UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
R | | 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 28, 2013 |
or |
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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 R
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 R
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 R 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 R 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. R
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 R 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 R
The registrant’s equity is not traded on any exchange or other public market; however, there have been private transactions. As of February 28, 2014, there were 735,385 Class A units and 755,385 Class B units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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.
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.
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.
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.
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.
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 Class A unitholders and associates to NBP. Each Class A 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 10.8 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. 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.
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 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 - Regulation and Environmental.
Sales, Marketing, and Customers
NBP is the only beef processor that USPB has a cattle delivery agreement with. 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 Class A 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 maintains a federally registered trademark on a U.S. Premium Beef logo that it uses periodically.
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 Class A unitholders and associates to NBP. Each Class A 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 (NBP is the only beef processor that USPB has a cattle delivery agreement with). 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’s beef processing operations are one of the largest beef processing companies in the U.S., accounting for approximately 14.5% of the 2013 federally inspected steer and heifer slaughter as reported by the United States Department of Agriculture (USDA). NBP, headquartered in Kansas City, Missouri, 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 with approximately 87% of NBP’s revenues being generated from the sale of fresh beef.
NBP operates the largest wet blue tanning facility in the world 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 recently spent approximately $40.0 million to rebuild the tannery, while significantly expanding its capacity and capabilities; the plant is outfitted with automated production and packaging technology and is expected to be fully operational in 2014. The tannery is capable of producing 60,000 hides per week.
NBP owns Kansas City Steak Company, LLC, 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 also owns a refrigerated and livestock transportation company that provides transportation services for NBP and third parties.
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 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 and was largely unchanged during 2013.
Revenues were largely unchanged during 2013 as compared to 2012 due primarily to slightly higher selling prices but fewer cattle processed. Cost of sales increased during 2013 as compared to 2012 as cattle prices rose to record high levels, due in part to the declining U.S. cattle herd, which was exacerbated by drought conditions across key cattle raising areas in 2012. As a result, gross margins were compressed during 2013. In addition, NBP’s profitability during 2013 declined as compared to 2012 due to the reduction in gross margin generated by the consumer-ready facilities, as discussed below.
During 2013, Walmart discontinued using NBP as a provider of its consumer-ready products. NBP has two consumer-ready processing facilities, one of which was completely dedicated to Walmart’s business and the other substantially so dedicated. Total consumer-ready revenues were approximately 7% of NBP consolidated revenues during 2012, but as a value-added product, consumer-ready products have historically constituted a higher percentage of NBP’s gross margin. Since 2008, consumer-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 continues to pursue replacement business for its consumer-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. If NBP concludes its best course of action is to close one or both consumer-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.
During 2013, the two consumer-ready facilities operated 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, NBP recorded charges of approximately $1.9 million during 2013.
During the fourth quarter of 2013 NBP decided to close its beef processing facility located in Brawley, California; the facility is expected to close in May 2014. Closing the facility is expected to result in improved cash flows from NBP’s operations. NBP evaluated the recoverability of the long-lived assets at Brawley, which had an aggregate carrying amount of $93.2 million at December 28, 2013, and based on its estimate of future undiscounted cash flows concluded that the carrying value was not recoverable and the facility was impaired. As a result, NBP concluded that the fair value of the long-lived assets at the Brawley facility is $29.9 million at December 31, 2013, and recorded an impairment loss of $63.3 million, which is reflected in Costs and expenses in NBP’s Consolidated Statement of Operations for the year ended December 28, 2013. As with any estimate of fair value, future market, regulatory and general economic conditions as well as the obsolescence, future deterioration of, or inability to locate a purchaser should NBP decide to sell the facility could have a significant effect on their future value.
In addition to the long-lived asset impairment charge, NBP expects to incur additional costs relating to the closing of the facility during 2014. These costs include costs for fulfilling certain contractual obligations, employee separation and retention, systems decommissioning and various other expenses. NBP currently estimates that these costs could be up to $20.0 million in the aggregate. Under GAAP, these costs may not be accrued until they are actually incurred.
Sales and Marketing
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. In addition, NBP sells beef by-products to the variety meat, feed processing, fertilizer and pet food industries. NBP exports products to more than 25 countries; export sales currently represent approximately 13% of annual revenues. In 2013, Walmart represented approximately 5% of NBP’s revenues, and its top 10 customers accounted for approximately 26% of revenues.
NBP emphasizes the sale of higher-margin, value-added products, which include branded boxed beef, consumer-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.
The demand for beef products is generally highest in the spring and summer months.
Raw Materials and Procurement
The primary raw material for the processing plants is live cattle. The domestic beef industry is characterized by cattle prices that change daily based on seasonal consumption patterns, overall supply and demand for beef and other proteins, cattle inventory levels, weather and other factors. NBP’s two largest beef processing facilities are located in southwest Kansas. The primary market area for the purchase of cattle for those facilities includes Kansas, Texas and Oklahoma. A significant portion of USPB’s unitholders and associates are located in this area. The close proximity of NBP’s facilities to large supplies of cattle gives its buyers the ability to visit feedlots on a regular basis, which enables NBP to develop strong working relationships with its suppliers, reduces its reliance on any one cattle supplier and lowers in-bound transportation costs.
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 years 2013 and 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 years 2013 and 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.
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. During 2013, after exhausting all opportunities to improve the operating performance of the Brawley beef processing facility, NBP decided to close the facility. The facility is expected to close in May 2014. Subsequent to closing the plant, NBP plans to hold the plant in “mothballed” status indefinitely. See Business of NBP Packing Company, Beef Processing Services, for more information.
NBP owns consumer-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).
Competition
The beef processing industry is highly competitive. Competitive conditions 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’s operations are subject to extensive regulation by the USDA including its Food Safety and Inspection Service (FSIS) and its Grain Inspection, Packers and Stockyards Administration (GIPSA), the Food and Drug Administration (FDA), the U.S. Environmental Protection Agency (EPA) and other federal, state, local and foreign authorities regarding the processing, packaging, storage, safety, distribution, advertising and labeling of its products.
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, 2013, NBP has obtained from an insurance company a surety bond in the amount of $49.4 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 facility 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, Brawley, Hummels Wharf and Moultrie 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 9,200 employees, of which approximately 6,700 are currently represented by collective bargaining agreements. Approximately 2,700 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 that was scheduled to expire in December 2013 but was extended indefinitely prior to the expiration. Approximately 150 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 our beef processing and manufacturing 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. A decline in the supply of fed cattle available for NBP’s Brawley facility was a key factor in the decision to close the plant.
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 our 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 our 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 13% of NBP’s annual sales are export sales, primarily to Mexico, Japan, South Korea, Canada, China (for hides), Hong Kong, 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 incurs substantial costs to comply with environmental regulations and could incur additional costs as a result of new regulations or compliance failures that result in civil or criminal penalties, liability for damages and negative publicity.
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.
Failure to replace Walmart’s consumer-ready business would have a significant adverse effect on NBP’s sales and profitability.
Sales to Walmart represented approximately 10% of NBP’s total net sales during 2012. Walmart discontinued using NBP as a provider of its consumer-ready products in 2013. Total consumer-ready revenues were approximately 7% of NBP consolidated revenues during 2012, but as a value-added product, consumer-ready products have historically constituted a higher percentage of NBP’s gross margin. Since 2008, consumer-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 consumer-ready facilities; however, it may not be able to fully replace the operating cash flow generated by these facilities.
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 our financial condition, cash flows and results of operations.
Risk Factors Associated with USPB
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.
USPB’s investment in NBP could become impaired.
USPB’s investment in NBP is carried under the equity method of accounting. Operating losses, economic and industry events, and a variety of other factors may result in a decrease in the value of the investment, which is other than temporary. Such potential decreases in value will cause the Company to record an impairment charge, which may have an impact on the trading values of USPB’s Class A and Class B units.
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.
