Treasurer |
| 1,000 Class B Units | (3) |
| $ | 0.00 | (4) | None |
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(1) | Mr. Hunt is fully vested in the 20,000 Class A phantom rights on phantom units, and therefore fully exercisable. |
(2) | Mr. Hunt shall be entitled to exercise phantom unit rights at his election, at the time and under the conditions, and with the same consequences as if he held similar unqualified options to purchase USPB Class A Units acquired at the same time as the phantom unit rights. |
(3) | The phantom plan awards, which provide for the award of appreciation rights only, for Mr. Miller, Mr. Linville and Ms. Imel vest over a 5 year period. At the end of fiscal year 2012, the unexercised phantom units were 40% vested, and therefore exercisable. |
(4) | During fiscal year 2011, a total of 5,000 Class A phantom units and 5,000 Class B phantom units were awarded to certain management employees, with a strike price of $118 and $157, respectively. However, as a result of the LUK transaction, which occurred during the 2011 Transition Period, employees with phantom plan awards were paid $687 per combined Class A and Class B phantom units less the combined strike price of $275 ($118 + $157). Subsequent to this payment, the new strike prices for Class A phantom units and Class B phantom units are now $0.00 and $0.00, respectively. The number of outstanding phantom units and the vesting schedule remain unchanged. |
48 |
Options Exercised
|
|
| Option Awards |
| |||||
|
|
| Number of options |
| Value realized on |
| |||
Name and Principal Position |
| acquired on exercise |
| exercise ($) |
| ||||
Steven D. Hunt |
|
|
| - |
| $ | - |
| |
Chief Executive Officer |
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|
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| ||
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|
|
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|
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| |
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| |
Scott J. Miller |
|
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| - |
| $ | 1,488 | (1) | |
Chief Financial Officer |
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| ||
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| |
Stanley D. Linville |
|
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| - |
| $ | 1,612 | (2) | |
Chief Operating Officer |
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| |
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| |
Danielle D. Imel |
|
|
| - |
| $ | 1,240 | (3) | |
Treasurer |
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| |
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(1) Mr. Miller did not exercise any option awards in fiscal year 2012. However, he will receive a payment which resulted from a dilution event which occurred as a result of distributions being made to our unitholders in excess of the the maximum allowable tax distributions. The full amount that the Company anticipated paying to Mr. Miller regarding this dilution event is $1,488. However, the actual future payment is based on the vesting of the Class A and Class B phantom units. These vest over a five year period and will be fully vested on August 29, 2015. Based on vesting, the Company anticipates paying Mr. Miller 40% of the disclosed amount by March 15, 2013 and 20% of the disclosed amount by March 15th of 2014, 2015 and 2016. Actual payments made will be reflected in the "All Other Compensation" column in the Summary Compensation Table. |
(2) Mr. Linville did not exercise any option awards in fiscal year 2012. However, he will receive a payment which resulted from a dilution event which occurred as a result of distributions being made to our unitholders in excess of the the maximum allowable tax distributions. The full amount that the Company anticipated paying to Mr. Linville regarding this dilution event is $1,612. However, the actual future payment is based on the vesting of the Class A and Class B phantom units. These vest over a five year period and will be fully vested on August 29, 2015. Based on vesting, the Company anticipates paying Mr. Linville 40% of the disclosed amount by March 15, 2013 and 20% of the disclosed amount by March 15th of 2014, 2015 and 2016. Actual payments made will be reflected in the "All Other Compensation" column in the Summary Compensation Table. |
(3) Ms. Imel did not exercise any option awards in fiscal year 2012. However, she will receive a payment which resulted from a dilution event which occurred as a result of distributions being made to our unitholders in excess of the the maximum allowable tax distributions. The full amount that the Company anticipated payingto Ms. Imel regarding this dilution event is $1,240. However, the actual future payment is based on the vesting of the Class A and Class B phantom units. These vest over a five year period and will be fully vested on August 29, 2015. Based on vesting, the Company anticipates paying Ms. Imel 40% of the disclosed amount by March 15, 2013 and 20% of the disclosed amount by March 15th of 2014, 2015 and 2016. Actual payments made will be reflected in the "All Other Compensation" column in the Summary Compensation Table. |
Retirement Plans
We do not maintain a qualified or non-qualified defined benefit pension plan covering any of our employees. Our named executive officers are eligible to participate in our tax-qualified Profit Sharing and Savings Plan on the same basis as other employees under the plan. The Company makes a matching contribution to this plan equal to 100% of each participant’s own elective contributions up to 4% of his or her qualifying compensation. The Company also has the discretion to make annual profit sharing contributions that are allocated among all eligible participants in proportion to their respective compensation. The Company did not make a profit sharing contribution to the plan in fiscal year 2012. The Summary Compensation Table above reflects the contributions to our Profit Sharing and Savings Plan for those employees whose All Other Compensation exceeds $10,000.
Potential Payments Upon Termination
Mr. Steven D. Hunt
If the Hunt Employment Agreement is terminated upon death or permanent disability, Mr. Hunt is entitled to:
Salary to the date of termination plus continued monthly payment of salary through the earlier of the first anniversary of the termination or the contract expiration date (“Deemed Termination Date”). If Mr. Hunt were terminated upon death or permanent disability in fiscal year 2013, his payment would be $825,000;
Certain fringe benefits if terminated upon disability;
Annual incentive through the employment year in which the Deemed Termination Date occurs pro-rated for the last employment year based upon the period through the Deemed Termination Date;
Long-term cash bonus that would have accrued if Mr. Hunt had remained employed through the end of the Agreement;
49 |
Full-term cash bonus that would have been paid if Mr. Hunt had remained employed through the end of fiscal year 2015, pro-rated based upon the period of his employment under the Agreement through the Deemed Termination Date versus the period of employment under the Agreement through the end of the contract period; and
Amounts paid under the annual incentive bonuses, long-term cash bonus, and full-term cash bonus described above are subject to the Incentive Cap and will be determined based on the financial and grid premium performance for fiscal years 2010 and 2011, the 2011 transition period, and fiscal years 2012, 2013, 2014, and 2015. The amount of compensation applied to toward the Incentive Cap through fiscal year 2012 is $6,666,667.
If the Hunt Employment Agreement is terminated by USPB for cause or by Mr. Hunt for other than good reason, he is entitled to:
Salary accrued to the date of termination; and
Payment of noncompetition compensation under certain circumstances, as described below.
If the Hunt Employment Agreement is terminated by USPB other than for cause, death or disability or by Mr. Hunt for reason, he is entitled to:
Salary through the end of the contract period;
Certain fringe benefits;
Annual incentive bonuses that would have been earned through the end of the contract period;
Long-term cash bonus that would have been earned through the end of the contract period;
Full-term cash bonuses that would have been earned if he were employed at the end of fiscal year 2015 ($825,000);
Amounts paid under the annual incentive bonuses, long-term cash bonus, and full-term cash bonus described above are subject to the Incentive Cap and will be determined based on the financial and grid premium performance for fiscal years 2010 and 2011, the 2011 transition period, and fiscal years 2012, 2013, 2014, and 2015. The amount of compensation applied toward the Incentive Cap through fiscal year 2012 is $6,666,667; and
Payment of noncompetition compensation under certain circumstances, as described below.
In the event Mr. Hunt’s employment is terminated (including by expiration of the Hunt Employment Agreement), other than by death or permanent disability or for cause under specified circumstances (being convicted of a felony or other serious crime or engaging in fraud, embezzlement or other illegal conduct to the detriment of USPB), as set for the in the Hunt Employment Agreement, and Mr. Hunt is not employed by USPB or one of the USPB Entities (the “USPB Non-Employment”); or his employment is terminated, including by expiration of the Hunt Employment Agreement, and other than by death or permanent disability and he is not employed by USPB, National Beef Packing Company, LLC, or a subsidiary of either USPB or National Beef Packing Company, LLC (the “National Non-Employment”), then USPB shall provide noncompetition compensation for: (1) each of the eighteen (18) months first following the termination of employment of CEO with USPB (USPB Noncompetition Payments), provided USPB may terminate the USPB Noncompetition Payments prior to the end of the 18 month period if the Board of Directors determines he violated the noncompetition restriction in Section 6(a) or any of the remaining obligations under Section 6 of the Hunt Employment Agreement; and (2) USPB shall pay noncompetition compensation for each of the months for the period of National Non-Employment starting after USPB Non-Employment until ten years after the LUK Closing Date (National Noncompetition Payments), provided that USPB may terminate the National Noncompetition Payments if, National Beef determines and USPB approves, that he has violated his noncompetition agreement with National Beef Packing Company, LLC. The period in which noncompetition compensation is provided, from start to expiration or earlier termination for both of the USPB Noncompetition Payments and National Noncompetition Payments, is the “Noncompetition Period.”
50 |
Mr. Hunt notified the Company’s Board of Directors in November 2012 of his plans to resign from his employment with the Company effective as of January 28, 2013. The Hunt Employment Agreement provides that for his services performed prior to January 28, 2013, Mr. Hunt will continue to receive his current salary and coverage under the Company’s health and benefit plans. Mr. Hunt will also receive annual bonus and other payments with respect to the Company’s operations during fiscal year 2012 pursuant to the terms of the Hunt Employment Agreement. In addition, Mr. Hunt will receive payments pursuant to the non-competition agreement entered into in connection with the Leucadia Transaction. However, Mr. Hunt will not be entitled to receive the full-term cash bonus described in the Hunt Employment Agreement or any bonus or incentive payments related to periods following termination of Mr. Hunt’s employment with the Company.
Mr. Stanley D. Linville
If Mr. Linville terminates the Linville Employment Agreement, which was effective on January 28, 2013, for any or no reason, USPB need only pay salary earned to the date of the termination, and the noncompetition compensation, unless termination is the result of death or permanent disability. If USPB terminates the agreement for any reason other than cause, death or disability, or if Mr. Linville terminates the Linville Employment Agreement for good reason, Mr. Linville shall be entitled to salary and benefits through employment year 2015; payment of certain fringe benefits through employment year 2015; the annual incentive bonus for the year in which the termination occurs and each subsequent year through employment year 2015; the long-term incentive bonus that would have accrued had Mr. Linville been employed through employment year 2015; and the payment of the noncompetition compensation.
The Linville Employment Agreement also provides for post termination compensation. In addition to the amounts described above that will be payable upon termination of the Linville Employment Agreement, Mr. Linville has agreed to a noncompetition provision that, for twelve (12) months following the termination of Mr. Linville’s employment with USPB, prohibits him from participating in the management or control of any beef industry business or enterprise that competes with the business of USPB and its various affiliates. During such period, Mr. Linville will receive a monthly payment equal to one twelfth of Mr. Linville’s annual salary at the time of termination.
Director Compensation Table
Each director receives cash compensation for meetings attended. Directors are compensated $250 per diem for regular meetings, special meetings, compensation committee meetings and audit committee meetings. We do not award any other type of compensation to our directors.
The table below reflects compensation paid to each director during the fiscal year 2012.
|
|
| Fees Earned or | |
Name |
| Paid in Cash ($) | ||
Mark R. Gardiner |
|
| 4,000 | |
Duane K. Ramsey |
|
| 4,000 | |
Joe M. Morgan |
|
| 4,000 | |
Jerry L. Bohn |
|
| 3,250 | |
Douglas A. Laue |
|
| 3,250 | |
Rex W. McCloy |
|
| 3,250 | |
Jeff H. Sternberger |
|
| 3,250 | |
|
|
|
|
|
Compensation Committee Interlocks and Insider Participation
None of the members of our Compensation Committee is, or was, an officer or employee of U.S. Premium Beef, LLC or its subsidiaries. None of our executive officers served as a director or was a member of the compensation committee of any entity where a member of our Board or Compensation Committee was an executive officer.
51 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED UNITHOLDER MATTERS
Equity Compensation Plan Information
The table below sets forth information with respect to securities available for issuance under our equity compensation plan.
|
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| Equity Compensation Plan Information |
|
|
| ||||||
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| Number of | ||
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| securities | ||
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| remaining available | ||
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| Number of |
|
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| for future issuance | |||||
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| securities to be |
|
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| under equity | |||||
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|
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| issued upon |
| Weighted-average |
| compensation plans | |||||
|
|
|
|
|
|
| exercise of |
| exercise price of |
| (excluding | |||||
|
|
|
| Type of |
| outstanding options, |
| outstanding options, |
| securities reflected | ||||||
Plan Category |
| Equity |
| warrants and rights |
| warrants and rights |
| in column (2)) | ||||||||
Equity compensation plans approved |
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|
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|
|
|
|
|
|
|
| |||
by security holders |
|
|
|
|
|
|
|
| - |
| N/A |
|
| - | ||
Equity compensation plans not |
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|
| |||
approved by security holders (1) |
| Class A Units |
|
|
|
| 20,000 |
| $ | 55.00 |
|
| - | |||
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(1) See Note 7 to our consolidated financial statements for a description of the equity compensation plan. |
|
|
|
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of February 28, 2013 regarding the only persons known by the Company to own directly or indirectly, more than 5% of its Class A and Class B units.
|
|
|
|
|
|
| Number of Units |
|
| |||
|
|
|
|
|
| Beneficially |
|
| ||||
Name and Address of Beneficial Owner |
| Title of Class |
| Owned |
| Percent of Class | ||||||
Douglas A. Laue (1) |
| Class A and Class B Units |
|
| 95,000 |
| 12.6% | |||||
509 Country Lane |
|
|
|
|
|
|
|
|
| |||
Council Grove, Kansas 66846 |
|
|
|
|
|
|
|
| ||||
John Fairleigh(2) |
|
| Class A and Class B Units |
|
| 54,288 |
| 7.2% | ||||
Box 560 |
|
|
|
|
|
|
|
|
|
| ||
Scott City, KS 67871 |
|
|
|
|
|
|
|
|
| |||
Stacy and Kelly Hoeme(3) |
| Class A and Class B Units |
|
| 41,125 |
| 5.4% | |||||
PO Box 186 |
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| |||
Scott City, KS 67871 |
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(1) | Includes i) 90,000 Class A and Class B units held by Black Diamond Cattle Co., Inc., of which Mr. Laue is the owner and ii) 5,000 Class A and Class B units held by Black Diamond Custom Feeders, of which Mr. Laue is the owner. |
(2) | Includes i) 54,288 Class A and 30,000 Class B units held by JBT Land & Cattle, LLC., of which Mr. Fairleigh is part owner and ii) 24,288 Class B units held by Fairleigh Corporation bda Fairleigh Feed Yard, of which Mr. Fairleigh is part owner. |
(3) | Includes i) 39,425 Class A and Class B units held by Crown H Cattle Co, Inc., of which Kelly and Stacy Hoeme are owners and ii) 1,500 Class A and Class B units owned by Stacy Hoeme and iii) 200 Class A and Class B units owned by Kelly Hoeme. |
52 |
Security Ownership of Management
The following table furnishes information, as of March 8, 2013, regarding ownership of USPB’s Class A and Class B units is furnished with respect to (i) each director and director nominee, (ii) each executive officer named in the Summary Compensation Table on page 45, and (iii) all current directors and executive officers as a group.
|
|
|
|
|
| Beneficial Ownership of |
|
| ||||
| Class A Units |
| Class B Units | |||||||||
Name | Number (1) |
| Percentage (2) |
| Number (1) |
| Percentage (2) | |||||
Douglas A. Laue (3) |
|
| 95,000 |
|
| 12.6% |
| 95,000 |
| 12.6% | ||
Jeff H. Sternberger (4) |
|
| 34,500 |
|
| 4.6% |
| 34,500 |
| 4.6% | ||
Jerry L. Bohn (5) |
|
| 35,867 |
|
| 4.7% |
| 31,617 |
| 4.2% | ||
Joe M. Morgan (6) |
|
| 17,865 |
|
| 2.4% |
| 17,865 |
| 2.4% | ||
Rex W. McCloy (7) |
|
| 16,085 |
|
| 2.1% |
| 13,085 |
| 1.7% | ||
Duane K. Ramsey (8) |
|
| 8,800 |
|
| 1.2% |
| 8,800 |
| 1.2% | ||
Mark R. Gardiner (9) |
|
| 3,000 |
|
| 0.4% |
| 3,000 |
| 0.4% | ||
Steven D. Hunt (10) |
|
| 20,000 |
|
| 2.6% |
| 20,000 |
| 2.6% | ||
Scott J. Miller |
|
|
| - |
|
| 0.0% |
| - |
| 0.0% | |
Stanley D. Linville |
|
|
| - |
|
| 0.0% |
| - |
| 0.0% | |
Danielle D. Imel |
|
|
| - |
|
| 0.0% |
| - |
| 0.0% | |
Directors, Nominees, and Executive Officers as a group (11 persons) (11) |
|
| 231,117 |
|
| 30.6% |
| 223,867 |
| 29.6% | ||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Each cooperative shareholder received one Class A unit and one Class B unit in USPB for each share of cooperative common stock held prior to the conversion. |
(2) | Represents the percentage of Class A units and the percentage of Class B units beneficially held by the named party. |
(3) | Includes i) 90,000 Class A and Class B units held by Black Diamond Cattle Co., Inc., of which Mr. Laue is the owner and ii) 5,000 Class A and Class B units held by Black Diamond Custom Feeders, of which Mr. Laue is the owner. |
(4) | Includes i) 32,500 Class A and Class B units held by Midwest Feeders Inc., of which Mr. Sternberger is an owner and the General Manager, and ii) 2,000 Class A and Class B units held by CRI Feeders of Guymon, LLC of which Mr. Sternberger is a director. All of the Class A and Class B units are pledged as security. |
(5) | Includes i) 35,867 Class A and 31,617 Class B units held by Pratt Feeders, LLC, of which Mr. Bohn is the general manager. All of the units are pledged as security. |
(6) | Includes 17,865 Class A and Class B units held by Mr. Morgan. |
(7) | Includes 16,085 Class A units and 13,085 Class B units held by McLeod Farms, Inc., of which Mr. McCloy is an owner. |
(8) | Includes i) 8,800 Class A and Class B units held by the Duane K. Ramsey Trust, over which Mr. Ramsey has sole voting and investment power |
(9) | Includes 3,000 Class A and Class B units held by the Mark Gardiner Revocable Trust, over which Mr. Gardiner has sole voting and investment power. |
(10) | Includes the option held by Mr. Hunt to purchase 20,000 Class A units and the 20,000 Class B units Mr. Hunt's spouse acquired in August 2009. |
(11) | Reflects unit ownership by all seven directors, the nominees to the board, and the named executive officers of USPB. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
USPB’s board of directors has not adopted a formal policy or procedure that must be followed prior to any transaction, arrangement or relationship with a related person, as defined by SEC regulations (e.g., directors, executive officers, any 5 percent shareholder, or immediate family member of any of the foregoing).
53 |
USPB has adopted a corporate Code of Conduct that is enforced throughout all levels of management. It deals with conflicts of interest, among other things. The Code prohibits any conduct or activities that conflict with the interests of the Company, or that might influence or appear to influence our judgment or actions in performing our duties. The Code also requires directors and all levels of management to make full written disclosure of any activity that may present a conflict of interest and receive prior written approval from the Company. No waivers have been granted.
Our directors and all levels of management are required each year to respond to a Related Party Questionnaire. The questionnaire requires each director and all levels of management to identify if they or an immediate family member had been indebted to, or had been a participant in any material transactions with, the Company or any of its affiliates. The questionnaire requires disclosure of the name of related parties if such parties have an ownership or management control relationship with the Company sufficient to exert significant influence over the Company’s management or operating policies which could cause significantly different operating results or financial position of the Company.
The standards applied pursuant to the above-described procedures are to provide comfort that any conflict of interest or related party transition is on an arms-length basis which is fair to the Company.
Directors who are Unitholders
USPB is not a listed company and as a result has chosen the NASDAQ independence listing standards to determine whether our directors are independent. The NASDAQ independence definitions provide that directors cannot be independent if they do not meet certain objective standards.
All of USPB’s directors hold units of the LLC and are also agricultural producers. By virtue of their unitholder status and ownership of Class A units, each of these individuals is obligated to deliver cattle to USPB. The amount and terms of the payments received by these individuals (or the entities they represent) for the delivery of cattle are made on exactly the same basis as those received by other unitholders and associates of USPB for the delivery of their cattle. Based on the NASDAQ’s standards and as a result of their equal treatment with respect to the delivery of cattle, the following current directors were determined to be independent: Messrs. Bohn, Gardiner, Laue, McCloy, Morgan, Ramsey, and Sternberger.
Certain Arrangements with Holders of NBP’s Membership Interests
Simultaneous with the closing the Leucadia Transaction, all of the holders of NBP’s membership interests entered into a limited liability company agreement that provides for, among other things, election of its board of managers, the powers of its board of managers and its officers, approval rights for certain of its equity holders, restrictions and rights related to the transfer, sale or purchase of its membership interests, and preemptive and repurchase rights.
Transactions with NBP
On December 30, 2011, USPB entered into a Cattle Purchase and Sale Agreement with NBP. Per the terms and conditions of the Agreement, NBP shall purchase through USPB from its owners and associates, and USPB shall cause to be sold and delivered from its owners and associates to NBP, on an annual basis, a base amount of 735,385 (subject to adjustment) head of cattle per year. In fiscal year 2012, USPB and NBP agreed to increase the number of cattle that USPB’s owners and associates could deliver during USPB’s delivery year by up to 10%. During fiscal year 2012, USPB and its owners and associates provided approximately 21% of NBP’s total cattle requirements. The purchase price for the cattle is determined by pricing grids, which shall at all times be no less favorable than any other pricing grid being utilized by NBP and the pricing grid shall be competitive with NBP’s major competitors for the purchase of cattle.
Transactions with Beef Products, Inc.
