UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to ______.
Commission file number333-115164
U.S. PREMIUM BEEF, LLC
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization) | 20-1576986
(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 ☑
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 ☑
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 ☑ 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 ☑ 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. ☑
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 ☑ 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 ☑
The registrant’s equity is not traded on any exchange or other public market; however, there have been private transactions. As of February 24, 2018, there were 735,385 Class A units and 755,385 Class B units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV on page 37.
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MARKET AND INDUSTRY DATA AND FORECASTS
Market data and certain industry forecasts used throughout this report were obtained from internal surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal surveys, industry forecasts and market research, which we believe to be reliable, based upon our management’s knowledge of the industry, have not been independently verified. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements,” which are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements are typically identified by the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, and similar expressions. Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including economic conditions generally and in our principal markets, the availability and prices of live cattle and commodities, food safety, livestock disease, including the identification of cattle with BSE, competitive practices and consolidation in the cattle production and processing industries, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers, loss of key employees, labor relations, and consolidation among our customers.
In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Please review Item 1A,Risk Factors, included in this report, for other important factors that could cause actual results to differ materially from those in any such forward-looking statements.
Unless the context indicates or otherwise requires, the terms “the Company”, “we”, “USPB”, “our” and “us” refer to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.). 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. As used in this report, the terms “fiscal year” or “fiscal year ended” refers to our fiscal year which ends on the last Saturday in December.
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PART I
ITEM 1. BUSINESS
BUSINESS OF U.S. PREMIUM BEEF, LLC
Overview
U.S. Premium Beef’s (USPB or the Company) 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. 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 potential distributions, (iii) potential unit price appreciation, and (iv) information that permits unitholders to make informed production decisions.
Products and Production
Ownership in USPB provides unitholders access to an integrated cattle production, processing and marketing system. 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 NBP, pursuant to the Uniform Cattle Delivery and Marketing Agreement (seeCattle 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 inCattle 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. Under that arrangement, USPB has delivered more than 14.1 million head of cattle to NBP for processing since it commenced deliveries.
On August 6, 2003, USPB became the majority owner in NBP.
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On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversion of the cooperative into a Delaware LLC.
On December 5, 2011, USPB entered into a Membership Interest Purchase Agreement with Leucadia National Corporation (Leucadia). The Purchase Agreement provided for Leucadia to purchase 56.2415% of the membership interests in NBP (National Interests) from the Company for approximately $646.8 million. The Leucadia Transaction closed on December 30, 2011. Following the close, USPB owned 15.0729% of NBP’s membership interests.
Employees
USPB has seven employees as of December 30, 2017. 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. SeeBusiness 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 inBusiness 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 inBusiness 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
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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.
USPB’s unitholders and associates deliver cattle 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 NBP 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 is one of the largest beef processing companies in the U.S., accounting for approximately 12.5% of the fed cattle slaughter market. NBP processes and markets fresh and chilled boxed beef, ground beef, beef byproducts, consumer-ready beef and pork, and wet blue leather for domestic and international markets. Based in Kansas City, Missouri, NBP had approximately 8,200 employees on December 30, 2017 and generated total revenues of $7.4 billion in 2017.
The largest share of NBP’s revenue, about 92.7%, is generated from the sale of boxed beef and beef byproducts. NBP also generates revenues through value-added production with its consumer-ready products. In addition, NBP operates one of the largest wet blue tanning facilities in the world (wet blue tanning refers to the first step in processing raw and brine-cured hides into tanned leather), selling processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries. Other streams of revenue include sales through its subsidiary, Kansas City Steak Company, LLC, which sells portioned beef and other products directly to consumers through internet, direct mail and direct response television, and service revenues generated by National Carriers, Inc., a wholly owned transportation and logistics company that is one of the largest refrigerated and livestock carrier operations in the U.S. and transports products for NBP and a variety of other customers. NBP’s profitability typically fluctuates seasonally as well as cyclically, based on the availability of fed cattle.
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 coupled with its overall volume. NBP operates in a large and liquid commodity market and 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 with relatively higher margins in the spring and summer months and during times of ample cattle availability.
Revenues in 2017 increased 5% in comparison to 2016, primarily due to an increase in the number of cattle processed. Cost of sales increased by 4% in 2017 as compared to 2016. The increase is also due to an increase in the number of cattle processed. The combined effects of increased margin per head and an increase in volume led to higher profitability in 2017 as compared to 2016.
Revenues in 2016 decreased about 5% in comparison to 2015, due to lower average selling prices for beef and beef by-products, partially offset by an increase in the number of cattle processed. Additionally, during 2015, decreases to revenues of $52.9 million were recorded as a result of NBP’s use of derivatives in its hedging activity. For 2016, cost of sales declined 11% as compared to 2015, due to a decrease in the price of fed cattle, partially offset by an increase in volume. For 2016, the combined effects of increased margin per head and an increase in volume led to higher profitability as compared to 2015.
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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 further processors. In addition, NBP sells beef by-products to the medical, feed processing, fertilizer and pet food industries. NBP exports products to more than 20 countries; in 2017, export sales represented approximately 11.2% of revenues. The demand for beef is generally strongest in the spring and summer months and generally decreases during the winter months.
NBP emphasizes the sale of higher-margin, value-added products, which include branded boxed beef, consumer-ready beef and pork, portion control beef and wet blue hides. NBP believes its value-added products can command higher prices than commodity products because of NBP’s ability to consistently meet product specifications, based on quality, trim, weight, size, breed or other factors, tailored to the needs of its customers. In addition to the value-added brands that NBP owns, NBP licenses the use of Certified Angus Beef®, a registered trademark of Certified Angus Beef LLC, and Certified Hereford Beef®, a registered trademark of Certified Hereford Beef LLC.
Raw Materials and Procurement
The primary raw material for the beef processing plants is live cattle. Live cattle prices change daily based on 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, USPB entered into a new Cattle Purchase and Sale Agreement with NBP. Per the terms and conditions of the Agreement, NBP is required to purchase through USPB from its members, and USPB is required to cause to be sold and delivered from its members to NBP, a base amount of 735,385 (subject to adjustment) head of cattle per year. The purchase price for the cattle is determined by pricing grids, which, at all times, are required to 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 30, 2022, with automatic, but optional 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 members and associates outside of the cattle supply agreement.
During fiscal years 2017, 2016, and 2015, USPB’s members and associates provided approximately 24%, 27%, and 28%, respectively, of NBP’s total cattle requirements.
Processing Facilities
NBP owns two beef processing facilities located in Liberal and Dodge City, Kansas, which can each process approximately 6,000 cattle per day. NBP’s three consumer-ready facilities are in Hummels Wharf, Pennsylvania, Moultrie, Georgia and Kansas City, Kansas. NBP’s wet blue tanning facility is in St. Joseph, Missouri.
Competition
Competitive conditions exist 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.
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Regulation and Environmental
NBP’s operations are subject to extensive regulation by the U.S. Department of Agriculture (USDA) including its Food Safety and Inspection Service (FSIS), its Animal and Plant Health Inspection Service (APHIS) 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 cash livestock suppliers all receivables, inventory and proceeds derived from NBP's sale of such cattle until the sellers have received full payment. In addition, pursuant to PSA rules, at December 30, 2017, NBP has obtained from an insurance company a surety bond in the amount of $50.4 million as a measure of protection for livestock sellers.
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 St. Joseph facility is subject to a secondary air permit which is in place. The Dodge City, Liberal, 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 waste streams 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
Of NBP’s 8,200 employees, approximately 5,200 are represented by collective bargaining agreements. Approximately 2,500 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 2022, approximately 2,500 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 2021, and another approximately 200 employees at the St. Joseph plant are represented by the United Cereal Workers (R.W.D.S.U./U.F.C.W.) under a collective bargaining agreement scheduled to expire in June 2019.
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. ThisRisk Factorssection 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.
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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 its 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. The cost of raw materials used by our manufacturing businesses have fluctuated over time as a result of a variety of factors. Although our manufacturing businesses are not currently experiencing any shortage of raw materials, if such shortages occur, revenues and profitability could decline.
Outbreaks of disease affecting livestock can adversely affect the supply of cattle and the demand for NBP’s products.
NBP is subject to risks relating to animal health and disease control. An outbreak of disease affecting livestock (such as foot-and-mouth disease or bovine spongiform encephalopathy (BSE), commonly referred to as mad cow disease) could result in restrictions on sales of products, restrictions on purchases of livestock from suppliers or widespread destruction of cattle. The discovery of BSE in the past caused certain countries to restrict or prohibit the importation of beef products. Outbreaks of diseases, or the perception by the public that an outbreak has occurred, or other concerns regarding diseases, can lead to inadequate supply, cancellation of orders by customers and create adverse publicity, any of which can have a significant negative impact on consumer demand and, as a result, on 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 cause 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 asE. 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.
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NBP’s exports expose it to political and economic risks in the U.S. and foreign countries, as well as to risks related to currency fluctuations.
Approximately 11.2% of NBP’s annual sales are export sales, primarily to Japan, Mexico, South Korea, Hong Kong, China, Taiwan, Italy and Canada, 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 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 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.
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, APHIS and GIPSA agencies, the FDA, and other federal, state, local and foreign authorities regarding the procurement of cattle and 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.
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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.
NBP is the only beef processor that USPB has a cattle delivery agreement with. USPB has not developed alternative customers for the cattle delivered 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.
11
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 8.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 SECURITIESThere is no established public trading market for any class of common equity of U.S. Premium Beef, LLC. As of February 24, 2018, there were 478 record holders of Class A units and 477 record holders of Class B units. The per unit sales prices for the fiscal years 2017 and 2016 by quarter were as follows:
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| | | | Third Party Sales |
| | Class A | | Class B | | Class A | | Class B |
| | Low | | High | | Low | | High | | Low | | | High | | Low | | High |
| |
Fiscal Year 2017 | | | | | | | | | | | | | | | | | | | | | | | |
Quarter ending: | | | | | | | | | | | | | | | | | | | | | | | |
March 25, 2017 | $ | 16.00 | | $ | 122.00 | | $ | 15.10 | | $ | 118.00 | | $ | 110.00 | | $ | 120.00 | | $ | 105.00 | | $ | 125.00 |
June 24, 2017 | $ | - | | $ | - | | $ | - | | $ | - | | $ | 125.00 | | $ | 125.00 | | $ | - | | $ | - |
September 30, 2017 | $ | 110.00 | | $ | 150.00 | | $ | 83.00 | | $ | 150.00 | | $ | - | | $ | - | | $ | 151.00 | | $ | 161.00 |
December 30, 2017 | $ | 121.00 | | $ | 163.73 | | $ | 105.00 | | $ | 180.00 | | $ | - | | $ | - | | $ | 177.00 | | $ | 180.00 |
Subsequent to December 30, 2017 | $ | - | | $ | - | | $ | - | | $ | - | | $ | 136.67 | | $ | 136.67 | | $ | 165.00 | | $ | 180.00 |
| |
Fiscal Year 2016 | | | | | | | | | | | | | | | | | | | | | | | |
Quarter ending: | | | | | | | | | | | | | | | | | | | | | | | |
March 26, 2016 | $ | 100.00 | | $ | 100.00 | | $ | 75.00 | | $ | 87.50 | | $ | 110.00 | | $ | 110.00 | | $ | - | | $ | - |
June 25, 2016 | $ | 125.00 | | $ | 125.00 | | $ | 125.00 | | $ | 125.00 | | $ | 121.00 | | $ | 128.00 | | $ | 95.00 | | $ | 95.00 |
September 24, 2016 | $ | 142.50 | | $ | 142.50 | | $ | 7.50 | | $ | 7.50 | | $ | - | | $ | - | | $ | - | | $ | - |
December 31, 2016 | $ | - | | $ | - | | $ | - | | $ | - | | $ | 115.00 | | $ | 128.00 | | $ | 150.00 | | $ | 150.00 |
Subsequent to December 31, 2016 | $ | 75.48 | | $ | 100.00 | | $ | 75.48 | | $ | 110.00 | | $ | 112.00 | | $ | 120.00 | | $ | 105.00 | | $ | 125.00 |
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 2017 and 2016, 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 2017 | | | |
| February 28, 2017 | $3.52 | | $30.85 |
| December 28, 2017 | $3.89 | | $34.12 |
| |
| Fiscal Year 2016 | | | |
| December 7, 2016 | $5.02 | | $44.02 |
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
USPB’s 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.
The following table sets forth selected statement of operations and balance sheet data for fiscal years ended December 30, 2017, December 31, 2016, December 26, 2015, December 27, 2014, and December 28, 2013. The selected financial data has been derived from our audited financial statements included elsewhere in this filing or from audited financial statements from prior years’ filings.
The following table should be read in conjunction with Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operationsand Item 8.Financial Statements and Supplementary Data(including the accompanying notes) contained elsewhere in this report.
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| | |
| | | December 30,
2017 | | | December 31,
2016 | | | December 26,
2015 | | | December 27,
2014 | | | December 28,
2013 |
| | | (millions of dollars, except unit and per unit data) | |
| Statement of Operations Data: | | | | | | | | | | | | | | |
| Net sales | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| Costs and expenses: | | | | | | | | | | | | | | |
| Cost of sales | | - | | | - | | | - | | | - | | | - |
| Selling, general, and administrative | | 4.0 | | | 3.6 | | | 2.4 | | | 3.1 | | | 5.4 |
| Depreciation and amortization | | - | | | - | | | - | | | - | | | - |
| Operating loss | | (4.0) | | | (3.6) | | | (2.4) | | | (3.1) | | | (5.4) |
| Other income (expense): | | | | | | | | | | | | | | |
| Interest income | | 0.3 | | | - | | | - | | | - | | | - |
| Equity in income (loss) of National Beef Packing Company, LLC | | 61.1 | | | 49.3 | | | (18.9) | | | (6.1) | | | (6.5) |
| Other, net | | 0.1 | | | 0.7 | | | - | | | 0.2 | | | 0.7 |
| Total other income (expense) | | 61.5 | | | 50.0 | | | (18.9) | | | (5.9) | | | (5.8) |
| Net income (loss) | $ | 57.5 | | $ | 46.4 | | $ | (21.3) | | $ | (9.0) | | $ | (11.2) |
| |
| Selected Balance Sheet Data: | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 119.1 | | $ | 85.2 | | $ | 85.2 | | $ | 92.3 | | $ | 59.8 |
| Total assets | $ | 259.4 | | $ | 228.9 | | $ | 218.2 | | $ | 240.5 | | $ | 254.9 |
| Capital shares and equities | $ | 224.1 | | $ | 221.2 | | $ | 211.8 | | $ | 233.1 | | $ | 244.2 |
| |
| Units outstanding | | | | | | | | | | | | | | |
| Class A units | | 735,385 | | | 735,385 | | | 735,385 | | | 735,385 | | | 735,385 |
| Class B units | | 755,385 | | | 755,385 | | | 755,385 | | | 755,385 | | | 755,385 |
| |
| Per Unit Data: | | | | | | | | | | | | | | |
| Income (loss) per unit | | | | | | | | | | | | | | |
| Basic and diluted | | | | | | | | | | | | | | |
| Class A Units | | $7.82 | | | $6.31 | | | ($2.90) | | | ($1.23) | | | ($1.52) |
| Class B Units | | $68.49 | | | $55.24 | | | ($25.40) | | | ($10.77) | | | ($13.34) |
| |
| Outstanding weighted-average units | | | | | | | | | | | | | | |
| Basic and diluted | | | | | | | | | | | | | | |
| Class A Units | | 735,385 | | | 735,385 | | | 735,385 | | | 735,385 | | | 735,385 |
| Class B Units | | 755,385 | | | 755,385 | | | 755,385 | | | 755,385 | | | 755,385 |
1) Fiscal year 2017 consisted of a 52 week year, fiscal year 2016 consisted of a 53 week year and fiscal years 2015, 2014, and 2013 consisted of 52 week years.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our 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 Statementsand elsewhere in this report.