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 10. 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, 2014, there were 481 record holders of Class A units and 486 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 years 2013 and 2012 by quarter were as follows:
| | | Affiliated Sales | | | | Third Party Sales | |
| | Class A | | Class B | | Class A | | Class B |
| | Low | High | | Low | High | | Low | High | | Low | High |
| | | | | | | | | | | | |
Fiscal Year 2013 | | | | | | | | | | | |
Quarter ending: | | | | | | | | | | | |
| March 30, 2013 | $ | 18.99 | $ | 100.00 | | $ | 170.99 | $ | 200.00 | | $ | 151.00 | $ | 175.00 | | $ | - | $ | - |
| June 29, 2013 | $ | 64.13 | $ | 150.00 | | $ | 130.19 | $ | 180.00 | | $ | 150.00 | $ | 181.00 | | $ | 170.00 | $ | 180.00 |
| September 28, 2013 | $ | - | $ | - | | $ | 170.12 | $ | 175.00 | | $ | 170.00 | $ | 170.00 | | $ | 170.00 | $ | 170.00 |
| December 28, 2013 | $ | 9.45 | $ | 181.00 | | $ | 78.00 | $ | 170.00 | | $ | 170.00 | $ | 174.25 | | $ | 174.25 | $ | 174.25 |
Subsequent to December 28, 2013 | $ | 20.00 | $ | 165.00 | | $ | 35.00 | $ | 130.00 | | $ | 150.00 | $ | 165.00 | | $ | - | $ | - |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Fiscal Year 2012 | | | | | | | | | | | |
Quarter ending: | | | | | | | | | | | |
| 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 | | $ | - | $ | - | | $ | - | $ | - |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
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 years 2013 and 2012, USPB’s Board of Directors approved the following per unit cash distributions to be made to its Class A and Class B unitholders:
| | Class A | | | Class B |
Fiscal Year 2013 | | | | | |
| None | | $ | 0.00 | | | $ | 0.00 |
| | | | | | |
Fiscal Year 2012 | | | | | |
| February 27, 2012 | | $ | 2.87 | | | $ | 25.18 |
| April 10, 2012 | | $ | 0.32 | | | $ | 2.83 |
| | | | | | |
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 28, 2013 and December 29, 2012 were not consolidated with NBP. In all periods prior to the Leucadia Transaction, NBP’s financial results were consolidated with the results of USPB.
The following table sets forth selected unconsolidated statement of operations and balance sheet data for fiscal years ended December 28, 2013 and 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 three fiscal years ended August 27, 2011 and selected balance sheet data as of the three fiscal years ended August 27, 2011, August 28, 2010, and August 29, 2009. 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.
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.
| | | | | | | 18 Weeks | | | |
| | | | Fiscal Year Ended (1) | | Ended | Fiscal Years Ended (1) |
| | | | December | December | December | August 27, | August 28, | August 29, |
| | | | 28, 2013 | 29, 2012 | 31, 2011 | 2011 | 2010 | 2009 |
| | | | | (millions of dollars, except unit and per unit data) | |
Statement of Operations Data: | | | | | | | | |
Net sales | | $ | - | $ | - | | $ | 2,466.3 | $ | 6,849.5 | $ | 5,807.9 | $ | 5,449.3 |
Costs and expenses: | | | | | | | | |
| Cost of sales | | - | - | | 2,412.1 | 6,473.3 | 5,438.0 | 5,187.1 |
| Selling, general, and administrative | 5.4 | 5.7 | | 31.9 | 60.7 | 55.5 | 49.1 |
| Depreciation and amortization | | - | - | | 15.4 | 54.6 | 53.0 | 45.7 |
Operating (loss) income | | (5.4) | (5.7) | | 6.8 | 260.9 | 261.4 | 167.4 |
Other income (expense): | | | | | | | | |
| Interest income | | 0.1 | 0.1 | | - | - | - | 0.3 |
| Interest expense | | (0.1) | (0.3) | | (3.3) | (11.7) | (14.9) | (23.6) |
| Equity in (loss) income of National Beef Packing Company, LLC | (6.5) | 8.6 | | - | - | - | - |
| Gain on deconsolidation and sale of majority of ownership | | | | | | | |
| | interest in National Beef Packing Company, LLC | - | - | | 777.7 | - | - | - |
| Termination fee | | - | - | | - | - | - | 14.6 |
| Other, net | | 0.7 | 0.1 | | 1.5 | 0.3 | (7.3) | (6.4) |
Total other (expense) income | | (5.8) | 8.5 | | 775.9 | (11.4) | (22.2) | (15.1) |
| Income tax expense | | - | (0.1) | | (0.7) | (2.6) | (0.9) | (1.0) |
Net (loss) income | | (11.2) | 2.7 | | 782.0 | 246.9 | 238.4 | 151.3 |
Less: Net income attributable to non-controlling interest in: | | | | | | | |
| Kansas City Steak Company, LLC | | - | - | | (0.5) | (0.6) | (1.0) | (1.3) |
| National Beef Packing Company, LLC | - | - | | (5.4) | (78.7) | (76.5) | (50.0) |
Net (loss) income attributable to U.S. Premium Beef, LLC | $ | (11.2) | $ | 2.7 | | $ | 776.1 | $ | 167.6 | $ | 160.9 | $ | 100.0 |
| | | | | | | | | | |
Selected Balance Sheet Data: | | | | | | | | |
| Cash and cash equivalents | | $ | 59.8 | $ | 62.7 | | $ | 642.7 | $ | 78.6 | $ | 35.4 | $ | 18.9 |
| Total assets | | $ | 254.9 | $ | 267.4 | | $ | 848.1 | $ | 1,082.2 | $ | 986.7 | $ | 872.9 |
| Long-term debt, less current maturities | $ | - | $ | - | | $ | - | $ | 321.9 | $ | 225.1 | $ | 293.4 |
| Non-controlling interest in National Beef Packing | | | | | | | |
| | Company, LLC and Kansas City Steak Company, LLC | $ | - | $ | - | | $ | - | $ | 354.2 | $ | 294.5 | $ | 185.8 |
| Capital shares and equities | | $ | 244.2 | $ | 254.5 | | $ | 275.3 | $ | 85.1 | $ | 166.9 | $ | 159.8 |
| | | | | | | | | | |
| Units outstanding | | | | | | | | |
| | 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 | 755,385 | 755,385 |
| | | | | | | | | | |
Per Unit Data: | | | | | | | | |
Earnings Per Unit | | | | | | | | |
| Basic | | | | | | | | |
| | Class A Units | | $ | (1.52) | $ | 0.37 | | $ | 105.46 | $ | 21.80 | $ | 29.24 | $ | 44.57 |
| | Class B Units | | $ | (13.34) | $ | 3.25 | | $ | 924.04 | $ | 190.98 | $ | 174.24 | $ | 90.29 |
| Diluted | | | | | | | | |
| | Class A Units | | $ | (1.52) | $ | 0.36 | | $ | 103.68 | $ | 21.44 | $ | 28.78 | $ | 44.05 |
| | Class B Units | | $ | (13.34) | $ | 3.25 | | $ | 924.04 | $ | 190.98 | $ | 174.24 | $ | 90.29 |
| | | | | | | | | | |
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 | 755,385 | 737,052 |
| Diluted | | | | | | | | |
| | Class A Units | | 735,385 | 747,836 | | 748,055 | 747,600 | 747,334 | 744,039 |
| | Class B Units | | 755,385 | 755,385 | | 755,385 | 755,385 | 755,385 | 737,052 |
| | | | | | | | | | |
| | | | | | | | | | |
(1) | Effective December 30, 2011, USPB's fiscal year changed from the last Saturday in August to the last Saturday in December. Fiscal years 2013, 2012, 2011, 2010 and 2009 consisted of a 52 week year. |
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, 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%.
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. In the fourth quarter of fiscal year 2003, the cooperative acquired a controlling interest in the former FNB, now NBP, and the assets, liabilities and operating results of NBP were consolidated with those of USPB effective August 7, 2003.
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 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 agreements carry a term of five years and have an evergreen renewal provision. The agreement provides 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.
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 closed on August 6, 2003. NBP assumed both the Uniform Delivery and Marketing Agreements and the cattle purchase agreement.
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.
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 2013, 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 for the 18 weeks ended December 31, 2011 and prior.
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 accounting 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.
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 periods ended December 28, 2013 and 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 | | December | | August 27, |
| | | | 28, 2013 | | 29, 2012 | | 2011 |
| | | | (millions of dollars) |
Net sales | $ | - | | $ | - | | $ | 6,849.5 |
| | | | | | | | |
Costs and expenses: | | | | | |
| | Cost of sales | - | | - | | 6,473.3 |
| | Selling, general, and administrative | 5.4 | | 5.7 | | 60.7 |
| | Depreciation and amortization | - | | - | | 54.6 |
| | | Operating (loss) income | (5.4) | | (5.7) | | 260.9 |
| | | | | | | | |
| Other income (expense): | | | | | |
| | Interest income | 0.1 | | 0.1 | | - |
| | Interest expense | (0.1) | | (0.3) | | (11.7) |
| | Equity in (loss) income of National Beef Packing Company, LLC | (6.5) | | 8.6 | | - |
| | Other, net | 0.7 | | 0.1 | | 0.3 |
Total other income (expense), net | (5.8) | | 8.5 | | (11.4) |
| | Income tax expense | - | | (0.1) | | (2.6) |
Net (loss) income | (11.2) | | 2.7 | | 246.9 |
Less: Net income attributable to noncontrolling interest in: | | | | | |
| | Kansas City Steak Company, LLC | - | | - | | (0.6) |
| | National Beef Packing Company, LLC | - | | - | | (78.7) |
Net (loss) income attributable to U.S. Premium Beef, LLC | $ | (11.2) | | $ | 2.7 | | $ | 167.6 |
The results of operations of NBP for the fiscal year ended August 27, 2011 are consolidated and transactions between USPB and NBP have been eliminated.