54 |
Since 1994, NBP has had a business relationship with Beef Products, Inc. (BPI), which is an affiliate of NBPCo Holdings, whereby NBP sells beef trimmings, referred to as trim, to BPI, primarily at a formula-based price, and NBP purchases processed lean beef from BPI at negotiated prices for use in NBP’s ground beef operations. NBP’s aggregate sales of trim to BPI totaled approximately $66.3 million, $170.2 million, and $120.4 million, respectively, in the 18 week period ended December 31, 2011, and fiscal years 2011 and 2010. NBP’s aggregate purchases of processed lean beef from BPI totaled approximately $14.3 million, $47.5 million, and $40.6 million, respectively, in the 18 week period ended December 31, 2011, and fiscal years 2011 and 2010.
In January 2007, NBP entered into an agreement with BPI for BPI to manufacture and install a grinding system in one of its plants. In accordance with the agreement with BPI, NBP is to pay BPI a technology and support fee based on the number of pounds of product produced using the grinding system. The installation of the grinding system was completed in fiscal year 2008. During the 18 weeks ended December 31, 2011 and fiscal years 2011 and 2010, NBP paid approximately $0.6 million, $2.0 million, and $1.9 million, respectively, to BPI in technology and support fees.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers, an independent registered public accounting firm, served as our auditors for fiscal year 2012 and the 18 weeks ended December 31, 2011. KPMG, an independent registered public accounting firm, served as our auditors for the review of the quarterly report on Form 10-Q for the period ended November 26, 2011. KPMG, an independent registered public accounting firm, served as our auditors for the fiscal year ended August 27, 2011 (thousands of dollars).
|
| Fiscal Year Ended |
| 18 Weeks Ended |
| Fiscal Year Ended | |||
|
| December 29, 2012 |
| December 31, 2011 |
| August 27, 2011 | |||
|
|
|
|
|
|
| |||
Audit Fees |
| $ | 110 |
| $ | 160 |
| $ | 508 |
Audit Related Fees |
| - |
| - |
| - | |||
Tax Fees |
| 298 |
| 133 |
| - | |||
All Other Fees |
| - |
| - |
| 9 | |||
Total |
| $ | 408 |
| $ | 293 |
| $ | 517 |
|
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|
|
|
|
|
Audit Fees
Audit fees relate to the audits of our consolidated financial statements and the reviews of quarterly reports on Form 10-Q for fiscal year ended December 29, 2012 and the 18 weeks ended December 31, 2011. Audit fees for fiscal year ended August 27, 2011 include the audit of the consolidated financial statements of NBP filed on Form 10-K and the reviews of quarterly reports on Form 10-Q.
Audit-Related Fees
Audit-related fees relate to consultations on accounting related matters.
Tax Fees
Tax fees relate to tax compliance, tax advice and tax planning services.
All Other Fees
All other fees for fiscal year 2011 relate to workpaper reviews.
Our Audit Committee appoints our independent auditors. The Audit Committee is solely and directly responsible for the approval of the appointment, re-appointment, compensation and oversight of our independent auditors. The Audit Committee approves in advance all work to be performed by the independent auditors.
55 |
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Financial Statement Schedules
(1) The consolidated financial statements filed as part of this report at Item 8 are listed in the Index to the Consolidated Financial Statements on page F-1 contained herein.
(b) The following documents are filed or incorporated by reference as exhibits to this report:
2.1 | Agreement and Plan of Merger between U.S. Premium Beef, Ltd. and U.S. Premium Beef, Inc. (incorporated herein by reference to Appendix A to voting materials-prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
2.2 | Plan of Conversion adopted by U.S. Premium Beef, Inc. (incorporated herein by reference to Appendix B to the voting materials – prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
3.1 | Certificate of Formation of U.S. Premium Beef, LLC (incorporated herein by reference to Appendix C to the voting materials – prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
3.2(a) | Limited Liability Agreement of U.S. Premium Beef, LLC (incorporated herein by reference to Appendix D to the voting materials – prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
3.2(b) | Amended and Restated Limited Liability Company Agreement of U.S. Premium Beef, LLC, dated as of March 2, 2011 (incorporated herein by reference to Exhibit 3.1 to Form 8-K (File No. 333-115164) filed with the SEC on March 7, 2011). |
3.2(c) | Amended and Restated Limited Liability Company Agreement of U.S. Premium Beef, LLC, dated as of January 17, 2012 (incorporated herein by reference to Exhibit 3 to Form 8-K (File No. 333-115164) filed with the SEC on January 18, 2012). |
10.2 | Cattle Purchase and Sale Agreement dated December 30, 2011 between the Company and National Beef Packing Company, LLC (incorporated herein by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 2011). |
10.3(b) | Form of Uniform Cattle Delivery and Marketing Agreement – Odd Slots (incorporated by reference to Exhibit 10.3(b) to Form 10-K (File No. 333-115164) filed with the Commission on November 14, 2007). |
10.4(b)* | U.S. Premium Beef, LLC Phantom Unit Bonus Compensation Policy adopted September 28, 2010 (incorporated herein by reference to Exhibit 10.02 to Form 8-K (File No. 333-115164) filed with the SEC on October 4, 2010). |
10.5(a) | Master Loan Agreement between U.S. Premium Beef, LLC and CoBank, ACB, executed July 28, 2011 (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 333-115164) filed with the SEC on August 1, 2011). |
56 |
10.5(b) | Revolving Term Loan Supplement between U.S. Premium Beef, LLC and CoBank, ACB, executed July 28, 2011 (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 333-115164) filed with the SEC on August 1, 2011). |
10.5(c) | Pledge Agreement between U.S. Premium Beef, LLC and CoBank, ACB, executed July 28, 2011 (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 333-115164) filed with the SEC on August 1, 2011). |
10.5(d) | Security Agreement between U.S. Premium Beef, LLC and CoBank, ACB, executed July 28, 2011 (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 333-115164) filed with the SEC on August 1, 2011). |
10.5(e) | Pledge Agreement dated December 30, 2011 between the Company and National Beef Packing Company, LLC, with attached Consent and First Amendment to Pledge Agreement and Security Agreement dated December 30, 2011 between the Company and CoBank, ACB (incorporated herein by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 2011). |
10.6(a)* | CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef, LLC dated July 10, 2009 (incorporated by reference to Exhibit 10.4 to Form 10-Q (File No. 333-115164) filed with the SEC on July 10, 2009). |
10.6(b)* | First Amendment to CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef, LLC adopted September 28, 2010 (incorporated herein by reference to Exhibit 10.02 to Form 8-K (File No. 333-115164) filed with the SEC on October 4, 2010). |
10.6(c)* | Second Amendment to CEO Employment Agreement between U.S. Premium Beef, LLC and Steven D. Hunt (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 6, 2011). |
10.6(d)* | Third Amendment to CEO Employment Agreement between U.S. Premium Beef, LLC and Steven D. Hunt (incorporated by reference to Exhibit 10.6(d) to Form 10-KT (File No. 333-115164) filed with the SEC on May 24, 2012). |
10.6(e)* | CEO Employment Agreement between U.S. Premium Beef, LLC and Stanley D. Linville, executed on November 23, 2012 and effective as of January 28, 2013 (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 3, 2012). |
10.6(f)* | Consulting Agreement between U.S. Premium Beef, LLC and Steven D. Hunt executed on November 19, 2012 and effective as of January 28, 2013 (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 3, 2012). |
10.7(i)* | Unit Redemption Agreement dated as of June 2, 2010, among National Beef Packing Company, LLC, TKK Investments, LLC and TMKCo., LLC (incorporated by reference to Exhibit 2 to the Company’s Current Report on Form 8-K filed with the SEC on June 8, 2010). |
10.14(a) | Lease dated as of December 1, 2004 between City of Dodge City, Kansas and National Beef Packing Company, LLC securing $102,300,000 City of Dodge City, Kansas Industrial Development Revenue Bonds, Series 2004 (National Beef Packing Company, LLC Project) (incorporated by reference to Exhibit 10.2 to Form 8-K (File No. 333-111407) filed with the Commission on January 6, 2005). |
57 |
10.14(b) | Trust Indenture dated as of December 1, 2004 between City of Dodge City, Kansas and Commerce Bank, N.A., as trustee, securing $102,300,000 City of Dodge City, Kansas Industrial Development Revenue Bonds, Series 2004 (National Beef Packing Company, LLC Project) (incorporated by reference to Exhibit 10.3 to Form 8-K filed (File No. 333-111407) with the Commission on January 6, 2005). |
10.20 | FMI Grinding System Lease Agreement by and between Beef Products, Inc. and National Beef Packing Company, LLC (incorporated herein by reference to Exhibit 10.16 to Form 10-K (File No. 333-111407) filed with the SEC on November 24, 2008). |
10.21(a) | Amended and Restated Credit Agreement dated as of June 4, 2010 by and among National Beef Packing Company, LLC and certain agents, lenders and issuers (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 333-111407) filed with the SEC on June 6, 2010). |
10.21(b) | First Amendment, dated June 10, 2011, to National Beef Packing Company, LLC’s Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to Form 8-K (File No. 333-111407) filed with the SEC on June 16, 2011). |
10.21(c) | Limited Waiver and Second Amendment, dated July 7, 2011, to National Beef Packing Company, LLC’s Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to Form 10-Q (File No. 333-111407) for the quarter ended May 28, 2011, filed with the SEC on July 8, 2011). |
10.22 | Escrow Agreement dated December 30, 2011 between and among the Company, Leucadia National Corporation, NBPCo Holdings, LLC, and Marshall & Ilsley Trust Company, N.A. (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 2011). |
10.23 | Proxy Statement regarding proposed transaction sent by U.S. Premium Beef, LLC to it members on or about December 5, 2011(incorporated herein by reference to Exhibit 20.1 to Company’s Current Report on Form 8-K (File No. 333-111407) filed with the SEC on December 6, 2011). |
21.1 | Subsidiaries of National Beef Packing Company, LLC (incorporated herein by reference to Exhibit 21.1 to Form 10-K (File No. 333-111407) filed with the SEC on November 16, 2011). |
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
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 (filed herewith). |
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 (filed herewith). |
101.INS | XBRL Instance Document ** |
101.SCH | XBRL Taxonomy Extension Schema Document ** |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase ** |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document ** |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document ** |
58 |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document ** |
_____________
* Management contract or compensatory plan or arrangement.
** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. 61 |
Pursuant to the requirements of Section 13 or 15(d) 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.
U.S. Premium Beef, LLC |
By: /s/ Stanley D. Linville |
|
Name: Stanley D. Linville |
Chief Executive Officer |
(Principal Executive Officer) |
Date: March 27 , 2013
* * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
Signature | Title | Date | |||
/s/ Stanley D. Linville Stanley D. Linville |
Chief Executive Officer (Principal Executive Officer)
| March 27, 2013 | |||
/s/ Scott J. Miller Scott J. Miller
|
Chief Financial Officer (Principal Financial and Accounting Officer)
| March 27, 2013 | |||
/s/ Mark R. Gardiner Mark R. Gardiner
|
Chairman of the Board | March 27, 2013 | |||
/s/ Duane K. Ramsey Duane K. Ramsey
|
Vice Chairman of the Board | March 27, 2013 | |||
/s/ Joe M. Morgan Joe M. Morgan
|
Secretary of the Board | March 27, 2013 | |||
/s/ Jerry L. Bohn Jerry L. Bohn
|
Director | March 27, 2013 | |||
/s/ Douglas A. Laue Douglas A. Laue
|
Director | March 27, 2013 | |||
/s/ Rex W. McCloy Rex W. McCloy
|
Director | March 27, 2013 | |||
/s/ Jeff H Sternberger Jeff H. Sternberger
|
Director | March 27, 2013 | |||
60 |
U.S. PREMIUM BEEF, LLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page |
|
|
Audited Consolidated Financial Statements: |
|
|
|
Report of Independent Registered Public Accounting Firm – PricewaterhouseCoopers, LLP
Report of Independent Registered Public Accounting Firm – KPMG, LLP | F-2
F-3 |
|
|
Consolidated Balance Sheets at December 29, 2012, December 31, 2011, and August 27, 2011 | F-4 |
|
|
F-5 | |
|
|
F-6 | |
|
|
F-7 | |
|
|
F-8 | |
|
|
Notes to Consolidated Financial Statements
| F-9
F-37 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Owners
U.S. Premium Beef, LLC:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of U.S. Premium Beef, LLC and its subsidiaries at December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for the year ended December 29, 2012 and for the 18 week period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Kansas City, MO
March 27, 2013
F-2 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Owners
U.S. Premium Beef, LLC:
We have audited the accompanying consolidated balance sheet of U.S. Premium Beef, LLC and subsidiaries (the Company) as of August 27, 2011, and the related consolidated statements of operations, comprehensive income, capital shares and equities, and cash flows for each of the years in the two‑year period ended August 27, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Premium Beef, LLC and subsidiaries as of August 27, 2011, and the results of their operations and their cash flows for each of the years in the two‑year period ended August 27, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG, LLP
Kansas City, Missouri
November 16, 2011,
Except for Note 2, Earnings Per Unit, which is as of May 24, 2012
F-3 |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||||||
(thousands of dollars, except unit information) | |||||||||||
|
|
|
|
|
|
|
|
| |||
Assets |
| December 29, 2012 |
| December 31, 2011 |
| August 27, 2011 | |||||
Current assets: |
|
|
|
|
|
| |||||
| Cash and cash equivalents |
| $ | 62,683 |
| $ | 642,670 |
| $ | 78,567 | |
| Accounts receivable, less allowance for returns and doubtful |
|
|
|
|
|
| ||||
|
| accounts of $0, $0, and $3,368, respectively |
| - |
| - |
| 200,254 | |||
| Due from affiliates |
| 657 |
| 2,333 |
| 5,868 | ||||
| Other receivables |
| 78 |
| - |
| 7,448 | ||||
| Inventories |
| - |
| - |
| 276,783 | ||||
| Other current assets |
| - |
| - |
| 25,975 | ||||
|
| Total current assets |
| 63,418 |
| 645,003 |
| 594,895 | |||
Property, plant, and equipment, at cost |
| 250 |
| 241 |
| 608,261 | |||||
| Less accumulated depreciation |
| 238 |
| 231 |
| 271,877 | ||||
|
| Net property, plant, and equipment |
| 12 |
| 10 |
| 336,384 | |||
Goodwill |
| - |
| - |
| 86,251 | |||||
Other intangible assets, net of accumulated amortization of $0, $0, and $18,230, |
|
|
|
|
|
| |||||
| respectively |
| - |
| - |
| 56,520 | ||||
Investment in National Beef Packing Company, LLC |
| 165,401 |
| 165,696 |
| - | |||||
Restricted cash |
| 36,943 |
| 36,943 |
| - | |||||
Other assets |
| 1,664 |
| 418 |
| 8,119 | |||||
|
| Total assets |
| $ | 267,438 |
| $ | 848,070 |
| $ | 1,082,169 |
Liabilities and Capital Shares and Equities |
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
| |||||
| Current installments of long-term debt |
| $ | - |
| $ | - |
| $ | 38,486 | |
| Cattle purchases payable |
| - |
| - |
| 73,407 | ||||
| Accounts payable - trade |
| 42 |
| 44 |
| 81,245 | ||||
| Due to affiliates |
| 446 |
| 34 |
| 486 | ||||
| Accrued compensation and benefits |
| 4,654 |
| 2,559 |
| 83,124 | ||||
| Accrued insurance |
| - |
| - |
| 17,271 | ||||
| Other accrued expenses and liabilities |
| 197 |
| 9,831 |
| 19,946 | ||||
| Patronage notices payable |
| 115 |
| 42,160 |
| - | ||||
| Distributions payable |
| 172 |
| 508,936 |
| 8,199 | ||||
|
| Total current liabilities |
| 5,626 |
| 563,564 |
| 322,164 | |||
Long-term liabilities: |
|
|
|
|
|
| |||||
| Long-term debt, excluding current installments |
| - |
| - |
| 321,926 | ||||
| Other liabilities |
| 7,266 |
| 9,179 |
| 1,954 | ||||
|
| Total long-term liabilities |
| 7,266 |
| 9,179 |
| 323,880 | |||
|
| Total liabilities |
| 12,892 |
| 572,743 |
| 646,044 | |||
| Non-controlling interest in National Beef Packing Company, LLC |
| - |
| - |
| 351,071 | ||||
|
|
|
|
|
|
|
|
| |||
Commitments and contingencies |
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
| |||
Capital shares and equities: |
|
|
|
|
|
| |||||
Members' capital, 735,385 , 755,385 authorized, issued and outstanding |
| 254,546 |
| 275,327 |
| 39,768 | |||||
| Patronage notices |
| - |
| - |
| 42,130 | ||||
| Accumulated other comprehensive income |
| - |
| - |
| 68 | ||||
|
| Total capital shares and equities attributable to USPB |
| 254,546 |
| 275,327 |
| 81,966 | |||
| Non-controlling interest in Kansas City Steak Company, LLC |
| - |
| - |
| 3,088 | ||||
|
| Total capital shares and equities |
| 254,546 |
| 275,327 |
| 85,054 | |||
|
| Total liabilities, non-controlling interest in NBP and capital shares and equities |
| $ | 267,438 |
| $ | 848,070 |
| $ | 1,082,169 |
|
|
|
|
|
|
|
|
| |||
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
F-4
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||||||||||
(thousands of dollars, except unit and per unit data) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
| 52 weeks ended |
| 18 weeks ended |
| 52 weeks ended | ||||||
|
|
|
|
| December 29, 2012 |
| December 31, 2011 |
| August 27, 2011 |
| August 28, 2010 | ||||
Net sales |
| $ | - |
| $ | 2,466,256 |
| $ | 6,849,467 |
| $ | 5,807,929 | |||
Costs and expenses: |
|
|
|
|
|
|
|
| |||||||
| Cost of sales |
| - |
| 2,412,144 |
| 6,473,292 |
| 5,438,033 | ||||||
| Selling, general, and administrative expenses |
| 5,727 |
| 31,969 |
| 60,669 |
| 55,461 | ||||||
| Depreciation and amortization |
| 7 |
| 15,378 |
| 54,590 |
| 53,012 | ||||||
|
| Total costs and expenses |
| 5,734 |
| 2,459,491 |
| 6,588,551 |
| 5,546,506 | |||||
|
|
| Operating (loss) income |
| (5,734) |
| 6,765 |
| 260,916 |
| 261,423 | ||||
Other income (expense): |
|
|
|
|
|
|
|
| |||||||
| Interest income |
| 54 |
| 10 |
| 33 |
| 44 | ||||||
| Interest expense |
| (253) |
| (3,261) |
| (11,746) |
| (14,854) | ||||||
| Equity in earnings of National Beef Packing Company, LLC |
| 8,611 |
|
|
|
|
|
| ||||||
| Gain on deconsolidation and sale of majority of ownership |
|
|
|
|
|
|
|
| ||||||
|
| interest in National Beef Packing Company, LLC |
| - |
| 777,656 |
| - |
| - | |||||
| Other, net |
| 153 |
| 1,486 |
| 279 |
| (7,310) | ||||||
|
| Total other income (expense) |
| 8,565 |
| 775,891 |
| (11,434) |
| (22,120) | |||||
|
|
| Income before taxes |
| 2,831 |
| 782,656 |
| 249,482 |
| 239,303 | ||||
Income tax expense |
| (107) |
| (718) |
| (2,590) |
| (939) | |||||||
|
|
| Net income |
| 2,724 |
| 781,938 |
| 246,892 |
| 238,364 | ||||
Less: Net income attributable to non-controlling interest in: |
|
|
|
|
|
|
|
| |||||||
| Kansas City Steak Company, LLC |
| - |
| (454) |
| (551) |
| (963) | ||||||
| National Beef Packing Company, LLC |
| - |
| (5,420) |
| (78,747) |
| (76,450) | ||||||
Net income attributable to U.S. Premium Beef, LLC |
| $ | 2,724 |
| $ | 776,064 |
| $ | 167,594 |
| $ | 160,951 | |||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per unit: |
|
|
|
|
|
|
|
| |||||||
| Basic |
|
|
|
|
|
|
|
| ||||||
|
| Class A units |
| $ | 0.37 |
| $ | 105.46 |
| $ | 21.80 |
| $ | 29.24 | |
|
| Class B units |
| $ | 3.25 |
| $ | 924.04 |
| $ | 190.98 |
| $ | 174.24 | |
| Diluted |
|
|
|
|
|
|
|
| ||||||
|
| Class A units |
| $ | 0.36 |
| $ | 103.68 |
| $ | 21.44 |
| $ | 28.78 | |
|
| Class B units |
| $ | 3.25 |
| $ | 924.04 |
| $ | 190.98 |
| $ | 174.24 | |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Outstanding weighted-average Class A and Class B units: |
|
|
|
|
|
|
|
| |||||||
| Basic |
|
|
|
|
|
|
|
| ||||||
|
| Class A units |
| 735,385 |
| 735,385 |
| 735,385 |
| 735,385 | |||||
|
| Class B units |
| 755,385 |
| 755,385 |
| 755,385 |
| 755,385 | |||||
| Diluted |
|
|
|
|
|
|
|
| ||||||
|
| Class A units |
| 747,836 |
| 748,055 |
| 747,600 |
| 747,334 | |||||
|
| Class B units |
| 755,385 |
| 755,385 |
| 755,385 |
| 755,385 | |||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
F-5
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||||||||||
(thousands of dollars) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
| 52 weeks ended |
| 18 weeks ended |
| 52 weeks ended | ||||||
|
|
|
|
| December 29, 2012 |
| December 31, 2011 |
| August 27, 2011 |
| August 28, 2010 | ||||
Net income |
|
| $ | 2,724 |
| $ | 781,938 |
| $ | 246,892 |
| $ | 238,364 | ||
Other comprehensive income (expense): |
|
|
|
|
|
|
|
|
| ||||||
| Foreign currency translation adjustments |
|
| - |
| (30) |
| 45 |
| 24 | |||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Comprehensive income |
|
| 2,724 |
| 781,908 |
| 246,937 |
| 238,388 | ||||
Comprehensive income attributable to non-controlling interest in: |
|
|
|
|
|
|
| ||||||||
| Kansas City Steak Company, LLC |
|
| - |
| (454) |
| (551) |
| (963) | |||||
| National Beef Packing Company, LLC |
|
| - |
| (5,420) |
| (78,747) |
| (76,450) | |||||
Comprehensive income attributable to USPB |
|
| $ | 2,724 |