Overview
U.S. Premium Beef (USPB or the Company) 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. 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 potential distributions, (iii) potential unit price appreciation, and (iv) information that permits unitholders to make informed production decisions.
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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). The Purchase Agreement provided for Leucadia to purchase 56.2415% of the membership interests in NBP (National Interests) from the Company for approximately $646.8 million. The Leucadia Transaction closed on December 30, 2011. Following the close, USPB owned 15.0729% of NBP’s membership interests.
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. NBP’s financial statements and footnotes are attached 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 (seeCattle 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.
NBP is one of the largest beef processing companies in the U.S., accounting for approximately 12.5% of the fed cattle slaughter market. NBP processes and markets fresh and chilled boxed beef, ground beef, beef byproducts, consumer-ready beef and pork, and wet blue leather for domestic and international markets. Based in Kansas City, Missouri, NBP had approximately 8,200 employees on December 3, 2017 and generated total revenues of $7.4 billion in 2017.
The largest share of NBP’s revenue, about 92.7%, is generated from the sale of boxed beef and beef byproducts. NBP also generates revenues through value-added production with its consumer-ready products. In addition, NBP operates one of the largest wet blue tanning facilities in the world (wet blue tanning refers to the first step in processing raw and brine-cured hides into tanned leather), selling processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries. Other streams of revenue include sales through its subsidiary, Kansas City Steak Company, LLC, which sells portioned beef and other products directly to consumers through internet, direct mail and direct response television, and service revenues generated by National Carriers, Inc., a wholly owned transportation and logistics company that is one of the largest refrigerated and livestock carrier operations in the U.S. and transports products for NBP and a variety of other customers. NBP’s profitability typically fluctuates seasonally as well as cyclically, based on the availability of fed cattle.
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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 ends on the last Saturday in December. 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. 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.
Results of Operations
The following table presents the statements of operations data for USPB for the periods indicated:
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| | (millions of dollars) |
| Net sales | $ | - | | $ | - | | $ | - |
| |
| Costs and expenses: | | | | | | | | |
| Cost of sales | | - | | | - | | | - |
| Selling, general, and administrative | | 4.0 | | | 3.6 | | | 2.4 |
| Operating loss | | (4.0) | | | (3.6) | | | (2.4) |
| |
| Other income (expense): | | | | | | | | |
| Interest income | | 0.3 | | | - | | | - |
| Equity in income (loss) of National Beef Packing Company, LLC | | 61.1 | | | 49.3 | | | (18.9) |
| Other, net | | 0.1 | | | 0.7 | | | - |
| Total other income (expense), net | | 61.5 | | | 50.0 | | | (18.9) |
| Net income (loss) | $ | 57.5 | | $ | 46.4 | | $ | (21.3) |
Fiscal Year Ended December 30, 2017 compared to December 31, 2016
Net Sales.There were no sales during the fifty-two weeks ended December 30, 2017 and the fifty-three weeks ended December 31, 2016.
Cost of Sales. There were no cost of sales during the fifty-two weeks ended December 30, 2017 and the fifty-three weeks ended December 31, 2016.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $4.0 million for the fifty-two weeks ended December 30, 2017, compared to approximately $3.6 million for the fifty-three weeks ended December 31, 2016, an increase of approximately $0.4 million. The increase is primarily due to higher expenses associated with the bonus plans and phantom unit plans, which were partially offset by lower legal and non-compete expenses.
Depreciation and Amortization Expense. There were immaterial depreciation and amortization expenses during the fifty-two weeks ended December 30, 2017 compared to the fifty-three weeks ended December 31, 2016.
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Operating Loss.Operating loss was approximately $4.0 million for the fifty-two weeks ended December 30, 2017 compared to approximately $3.6 million for the fifty-three weeks ended December 31, 2016, an increase of approximately $0.4 million.
Interest Income. Interest income was $0.3 million during the fifty-two weeks ended December 30, 2017 and immaterial in the fifty-three weeks ended December 31, 2016.
Equity in Income (Loss) of National Beef Packing Company, LLC. Equity in NBP income was $61.1 million for the fifty-two weeks ended December 30, 2017 compared to $49.3 million for the fifty-three weeks ended December 31, 2016. USPB carries its 15.0729% investment in NBP under the equity method of accounting.
Other, net. Other income was $0.1 million for the fifty-two weeks ended December 30, 2017 compared to $0.7 million for the fifty-three weeks ended December 31, 2016, a decrease of approximately $0.6 million. The decrease was primarily due to lower lease income on the Company owned delivery rights.
Income Tax Expense. USPB is structured as an LLC and is therefore not subject to income taxes at the Company level. See footnote 2 for further information.
Net Income.Net income for the fifty-two weeks ended December 30, 2017 was approximately $57.5 million compared to approximately $46.4 million for the fifty-three weeks ended December 31, 2016, an improvement of approximately $11.1 million. The improvement was due to higher net income at NBP.
Fiscal Year Ended December 31, 2016 compared to December 26, 2015
Net Sales.There were no sales during the fifty-three weeks ended December 31, 2016 and the fifty-two weeks ended December 26, 2015.
Cost of Sales. There were no cost of sales during the fifty-three weeks ended December 31, 2016 and the fifty-two weeks ended December 26, 2015.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $3.6 million for the fifty-three weeks ended December 31, 2016, compared to approximately $2.4 million for the fifty-two weeks ended December 26, 2015, an increase of approximately $1.2 million. The increase is primarily due to higher expenses associated with the bonus plans, non-compete agreements and phantom unit plans.
Depreciation and Amortization Expense. There were immaterial depreciation and amortization expenses during the fifty-three weeks ended December 31, 2016 compared to the fifty-two weeks ended December 26, 2015.
Operating Loss.Operating loss was approximately $3.6 million for the fifty-three weeks ended December 31, 2016 compared to an operating loss of approximately $2.4 million for the fifty-two weeks ended December 26, 2015, an increase of approximately $1.2 million.
Interest Income. Interest income was immaterial during the fifty-three weeks ended December 31, 2016 and fifty-two weeks ended December 26, 2015.
Equity in Income (Loss) of National Beef Packing Company, LLC. Equity in NBP income was $49.3 million for the fifty-three weeks ended December 31, 2016 compared to a loss of $18.9 million for the fifty-two weeks ended December 26, 2015. USPB carries its 15.0729% investment in NBP under the equity method of accounting.
Other, net. Other income was $0.7 million for the fifty-three weeks ended December 31, 2016 compared to $0.0 million for the fifty-two weeks ended December 26, 2015, an increase of approximately $0.7 million. The increase was primarily due to higher lease income on the Company owned delivery rights.
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Income Tax Expense. USPB is structured as an LLC and is therefore not subject to income taxes at the Company level. See footnote 2 for further information.
Net Income (Loss).Net income for the fifty-three weeks ended December 31, 2016 was approximately $46.4 million compared to a net loss of approximately $21.3 million for the fifty-two weeks ended December 26, 2015, an improvement of approximately $67.7 million. The improvement was due to net income at NBP.
Liquidity and Capital Resources
As of December 30, 2017, we had net working capital (the excess of current assets over current liabilities) of approximately $87.9 million, which included cash and cash equivalents of $119.1 million. As of December 31, 2016, we had net working capital of approximately $82.0 million, which included cash and cash equivalents of $85.2 million. Our primary sources of liquidity for fiscal year 2017 was cash, and cash flows from operating and investing activities and available borrowings under the Master Loan Agreement with CoBank.
As of December 30, 2017, USPB had no long-term debt outstanding. We had a $5.0 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 30, 2017.
USPB believes available borrowings under the Master Loan Agreement and cash 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
Net cash provided by operating activities was $30.3 million in fiscal year 2017 as compared to net cash provided by operating activities of $8.3 million in fiscal year 2016. The $22.0 million increase was primarily due to the higher distributions received from NBP.
Net cash provided by operating activities was $8.3 million in fiscal year 2016 as compared to net cash used by operating activities of $3.3 million in fiscal year 2015. The $11.6 million increase was primarily due to the distributions received from NBP, which was partially offset by increases in compensation related expenses in the current fiscal year.
Investing Activities
Net cash provided by investing activities was $30.9 million in fiscal year 2017 as compared to net cash provided by investing activities was $27.5 in fiscal year 2016. The $3.4 million change was due to higher distributions received from NBP.
Net cash provided by investing activities was $27.5 million in fiscal year 2016 as compared to net cash used in investing activities of $3.8 million in fiscal year 2015. The $31.3 million change was due to distributions received from NBP in fiscal year 2016 as compared to USPB’s $3.8 million contribution of additional capital to NBP in fiscal year 2015 to purchase 33.97 NBP units and maintain its 15.0729% ownership percentage.
Financing Activities
Net cash used in financing activities was $27.4 million in fiscal year 2017 as compared to $35.8 million in fiscal year 2016. The $8.4 million change was due to lower cash payments to members in fiscal year 2017 compared to fiscal year 2016.
Net cash used in financing activities was $35.8 million in fiscal year 2016 as compared to $0.0 million in fiscal year 2015. The $35.8 million change was primarily related to a distribution to USPB’s unitholders in fiscal year 2016.
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CoBank Debt
On June 13, 2017, USPB and CoBank entered into a Revolving Term Loan Supplement to the Master Loan Agreement dated July 26, 2011. The Revolving Term Loan Supplement provides for a $5 million revolving credit commitment. The new commitment carries a term of three years, maturing on June 30, 2020. The Pledge Agreement provides CoBank with a first-priority security interest in USPB’s membership interests in, and distributions from, NBP.
All of the $5 million revolving credit commitment was available as of December 30, 2017. 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 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.
Cash Payment Obligations
The following table describes the cash payment obligations as of December 30, 2017 (thousands of dollars):
| | | | Fiscal Year | | Fiscal Year | | Fiscal Year | | Fiscal Year | | Fiscal Year | | |
| | | | 2018 (Year 1) | | 2019 (Year 2) | | 2020 (Year 3) | | 2021 (Year 4) | | 2022 (Year 5) | | After Year 5 |
| Revolving credit facility | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| Interest on long-term debt | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - |
| Non-competition payments(1) | $ | 3,720 | | $ | 845 | | $ | 847 | | $ | 849 | | $ | 851 | | $ | 328 | | $ | - |
| Operating leases | $ | 349 | | $ | 56 | | $ | 57 | | $ | 58 | | $ | 59 | | $ | 59 | | $ | 60 |
Total | $ | 4,069 | | $ | 901 | | $ | 904 | | $ | 907 | | $ | 910 | | $ | 387 | | $ | 60 |
| |
| (1)Reflects payments to be made to current and former Chief Executive Officer's pursuant to their employment agreements. |
| |
Off-Balance Sheet Arrangements
As of December 30, 2017, we did not have any material 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 2017 and 2016. 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.
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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 30, 2017, the Company did not have any outstanding debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 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 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 fourteen weeks ended December 30, 2017 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.
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 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.
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Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 30, 2017. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework(2013 Framework).
Based on the Company’s processes and assessment, as described above, management has concluded that, as of December 30, 2017, 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
USPB’s business and affairs are governed by its board of directors. The board of directors is to consist 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 | | 57 | | Chairman of the Board | | 2019 |
| Joe M. Morgan | | 66 | | Vice Chairman of the Board | | 2019 |
| Jerry L. Bohn | | 68 | | Secretary | | 2018 |
| Wayne L. Carpenter | | 56 | | Director | | 2018 |
| John M. Freund | | 50 | | Director | | 2019 |
| RexW. McCloy | | 63 | | Director | | 2017 |
| Jeff H. Sternberger | | 57 | | Director | | 2017 |
| Stanley D. Linville | | 59 | | Chief Executive Officer | | — |
| Scott J. Miller | | 53 | | Chief Financial Officer | | — |
| Danielle D. Imel | | 42 | | Treasurer | | — |
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Mark R. Gardiner.Mr. Gardiner is President of Gardiner Angus Ranch, Inc. (GAR), a family owned purebred and commercial Angus operation headquartered at Ashland, Kansas, with 10 seedstock satellite cowherds across the United States and Australia. Mr. Gardiner has been involved with the management of GAR since 1983. GAR markets over 2,000 bulls and 700 females per year to both commercial and seedstock beef producers throughout the United States. GAR also runs an embryo transfer program that makes more than 3,500 transfers per year, including more than 60% of GAR’s 1,500-plus head of registered Angus calves born each year. A percentage of its calves are finished at commercial feedlots to provide carcass data on all Gardiner sires. In addition to a native range program, GAR operates a significant dryland farming enterprise. Mr. Gardiner is a member of the National Cattlemen’s Beef Association, Kansas Livestock Association, American Angus Association, Kansas Angus Association and the Beef Improvement Federation. He also serves on the Board of Irsik & Doll Company, a privately held company primarily involved in cattle feeding, grain and feed merchandising. Mr. Gardiner has served as a member of the Company’s Board of Directors since 1996. He was elected Secretary/Treasurer of the Company’s Board in 2003, Vice Chairman of the Board in 2004 and Chairman of the Board in 2006. Mr. Gardiner holds a Bachelor’s degree from Kansas State University in Animal Sciences and Industry. As a member of USPB’s board of directors, Mr. Gardiner and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
Joe M. Morgan.Mr. Morgan has been managing commercial feed yards 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 85,000 head), plus ranches in seven states. Mr. Morgan has had responsibility for all banking of Poky Feeders for over 30 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 is a board member and owner of Pratt Feeders. 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.
Wayne L. Carpenter.Mr. Carpenter is the President and owner of Carpenter Cattle Company Inc. which was established in 1980. His operation today consists of a 15,000 head feed yard which markets 10,000-11,000 head through USPB annually. Mr. Carpenter runs 1,100 mother cows and also yearlings on ranches in Kansas and Montana. His farming operation consists of dryland and irrigated acres, which markets most of its crop production through the feed yard. Mr. Carpenter is a member of Kansas Livestock Association and National Cattlemen’s Beef Association. Carpenter Cattle Company Inc. has been a member of USPB since the beginning. Mr. Carpenter has served as a member of the Company’s board since 2016. As a member of USPB’s board of directors, Mr. Carpenter and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
John M. Freund.Mr. Freund has been actively involved in his family’s cattle feeding operation in Southwest Iowa since 1985 and has been president since 2005. In addition to the feeding operation, the business also includes feed grain production and has ownership in stockers, feedlot production and a ranch in other Midwest states. He has been a member of USPB since its inception and was a member of the company’s Nominating Committee from 2011 to 2015. As a member of USPB’s board of directors, Mr. Freund and the entities he is associated with that deliver cattle to USPB are considered affiliates of USPB.
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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 involved in farming and ranching in the Texas Panhandle. 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.
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. 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 degrees in Accounting and 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.
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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, Bohn, and McCloy. 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. Bohn 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.
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- 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—Management phantom unit plans approved in September 2010 and January 2013 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 2017 Executive Compensation Elements
The elements of our named executive officers total compensation package are as follows:
- base salary;
- annual cash bonuses;
- long-term cash bonus;
- discretionary cash bonuses;
- retirement plans; and
- limited personal benefits.