Fiscal Year Ended December 28, 2013 compared to December 29, 2012
Net Sales. There were no sales during the fifty-two weeks end December 28, 2013 and December 29, 2012.
Cost of Sales. There was no cost of sales during the fifty-two weeks end December 28, 2013 and December 29, 2012.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $5.4 million for the fifty-two weeks ended December 28, 2013 compared to approximately $5.7 million for the fifty-two weeks ended December 29, 2012, a decrease of approximately $0.3 million. The decrease is primarily due to lower salary, bonus and advisory expenses, which were down as a result of the former CEO resigning his position. Those decreases were partially offset by higher expenses on the former CEO’s phantom unit plan.
Depreciation and Amortization Expense. There were no depreciation and amortization expenses during the fifty-two weeks end December 28, 2013 and December 29, 2012.
Operating Loss. Operating loss was approximately $5.4 million for the fifty-two weeks ended December 28, 2013 compared to operating loss of approximately $5.7 million for the fifty-two weeks ended December 29, 2012, a decrease of approximately $0.3 million.
Interest Expense. Interest expense was $0.1 million for the fifty-two weeks ended December 28, 2013 compared to $0.3 million for the fifty-two weeks ended December 29, 2012.
Equity in (Loss) Income of National Beef Packing Company, LLC. Equity in NBP was a loss of $6.5 million for the fifty-two weeks ended December 28, 2013 compared to income of $8.6 million for the fifty-two weeks ended December 29, 2012. As of December 31, 2011, USPB started carrying its 15.0729% investment in NBP under the equity method of accounting.
Other, net. Other income was $0.7 million and $0.1 million for the fifty-two weeks ended December 28, 2013 and December 29, 2012, respectively, an increase of approximately $0.6 million. The increase was primarily due to higher lease income on the Company owned delivery rights.
Income Tax Expense. Income tax expense was $0.0 million and $0.1 million for the fifty-two weeks ended December 28, 2013 and December 29, 2012, respectively.
Net (Loss) Income. Net loss for the fifty-two-week period ended December 28, 2013 was approximately $11.2 million compared to net income of approximately $2.7 million for the fifty-two-week period ended December 29, 2012, a decrease of approximately $13.9 million. The decrease in net income is primarily due to lower gross margins at NBP, which was partially offset by lower expense at USPB.
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 earlier. That decrease is primarily due to lower compensation expense on the phantom unit plans and lower legal expenses.
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.
The following table shows consolidated statements of operations data for the periods indicated:
| | | | 18 weeks ended | | 17 weeks ended |
| | | | December 31, | | December 25, |
| | | | 2011 | | 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
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 company’s 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 10.5%. 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 consolidated statements of operations data for NBP for the transition period and the same period in the prior year:
| | 18 weeks ended | | 17 weeks ended |
| | December 31, 2011 | | December 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 | 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 |
| | | | |
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 28, 2013, we had net working capital (the excess of current assets over current liabilities) of approximately $94.2 million, which included cash and cash equivalents of $59.8 million and restricted cash of $36.9 million, with $0.2 million in distributions payable and $0.1 million in patronage notices payable. As of December 29, 2012, we had net working capital of approximately $59.1 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. Our primary sources of liquidity for fiscal years 2013 and 2012 were cash and cash flow from operations, respectively, and available borrowings under the Master Loan Agreement.
As of December 28, 2013, 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 28, 2013.
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 in fiscal years 2013 or 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 used in operating activities was $6.0 million in fiscal year 2013 as compared to net cash provided of $3.2 million in fiscal year 2012. The $9.2 million decrease was primarily due to lower distributions from NBP and the payment of the former CEO’s bonus.
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 28, 2013.
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.
Investing Activities
Net cash provided by investing activities was $3.0 million in fiscal year 2013 as compared to $0.0 million in fiscal year 2012. The $3.0 million change was due to distributions from NBP, which was partially offset by USPB contributing $1.5 million in additional capital to NBP to purchase 69 NBP units.
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 28, 2013.
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.
Financing Activities
Net cash provided by financing activities was $0.1 million in fiscal year 2013 as compared to a use of cash of $583.1 million in fiscal year 2012. The change was primarily related to distributions to USPB’s unitholders, and the redemption of the patronage notices which occurred as a result of the transaction with Leucadia.
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 28, 2013.
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.
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.
All of the $15 million revolving credit commitment was available as of December 28, 2013. 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 transaction with Leucadia, 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 NBP Pledge and (iv) consent to the amendments and restatements of the NBP Operating Agreement and the PA Newco Operating Agreement. The NBP Pledge grants NBP 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.
For tax year 2012, USPB’s Board of Directors authorized the Company to make quarterly tax distributions to its unitholders to assist those that make quarterly estimated tax payments. USPB made one such distribution in April 2012, which was based on a conservative estimate of taxable income for the first quarter. The estimate for the quarter was ultimately higher than actual taxable income for the full year, which caused the Company to be over-distributed. USPB’s Board of Director’s directed management to offset future tax distributions by the amount of the over-distribution. The over-distribution also resulted in a violation of the terms of the Company’s Master Loan Agreement with CoBank. The Company informed CoBank of the over-distribution and CoBank waived the violation.
Cash Payment Obligations
The following table describes the cash payment obligations as of December 28, 2013 (thousands of dollars):
| | | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | Fiscal Year | |
| | Total | 2014 (Year 1) | 2015 (Year 2) | 2016 (Year 3) | 2017 (Year 4) | 2018 (Year 5) | After Year 5 |
Term loan facility | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
Revolving credit facility | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
Interest on long-term debt (1) | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
Non-competition and consulting payments | $ | 5,863 | $ | 883 | $ | 850 | $ | 850 | $ | 850 | $ | 850 | $ | 1,580 |
Operating leases | $ | 345 | $ | 58 | $ | 58 | $ | 58 | $ | 58 | $ | 58 | $ | 58 |
| Total | $ | 6,208 | $ | 941 | $ | 908 | $ | 908 | $ | 908 | $ | 908 | $ | 1,638 |
| | | | | | | | | | | |
(1) Reflects payments to be made to CEO's pursuant to advisory and employment agreements. | | | | |
| | | | | | | | | | | |
Off-Balance Sheet Arrangements
As of December 28, 2013, 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 years 2013, 2012, the 18 week period ended December 31, 2011 and fiscal year 2011. 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 principal market risk affecting USPB’s business is exposure to interest rate risk, to the extent the Company has debt outstanding. As of December 28, 2013, the Company did not have any outstanding debt.
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 28, 2013 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;
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 28, 2013. 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(1992 Framework).
Based on the Company’s processes and assessment, as described above, management has concluded that, as of December 28, 2013, 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.
Directors, Director Nominee and Executive Officers | | | |
| | | | | | | Term Expires |
Name | | Age | | Positions and Offices with Registrant | | After FY |
Mark R. Gardiner | | 53 | | Chairman of the Board | | 2013 |
Duane K. Ramsey | | 77 | | Vice Chairman of the Board | | 2015 |
Joe M. Morgan | | 62 | | Secretary | | 2013 |
Jerry L. Bohn | | 64 | | Director | | 2015 |
Douglas A. Laue | | 62 | | Director | | 2013 |
Rex W. McCloy | | 59 | | Director | | 2014 |
Jeff H. Sternberger | | 53 | | Director | | 2014 |
Stanley D. Linville | | 55 | | Chief Executive Officer | | — |
Steven D. Hunt | | 55 | | Former Chief Executive Officer | | — |
Scott J. Miller | | 49 | | Chief Financial Officer | | — |
Danielle D. Imel | | 39 | | Treasurer | | — |
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 over 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 17,000 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.
Jerry L. Bohn. Mr. Bohn has served as the General Manager of Pratt Feeders since 1982. Pratt Feeders has a one-time capacity of 85,000 head in three 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 over 40 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 over 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, a 20,000 acre ranch in Harding Co., New Mexico and a 19,000 acre ranch in Moore Co., Texas. 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.
Stanley D. Linville. Mr. Linville has served as the Company’s Chief Executive Officer since January 28, 2013. Prior to this appointment, he served as the Company’s Chief Operating Officer, a position he held since joining the Company in 1997. As CEO, Mr. Linville continues to oversee 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.
Steven D. Hunt. 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. 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 served on the Board of National Beef Packing Company, LLC, (NBP) from 1997 until January 2013 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.
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, tax 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.
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. The Audit Committee has a charter.
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.
Fiscal Year 2013 Executive Compensation Elements
The elements of our named executive officers total compensation package are as follows:
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.
Mr. Steven Hunt served as USPB’s CEO through January 28, 2013. Mr. Hunt’s base salary was paid in accordance with the amended and restated employment agreement effective September 1, 2009 through December 31, 2015 (Hunt Employment Agreement), which provided for Mr. Hunt 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). Mr. Hunt was paid $57,292 in base salary during FY 2013.