| $ | 776,034 |
| $ | 167,639 |
| $ | 160,975 | ||
|
|
|
|
|
|
|
|
|
|
|
| ||||
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-6
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||||||||||||
(thousands of dollars) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
| Non-controlling |
|
| ||||||
|
|
|
|
|
|
| Accumulated |
| interest in |
|
| ||||||
|
|
|
|
|
|
| other |
| Kansas City |
| Total capital | ||||||
|
|
| Members' |
| Patronage |
| comprehensive |
| Steak |
| shares and | ||||||
|
|
| capital |
| notices |
| (loss) income |
| Company, LLC |
| equities | ||||||
Balance at August 29, 2009 |
| $ | 111,085 |
| $ | 48,682 |
| $ | (1) |
|
| $ | 2,367 |
| $ | 162,133 | |
Foreign currency translation adjustment |
| - |
| - |
| 24 |
|
| - |
| 24 | ||||||
Allocation of net income for the year |
|
|
|
|
|
|
|
|
|
|
| ||||||
| ended August 28, 2010 |
| 160,951 |
| - |
| - |
|
| 963 |
| 161,914 | |||||
Adjustment to fair value of non-controlling interest | (82,710) |
| - |
| - |
|
| - |
| (82,710) | |||||||
Distributions to non-controlling interest in Kansas City |
|
|
|
|
|
|
|
|
|
| |||||||
| Steak Company, LLC |
| - |
| - |
| - |
|
| (568) |
| (568) | |||||
Partner distributions |
| (73,874) |
| - |
| - |
|
| - |
| (73,874) | ||||||
Balance at August 28, 2010 |
| $ | 115,452 |
| $ | 48,682 |
| $ | 23 |
|
| $ | 2,762 |
| $ | 166,919 | |
Foreign currency translation adjustment |
| - |
| - |
| 45 |
|
| - |
| 45 | ||||||
Allocation of net income for the year |
|
|
|
|
|
|
|
|
|
|
| ||||||
| ended August 27, 2011 |
| 167,594 |
| - |
| - |
|
| 551 |
| 168,145 | |||||
Adjustment to fair value of non-controlling interest | (68,718) |
| - |
| - |
|
| - |
| (68,718) | |||||||
Redemption of patronage notices |
| - |
| (6,552) |
| - |
|
| - |
| (6,552) | ||||||
Distributions to non-controlling interest in Kansas City |
|
|
|
|
|
|
|
|
|
| |||||||
| Steak Company, LLC |
| - |
| - |
| - |
|
| (225) |
| (225) | |||||
Partner distributions |
| (174,560) |
| - |
| - |
|
| - |
| (174,560) | ||||||
Balance at August 27, 2011 |
| $ | 39,768 |
| $ | 42,130 |
| $ | 68 |
|
| $ | 3,088 |
| $ | 85,054 | |
Adjustment to reflect prior period corrections |
|
| (73) |
|
|
|
|
|
|
|
|
| (73) | ||||
Foreign currency translation adjustment |
|
| - |
|
| - |
|
| (30) |
|
|
| - |
|
| (30) | |
Allocation of net income for the 18 week period |
|
|
|
|
|
|
|
|
|
| |||||||
| ended December 31, 2011 |
|
| 776,064 |
|
| - |
|
| (38) |
|
|
| (3,088) |
|
| 772,938 |
Partner distributions |
|
| (530,273) |
|
| - |
|
| - |
|
|
| - |
|
| (530,273) | |
Redemption of patronage notices |
|
| - |
|
| (42,130) |
|
| - |
|
|
| - |
|
| (42,130) | |
Adjustment to fair value of non-controlling interest |
| (10,159) |
|
| - |
|
| - |
|
|
| - |
|
| (10,159) | ||
Balance at December 31, 2011 |
| $ | 275,327 |
| $ | - |
| $ | - |
|
| $ | - |
| $ | 275,327 | |
Allocation of net income for the year |
|
|
|
|
|
|
|
|
|
|
| ||||||
| ended December 29, 2012 |
|
| 2,724 |
| - |
| - |
|
| - |
| 2,724 | ||||
Partner distributions |
| (23,505) |
| - |
| - |
|
| - |
| (23,505) | ||||||
Balance at December 29, 2012 |
| $ | 254,546 |
| $ | - |
| $ | - |
|
| $ | - |
| $ | 254,546 | |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||||||||||||
(thousands of dollars) | |||||||||||||||||
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
| 52 weeks ended |
| 18 weeks ended |
| 52 weeks ended | |||||||
|
|
|
|
|
| December 29, 2012 |
| December 31, 2011 |
| August 27, 2011 |
| August 28, 2010 | |||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
| |||||||||
| Net income |
| $ | 2,724 |
| $ | 781,938 |
| $ | 246,892 |
| $ | 238,364 | ||||
| Adjustments to reconcile net income to net cash provided by operating |
|
|
|
|
|
|
|
| ||||||||
|
| activities: |
|
|
|
|
|
|
|
| |||||||
|
|
| Depreciation and amortization |
| 7 |
| 15,378 |
| 54,590 |
| 53,012 | ||||||
|
|
| Gain on sale of majority interest in National Beef Packing Co., LLC |
| - |
| (777,656) |
| - |
| - | ||||||
|
|
| Equity in earnings of National Beef |
| (8,611) |
| - |
| - |
| - | ||||||
|
|
| Distribution from National Beef |
| 8,906 |
|
|
|
|
|
| ||||||
|
|
| Gain on disposal of property, plant, and equipment |
| - |
| (646) |
| (1,557) |
| (75) | ||||||
|
|
| Amortization of debt issuance costs |
| - |
| 440 |
| 1,440 |
| 1,516 | ||||||
|
|
| Write-off of debt issuance costs |
| - |
| - |
| 436 |
| 496 | ||||||
|
|
| Changes in assets and liabilities (net of acquisition): |
|
|
|
|
|
|
|
| ||||||
|
|
|
| Accounts receivable |
| - |
| 21,802 |
| (18,017) |
| (9,816) | |||||
|
|
|
| Due from affiliates |
| 1,676 |
| (980) |
| (777) |
| (501) | |||||
|
|
|
| Other receivables |
| (78) |
| (1,788) |
| (49) |
| (234) | |||||
|
|
|
| Inventories |
| - |
| (3,716) |
| (43,840) |
| (57,643) | |||||
|
|
|
| Other assets |
| (1,246) |
| (900) |
| 19,960 |
| (30,625) | |||||
|
|
|
| Cattle purchases payable |
| - |
| 14,697 |
| 3,639 |
| 4,425 | |||||
|
|
|
| Accounts payable |
| (2) |
| 2,529 |
| 9,462 |
| 463 | |||||
|
|
|
| Due to affiliates |
| 412 |
| 1,130 |
| (254) |
| (312) | |||||
|
|
|
| Accrued compensation and benefits |
| 182 |
| (41,798) |
| 650 |
| 25,921 | |||||
|
|
|
| Accrued insurance |
| - |
| 2,662 |
| 2,223 |
| (1,296) | |||||
|
|
|
| Other accrued expenses and liabilities |
| (815) |
| (8,698) |
| (8,290) |
| 12,666 | |||||
|
|
|
|
| Net cash provided by operating activities |
| 3,155 |
| 4,394 |
| 266,508 |
| 236,361 | ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
| |||||||||
| Capital expenditures, including interest capitalized |
| (9) |
| (18,548) |
| (68,345) |
| (49,536) | ||||||||
| Proceeds from sale of majority interest in National Beef Packing Co., LLC, net |
| - |
| 593,584 |
| - |
| - | ||||||||
| Proceeds from sale of property, plant, and equipment |
| - |
| - |
| 5,118 |
| 1,399 | ||||||||
|
|
|
|
| Net cash provided by (used in) investing activities |
| (9) |
| 575,036 |
| (63,227) |
| (48,137) | ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
| |||||||||
| Net (payments) receipts under revolving credit lines |
| - |
| 16,156 |
| (27,000) |
| (7,168) | ||||||||
| Borrowings under term note payable |
| - |
| - |
| 175,000 |
| 275,000 | ||||||||
| Repayments of other indebtedness/capital leases |
| - |
| (539) |
| (1,310) |
| (6,430) | ||||||||
| Purchase and cancellation of Senior Notes |
| - |
| - |
| - |
| (66,855) | ||||||||
| Payments of patronage notices |
| (21,868) |
| (20,262) |
| (6,552) |
| - | ||||||||
| Payments of notes payable and fees |
| - |
| (18,500) |
| (33,780) |
| (252,933) | ||||||||
| Cash paid for financing costs |
| - |
| (733) |
| (1,261) |
| (5,194) | ||||||||
| Change in overdraft balances |
| (20,052) |
| 31,865 |
| (2,051) |
| 19,817 | ||||||||
| Member capital redeemed |
| - |
| - |
| - |
| (8,000) | ||||||||
| Distributions to non-controlling interests in National Beef Packing Company, LLC |
| - |
| (10,719) |
| (88,684) |
| (46,025) | ||||||||
| Partnership distributions and redemptions |
| (541,213) |
| (12,566) |
| (174,560) |
| (73,874) | ||||||||
|
|
|
|
| Net cash used in financing activities |
| (583,133) |
| (15,298) |
| (160,198) |
| (171,662) | ||||
Effect of exchange rate changes on cash |
| - |
| (29) |
| 45 |
| 24 | |||||||||
|
|
|
|
| Net (decrease) increase in cash |
| (579,987) |
| 564,103 |
| 43,128 |
| 16,586 | ||||
Cash and cash equivalents at beginning of period |
| 642,670 |
| 78,567 |
| 35,439 |
| 18,853 | |||||||||
Cash and cash equivalents at end of period |
| $ | 62,683 |
| $ | 642,670 |
| $ | 78,567 |
| $ | 35,439 | |||||
Supplemental cash disclosures: |
|
|
|
|
|
|
|
| |||||||||
| Cash paid during the period for interest |
| $ | 59 |
| $ | 3,203 |
| $ | 11,120 |
| $ | 13,934 | ||||
| Cash paid during the period for taxes, net |
| $ | 107 |
| $ | 341 |
| $ | 800 |
| $ | 814 | ||||
Supplemental noncash disclosures of investing and financing activities: |
|
|
|
|
|
|
|
| |||||||||
| Assets acquired through capital lease |
| $ | - |
| $ | - |
| $ | 187 |
| $ | 139 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
|
|
F-8
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Due to the transaction with Leucadia, which is described further in Note 1 below, USPB’s financial statements were not consolidated with NBP’s for the fifty-two week period ended December 29, 2012. As NBP’s results are no longer consolidated, some of the Notes below do not reflect fiscal year 2012 activity. The information in those Notes that do not reflect fiscal year 2012 activity relates solely to NBP. Our financial results for the 18 week period ended December 31, 2011, are referred to as the “18 week period” or “transition period” in the Notes.
(1) Description of Business
U.S. Premium Beef (USPB or the Company) was formed as a closed marketing cooperative on July 1, 1996, and was then known as U.S. Premium Beef, Ltd. Its mission is to increase the quality of beef and long‑term profitability of cattle producers by creating a fully integrated producer-owned beef processing system that is a global supplier of high quality, value-added beef products responsive to consumer desires.
On December 1, 1997, USPB became operational by acquiring 25.4966% of Farmland National Beef Packing Co., L.P. (FNB), a partnership owned by USPB and Farmland Industries, Inc. (Farmland). USPB acquired an additional 3.29% partnership interest in February 1998, bringing its ownership to 28.7866% of FNB. Farmland owned the remaining 71.2134%.
On May 31, 2002, Farmland and four of its subsidiaries filed voluntary petitions to reorganize under Chapter 11 of the United States Bankruptcy Code. FNB was not a party of these filings. Provisions of FNB’s Operating Agreement and its financing agreement restricted partners’ access to FNB’s assets. In the fourth quarter of fiscal year 2003, USPB acquired a controlling interest in the former FNB, now National Beef Packing Company, LLC (NBP).
On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the merger of the cooperative into a wholly-owned subsidiary, U.S. Premium Beef, Inc., a Delaware corporation. The merger was effective on August 29, 2004. The Delaware corporation then, in a statutory conversion authorized under Delaware law, converted into a Delaware limited liability company (see Note 13). Following the effective date of the merger and the statutory conversion, the business of the cooperative continues in the limited liability company form of business organization.
On December 5, 2011, USPB entered into a Membership Interest Purchase Agreement with Leucadia National Corporation (Leucadia), NBP, NBPCo Holdings, LLC (NBPCo), TKK Investments, LLC (TKK), TMKCo, LLC (TMKCo), and TMK Holdings, LLC (TMK Holdings) (the “Purchase Agreement”). The Purchase Agreement provided for (i) Leucadia to purchase 56.2415% of the membership interests in NBP (the “National Interests”) from the Company for $646,777,342 and 19.8775% of the National Interests from NBPCo for $228,591,527; (ii) pursuant to pre-existing put rights, NBP will purchase from TKK and TMKCo all the National Interests owned by TKK and TMKCo for $75,946,955; and (iii) Leucadia to sell to TMK Holdings 0.6522% of the National Interests for $7,500,000 (the “Leucadia Transaction”). Upon consummation of the Leucadia Transaction, the parties owned the following percentage membership interests in NBP: Leucadia 78.9477%; USPB 15.0729%; NBPCo 5.3272%; and TMK Holdings 0.6522%.
In connection with its approval of the Purchase Agreement, the Company’s Board of Directors adopted a change to the Company’s fiscal year, which became effective upon closing. The Leucadia Transaction closed on December 30, 2011 and the Company’s fiscal year-end changed from the last Saturday in August to the last Saturday in December. Beginning with fiscal year 2012 the Company will file annual reports for each 52 week or 53 week period ended on the last Saturday in December.
F-9
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NBP and its subsidiaries sell meat products to customers in the food service, international, further processor, and retail distribution channels. NBP also produces and sells by‑products that are derived from its meat processing operations and variety meats to customers in various industries.
NBP operates beef slaughter and fabrication facilities in Liberal and Dodge City, Kansas, and Brawley, California, case-ready beef processing facilities in Hummels Wharf, Pennsylvania and Moultrie, Georgia and holds a 75% interest in Kansas City Steak Company, LLC (Kansas City Steak), a portion control processing facility in Kansas City, Kansas. National Carriers, Inc. (National Carriers), NBP’s wholly-owned subsidiary located in Liberal, Kansas, provides trucking services to NBP and third parties and National Elite Transportation, LLC (National Elite), a wholly-owned subsidiary located in Springdale, Arkansas, provides third-party logistics services to the transportation industry. National Beef Leathers, LLC (NBL), a wholly-owned subsidiary located in St. Joseph, Missouri, provides wet blue hide tanning services to NBP.
On December 30, 2011, USPB entered into a Cattle Purchase and Sale Agreement with NBP. Per the terms and conditions of the Agreement, NBP shall purchase through USPB from its owners and associates, and USPB shall cause to be sold and delivered from its owners and associates to NBP, on an annual basis, a base amount of 735,385 (subject to adjustment) head of cattle per year. In fiscal year 2012, USPB and NBP agreed to increase the number of cattle that USPB’s owners and associates could deliver during USPB’s delivery year by up to 10%. During fiscal year 2012, USPB and its owners and associates provided approximately 21% of NBP’s total cattle requirements. The purchase price for the cattle is determined by pricing grids, which shall at all times be no less favorable than any other pricing grid being utilized by NBP and the pricing grid shall be competitive with NBP’s major competitors for the purchase of cattle.
USPB sources all of its cattle requirements from its unitholders and associates. Unitholders enter into Uniform Cattle Delivery and Marketing Agreements and are obligated to deliver a designated number of cattle to USPB during the delivery year. The agreements carry a term of five years and have an evergreen renewal provision. Both agreements provide for minimum quality standards, delivery variances, and termination provisions, as defined.
Capital Structure of NBP
a) Effective December 30, 2011
The Leucadia Transaction closed on December 30, 2011. The parties own the following percentage membership interests in NBP: Leucadia 78.9477%; USPB 15.0729%; NBPCo 5.3272%; and TMK Holdings 0.6522%. In conjunction with the transaction, NBP amended its LLC agreement, which resulted in the creation of one class of equity interests.
In connection with entering into the Purchase Agreement, described further above, the Company has the right to offer all or any portion of its units for sale to Leucadia.
b) August 28, 2011 through December 29, 2011 and Fiscal Years 2011, and 2010
Class A Interests. Class A interests were non-voting and were entitled to a priority distribution of 5% per year on the face amount of the Class A interests, payable not later than 30 days after the close of NBP’s tax year quarters in cash to the extent permitted by the NBP’s senior lenders and the indenture governing the senior notes. The face amount of the Class A interests, together with all unpaid priority distributions, were redeemed as a part of the Leucadia Transaction.
Class A1 Interests. Class A1 interests were non-voting and were entitled to a priority distribution of 7% per year on the face amount of the Class A1 interests, payable with payment in kind Class A1 interests in lieu of cash if NBP’s EBITDA did not meet certain tests. For purposes of determining Class B ownership for liquidation or redemption, the Class A1 interests were deemed to be converted to Class B interests as a part of the Leucadia Transaction.
F-10
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Class B Interests. Class B interests were entitled to receive all assets available for distribution upon liquidation after payment of the Class A and Class A1 face amounts together with all unpaid Class A and Class A1 priority distributions. Class B interests were allocated all items of income and loss earned or incurred by NBP after allocation of income attributable to the Class A and Class A1 priority distributions. In addition, the holders of Class B interests were entitled to receive quarterly distributions to make tax payments which consist of 48% of NBP’s remaining estimated taxable net income after the Class A and Class A1 priority distributions were made. The voting power of the members (voting either directly or by action of the board of managers designated by the members) was determined based upon the number of Class B interests held.
USPB held approximately 69.3% of the Class B interests, as well as Class A and Class A1 interests with an aggregate face amount of approximately $150.5 million, NBPCo Holdings owned approximately 24.8% of the Class B interests, as well as Class A and Class A1 interests with an aggregate face amount of approximately $51.2 million, and affiliates of Timothy M. Klein owned approximately 5.9% of the Class B interests, as well as Class A interests with an aggregate face amount of approximately $2.3 million.
Non-controlling interests in NBP on USPB’s balance sheet represents Class A, A1 and B interests held by NBPCo Holding and Class A and Class B interests held by affiliates of Timothy M. Klein (see Note 14).
(2) Basis of Presentation and Accounting Policies
Basis of Presentation and Consolidation
As a result of the Leucadia Transaction, which closed December 30, 2011, USPB’s investment in NBP is accounted for using the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operational control. As such, the Company’s balance sheet as of December 29, 2012 and December 31, 2011 were not consolidated with NBP. In fiscal year 2012, the Company’s statement of operations, statement of cashflows, statement of comprehensive income, and statement of capital shares and equities were not consolidated with NBP.
In all periods prior to the closing of the Leucadia Transaction, NBP’s financial results were consolidated with USPB’s. As such, the Company’s balance sheet as of August 27, 2011 was consolidated with its then majority owned subsidiary, NBP, and its direct and indirect subsidiaries. In the transition period and fiscal years 2011 and 2010, the Company’s consolidated financial statements included the accounts of USPB and NBP, and its direct and indirect subsidiaries. All significant intercompany accounts and transactions were eliminated in consolidation.
Fiscal Year
With the closing of the Leucadia Transaction on December 30, 2011, the Company’s fiscal year-end changed from the last Saturday in August to the last Saturday in December. Beginning with fiscal year 2012, the Company will file annual reports for each 52 week or 53 week period ended on the last Saturday in December.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
F-11
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 29, 2012, December 31, 2011, and August 27, 2011, the Company had cash and cash equivalents of $62.7 million, $642.7 million, and $78.6 million, respectively.
Restricted Cash
When the Leucadia Transaction closed on December 30, 2011, approximately $36.9 million of the Company’s proceeds were deposited in an escrow account to satisfy potential indemnification claims from Leucadia under the Purchase Agreement. If no indemnification claims arise during the first year after the closing of the Leucadia Transaction, 40% of those funds will be distributed to USPB. If no indemnification claims arise during the second year after the closing of the Leucadia Transaction, the remaining funds will be distributed to USPB. USPB received 40%, or approximately $14.8 million, in January 2013; however, those funds remain subject to potential indemnification claims that may arise during the second year after the closing of the Leucadia Transaction.
Allowance for Returns and Doubtful Accounts
The allowance for returns and doubtful accounts is NBP’s best estimate of the amount of probable returns and credit losses in NBP’s existing accounts receivable. NBP determines these allowances based on historical experience, customer conditions and management’s judgments. Management considers factors such as changes in the economy and industry. Specific accounts are reviewed individually for collectability.
The following table represents the rollforward of the allowance for returns and doubtful accounts for fiscal year 2012, the 18 weeks ended December 31, 2011 and fiscal year ended August 27, 2011 (thousands of dollars).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Beginning |
|
|
|
|
| Fair Value |
| Ending | |||||
Period Ending |
| Balance |
| Provision |
| Charge Off |
| Adjustment |
| Balance | |||||
|
|
|
|
|
|
|
|
|
|
| |||||
Fiscal Year Ended December 29, 2012 |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
18 Weeks Ended December 31, 2011 |
| $ | (3,368) |
| $ | (2,252) |
| $ | 2,441 |
| $ | (3,179) |
| $ | - |
Fiscal Year Ended August 27, 2011 |
| $ | (2,891) |
| $ | (7,584) |
| $ | 7,107 |
| $ | - |
| $ | (3,368) |
|
|
|
|
|
|
|
|
|
|
|
Inventories
NBP’s inventories consist primarily of meat products and supplies. Product inventories are considered commodities and are recorded based on quoted commodity prices, which approximate net realizable value. Supply and other inventories are valued on the basis of first-in, first-out, specific or average cost methods. Product inventories are relieved from inventory utilizing the first-in, first-out method.