Elements of Our Compensation Program
Base Salary
Base salaries are intended to provide a level of compensation sufficient to attract and retain an effective management team, when considered in combination with the other components of our executive compensation program. The relative levels of base salary for named executive officers are designed to reflect each executive officer’s scope of responsibility and accountability with USPB. Except for the CEO’s salary, base salaries are reviewed annually to determine if they are consistent with the performance of the individual executive and equitable relative to USPB’s other executive officers and professional staff. Salary surveys summarizing the compensation packages for positions of equivalent responsibility in related industries were used to establish the CEO’s base salary.
On December 21, 2015, USPB entered into a new employment agreement with Mr. Linville (Linville Employment Agreement), which became effective on January 1, 2016. The Linville Employment Agreement provides for Mr. Linville to serve as USPB’s CEO for a term that started on January 1, 2016 and expires on December 29, 2018. The Linville Employment Agreement provides for Mr. Linville to receive an annual base salary of $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 Linville Employment Agreement, if Mr. Linville is employed by USPB on the last day of any fiscal 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 (USPB Total Benefits) that exceed $25,000,000 (Annual Incentive). The 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.
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For fiscal year 2017, named executive officers and certain 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 fiscal year 2017 USPB earnings before tax plus USPB grid premiums during the fiscal year, less (2) $15,000,000, multiplied by (3) management bonus factor. The bonus plan payments are vested over a two-year period. 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 Incentive
Mr. Linville is eligible for a long-term incentive compensation under the Linville Employment Agreement. If he is employed by USPB on December 29, 2018, 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 USPB Total Benefits from January 1, 2016 to December 29, 2018 exceed $75,000,000 (Long-Term Incentive).
The Linville Employment Agreement provides for a cumulative annual cap of $450,000 for payments to Mr. Linville for Annual Incentive and Long-Term Incentive cash bonuses.
Discretionary Cash Bonuses
Discretionary bonuses may be 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 the Company’s 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
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. As a result of the retirement of one of USPB’s employees on December 31, 2014, 4,750 Class A phantom units and 4,750 Class B phantom units remained outstanding at December 30, 2017, all of which were fully vested.
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 were fully vested on January 28, 2018.
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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
On December 21, 2015, USPB entered into the Linville Employment Agreement with Mr. Linville, which became effective on January 1, 2016 and expires on December 29, 2018, subject to earlier termination as provided in the 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 an Annual Incentive. If he is employed by USPB on December 29, 2018, he is to be paid Long-Term Incentive compensation. 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. Mr. Linville currently holds a total of 2,300 Class A and 2,300 Class B phantom units.
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 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 fiscal year 2018; payment of certain fringe benefits through fiscal year 2018; the annual incentive bonus for the year in which the termination occurs and each subsequent year through fiscal year 2018; the long-term incentive bonus that would have accrued had Mr. Linville been employed through fiscal year 2018; 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.
Unit Ownership Guidelines
USPB does not allow its named executive officers to own USPB’s Class A units. As of December 30 2017, certain members of management own a total of 6,250 Class A and 6,250 Class B phantom unit rights awarded under the management phantom unit plans 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.
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Compensation Committee
Mark Gardiner – Chairman
JoeMorgan
Jerry Bohn |
Summary Compensation Table
The table below sets forth information regarding compensation for our named executive officers for fiscal years 2017, 2016, and 2015. 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.
Name and Principal
Position | | Period | | Salary
($) | | Bonus
($) | | Option
Awards
($) | | Non-Equity
Incentive Plan
Compensation
($) | | All Other
Compensation
($) | | Total
($) |
| Stanley D. Linville | | FY 2017 | | 305,172 | | - | | - | | 450,000 (3) | | 62,554 (1) | | 817,726 |
| Chief Executive Officer | | FY 2016 | | 308,190 | | - | | - | | 447,628 (3) | | 77,387 (1) | | 833,205 |
| | | FY 2015 | | 308,154 | | - | | - | | 32,810 (3) | | 13,410 (1) | | 354,374 |
| |
| Scott J. Miller | | FY 2017 | | 188,246 | | - | | - | | 245,006 (2) | | 39,933 (1) | | 473,185 |
| Chief Financial Officer | | FY 2016 | | 190,714 | | - | | - | | 210,842 (2) | | 71,978 (1) | | 473,534 |
| | | FY 2015 | | 183,891 | | - | | - | | 11,741 (2) | | 11,386 (1) | | 207,018 |
| |
| Danielle D. Imel | | FY 2017 | | 131,595 | | - | | - | | 176,355 (2) | | 14,625 (1) | | 322,575 |
| Treasurer | | FY 2016 | | 132,964 | | - | | - | | 151,764 (2) | | 58,727 (1) | | 343,455 |
| | | FY 2015 | | 128,681 | | - | | - | | 8,451 (2) | | - (1) | | 137,132 |
(1)Mr. Linville- Amounts for Mr. Linville include Company match under our 401(k) plan, non-dilution payments resulting from excess tax distributions and a phantom unit plan payment resulting from the payment of funds escrowed in the Leucadia Transaction, $10,800, $51,754, and $0, respectively in fiscal year 2017; $10,747, $2,888 and $63,752, respectively in fiscal year 2016; and $10,523, $2,887 and $0, respectively in fiscal year 2015.
Mr. Miller- Amounts for Mr. Miller include Company match under our 401(k) plan, non-dilution payments resulting from excess tax distributions and a phantom unit plan payment resulting from the payment of funds escrowed in the Leucadia Transaction, $10,800, $29,133, and $0, repectively in fiscal year 2017; $10,322, $2,628 and $58,848, respectively in fiscal year 2016; and $8,758, $2,628 and $0, respectively in fiscal year 2015.
Ms. Imel- Amounts for Ms. Imel include Company match under our 401(k) plan, non-dilution payments resulting from excess tax distributions and a phantom unit plan payment resulting from the payment of funds escrowed in the Leucadia Transaction, $8,705, $5,920, and $0, respectively in fiscal year 2017 and $7,535, $2,152 and $49,040, respectively in fiscal year 2016. None of the benefits paid to Ms. Imel in fiscal year 2015 exceeded $10,000.
(2) 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.
(3) The amount of non-equity incentive plan compensation, which is to include the annual cash bonus and amounts earned pursuant to the long-term cash bonus plan pursuant to Mr. Linville's employment agreement. The amounts represent annual cash bonus of $450,000, $447,628, and $0 for fiscal years 2017, 2016, and 2015, respectively, and $0, $0, and $32,810 of long-term cash bonus for fiscal years 2017, 2016, and 2015, respectively. The Linville Employment Agreement provides for a cumulative annual cap of $450,000 for payments to Mr. Linville for annual and long-term incentive amounts.
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Grants of Plan-Based Awards in the Fiscal Year 2017
The table below sets forth information regarding grants of a non-equity incentive plan-based award made to our named executive officers during fiscal year 2017.
| | | | | Estimated Future Payouts under Non-Equity Incentive
Plan Awards |
| Name and Principal Position | | Grant Date | | Threshold ($) | | Target ($) | | Maximum ($) |
| Stanley D. Linville (2) | | n/a | | | | | | | | |
| Chief Executive Officer | | | | | | | | | | |
| |
| Scott J. Miller | | 11/1/2017 | | $ | - | | $ | 199,199(1) | | $ 271,950 |
| Chief Financial Officer | | | | | | | | | | |
| |
| Danielle D. Imel | | 11/1/2017 | | $ | - | | $ | 143,384(1) | | $ 195,750 |
| Treasurer | | | | | | | | | | |
(1) The target amount is based on estimated benefits for fiscal year 2018. Amounts to be paid, which could be more or less, will be based on actual input amounts for fiscal year 2018 and will be paid out over a two-year period.
(2) There were no grants of plan-based awards in fiscal year 2017 for Mr. Linville.
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 2018: 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
Danielle D. Imel | | For fiscal year 2018: The executive’s proportionate share of the Management Bonus Pool, which is (1) the audited fiscal year 2017 USPB earnings before tax plus USPB grid premiums during fiscal year 2017, less (2) $15,000,000, multiplied by (3) management bonus factor. The bonus plan payments are vested over a two-year period. The maximum Management Bonus Pool for a given bonus plan year is equal to 150% of the sum of the qualifying participants’ salaries in effect at the end of such year. |
Other Bonuses
We also pay discretionary cash bonuses to executive officers from time to time to reward elements of performance that are not reflected in the criteria for performance based cash bonuses. No such bonuses were paid to executive officers in fiscal year 2017, 2016, and 2015. The discretionary bonuses, if paid, are disclosed in the Bonus column in the Summary Compensation Table.
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Outstanding Equity Awards at Fiscal Year End 2017
| | | Option Awards |
| | | Number of Securities | | | | | | |
| | | Underlying | | | Option Exercise Price | | | |
Name and Principal Position | | Unexercised Options | | | ($) | | | Option Expiration Date |
| Stanley D. Linville | | 1,300 Class A Units | (1) | | $0.00 | (3) | | None |
| Chief Executive Officer | | 1,300 Class B Units | (1) | | $0.00 | (3) | | None |
| | | 1,000 Class A Units | (2) | | $66.01 | | | None |
| | | 1,000 Class B Units | (2) | | $73.72 | | | None |
| |
| Scott J. Miller | | 1,200 Class A Units | (1) | | $0.00 | (3) | | None |
| Chief Financial Officer | | 1,200 Class B Units | (1) | | $0.00 | (3) | | None |
| | | 500 Class A Units | (2) | | $66.01 | | | None |
| | | 500 Class B Units | (2) | | $73.72 | | | None |
| |
| Danielle D. Imel | | 1,000 Class A Units | (1) | | $0.00 | (3) | | None |
| Treasurer | | 1,000 Class B Units | (1) | | $0.00 | (3) | | None |
(1) The phantom plan awards, which provide for the award of appreciation rights only, for Mr. Miller, Mr. Linville and Ms. Imel vested over a 5 year period. At the end of fiscal year 2017, the unexercised phantom units were fully vested, and therefore exercisable.
(2) 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 27, 2018, the unexercised phantom units were fully vested.
(3) 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 2011 Leucadia Transaction, management employees received 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 satisified and is now $0. As a result of the retirement of one of USPB’s employees on December 31, 2014, 4,750 Class A phantom units and 4,750 Class A phantom units remained outstanding at December 31, 2017, all of which were fully vested.
Options Exercised
| | | Option Awards |
| | | Number of options | | Value realized on |
Name and Principal Position | | acquired on exercise | | exercise ($) |
| Stanley D. Linville | | - | | $ - |
| 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 2017. 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. Stanley D. Linville
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Employment Agreement
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 2017, his payment would be $300,000;
- If termination is due to permanent disability, provision of certain fringe benefits through the Deemed Termination Date, but excluding vacation pay, personal and sick days, vehicle, telecommunications, and 401(k) 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 Incentive that would have accrued if Mr. Linville had remained employed under the Linville Employment 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 Incentive 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, unless Mr. Linville is terminated for being convicted of a felony or other serious crime or engaging in fraud, embezzlement or other illegal conduct to the detriment of USPB, in which case noncompetition compensation will not be paid.
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 December 29, 2018;
- Payment of certain fringe benefits, but excluding vacation pay, personal and sick days, vehicle, telecommunications, and 401(k) 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 December 29, 2018;
- Annual Incentive for the year in which the termination occurs and each subsequent year through employment year 2018;
- Long-Term Incentive that would have accrued had Mr. Linville had remained employed through employment year 2018; and
- The payment of the noncompetition compensation.
- The Linville Employment Agreement provides for a cumulative annual cap of $450,000 for payments to Mr. Linville for Annual Incentive and Long-Term Incentive amounts.
Where the Linville Employment Agreement provides for post-termination noncompetition compensation, Mr. Linville will receive a monthly payment equal to the annual salary that would be paid to Mr. Linville under the Linville Employment Agreement or his annual salary at the time of termination, whichever is greater, divided by twelve (12), which will be paid at normal salary payment intervals in effect for management personnel on the date of termination. USPB will also pay Mr. Linville certain fringe benefits provided to other employees of USPB, but excluding paid vacations, personal and sick days, allowances, telecommunications equipment or services, expense reimbursement (except on prior written approval), or 401(k) 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 will be paid to CEO in equal monthly payments during the noncompetition period). In return for such payment, 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, within the United States of America, from participating through management or control or consult or employment of any beef packing or processing industry business or enterprise that competes with the business of USPB and its various affiliates. USPB may terminate the USPB noncompetition payments prior to the end of the twelve (12) month period if the Board of Directors determines the CEO violated the noncompetition restriction as outlined in the Linville Employment Agreement.
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Director Compensation Table
Each director receives cash compensation for meetings attended. Directors are compensated $250 per diem for regular meetings, special meetings, compensation committee meetings and audit committee meetings. We do not award any other type of compensation to our directors.
The table below reflects compensation paid to each director during the fiscal year 2017.
| | | Fees Earned or |
Name | | Paid in Cash ($) |
| Mark R. Gardiner | | 2,250 |
| Joe M. Morgan | | 2,500 |
| Jerry L. Bohn | | 2,500 |
| Wayne L. Carpenter | | 2,250 |
| John M. Freund | | 2,250 |
| Rex W. McCloy | | 2,250 |
| Jeff H. Sternberger | | 2,250 |
Pay Ratio Disclosure Rule
Pursuant to a mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission adopted a rule requiring annual disclosure of the ratio of the median employee’s annual total compensation to the total annual compensation of the principal executive officer, Stanley D. Linville. The purpose of the disclosure is to provide a measure of the equitability of pay within the organization. The Company believes its compensation policy yields an equitable result.
| | • | Median employee total annual compensation for 2017 | $267,781 |
| | • | Stanley D. Linville total annual compensation for 2017 | $817,726 |
| | • | Ratio of Stanley D. Linville to Median employee compensation | 3.1 : 1.0 |
In determining the median employee total annual compensation, a listing was prepared of all employees, other than the CEO, as of December 30, 2017. The median of the total annual compensation amounts for all the employees is the amount disclosed above.
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.
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| | | 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 | | | | - | | N/A | | - |
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of February 24, 2018 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 |
| Black Diamond Cattle Co, Inc.(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 95,000 Class A and Class B units held by Black Diamond Cattle Co., Inc., which is managed by Karen Laue. |
| (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 dba 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 25, 2018, 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 28, and (iii) all current directors and executive officers as a group.
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| | | Beneficial Ownership of |
| | | Class A Units | | Class B Units |
| Name | | Number(1) | | Percentage(1) | | Number(1) | | Percentage(1) |
| Jeff H. Sternberger(2) | | 40,770 | | 5.5% | | 40,770 | | 5.4% |
| Jerry L. Bohn(3) | | 35,867 | | 4.9% | | 31,617 | | 4.2% |
| Joe M. Morgan(4) | | 33,128 | | 4.5% | | 17,865 | | 2.4% |
| Rex W. McCloy(5) | | 16,085 | | 2.2% | | 13,085 | | 1.7% |
| Wayne L. Carpenter(6) | | 6,000 | | 0.8% | | 6,000 | | 0.8% |
| Mark R. Gardiner(7) | | 3,100 | | 0.4% | | 3,100 | | 0.4% |
| John M. Freund(8) | | 2,225 | | 0.3% | | 2,225 | | 0.3% |
| 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 (10 persons)(9) | | 137,175 | | 18.5% | | 114,662 | | 15.2% |
(1) | Represents the percentage of Class A units and the percentage of Class B units beneficially held by the named party. |
(2) | 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. 37,770 of the Class A and Class B units are pledged as security. |
(3) | Includes i) 35,867 Class A and 31,617 Class B units held by Pratt Feeders, LLC, of which Mr. Bohn is an owner and Board Member. All of the units are pledged as security. |
(4) | 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. |
(5) | 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. |
(6) | Includes i) 6,000 Class A and Class B units held by the Carpenter Cattle Co. Inc., of which Mr. Carpenter is the owner. |
(7) | Includes i) 3,000 Class A and Class B units held by the Mark Gardiner Revocable Trust and ii) 100 Class A and Class B units held by Gardiner Angus Ranch, Inc., over which Mr. Gardiner has sole voting and investment power. |
(8) | Includes 2,225 Class A and Class B units held by the John Freund, over which Mr. Freund has sole voting and investment power. |
(9) | 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 questionnaire regarding their independence. The questionnaire also 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 transaction is on an arms-length basis which is fair to the Company.