On November 23, 2012, USPB entered into an employment agreement with Mr. Stanley 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.
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 was 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 was paid an annual incentive compensation, equal to two percent (2.0%) of the sum of the total financial benefits to USPB (Hunt USPB Total Benefits) that exceed $25,000,000 ($8,333,333 for the transition period). The Hunt USPB Total Benefits are: (1) audited fiscal year-end or Transition Period USPB earnings before tax; 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. 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. Mr. Hunt was not eligible for an annual cash bonus in FY 2013 due to his resignation effective January 28, 2013.
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 seventy-five one-hundredths of a percent (0.75%) of the sum of the total financial benefits to USPB (Linville USPB Total Benefits) that exceed $25,000,000. The Linville 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.
For FY 2013, 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 2013 USPB earnings before tax 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.
Long-term Cash Bonuses
Under the Hunt Employment Agreement, since he was employed by USPB through the end of employment year 2012, Mr. Hunt was paid long-term incentive compensation equal to one and one-quarter percent (1.25%) of the amount by which the Hunt USPB 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 the Hunt USPB Total Benefits from FY 2010, FY 2011, TP 2011 and FY 2012 exceed $144,444,444. If Mr. Hunt had remained employed by USPB through the end of employment year 2015, he was to be paid long-term incentive compensation equal to one and one-quarter percent (1.25%) of the amount by which the Hunt USPB 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 the Hunt USPB Total Benefits from FY 2013, FY 2014, and FY 2015 exceed $130,000,000. Mr. Hunt will not receive a long-term incentive compensation for FY 2013 through FY 2015.
Mr. Linville is also eligible for a long-term incentive compensation 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 the Linville USPB Total Benefits from January 1, 2013 to December 31, 2015 exceed $75,000,000.
Full Term Cash Bonus
Under the Hunt Employment Agreement, Mr. Hunt was paid full-term incentive compensation in the amount of $861,111, as he was employed under the Hunt Employment Agreement through the end of FY 2012. However, due to his resignation effective January 28, 2013, he will not receive full-term incentive compensation in the amount of $825,000 that would have been paid to him had he been 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 were 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) (Hunt Incentive Cap).
The Linville Employment Agreement provides for a cumulative annual cap of $450,000 for payments to Mr. Linville for annual and long-term incentive cash bonuses.
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
USPB also provides 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 then CEO the incentive to create and grow share value 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 2013, the management employees were 60% vested in these phantom units. The remaining phantom units will vest over the next two 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.
CEO Employment Agreement for Steven Hunt
USPB entered into the Hunt Employment Agreement with CEO Steven Hunt that provided 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. Mr. Hunt resigned effective January 28, 2013 and, as a result, USPB only paid Mr. Hunt salary earned to the date of the termination, and the noncompetition compensation described elsewhere in this section. If USPB had terminated the agreement for any reason other than cause, death or disability, or if Mr. Hunt had terminated the Hunt Employment Agreement for good reason, Mr. Hunt would have been 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 were subject to the Hunt Incentive Cap.
The Hunt Employment Agreement contained provisions that required the agreement to be renegotiated in the event certain circumstances occurred.
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 were 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 had been renegotiated, the renegotiated terms would have applied 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 would 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 would 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 noncompetition 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 noncompetition 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.
Mr. Hunt notified the Company’s Board of Directors in November 2012 of his plans to resign from his employment with the Company and Mr. Hunt did resign from his employment effective as of January 28, 2013. In accordance with the Hunt Employment Agreement, Mr. Hunt received his base salary and coverage under the Company’s health and benefit plans through January 28, 2013. Mr. Hunt also received 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 noncompetition agreement entered into in connection with the LUK Transaction. However, Mr. Hunt did not 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 seventy-five one-hundredths of a percent (0.75%) of the sum of the Linville USPB Total Benefits. 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 the Linville USPB 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.
Unit Ownership Guidelines
USPB does not allow its named executive officers to own USPB’s Class A units. As of December 28, 2013, former CEO Steven Hunt owns 20,000 Class A phantom unit options as discussed above and certain members of management own a total of 6,500 Class A and 6,500 Class B phantom unit rights awarded under the management phantom unit plan also discussed above.
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 |
Summary Compensation Table
The table below sets forth information regarding compensation for our named executive officers for fiscal year 2013 and 2012, the 2011 transition period, and fiscal year 2011. 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 | | | | |
| | | | | | | | | | | | | | | | Incentive Plan | | All Other | | |
| | | | | | | | | | | | | | Option | | Compensation | | Compensation | | |
Name and Principal Position | | Period (1) | | | | Salary ($) | | | Bonus ($) | | Awards ($) | | ($) | | ($) | | Total ($) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Stanley D. Linville (2) | | FY 2013 | | 299,331 | | - | | - | | 167,552 | (9) | 12,808 | (3) | 479,692 |
Chief Executive Officer | | FY 2012 | | | | 145,661 | | - | | 221,503 | (8) | | 216,000 | (4) | 12,633 | (3) | 595,797 |
| | TP 2011 | | | | 51,075 | | - | | - | | | | | 70,000 | (4) | 542,011 | (3) | 663,086 |
| | FY 2011 | | | | 143,283 | | - | | 132,353 | (7) | | 210,000 | (4) | - | (3) | 485,636 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Steven D. Hunt (2) | | FY 2013 | | | | 113,963 | | 861,111 | (5) | - | | | | | - | | 469,290 | (3) | 1,444,364 |
Former Chief Executive Officer | | FY 2012 | | | | 791,365 | | - | | - | | | 2,000,000 | (6) | 1,428,788 | (3) | 4,220,153 |
| | TP 2011 | | | | 296,100 | | - | | - | | | 666,667 | (6) | - | (3) | 962,767 |
| | FY 2011 | | | | 784,232 | | - | | - | | | 2,000,000 | (6) | 11,592 | (3) | 2,795,824 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Scott J. Miller | | FY 2013 | | | | 181,016 | | - | | - | | | | | 53,240 | (4) | - | (3) | 234,256 |
Chief Financial Officer | | FY 2012 | | | | 143,799 | | - | | 110,752 | (8) | | 208,500 | (4) | 12,429 | (3) | 475,480 |
| | TP 2011 | | | | 53,130 | | - | | - | | | | | 67,500 | (4) | 500,920 | (3) | 621,551 |
| | FY 2011 | | | | 139,724 | | - | | 122,172 | (7) | | 202,500 | (4) | - | (3) | 464,396 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Danielle D. Imel | | FY 2013 | | | | 126,317 | | - | | - | | | | | 38,333 | (4) | - | (3) | 164,650 |
Treasurer | | FY 2012 | | | | 123,978 | | - | | - | | | 185,250 | (4) | 12,023 | (3) | 321,251 |
| | TP 2011 | | | | 43,779 | | - | | - | | | | | 60,000 | (4) | 418,870 | (3) | 522,649 |
| | FY 2011 | | | | 120,968 | | - | | 101,810 | (7) | | 180,000 | (4) | - | (3) | 402,778 |
(1) TP 2011 refers to the four month Transition Period from August 28, 2011 through December 31, 2011. The FY 2013, FY 2012, and FY 2011 amounts include compensation earned during fiscal years 2013, 2012 and 2011.
(2) Mr. Hunt was a named executive officer and served as USPB's Chief Executive Officer through January 28, 2013. Mr. Linville, who served as Chief Operating Officer through that date, was named successor CEO.
(3) 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, $10,153, $0 and $2,655, respectively in fiscal year 2013, $9,978, $0, and $2,655,respectively in fiscal year 2012, and $6,125, $535,886, and $0, respectively in transition period 2011. None of the benefits paid to Mr. Linville in fiscal year 2011 exceeded $10,000.
Mr. Hunt- Amounts for Mr. Hunt include payments for advisory services, the non - dilution payment resulting from the transaction with LUK, Company match under our 401(k) plan and cost of excess life insurance, $459,052, $0, $10,238, and $0, respectively in fiscal year 2013, $0,$1,417,000, $9,962 and $1,826, respectively in fiscal year 2012, and $0, $0, $9,766 and $1,826, respectively, in fiscal year 201 1. 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. None of the benefits paid to Mr. Miller in fiscal years 2013 and 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 2013 and 2011 exceeded $10,000 .
(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 2013, FY 2012 and FY 2011 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) Mr. Hunt was paid full - term incentive compensation in the amount of $861,111 for his employment under the Hunt Employment Agreement through the end of FY 2012.
(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. Mr. Hunt did not earn an annual bonus for FY 2013.
(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 B units, 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.
(9) The amount of non - equity incentive plan compensation, which is to include the annual cash bonus and amounts earned for FY 20 13 pursuant to the long - term cash bonus plan pursuant to Mr. Linville's employment agreement. The amount represents annual cash bonus of $77,30 5 and $90,247 of long - term cash bonus, the latter will only be paid if Mr. Linville is employed on December 31, 2015. The Linville Employment Agreement provides for a cumulative annual cap of $450,000 for payments to Mr. Linville for annual and long - term incentive amounts.