Inventories at December 29, 2012, December 31, 2011, and August 27, 2011 consisted of the following (thousands of dollars):
F-12
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
| December 29, |
| December 31, |
| August 27, | |||
|
|
|
| 2012 |
| 2011 |
| 2011 | |||
Product inventories: |
|
|
|
|
|
| |||||
| Dressed and boxed meat products |
| $ | - |
| $ | - |
| $ | 173,853 | |
| Beef by-products |
| - |
| - |
| 57,009 | ||||
Supplies and other |
| - |
| - |
| 45,921 | |||||
| Total Inventory |
| $ | - |
| $ | - |
| $ | 276,783 |
Investment in National Beef Packing Company, LLC
As a result of the Leucadia Transaction, beginning on December 31, 2011, USPB’s investment in NBP accounted for using the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operational control.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Property, plant, and equipment are depreciated principally on a straight-line basis over the estimated useful life (based upon original acquisition date) of the individual asset by major asset class as follows:
|
|
|
|
Buildings and improvements |
| 15 to 25 years | |
Machinery and equipment |
| 2 to 15 years | |
Furniture and fixtures |
| 3 to 5 years | |
Trailers and automotive equipment | 2 to 4 years | ||
|
|
|
|
Upon disposition of these assets, any resulting gain or loss is included in other, net. Major repairs and maintenance costs that extend the useful life of the related assets are capitalized. Normal repairs and maintenance costs are charged to operations.
NBP capitalizes the cost of interest on borrowed funds, which are used to finance the construction of certain property, plant, and equipment. Such capitalized interest costs are charged to the property, plant, and equipment accounts and are amortized through depreciation charges over the estimated useful lives of the assets.
NBP reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is assessed based on estimated undiscounted future cash flows. Impairment, if any, is recognized based on fair value of the assets. Assets to be disposed of are reported at the lower of cost or fair value less costs to sell, and are no longer depreciated.
A summary of cost and accumulated depreciation for property, plant, and equipment as of December 29, 2012, December 31, 2011, and August 27, 2011 follows (thousands of dollars):
|
|
| December 29, |
| December 31, |
| August 27, | |||
|
|
| 2012 |
| 2011 |
| 2011 | |||
Land and improvements |
| $ | - |
| $ | - |
| $ | 35,268 | |
Building and improvements |
| - |
| - |
| 140,036 | ||||
Machinery and equipment |
| 37 |
| 37 |
| 378,254 | ||||
Furniture and fixtures |
| 126 |
| 117 |
| 11,801 | ||||
Trailers and automotive equipment |
| 87 |
| 87 |
| 3,688 | ||||
Construction in process |
| - |
| - |
| 39,214 | ||||
| Total property, plant, and equipment, at cost |
| 250 |
| 241 |
| 608,261 | |||
Accumulated depreciation |
| 238 |
| 231 |
| 271,877 | ||||
| Property, plant, and equipment, net |
| $ | 12 |
| $ | 10 |
| $ | 336,384 |
F-13
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Depreciation expense was $0.0 million, $16.5 million, $50.9 million and $47.4 million for fiscal year ended December 29, 2012, transition period ended December 31, 2011, and fiscal years ended August 27, 2011 and August 28, 2010.
Debt Issuance Costs
On June 4, 2010, NBP’s Credit Facility was amended and restated to: (1) increase the borrowings under the Credit Facility by providing for a term loan facility of up to $375 million and a revolving line of credit of up to $250 million; (2) reduce the applicable margin on the rates of interest of the term loan and revolving line of credit; (3) revise the payment schedule of the term loan; (4) extend the maturity date of the Credit Facility to June 4, 2015; (5) remove the limitations on capital expenditures; (6) add new financial covenants regarding adjusted net worth and a fixed charge coverage ratio; and (7) add two wholly owned subsidiaries, National Beef California, LLP and National Carriers, Inc., as loan parties and guarantors. The related financing charges, of approximately $4.2 million, will be amortized over the life of the loan.
During fiscal year 2010, NBP repurchased and cancelled the remaining approximately $66.9 million of its senior notes. Associated with the repurchase and cancellation of these senior notes, the remaining unamortized loan costs of approximately $0.4 million were expensed in other, net in the consolidated statement of operations during the fiscal year ended August 28, 2010.
On June 10, 2011, NBP’s Credit Facility was amended and restated to: (1) reduce the applicable margin by up to 0.75% for “LIBOR Rate” advances and “Base Rate” advances, (2) revise the “fixed charge coverage ratio” covenant provisions to provide the Company credit of up to $30 million for maintaining net asset borrowing base levels that exceed the lenders' aggregate credit commitments under the Credit Facility and (3) extend the maturity date of the Credit Facility to June 4, 2016. The related financing charges of approximately $0.8 million will be amortized over the life of the loan.
Amortization of $1.4 million, and $1.5 million was charged to interest expense during the fiscal years 2011 and 2010, respectively, related to these costs. NBP had unamortized costs of $5.2 million included in other assets on the consolidated balance sheet for fiscal year 2011.
Goodwill and Other Intangible Assets
ASC 350, Intangibles - Goodwill and Other, provides that goodwill and other intangible assets with indefinite lives shall not be amortized but shall be tested for impairment on an annual basis. Identifiable intangible assets with definite lives are amortized over their estimated useful lives. The Company evaluates goodwill and other indefinite life intangible assets annually for impairment and, if there is impairment, the carrying amount of goodwill and other intangible assets is written down to the implied fair value. For goodwill, this test involves comparing the fair value of each reporting unit to the unit’s book value to determine if any impairment exists. The Company calculates the fair value of each reporting unit using estimates of future cash flows.
In accordance with ASC 350, goodwill was tested for impairment and, as of August 27, 2011, management determined there was no impairment.
The amounts of goodwill are as follows (thousands of dollars):
F-14
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
| December 29, |
| December 31, |
| August 27, | ||||
|
|
| 2012 |
| 2011 |
| 2011 | |||
Beginning balance |
| $ | - |
| $ | 86,251 |
| $ | 86,251 | |
| Adjustment for deconsolidation |
| - |
| (86,251) |
| - | |||
Ending balance |
| $ | - |
| $ | - |
| $ | 86,251 |
The amounts of other intangibles assets are as follows (thousands of dollars):
|
|
|
|
|
|
|
| December 29, 2012 |
| December 31, 2011 |
| August 27, 2011 | ||||||||||||
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Average |
| Gross |
|
|
| Gross |
|
|
| Gross |
|
| ||||||||||
|
| Amortization |
| Carrying |
| Accumulated |
| Carrying |
| Accumulated |
| Carrying |
| Accumulated | ||||||||||
|
| Period |
| Amount |
| Amortization |
| Amount |
| Amortization |
| Amount |
| Amortization | ||||||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Customer Relationships | 16.4 years |
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | 51,980 |
| $ | 18,230 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Trademarks | indefinite |
| - |
| - |
| - |
| - |
| 22,770 |
| - | ||||||||||
Total intangible assets |
|
|
|
|
|
| $ | - |
| $ | - |
| $ | - |
| $ | - |
| $ | 74,750 |
| $ | 18,230 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships, including contractual and non-contractual relationships, are being amortized using the straight-line method over their useful lives which range from 5 to 15 years. Trademarks are not scheduled for amortization due to their expected indefinite useful life. In accordance with ASC 350, these trademarks were tested for impairment and, as of August 27, 2011, management determined there was no impairment.
For the 18-week period ended December 31, 2011, and fiscal years 2011 and 2010, the Company recognized $1.2 million, $2.1 million and $4.0 million, respectively, of amortization expense on intangible assets.
Overdraft Balances
USPB utilizes a controlled disbursement account to fund cash distribution checks presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are included in patronage notices payable and distributions payable and the change in the related balances are reflected in financing activities on the consolidated statement of cash flows. Overdraft balances totaled $0.3 million, $20.3 million, and $0.2 million as of December 29, 2012, December 31, 2011, and August 27, 2011, respectively.
The majority of NBP’s bank accounts are zero balance accounts where cash needs are funded as checks are presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are included in the trade accounts payable and cattle purchases payable balances, and the change in the related balances are reflected in financing activities on the consolidated statement of cash flows. Overdraft balances of $76.8 million were included in trade accounts and cattle purchases payables at August 27, 2011.
Self-Insurance
NBP is self-insured for certain losses relating to workers’ compensation, automobile liability, general liability and employee medical and dental benefits. NBP has purchased stop-loss coverage in order to limit its exposure to any significant levels of claims. Self-insured losses are accrued based upon NBP’s estimates of the aggregate uninsured claims incurred using actuarial assumptions accepted in the insurance industry and the Company’s historical experience rates.
F-15
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Environmental Expenditures and Remediation Liabilities
NBP’s environmental expenditures that relate to current or future operations and which improve operational capabilities are capitalized at the time of expenditure. Expenditures that relate to an existing or prior condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated.
Foreign Currency Translation
NBP has representative offices located in Tokyo, Japan, Seoul, South Korea and Guangzhou, China. The primary activity of these offices is to assist customers with product and order related issues. For foreign operations, the local currency is the functional currency. Translation into U.S. dollars is performed for assets and liabilities at the exchange rates as of the balance sheet date. Income and expense accounts are recorded at average exchange rates for the period. Adjustments resulting from the translation are reflected as a separate component of other comprehensive income.
Income Taxes
Effective August 29, 2004, the Company converted to an LLC, and under this structure, taxes are not provided at the Company level because the results of operations are included in the taxable income of the individual members.
The provision for income taxes for NBP is computed on a separate legal entity basis. Accordingly, NBP does not provide for income taxes, except for certain states which impose privilege taxes on the apportioned taxable income of USPB, as the results of operations are included in the taxable income of the individual members. However, to the extent that entities provide for income taxes, deferred tax assets and liabilities are recognized based on the differences between the financial statement and tax bases of assets and liabilities at each balance sheet date using enacted tax rates expected to be in effect in the year the differences are expected to reverse, and are thus included in the consolidated financial statements of the Company. Based on federal income tax statute of limitations, National Carriers remains subject to examination of its income taxes for calendar years 2011 and 2010.
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, short-term trade receivables and payables, approximate their fair values due to the short-term nature of the instruments. The carrying value of other debt approximates its fair value at August 27, 2011 as substantially all such debt has a variable interest rate.
Revenue Recognition
NBP recognizes revenue from the sale of products based on the terms of the sale, typically upon delivery to customers. National Carriers, Inc. and National Elite recognize revenue when shipments are complete.
Selling, General, and Administrative
Selling expenses consist primarily of salaries, unit option expense, trade promotions, advertising, commissions and other marketing costs. General and administrative costs consist primarily of general management, insurance and professional expenses. Selling, general, and administrative costs consist of expenses for USPB for period ended December 29, 2012 and aggregated expenses for USPB and NBP for periods ended December 31, 2011 and prior.
F-16
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Shipping Costs
NBP’s pass-through finished goods delivery costs reimbursed by customers are reported in sales, while an offsetting expense is included in cost of sales.
Advertising and Promotion Expenses
Advertising and promotion expenses are charged to operations in the period incurred and were $0.0 million, $3.2 million, $6.4 million, and $5.3 million in fiscal year 2012, the transition period ended December 31, 2011, and fiscal years 2011, and 2010, respectively.
Comprehensive Income
Comprehensive income consists of net income and foreign currency translation adjustments. NBP deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.
Derivatives and Hedging Activities
USPB does not have any derivatives. NBP uses futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. In accordance with ASC 815, Derivatives and Hedging, NBP accounts for futures contracts and their related firm purchase commitments at fair value. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as “normal purchases and sales” and not marked to market. ASC 815 imposes extensive recordkeeping requirements in order to treat a derivative financial instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction is settled. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.
While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under ASC 815 as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.
The fair value of derivative assets is recognized within other current assets, while the fair value of derivative liabilities is recognized within accrued liabilities.
Earnings Per Unit
Under the LLC structure, earnings of the Company are to be distributed to unitholders based on their proportionate share of underlying equity, and, as a result, earnings per unit (EPU) has been presented in the accompanying Consolidated Statement of Operations and in the table that follows.
F-17
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Basic EPU excludes dilution and is computed by first allocating a portion of net income attributable to USPB to Class A units and the remainder is allocated to Class B units. On November 2, 2009, the Company’s members approved changing the allocation of income from 33% to the Class A’s and 67% to the Class B’s to 10% to the Class A’s and 90% to the Class B’s. Accordingly, for fiscal year 2010, the pro-rata share of income earned through November 1, 2009 was allocated 33% to the Class A’s and 67% to the Class B’s and the remainder of the income for the fiscal year was allocated 10% to the Class A’s and 90% to the Class B’s. Income allocated to the Class A and Class B units is then divided by the weighted-average number of Class A and Class B units outstanding for the period to determine the basic EPU for each respective class of unit. On March 27, 2010, the Class A and Class B units were de-linked, allowing the transfer of each class of units without a concurrent transfer of a unit of the other Class.
Diluted EPU reflects the potential dilution that could occur if potential Class A unit purchase rights were exercised or contractual appreciation rights were converted into units. Upon termination of the CEO employment agreement and until 18 months after the termination of the CEO employment agreement, at the election of the CEO, or upon mutual agreement of the Board of the Company and the CEO, the CEO may purchase up to 20,000 Class A units, or upon agreement of the CEO and the Board of the Company, the CEO may convert the contractual unit appreciation rights to up to 20,000 Class A units. The diluted EPU reflects the circumstances of termination of the CEO employment agreement, and the election of CEO or agreement by the Board of the Company and the CEO for the CEO to purchase or convert contractual rights to the maximum 20,000 Class A units at $55 per unit for the periods as provided in the CEO employment agreement. The CEO exercised his right to purchase 20,000 Class B units at an exercise price of $0 per unit in fiscal year 2009 and, as a result, there was no dilution for the Class B units in fiscal years 2011 and 2010.
Income Per Unit Calculation | 52 weeks ended |
| 18 weeks ended |
| 52 weeks ended | ||||||||
(thousands of dollars, except unit and per unit data) | December 29, 2012 |
| December 31, 2011 |
| August 27, 2011 |
| August 28, 2010 | ||||||
|
|
|
|
|
|
|
|
|
| ||||
Basic income per unit: |
|
|
|
|
|
|
| ||||||
Income attributable to USPB available to |
|
|
|
|
|
|
| ||||||
| unitholders (numerator) |
|
|
|
|
|
|
| |||||
|
| Class A | $ | 272 |
| $ | 77,556 |
| $ | 16,029 |
| $ | 21,505 |
|
| Class B | $ | 2,452 |
| $ | 698,003 |
| $ | 144,266 |
| $ | 131,619 |
|
|
|
|
|
|
|
|
|
| ||||
Weighted average outstanding units (denominator) |
|
|
|
|
|
|
| ||||||
| Class A | 735,385 |
| 735,385 |
| 735,385 |
| 735,385 | |||||
| Class B | 755,385 |
| 755,385 |
| 755,385 |
| 755,385 | |||||
|
|
|
|
|
|
|
|
|
| ||||
Per unit amount |
|
|
|
|
|
|
| ||||||
| Class A | $ | 0.37 |
| $ | 105.46 |
| $ | 21.80 |
| $ | 29.24 | |
| Class B | $ | 3.25 |
| $ | 924.04 |
| $ | 190.98 |
| $ | 174.24 | |
|
|
|
|
|
|
|
|
|
| ||||
Diluted income per unit: |
|
|
|
|
|
|
| ||||||
Income attributable to USPB available to |
|
|
|
|
|
|
| ||||||
| unitholders (numerator) |
|
|
|
|
|
|
| |||||
|
| Class A | $ | 272 |
| $ | 77,556 |
| $ | 16,029 |
| $ | 21,505 |
|
| Class B | $ | 2,452 |
| $ | 698,003 |
| $ | 144,266 |
| $ | 131,619 |
|
|
|
|
|
|
|
|
|
| ||||
Weighted average outstanding Class A units | 735,385 |
| 735,385 |
| 735,385 |
| 735,385 | ||||||
Effect of dilutive securities - Class A unit options | 12,451 |
| 12,670 |
| 12,215 |
| 11,949 | ||||||
| Units (denominator) | 747,836 |
| 748,055 |
| 747,600 |
| 747,334 | |||||
|
|
|
|
|
|
|
|
|
| ||||
Weighted average outstanding Class B units | 755,385 |
| 755,385 |
| 755,385 |
| 755,385 | ||||||
Effect of dilutive securities - Class B unit options | - |
| - |
| - |
| - | ||||||
| Units (denominator) | 755,385 |
| 755,385 |
| 755,385 |
| 755,385 | |||||
|
|
|
|
|
|
|
|
|
| ||||
Per unit amount |
|
|
|
|
|
|
| ||||||
| Class A | $ | 0.36 |
| $ | 103.68 |
| $ | 21.44 |
| $ | 28.78 | |
| Class B | $ | 3.25 |
| $ | 924.04 |
| $ | 190.98 |
| $ | 174.24 |
F-18
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Immaterial Prior Period Error
The Company identified immaterial errors in the manner in which expense has been recognized under its management phantom unit plan and the accounting for non-competition consideration included in the former CEO’s employment agreement. These phantom units vest over a 5 year period. Since February 2011, the Company has recorded the entire fair value of the phantom units as a liability rather than only the percentage of the fair value that had vested. The former CEO’s employment agreement provided for non-competition consideration in the form of salary and certain benefits, originally for an 18 month period when signed in September 2009. In conjunction with the Leucadia Transaction, this was expanded to a 10 year period and the employment agreement was modified accordingly. Since the CEO had unilateral ability to terminate at any time under the terms of his employment agreement and initiate this payment stream, the present value of the liability should have been recorded as a liability and expensed when the agreement was originally signed and then adjusted upon the amendment for the Leucadia Transaction. These matters impacted the selling, general and administrative expenses, accrued liabilities and members’ capital for the periods discussed below, but did not impact cash flows for any period presented. Of the $6.0 million adjustment to member's capital for the four months ended December 31, 2011, approximately $5.9 million relates to an adjustment at December 31, 2011, the balance relates to expense in the prior fiscal year. The Company assessed the materiality of these items in all periods in accordance with the SEC’s guidance in Staff Accounting Bulletin 99 and concluded that the adjustments were not material to any prior period. These immaterial corrections impacted the prior period consolidated financial statements included below and will be revised the next time they are filed. The impacts for the four month period are presented in this 10-K, while the 2012 quarterly periods will be presented in the appropriate 2013 10-Q. (thousands of dollars, except unit and per unit data). Information for the quarterly periods ended March 31, 2012, June 30, 2012 and September 30, 2012 is unaudited.
| 4 months ended December 31, 2011 |
| 13 weeks ended March 31, 2012 | ||||||||||||||||
|
|
|
|
|
| Phantom |
| Non- |
|
|
|
|
| Phantom |
| Non- |
|
| |
|
|
|
|
| Unit |
| compete |
|
|
|
|
| Unit |
| compete |
|
| ||
| Original |
| Revision |
| Revision |
| Revised |
| Original |
| Revision |
| Revision |
| Revised | ||||
Net Income (Loss) |
| 781,993 |
|
|
| 343 |
| (6,272) |
| 776,064 |
| (4,783) |
| (68) |
| 133 |
| (4,718) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Units |
| 106.27 |
|
|
| 0.05 |
| (0.85) |
| 105.46 |
| (0.65) |
| (0.01) |
| 0.02 |
| (0.64) | |
Class B Units |
| 931.10 |
|
|
| 0.41 |
| (7.47) |
| 924.04 |
| (5.70) |
| (0.08) |
| 0.16 |
| (5.62) | |
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Units |
| 104.47 |
|
|
| 0.05 |
| (0.84) |
| 103.68 |
| (0.65) |
| (0.01) |
| 0.02 |
| (0.64) | |
Class B Units |
| 931.10 |
|
|
| 0.41 |
| (7.47) |
| 924.04 |
| (5.70) |
| (0.08) |
| 0.16 |
| (5.62) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits | 5,736 |
|
|
| (993) |
| 6,995 |
| 11,738 |
| 3,381 |
| (925) |
| 6,862 |
| 9,318 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member's capital |
| 281,329 |
|
|
| 993 |
| (6,995) |
| 275,327 |
| 255,414 |
| 993 |
| (6,729) |
| 249,678 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
| 13 weeks ended June 30, 2012 |
| 13 weeks ended September 30, 2012 | ||||||||||||||||
|
|
|
|
|
| Phantom |
| Non- |
|
|
|
|
| Phantom |
| Non- |
|
| |
|
|
|
|
| Unit |
| compete |
|
|
|
|
| Unit |
| compete |
|
| ||
| Original |
| Revision |
| Revision |
| Revised |
| Original |
| Revision |
| Revision |
| Revised | ||||
Net Income |
| 5,372 |
|
|
| (18) |
| 134 |
| 5,488 |
| 5,022 |
| - |
| 135 |
| 5,157 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Unit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Units |
| 0.73 |
|
|
| - |
| 0.02 |
| 0.75 |
| 0.68 |
| - |
| 0.02 |
| 0.70 | |
Class B Units |
| 6.40 |
|
|
| (0.02) |
| 0.16 |
| 6.54 |
| 5.98 |
| - |
| 0.16 |
| 6.14 | |
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Units |
| 0.72 |
|
|
| - |
| 0.02 |
| 0.73 |
| 0.67 |
| - |
| 0.02 |
| 0.69 | |
Class B Units |
| 6.40 |
|
|
| (0.02) |
| 0.16 |
| 6.54 |
| 5.98 |
| - |
| 0.16 |
| 6.14 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits | 3,376 |
|
|
| (917) |
| 9,727 |
| 9,186 |
| 2,216 |
| - |
| 6,592 |
| 8,808 | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member's capital |
| 258,414 |
|
|
| 935 |
| (6,593) |
| 252,756 |
| 264,363 |
| - |
| (6,457) |
| 257,906 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) New Accounting Policies
In May 2011, the FASB issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS under ASU 2011-04, or ASU 2011-04. ASU 2011-04 amends ASC 820, Fair Value Measurements (ASC 820), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 was effective for annual and interim periods beginning after December 31, 2011. The amendments in ASU 2011-04 are to be applied prospectively. The adoption of ASU 2011-04 did not have a material effect on USPB's consolidated financial statements or disclosures.