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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, Carpenter, Freund, Gardiner, McCloy, Morgan, and Sternberger.
Certain Arrangements with Holders of NBP’s Membership Interests
Simultaneous with the closing the Leucadia Transaction, all of the holders of NBP’s membership interests entered into a limited liability company agreement that provides for, among other things, election of its board of managers, the powers of its board of managers and its officers, approval rights for certain of its equity holders, restrictions and rights related to the transfer, sale or purchase of its membership interests, and preemptive and repurchase rights.
Transactions with NBP
On December 30, 2011, USPB entered into a new Cattle Purchase and Sale Agreement with NBP. Per the terms and conditions of the Agreement, NBP shall purchase through USPB from its members, and USPB shall cause to be sold and delivered from its members to NBP, on an annual basis, a base amount of 735,385 (subject to adjustment) head of cattle per year. In fiscal years 2017, 2016, and 2015, USPB and NBP agreed to increase the number of cattle that USPB’s members could deliver during USPB’s delivery year by up to 10%. During fiscal years 2017, 2016, and 2015, USPB’s members and associates provided approximately 24%, 27%, and 28%, respectively, 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 30, 2022, 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PricewaterhouseCoopers, an independent registered public accounting firm, served as our auditors for the review of the quarterly report on Form 10-Q for the period ended March 25, 2017 and for fiscal year 2016. Deloitte and Touche LLP, an independent registered public accounting firm, was engaged in April 2017 and served as our auditors for the review of the quarterly report on Form 10-Q for the periods ended June 24, 2017 and September 30, 2017, and as our auditor for the fiscal year ended December 30, 2017 (thousands of dollars).
| | Fiscal Year Ended | | Fiscal Year Ended |
| | December 30, 2017 | | December 31, 2016 |
| |
| Audit Fees | $ | 115 | | $ | 115 |
| Audit Related Fees | | - | | | 2 |
| Tax Fees(1) | | 237 | | | 240 |
| All Other Fees | | - | | | - |
Total | $ | 352 | | $ | 357 |
1)- Tax fees relate to tax compliance work performed by PricewaterhouseCoopers
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Audit Fees
Audit fees relate to the audits of our 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.
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PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
(a) Financial Statements and Financial Statement Schedules
| (1) | The financial statements filed as part of this report at Item 8 are listed in the Index to the Financial Statements on page F-1 contained herein. |
(b) The following documents are filed or incorporated by reference as exhibits to this report:
| 2.1 | Agreement and Plan of Merger between U.S. Premium Beef, Ltd. and U.S. Premium Beef, Inc. (incorporated herein by reference to Appendix A to voting materials-prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
| | |
| 2.2 | Plan of Conversion adopted by U.S. Premium Beef, Inc. (incorporated herein by reference to Appendix B to the voting materials – prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
| | |
| 3.1 | Certificate of Formation of U.S. Premium Beef, LLC (incorporated herein by reference to Appendix C to the voting materials – prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
| | |
| 3.2(a) | Limited Liability Agreement of U.S. Premium Beef, LLC (incorporated herein by reference to Appendix D to the voting materials – prospectus contained in U.S. Premium Beef, Inc. Registration Statement on Form S-4 (File No. 333-115164) filed with the SEC on August 5, 2004). |
| | |
| 3.2(b) | Amended and Restated Limited Liability Company Agreement of U.S. Premium Beef, LLC, dated as of March 2, 2011 (incorporated herein by reference to Exhibit 3.1 to Form 8-K (File No. 333-115164) filed with the SEC on March 7, 2011). |
| | |
| 3.2(c) | Amended and Restated Limited Liability Company Agreement of U.S. Premium Beef, LLC, dated as of January 17, 2012 (incorporated herein by reference to Exhibit 3 to Form 8-K (File No. 333-115164) filed with the SEC on January 18, 2012). |
| | |
| 10.2 | Cattle Purchase and Sale Agreement dated December 30, 2011 between the Company and National Beef Packing Company, LLC (incorporated herein by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 2011). |
| | |
| 10.3(b) | Form of Uniform Cattle Delivery and Marketing Agreement – Odd Slots (incorporated by reference to Exhibit 10.3(b) to Form 10-K (File No. 333-115164) filed with the Commission on November 14, 2007). |
| | |
| 10.4(b)* | U.S. Premium Beef, LLC Phantom Unit Bonus Compensation Policy adopted September 28, 2010 (incorporated herein by reference to Exhibit 10.01 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 10.2 to Form 8-K (File No. 333-115164) filed with the SEC on August 1, 2011). |
| | |
| 10.5(c) | Pledge Agreement between U.S. Premium Beef, LLC and CoBank, ACB, executed July 28, 2011 (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 333-115164) filed with the SEC on August 1, 2011). |
| | |
| 10.5(d) | Security Agreement between U.S. Premium Beef, LLC and CoBank, ACB, executed July 28, 2011 (incorporated herein by reference to Exhibit 10.4 to Form 8-K (File No. 333-115164) filed with the SEC on August 1, 2011). |
| | |
| 10.5(e) | Pledge Agreement dated December 30, 2011 between the Company and National Beef Packing Company, LLC, with attached Consent and First Amendment to Pledge Agreement and Security Agreement dated December 30, 2011 between the Company and CoBank, ACB (incorporated herein by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 2011). |
| | |
| 10.5(f) | Revolving Term Loan Supplement between U.S. Premium Beef, LLC and CoBank, ACB, executed May 29, 2014 (incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 333-115164) filed with the SEC on June 3, 2014). |
| | |
| 10.5(g) | Amended and Restated Revolving Term Supplement between U.S. Premium Beef, LLC and CoBank, ACB, executed June 13, 2017 incorporated herein by reference to Exhibit 10.1 to Form 8-K (File No. 333-115164) filed with the SEC on June 15, 2017). |
| | |
| 10.6(a)* | CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef, LLC dated July 10, 2009 (incorporated by reference to Exhibit 10.4 to Form 10-Q (File No. 333-115164) filed with the SEC on July 10, 2009). |
| | |
| 10.6(b)* | First Amendment to CEO Employment Agreement by and between Steven D. Hunt and U.S. Premium Beef, LLC adopted September 28, 2010 (incorporated herein by reference to Exhibit 10.02 to Form 8-K (File No. 333-115164) filed with the SEC on October 4, 2010). |
| | |
| 10.6(c)* | Second Amendment to CEO Employment Agreement between U.S. Premium Beef, LLC and Steven D. Hunt (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 6, 2011). |
| | |
| 10.6(d)* | Third Amendment to CEO Employment Agreement between U.S. Premium Beef, LLC and Steven D. Hunt (incorporated by reference to Exhibit 10.6(d) to Form 10-KT (File No. 333-115164) filed with the SEC on May 24, 2012). |
| | |
| 10.6(e)* | CEO Employment Agreement between U.S. Premium Beef, LLC and Stanley D. Linville, executed on November 23, 2012 and effective as of January 28, 2013 (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 3, 2012). |
| | |
| 10.6(f)* | CEO Employment Agreement between U.S. Premium Beef, LLC and Stanley D. Linville, executed on December 21, 2015 and effective as of January 1, 2016 (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 23, 2015). |
| | |
| 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). |
38
|
| 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). |
| | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
| 101.INS | XBRL Instance Document ** |
| 101.SCH | XBRL Taxonomy Extension Schema Document ** |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase ** |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document ** |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document ** |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document ** |
* Management contract or compensatory plan or arrangement.
** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections
39
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
/s/ Stanley D. Linville
________________________________
Name: Stanley D. Linville
Chief Executive Officer
(Principal Executive Officer) |
Date: March 14, 2018
* * * *
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
| | | | |
Signature | | Title | | Date |
| | | | | |
/s/ Stanley D. Linville | | Chief Executive Officer | | |
| Stanley D. Linville | | (Principal Executive Officer) | | March 14, 2018 |
| | | | | |
/s/ Scott J. Miller | | Chief Financial Officer | | |
| Scott J. Miller | | (Principal Financial and Accounting Officer) | | March 14, 2018 |
| |
/s/ Mark R. Gardiner | | Chairman of the Board | | |
| Mark R. Gardiner | | | | March 14, 2018 |
| | | | | |
/s/ Joe M. Morgan | | Vice Chairman of the Board | | |
| Joe M. Morgan | | | | March 14, 2018 |
| |
/s/ Jerry L. Bohn | | Secretary | | |
| Jerry L. Bohn | | | | March 14, 2018 |
| |
/s/ Wayne L. Carpenter | | Director | | |
| Wayne L. Carpenter | | | | March 14, 2018 |
| |
/s/ John M. Freund | | Director | | |
| John M. Freund | | | | March 14, 2018 |
| |
/s/ Rex W. McCloy | | Director | | |
| Rex W. McCloy | | | | March 14, 2018 |
| |
/s/ Jeff H. Sternberger | | Director | | |
| Jeff H. Sternberger | | | | March 14, 2018 |
40
U.S. PREMIUM BEEF, LLC
INDEX TO FINANCIAL STATEMENTS
| | |
| | | Page |
| Audited Financial Statements: | | |
Report of Independent Registered Public Accounting Firm – Deloitte & Touche LLP | | F-2 |
Report of Independent Registered Public Accounting Firm – PricewaterhouseCoopers, LLP | | F-3 |
Balance Sheets at December 30, 2017 and December 31, 2016 | | F-4 |
Statements of Operations for the years ended December 30, 2017, December 31, 2016, and December 26, 2015 | | F-5 |
Statements of Capital Shares and Equities for the years ended December 30, 2017, December 31, 2016, and December 26, 2015 | | F-5 |
Statements of Cash Flows for the years ended December 30, 2017, December 31, 2016, and December 26, 2015 | | F-6 |
Notes to Financial Statements | | F-7 |
National Beef Packing Company, LLC Consolidated Balance Sheets at December 30, 2017 and December 31, 2016 and Consolidated Statements of Operations, Comprehensive (Loss) Income, Cash Flows and Members’ Capital for years ended December 30, 2017, December 31, 2016, and December 26, 2015 and Notes to Consolidated Financial Statements | | F-14 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Members of U.S. Premium Beef, LLC:
Opinion on the Financial Statements
We have audited the accompanying balance sheet of U.S. Premium Beef, LLC (the "Company") as of December 30, 2017, the related statements of operations, capital shares and equities, and cash flows for the period then ended and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2017, and the results of its operations and its cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provide a reasonable basis for our opinion.
/s/Deloitte & Touche, LLP
Kansas City, Missouri
March 14, 2018
We have served as the Company’s auditor since 2017
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Owners
U.S. Premium Beef, LLC:
In our opinion, the accompanying balance sheet and the related statements of operations, comprehensive income (loss), capital shares and equities and cash flows present fairly, in all material respects, the financial position of U.S. Premium Beef, LLC at December 31, 2016, and the results of its operations and its cash flows for each of the years ended December 31, 2016 and December 26, 2015 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 financial 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, Missouri
March 9, 2017
F-3
| U.S. PREMIUM BEEF, LLC |
| Balance Sheets |
| (thousands of dollars, except unit information) |
|
| |
| Assets | December 30, 2017 | | December 31, 2016 |
| Current assets: | | | | | |
Cash and cash equivalents | $ | 119,074 | | $ | 85,230 |
Due from affiliates | | 137 | | | 48 |
| Other current assets | | 35 | | | 27 |
| Total current assets | | 119,246 | | | 85,305 |
| Property, plant, and equipment, at cost | | 223 | | | 223 |
| Less accumulated depreciation | | 201 | | | 188 |
| Net property, plant, and equipment | | 22 | | | 35 |
| Investment in National Beef Packing Company, LLC | | 140,030 | | | 143,446 |
| Other assets | | 103 | | | 146 |
| Total assets | $ | 259,401 | | $ | 228,932 |
| Liabilities and Capital Shares and Equities | | | | | |
| Current liabilities: | | | | | |
| Accounts payable - trade | $ | 58 | | $ | 66 |
| Due to affiliates | | 388 | | | 37 |
| Accrued compensation and benefits | | 2,250 | | | 1,690 |
| Other accrued expenses and liabilities | | 284 | | | 253 |
| Patronage notices payable | | - | | | 19 |
| Distributions payable | | 28,328 | | | 1,199 |
| Total current liabilities | | 31,308 | | | 3,264 |
| Long-term liabilities: | | | | | |
| Other liabilities | | 3,946 | | | 4,473 |
| Total long-term liabilities | | 3,946 | | | 4,473 |
| Total liabilities | | 35,254 | | | 7,737 |
| |
| Commitments and contingencies | | - | | | - |
| |
| Capital shares and equities: | | | | | |
| Members' capital, 735,385 Class A units and 755,385 Class B units authorized, | | | | | |
| issued and outstanding | | 224,147 | | | 221,195 |
| Total capital shares and equities | | 224,147 | | | 221,195 |
| Total liabilities and capital shares and equities | $ | 259,401 | | $ | 228,932 |
| |
| See accompanying notes to financial statements. |
F-4
| U.S. PREMIUM BEEF, LLC |
| Statements of Operations |
| (thousands of dollars, except unit and per unit data) |
| |
| |
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Net sales | $ | - | | $ | - | | $ | - |
| Costs and expenses: | | | | | | | | |
| Cost of sales | | - | | | - | | | - |
| Selling, general, and administrative expenses | | 4,008 | | | 3,621 | | | 2,397 |
| Depreciation and amortization | | 13 | | | 13 | | | 7 |
| Total costs and expenses | | 4,021 | | | 3,634 | | | 2,404 |
Operating loss | | (4,021) | | | (3,634) | | | (2,404) |
| Other income (expense): | | | | | | | | |
| Interest income | | 321 | | | 48 | | | 47 |
| Interest expense | | (13) | | | (13) | | | (13) |
| Equity in income (loss) of National Beef Packing Company, LLC | | 61,056 | | | 49,267 | | | (18,949) |
| Other, net | | 138 | | | 700 | | | 3 |
Total other expense | | 61,502 | | | 50,002 | | | (18,912) |
Net income (loss) | $ | 57,481 | | $ | 46,368 | | $ | (21,316) |
| |
| Income (loss) per unit: | | | | | | | | |
| Basic and diluted | | | | | | | | |
| Class A units | $ | 7.82 | | $ | 6.31 | | $ | (2.90) |
| Class B units | $ | 68.49 | | $ | 55.24 | | $ | (25.40) |
| Outstanding weighted-average Class A and Class B units: | | | | | | | | |
| Basic and diluted | | | | | | | | |
Class A units | | 735,385 | | | 735,385 | | | 735,385 |
Class B units | | 755,385 | | | 755,385 | | | 755,385 |
| See accompanying notes to financial statements. |
| |
| U.S. PREMIUM BEEF, LLC |
| Statements of Capital Shares and Equities |
| (thousands of dollars) |
|
| |
| |
| | Members' |
| | capital |
| Balance at December 27, 2014 | $ | 233,086 |
| Net loss for the year ended December 26, 2015 | | (21,316) |
| Balance at December 26, 2015 | $ | 211,770 |
| Net income for the year ended December 31, 2016 | | 46,368 |
| Member distribution | | (36,943) |
| Balance at December 31, 2016 | $ | 221,195 |
| Net income for the year ended December 30, 2017 | | 57,481 |
| Member distributions | | (54,529) |
| Balance at December 30, 2017 | $ | 224,147 |
| See accompanying notes to financial statements. |
F-5
| U.S. PREMIUM BEEF, LLC |
| Statements of Cash Flows |
| (thousands of dollars) |
|
| |
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Cash flows from operating activities: | | | | | | | | |
| Net income (loss) | $ | 57,481 | | $ | 46,368 | | $ | (21,316) |
| Adjustments to reconcile net income (loss) to net cash provided by operating | | | | | | | |
| activities: | | | | | | | | |
| Depreciation and amortization | | 13 | | | 13 | | | 7 |
| Equity in net (income) loss of National Beef Packing Company, LLC | (61,056) | | | (49,267) | | | 18,949 |
| Distributions from National Beef Packing Company, LLC | | 33,531 | | | 10,923 | | | - |
| Changes in assets and liabilities: | | | | | | | | |
| Due from affiliates | | (89) | | | 89 | | | (55) |
| Other assets | | 34 | | | 32 | | | 57 |
| Accounts payable | | (8) | | | 52 | | | (20) |
| Due to affiliates | | 351 | | | 37 | | | (17) |
| Accrued compensation and benefits | | 33 | | | (21) | | | (968) |
| Other accrued expenses and liabilities | | 31 | | | 74 | | | 60 |
| Net cash provided by (used in) operating activities | | 30,321 | | | 8,300 | | | (3,303) |
| Cash flows from investing activities: | | | | | | | | |
| Capital expenditures, including interest capitalized | | - | | | - | | | (51) |
| Distributions from National Beef Packing Company, LLC | | 30,942 | | | 27,525 | | | - |
| Additional minority interest acquired in National Beef Packing Company, LLC | | - | | | - | | | (3,768) |
| Net cash provided by (used in) investing activities | | 30,942 | | | 27,525 | | | (3,819) |
| Cash flows from financing activities: | | | | | | | | |
| Change in overdraft balances | | 27,110 | | | 1,128 | | | (2) |
| Partnership distributions and redemptions | | (54,529) | | | (36,943) | | | - |
| Net cash used in financing activities | | (27,419) | | | (35,815) | | | (2) |
| Net increase (decrease) in cash | | 33,844 | | | 10 | | | (7,124) |
| Cash and cash equivalents at beginning of period | | 85,230 | | | 85,220 | | | 92,344 |
| Cash and cash equivalents at end of period | $ | 119,074 | | $ | 85,230 | | $ | 85,220 |
| Supplemental cash disclosures: | | | | | | | | |
Cash paid during the period for interest | $ | 13 | | $ | 13 | | $ | 13 |
| |
| See accompanying notes to financial statements. |
F-6
U.S. Premium Beef, LLC
Notes to Financial Statements
NOTE 1. Description of Business
U.S. Premium Beef (USPB or the Company) 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. 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 potential distributions, (iii) potential unit price appreciation, and (iv) information that permits unitholders to make informed production decisions.