41
Grants of Plan-Based Awards in the Fiscal Year 2013
The table below sets forth information regarding grants of a non-equity incentive plan-based award made to our named executive officers during fiscal year 2013.
| | | | | Estimated Future Payouts under Non-Equity Incentive |
| | | | | Plan Awards |
Name and Principal Position | | Grant Date | | Threshold ($) | | Target ($) | | Maximum ($) |
Stanley D. Linville (2) | | n/a | | | | | | | | |
Chief Executive Officer | | | | | | | | | | |
| | | | | | | | | | | |
Steven D. Hunt (2) | | n/a | | | | | | | | |
Former Chief Executive Officer | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Scott J. Miller | | 10/24/2013 | | | - | | | 53,240 | (1) | 266,550 |
Chief Financial Officer | | | | | | | | | | |
| | | | | | | | | | | |
Danielle D. Imel | | 10/24/2013 | | | - | | | 38,333 | (1) | 191,850 |
Treasurer | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| (1) | The target amount is based on fiscal year 2013 inputs and reflects the actual management annual cash bonus plan award for fiscal year 2013. The amount is reflected in the "Non-Equity Incentive Plan Compensation" column in the Summary Compensation Table. Amounts, which could be more or less, will be based on actual input amounts for fiscal year 2014. |
| | |
| (2) | There were no grants of plan-based awards in fiscal year 2013 for Mr. Linville. Mr. Hunt resigned his position as Chief Executive Officer effective 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. Linville, 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 |
Stanley D. Linville | | For fiscal year 2013: 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. |
| |
Scott J. Miller and | | For fiscal year 2013: The executive's proportionate share of the Management Bonus Pool, which is (1) the audited fiscal year 2013 USPB earnings before tax plus USPB grid premiums during fiscal year 2013, less (2) $15,000,000, multiplied by (3) management bonus factor. The bonus plan payments are vested over a two-year period to provide an added incentive to remain with USPB. The maximum Management Bonus Pool for a given bonus plan year is equal to 150% of the sum of the qualifying participants' salaries in effect at the end of such year. |
Danielle D. Imel | |
| | | | | |
Other Bonuses
We also pay discretionary cash bonuses to executive officers from time to time to reward elements of performance that are not reflected in the criteria for performance based cash bonuses. No such bonuses were paid to executive officers in fiscal year 2013, 2012, the 2011 transition period or fiscal year 2011. The discretionary bonuses, if paid, are disclosed in the Bonus column in the Summary Compensation Table.
42
Outstanding Equity Awards at Fiscal Year End 2013
| | | | | | Option Awards | | |
| | | | Number of Securities | | | | | | |
| | | | Underlying | | Option Exercise | | Option Expiration | |
Name and Principal Position | | Unexercised Options | | Price ($) | | Date | |
Stanley D. Linville | | | 1,300 Class A Units | (3) | | $ | 0.00 | (5) | None | |
Chief Executive Officer | | | 1,300 Class B Units | (3) | | $ | 0.00 | (5) | None | |
| | | | | 1,000 Class A Units | (4) | | $ | 66.01 | | None | |
| | | | | 1,000 Class B Units | (4) | | $ | 73.72 | | None | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Steven D. Hunt | | | 20,000 Class A Units | (1) | | $ | 55.00 | | None | (2) |
Former Chief Executive Officer | | | | | | | | | |
| | | | | | | | | | | |
Scott J. Miller | | | 1,200 Class A Units | (3) | | $ | 0.00 | (5) | None | |
Chief Financial Officer | | | 1,200 Class B Units | (3) | | $ | 0.00 | (5) | None | |
| | | | | 500 Class A Units | (4) | | $ | 66.01 | | None | |
| | | | | 500 Class B Units | (4) | | $ | 73.72 | | None | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Danielle D. Imel | | | 1,000 Class A Units | (3) | | $ | 0.00 | (5) | None | |
Treasurer | | | 1,000 Class B Units | (3) | | $ | 0.00 | (5) | None | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| (1) | Mr. Hunt is fully vested in the 20,000 Class A phantom rights on phantom units and such units are 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 2013, the unexercised phantom units were 60% vested, and therefore exercisable. |
| (4) | The phantom plan awards, which provide for the award of appreciation rights only, for Mr. Miller and Mr. Linville vest over a 5 year period. On January 28, 2014, the unexercised phantom units were 20% vested, and therefore exercisable. |
| (5) | 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 $0.00, respectively. The number of outstanding phantom units and the vesting schedule remain unchanged. |
Options Exercised
| | | Option Awards |
| | | Number of options | | Value realized on |
Name and Principal Position | | acquired on exercise | | exercise ($) |
Stanley D. Linville | | | | - | | $ | - |
Chief Executive Officer | | | | | | |
| | | | | | | |
Steven D. Hunt | | | | - | | $ | - |
Former Chief Executive Officer | | | | | | |
| | | | | | | |
Scott J. Miller | | | | - | | $ | - |
Chief Financial Officer | | | | | | |
| | | | | | | |
Danielle D. Imel | | | | - | | $ | - |
Treasurer | | | | | | | |
| | | | | | | |
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 2013. 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
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 provided that for his services performed prior to January 28, 2013, Mr. Hunt received his current salary and coverage under the Company’s health and benefit plans. Mr. Hunt also received annual bonus and other bonus payments with respect to the Company’s operations during fiscal year 2012 pursuant to the terms of the Hunt Employment Agreement of $2,000,000 and a full-term bonus payment of $861,111 for fiscal year 2010 through 2012. In addition, Mr. Hunt will receive payments pursuant to the noncompetition agreement entered into in connection with the LUK Transaction. During calendar year 2013, Mr. Hunt was paid $767,708 in noncompetition payments. He will receive noncompetition payments of $825,000 per year during calendar years 2014 through 2021. 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 the Linville Employment Agreement is terminated upon death or permanent disability, Mr. Linville is entitled to:
- Salary to the date of the 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. Linville were terminated upon death or disability in fiscal year 2014, his payment would be $300,000;
- Certain fringe benefits through the Deemed Termination Date, but excluding vacation pay, personal and sick days, vehicle, telecommunications, and 401K contributions, (subject to any necessary consent of applicable insurers which, if consent is not obtained within 30 days after termination, then the cash value of the monthly premiums at the date of termination shall be paid to CEO in equal monthly payments), through the Deemed Termination Date;
- 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 the CEO had remained employed under this Agreement through the Deemed Termination Date; and
- 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.
If Linville Employment Agreement is terminated by USPB for cause or by Mr. Linville for other than good reason, he is entitled to:
Salary earned to the date of the termination; and
Payment of noncompetition compensation, under certain circumstances, as described below.
If the Linville Employment Agreement is terminated by USPB other than for cause, death or disability, or by Mr. Linville for good reason, he 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, currently $300,000 per year. In the event that Mr. Linville’s employment is terminated (including by expiration of this 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 Linville Employment Agreement, and CEO is not employed by USPB, then USPB shall provide noncompetition compensation for: (1) each of the twelve (12) 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 twelve month period if the Board of Directors determines the CEO violated the noncompetition restriction as outlined in the Linville Employment Agreement.
Director Compensation Table
Each director receives cash compensation for meetings attended. Directors are compensated $250 per diem for regular meetings, special meetings, compensation committee meetings and audit committee meetings. We do not award any other type of compensation to our directors.
The table below reflects compensation paid to each director during the fiscal year 2013.
| | Fees Earned or |
Name | | Paid in Cash ($) |
Mark R. Gardiner | | | 3,750 |
Duane K. Ramsey | | | 3,750 |
Joe M. Morgan | | | 3,750 |
Jerry L. Bohn | | | 2,750 |
Douglas A. Laue | | | 3,000 |
Rex W. McCloy | | | 3,000 |
Jeff H. Sternberger | | | 3,000 |
| | | |
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.