F-19
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In June 2011, the FASB issued Presentation of Comprehensive Income under ASU 2011-05 or ASU 2011-05. ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for annual and interim periods beginning after December 31, 2011. The adoption of ASU 2011-05 resulted in USPB presenting the consolidated statement of comprehensive income as a separate but consecutive statement following the statement of operations as presented in these financial statements.
In September 2011, the FASB issued Testing Goodwill for Impairment under ASU 2011-08, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities with the option of performing a qualitative assessment to determine whether impairment testing is necessary. The revised standard is effective for annual and interim periods beginning after December 15, 2011, with early adoption permitted under certain circumstances. USPB’s adoption of this standard did not have a material impact on its financial statements.
(5) Divestiture, Deconsolidation
On December 30, 2011, the Company sold 79.6% of its ownership interest in NBP to Leucadia National Corporation for approximately $646.8 million and deconsolidated it. The gain on the deconsolidation and sale was approximately $777.7 million. As a result of the sale, beginning on December 31, 2011, USPB’s investment in NBP was accounted for using the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operational control. The Company’s investment in NBP of $165.4 million is recorded at the initial fair value plus equity in undistributed earnings of NBP as of December 29, 2012.
(6) Long‑Term Debt and Loan Agreements
The Company entered into various debt agreements in order to finance acquisitions and provide liquidity to operate the business on a going forward basis. As of December 29, 2012, December 31, 2011, and August 27, 2011, debt consisted of the following (thousands of dollars):
|
|
| December 29, |
| December 31, |
| August 27, | |||
|
|
| 2012 |
| 2011 |
| 2011 | |||
Short-term debt: |
|
|
|
|
| |||||
| Current portion of long-term debt (a,b) | $ | - |
| $ | - |
| $ | 37,000 | |
Current portion of capital lease obligations and other (d) | - | - | 1,486 | |||||||
|
|
| $ | - |
| $ | - |
| $ | 38,486 |
Long-term debt: |
|
|
|
|
| |||||
| Term loan facility (b) | $ | - |
| $ | - |
| $ | 305,250 | |
| Industrial Development Revenue Bonds (c) | - |
| - |
| 12,245 | ||||
| Long-term capital lease obligations and other (d) | - |
| - |
| 4,431 | ||||
|
|
| $ | - |
| $ | - |
| $ | 321,926 |
|
| Total debt | $ | - |
| $ | - |
| $ | 360,412 |
(a) Master Loan Agreement
On July 28, 2011, USPB and CoBank entered into a Master Loan Agreement, Revolving Term Loan Supplement to the Master Loan Agreement, and Pledge Agreement. These agreements replace the Amended and Restated Credit Agreement and Security Agreement dated June 22, 2009.
F-20
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Master Loan Agreement and the Revolving Term Loan Supplement provide for a $15 million revolving credit commitment. That commitment carries a term of three years, maturing on June 30, 2014. The Pledge Agreement provides CoBank with a first-priority security interest in USPB’s membership interests in, and Distributions from, NBP.
All of the $15 million revolving credit commitment was available at the end of fiscal year 2012. Borrowings under the revolving credit commitment bear interest at the base rate or LIBOR rate plus applicable margin.
On December 30, 2011, in connection with the closing of the Leucadia Transaction, the Company and CoBank entered into the Consent and First Amendment to Pledge Agreement and Security Agreement, by which CoBank agreed to (i) consent to the Membership Interest Sale and the PA Distribution, (ii) release its security interest in, and liens on, the Membership Interests being sold pursuant to the Membership Interest Sale, (iii) consent to the National Beef Pledge and (iv) consent to the amendments and restatements of the National Beef Operating Agreement and the PA Newco Operating Agreement. The National Beef Pledge grants National Beef a perfected security interest in and to USPB’s membership interests in, and distributions from, NBP, subject only to the prior first priority security interest held by CoBank.
The Company was in compliance with all of the Master Loan Agreement debt covenants as of December 29, 2012.
(b) Senior Credit Facilities
On June 4, 2010, NBP’s Credit Facility was amended and restated to: (1) increase the borrowings under the Credit Facility by providing for a term loan facility of up to $375 million and a revolving line of credit of up to $250 million; (2) reduce the applicable margin on the rates of interest of the term loan and revolving line of credit; (3) revise the payment schedule of the term loan; (4) extend the maturity date of the Credit Facility to June 4, 2015; (5) remove the limitations on capital expenditures; (6) add new financial covenants regarding adjusted net worth and a fixed charge coverage ratio; and (7) add two wholly owned subsidiaries, National Beef California, LLP and National Carriers, Inc., as loan parties and guarantors. The related financing charges, of approximately $4.2 million, will be amortized over the life of the loan.
On June 10, 2011, NBP’s Credit Facility was amended and restated to: (1) reduce the applicable margin by up to 0.75% for “LIBOR Rate” advances and “Base Rate” advances, (2) revise the “fixed charge coverage ratio” covenant provisions to provide the Company credit of up to $30 million for maintaining net asset borrowing base levels that exceed the lenders' aggregate credit commitments under the Credit Facility in the calculation of the fixed charge coverage ratio; and (3) extend the maturity date of the Credit Facility to June 4, 2016. The related financing charges of approximately $0.8 million will be amortized over the life of the loan.
On December 5, 2011, NBP's Credit Facility was amended and restated to (1) permit the Leucadia Transaction, (2) adjust NBP's fiscal year and (3) allow for the updated distribution percentage.
The borrowings under the Credit Facility bear interest at LIBOR or the Base Rate, plus the applicable margin. The applicable margin for the revolving line of credit and the term loan will be as set forth on a grid based on different ratios of funded debt to EBITDA as depicted in the table below:
F-21
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
|
|
| Base Rate |
|
|
|
|
|
| ||
|
|
|
|
|
|
| Advance Line |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| of Credit and |
|
|
|
|
|
| |
| Borrowing Base |
|
|
|
| Swing Line |
| LIBOR Rate |
|
|
|
| |||
Availability |
| Funded Debt to EBITDA |
| Loans and |
| Line of Credit |
|
|
|
| |||||
Level |
| Ratio |
| Term Loans |
| Loan |
| LC Fees |
| Non-Use Fee | |||||
Level 1 |
| Less than 1:50:1:00 |
|
|
| 0.75% |
| 1.75% |
| 1.75% |
| 0.250% | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
| Greater than 1:50:1:00 and less than 2:50:1:00 |
|
|
| 1.00% |
| 2.00% |
| 2.00% |
| 0.375% | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
| Greater than or equal to 2:50:1:00 |
|
|
| 1.50% |
| 2.50% |
| 2.50% |
| 0.500% |
As of August 27, 2011, the interest rate for the term loan was approximately 1.96%.
The borrowings under the revolving loan are available for NBP’s working capital requirements, capital expenditures and other general corporate purposes. The advance rates under the borrowing base are 90% on eligible accounts and 70% on eligible inventory. The Credit Facility is secured by a first priority lien on substantially all of the assets of NBP and its subsidiaries.
Effective as of the June 10, 2011 amendment, the principal amount outstanding under the term loan is due and payable in equal quarterly installments of approximately $9.3 million. All outstanding loan amounts are due and payable on June 4, 2016. Prepayment of the loans is allowed at any time.
The Credit Facility contains customary affirmative covenants relating to NBP and its subsidiaries, including, without limitation, conduct of business, maintenance of insurance, compliance with laws, maintenance of properties, keeping of books and records, and the furnishing of financial statements. The facility also contains customary negative covenants relating to NBP and its subsidiaries, including, without limitation, restrictions on: distributions, mergers, asset sales, investments and acquisitions, encumbrances, affiliate transactions, and ERISA matters. The ability of NBP and its subsidiaries to engage in other business, incur debt or grant liens is also restricted.
The Credit Facility contains customary events of default, including without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of NBP’s property, changes in control of NBP, or failure of any of the loan documents to remain in full force, and NBP’s failure to properly fund its employee benefit plans. The Credit Facility also includes customary provisions protecting the lenders against increased cost or loss of yield resulting from changes in tax, reserve, capital adequacy and other requirements of law.
(c) Industrial Development Revenue Bonds
Effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, designed to provide property tax savings. Under the transaction, the City purchased NBP’s Dodge City facility, or the facility, by issuing $102.3 million in bonds due in December 2019, used the proceeds to purchase the Dodge City facility and leased the facility to NBP for an identical term under a capital lease. NBP purchased the City’s bonds with the proceeds of its term loan under the Credit Facility. Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP effectively controls enforcement of the lease against itself. As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated in consolidation. The transaction provides NBP with property tax exemptions for the leased facility, that, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%. The facility remains subject to a prior mortgage and security interest in favor of the lenders under the Credit Facility. Additional revenue bonds may be issued to cover the costs of certain improvements to this facility. The total amount of revenue bonds authorized for issuance is $120.0 million.
F-22
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on NBP’s behalf to fund the purchase of equipment and construction improvements at NBP’s facilities in those cities. These bonds were issued in 1999 and 2000 in four series of $1.0 million, $1.0 million, $6.0 million and $5.9 million and are due on demand or on February 1, 2029, March 1, 2027, March 1, 2015, and October 1, 2009, respectively. Because each series of bonds is backed by a letter of credit under the Credit Facility, these due-on-demand bonds have been presented as non-current obligations until twelve months prior to their maturity. As of August 27, 2011, the amount outstanding on the $6.0 million series of bonds had been reduced to $3.4 million and the $5.9 million series were paid at maturity on October 1, 2009. Pursuant to a lease agreement, NBP leases the facilities, equipment and improvements from the respective cities and make lease payments in the amount of principal and interest due on the bonds.
The bonds issued in 1999 and 2000 are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. The average per annum interest rate for each series of bonds was 0.5% for the 18 weeks ended December 31, 2012, 0.3% in fiscal year 2011 and 0.5% in fiscal year 2010. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.
In connection with the Brawley Beef acquisition, NBP assumed the obligation under a Trust Indenture securing $6.8 million in California Pollution Control Financing Authority Tax-Exempt variable rate demand solid waste disposal revenue bonds dated as of October 1, 2001. The bonds bear a rate that is adjusted weekly, which rate will not exceed 12% per annum. The average per annum interest rate for this series of bonds for the 18 weeks ended December 31, 2011 and fiscal years 2011 and 2010 was 0.2%, 0.3% and 0.4%, respectively. These bonds have a maturity date of October 1, 2016. NBP has the option to redeem all or a portion of the bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.
On December 17, 2010, National Beef Leathers, LLC (NBL) a subsidiary of NBP, entered into various agreements with the city of St. Joseph, Missouri, designed to provide NBP property tax savings. Under the transaction, the city of St. Joseph issued $14.5 million in bonds due in December 2022, used the proceeds to purchase equipment within the NBL facility and subsequently leased the equipment back to NBP for an identical term under a capital lease. NBP purchased the City’s bonds with proceeds of the term loan under the Credit Facility. Because the city of St. Joseph has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP effectively controls enforcement of the lease against itself. As a result of the capital lease treatment, the equipment will remain a component of property, plant and equipment in NBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments will be eliminated in consolidation.
F-23
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(d) Capital and Operating Leases
USPB leases its office space. NBP leases a variety of buildings and equipment, some of which were acquired through the Brawley Beef acquisition, as well as tractors and trailers through its subsidiary National Carriers, under capital and operating lease agreements that expire in various years.
Rent expense associated with operating leases was $0.1 million, $0.0 million, $14.1 million and $14.1 million for fiscal year 2012, the transition period, and fiscal years 2011 and 2010, respectively. USPB and NBP expect that they will renew lease agreements or enter into new leases as the existing leases expire.
Other Commitments
Effective December 30, 2004, NBP finalized an agreement with the City of Dodge City, Kansas, whereby in consideration of certain improvements made to the city water and wastewater systems, NBP committed to make a series of service charge payments totaling $19.3 million over a 20 year period, of which $0.7 million, $0.8 million, and $1.7 million was paid in each of the 18 weeks ended December 31, 2011 and fiscal years 2011 and 2010, respectively.
NBP makes verbal commitments to cattle producers to purchase cattle about one week in advance of delivery of the live animals to its plants, with the actual price paid for the cattle determined after the cattle are delivered and inspected at NBP’s facilities.
(7) Employee Options and Benefit Plans
The cooperative established a phantom stock option plan for the then CEO which provided for the issuance of 20,000 phantom stock options with an exercise price of $55 per share, all of which had been issued and were exercisable upon election. In connection with the conversion described in Note 13, this phantom stock option plan was converted into a phantom unit plan in a similar fashion as the conversion of cooperative shares to LLC units. The 20,000 phantom stock options converted into 20,000 phantom Class A units and 20,000 phantom Class B units with an exercise price of $55 per unit and $0 per unit, respectively. In August 2009, the CEO exercised 20,000 Class B units at an exercise price of $0 per unit. The Company recognizes compensation expense for the CEO’s Class A phantom units for the difference between the fair market value for the Class A units and the $55 exercise price. For the CEO’s phantom plan, a decrease in compensation expense of $0.2 million was recognized in fiscal year 2012, an increase in compensation expense of $1.2 million was recognized in the 18 week period ended December 31, 2011, and a $1.0 million increase was recognized in fiscal year 2011, and a decrease in compensation expense of $0.4 million was recognized in fiscal year 2010.
In September 2010, USPB’s Board of Directors approved a management phantom unit plan. The phantom unit plan provides for the award of unit appreciation rights to management employees of USPB. USPB’s CEO administers the phantom unit plan and awards “Phantom Units” (Class A and Class B Units) to employees in amounts determined by the CEO, subject to the total Phantom Unit amount approved by the Board of Directors of USPB. A total of 5,000 Class A phantom units and 5,000 Class B phantom units were awarded to management employees, with a strike price of $118 and $157, respectively. The closing of the Leucadia Transaction resulted in management employees receiving a payment under management phantom unit plan. As a result of that payment, the strike price for both the Class A phantom units and Class B phantom units was satisfied and is now $0. The phantom units will vest over a 5 year period. For the management phantom plan, an increase in compensation expense of $0.3 million was recognized in fiscal year 2012, an increase in compensation expense of $2.3 million was recognized in the 18 week period ended December 31, 2011 and an increase in compensation expense of $0.8 million was recognized in fiscal year 2011.
F-24
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On November 16, 2012, USPB’s Board of Directors approved the issuance of an additional 1,500 Class A phantom units and 1,500 Class B phantom units to certain members of management, to be effective on January 28, 2013. These phantom units will vest over a five year period.
The Company maintains a tax-qualified employee savings and retirement plan (401(k) Plan) covering the Company’s non-union employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 75% of their annual compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan provides for additional matching contributions by the Company, based on specific terms contained in the 401(k) Plan. The trustee of the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in designated investment options. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code. Expenses related to the 401(k) Plan totaled approximately $0.1 million, $0.5 million, $1.1 million, and $0.9 million for fiscal year 2012, the transition period and fiscal years 2011, and 2010, respectively.
NBP has agreed to make contributions to the United Food and Commercial Workers International Union-Industry Pension Fund (UFCW Plan) for employees covered by a collective bargaining agreement as provided for in that agreement. Expenses related to the UFCW Plan totaled approximately $0.2 million, $0.9 million and $0.8 million for the transition period and fiscal years 2011 and 2010, respectively.
Postretirement Benefits— Certain former employees of NBP are covered by an unfunded postretirement benefit plan that provides medical and dental benefits. Costs associated with this plan, which relate primarily to insurance premiums, benefit payments and changes in the accumulated benefit obligation were approximately $0.1 million, $0.1 million, and $0.0 million, for the transition period and fiscal years 2011 and 2010, respectively, and are included in other, net.
The health care trend rate used to value the accumulated benefit obligation at December 31, 2011 is a rate of 8.0% per year, declining by 0.5% per year to an ultimate rate of 5.0% in 2017 and thereafter. The discount rate used to value the accumulated benefit obligation is 5%. The unfunded accumulated benefit obligation was $1.4 million at August 27, 2011 and has been recorded in the consolidated financial statements as non-current other liabilities.
(8) Other Income
Other non-operating income, net was $0.2 million, $1.5 million and $0.3 million for fiscal year 2012, the 18 week period ended December 31, 2011 and for the fiscal year ended 2011, respectively, while other non-operating expense, net was $7.3 million for the fiscal year ended 2010. Other, net includes miscellaneous non-operating items of income and expense such as adjustments to unamortized loan costs as discussed in Note 2. Basis of Presentation and Accounting Policies, Debt Issuance Costs, adjustments to postretirement benefits costs as discussed in Note 7 Employee Options and Benefits, and gains or losses on the disposal of fixed assets as discussed in Note 2. Basis of Presentation and Accounting Policies, Property, Plant and Equipment, and disclosed on the consolidated statements of cash flows. Other non-operating income, net for fiscal year 2012 primarily includes $0.2 million of income related to lease income on additional delivery rights made available by the company. Other non-operating income, net for the 18 weeks ended December 31, 2011 primarily includes approximately $0.6 million of income related to gains on the sale of fixed assets and $1.0 million due to a reduction in state tax accruals. Other non-operating income, net for fiscal year 2011 primarily includes approximately $1.5 million of income related to gains on the sale of fixed assets, which was partially offset by $0.8 million in expenses related to an abandoned IPO effort. Other non-operating expense, net for fiscal year 2010 primarily includes approximately $2.4 million related to tannery litigation and approximately $2.2 million related to an abandoned IPO effort. In addition, other non-operating expense, net includes approximately $3.3 million accrued for a potential settlement of a dispute with the city of Dodge City, Kansas pertaining to the transfer of certain water rights.
F-25
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Income Taxes
Income tax expense includes the following current and deferred provisions (thousands of dollars):
|
|
| 52 weeks ended |
| 18 weeks ended |
| 52 weeks ended |
| 52 weeks ended | ||||
|
|
| December 29, |
| December 31, |
| August 27, |
| August 28, | ||||
|
|
| 2012 |
| 2011 |
| 2011 |
| 2010 | ||||
Current provision: |
|
|
|
|
|
|
| ||||||
| Federal | $ | - |
| $ | 490 |
| $ | 1,689 |
| $ | 61 | |
| State | 107 |
| 201 |
| 1,422 |
| 958 | |||||
| Foreign | - |
| 27 |
| 54 |
| 80 | |||||
|
| Total current tax expense | 107 |
| 718 |
| 3,165 |
| 1,099 | ||||
|
|
|
|
|
|
|
|
|
| ||||
Deferred provision: |
|
|
|
|
|
|
| ||||||
| Federal | - |
| - |
| (500) |
| (144) | |||||
| State | - |
| - |
| (75) |
| (16) | |||||
| Foreign | - |
| - |
| - |
| - | |||||
|
| Total deferred tax expense | - |
| - |
| (575) |
| (160) | ||||
|
| Total income tax expense | $ | 107 |
| $ | 718 |
| $ | 2,590 |
| $ | 939 |
Income tax expense differed from the “expected” income tax (computed by applying the federal income tax rate of 35% to net income attributable to USPB before income taxes) as follows (thousands of dollars):
|
| 52 weeks ended |
| 18 weeks ended |
| 52 weeks ended |
| 52 weeks ended | |||||
|
|
| December 29, |
| December 31, |
| August 27, |
| August 28, | ||||
|
|
| 2012 |
| 2011 |
| 2011 |
| 2010 | ||||
Computed “expected” income tax expense |
| $ | 954 |
| $ | 273,949 |
| $ | 59,564 |
| $ | 56,661 | |
Passthrough “expected” income tax expense |
| (954) |
| (273,457) |
| (58,339) |
| (56,656) | |||||
State taxes, net of federal |
| 71 |
| 182 |
| 1,264 |
| 928 | |||||
Other |
| 36 |
| 44 |
| 101 |
| 6 | |||||
| Total income tax expense |
| $ | 107 |
| $ | 718 |
| $ | 2,590 |
| $ | 939 |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 29, 2012, December 31, 2011, and August 27, 2011 are presented below (thousands of dollars):
| December |
| December |
| August 27, | ||||||
Deferred tax assets: | 29, 2012 |
| 31, 2011 |
| 2011 | ||||||
| Accounts receivable, due to allowance for doubtful accounts | $ | - |
| $ | - |
| $ | 247 | ||
| Intangible assets | - |
| - |
| 336 | |||||
| Self-insurance and workers compensation accruals | - |
| - |
| 1,171 | |||||
| Employee benefit accruals | - |
| - |
| 44 | |||||
| Plant and equipment, principally due to differences in depreciation | - |
| - |
| 40 | |||||
|
| Total gross deferred tax assets | - |
| - |
| 1,838 | ||||
Deferred tax liabilities: |
|
|
|
|
| ||||||
| Prepaid assets | - |
| - |
| 5 | |||||
| Property, plant, and equipment, principally due to differences in depreciation | - |
| - |
| 444 | |||||
|
| Total gross deferred tax liabilities | - |
| - |
| 449 | ||||
|
|
| Net deferred tax assets | $ | - |
| $ | - |
| $ | 1,389 |
F-26
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net deferred tax assets and liabilities at December 29, 2012, December 31, 2011, and August 27, 2011 are included in the consolidated balance sheet as follows (thousands of dollars):
| December 29, |
| December 31, |
| August 27, | |||
| 2012 |
| 2011 |
| 2011 | |||
Other current assets | $ | - |
| $ | - |
| $ | 1,838 |
Other liabilities | - |
| - |
| 449 | |||
| $ | - |
| $ | - |
| $ | 1,389 |
Deferred tax assets and liabilities relate primarily to the operations of National Carriers, Inc.