On August 18, 2004, the shareholders of U.S. Premium Beef, Ltd. approved the conversion of the cooperative into a Delaware LLC.
On December 5, 2011, USPB entered into a Membership Interest Purchase Agreement with Leucadia National Corporation (Leucadia). The Purchase Agreement provided for Leucadia to purchase 56.2415% of the membership interests in NBP (National Interests) from the Company for approximately $646.8 million. The Leucadia Transaction closed on December 30, 2011. Following the close, USPB owned 15.0729% of NBP’s membership interests.
As a result of the sale to Leucadia, 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.
Ownership Structure
As USPB is structured as a Limited Liability Company, its members are not personally liable for liabilities of USPB. USPB’s members are taxed on their proportionate share of USPB’s taxable income.
Class A Units. There are 735,385 Class A units outstanding. Class A unitholders are allocated 10% of the Company’s profits and losses. 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.There are 755,385 Class B units outstanding. Class B unitholders are allocated 90% of the Company’s profits and losses. Holders of USPB Class B units have no cattle delivery commitment.
NOTE 2. Basis of Presentation and Accounting Policies.
Basis of Presentation
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.
Fiscal Year
The Company’s fiscal year ends on the last Saturday in December. The Company files annual reports for each 52 week or 53 week period ended on the last Saturday in December.
F-7
U.S. Premium Beef, LLC
Notes to Financial Statements
Use of Estimates
The 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 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.
Investment in National Beef Packing Company, LLC
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.
For fiscal years 2017 and 2016, USPB conducted an evaluation to determine if its investment in NBP was impaired as of the end of the fiscal year in accordance with Auditing Standards Codification (ASC) 323Investments Equity Method and Joint Ventures. The evaluation included both quantitative and qualitative factors. The quantitative approach computed the fair value of the investment using market based and discounted cash flow valuation approaches, and resulted in a fair value that exceeded the carrying value. As a result of the analysis, USPB concluded that the carrying value of its investment in NBP was not impaired as of December 30, 2017 and December 31, 2016.
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. Normal repairs and maintenance costs are charged to Selling, general and administrative expenses, as incurred.
A summary of cost and accumulated depreciation for property, plant, and equipment as of December 30, 2017 and December 31, 2016 follows (thousands of dollars):
| | December 30, 2017 | | December 31, 2016 |
| Machinery and equipment | $ | 24 | | $ | 24 |
| Furniture and fixtures | | 140 | | | 140 |
| Trailers and automotive equipment | | 59 | | | 59 |
| Total property, plant, and equipment, at cost | | 223 | | | 223 |
| Accumulated depreciation | | 201 | | | 188 |
| Property, plant, and equipment, net | $ | 22 | | $ | 35 |
F-8
U.S. Premium Beef, LLC
Notes to Financial Statements
Depreciation expense was immaterial for fiscal years ended December 30, 2017 and December 31, 2016.
New Accounting Standard
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires an entity that is a lessee to record a right-of-use asset and a lease liability for lease payments on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new guidance is effective for interim and annual periods beginning after December 15, 2018, and is required to be applied using a modified retrospective approach. USPB plans to adopt the new guidance on January 1, 2019. USPB expects that the new guidance will affect the balance sheet by increasing the assets and liabilities recorded related to operating leases and continue to evaluate the effect that ASU No. 2016-02 will have on the income statement, statement of cash flows and related disclosures.
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 statement of cash flows. Overdraft balances totaled $27.1 million and $1.1 million as of December 30, 2017 and December 31, 2016, respectively.
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.
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.
Noncompetition Payments
The former CEO’s employment agreement provided for him to receive noncompetition payments in connection with the Leucadia Transaction. During fiscal years 2017 and 2016, the former CEO was paid $853,263 and $852,948, respectively, in noncompetition payments. He will continue to receive noncompetition payments of approximately $850,000 per year during calendar years 2018 through 2021.
The current CEO’s employment agreement provides for him to receive noncompetition payments for a twelve month period following his termination of employment with USPB.
As of December 30, 2017 and December 31, 2016, the Company had accrued $3.4 million and $4.1 million, respectively, for the noncompetition agreements. The current and long-term portion of the accrued amounts are included in Accrued compensation and benefits and Other liabilities, respectively, on the balance sheet.
F-9
U.S. Premium Beef, LLC
Notes to Financial Statements
Business Segments
USPB is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, USPB has one reportable segment.
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 Statement of Operations and in the table that follows.
Basic EPU excludes dilution and is computed by first allocating 10% of net income or loss attributable to USPB to Class A units and the remaining 90% is allocated to Class B units. Net income or loss 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.
Diluted EPU reflects the potential dilution that could occur to the extent that any outstanding dilutive Class A or Class B units were exercised. There are no potentially dilutive Class A or Class B units outstanding.
| Income (Loss) Per Unit Calculation | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| (thousands of dollars, except unit and per unit data) | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| |
| Basic and diluted earnings per unit: | | | | | | | | |
| Income (loss) attributable to USPB available to | | | | | | | | |
| unitholders (numerator) | | | | | | | | |
Class A | $ | 5,748 | | $ | 4,637 | | $ | (2,132) |
Class B | $ | 51,733 | | $ | 41,731 | | $ | (19,184) |
| |
| Weighted average outstanding units (denominator) | | | | | | | | |
Class A | | 735,385 | | | 735,385 | | | 735,385 |
| Class B | | 755,385 | | | 755,385 | | | 755,385 |
| |
| Per unit amount | | | | | | | | |
Class A | $ | 7.82 | | $ | 6.31 | | $ | (2.90) |
Class B | $ | 68.49 | | $ | 55.24 | | $ | (25.40) |
NOTE 3. Long-Term Debt and Loan Agreements
(a) Master Loan Agreement
On June 13, 2017, USPB and CoBank entered into a Revolving Term Loan Supplement to the Master Loan Agreement dated July 26, 2011. The Revolving Term Loan Supplement provides for a $5 million revolving credit commitment. The new commitment carries a term of three years, maturing on June 30, 2020. The Pledge Agreement provides CoBank with a first-priority security interest in USPB’s membership interests in, and distributions from, NBP.
All of the $5 million revolving credit commitment was available as of December 30, 2017. 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.
F-10
U.S. Premium Beef, LLC
Notes to Financial Statements
The Company was in compliance with the Master Loan Agreement’s Net Worth covenant as of December 30, 2017.
(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 for fiscal years 2017, 2016, and 2015. 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
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. As a result of the retirement of one of USPB’s employees on December 31, 2014, 50 Class A phantom units and 50 Class B phantom units were forfeited as they were not vested. One third of the retiring employee’s vested phantom units will be exercised and the appreciation rights paid in three tranches (retirement, and first and second anniversary of retirement). At the end of fiscal year 2017, 4,750 Class A phantom units and 4,750 Class B phantom units remain outstanding. The phantom units became fully vested in August 2015. For the management phantom unit plan, compensation expense of $0.3 million, $0.2 million, and $0.0 million was recognized in fiscal years 2017, 2016 and 2015, respectively.
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, $0.0 million and $0.0 million was recognized in fiscal years 2017, 2016, and 2015, respectively.
The Company maintains a tax-qualified employee savings and retirement plan (401(k) Plan) covering the Company’s non-union employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 75% of their annual compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan provides for additional matching contributions by the Company, based on specific terms contained in the 401(k) Plan. The trustee of the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in designated investment options. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code. Expenses related to the 401(k) Plan totaled approximately $0.1 million, $0.0 million, and $0.0 million for fiscal years 2017, 2016, and 2015, respectively.
F-11
U.S. Premium Beef, LLC
Notes to Financial Statements
NOTE 5. Other Income
Other non-operating income, net was $0.1 million, $0.7 million, and $0.0 million for fiscal years 2017, 2016, and 2015, respectively. Other non-operating income primarily includes income related to lease income on additional delivery rights made available by the Company.
NOTE 6. Income Taxes
USPB is structured as an LLC and is taxed as a partnership for federal income tax purposes. As a result, its taxable income/loss are passed through to the unitholders at the end of each tax year. Certain states assess an entity level tax, which is paid by USPB. Such taxes are generally immaterial, and the current provision in tax years 2017, 2016, and 2015 was $0.0 million.
NOTE 7. Related Party Transactions
All of the Company’s directors hold Class A 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.
On December 30, 2011, USPB entered into a new Cattle Purchase and Sale Agreement with NBP. Per the terms and conditions of the Agreement, NBP is required to purchase through USPB from its members, and USPB is required to cause to be sold and delivered from its members to NBP, a base amount of 735,385 (subject to adjustment) head of cattle per year. The purchase price for the cattle is determined by pricing grids, which, at all times, are required to 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 30, 2022, with automatic, but optional one year extensions on each December 30, unless either party provides a notice not to extend sixty days prior to the annual anniversary date. Neither party provided sixty day notice prior to December 30, 2017, the current year annual anniversary date. NBP also purchased additional cattle from certain USPB members and associates outside of the cattle supply agreement.
USPB facilitates the delivery of cattle owned by its unitholders and associates to NBP. During fiscal years 2017, 2016, and 2015, USPB’s members and associates provided approximately 24%, 27%, and 28%, respectively, of NBP’s total cattle requirements.
At December 30, 2017 and December 31, 2016, the Company had receivables from unitholders and associates in the amount of $0.1 million and $0.0 million, respectively.
At December 30, 2017 and December 31, 2016, the Company had payables to unitholders and associates in the amount of $28.7 million and $1.3 million, respectively.
NOTE 8. Legal Proceedings
As of December 30, 2017, USPB was not a party to any lawsuit or claim arising out of the operation of its business.
F-12
U.S. Premium Beef, LLC
Notes to Financial Statements
NOTE 9. Quarterly Results (Unaudited)
Selected quarterly financial data for fiscal years 2017 and 2016 are set forth below (dollars in thousands, except per unit data):
| | | | | Operating | | Net | | Basic and Diluted Earnings Per |
| | Net Sales | | Loss | | Income | | Class A Unit | | Class B Unit |
2017 quarterly results: | | | | | | | | | | | | | | |
| March 25, 2017 | $ | - | | $ | (1,067) | | $ | 7,576 | | $ | 1.03 | | $ | 9.03 |
| June 24, 2017 | | - | | | (840) | | | 10,954 | | $ | 1.49 | | $ | 13.05 |
| September 30, 2017 | | - | | | (862) | | | 25,501 | | $ | 3.47 | | $ | 30.38 |
| December 30, 2017 | | - | | | (1,252) | | | 13,450 | | $ | 1.83 | | $ | 16.02 |
| | $ | - | | $ | (4,021) | | $ | 57,481 | | | | | | |
| |
2016 quarterly results: | | | | | | | | | | | | | | |
| March 26, 2016 | $ | - | | $ | (754) | | $ | 2,733 | | $ | 0.37 | | $ | 3.26 |
| June 25, 2016 | | - | | | (808) | | | 8,599 | | $ | 1.17 | | $ | 10.25 |
| September 24, 2016 | | - | | | (729) | | | 15,570 | | $ | 2.12 | | $ | 18.55 |
| December 31, 2016 | | - | | | (1,343) | | | 19,466 | | $ | 2.65 | | $ | 23.19 |
| | $ | - | | $ | (3,634) | | $ | 46,368 | | | | | | |
NOTE 10. Subsequent Events
On February 27, 2018, USPB paid a $24.4 million cash distribution to its members.
