EX-99.1 11 seb-20161231ex991b66a90.htm AUDITED STATEMENTS OF BUTTERBALL, LLC seb_EX_99_1

Exhibit 99.1

BUTTERBALL, LLC

Financial Statements

January 1, 2017 and January 3, 2016

(With Independent Auditors’ Report Thereon)

 

 

 


 

 

Independent Auditors’ Report

The Board of Directors
Butterball, LLC:

We have audited the accompanying financial statements of Butterball, LLC, which comprise the balance sheets as of January 1, 2017 and January 3, 2016, and the related statements of comprehensive income, members’ equity, and cash flows for each of the years ended January 1, 2017, January 3, 2016 and December 28, 2014, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of 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 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 financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the 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 entity’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 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 financial statements referred to above present fairly, in all material respects, the financial position of Butterball, LLC as of January 1, 2017 and January 3, 2016, and the results of its operations and its cash flows for each of the years ended January 1, 2017, January 3, 2016 and December 28, 2014, in accordance with U.S. generally accepted accounting principles.

Picture 1

Raleigh, North Carolina
February 13, 2017

 

 

 


 

 

BUTTERBALL, LLC

Balance Sheets

(in thousands)

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017 

 

2016 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

145,433 

 

162,322 

 

Accounts receivable, less allowance for doubtful accounts of $1,990 and $1,971 at January 1, 2017 and January 3, 2016, respectively

 

 

100,442 

 

93,089 

 

Other receivables

 

 

7,756 

 

6,573 

 

Inventories

 

 

328,322 

 

277,142 

 

Other current assets

 

 

9,380 

 

14,563 

 

Total current assets

 

 

591,333 

 

553,689 

 

Net property, plant and equipment

 

 

353,172 

 

319,840 

 

Other assets:

 

 

 

 

 

 

Trade names

 

 

111,000 

 

111,000 

 

Goodwill

 

 

73,667 

 

73,667 

 

Intangible assets with finite lives

 

 

3,205 

 

6,068 

 

Other assets

 

 

21,247 

 

18,405 

 

Total other assets

 

 

209,119 

 

209,140 

 

Total assets

 

$

1,153,624 

 

1,082,669 

 

Liabilities and Members’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

86,659 

 

68,175 

 

Accrued expenses

 

 

83,040 

 

88,349 

 

Revolving line of credit

 

 

20,000 

 

— 

 

Current maturities of long-term debt

 

 

3,605 

 

6,724 

 

Current maturities of Member notes payable

 

 

161,422 

 

— 

 

Total current liabilities

 

 

354,726 

 

163,248 

 

Long-term debt, less current maturities

 

 

147,405 

 

188,852 

 

Notes payable – Member, net of debt discount

 

 

7,531 

 

165,939 

 

Pension plan liability

 

 

2,544 

 

4,406 

 

Other liabilities

 

 

16,760 

 

14,112 

 

Total liabilities

 

 

528,966 

 

536,557 

 

Members’ equity:

 

 

 

 

 

 

Members’ equity

 

 

631,090 

 

551,536 

 

Accumulated other comprehensive loss

 

 

(6,432)

 

(5,424)

 

Total Members’ equity

 

 

624,658 

 

546,112 

 

Total liabilities and Members’ equity

 

$

1,153,624 

 

1,082,669 

 

See accompanying notes to financial statements.

 

 

 

 

2

 

 


 

BUTTERBALL, LLC

Statements of Comprehensive Income

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

    

January 1,

    

January 3,

    

December 28,

 

 

 

2017

 

2016

 

2014

 

Net sales

 

$

1,812,654 

 

1,901,805 

 

1,833,141 

 

Cost of goods sold

 

 

1,531,303 

 

1,557,401 

 

1,578,502 

 

Gross profit

 

 

281,351 

 

344,404 

 

254,639 

 

Selling and marketing expenses

 

 

67,674 

 

62,993 

 

59,728 

 

General and administrative expenses

 

 

51,374 

 

50,406 

 

53,921 

 

Operating income

 

 

162,303 

 

231,005 

 

140,990 

 

Net finance expense

 

 

1,978 

 

8,643 

 

12,955 

 

Related party finance expense

 

 

21,887 

 

27,088 

 

24,370 

 

Other income

 

 

(163)

 

(33)

 

(465)

 

Net income

 

 

138,601 

 

195,307 

 

104,130 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Unrecognized actuarial (loss) gain of defined benefit plan, net of amounts included in net periodic benefit (income) cost

 

 

(1,008)

 

16 

 

(8,729)

 

Comprehensive income

 

$

137,593 

 

195,323 

 

95,401 

 

See accompanying notes to financial statements.

 

 

 

 

3

 

 


 

BUTTERBALL, LLC

Statements of Members’ Equity

(in thousands)

 

 

 

 

 

 

 

 

 

 

    

 

    

Accumulated

    

 

 

 

 

 

 

other

 

 

 

 

 

Members’

 

comprehensive

 

 

 

 

 

equity

 

income (loss)

 

Total

 

Members’ equity – December 29, 2013

 

$

399,134 

 

3,289 

 

402,423 

 

Distributions to members

 

 

(24,040)

 

— 

 

(24,040)

 

Net income

 

 

104,130 

 

— 

 

104,130 

 

Unrecognized actuarial loss of defined benefit plan

 

 

— 

 

(8,729)

 

(8,729)

 

Members’ equity – December 28, 2014

 

 

479,224 

 

(5,440)

 

473,784 

 

Distributions to members

 

 

(122,995)

 

— 

 

(122,995)

 

Net income

 

 

195,307 

 

— 

 

195,307 

 

Unrecognized actuarial gain of defined benefit plan

 

 

— 

 

16 

 

16 

 

Members’ equity – January 3, 2016

 

 

551,536 

 

(5,424)

 

546,112 

 

Distributions to members

 

 

(59,047)

 

— 

 

(59,047)

 

Net income

 

 

138,601 

 

— 

 

138,601 

 

Unrecognized actuarial loss of defined benefit plan

 

 

— 

 

(1,008)

 

(1,008)

 

Members’ equity – January 1, 2017

 

$

631,090 

 

(6,432)

 

624,658 

 

See accompanying notes to financial statements.