There was no valuation allowance provided for at August 27, 2011. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.
(10) Related Party Transactions
All of the Company’s directors hold units of the Company. By virtue of their ownership of the units, each of these individuals is obligated to deliver cattle to the Company. The amount and terms of the payments received by these individuals (or the entities they represent) for the delivery of cattle are made on exactly the same basis as those received by other unitholders of the Company for the delivery of their cattle.
USPB facilitates the delivery of cattle annually to NBP through its unitholders and associates. During fiscal year 2012, USPB’s unitholders and associates provided approximately 21% of NBP’s cattle requirements, in the 18 week period ended December 31, 2011 they provided approximately 17% of NBP’s cattle requirements, and in fiscal years 2011 and 2010, provided approximately 20%. The purchase price for the cattle is determined by NBP’s pricing grid, which, under the terms of the agreement with USPB, must be competitive with the pricing grids of NBP’s competitors and may not be less favorable than pricing grids offered to other suppliers.
At December 29, 2012, December 31, 2011, and August 27, 2011, the Company had receivables from unitholders and associates in the amount of $0.7 million, $0.0, million, and $0.1 million, respectively.
NBP entered into various transactions with a company affiliated with NBPCo Holdings in the ordinary course of business. Sales transactions were based upon prevailing market prices, and purchases were on terms no less favorable to NBP than would be obtained from an unaffiliated party.
During the 18 week period ended December 31, 2011 and fiscal years 2011, and 2010, NBP had sales and purchases with the following related parties (thousands of dollars):
|
|
| 18 weeks ended |
| 52 weeks ended |
| 52 weeks ended | ||||
|
|
| December 31, 2011 |
| August 27, 2011 |
| August 28, 2010 | ||||
Sales to: |
|
|
|
|
|
| |||||
| Beef Products, Inc. (1) |
| $ | 66,322 |
| $ | 170,227 |
| $ | 120,362 | |
|
| Total Sales to Affiliate |
| $ | 66,322 |
| $ | 170,227 |
| $ | 120,362 |
|
|
|
|
|
|
|
|
| |||
Purchases from: |
|
|
|
|
|
| |||||
| Beef Products, Inc. (1) |
| $ | 14,257 |
| $ | 47,508 |
| $ | 40,649 | |
|
| Total Purchases from Affiliate |
| $ | 14,257 |
| $ | 47,508 |
| $ | 40,649 |
|
|
|
|
|
|
|
|
| |||
(1) Beef Products, Inc. (BPI) is an affiliate of NBPCo Holdings |
|
| |||||||||
|
|
|
|
|
|
|
|
|
F-27
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At August 27, 2011, the amount due from Beef Products, Inc. (BPI) for sale of beef trimmings was approximately $5.8 million. At August 27, 2011, the amount due to BPI for the purchase of processed lean beef was approximately $0.5 million.
In January 2007, NBP entered into an agreement with BPI for BPI to manufacture and install a grinding system in one of its plants. In accordance with the agreement with BPI, NBP is to pay BPI a technology and support fee based on the number of pounds of product produced using the grinding system. The installation of the grinding system was completed in fiscal year 2008. During the 18 weeks ended December 31, 2011 and fiscal years 2011 and 2010, NBP paid approximately $0.6 million, $2.0 million, and $1.9 million, respectively, to BPI in technology and support fees.
(11) Fair Value Measurements
The Company determines fair value utilizing a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs used to measure fair value are as follows:
• Level 1 – quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.
• Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
• Level 3 – unobservable inputs for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are not available.
As a result of the Company’s deconsolidation of NBP, the Company does not carry any assets or liabilities on its consolidated balance sheet at fair value as of December 31, 2011. The following table details the assets and liabilities measured at fair value on a recurring basis as of August 27, 2011 and the level within the fair value hierarchy used to measure each category of assets (thousands of dollars).
|
|
|
| Quoted Prices in |
|
|
|
| ||||
|
|
|
| Active Markets for |
| Significant Other |
| Significant | ||||
|
|
|
| Identical Assets |
| Observable Inputs |
| Unobservable | ||||
Description |
| August 27, 2011 |
| (Level 1) |
| (Level 2) |
| Inputs (Level 3) | ||||
|
|
|
|
|
|
|
|
| ||||
Other current assets - |
|
|
|
|
|
|
|
| ||||
derivatives |
| $ | 4,022 |
| $ | - |
| $ | 4,022 |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Other accrued expenses and |
|
|
|
|
|
|
|
| ||||
liabilities - derivatives |
| $ | 5,860 |
| $ | 5,860 |
| $ | - |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Non-controlling interests in NBP | $ | 351,071 |
| $ | - |
| $ | 75,922 |
| $ | 275,149 | |
|
|
|
|
|
|
|
|
|
Management has used certain agreed-upon contractual redemption prices in measuring the fair value of the Klein Affiliates non-controlling interest, which is included in Level 2 as of August 27, 2011. NBPCo Holdings non-controlling interest is based upon unobservable inputs and was included in Level 3 as of August 27, 2011.
F-28
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Disclosure About Derivative Instruments and Hedging Activities
As part of NBP’s ongoing operations, NBP is exposed to market risks such as changes in commodity prices. To manage these risks, NBP may enter into the following derivative instruments pursuant to its established policies:
• Forward purchase contracts for cattle for use in NBP’s beef plants
• Exchange traded futures contracts for cattle
• Exchange traded futures contracts for grain
While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive recordkeeping requirements associated with hedge accounting. Accordingly, the gains and losses associated with the change in fair value of the instruments are recorded to net sales and cost of goods sold in the period of change. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as normal purchases and sales and not recorded at fair value.
NBP enters into certain commodity derivatives, primarily with a diversified group of highly rated counterparties. The maximum amount of loss due to the credit risk of the counterparties, should the counterparties fail to perform according to the terms of the contracts, is deemed to be immaterial as of August 27, 2011. The exchange-traded contracts have been entered into under a master netting agreement. None of the derivatives entered into have credit-related contingent features. NBP has $14.5 million in cash collateral posted on its derivative liabilities included in other assets on the consolidated balance sheet as of August 27, 2011.
The following table presents the fair values and other information regarding derivative instruments not designated as hedging instruments as of fiscal year ended August 27, 2011 (thousands of dollars):
August 27, 2011 | Derivative Asset |
| Derivative Liability | |||||||||
|
| Balance Sheet |
|
|
| Balance Sheet |
|
| ||||
|
| Location |
| Fair Value |
| Location |
| Fair Value | ||||
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| Other accrued |
|
| ||
|
| Other current |
|
|
| expenses and |
|
| ||||
Commodity contracts | assets |
| $ | 4,022 |
| liabilities |
| $ | 5,860 | |||
| Total |
|
|
|
| $ | 4,022 |
|
|
| $ | 5,860 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents the impact of derivative instruments on the Consolidated Statement of Operations for the 18 weeks ended December 31, 2011 and fiscal years ended August 27, 2011, and August 28, 2010 (thousands of dollars):
Derivatives Not |
| Gain (Loss) |
|
|
|
|
|
|
| |||||||
Designated as |
| Recognized in |
|
|
|
|
|
|
| |||||||
Hedging |
| Income on |
|
|
|
|
|
|
| |||||||
Instruments |
| Derivatives |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
| 18 weeks ended |
| Fiscal year ended | ||||||
|
|
|
|
|
|
|
| December 31, 2011 |
| August 27, 2011 |
| August 28, 2010 | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Commodity contracts Net sales |
|
| $ | 6,271 |
| $ | 6,975 |
| $ | 14,860 | ||||||
Commodity contracts Cost of sales |
|
| (3,866) |
| (33,829) |
| (2,397) | |||||||||
| Total |
|
|
|
|
|
| $ | 2,405 |
| $ | (26,854) |
| $ | 12,463 |
F-29
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Capital Shares and Equities
LLC Structure
On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversion of the cooperative into a Delaware LLC (Conversion). Under the new ownership structure, each share of common stock of the cooperative was converted to one unit of Class A interest and one unit of Class B interest. Immediately following the Conversion, there were 691,845 Class A units and 691,845 Class B units. For a period of time determined by the board of directors, each Class A unit was linked to its corresponding Class B unit and each pair of linked units was required, if transferred, to be transferred together. On March 27, 2010, the board of directors amended USPB’s LLC Agreement to enable the Class A and Class B units to be transferred separately. Patronage Refunds for Reinvestment in the cooperative were carried over at their face amount as Patronage Notices.
On June 1, 2006, NBP completed the acquisition of the assets of Brawley Beef. As a result of the acquisition, USPB issued 44,160 new Class A units and 44,160 new Class B units to Brawley Beef in exchange for 44,160 limited partnership units in National Beef California, LP (NBC), a subsidiary of NBP. USPB then exchanged the limited partnership units with NBP for a higher ownership percentage in NBP. Immediately following the issuance, there were 736,005 Class A units and 736,005 Class B units.
Class A Units. When the Conversion occurred, holders of USPB Class A units were entitled to a pro rata share of 33% of the profits and losses; to receive distributions of USPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB’s assets if it dissolves or liquidates after payment of the Patronage Notices, and to vote on matters submitted to a vote of USPB’s unitholders. On November 9, 2009, USPB members approved an amendment to USPB’s limited liability company agreement that changed the allocation of profits and losses to Class A unitholders to 10%. Holders of USPB Class A units, committed under Uniform Cattle Delivery and Marketing Agreements, have the right and obligation to deliver one head of cattle to USPB annually for each unit held.
Class B Units. When the Conversion occurred, holders of USPB Class B units were entitled to a pro rata share of 67% of the profits and losses; to receive distributions of USPB’s net cash flow when declared by the board of directors; to participate in the distribution of USPB’s assets if it dissolves or liquidates after the payment of the Patronage Notices, and to vote on matters submitted to a vote of USPB’s unitholders. On November, 9, 2009, USPB members approved an amendment to USPB’s limited liability company agreement that changed the allocation of profits and losses to Class B unitholders to 90%. Holders of USPB Class B units have no cattle delivery commitment.
Patronage Notices. Patronage Notices do not constitute units or membership interests in the Company, and holders will not be unitholders or associates of the Company by virtue of holding Patronage Notices. As was the case in the cooperative, Patronage Notices will be paid by the Company at such time and in such amounts as may be determined by the board of directors in its sole and absolute discretion. Upon liquidation, holders of Patronage Notices will be paid before holders of Class A and Class B interests. Patronage Notices carry no other or additional rights. USPB’s Board of Directors authorized the redemption of the outstanding patronage notices as a result of USPB’s sale of a majority of its ownership interest in NBP to Leucadia.
F-30
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Non-controlling Interest
Certain affiliates of NBP’s Chief Executive Officer, Timothy M. Klein (collectively referred to herein as “the Klein Affiliates”), and/or NBPCo Holdings, LLC (NBPCo Holdings) had the right to request that NBP repurchase their interests, the value of which was to be determined by a specified formula or a mutually agreed appraisal process. If NBP was unable to effect the repurchase within a specified time, the requesting member(s) had the right to cause a sale process to commence.
Generally accepted accounting principles required the Company to determine the fair value of the non-controlling interest in NBP at the end of each reporting period. The carrying value of non-controlling interest in NBP reflects fair value. In determining the fair value of the non-controlling interest in NBP held by NBPCo Holdings as of August 27, 2011, management considered previous redemption prices, valuations of peer companies and other factors. The non-controlling interest in NBP held by the Klein Affiliates as of August 27, 2011 was valued based upon a contractually stipulated valuation formula. As a result of the Leucadia Transaction, the put rights held by the Klein Affiliates and NBPCo Holdings were eliminated. The accumulated adjustment to fair value of the non-controlling interest was also eliminated which resulted in an increase to members’ capital.
At August 27, 2011, the value of the non-controlling interest in NBP was determined to be $351.1 million, which was equal to its carrying value. The total value of the non-controlling interest in NBP as of August 27, 2011, increased by approximately $53.8 million compared to the value at August 28, 2010. The carrying value of the non-controlling interest in NBP increased approximately $68.7 million through valuation changes during the fiscal year ended August 27, 2011, resulting in the $351.1 million carrying value, as reflected in the accompanying consolidated balance sheet as of August 27, 2011. Offsetting the change in the value of the non-controlling interest in NBP is a corresponding change in members’ capital.
(15) Legal Proceedings
As of December 29, 2012, USPB was not a party to any lawsuit or claim arising out of the operation of its business.
NBP is a party to a number of lawsuits and claims arising out of the operation of its business. Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
(16) Business Segments
ASC 820, Disclosures about Segments of an Enterprise and Related Information establishes annual and interim reporting standards for operating segments of a company. It also requires entity wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues, and its major customers. USPB is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, USPB operates in one operating segment and reports only certain enterprise‑wide disclosures.
Customer Concentration
In the 18 weeks ended December 31, 2011 and fiscal years 2011 and 2010, one customer of NBP represented 9.3%, 8.7%, and 9.5%, respectively, of total sales, with no other customer representing more than 3.6%, 3.3%, and 3.0%, respectively, of total sales.
Sales to Foreign Countries
NBP had sales outside the United States in the 18 weeks ended December 31, 2011 and fiscal years 2011 and 2010 of approximately $269.6 million, $865.2 million, and $636.9 million, respectively. No single country outside the United States of America accounted for more than 3.6% of total sales. The amount of assets maintained outside the United States of America is not material.
F-31
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Transition Period Comparative Data
|
|
|
|
| 17 weeks | ||
|
|
| 18 weeks |
| ended | ||
|
|
| ended |
| December | ||
|
|
| December |
| 25, 2010 | ||
|
|
| 31, 2011 |
| (unaudited) | ||
|
|
| (millions of dollars) | ||||
Statement of Operations Data: |
|
|
| ||||
Net sales | $ | 2,466.3 |
| $ | 2,102.9 | ||
|
|
|
|
|
| ||
Costs and expenses: |
|
|
| ||||
| Cost of sales | 2,412.1 |
| 1,995.2 | |||
| Selling, general, and administrative | 31.9 |
| 18.6 | |||
| Depreciation and amortization | 15.4 |
| 17.2 | |||
|
|
|
|
|
| ||
| Operating income | 6.8 |
| 71.8 | |||
|
|
|
|
|
| ||
Other income (expense): |
|
|
| ||||
| Interest income | - |
| 0.0 | |||
| Interest expense | (3.3) |
| (3.7) | |||
| Gain on deconsolidation and sale of majority of ownership |
|
|
| |||
|
| interest in National Beef Packing Company, LLC | 777.7 |
| - | ||
| Other, net | 1.5 |
| 0.6 | |||
Total other expense, net | 775.9 |
| (3.1) | ||||
| Income tax expense | (0.7) |
| (0.4) | |||
Net income | 782.0 |
| 68.3 | ||||
Less: Net income attibutable to non-controlling interest in: |
|
|
| ||||
| Kansas City Steak Company, LLC | (0.5) |
| (0.9) | |||
| National Beef Packing Company, LLC | (5.4) |
| (21.1) | |||
Net income attributable to U.S. Premium Beef, LLC | $ | 776.1 |
| $ | 46.3 | ||
|
|
|
|
|
| ||
Earnings per unit: |
|
|
| ||||
| Basic |
|
|
| |||
|
| Class A units | $ | 105.53 |
| $ | 6.05 |
|
| Class B units | $ | 924.64 |
| $ | 53.00 |
| Diluted |
|
|
| |||
|
| Class A units | $ | 103.75 |
| $ | 5.95 |
|
| Class B units | $ | 924.64 |
| $ | 53.00 |
|
|
|
|
|
| ||
Outstanding weighted-average Class A and Class B units: |
|
|
| ||||
| Basic |
|
|
| |||
|
| Class A units | 735,385 |
| 735,385 | ||
|
| Class B units | 755,385 |
| 755,385 | ||
| Diluted |
|
|
| |||
|
| Class A units | 748,055 |
| 747,600 | ||
|
| Class B units | 755,385 |
| 755,385 | ||
|
|
|
|
|
| ||
Statement of Cash Flow Data: |
|
|
| ||||
Net cash provided by operating activities | $ | 4.4 |
| $ | 50.4 | ||
Net cash provided by (used in) investing activities | 575.0 |
| (19.8) | ||||
Net cash used in financing activities | (15.3) |
| (14.1) | ||||
Effect of exchange rate changes on cash | - |
| 0.0 | ||||
| Net increase in cash | $ | 564.1 |
| $ | 16.6 | |
|
|
|
|
|
| ||
|
|
|
|
|
|
F-32
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(18) Quarterly Results (Unaudited)
Selected quarterly financial data for fiscal year 2012, 18 weeks ended December 31, 2011 and fiscal year 2011 are set forth below (dollars in thousands, except per unit data):
|
|
|
|
|
|
| Net |
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
| (Loss) Income |
|
|
|
|
|
|
|
| |||||||
|
|
|
|
| Operating |
| Attributable |
| Basic (Loss) Earnings Per |
| Diluted Earnings Per | |||||||||||
|
| Net Sales |
| (Loss) Income |
| to USPB |
| Class A Unit |
| Class B Unit |
| Class A Unit |
| Class B Unit | ||||||||
2012 quarterly results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| March 31, 2012 |
| $ | - |
| $ | (2,026) |
| $ | (4,718) |
| $ | (0.64) |
| $ | (5.62) |
| $ | (0.64) |
| $ | (5.62) |
| June 30, 2012 |
| - |
| (1,431) |
| 5,489 |
| $ | 0.75 |
| $ | 6.54 |
| $ | 0.73 |
| $ | 6.54 | |||
| September 29, 2012 |
| - |
| (1,119) |
| 5,157 |
| $ | 0.70 |
| $ | 6.14 |
| $ | 0.69 |
| $ | 6.14 | |||
| December 29, 2012 |
| - |
| (1,158) |
| (3,204) |
| $ | (0.44) |
| $ | (3.81) |
| $ | (0.42) |
| $ | (3.81) | |||
|
|
| $ | - |
| $ | (5,734) |
| $ | 2,724 |
|
|
|
|
|
|
|
| ||||
Transition Period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Qtr ended November 26, 2011 |
| $ | 1,775,715 |
| $ | 15,980 |
| $ | 8,928 |
| $ | 0.51 |
| $ | 4.45 |
| $ | 0.50 |
| $ | 4.45 |
| Month ended December 31, 2011 |
| 690,541 |
| (9,215) |
| 767,136 |
| $ | 104.95 |
| $ | 919.59 |
| $ | 103.18 |
| $ | 919.59 | |||
|
|
| $ | 2,466,256 |
| $ | 6,765 |
| $ | 776,064 |
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
2011 quarterly results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| November 27, 2010 |
| $ | 1,587,320 |
| $ | 54,398 |
| $ | 35,449 |
| $ | 4.57 |
| $ | 40.02 |
| $ | 4.50 |
| $ | 40.02 |
| February 26, 2011 |
| 1,652,606 |
| 60,615 |
| 38,051 |
| $ | 5.04 |
| $ | 44.16 |
| $ | 4.96 |
| $ | 44.16 | |||
| May 28, 2011 |
| 1,772,903 |
| 62,469 |
| 39,931 |
| $ | 5.17 |
| $ | 45.32 |
| $ | 5.08 |
| $ | 45.32 | |||
| August 27, 2011 |
| 1,836,638 |
| 83,434 |
| 54,163 |
| $ | 7.02 |
| $ | 61.48 |
| $ | 6.90 |
| $ | 61.48 | |||
|
|
| $ | 6,849,467 |
| $ | 260,916 |
| $ | 167,594 |
|
|
|
|
|
|
|
|
F-33
NATIONAL BEEF PACKING COMPANY, LLC INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page |
|
|
Audited Consolidated Financial Statements: |
|
|
|
F-34
| |
Consolidated Balance Sheet at December 29, 2012 and December 31, 2011 | F-35
|
Consolidated Statements of Operations for the year ended December 29, 2012 | F-36
|
Consolidated Statements of Comprehensive Income for the year ended December 29, 2012 | F-36
|
Consolidated Statements of Capital Shares and Equities for the year ended December 29, 2012 | F-37
|
Consolidated Statements of Cash Flows for the year ended December 29, 2012 | F-38
|
F-39
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
F-34
The Board of Managers and Members
National Beef Packing Company, LLC:
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Beef Packing Company, LLC and its subsidiaries at December 29, 2012 and December 31, 2011, and the results of their operations and their cash flows for the year ended December 29, 2012 in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
March 27, 2013
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
National Beef Packing Company, LLC and Subsidiaries | ||||||||
Consolidated Balance Sheets | ||||||||
(thousands of dollars) | ||||||||
|
|
|
|
|
|
| ||
Assets |
| December 29, 2012 |
| December 31, 2011 | ||||
Current assets: |
|
|
|
| ||||
| Cash and cash equivalents |
| $ | 24,986 |
| $ | 18,481 | |
| Accounts receivable, less allowance for returns and doubtful accounts of $1,296 |
|
|
|
| |||
|
| and $0, respectively |
| 207,161 |
| 179,593 | ||
| Due from affiliates |
| 2,107 |
| 6,814 | |||
| Other receivables |
| 3,476 |
| 9,236 | |||
| Inventories |
| 302,914 |
| 280,499 | |||