F-13
NATIONAL BEEF PACKING COMPANY, LLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | |
| | | Page |
| Audited Consolidated Financial Statements: | | |
Independent Auditors' Report | | F-15 |
Report of Independent Auditors | | F-16 |
Consolidated Balance Sheet at December 30, 2017 and December 31, 2016 | | F-17 |
Consolidated Statements of Operations for the years ended December 30, 2017 and December 31, 2016, and December 26, 2015 | | F-18 |
Consolidated Statements of Comprehensive Income (Loss) for the year ended December 30, 2017 and December 31, 2016, and December 26, 2015 | | F-18 |
Consolidated Statements of Members’ Capital for the year ended December 30, 2017 and December 31, 2016, and December 26, 2015 | | F-19 |
Consolidated Statements of Cash Flows for the years December 30, 2017 and December 31, 2016, and December 26, 2015 | | F-20 |
Notes to Consolidated Financial Statements | | F-21 |
F-14
Independent Auditors' Report
The Board of Managers and Members
National Beef Packing Company, LLC:
We have audited the accompanying consolidated financial statements of National Beef Packing Company, LLC, and its subsidiaries, which comprise the consolidated balance sheets as of December 30, 2017, and the related consolidated statements of operations, comprehensive income (loss), members' capital, and cash flows for the year ended December 30, 2017.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to National Beef Packing Company, LLC’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of National Beef Packing Company, LLC’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Beef Packing Company, LLC and its subsidiaries at December 30, 2017, and the results of their operations and their cash flows for the year ended December 30, 2017 in accordance with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
March 14, 2018
F-15
Report of Independent Auditors
The Board of Managers and Members
National Beef Packing Company, LLC:
We have audited the accompanying consolidated financial statements of National Beef Packing Company, LLC, and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2016, and the related consolidated statement of operations, cash flows, members’ capital, and comprehensive income (loss) for the years ended December 31, 2016 and December 26, 2015.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Beef Packing Company, LLC and its subsidiaries at December 31, 2016, and the results of their operations and their cash flows for each of the years ended December 31, 2016 and December 26, 2015 in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
March 9, 2017, except as to the revision of the statement of cash flows described in Note 2, which is dated March 14, 2018
F-16
| National Beef Packing Company, LLC and Subsidiaries |
| Consolidated Balance Sheets |
| (thousands of dollars) |
|
| |
| Assets | December 30, 2017 | | December 31, 2016 |
| Current assets: | | | | | |
| Cash and cash equivalents | $ | 18,516 | | $ | 37,702 |
| Accounts receivable, less allowance for returns and doubtful accounts of $4,211 | | | | | |
| and $3,944, respectively | | 186,837 | | | 166,883 |
| Due from affiliates | | 786 | | | 918 |
| Other receivables | | 9,302 | | | 6,515 |
| Inventories | | 261,302 | | | 275,353 |
| Other current assets | | 15,537 | | | 16,729 |
| Total current assets | | 492,280 | | | 504,100 |
| Property, plant, and equipment, at cost | | | | | |
| Land and improvements | | 20,378 | | | 19,226 |
| Buildings and improvements | | 182,100 | | | 166,644 |
| Machinery and equipment | | 360,974 | | | 330,453 |
| Trailers and automotive equipment | | 2,626 | | | 2,461 |
| Furniture and fixtures | | 12,052 | | | 10,126 |
| Construction in progress | | 71,934 | | | 54,449 |
| | | 650,064 | | | 583,359 |
| Less accumulated depreciation | | 248,917 | | | 197,760 |
| Net property, plant, and equipment | | 401,147 | | | 385,599 |
| Goodwill | | 14,991 | | | 14,991 |
| Other intangibles, net of accumulated amortization of $271,519 and $226,265, respectively | | 539,549 | | | 584,803 |
| Other assets | | 13,792 | | | 8,824 |
| Total assets | $ | 1,461,759 | | $ | 1,498,317 |
| Liabilities and Members' Capital | | | | | |
| Current liabilities: | | | | | |
| Current installments of long-term debt | $ | 13,247 | | $ | 29,565 |
| Cattle purchases payable | | 116,732 | | | 92,272 |
| Accounts payable - trade | | 71,213 | | | 63,728 |
| Due to affiliates | | 762 | | | 1,013 |
| Accrued compensation and benefits | | 82,640 | | | 68,710 |
| Accrued insurance | | 14,661 | | | 25,042 |
| Other accrued expenses and liabilities | | 20,668 | | | 18,760 |
| Total current liabilities | | 319,923 | | | 299,090 |
| Long-term liabilities: | | | | | |
| Long-term debt, excluding current installments | | 185,973 | | | 246,776 |
| Other liabilities | | 26,655 | | | 658 |
| Total long-term liabilities | | 212,628 | | | 247,434 |
| Total liabilities | | 532,551 | | | 546,524 |
| Commitments and contingencies | | | | | |
| Members' capital | | | | | |
| Members' capital | | 929,265 | | | 951,930 |
| Accumulated other comprehensive loss | | (57) | | | (137) |
| Total members' capital | | 929,208 | | | 951,793 |
| Total liabilities and members' capital | $ | 1,461,759 | | $ | 1,498,317 |
| |
| See accompanying notes to consolidated financial statements. |
F-17
National Beef Packing Company, LLC and Subsidiaries |
| Consolidated Statement of Operations |
| (thousands of dollars) |
| |
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Net sales | $ | 7,353,662 | | $ | 7,021,902 | | $ | 7,396,868 |
| Costs and expenses: | | | | | | | | |
| Cost of sales | | 6,764,057 | | | 6,513,767 | | | 7,347,869 |
| Selling, general, and administrative | | 77,459 | | | 71,849 | | | 62,252 |
| Depreciation and amortization | | 98,515 | | | 94,483 | | | 89,317 |
| Impairment of long-lived assets | | - | | | - | | | 4,734 |
Total costs and expenses | | 6,940,031 | | | 6,680,099 | | | 7,504,172 |
| Operating income (loss) | | 413,631 | | | 341,803 | | | (107,304) |
| Other income (expense): | | | | | | | | |
| Interest income | | 339 | | | 166 | | | 21 |
| Interest expense | | (6,658) | | | (12,946) | | | (16,633) |
Total other expense | | (6,319) | | | (12,780) | | | (16,612) |
| Income (loss) before taxes | | 407,312 | | | 329,023 | | | (123,916) |
| Income tax expense | | 2,238 | | | 2,166 | | | 1,797 |
Net income (loss) | | 405,074 | | | 326,857 | | | (125,713) |
| See accompanying notes to consolidated financial statements. |
National Beef Packing Company, LLC and Subsidiaries |
| Consolidated Statement of Comprehensive Income (Loss) |
| (thousands of dollars) |
| |
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Net income (loss) | $ | 405,074 | | $ | 326,857 | | $ | (125,713) |
| Other comprehensive income (loss): | | | | | | | | |
| Foreign currency translation adjustments | | 80 | | | (14) | | | (34) |
Comprehensive income (loss) | | 405,154 | | | 326,843 | | | (125,747) |
| |
| See accompanying notes to consolidated financial statements. |
F-18
| National Beef Packing Company, LLC |
| Consolidated Statement of Members' Capital |
| (thousands of dollars) |
|
| |
| |
| | | | Accumulated | | | |
| | | | other | | | |
| | Members' | | comprehensive | | | |
| | Capital | | income (loss) | | | Total |
| Balance at December 27, 2014 | $ | 980,868 | | $ | (89) | | $ | 980,779 |
| Net loss | | (125,713) | | | - | | | (125,713) |
| Member contributions | | 25,000 | | | - | | | 25,000 |
| Foreign currency translation adjustments | | - | | | (34) | | | (34) |
| Balance at December 26, 2015 | $ | 880,155 | | $ | (123) | | $ | 880,032 |
| Net income | | 326,857 | | | - | | | 326,857 |
| Member distributions | | (255,082) | | | - | | | (255,082) |
| Foreign currency translation adjustments | | - | | | (14) | | | (14) |
| Balance at December 31, 2016 | $ | 951,930 | | $ | (137) | | $ | 951,793 |
| Net income | | 405,074 | | | - | | | 405,074 |
| Member distributions | | (427,739) | | | - | | | (427,739) |
| Foreign currency translation adjustments | | - | | | 80 | | | 80 |
| Balance at December 30, 2017 | $ | 929,265 | | $ | (57) | | $ | 929,208 |
| |
| See accompanying notes to consolidated financial statements. |
F-19
| National Beef Packing Company, LLC and Subsidiaries |
| Consolidated Statement of Cash Flows |
| (thousands of dollars) |
|
| |
| |
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Cash flows from operating activities: | | | | | | | | |
| Net income (loss) | $ | 405,074 | | $ | 326,857 | | $ | (125,713) |
| Adjustments to reconcile net income (loss) to net cash provided by operating | | | | | | | |
| activities: | | | | | | | | |
| Depreciation and amortization | | 98,515 | | | 94,483 | | | 89,317 |
| Provision for dobutful accounts | | 9,416 | | | 9,910 | | | 12,838 |
| Deferred income tax provision | | 823 | | | 217 | | | 275 |
| Impairment of long-lived assets | | - | | | - | | | 4,734 |
| (Gain) on disposal of property, plant, and equipment | | (1,144) | | | (98) | | | (429) |
| Amortization of debt issuance costs | | 766 | | | 692 | | | 671 |
| Changes in assets and liabilities: | | | | | | | | |
| Accounts receivable | | (29,370) | | | 26,847 | | | 4,644 |
| Due from affiliates | | 132 | | | (399) | | | 537 |
| Other receivables | | (2,787) | | | 2,432 | | | (785) |
| Inventories | | 14,051 | | | (40,018) | | | 138,426 |
| Other assets | | (4,598) | | | (10,466) | | | 1,991 |
| Cattle purchases payable | | 24,460 | | | 20,761 | | | (38,202) |
| Accounts payable | | 7,485 | | | 7,913 | | | (8,702) |
| Due to affiliates | | (251) | | | 231 | | | 187 |
| Accrued compensation and benefits | | 13,930 | | | 53,567 | | | (5,446) |
| Accrued insurance | | (10,381) | | | (6,580) | | | (842) |
| Other accrued expenses and liabilities | | 27,905 | | | (2,491) | | | 3,068 |
| Net cash provided by (used in) operating activities | | 554,026 | | | 483,858 | | | 76,569 |
| Cash flows from investing activities: | | | | | | | | |
| Capital expenditures, including interest capitalized | | (70,446) | | | (62,010) | | | (48,620) |
| Proceeds from sale of property, plant, and equipment | | 2,791 | | | 16,788 | | | 731 |
| Net cash used in investing activities | | (67,655) | | | (45,222) | | | (47,889) |
| Cash flows from financing activities: | | | | | | | | |
| Net (payments) under revolving credit lines | | - | | | (1,961) | | | (13,183) |
| Receipts under revolving credit lines | | 280,000 | | | 120,000 | | | 381,000 |
| Payments under revolving credit lines | | (200,000) | | | (240,000) | | | (381,000) |
| Repayments of term note payable | | (17,500) | | | (35,000) | | | (35,000) |
| Receipts under reducing revolving credit lines | | 197,500 | | | | | | |
| Payments under reducing revolving credit lines | | (335,000) | | | | | | |
| Net repayments of other indebtedness/capital leases | | (119) | | | (6,688) | | | (3,176) |
| Cash paid for financing costs | | (2,769) | | | - | | | (100) |
| Member distributions | | (427,739) | | | (255,082) | | | - |
| Member contributions | | - | | | - | | | 25,000 |
| Net cash (used in) provided by financing activities | | (505,627) | | | (418,731) | | | (26,459) |
| Effect of exchange rate changes on cash | | 70 | | | (16) | | | (34) |
| Net decrease (increase) in cash | | (19,186) | | | 19,889 | | | 2,187 |
| Cash and cash equivalents at beginning of period | | 37,702 | | | 17,813 | | | 15,626 |
| Cash and cash equivalents at end of period | $ | 18,516 | | $ | 37,702 | | $ | 17,813 |
| Supplemental cash disclosures: | | | | | | | | |
| Cash paid during the period for interest | $ | 6,512 | | $ | 13,851 | | $ | 16,092 |
Cash paid during the period for taxes | $ | 792 | | $ | 1,094 | | $ | 1,442 |
| Supplemental noncash disclosures of investing and financing activities: | | | | | | | |
Assets acquired through capital lease | $ | 137 | | $ | 305 | | $ | 376 |
| |
| See accompanying notes to consolidated financial statements. |
F-20
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 1. DESCRIPTION OF BUSINESS
National Beef Packing Company, LLC (NBP) is a Delaware limited liability company. NBP and its subsidiaries sell meat products to customers in the food service, international, further processor and retail distribution channels. NBP also produces and sells by-products that are derived from its meat processing operations and variety meats to customers in various industries.
NBP operates beef slaughter and fabrication facilities in Liberal and Dodge City, Kansas, and consumer-ready animal protein processing facilities in Hummels Wharf, Pennsylvania, Moultrie, Georgia, and 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. Kansas City Steak Company, LLC, or Kansas City Steak, includes a direct to consumer business and operates a warehouse and fulfilment facility in Kansas City, Kansas. As of December 30, 2017, approximately 63% of its employees were represented by collective bargaining agreements. NBP makes certain contributions for the benefit of employees (see Note 5).
On December 30, 2011, Leucadia National Corporation (Leucadia) acquired a 78.9% interest in NBP for aggregate net cash consideration of approximately $867.9 million.
NOTE 2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of NBP and its direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The 2016 and 2015 statement of cash flows have been revised to correctly present borrowings and repayments under the revolving line of credit on a gross basis. This change in presentation does not affect previously reported cash flows (used in) provided by financing activities in the Consolidated Statements of Cash Flows. The impact of this error on previously issued financial statements is not material.
Fiscal Year
NBP’s fiscal year consists of 52 or 53 weeks, ending on the last Saturday in December. Fiscal 2017 and 2015 were 52 week fiscal years while fiscal 2016 was a 53 week fiscal years. All references to years in these notes to consolidated financial statements represent fiscal years unless otherwise noted.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, using management’s best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements. The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
F-21
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
NBP considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Allowance for Returns and Doubtful Accounts
The allowance for returns and doubtful accounts is NBP’s best estimate of the amount of probable returns and credit losses in NBP’s existing accounts receivable. NBP determines these allowances based on historical experience, customer conditions and management’s judgments. Management considers factors such as changes in the economy and industry. Specific accounts are reviewed individually for collectability.
The following table represents the rollforward of the allowance for returns and doubtful accounts for the fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015 (in thousands).
| | | Beginning | | | | | | Ending |
| Period Ended | | Balance | | Provision | | Charge Off | | Balance |
| |
| December 26, 2015 | | $ | (2,147) | | $ | (12,838) | | $ | 9,556 | | $ | (5,429) |
| December 31, 2016 | | $ | (5,427) | | $ | (9,910) | | $ | 11,395 | | $ | (3,942) |
| December 30, 2017 | | $ | (3,942) | | $ | (9,416) | | $ | 9,149 | | $ | (4,209) |
Inventories
Inventories consist primarily of beef and beef by-products and supplies and are restated at the lower of cost or net realizable value, with cost principally determined under the first-in-first-out method for beef products and average cost for supplies. .
Inventories at December 30, 2017 and December 31, 2016 consisted of the following (in thousands):
| | December 30, 2017 | | December 31, 2016 |
| Dressed and boxed beef products | $ | 190,103 | | $ | 173,997 |
| Beef by-products | | 42,256 | | | 70,557 |
| Supplies and other | | 28,943 | | | 30,799 |
| Total Inventory | $ | 261,302 | | $ | 275,353 |
Property, plant and equipment
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 are depreciated principally on a straight-line basis over the estimated useful life of the individual asset by major asset class as follows:
| Buildings and improvements | 15 to 25 years |
Machinery and equipment | 2 to 15 years |
| Trailers and automotive equipment | 2 to 4 years |
| Furniture and fixtures | 3 to 5 years |
Depreciation expense was $53.3 million, $49.2 million, and $44.1 million for the fiscal years ended December 30, 2017, December 31, 2016 and December 26, 2015 respectively.
Upon disposition of these assets, any resulting gain or loss is included in selling, general, and administrative. 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, as incurred.
F-22
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
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 $1.0 million, $0.5 million, and $0.3 million for the fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015, respectively.
NBP reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is assessed based on estimated undiscounted future cash flows. Impairment, if any, is recognized based on fair value of the assets. Assets to be disposed of are reported at the lower of cost or fair value less costs to sell, and are no longer depreciated. There were no events or circumstances which would indicate that the carrying amount of property plant, and equipment may not be recoverable during 2016 or 2017. During 2015, NBP recorded an impairment loss on property, plant and equipment of approximately $4.7 million to adjust the carrying value of the long-lived assets to their fair value.