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.
| | | | | | Equity Compensation Plan Information | | | |
| | | | | | | | | | | Number of |
| | | | | | | | | | | securities |
| | | | | | | | | | | remaining available |
| | | | | | Number of | | | | for future issuance |
| | | | | | securities to be | | | | under equity |
| | | | | | 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 | | | | | | | | | | | |
by security holders | | | | | | - | | N/A | | | - |
Equity compensation plans not | | | | | | | | | | | |
approved by security holders (1) | | Class A Units | | | 20,000 | | $ | 55.00 | | | - |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) See Note 4 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, 2014 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 | | | | 95,000 | | 12.9% |
509 Country Lane | | Class B | | | | 95,000 | | 12.6% |
Council Grove, Kansas 66846 | | | | | | | | |
John Fairleigh(2) | | | Class A | | | | 54,288 | | 7.4% |
Box 560 | | | | Class B | | | | 54,288 | | 7.2% |
Scott City, KS 67871 | | | | | | | | |
Stacy and Kelly Hoeme (3) | | Class A | | | | 41,125 | | 5.6% |
PO Box 186 | | | Class B | | | | 41,125 | | 5.4% |
Scott City, KS 67871 | | | | | | | | |
Jeff Sternberger(4) | | | Class A | | | | 40,770 | | 5.5% |
05013 13 Rd | | | Class B | | | | 40,770 | | 5.4% |
Ingalls, KS 67853 | | | | | | | | |
| | | | | | | | | | |
| (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. |
| (4) | Includes i) 38,770 Class A and Class B units held by Midwest Feeders Inc. of which Mr. Sternberger is a manager, and ii) 2,000 Class A and Class B units owned CRI Feeders of Guymon, LLC of which Mr. Sternberger is a director. |
Security Ownership of Management
The following table furnishes information, as of February 28, 2014, 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 41, 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) | | | | 40,770 | | | 5.4% | | 40,770 | | 5.4% |
Jerry L. Bohn (5) | | | | 35,867 | | | 4.7% | | 31,617 | | 4.2% |
Joe M. Morgan (6) | | | | 33,128 | | | 4.4% | | 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) | | | | 3,100 | | | 0.4% | | 3,100 | | 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) | | | | 252,750 | | | 33.4% | | 230,237 | | 30.5% |
| | | | | | | | | | | | |
| (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)38,770 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. 31,500 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 and 15,263 Class A units held by Poky Feeders, of which Mr. Morgan is the manager. |
| (7) | Includes 16,085 Class A units and 13,085 Class B units held by Rex McCloy 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 and 100 Class A and Class B units, 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).
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, 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 years 2013 and 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 years 2013 and 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.
Transactions with Beef Products, Inc.
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 and $170.2 million, respectively, in the 18 week period ended December 31, 2011, and fiscal year 2011. NBP’s aggregate purchases of processed lean beef from BPI totaled approximately $14.3 million and $47.5 million, respectively, in the 18 week period ended December 31, 2011, and fiscal year 2011.
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 year 2011, NBP paid approximately $0.6 million and $2.0 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 years 2013 and 2012 (thousands of dollars).
| | Fiscal Year Ended | | Fiscal Year Ended |
| | December 28, 2013 | | December 29, 2012 |
| | | | |
Audit Fees | | $ | 113 | | $ | 110 |
Audit Related Fees | | - | | - |
Tax Fees | | 260 | | 298 |
All Other Fees | | - | | - |
Total | | $ | 373 | | $ | 408 |
| | | | |
| | | | |
Audit Fees
Audit fees relate to the audits of our consolidated financial statements 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. We did not pay any other type of fee and did not receive any other services.
Tax Fees
Tax fees relate to tax compliance, tax advice and tax planning services.
All Other Fees
We did not pay any other type of fee and did not receive any other services.
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.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Financial Statement Schedules |
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| (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. |
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(b) The following documents are filed or incorporated by reference as exhibits to this report: |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 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). |
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| 10.7 | 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). |
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| 10.8 | 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). |
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| 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). |
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| 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). |
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| 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). |
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| 101.INS | XBRL Instance Document ** |
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| 101.SCH | XBRL Taxonomy Extension Schema Document ** |
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| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase ** |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document ** |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document ** |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document ** |
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_____________
* 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. 54 |
SIGNATURES
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 13, 2014
* * * *
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 |
Stanley D. Linville | Chief Executive Officer (Principal Executive Officer) | March 13, 2014 |
Scott J. Miller | Chief Financial Officer (Principal Financial and Accounting Officer) | March 13, 2014 |
Mark R. Gardiner | Chairman of the Board | March 13, 2014 |
Duane K. Ramsey | Vice Chairman of the Board | March 13, 2014 |
Joe M. Morgan | Secretary of the Board | March 13, 2014 |
Jerry L. Bohn | Director | March 13, 2014 |
Douglas A. Laue | Director | March 13, 2014 |
Rex W. McCloy | Director | March 13, 2014 |
Jeff H. Sternberger | Director | March 13, 2014 |
| | | | | |
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 |
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Consolidated Balance Sheets at December 28, 2013 and December 29, 2012 | F-4 |
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Consolidated Statements of Operations for the years ended December 28, 2013, December 29, 2012, 18 weeks ended December 31, 2011, and year ended August 27, 2011 | F-5 |
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Consolidated Statements of Comprehensive Income for the years ended December 28, 2013, December 29, 2012, 18 weeks ended December 31, 2011, and year ended August 27, 2011 | F-6 |
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Consolidated Statements of Capital Shares and Equities for the years ended December 28, 2013, December 29, 2012, 18 weeks ended December 31, 2011, and year ended August 27, 2011 | F-7 |
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Consolidated Statements of Cash Flows for the years ended December 28, 2013, December 29, 2012, 18 weeks ended December 31, 2011, and year ended August 27, 2011 | F-8 |
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Notes to Consolidated Financial Statements | F-9 |
| | |
National Beef Packing Company, LLC Consolidated Balance Sheets at December 28, 2013 and December 29, 2012 and Consolidated Statements of Operations, Comprehensive Income, and Cashflows for years ended December 28, 2013 and December 29, 2012 and Notes to Consolidated Financial Statements | 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 accompanying consolidated balance sheets and the related statements of operations, comprehensive (loss)/income, capital shares and equities and cash flows present fairly, in all material respects, the financial position of U.S. Premium Beef, LLC and its subsidiaries at December 28, 2013 and December 29, 2012, and the results of their operations and their cash flows for the year ended December 28, 2013 and 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 13, 2014
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 statements of operations, comprehensive (loss) income, capital shares and equities, and cash flows of U.S. Premium Beef, LLC and subsidiaries (the Company) for the 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of U.S. Premium Beef, LLC and subsidiaries for the 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
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 periods ended December 28, 2013 and December 29, 2012. As a result, some of the Notes below do not reflect fiscal year 2013 and 2012 activity. The information in those Notes that do not reflect fiscal year 2013 or 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.
NOTE 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. 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 9). 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 to 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.
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.
F-9
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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, 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 years 2013 and 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 years 2013 and 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.
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
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.
NOTE 2. Basis of Presentation and Accounting PoliciesBasis 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 28, 2013 and December 29, 2012 were not consolidated with NBP. Starting in fiscal year 2012, the Company’s statement of operations, statement of cash flows, 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. In the transition period and fiscal year 2011, 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.
Certain expenses related to compensation payments made to the former CEO, pursuant to his employment agreement, in the 2012 Statements of Operations have been reclassified from interest expense to selling, general and administrative expenses, to conform to the 2013 presentation.
Certain assets related to prepaid expenses have been reclassified from other assets to other current assets, to conform to the fiscal year 2013 presentation.
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.
F-11
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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 28, 2013 and December 29, 2012, the Company had cash and cash equivalents of $59.8 million and $62.7 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. As no indemnification claims were made by Leucadia by the one year anniversary of the closing of the Leucadia Transaction, USPB received 40%, or approximately $14.8 million, in January 2013; however, as those funds remained subject to potential indemnification claims that may arise during the second year after the closing of the Leucadia Transaction, the amount received continued to be shown as Restricted Cash as of December 29, 2012. As no indemnification claims were made by Leucadia by the second anniversary of the closing of the Leucadia Transaction, USPB received the remaining 60%, or approximately $22.1 million, in January 2014.
Investment in National Beef Packing Company, LLC
As a result of the Leucadia Transaction, beginning on December 31, 2011, USPB’s 15.0729% 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.
F-12
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of cost and accumulated depreciation for property, plant, and equipment as of December 28, 2013 and December 29, 2012 follows (thousands of dollars):
| | | December 28, | | December 28, |
| | | 2013 | | 2012 |
Land and improvements | | $ | - | | $ | - |
Building and improvements | | - | | - |
Machinery and equipment | | 37 | | 37 |
Furniture and fixtures | | 126 | | 126 |
Trailers and automotive equipment | | 87 | | 87 |
Construction in process | | - | | - |
| Total property, plant, and equipment, at cost | | 250 | | 250 |
Accumulated depreciation | | 244 | | 238 |
| Property, plant, and equipment, net | | $ | 6 | | $ | 12 |
| | | | | |
Depreciation expense was $0.0 million, $0.0 million, $16.5 million, and $50.9 million for fiscal years ended December 28, 2013 and December 29, 2012, transition period ended December 31, 2011, and fiscal year ended August 27, 2011.
Debt Issuance Costs
Amortization of $1.4 million was charged to interest expense during the fiscal year 2011 related to amendments to NBP’s various credit facilities.
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.
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 year 2011, the Company recognized $1.2 million and $2.1 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, $0.3 million, $20.3 million, and $0.2 million as of December 28, 2013, December 29, 2012, December 31, 2011, and August 27, 2011, respectively.