| Other current assets |
| 22,594 |
| 25,305 | |||
|
| Total current assets |
| 563,238 |
| 519,928 | ||
Property, plant, and equipment, at cost |
|
|
|
| ||||
| Land and improvements |
| 14,892 |
| 17,859 | |||
| Buildings and improvements |
| 182,327 |
| 162,179 | |||
| Machinery and equipment |
| 240,412 |
| 201,934 | |||
| Trailers and automotive equipment |
| 1,833 |
| 10,897 | |||
| Furniture and fixtures |
| 6,159 |
| 4,117 | |||
| Construction in progress |
| 41,943 |
| 49,180 | |||
|
|
|
| 487,566 |
| 446,166 | ||
| Less accumulated depreciation |
| 37,690 |
| - | |||
|
| Net property, plant, and equipment |
| 449,876 |
| 446,166 | ||
Goodwill |
| 14,991 |
| 8,915 | ||||
Other intangibles, net of accumulated amortization of $45,249 and $0, respectively |
| 765,782 |
| 809,569 | ||||
Other assets |
| 3,266 |
| 3,359 | ||||
|
| Total assets |
| $ | 1,797,153 |
| $ | 1,787,937 |
Liabilities and Members' Capital |
|
|
|
| ||||
|
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
| ||||
| Current installments of long-term debt |
| $ | 38,609 |
| $ | 29,262 | |
| Cattle purchases payable |
| 134,556 |
| 101,301 | |||
| Accounts payable - trade |
| 87,518 |
| 82,277 | |||
| Due to affiliates |
| 551 |
| 1,584 | |||
| Accrued compensation and benefits |
| 25,213 |
| 29,588 | |||
| Accrued insurance |
| 28,393 |
| 19,933 | |||
| Other accrued expenses and liabilities |
| 13,165 |
| 10,402 | |||
| Distributions payable |
| - |
| 3,112 | |||
|
| Total current liabilities |
| 328,005 |
| 277,459 | ||
Long-term liabilities: |
|
|
|
| ||||
| Long-term debt, excluding current installments |
| 365,140 |
| 404,214 | |||
| Other liabilities |
| 2,279 |
| 2,486 | |||
|
| Total long-term liabilities |
| 367,419 |
| 406,700 | ||
|
| Total liabilities |
| 695,424 |
| 684,159 | ||
Commitments and contingencies |
|
|
|
| ||||
Members' capital |
|
|
|
| ||||
| Members' capital attributable to NBP |
| 1,097,717 |
| 1,099,710 | |||
| Accumulated other comprehensive income attributable to NBP |
| 18 |
| - | |||
| Noncontrolling interest in Kansas City Steak Company, LLC |
| 3,994 |
| 4,068 | |||
|
| Total members' capital |
| 1,101,729 |
| 1,103,778 | ||
|
| Total liabilities and members' capital |
| $ | 1,797,153 |
| $ | 1,787,937 |
|
|
|
|
|
|
| ||
See accompanying notes to consolidated financial statements. |
|
|
|
| ||||
|
|
|
|
|
|
|
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
National Beef Packing Company, LLC and Subsidiaries | ||||||
Consolidated Statement of Operations | ||||||
(thousands of dollars) | ||||||
|
|
|
|
| 52 weeks ended | |
|
|
|
|
| December 29, 2012 | |
Net sales |
| $ | 7,479,251 | |||
Costs and expenses: |
|
| ||||
| Cost of sales |
| 7,269,912 | |||
| Selling, general, and administrative |
| 56,478 | |||
| Depreciation and amortization |
| 83,063 | |||
|
| Total costs and expenses |
| 7,409,453 | ||
|
|
| Operating income |
| 69,798 | |
Other income (expense): |
|
| ||||
| Interest income |
| 43 | |||
| Interest expense |
| (12,432) | |||
| Other, net |
| 1,640 | |||
|
| Total other expense |
| (10,749) | ||
|
|
| Income before taxes |
| 59,049 | |
Income tax expense |
| (1,710) | ||||
|
|
| Net income |
| 57,339 | |
Less net income attributable to noncontrolling interest |
| (209) | ||||
Net income attributable to NBP |
| $ | 57,130 | |||
|
|
|
|
|
| |
|
|
|
|
|
| |
See accompanying notes to consolidated financial statements. |
|
| ||||
|
|
|
|
|
|
National Beef Packing Company, LLC and Subsidiaries | |||||
Consolidated Statement of Comprehensive Income | |||||
(thousands of dollars) | |||||
|
|
|
|
| |
|
|
|
| 52 weeks ended | |
|
|
|
| December 29, 2012 | |
Net income |
| $ | 57,339 | ||
Other comprehensive income (loss): |
|
| |||
| Foreign currency translation adjustments |
| 18 | ||
|
| Comprehensive income |
| 57,357 | |
|
| Comprehensive income attributable to noncontrolling interest |
| (209) | |
Comprehensive income attributable to NBP |
| $ | 57,148 | ||
|
|
|
|
| |
See accompanying notes to consolidated financial statements. |
|
| |||
|
|
|
|
|
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
National Beef Packing Company, LLC | ||||||||||||||
Consolidated Statement of Members' Capital | ||||||||||||||
(thousands of dollars) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
| Non-controlling |
|
| |||||
|
|
| Members' |
| Accumulated |
|
| interest in |
|
| ||||
|
|
| Capital |
| other |
| Kansas City |
|
| |||||
|
|
| Attributable |
| comprehensive |
|
| Steak |
|
| ||||
|
|
| to NBP |
| (loss) income |
| Company, LLC |
| Total | |||||
Balance at December 31, 2011 |
|
| $ | 1,099,710 |
| $ | - |
|
| $ | 4,068 |
| 1,103,778 | |
Net income |
|
| 57,130 |
|
|
|
| 209 |
| 57,339 | ||||
Distributions |
|
| $ | (59,123) |
| - |
|
| - |
| (59,123) | |||
Foreign currency translation adjustments |
|
|
| 18 |
|
|
|
| 18 | |||||
Distributions paid to noncontrolling interests |
|
|
|
|
|
| (283) |
| (283) | |||||
Balance at December 29, 2012 |
|
| $ | 1,097,717 |
| $ | 18 |
|
| $ | 3,994 |
| $ | 1,101,729 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
See accompanying notes to consolidated financial statements. |
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
National Beef Packing Company, LLC and Subsidiaries | ||||||||
Consolidated Statement of Cash Flows | ||||||||
(thousands of dollars) | ||||||||
|
|
|
|
|
| 52 weeks ended | ||
|
|
|
|
|
| December 29, 2012 | ||
Cash flows from operating activities: |
|
| ||||||
| Net income |
| $ | 57,339 | ||||
| Adjustments to reconcile net income to net cash provided by operating |
|
| |||||
|
| activities: |
|
| ||||
|
|
| Depreciation and amortization |
| 83,063 | |||
|
|
| Gain on disposal of property, plant, and equipment |
| (676) | |||
|
|
| Changes in assets and liabilities: |
|
| |||
|
|
|
| Accounts receivable |
| (27,568) | ||
|
|
|
| Due from affiliates |
| 4,707 | ||
|
|
|
| Other receivables |
| 5,760 | ||
|
|
|
| Inventories |
| (22,415) | ||
|
|
|
| Other assets |
| 2,669 | ||
|
|
|
| Cattle purchases payable |
| 33,255 | ||
|
|
|
| Accounts payable |
| 5,241 | ||
|
|
|
| Due to affiliates |
| (1,033) | ||
|
|
|
| Accrued compensation and benefits |
| (4,375) | ||
|
|
|
| Accrued insurance |
| 3,070 | ||
|
|
|
| Other accrued expenses and liabilities |
| 2,643 | ||
|
|
|
|
| Net cash provided by operating activities |
| 141,680 | |
Cash flows from investing activities: |
|
| ||||||
| Capital expenditures, including interest capitalized |
| (45,629) | |||||
| Proceeds from sale of property, plant, and equipment |
| 2,642 | |||||
|
|
|
|
| Net cash used in investing activities |
| (42,987) | |
Cash flows from financing activities: |
|
| ||||||
| Net (payments) under revolving credit lines |
| (700) | |||||
| Repayments of term note payable |
| (27,750) | |||||
| Repayments of other indebtedness/capital leases |
| (1,277) | |||||
| Member distributions |
| (62,196) | |||||
| Distributions paid to non-controlling interest |
| (283) | |||||
|
|
|
|
| Net cash used in financing activities |
| (92,206) | |
Effect of exchange rate changes on cash |
| 18 | ||||||
|
|
|
|
| Net increase in cash |
| 6,505 | |
Cash and cash equivalents at beginning of period |
| 18,481 | ||||||
Cash and cash equivalents at end of period |
| $ | 24,986 | |||||
Supplemental cash disclosures: |
|
| ||||||
| Cash paid during the period for interest |
| $ | 12,276 | ||||
| Cash paid during the period for taxes |
| $ | 983 | ||||
Supplemental noncash disclosures of investing and financing activities: |
|
| ||||||
| Assets acquired through capital lease |
| $ | 145 | ||||
|
|
|
|
|
|
|
| |
See accompanying notes to consolidated financial statements. |
|
|
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS
NBP operates beef slaughter and fabrication facilities in Liberal and Dodge City, Kansas, and Brawley, California, case-ready beef processing facilities in Hummels Wharf, Pennsylvania and Moultrie, Georgia and holds a 75% interest in Kansas City Steak Company, LLC, or Kansas City Steak, a portion control processing facility in Kansas City, Kansas. National Carriers, Inc., or National Carriers, a wholly-owned subsidiary located in Dallas, Texas, provides trucking services to NBP and third parties and National Elite Transportation, LLC, or National Elite, a wholly-owned subsidiary located in Springdale, Arkansas, provides third-party logistics services to the transportation industry. National Beef Leathers, LLC, or NBL, a wholly-owned subsidiary located in St. Joseph, Missouri, provides wet blue hide tanning services to NBP. As of December 29, 2012, approximately 71% of our employees were represented by collective bargaining agreements. NBP makes certain contributions for the benefit of employees (see Note 7).
On December 30, 2011, Leucadia National Corporation (Leucadia) acquired a 78.9% interest in NBP for aggregate net cash consideration of $867,869,000 (see Note 3).
NOTE 2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Basis of Presentation and Consolidation
NBP’s fiscal year consists of 52 or 53 weeks, ending on the last Saturday in December. NBP's fiscal year was changed as a result of the Leucadia acquisition (see note 3) from the last Saturday in August to the last Saturday in December. Fiscal 2012 was a 52 week fiscal year. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
NBP considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 29, 2012 and December 31, 2011, NBP had cash and cash equivalents of $25.0 million and $18.5 million, respectively, as presented in the consolidated balance sheets and consolidated statement of cash flows.
F-40
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Allowance for Returns and Doubtful Accounts
|
| Beginning |
|
|
|
|
| Ending | ||||
Period Ended |
| Balance |
| Provision |
| Charge Off |
| Balance | ||||
|
|
|
|
|
|
|
|
| ||||
December 29, 2012 |
| $ | - |
| $ | (10,470) |
| $ | 9,174 |
| $ | (1,296) |
|
|
|
|
|
|
|
|
|
Inventories at December 29, 2012 and December 31, 2011 consisted of the following (in thousands):
|
|
|
| December 29, |
| December 31, | ||
|
|
|
| 2012 |
| 2011 | ||
|
|
|
|
|
|
| ||
Dressed and boxed meat products |
| $ | 201,509 |
| $ | 167,013 | ||
Beef by-products |
| 64,846 |
| 50,356 | ||||
Supplies and other |
| 36,559 |
| 63,130 | ||||
| Total Inventory |
| $ | 302,914 |
| $ | 280,499 | |
|
|
|
|
|
|
|
Property, plant and equipment
Buildings and improvements |
| 15 to 25 years | |
Machinery and equipment |
| 2 to 15 years | |
Trailers and automotive equipment | 2 to 4 years | ||
Furniture and fixtures |
| 3 to 5 years | |
|
|
|
|
Depreciation expense was $37.8 million for the fiscal year ended December 29, 2012.
F-41
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Upon disposition of these assets, any resulting gain or loss is included in other, net (see Note 5). Major repairs and maintenance costs that extend the useful life of the related assets are capitalized. Normal repairs and maintenance costs are charged to operations.
Goodwill and Other Intangible Assets
ASC 350, Intangibles - Goodwill and Other, provides that goodwill and other intangible assets with indefinite lives shall not be amortized but shall be tested for impairment on an annual basis. Identifiable intangible assets with definite lives are amortized over their estimated useful lives. NBP evaluates goodwill and other indefinite life intangible assets annually for impairment and, if there is impairment, the carrying amount of goodwill and other intangible assets is written down to the implied fair value. For goodwill, this test involves comparing the fair value of a reporting unit to the unit’s book value to determine if any impairment exists. NBP calculates the fair value of the reporting unit using estimates of future cash flows. As of December 29, 2012, goodwill arising from the Leucadia transaction (see note 3) totaled $15.0 million.
The amounts of goodwill are as follows (amounts in thousands):
|
| December 29, | ||
|
| 2012 | ||
Beginning balance |
| $ | 8,915 | |
| Fair value adjustments |
| 6,076 | |
Ending balance |
| $ | 14,991 | |
|
|
|
|
The amounts of other intangible assets are as follows (amounts in thousands):
F-42
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| �� |
|
|
|
|
|
|
| December 29, 2012 | ||||
|
| Weighted |
|
|
|
| |||||||
|
| Average |
| Gross |
|
| |||||||
|
| Amortization |
| Carrying |
| Accumulated | |||||||
|
| Period |
| Amount |
| Amortization | |||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
| |||
| Customer Relationships | 18 |
| $ | 406,530 |
| $ | 22,585 | |||||
| Tradenames | 20 |
| 260,071 |
| 13,008 | |||||||
| Cattle supply contracts | 15 |
| 143,600 |
| 9,573 | |||||||
| Other | 10 |
| 830 |
| 83 | |||||||
|
| 18 |
| $ | 811,031 |
| $ | 45,249 | |||||
|
|
|
|
|
|
|
|
|
|
|
| ||
Total intangible assets |
|
|
|
|
|
|
| $ | 811,031 |
| $ | 45,249 | |
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
| December 31, 2011 | ||||
|
| Weighted |
|
|
|
| |||||||
|
| Average |
| Gross |
|
| |||||||
|
| Amortization |
| Carrying |
| Accumulated | |||||||
|
| Period |
| Amount |
| Amortization | |||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
| |||
| Customer Relationships | 18 |
| $ | 405,180 |
| $ | - | |||||
| Tradenames | 20 |
| 260,059 |
| - | |||||||
| Cattle supply contracts | 15 |
| 143,500 |
| - | |||||||
| Other | 10 |
| 830 |
| - | |||||||
|
| 18 |
| $ | 809,569 |
| $ | - | |||||
|
|
|
|
|
|
|
|
|
|
|
| ||
Total intangible assets |
|
|
|
|
|
|
| $ | 809,569 |
| $ | - | |
|
|
|
|
|
|
|
|
|
|
|
|
For the fiscal year ended December 29, 2012, NBP recognized $45.2 million of amortization expense on intangible assets. The following table reflects the anticipated amortization expense relative to intangible assets recognized in NBP’s consolidated balance sheet as of December 29, 2012, for each of the next five years and thereafter:
Estimated amortization expense for fiscal years ended: |
|
| ||
2013 |
| 45,249 | ||
2014 |
| 45,249 | ||
2015 |
| 45,249 | ||
2016 |
| 45,249 | ||
2017 |
| 45,249 | ||
Thereafter |
| 584,786 | ||
| Total |
| $ | 811,031 |
|
|
|
|
Overdraft Balances
The majority of NBP’s bank accounts are zero balance accounts where cash needs are funded as checks are presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are included in the trade accounts payable and cattle purchases payable balances, and the change in the related balances are reflected in operating activities on NBP’s consolidated statement of cash flows. Overdraft balances of $113.3 million and $90.8 million were included in trade accounts and cattle purchases payables at December 29, 2012 and December 31, 2011, respectively.
F-43
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Environmental Expenditures and Remediation Liabilities
Fair Value of Financial Instruments
The carrying amounts of NBP’s financial instruments, including cash and cash equivalents, short-term trade receivables and payables, approximate their fair values due to the short-term nature of the instruments. The carrying value of other debt approximates its fair value at December 29, 2012 and December 31, 2011, as substantially all such debt has a variable interest rate.
Selling, General and Administrative Costs
F-44
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Advertising and Promotion Expenses
Comprehensive income consists of net income and foreign currency translation adjustments. NBP deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.
Derivatives and Hedging Activities
NBP uses futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. In accordance with ASC 815, Derivatives and Hedging, NBP accounts for futures contracts and their related firm purchase commitments at fair value. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as “normal purchases and sales” and not marked to market. ASC 815 imposes extensive recordkeeping requirements in order to treat a derivative financial instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction is settled. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.
NOTE 3. ACQUISITION
On December 30, 2011, Leucadia acquired a controlling interest in NBP for aggregate net cash consideration of $867,869,000 (the Acquisition). Pursuant to a membership interest purchase agreement among NBP, Leucadia, US Premium Beef, LLC (USPB), NBPCo Holdings, TKK Investments, LLC (TKK), TMKCo, LLC (TMKCo) and TMK Holdings (TMK), the following transactions occurred in sequence on the closing date. TKK, TMKCo and TMK are entities controlled by the chief executive officer of NBP.
F-45
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) Leucadia purchased 76.1% of NBP from USPB and NBPCo Holdings for aggregate cash consideration of $875,369,000.
(b) TKK and TMKCo exercised their put rights with respect to their aggregate 5.1% interest in NBP and NBP redeemed their interest for aggregate cash payments of $75,947,000. NBP borrowed funds under its revolving credit facility to finance the redemption. Upon completion of this redemption Leucadia's interest in NBP increased to 79.6%.
(c) TMK purchased a .7% interest in NBP from Leucadia for a cash payment of $7,500,000, reducing Leucadia's interest to 78.9%.
A portion of the purchase price payable to USPB and NBPCo was placed on deposit with an escrow agent to secure certain indemnification obligations. Upon consummation of the transactions on the closing date, Leucadia owned 78.9%, USPB owned 15.1%, NBPCo owned 5.3%, and TMKCo owned 0.7% of NBP.
The following table reflects the allocation of the consideration paid to the assets acquired and liabilities assumed at the acquisition date, as well as the fair value of the redeemable noncontrolling interests in NBP (in thousands):
Assets: |
| December 30, 2011 | |||
Current assets: |
|
| |||
| Cash and cash equivalents |
| $ | 18,481 | |
| Trade, notes and other receivables |
| 195,643 | ||
| Inventory |
| 280,499 | ||
| Prepaids and other current assets |
| 25,305 | ||
|
| Total current assets |
| 519,928 | |
Intangible assets and goodwill |
| 826,010 | |||
Other assets |
| 3,359 | |||
Property, plant, and equipment |
| 444,030 | |||
Total assets |
| $ | 1,793,327 | ||
|
|
|
|
| |
Liabilities |
|
| |||
Current liabilities: |
|
| |||
| Trade payables and expense accruals |
| $ | 239,841 | |
| Other current liabilities |
| 13,746 | ||
| Debt due within one year |
| 29,262 | ||
|
| Total current liabilities |
| 282,849 | |
Other non-current liabilities |
| 2,486 | |||
| Long-term debt |
| 328,267 | ||
|
| Total liabilities |
| 613,602 | |
|
|
|
|
| |
Redeemable equity interests |
| 304,356 | |||
|
|
|
|
| |
|
| Net assets acquired |
| $ | 875,369 |
To assist NBP's management in its determination of the fair value of property and equipment, identifiable intangible assets and equity value, NBP engaged an independent valuation and appraisal firm. The methods used by NBP's management to determine the fair values included estimating the business enterprise value through the use of a discounted cash flow analysis. Property and equipment asset valuations included an analysis of depreciated replacement cost and current market prices. NBP considered several factors to determine the fair value of property and equipment, including local market conditions, recent market transactions, the size, age, condition, utility and character of the property, the estimated cost to acquire replacement property, an estimate of depreciation from use and functional obsolescence and the remaining expected useful life of the assets.
F-46
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Amounts allocated to product inventories were principally based on quoted commodity prices on the acquisition date. For other components of working capital, the historical carrying values approximated fair values. NBP's long-term debt principally consists of its senior credit facility payable to its bank group, which was renegotiated in June 2011. In December 2011, the lenders consented to the acquisition as required by the credit facility, and to certain other amendments to the facility's covenants; the pricing of the credit facility remained the same. In addition to these factors, NBP also analyzed changes in market interest rates from June 2011 and concluded that the principal amount due under the credit facility approximated its fair value on the acquisition date.
The fair value of TKK and TMKCo's redeemable noncontrolling interests was the amount paid to redeem those interests as described above. The fair value of other redeemable noncontrolling interests was determined based upon the purchase price paid by Leucadia for its interest. The redeemable equity interests are included in members’ capital attributable to NBP in the consolidated balance sheet at December 31, 2011.
Amounts allocated to intangible assets as a result of the Leucadia acquisition, the amortization period and goodwill were as follows:
|
|
| Gross Carrying |
|
| |
|
|
| Amount |
|
| |
|
|
| (amounts in |
| Amortization | |
|
|
| thousands) |
| Period | |
Customer relationships |
| $ | 406,530 |
| 18 | |
Tradenames |
| 260,059 |
| 20 | ||
Cattle supply contracts |
| 143,600 |
| 15 | ||
Other |
| 830 |
| 10 | ||
| Subtotal, intangible assets |
| $ | 811,019 |
|
|
Goodwill |
| 14,991 |
|
| ||
| Total |
| $ | 826,010 |
|
|
|
|
|
|
|
|
NOTE 4. NEW ACCOUNTING PRONOUNCEMENTS
In May 2011, the FASB issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS under ASU 2011-04, or ASU 2011-04. ASU 2011-04 amends ASC 820, Fair Value Measurements (ASC 820), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 was effective for annual and interim periods beginning after December 31, 2011. The amendments in ASU 2011-04 are to be applied prospectively. The adoption of ASU 2011-04 did not have a material effect on NBP's consolidated financial statements or disclosures.