During 2016, NBP completed the sale of its facility located in Brawley, California with proceeds approximating the carrying value of the related long-lived assets. These proceeds included a $5.0 million promissory note. Interest is due quarterly on the promissory note from the buyer, and principal payments of $0.3 million are due annually, with the remaining balance of $4.0 million due in June 2021. Other receivables on the Consolidated Balance Sheets includes the current portion of the note receivable of $0.3 million, and the remaining balance of $4.5 million is included in Other assets on the Consolidated Balance Sheets.
Goodwill and Other Intangible Assets
ASC 350,Intangibles - Goodwill and Other,provides that goodwill shall not be amortized but shall be tested for impairment on an annual basis. Identifiable intangible assets with definite lives are amortized over their estimated useful lives. NBP evaluates goodwill annually for impairment at the end of December and, if there is impairment, the carrying amount of goodwill and other intangible assets are written down to the implied fair value. For goodwill, this test involves comparing the fair value of a reporting unit to the unit’s book value to determine if any impairment exists. Fair values are based on valuation techniques NBP believes market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions. NBP calculates the fair value of the reporting unit using estimates of future cash flows and other market comparable information deemed appropriate. The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. As a result of the testing performed on NBP’s goodwill the fair value exceeded the carrying value of the reporting unit and thus no impairment charge was recorded. Adverse market or economic events could result in impairment charges in future periods.
The amounts of goodwill are as follows (amounts in thousands):
| | December 30, 2017 | | December 31, 2016 |
| Beginning balance | $ | 14,991 | | $ | 14,991 |
| Fair value adjustments | | - | | | - |
| Ending balance | $ | 14,991 | | $ | 14,991 |
ASC 360,Impairment and Disposal of Long-Lived Assets, provides that NBP evaluate its long-lived assets for impairment whenever events or changes in circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable. When testing for impairment, NBP groups its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of whether an asset group is recoverable is based on management’s estimate of undiscounted future cash flows directly attributable to the asset group as compared to its carrying value. If the carrying amount of the asset group is greater than the undiscounted cash flows, an impairment loss would be recognized for the amount by which the carrying amount of the asset group exceeds its estimated fair value. As a result of the review performed, no triggering events occurred during 2017, 2016 or 2015 related to NBP’s intangible assets, thus no impairment charge was recorded.
F-23
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
The amounts of other intangible assets are as follows (in thousands):
| | | | | December 30, 2017 |
| | Weighted | | | | | |
| | Average | | | Gross | | |
| | Amortization | | | Carrying | | Accumulated |
| | Period | | | Amount | | Amortization |
| Intangible assets subject to amortization: | | | | | | |
| Customer Relationships | 18 | | $ | 406,530 | | $ 135,510 |
| Tradenames | 20 | | | 260,108 | | 78,071 |
| Cattle supply contracts | 15 | | | 143,600 | | 57,440 |
| Other | 10 | | | 830 | | 498 |
| | 18 | | $ | 811,068 | | $ 271,519 |
| |
| Total intangible assets | | | $ | 811,068 | | $ 271,519 |
| |
| |
| | | | | December 31, 2016 |
| | Weighted | | | | | |
| | Average | | | Gross | | |
| | Amortization | | | Carrying | | Accumulated |
| | Period | | | Amount | | Amortization |
| Intangible assets subject to amortization: | | | | | | |
| Customer Relationships | 18 | | $ | 406,530 | | $ 112,925 |
| Tradenames | 20 | | | 260,108 | | 65,058 |
| Cattle supply contracts | 15 | | | 143,600 | | 47,867 |
| Other | 10 | | | 830 | | 415 |
| | 18 | | $ | 811,068 | | $ 226,265 |
| |
| Total intangible assets | | | $ | 811,068 | | $ 226,265 |
For the fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015 NBP recognized $45.3 million, $45.3 million and $45.3 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 30, 2017, for each of the next five years and thereafter:
| Estimated amortization expense for fiscal years ended: | | |
| 2018 | $ | 45,254 |
| 2019 | | 45,254 |
| 2020 | | 45,245 |
| 2021 | | 45,245 |
| 2022 | | 45,162 |
| Thereafter | | 313,389 |
Total | $ | 539,549 |
Overdraft Balances
The majority of NBP’s bank accounts are zero balance accounts where cash needs are funded as checks are presented for payment by the holder. Checks issued pending clearance that result in overdraft balances for accounting purposes are included in the trade accounts payable and cattle purchases payable balances, and the change in the related balances are reflected in operating activities on NBP’s consolidated statement of cash flows.
F-24
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Self-insurance
NBP is self-insured for certain losses relating to workers’ compensation, automobile liability, general liability and employee medical and dental benefits. NBP has purchased stop-loss coverage in order to limit its exposure to any significant levels of claims. Self-insured losses are accrued in accrued insurance and other long-term liabilities in NBP’s consolidated balance sheets based upon NBP’s estimates of the aggregate uninsured claims incurred using actuarial assumptions accepted in the insurance industry and NBP’s historical experience rates.
Environmental Expenditures and Remediation Liabilities
Environmental expenditures that relate to current or future operations and which improve operational capabilities are capitalized at the time of expenditure. Expenditures that relate to an existing or prior condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated.
Foreign Currency Translation
NBP has representative offices located in Tokyo, Japan; Seoul, South Korea; and Hong Kong. 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
The provision for income taxes is computed on a separate legal entity basis. Accordingly, as NBP is a limited liability company, the separate legal entity does not provide for income taxes, as the results of operations are included in the taxable income of the individual members. However, certain states impose privilege taxes on the apportioned taxable income of NBP. 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 NBP. Based on federal income tax statute of limitations, National Carriers remains subject to examination of its income taxes for calendar years 2016, 2015 and 2014.
Fair Value of Financial Instruments
The carrying amounts of NBP’s financial instruments, including cash and cash equivalents, short-term trade receivables and payables, approximate their fair values due to the short-term nature of the instruments. The carrying value of debt approximates its fair value at December 30, 2017 and December 31, 2016, as substantially all debt carries variable interest rates.
Revenue Recognition
Revenues are recognized when the following conditions are met: (1) collectability is reasonably assured; (2) title to the product has passed or the service has been rendered and earned; (3) persuasive evidence of an arrangement exists; and (4) there is a fixed or determinable price. 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.
F-25
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Selling, General and Administrative Costs
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. Selling, general and administrative costs consist of aggregated expenses that generally apply to multiple locations.
Shipping Costs
Pass-through finished goods delivery costs reimbursed by customers are reported in sales, while an offsetting expense is included in cost of sales.
Advertising
Advertising expenses are charged to operations in the period incurred and were $20.8 million, $19.2 million and $17.1 million for the fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015.
Comprehensive Income
Comprehensive income consists of net income and foreign currency translation adjustments. NBP deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting the investment in a foreign currency to U.S. dollars.
Derivatives Activities
NBP uses futures contracts in order to reduce exposure associated with entering into firm commitments to purchase live cattle at prices determined prior to the delivery of the cattle as well as firm commitments to sell certain beef products at sales prices determined prior to shipment. In accordance with ASC 815,Derivatives and Hedging, NBP accounts for futures contracts and their related firm purchase commitments at fair value. Firm commitments for sales are treated as normal sales and therefore not marked to market. Certain firm commitments to purchase cattle, are marked to market when a price has been agreed upon, otherwise they are treated as normal purchases and, therefore, not marked to market. ASC 815 imposes extensive recordkeeping requirements in order to treat a derivative financial instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction is settled. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.
While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges under ASC 815 as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.
The fair value of derivative assets is recognized within other current assets, while the fair value of derivative liabilities is recognized within accrued liabilities.
F-26
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 3. NEW ACCOUNTING PRONOUNCEMENTS
Revenue Recognition.In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance that defines how companies report revenues from contracts with customers, and also requires enhanced disclosures. The core principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. This guidance is effective for interim and annual periods beginning after December 15, 2017. NBP adopted the new guidance as of December 31, 2017 using the modified retrospective approach. NBP’s implementation efforts included the identification of revenue streams within the scope of the guidance and the evaluation of certain revenue contracts. NBP finalized its assessment of contracts with customers and evaluated the impact of the new guidance on these contracts. Based on NBP’s evaluation, the new guidance does not have a material impact on NBP’s consolidated financial statements. NBP earns over 95% of its revenues through the sale of beef, pork, and beef by-products. Agreements with customers for these sales typically consist of the type and quantity of products to be delivered, the unit price of each product, the estimated delivery date and credit and payment terms. The transaction price is generally fixed at this time and revenue is recognized when the customer takes control of the product. The impact of the new guidance does not materially impact how revenue is recognized for this revenue stream.
Goodwill. In January 2017, the FASB issued new guidance for simplifying goodwill impairment testing. The guidance is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted. NBP does not believe the new guidance will have a material impact on NBP’s consolidated financial statements.
Leases.In February 2016, the FASB issued new guidance that affects the accounting and disclosure requirements for leases. The FASB requires the recognition of lease assets and lease liabilities on the statement of financial condition. The guidance is effective for annual and interim periods beginning after December 15, 2018. NPB is currently evaluating the impact this new guidance will have on NBP’s consolidated financial statements.
Cash Flow Classifications.In August 2016, the FASB issued new guidance to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual and interim periods beginning after December 15, 2017. In November 2016, the FASB issued new guidance on restricted cash. The guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The guidance is effective for annual and interim periods beginning after December 15, 2017. NBP is currently evaluating the impact this new guidance will have on NBP’s consolidated financial statements.
Derivatives and hedging. In August 2017, the FASB issued new guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The guidance is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. NBP is currently evaluating the impact of the new guidance on NBP’s consolidated financial statements.
NOTE 4. LONG-TERM DEBT AND LOAN AGREEMENTS
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 30, 2017 and December 31, 2016, debt consisted of the following (in thousands):
F-27
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
| | December 30, 2017 | | December 31, 2016 |
| Short-term debt: | | | | | |
| Current portion of term loan facility(a) | $ | - | | $ | 30,000 |
| Reducing revolver credit facility(a) | | 13,750 | | | - |
| Current portion of loan costs(c) | | (724) | | | (679) |
| Current portion of capital lease obligations(d) | | 221 | | | 244 |
| | $ | 13,247 | | $ | 29,565 |
| Long-term debt: | | | | | |
| Term loan facility(a) | $ | - | | $ | 245,000 |
| Reducing revolver credit facility(a) | $ | 106,250 | | | |
| Industrial Development Revenue Bonds(b) | | 2,000 | | | 2,000 |
| Revolving credit facility(a) | | 80,000 | | | - |
| Long-term portion of loan costs(c) | | (2,468) | | | (509) |
| Long-term capital lease obligations(d) | | 191 | | | 286 |
| | $ | 185,973 | | $ | 246,776 |
| Total debt | $ | 199,220 | | $ | 276,341 |
(a) Senior Credit Facilities—In June 2017, NBP entered into a Third Amended and Restated Credit Agreement (Debt Agreement). The Debt Agreement matures in June 2022 and includes a $275.0 million reducing revolver loan and a $275.0 million revolving credit facility. The reducing revolver loan commitment decreases by $13.8 million on each annual anniversary of the Debt Agreement. The Debt Agreement is secured by a first priority lien on substantially all of the assets of NBP and its subsidiaries and includes customary covenants including a single financial covenant that requires NBP to maintain a minimum tangible net worth; at December 30, 2017, NBP was in compliance with the single financial covenant.
At December 30, 2017, NBP’s outstanding debt under the Debt Agreement consisted of a reducing revolver loan with an outstanding balance of $120.0 million and $80.0 million drawn on the revolving credit facility. The reducing revolving loan and the revolving credit facility bear interest at the Base Rate or the LIBOR Rate (as defined in the credit facility), plus a margin ranging from 0.75% to 2.75% depending upon certain financial ratios and the rate selected. At December 30, 2017, the interest rate on the outstanding reducing revolving loan and revolving credit facility was 3.3%.
Borrowings under the reducing revolver loan and the revolving credit facility are available for NBP’s working capital requirements, capital expenditures and other general corporate purposes. Unused capacity under the revolving credit facility can also be used to issue letters of credit; letters of credit aggregating $13.9 million were outstanding at December 30, 2017. Amounts available under the revolving credit facility are subject to a borrowing base calculation primarily comprised of receivable and inventory balances; amounts available under the reducing revolver facility are constrained only by the annual reduction in the commitment amount. At December 30, 2017, after deducting outstanding amounts and issued letters of credit, $87.1 million of the unused revolving credit facility and $155.0 million of the reducing revolver commitment was available to NBP.
(b)Industrial Development Revenue Bonds— Effective December 30, 2004, NBP entered into a transaction with the City of Dodge City, Kansas, designed to provide property tax savings. Under the transaction, the City purchased NBP’s Dodge City facility, or the facility, by issuing $102.3 million in bonds due in December 2019, used the proceeds to purchase the facility and leased the facility to NBP for an identical term under a capital lease. NBP purchased the City's bonds with proceeds of its term loan under the Debt Agreement. Because the City has assigned the lease to the bond trustee for the benefit of NBP as the sole bondholder, NBP, effectively controls enforcement of the lease against itself. As a result of the capital lease treatment, the facility will remain a component of property, plant and equipment in NBP’s consolidated balance sheets. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments have been eliminated in consolidation. The transaction provides NBP with property tax exemptions for the leased facility, that, after netting payments to the City and local school district under payment in lieu of tax agreements, result in an annual property tax savings of approximately 25%. The facility remains subject to a prior mortgage and security interest in favor of the lenders under the Debt Agreement. Additional revenue bonds may be issued to cover the costs of certain improvements to this facility. The total amount of revenue bonds authorized for issuance is $120.0 million.
F-28
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
The cities of Liberal and Dodge City, Kansas issued an aggregate of $13.8 million of industrial development revenue bonds on NBP’s behalf to fund the purchase of equipment and construction improvements at NBP’s facilities in those cities. These bonds were issued in four series of $1.0 million, $1.0 million, $6.0 million and $5.9 million. Of the four series of bonds, only the 1.0 million and $1.0 million due on demand or on February 1, 2029 and March 1, 2027, respectively remain outstanding. The bonds issued in 1999 and 2000 are variable rate demand obligations that bear interest at a rate that is adjusted weekly, which rate will not exceed 10% per annum. NBP has the option to redeem a series of bonds at any time for an amount equal to the principal plus accrued interest to the date of such redemption. The holders of the bonds have the option to tender the bonds upon seven days’ notice for an amount equal to par plus accrued interest. To the extent that the remarketing agent for the bonds is unable to resell any of the bonds that are tendered, the remarketing agent could use the letter of credit to fund such tender. Because each series of bonds is backed by a letter of credit under the Debt Agreement, these due-on-demand bonds have been presented as non-current obligations until twelve months prior to their maturity.
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 $10.2 million in bonds due in December 2022, used the proceeds to purchase the equipment within the Leathers facility and subsequently leased the equipment back to us for an identical term under a capital lease. NBP purchased the City's bonds with proceeds of the term loan under the Debt Agreement. Because the city of St. Joseph has assigned the lease to the bond trustee for the 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 sheets. As a result of the legal right of offset, the capital lease obligation and the corresponding bond investments will be eliminated in consolidation.
(c)Debt issuance costs—In June 2017, NBP entered into a Third Amended and Restated Credit Agreement. The Debt Agreement matures in June 2022 and includes a $275.0 million reducing revolver loan and a $275.0 million revolving credit facility. The related financing charges of approximately $2.8 million will be amortized over the life of the loan.