F-13
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 year 2011.
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, bonuses, phantom 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 periods ended December 28, 2013 and December 29, 2012, and aggregated expenses for USPB and NBP for periods ended December 31, 2011 and prior.
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.
F-14
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Advertising and Promotion Expenses
Advertising and promotion expenses are charged to operations in the period incurred and were $0.0 million, $0.0 million, $3.2 million, and $6.4 million, in fiscal years 2013 and 2012, the transition period ended December 31, 2011, and fiscal year 2011.
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.
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.
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 Mr. Hunt’s employment agreement and until 18 months after the termination of Mr. Hunt employment agreement, at the election of Mr. Hunt, or upon mutual agreement of the Board of the Company and Mr. Hunt, Mr. Hunt may purchase up to 20,000 Class A units, or upon agreement of Mr. Hunt and the Board of the Company, Mr. Hunt may convert the contractual unit appreciation rights to up to 20,000 Class A units. The diluted EPU reflects the circumstances of termination of Mr. Hunt’s employment agreement, and the election of Mr. Hunt or agreement by the Board of the Company and Mr. Hunt for Mr. Hunt to purchase or convert contractual rights to the maximum 20,000 Class A units at $55 per unit for the periods as provided in Mr. Hunt’s employment agreement. The diluted loss per Class A unit calculations for fiscal year 2013 in the following table excludes the effect of the 20,000 Class A unit purchase rights noted above as the effect of including them would have been anti-dilutive to the loss per Class A unit calculation.
Mr. Hunt resigned his position effective as of January 28, 2013. As a result, per the terms of his employment agreement, Mr. Hunt will be required to make his decision to purchase up to 20,000 Class A units or convert the contractual unit appreciation rights to up to 20,000 Class A units, by July 28, 2014.
F-15
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Loss) income Per Unit Calculation | 52 weeks ended | 52 weeks ended | | 18 weeks ended | | 52 weeks ended |
(thousands of dollars, except unit and per unit data) | December 28, 2013 | | December 29, 2012 | | December 31, 2011 | | August 27, 2011 |
| | | | | | | | | |
Basic (loss) income per unit: | | | | | | | |
(Loss) income attributable to USPB available to | | | | | | | |
| unitholders (numerator) | | | | | | | |
| | Class A | $ | (1,120) | | $ | 272 | | $ | 77,556 | | $ | 16,029 |
| | Class B | $ | (10,076) | | $ | 2,452 | | $ | 698,003 | | $ | 144,266 |
| | | | | | | | | |
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 | $ | (1.52) | | $ | 0.37 | | $ | 105.46 | | $ | 21.80 |
| Class B | $ | (13.34) | | $ | 3.25 | | $ | 924.04 | | $ | 190.98 |
| | | | | | | | | |
Diluted (loss) income per unit: | | | | | | | |
(Loss) income attributable to USPB available to | | | | | | | |
| unitholders (numerator) | | | | | | | |
| | Class A | $ | (1,120) | | $ | 272 | | $ | 77,556 | | $ | 16,029 |
| | Class B | $ | (10,076) | | $ | 2,452 | | $ | 698,003 | | $ | 144,266 |
| | | | | | | | | |
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 |
| Units (denominator) | 735,385 | | 747,836 | | 748,055 | | 747,600 |
| | | | | | | | | |
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 | $ | (1.52) | | $ | 0.36 | | $ | 103.68 | | $ | 21.44 |
| Class B | $ | (13.34) | | $ | 3.25 | | $ | 924.04 | | $ | 190.98 |
| | | | | | | | | |
NOTE 3. Long‑Term Debt and Loan Agreements
(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.
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 2013. 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 28, 2013.
F-16
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Capital and Operating Leases
USPB leases its office space in Kansas City, Missouri and Dodge City Kansas. Rent expense associated with operating leases was $0.1 million, $0.1 million, $0.0 million, and $14.1 million for fiscal years 2013 and 2012, the transition period, and fiscal year 2011, respectively. USPB expects that it will renew lease agreements or enter into new leases as the existing leases expire.
NOTE 4. 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 9, 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, Mr. Hunt exercised 20,000 Class B units at an exercise price of $0 per unit. The Company recognizes compensation expense for Mr. Hunt’s Class A phantom units for the difference between the fair market value for the Class A units and the $55 exercise price. For Mr. Hunt’s phantom plan, an increase in compensation expense of $1.4 million was recognized in fiscal year 2013, a decrease of $1.1 million was recognized in fiscal year 2012, a decrease of $0.2 million was recognized in the 18 week period ended December 31, 2011, and an increase of $1.0 million was recognized in fiscal year 2011.
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 the 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, compensation expense of $0.5 million, $0.3 million, $2.3 million and $0.8 million were recognized in fiscal years 2013 and 2012, in the 18 week period ended December 31, 2011 and in fiscal year 2011.
On November 16, 2012, USPB’s Board of Directors approved the issuance of an additional 1,500 Class A phantom units, with a strike price of $66.04 and 1,500 Class B phantom units, with a strike price of $73.70, to certain members of management, to be effective on January 28, 2013. These phantom units will vest over a five year period. Compensation expense of $0.1 million was recognized in fiscal year 2013.
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 $0.0 million, $0.1 million, $0.5 million, and $1.1 million for fiscal years 2013 and 2012, the transition period and fiscal year 2011, respectively.
F-17
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 and $0.9 million for the transition period and fiscal year 2011, 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, and $0.1 million, for the transition period and fiscal year 2011, respectively, and are included in other, net.
NOTE 5. Other IncomeOther non-operating income, net was $0.7 million, $0.2 million, $1.5 million and $0.3 million, for fiscal years 2013 and 2012, the 18 week period ended December 31, 2011 and for the fiscal year ended 2011, respectively. 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 4 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 years 2013 and 2012 primarily include $0.7 million and $0.2 million of income related to lease income on additional delivery rights made available by the Company, respectively. 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.
NOTE 6. Income Taxes Income tax expense includes the following current and deferred provisions (thousands of dollars):
| | | 52 weeks ended | | 52 weeks ended | | 18 weeks ended | | 52 weeks ended |
| | | December 28, | | December 29, | | December 31, | | August 27, |
Current provision: | | | | | | | |
| Federal | $ | - | | $ | - | | $ | 490 | | $ | 1,689 |
| State | 3 | | 107 | | 201 | | 1,422 |
| Foreign | - | | - | | 27 | | 54 |
| | Total current tax expense | 3 | | 107 | | 718 | | 3,165 |
| | | | | | | | | |
Deferred provision: | | | | | | | |
| Federal | - | | - | | - | | (500) |
| State | - | | - | | - | | (75) |
| Foreign | - | | - | | - | | - |
| | Total deferred tax expense | - | | - | | - | | (575) |
| | Total income tax expense | $ | 3 | | $ | 107 | | $ | 718 | | $ | 2,590 |
| | | | | | | | | |
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):
F-18
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | 52 weeks ended | | 52 weeks ended | | 18 weeks ended | | 52 weeks ended |
| | | December 28, | | December 29, | | December 31, | | August 27, |
| | | 2013 | | 2012 | | 2011 | | 2011 |
Computed “expected” income tax expense | | $ | - | | $ | 954 | | $ | 273,949 | | $ | 59,564 |
Passthrough “expected” income tax expense | | - | | (954) | | (273,457) | | (58,339) |
State taxes, net of federal | | 2 | | 71 | | 182 | | 1,264 |
Other | | 1 | | 36 | | 44 | | 101 |
| Total income tax expense | | $ | 3 | | $ | 107 | | $ | 718 | | $ | 2,590 |
| | | | | | | | | |
NOTE 7. Related Party TransactionsAll 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 years 2013 and 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 year 2011, 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 28, 2013 and December 29, 2012, the Company had receivables from unitholders and associates in the amount of $1.5 million and $0.7 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 year 2011, NBP had sales and purchases with the following related parties (thousands of dollars):
| | | 18 weeks ended | | 52 weeks ended |
| | | December 31, 2011 | | August 27, 2011 |
Sales to: | | | | |
| Beef Products, Inc. (1) | | $ | 66,322 | | $ | 170,227 |
| | Total Sales to Affiliate | | $ | 66,322 | | $ | 170,227 |
| | | | | | |
Purchases from: | | | | |
| Beef Products, Inc. (1) | | $ | 14,257 | | $ | 47,508 |
| | Total Purchases from Affiliate | | $ | 14,257 | | $ | 47,508 |
| | | | | | |
(1) Beef Products, Inc. (BPI) is an affiliate of NBPCo Holdings |
| | | | | | |
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 year 2011, NBP paid approximately $0.6 million, and $2.0 million, respectively, to BPI in technology and support fees.
F-19
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8. 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 December 28, 2013 and December 29, 2012, the Company does not carry any assets or liabilities on its consolidated balance sheet using the three-level fair value hierarchy.