In June 2011, the FASB issued Presentation of Comprehensive Income under ASU 2011-05 or ASU 2011-05. ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for annual and interim periods beginning after December 31, 2011. The adoption of ASU 2011-05 NBP resulted in NBP presenting the consolidated statement of comprehensive income as a separate but consecutive statement following the statement of operations as presented in these financial statements.
F-47
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In September 2011, the FASB issued Testing Goodwill for Impairment under ASU2011-08, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities with the option of performing a qualitative assessment to determine whether impairment testing is necessary. The revised standard is effective for annual and interim periods beginning after December 15, 2011, with early adoption permitted under certain circumstances. NBP’s adoption of this standard did not have a material impact on its financial statements.
NOTE 6. LONG-TERM DEBT AND LOAN AGREEMENTS
|
|
| December 29, 2012 |
| December 31, 2011 | |||
|
|
|
| (amounts in thousands) | ||||
Short-term debt: |
|
|
|
| ||||
| Current portion of term loan facility (a) |
| $ | 37,000 |
| $ | 27,750 | |
| Current portion of capital lease obligations and other (c) |
| 1,609 |
| 1,512 | |||
|
|
|
| $ | 38,609 |
| $ | 29,262 |
Long-term debt: |
|
|
|
| ||||
| Term loan facility (a) |
| $ | 259,000 |
| $ | 296,000 | |
| Industrial Development Revenue Bonds (b) |
| 12,245 |
| 12,245 | |||
| Revolving credit facility (a) |
| 91,403 |
| 92,103 | |||
| Long-term capital lease obligations and other (c) |
| 2,492 |
| 3,866 | |||
|
|
|
| $ | 365,140 |
| $ | 404,214 |
|
| Total debt |
| $ | 403,749 |
| $ | 433,476 |
|
|
|
|
|
|
|
(a) Senior Credit Facilities— Effective as of June 4, 2010, our Credit Facility was amended and restated to: (1) increase the borrowings under the Credit Facility by providing for a term loan facility of up to $375 million and a revolving line of credit of up to $250 million; (2) reduce the applicable margin on the rates of interest of the term loan and revolving line of credit; (3) revise the payment schedule of the term loan; (4) extend the maturity date of the Credit Facility to June 4, 2015; (5) remove limitations on capital expenditures; (6) add new financial covenants regarding adjusted net worth and a fixed charge coverage ratio; and (7) add two wholly owned subsidiaries, National Beef California, LP and National Carriers, Inc., as loan parties and guarantors
On December 5, 2011, NBP's Credit Facility was amended and restated to (1) permit the Leucadia Transaction, (2) adjust NBP's fiscal year and (3) allow for the updated distribution percentage.
On December 28, 2012, NBP received a Limited Waiver to our Credit Facility which waived the fixed charge coverage ratio requirement. A fee of approximately $0.3 million was paid by NBP for the waiver, and is included in selling, general, and administrative expenses on the consolidated statements of operations.
The borrowings under the Credit Facility bear interest at LIBOR or the Base Rate, plus the applicable margin. The applicable margin for the revolving line of credit and the term loan will be as set forth on a grid based on different rations of funded debt to EBITDA as depicted in the table below:
F-48
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
|
|
| Base Rate |
|
|
|
|
|
| ||
|
|
|
|
|
|
| Advance Line |
|
|
|
|
|
| ||
|
|
|
|
|
|
| of Credit and |
|
|
|
|
|
| ||
| Borrowing Base |
|
|
| Swing Line |
| LIBOR Rate |
|
|
|
| ||||
Availability |
| Funded Debt to EBITDA |
| Loans and |
| Line of Credit |
|
|
|
| |||||
Level |
| Ratio |
| Term Loans |
| Loan |
| LC Fees |
| Non-Use Fee | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
| Less than 1:50:1:00 |
|
|
| 0.75% |
| 1.75% |
| 1.75% |
| 0.25% | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
| Greater than 1:50:1:00 and less than 2:50:1:00 |
|
|
| 1.00% |
| 2.00% |
| 2.00% |
| 0.375% | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 |
| Greater than or equal to 2:50:1:00 |
|
|
| 1.50% |
| 2.50% |
| 2.50% |
| 0.50% | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 29, 2012 the interest rate for the term and revolving loan was equal to 2.71% and 2.79%, respectively. As of December 31, 2011, the interest rate for the term and revolving loan was equal to 2.05% and 2.20%, respectively.
The borrowings under the revolving loan are available for our working capital requirements, capital expenditures and other general corporate purposes. The advance rates under the borrowing base are 90% on eligible accounts and 70% on eligible inventory. The Credit Facility is secured by a first priority lien on substantially all of the assets of NBP and its subsidiaries.
The Credit Facility contains customary affirmative covenants relating to NBP LLC and its subsidiaries, including, without limitation, conduct of business, maintenance of insurance, compliance with laws, maintenance of properties, keeping of books and records, and the furnishing of financial statements. The facility also contains customary negative covenants relating to NBP LLC and its subsidiaries, including, without limitation, restrictions on: distributions, mergers, asset sales, investments and acquisitions, encumbrances, affiliate transactions, and ERISA matters. The ability of NBP LLC and its subsidiaries to engage in other business, incur debt or grant liens is also restricted.
The Credit Facility contains customary events of default, including without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of NBP’s property, changes in control of NBP, or failure of any of the loan documents to remain in full force, and NBP’s failure to properly fund its employee benefit plans. The Credit Facility also includes customary provisions protecting the lenders against increased cost or loss of yield resulting from changes in tax, reserve, capital adequacy and other requirements of law.
(b) Industrial Development Revenue Bonds—Effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, designed to provide property tax savings. Under the transaction, the City purchased NBP’s Dodge City facility, or the facility, by issuing $102.3 million in bonds due in December 2019, used the proceeds to purchase our Dodge City facility and leased the facility to NBP for an identical term under a capital lease. NBP purchased the City's bonds with proceeds of its term loan under the Credit Facility. Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP effectively controls enforcement of the lease against itself. As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP’s consolidated balance sheet. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated in consolidation. The transaction provides NBP with property tax exemptions for the leased facility, that, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%. The facility remains subject to a prior mortgage and security interest in favor of the lenders under the Credit Facility. Additional revenue bonds may be issued to cover the costs of certain improvements to this facility. The total amount of revenue bonds authorized for issuance is $120.0 million.
F-49
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on NBP’s behalf to fund the purchase of equipment and construction improvements at NBP’s facilities in those cities. These bonds were issued in four series of $1.0 million, $1.0 million, $6.0 million and $5.9 million and are due on demand or on February 1, 2029, March 1, 2027, March 1, 2015 and October 1, 2009, respectively. Because each series of bonds is backed by a letter of credit under our Credit Facility, these due-on-demand bonds have been presented as non-current obligations until twelve months prior to their maturity. As of December 29, 2012, the amount outstanding on the $6.0 million series of bonds had been reduced to $3.4 million and the $5.9 million series were paid at maturity on October 1, 2009. Pursuant to a lease agreement, we lease the facilities, equipment and improvements from the respective cities and make lease payments in the amount of principal and interest due on the bonds.
The bonds issued in 1999 and 2000 are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. The average per annum interest rate for each series of bonds was 0.8% in fiscal year 2012. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.
In connection with the Brawley Beef acquisition, NBP assumed the obligation under a Trust Indenture securing $6.8 million in California Pollution Control Financing Authority Tax-Exempt variable rate demand solid waste disposal revenue bonds dated as of October 1, 2001. The bonds bear a rate that is adjusted weekly, which rate will not exceed 12% per annum. The average per annum interest rate for this series of bonds for fiscal years 2012 was 0.3%. These bonds have a maturity date of October 1, 2016. NBP has the option to redeem all or a portion of the bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent will use the letter of credit to fund such tender.
(c) Capital and Operating Leases—NBP leases a variety of buildings and equipment, some of which were acquired through the Brawley Beef acquisition, as well as tractors and trailers through its subsidiary National Carriers, under capital and operating lease agreements that expire in various years. Future minimum lease payments required at December 29, 2012, under capital leases and non-cancelable operating leases with terms exceeding one year, are as follows:
F-50
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
|
|
|
|
| Non-Cancelable | |||
|
|
|
|
| Capital |
| Operating | |||
|
|
|
|
| Lease |
|
| Lease | ||
|
|
|
|
| Obligations |
| Obligations | |||
For the fiscal years ended December: |
| (amounts in thousands) | ||||||||
| 2013 |
|
| 1,569 |
|
| 15,116 | |||
| 2014 |
|
| 2,465 |
|
| 13,734 | |||
| 2015 |
|
| 17 |
|
| 8,919 | |||
| 2016 |
|
| 5 |
|
| 3,587 | |||
| 2017 |
|
| 5 |
|
| 2,115 | |||
|
|
|
|
|
|
|
|
| ||
| Thereafter |
| - |
|
| 126 | ||||
|
|
| Net minimum lease payments |
| $ | 4,061 |
|
| $ | 43,597 |
Less amount representing interest |
| (293) |
|
|
| |||||
|
|
| Present value of net minimum lease payments | $ | 3,768 |
|
|
|
| Minimum | ||
| Principal | ||
| Maturities | ||
| (amounts in thousands) | ||
Fiscal Year ending December: |
|
| |
2013 |
| 38,609 | |
2014 |
| 39,465 | |
2015 |
| 40,447 | |
2016 |
| 283,223 | |
2017 |
| 5 | |
Thereafter |
| 2,000 | |
Total minimum principal maturities |
| $ | 403,749 |
Utilities Commitment - Effective December 30, 2004, NBP finalized an agreement with the City of Dodge City, Kansas, whereby in consideration of certain improvements made to the city water and wastewater systems, NBP committed to make a series of service charge payments totaling $19.3 million over a 20 year period, of which $0.8 million was paid in the fiscal years ended 2012. Payments under the commitment will be $0.8 million in each of the fiscal years 2013 through 2017, with the remaining balance of $5.0 million to be paid in subsequent years.
Cattle Commitment - NBP makes verbal commitments to cattle producers to purchase cattle about one week in advance of delivery of the live animals to its plants, with the actual price paid for the cattle determined after the cattle are delivered and inspected at NBP’s facilities. NBP’s cattle commitments as of December 29, 2012 were $117.4 million.
F-51
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NBP maintains a tax-qualified employee savings and retirement plan, or the 401(k) Plan, covering NBP’s non-union employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 75% of their annual compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan provides for additional matching contributions by NBP, based on specific terms contained in the 401(k) Plan. The trustee of the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in designated investment options. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code. Expenses related to the 401(k) Plan totaled approximately $1.0 million for the fiscal year 2012.
NBP has agreed to make contributions to the United Food and Commercial Workers International Union-Industry Pension Fund, or the UFCW Plan, for employees covered by a collective bargaining agreement as provided for in that agreement. Expenses related to the UFCW Plan totaled approximately $0.9 million for the fiscal year 2012.
Postretirement Benefits—Certain former employees are covered by an unfunded postretirement benefit plan that provides medical and dental benefits. Costs associated with this plan, which relate primarily to insurance premiums, benefit payments and changes in the accumulated benefit obligation were approximately $0.1 million for the fiscal year 2012, and are included in other, net.
Income tax expense includes the following current and deferred provisions:
|
|
| 52 weeks ended | ||
|
|
| December 29, | ||
|
|
|
| 2012 | |
|
|
| (in thousands) | ||
Current provision: |
|
| |||
| Federal | $ | 1,188 | ||
| State |
| 634 | ||
| Foreign |
| 50 | ||
|
| Total current tax expense |
| 1,872 | |
|
|
|
|
| |
Deferred provision: |
|
| |||
| Federal |
| (165) | ||
| State |
| 3 | ||
| Foreign |
| - | ||
|
| Total deferred tax expense |
| (162) | |
|
| Total income tax expense | $ | 1,710 | |
|
|
|
|
|
Income tax expense differed from the “expected” income tax (computed by applying the federal income tax rate of 35% to earnings before income taxes) as follows:
F-52
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
| 52 weeks ended | |
|
| December 29, | |
|
| 2012 | |
|
| (in thousands) | |
Computed “expected” income tax expense | $ | 20,594 | |
Passthrough “expected” income tax expense | (19,692) | ||
State taxes, net of federal | 637 | ||
Other | 171 | ||
| Total income tax expense | $ | 1,710 |
|
|
| |
|
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 29, 2012 and December 31, 2011 are presented below:
|
|
|
| 52 weeks ended | 18 weeks ended | ||||
|
|
|
| December 29, |
| December 31, | |||
|
|
|
| 2012 |
| 2011 | |||
Deferred tax assets: |
| (in thousands) | |||||||
| Accounts receivable, due to allowance for doubtful accounts |
| $ | 143 |
| $ | 247 | ||
| Intangible assets |
| 244 |
| 336 | ||||
| Self-insurance and workers compensation accruals |
| 1,187 |
| 1,171 | ||||
| Employee benefit accruals |
| 281 |
| 44 | ||||
| Ownership in partnership |
| 186 |
| 40 | ||||
|
| Total gross deferred tax assets |
| 2,041 |
| 1,838 | |||
Deferred tax liabilities: |
|
|
|
| |||||
| Prepaid assets |
| 12 |
| 5 | ||||
| Property, plant, and equipment, principally due to differences in depreciation |
| 877 |
| 444 | ||||
|
| Total gross deferred tax liabilities |
| 889 |
| 449 | |||
|
|
| Net deferred tax assets |
| $ | 1,152 |
| $ | 1,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| December 29, |
| December 31, | |||
| 2012 |
| 2011 | |||
|
| (in thousands) | ||||
|
|
|
|
| ||
Other current assets |
| $ | 2,041 |
| $ | 1,838 |
Other liabilities |
| 889 |
| 449 | ||
|
| $ | 1,152 |
| $ | 1,389 |
|
|
|
|
|
Deferred tax assets and liabilities relate primarily to the operations of National Carriers.
NOTE 9. RELATED PARTY TRANSACTIONS
F-53
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
|
| 52 weeks ended | |
|
|
| December 29, | |
|
|
| 2012 | |
Sales to: |
| |||
| Beef Products, Inc. (1) | $ | 74,199 | |
|
| Total sales to affiliate | $ | 74,199 |
|
|
|
| |
Purchases from: |
| |||
| Beef Products, Inc. (1) | $ | 17,453 | |
|
| Total purchases from affiliate | $ | 17,453 |
|
|
|
| |
(1) Beef Products, Inc. (BPI) is an affiliate of NBPCo Holdings | ||||
|
|
|
| |
|
|
|
|
In January 2007, we entered into an agreement with BPI for BPI to manufacture and install a grinding system in one of our plants. In accordance with the agreement with BPI, we are to pay BPI a technology and support fee based on the number of pounds of product produced using the grinding system. The installation of the grinding system was completed in fiscal year 2008. During fiscal years 2012, we paid approximately $1.8 million to BPI in technology and support fees.
In December 1997, the former Farmland National Beef Packing Company, L.P., or FNBPC, the predecessor entity to NBP, entered into a contract with USPB to purchase a portion of its annual cattle requirements. In connection with USPB’s purchase of its interest in Farmland National Beef, USPB obtained the right, and became subject to the obligation, if requested, to deliver cattle annually to NBP relative to: (i) USPB’s ownership in NBP and (ii) the number of cattle processed annually by NBP. At the beginning of fiscal year 2005, USPB converted to a limited liability company. USPB now facilitates the delivery of cattle annually to NBP through its individual producer-owners. The purchase price for the cattle is determined by NBP’s pricing grid, which, under the terms of the agreement with USPB, must be competitive with the pricing grids of NBP’s competitors and may not be less favorable than pricing grids offered to other suppliers. During the fiscal year ended December 29, 2012 NBP obtained approximately 21%, of its cattle requirements through this pricing grid process from USPB and its producer-owners.
NOTE 10. FAIR VALUE MEASUREMENTS
NBP determines fair value utilizing a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs used to measure fair value are as follows:
• Level 1 — quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.
• Level 2 — observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
• Level 3 — unobservable inputs for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are not available.
F-54
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table details the assets and liabilities measured at fair value on a recurring basis as of December 29, 2012, and December 31, 2011 and also the level within the fair value hierarchy used to measure each category of assets (in thousands).
|
|
|
| Quoted Prices in |
|
|
|
| ||||
|
|
|
| Active Markets for |
| Significant Other |
| Significant | ||||
|
|
|
| Identical Assets |
| Observable Inputs |
| Unobservable | ||||
Description |
| December 29, 2012 |
| (Level 1) |
| (Level 2) |
| Inputs (Level 3) | ||||
|
|
|
|
|
|
|
|
| ||||
Other current assets - |
|
|
|
|
|
|
|
| ||||
derivatives |
| $ | 3,505 |
| $ | 375 |
| $ | 3,130 |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Other accrued expenses and |
|
|
|
|
|
|
|
| ||||
liabilities - derivatives |
| $ | 3,114 |
| $ | 3,114 |
| $ | - |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
|
|
|
| Quoted Prices in |
|
|
|
| ||||
|
|
|
| Active Markets for |
| Significant Other |
| Significant | ||||
|
|
|
| Identical Assets |
| Observable Inputs |
| Unobservable | ||||
Description |
| December 31, 2011 |
| (Level 1) |
| (Level 2) |
| Inputs (Level 3) | ||||
|
|
|
|
|
|
|
|
| ||||
Other current assets - |
|
|
|
|
|
|
|
| ||||
derivatives |
| $ | 3,816 |
| $ | 88 |
| $ | 3,728 |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Other accrued expenses and |
|
|
|
|
|
|
|
| ||||
liabilities - derivatives |
| $ | 2,802 |
| $ | 2,802 |
| $ | - |
| $ | - |
|
|
|
|
|
|
|
|
|
NOTE 11. DISCLOSURE ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As part of NBP’s ongoing operations, NBP is exposed to market risks such as changes in commodity prices. To manage these risks, NBP may enter into the following derivative instruments pursuant to our established policies:
• Forward purchase contracts for cattle for use in our beef plants
• Exchange traded futures contracts for cattle
• Exchange traded futures contracts for grain
NBP enters into certain commodity derivatives, primarily with a diversified group of highly rated counterparties. The maximum amount of loss due to the credit risk of the counterparties, should the counterparties fail to perform according to the terms of the contracts, is deemed to be immaterial as of December 29, 2012 and December 31, 2011. The exchange-traded contracts have been entered into under a master netting agreement. None of the derivatives entered into have credit-related contingent features. NBP has $6.8 million and $10.7 million in cash collateral posted on its derivative liabilities included in other current assets on the consolidated balance sheets as of December 29, 2012 and December 31, 2011, respectively.
F-55
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 29, 2012 | Derivative Asset |
| Derivative Liability | |||||||||
|
| Balance Sheet |
|
|
| Balance Sheet |
|
| ||||
|
| Location |
| Fair Value |
| Location |
| Fair Value | ||||
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| Other accrued |
|
| ||
|
| Other current |
|
|
| expenses and |
|
| ||||
Commodity contracts | assets |
| $ | 3,505 |
| liabilities |
| $ | 3,114 | |||
| Total |
|
|
|
| $ | 3,505 |
|
|
| $ | 3,114 |
December 31, 2011 | Derivative Asset |
| Derivative Liability | |||||||||
|
| Balance Sheet |
|
|
| Balance Sheet |
|
| ||||
|
| Location |
| Fair Value |
| Location |
| Fair Value | ||||
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| Other accrued |
|
| ||
|
| Other current |
|
|
| expenses and |
|
| ||||
Commodity contracts | assets |
| $ | 3,816 |
| liabilities |
| $ | 2,802 | |||
| Total |
|
|
|
| $ | 3,816 |
|
|
| $ | 2,802 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents the impact of derivative instruments on the Consolidated Statement of Operations for the fiscal year ended December 29, 2012 (in thousands of dollars):
|
|
|
|
|
|
|
| Amount of Gain (Loss) Recognized in | ||||
Derivatives Not |
| Location of Gain (Loss) |
|
|
|
| ||||||
Designated as |
| Recognized in Income on |
| 52 weeks ended |
| 18 weeks ended | ||||||
Hedging Instruments |
| Derivatives |
| December 29, 2012 |
| December 31, 2011 | ||||||
|
|
|
|
|
|
|
|
|
|
| ||
Commodity contracts |
| Net sales |
| $ | 288 |
| $ | 6,271 | ||||
Commodity contracts |
| Cost of sales |
| (911) |
| (3,866) | ||||||
|
| Total |
|
|
| $ | (623) |
| $ | 2,405 |
NOTE 12. LEGAL PROCEEDINGS
NBP has been named as a defendant in a wage-and-hour lawsuit entitled Valente Sandoval Barbosa, et al. v. National Beef Packing Company, LLC, Case No. 12-cv-2311 KHV/DJW (United States District Court, State of Kansas), instituted on May 22, 2012. The plaintiffs allege that NBP violated the Fair Labor Standards Act by failing to compensate non-exempt production line employees at its facility in Liberal, Kansas for time spent performing pre-and post-production activities. The court conditionally certified a class in January 2013 consisting of all hourly production employees subject to NBP gang-time compensation practices between January 31, 2010 and January 31, 2013. The plaintiffs seek actual damages, pre-and post-judgment interest, and costs and expenses incurred in the action, including attorneys’ fees. NBP believes that it has meritorious defenses to this case and intends to defend the case vigorously, but there can be no assurances as to the outcome of this case or the impact on NBP’s consolidated financial position, results of operations and cash flows.
NBP is a party to a number of other lawsuits and claims arising out of the operation of its business. Management believes the ultimate resolution of such matters should not have a material adverse effect on NBP’s financial condition, results of operations or liquidity.
F-55
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13. SUBSEQUENT EVENTS
During the first quarter of 2013, the two case-ready facilities will begin to operate at reduced levels, resulting in an approximate 50% reduction in the number of personnel employed at the facilities. In connection with the reduction in the labor force, National Beef will record a charge estimated to be approximately $2.9 million during the first quarter of 2013.
NBP evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through March 27, 2013, the date the financial statements were available for issuance.
F-56