Amortization of $0.8 million, $0.7 million, and $0.7 million was charged to interest expense during the fiscal years ended December 30, 2017, December 31, 2016 and December 26, 2015, respectively. Prior year amortization is related to costs associated with previous credit agreements. NBP had unamortized costs of $0.7 million and $0.7 million included in current installments of long-term debt on the consolidated balance sheets at December 30, 2017 and December 31, 2016, respectively, and unamortized costs of $2.5 million and $0.5 million included in long-term debt, excluding current installments on the consolidated balance sheets at December 30, 2017 and December 31, 2016, respectively.
(d)Capital and Operating Leases— NBP leases a variety of buildings and equipment, as well as tractors and trailers through its subsidiary National Carriers, under capital and operating lease agreements that expire in various years. Future minimum lease payments required at December 30, 2017, under capital leases are as follows (in thousands):
F-29
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
| | |
| | | Capital |
| | | Lease |
| | | Obligations |
| Fiscal year ending December: | | |
| 2018 | $ | 221 |
| 2019 | | 135 |
| 2020 | | 38 |
| 2021 | | 18 |
| 2022 | | - |
| Thereafter | | - |
| Net minimum lease payments | $ | 412 |
| Less amount representing interest | | (36) |
| Present value of net minimum lease payments | $ | 376 |
Future minimum lease payments required at December 30, 2017, under non-cancelable operating leases with terms exceeding one year, are as follows (in thousands):
| | Non-cancelable |
| | Operating Lease |
| | |
| Fiscal year ending December: | | |
| 2018 | $ | 22,328 |
| 2019 | | 14,772 |
| 2020 | | 9,290 |
| 2021 | | 6,759 |
| 2022 | | 4,007 |
| Thereafter | | 5,128 |
| Minimum lease payments | | 62,284 |
| Less: Sublease income | | (2,084) |
| Net minimum lease payments | $ | 60,200 |
Rent expense associated with operating leases (net of sublease rental income) was $20.6 million, $18.9 million, and $21.3 million for fiscal years 2017, 2016 and 2015, 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 30, 2017, are as follows (in thousands):
| | |
| | | Minimum |
| | | Principal |
| | | Maturities |
| Fiscal year ending December: | | |
| 2018 | $ | (488) |
| 2019 | | (574) |
| 2020 | | (671) |
| 2021 | | (691) |
| 2022 | | 199,644 |
| Thereafter | | 2,000 |
| Total minimum principal maturities | $ | 199,220 |
F-30
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Other Commitments
Utilities Commitment- Effective December 30, 2004, NBP finalized an agreement with the City of Dodge City, Kansas, whereby in consideration of certain improvements made to the city water and wastewater systems, NBP committed to make a series of service charge payments totaling $19.3 million over a 20-year period, of which $0.8 was paid in each of the fiscal years 2017, 2016, and 2015, respectively. Payments under the commitment will be $0.8 million in each of the fiscal years 2018 through 2022, with the remaining balance of $0.8 million to be paid in subsequent years.
NOTE 5. RETIREMENT PLANS
NBP maintains tax-qualified employee savings and retirement plans, or the 401(k) Plans, covering certain of NBP’s employees. Pursuant to the 401(k) Plans, 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) Plans. The 401(k) Plans provide for additional matching contributions by NBP, based on specific terms contained in the 401(k) Plans. The trustees of the 401(k) Plans, at the direction of each participant, invest the assets of the 401(k) Plan in designated investment options. The 401(k) Plans are intended to qualify under Section 401 of the Internal Revenue Code. Expenses related to the 401(k) Plans totaled approximately $1.3 million, $1.2 million, and $1.3 million for the fiscal years 2017, 2016 and 2015, respectively.
NBP has agreed to make contributions to the United Food and Commercial Workers International Union-Industry Pension Fund, or the UFCW Plan, for certain employees covered by a collective bargaining agreement as provided for in that agreement. Expenses related to the UFCW Plan totaled approximately $0.7 million, $0.7 million and $0.8 million for the fiscal years 2017, 2016 and 2015, respectively.
During 2017, NBP bargained with the United Food and Commercial Workers International Union (UFCW) Local 2 for a complete withdrawal from the UFCW Plan. As a result, NBP anticipates being required to make withdrawal payments into the fund over a 20-year period. NBP recorded expenses related to the UFCW Plan withdrawal of approximately $18.6 million which is included in Cost of sales in the Consolidated Statements of Operations. NBP anticipates the payments into the UFCW Plan begin in 2018. The withdrawal liability is included in Other liabilities on the Consolidated Balance Sheets.
NOTE 6. INCOME TAXES
Income tax expense includes the following current and deferred provisions (in thousands):
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Current provision: | | | | | | | | |
| Federal | $ | 764 | | $ | 1,139 | | $ | 1,135 |
| State | | 594 | | | 775 | | | 362 |
| Foreign | | 57 | | | 35 | | | 25 |
| Total current tax expense | | 1,415 | | | 1,949 | | | 1,522 |
| |
| Deferred provision: | | | | | | | | |
| Federal | | 707 | | | 184 | | | 238 |
| State | | 116 | | | 33 | | | 37 |
| Foreign | | - | | | - | | | - |
Total deferred tax expense | | 823 | | | 217 | | | 275 |
Total income tax expense | $ | 2,238 | | $ | 2,166 | | $ | 1,797 |
Income tax expense differed from the “expected” income tax (computed by applying the federal income tax rate of 35% to earnings before income taxes) as follows (in thousands):
F-31
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Computed “expected” income taxexpense | $ | 142,559 | | $ | 115,158 | | $ | (43,371) |
| Passthrough “expected” income tax expense | | (141,632) | | | (113,462) | | | 44,304 |
| State taxes, net of federal | | 710 | | | 815 | | | 399 |
| Permanent differences | | 313 | | | 312 | | | 358 |
| Rate Change | | 312 | | | - | | | - |
| Other | | (24) | | | (657) | | | 107 |
| Total income taxexpense | $ | 2,238 | | $ | 2,166 | | $ | 1,797 |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 30, 2017 and December 31, 2016 are presented below (in thousands):
| | 52 weeks ended | | 53 weeks ended |
| | December 30, 2017 | | December 31, 2016 |
| Deferred taxassets: | | | | | |
| Accounts receivable, due to allowance for doubtful accounts | $ | 30 | | $ | 51 |
| Intangible assets | | 57 | | | 114 |
| Self-insurance and workers compensation accruals | | 802 | | | 1,281 |
| Employee benefit accruals | | 168 | | | 258 |
| Total gross deferred tax assets | | 1,057 | | | 1,704 |
| Deferred taxliabilities: | | | | | |
| Property, plant, and equipment, principally due to differences in depreciation | | 834 | | | 691 |
| Other | | 61 | | | 29 |
| Total gross deferred taxliabilities | | 895 | | | 720 |
Net deferred taxassets | $ | 162 | | $ | 984 |
Net deferred tax assets at December 30, 2017 and December 31, 2016 are included in the consolidated balance sheet as other current assets.
Deferred tax assets and liabilities relate to the operations of National Carriers.
There were no valuation allowances provided for at December 30, 2017 and December 31, 2016. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. There are no unrecognized tax benefits recorded in NBP’s Consolidated Financial Statements as of December 30, 2017 and December 31, 2016.
NOTE 7. RELATED PARTY TRANSACTIONS
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 fiscal years 2017, 2016, and 2015, NBP had sales and purchases with the following related parties (in thousands):
| | 52 weeks ended | | 53 weeks ended | | 52 weeks ended |
| | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| Sales to: | | | | | | | | |
| Beef Products, Inc.(1) | $ | 31,672 | | $ | 30,879 | | $ | 31,008 |
| Total sales to affiliate | $ | 31,672 | | $ | 30,879 | | $ | 31,008 |
| |
| Purchases from: | | | | | | | | |
| Beef Products, Inc.(1) | $ | 13,410 | | $ | 14,850 | | $ | 15,124 |
Total purchases from affiliate | $ | 13,410 | | $ | 14,850 | | $ | 15,124 |
| |
| (1)Beef Products, Inc. (BPI) is an affiliate of NBPCo Holdings |
F-32
NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
At December 30, 2017 and December 31, 2016, the amounts due from BPI for the sale of beef trimmings were approximately $0.8 million and $0.9 million, respectively. At December 30, 2017 and December 31, 2016, the amounts due to BPI for the purchase of processed lean beef were approximately $0.3 million and $0.5 million, respectively.
In January 2007, NBP entered into an agreement with BPI for BPI to manufacture and install a grinding system in one of NBP’s 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 fiscal years 2017, 2016, and 2015, NBP paid approximately $1.7 million, and $1.7 million, and $1.6 million, respectively, to BPI in technology and support fees.
NBP participates in a cattle supply agreement with US Premium Beef, a minority owner. Under this agreement NBP agreed to purchase 735,385 head of cattle each year (subject to adjustment), from the members of US Premium Beef, with prices based on those published by the U.S. Department of Agriculture, subject to adjustments for cattle performance. NPB obtained approximately 24% and 27% of its cattle requirements under this agreement during 2017 and 2016, respectively.
NOTE 8. FAIR VALUE MEASUREMENTS
NBP determines fair value utilizing a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs used to measure fair value are as follows:
- Level 1 — quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.
- Level 2 — observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
- Level 3 — unobservable inputs for an asset or liability. Unobservable inputs should only be used to the extent observable inputs are not available.
The following table details the assets and liabilities measured at fair value on a recurring basis as of December 30, 2017, and December 31, 2016 and also the level within the fair value hierarchy used to measure each category of assets (in thousands).
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NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES |
| Consolidated Financial Statements |
Notes to Consolidated Financial Statements |
| |
| | | | | | Quoted Prices in | | | | |
| | | | | | Active Markets for | | Significant Other | | Significant |
| | | | | | Identical Assets | | Observable Inputs | | Unobservable |
| Description | | December 30, 2017 | | (Level 1) | | (Level 2) | | Inputs (Level 3) |
| |
| Other current assets - derivatives | | $ | 2,880 | | $ | 2,122 | | $ | 758 | | $ | - |
| Other current assets - promissory note | | $ | 250 | | $ | - | | $ | - | | $ | 250 |
| Other assets - promissory note | | $ | 4,500 | | $ | - | | $ | - | | $ | 4,500 |
| Other accrued expenses and liabilities - derivatives | | $ | 2,100 | | $ | - | | $ | 2,100 | | $ | - |
| |
| | | | | | Quoted Prices in | | | | |
| | | | | | Active Markets for | | Significant Other | | Significant |
| | | | | | Identical Assets | | Observable Inputs | | Unobservable |
| Description | | December 31, 2016 | | (Level 1) | | (Level 2) | | Inputs (Level 3) |
| |
| Other current assets - derivatives | | $ | 1,906 | | $ | - | | $ | 1,906 | | $ | - |
| Other current assets - promissory note | | $ | 250 | | $ | - | | $ | - | | $ | 250 |
| Other assets - promissory note | | $ | 4,750 | | $ | - | | $ | - | | $ | 4,750 |
| Other accrued expenses and liabilities - derivatives | | $ | 1,998 | | $ | 1,998 | | $ | - | | $ | - |
NOTE 9. DISCLOSURE ABOUT DERIVATIVE INSTRUMENTS
As part of NBP’s ongoing operations, NBP is exposed to market risks such as changes in commodity prices. To manage these risks, NBP may enter into the following derivative instruments pursuant to established policies:
- Forward purchase contracts for cattle for use in its beef plants
- Exchange traded futures contracts for cattle
- Exchange traded futures contracts for agricultural products
While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive recordkeeping requirements associated with hedge accounting. Accordingly, the gains and losses associated with the change in fair value of the instruments are recorded to net sales and cost of goods sold in the period of change. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are purchased in the normal course of business and are treated as normal purchases and sales and not recorded at fair value.
NBP enters into certain commodity derivatives, primarily with a diversified group of counterparties. The maximum amount of loss due to the credit risk of the counterparties, should the counterparties fail to perform according to the terms of the contracts, is deemed to be immaterial as of December 30, 2017 and December 31, 2016. The exchange-traded contracts have been entered into under a master netting agreement. None of the derivatives entered into have credit-related contingent features.
The following table presents the fair values as discussed in Note 8 and other information regarding derivative instruments not designated as hedging instruments as of December 30, 2017 and December 31, 2016 (thousands of dollars):
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NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
| December 30, 2017 | | Derivative Asset | | Derivative Liability |
| | | Balance Sheet | | | | | Balance Sheet | | | |
| | | Location | | | Fair Value | | Location | | | Fair Value |
| |
| | | | | | | | Other accrued | | | |
| | | Other current | | | | | expenses and | | | |
| Commodity contracts | | assets | | $ | 2,880 | | liabilities | | $ | 2,100 |
| Total | | | | $ | 2,880 | | | | $ | 2,100 |
| |
| December 31, 2016 | | Derivative Asset | | Derivative Liability |
| | | Balance Sheet | | | | | Balance Sheet | | | |
| | | Location | | | Fair Value | | Location | | | Fair Value |
| |
| | | | | | | | Other accrued | | | |
| | | Other current | | | | | expenses and | | | |
| Commodity contracts | | assets | | $ | 1,906 | | liabilities | | $ | 1,998 |
| Total | | | | $ | 1,906 | | | | $ | 1,998 |
The following table presents the unrealized and realized gains (losses) on derivative contracts as reflected in the Consolidated Statement of Operations for the fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015 (thousands of dollars):
| | | | | Amount of Gain (Loss) Recognized in Income On Derivatives |
Derivatives Not | | Location of Gain (Loss) | | | | | | | | | |
| Designated as | | Recognized in Income on | | | | | | | | | |
Hedging Instruments | | Derivatives | | December 30, 2017 | | December 31, 2016 | | December 26, 2015 |
| |
| Commodity contracts | | Net sales | | $ | 6,046 | | $ | 3,261 | | $ | (52,889) |
| Commodity contracts | | Cost of sales | | | (9,242) | | | 1,185 | | | 9,162 |
| Total | | | | $ | (3,196) | | $ | 4,446 | | $ | (43,727) |
NOTE 10. LEGAL PROCEEDINGS AND CONTINGENCIES
In April 2014, the California Regional Water Quality Control Board Colorado River Basin Region (Regional Board) issued an administrative civil liability complaint to NBP’s wholly-owned subsidiary, National Beef California, L.P. (NBC). The Complaint alleged that NBC violated federal National Pretreatment Standards regulations by introducing into the Brawley, California wastewater treatment plant (WWTP) pollutants that caused “pass through” or “interference” with the WWTP. The complaint assessed a penalty of approximately $3.8 million. A hearing before the Regional Board was scheduled for late October 2014, but the Regional Board withdrew its complaint in early October 2014 and requested the California State Water Resources Control Board (the “State Board”) to take up the matter. In response, the State Board issued an administrative civil liability complaint against NBC in January 2016, which sought a penalty of $1.65 million. The State Board withdrew its complaint in February 2016 and indicated that it intended to refile the complaint at a later date, but has yet to do so. NBP believes it has meritorious defenses to the State Board complaint and intends to defend against the complaint vigorously. There can be no assurances, however, as to the outcome of this matter or the impact on NBP’s consolidated financial position, results of operations and cash flows.
NBP is a party to a number of other lawsuits and claims arising out of the operation of its business. Management believes the ultimate resolution of such matters should not have a material adverse effect on NBP’s financial condition, results of operations or liquidity.
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NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES
Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 11. SUBSEQUENT EVENTS
NBP evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through March 14, 2018, the date the financial statements were available for issuance.
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