NOTE 9. Capital Shares and EquitiesLLC 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.
Class A Units. 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% from 33%. 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. 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% from 67%. Holders of USPB Class B units have no cattle delivery commitment.
NOTE 10. Legal Proceedings
As of December 28, 2013, USPB was not a party to any lawsuit or claim arising out of the operation of its business.
F-20
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 11. Business SegmentsASC 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 year 2011, one customer of NBP represented 9.3% and 8.7%, respectively, of total sales, with no other customer representing more than 3.6% and 3.3%, 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 year 2011 of approximately $269.6 million and $865.2 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-21
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 12. 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 | $ | 105.46 | | $ | 6.05 |
| | Class B units | $ | 924.04 | | $ | 53.00 |
| Diluted | | | |
| | Class A units | $ | 103.68 | | $ | 5.95 |
| | Class B units | $ | 924.04 | | $ | 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-22
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13. Quarterly Results (Unaudited)Selected quarterly financial data for fiscal years 2013 and 2012 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 |
2013 quarterly results: | | | | | | | | | | | | | | |
| March 30, 2013 | | $ | - | | $ | (1,376) | | $ | (4,185) | | $ | (0.57) | | $ | (4.98) | | $ | (0.57) | | $ | (4.98) |
| June 29, 2013 | | - | | (986) | | 3,056 | | $ | 0.42 | | $ | 3.64 | | $ | 0.41 | | $ | 3.64 |
| September 28, 2013 | | - | | (720) | | 6,532 | | $ | 0.89 | | $ | 7.78 | | $ | 0.88 | | $ | 7.78 |
| December 28, 2013 | | - | | (2,288) | | (16,599) | | $ | (2.26) | | $ | (19.78) | | $ | (2.26) | | $ | (19.78) |
| | | $ | - | | $ | (5,370) | | $ | (11,196) | | | | | | | | |
| | | | | | | | | | | | | | | |
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) | | $ | (0.44) | | $ | (3.81) |
| | | $ | - | | $ | (5,734) | | $ | 2,724 | | | | | | | | |
NOTE 14. Subsequent EventsOn January 31, 2014, NBP announced its intentions to close the Brawley, California beef processing facility. The facility is expected to close in May 2014. See Note 3 to NBP’s financial statements for additional information.
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.
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.
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 28, 2013 and December 29, 2012, and the results of their operations and their cash flows for each of the years ended December 28, 2013 and December 29, 2012 in accordance with accounting principles generally accepted in the United States of America.
NBP operates beef slaughter and fabrication facilities in Liberal and Dodge City, Kansas, and Brawley, California, and consumer-ready animal protein processing facilities in Hummels Wharf, Pennsylvania, Moultrie, Georgia and Kansas City, Kansas. During 2013 NBP acquired the remaining 25% 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 28, 2013, approximately 73% of NBP’s 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.
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.
Inventories at December 28, 2013 and December 29, 2012 consisted of the following (in thousands):
Property, plant and equipment were recorded at fair value as of December 31, 2011 as a result of the Leucadia transaction. Property, plant and equipment purchased subsequent to the transaction are recorded at cost. Property, plant, and equipment located at NBP’s Brawley, California facility are recorded at an orderly liquidation value (see note 3). Property, plant and equipment are depreciated principally on a straight-line basis over the estimated useful life of the individual asset by major asset class as follows:
Depreciation expense was $43.2 million and $37.8 million for the fiscal years ended December 28, 2013, and December 29, 2012, respectively.
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.
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. Interest capitalized was $0.6 million and $0.6 million for the fiscal years ended December 28, 2013 and December 29, 2012, respectively.
For the fiscal years ended December, 28, 2013 and December 29, 2012, NBP recognized $45.3 million and $45.2 million, respectively, 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 28, 2013, for each of the next five years and thereafter:
On September 30, 2013, NBP’s Credit Facility was amended and restated to increase the term loan to $375.0 million, increase the revolving credit facility to $300.0 million, extend the maturity to October 2018 and reduce the term loan’s required quarterly principal payments to $6.25 million. The related financing charges of approximately $2.9 million will be amortized over the life of the loan.
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 its historical experience rates.
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.
NBP has representative offices located in Tokyo, Japan; Seoul, South Korea; and Beijing, 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.
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 are charged to operations in the period incurred and were $11.5 million and $11.8 million for the fiscal years ended December 28, 2013 and December 29, 2012.
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.
NBP’s beef processing facility located in Brawley, California was originally acquired in May 2006. When NBP was acquired by Leucadia in December 2011, the Brawley facility was recorded at its then fair value, which was based in part on market studies and appraisals prepared by an independent valuation and appraisal firm. The facility was profitable for periods through 2011 during a period of favorable industry margins and when the plant had access to a sufficient supply of cattle. However, more recently the Brawley facility has struggled to achieve acceptable gross margins and to overcome the declining supply of fed cattle available to the plant and fixed cost inefficiencies inherent in a single shift plant. There is not an adequate supply of fed cattle to operate the plant efficiently and NBP’s outlook is for the supply to continue to decline.
After exhausting all opportunities to improve the operating performance of the Brawley beef processing facility, during the fourth quarter of 2013 NBP concluded that the facility would continue to generate losses for the foreseeable future, resulting in a decision in December 2013 to close the facility. The facility is expected to close in May 2014. Subsequent to closing the plant, NBP plans to hold the plant in “mothballed” status indefinitely. NBP evaluated the recoverability of the long-lived assets at Brawley, which had an aggregate carrying amount of $93.2 million at December 28, 2013, and based on its estimate of future undiscounted cash flows concluded that the carrying value was not recoverable and the facility was impaired. In performing this evaluation, NBP determined that the Brawley facility is the asset group that represents the lowest level of cash flows that are largely independent of the cash flows of other assets and liabilities.
The management of NBP engaged an independent valuation and appraisal firm to assist in estimating the fair value of the long-lived assets at Brawley. NBP’s estimate of fair value was based on an orderly liquidation technique, which represents the amount that can be realized in a liquidation sale, given a reasonable period of time to find a purchaser, assuming an as-is where-is condition. In preparing its analysis, NBP considered current market conditions, replacement cost, as well as the age, physical and functional characteristics of the long-lived assets.
As a result, NBP concluded that the fair value of the long-lived assets at the Brawley facility is $29.9 million at December 28, 2013, and recorded an impairment loss of $63.3 million, which is included in Impairment of long-lived assets on the Consolidated Statements of Operations for the year ended December 28, 2013. As with any estimate of fair value, future market, regulatory and general economic conditions as well as the obsolescence, future deterioration of, or inability to locate a purchaser should NBP decide to sell the facility could have a significant effect on their future value.
In addition to the long-lived asset impairment charge, NBP expects to incur additional costs relating to the closing of the facility during 2014. These costs include costs for fulfilling certain contractual obligations, employee separation and retention, systems decommissioning and various other expenses. NBP is currently estimating the amounts that will be incurred for each individual component, but it currently expects these costs could be up to $20.0 million in the aggregate. Under GAAP, these costs may not be accrued until they are actually incurred.
NBP 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 28, 2013 and December 29, 2012, debt consisted of the following:
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 its 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.
During 2013, NBP’s Credit Facility was amended and restated to increase the term loan to $375.0 million, increase the revolving credit facility to $300.0 million, extend the maturity to October 2018 and reduce the term loan’s required quarterly principal payments to $6.25 million. The amended Credit Facility contains a minimum tangible net worth covenant, but does not contain the numerical covenants requiring certain leverage and fixed charge ratios that were in the previous agreement. At December 28, 2013, NBP met the tangible net worth covenant. The Credit Facility is secured by a first priority lien on substantially all of the assets of NBP and its subsidiaries.
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 its Credit Facility, these due-on-demand bonds have been presented as non-current obligations until twelve months prior to their maturity. As of December 28, 2013, 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 makes lease payments in the amount of principal and interest due on the bonds.
On December 17, 2010, National Beef Leathers, LLC, or Leathers, 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 NBP’s Leathers 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 its term loan under the Credit Facility. Because the city of St. Joseph has assigned the lease to the bond trustee for its 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.
Rent expense associated with operating leases was $17.3 million and $16.9 million for fiscal years 2013 and 2012, respectively. NBP expects that it will renew lease agreements or enter into new leases as the existing leases expire.
The aggregate minimum principal maturities of the long-term debt for each of the five fiscal years and thereafter following December 28, 2013, are as follows:
The health care trend rate used to value the accumulated benefit obligation at December 28, 2013 is a rate of 5.75% per year, declining by 0.25% per year to an ultimate rate of 5% in 2017 and thereafter. The discount rate used to value the accumulated benefit obligation is 2.8%. The unfunded accumulated benefit obligation was $1.1 million and $1.2 million at December 28, 2013 and December 29, 2012, respectively, and has been recorded in the consolidated financial statements as non-current other liabilities.