 

 

 

 

4

 

 


 

BUTTERBALL, LLC

Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

    

January 1,

    

January 3,

    

December 28,

 

 

 

2017

 

2016

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

138,601 

 

195,307 

 

104,130 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

39,042 

 

36,695 

 

33,185 

 

Amortization

 

 

4,841 

 

4,815 

 

4,711 

 

Loss (gain) on disposition of property, plant and equipment

 

 

273 

 

180 

 

(85)

 

Paid-in-kind interest and accretion on Member notes payable

 

 

3,014 

 

17,148 

 

15,178 

 

Changes in operating assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,353)

 

23,000 

 

(18,549)

 

Inventories

 

 

(50,187)

 

(14)

 

25,220 

 

Other current assets

 

 

4,000 

 

(7,675)

 

1,444 

 

Other assets

 

 

(2,842)

 

(1,844)

 

(1,645)

 

Accounts payable

 

 

18,483 

 

(7,970)

 

7,523 

 

Accrued expenses

 

 

(5,309)

 

22,015 

 

16,188 

 

Other liabilities

 

 

(221)

 

(7,261)

 

259 

 

Net cash provided by operating activities

 

 

142,342 

 

274,396 

 

187,559 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of property, plant and equipment

 

 

45 

 

297 

 

6,007 

 

Purchases of property, plant and equipment

 

 

(57,961)

 

(83,969)

 

(41,960)

 

Acquisition of business

 

 

(15,724)

 

 

 

Net cash used in investing activities

 

 

(73,640)

 

(83,672)

 

(35,953)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net proceeds (payments) in revolving line of credit

 

 

20,000 

 

(24,000)

 

2,000 

 

Payments of long-term debt

 

 

(45,621)

 

(6,771)

 

(5,760)

 

Debt issuance costs

 

 

(923)

 

 

 

Payments of notes payable – Members

 

 

 

(74)

 

(1,300)

 

Distributions to Members

 

 

(59,047)

 

(122,995)

 

(24,040)

 

Net cash used in financing activities

 

 

(85,591)

 

(153,840)

 

(29,100)

 

Net (decrease) increase in cash and cash equivalents

 

 

(16,889)

 

36,884 

 

122,506 

 

Cash and cash equivalents – beginning of year

 

 

162,322 

 

125,438 

 

2,932 

 

Cash and cash equivalents – end of year

 

$

145,433 

 

162,322 

 

125,438 

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

21,851 

 

14,624 

 

16,809 

 

See accompanying notes to financial statements.

 

 

 

 

 

 

5

 

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

(1)

Summary of Significant Accounting Policies

(a)

Description of Business and Basis of Presentation

Butterball, LLC (Butterball or the Company) is a limited liability company organized in the State of North Carolina. Tracing its roots back to 1954 and headquartered in Garner, North Carolina, Butterball is a vertically integrated producer, processor, and marketer of branded and nonbranded turkey and pork products. From seven facilities located across the United States, the Company produces a diverse portfolio of premium, value‑added turkey and pork products and commodity turkey products that are distributed through retail, food service, industrial, and international channels.

The Company is operated as a joint venture between Maxwell Farms, LLC (50% ownership position and an affiliate of Goldsboro Milling Company (Maxwell)), and BB Kansas Holdings, Inc. (50% ownership position and an affiliate of Seaboard Corporation (Seaboard)), together, the Members.

Butterball prepares its financial statements in accordance with accounting principles generally accepted in the United States of America  (U.S. GAAP), which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements, and such differences could be material.

(b)

Business Environment

Integrated turkey and nonintegrated pork processors operate in an environment where in the commodity nature of both their products for sale and primary raw materials cause sales prices and purchase costs to fluctuate, often on a short‑term basis, due to the worldwide supply and demand situation for those commodities. Supply and demand factors for their products for sale and the supply and demand factors for their primary raw materials correlate to a degree, but are not the same, thereby causing margins between sales price and production costs to increase, decrease, or invert, often on a short‑term basis.

(c)

Fiscal Year

The Company follows a 52/53‑week fiscal year that ends the Sunday closest to December 31st. The fiscal periods reflected in the accompanying financial statements consist of the periods January 4, 2016 to January 1, 2017, December 30, 2013 to December 28, 2014, both 52‑week fiscal years, and December 29, 2014 to January 3, 2016, a 53‑week fiscal year.

(d)

Reclassifications

Debt issuance costs included in other assets in the prior fiscal year have been reclassified to conform to the presentation adopted in the current fiscal year, with no effect on net income or net cash provided by/used in operating, investing, and financing activities. The reclassification resulted in a decrease to other assets and long term debt of $4,312 in the January 3, 2016 balance sheet.

(e)

Cash Equivalents

For purposes of the statement of cash flows, the Company considers all instruments purchased with an original maturity of three months or less to be cash equivalents.

 

 

 

 

6

 

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

(f)

Accounts Receivable

Accounts receivable consist of credit extended to the Company’s customers in the normal course of business and are reported net of an allowance for doubtful accounts. The Company reviews its customer accounts on a periodic basis and records bad debt expense for specific amounts that the Company evaluates as uncollectible. Past due status is determined based upon contractual terms. Amounts are written off at the point when collection attempts have been exhausted. Management uses judgment in estimating uncollectible amounts, considering such factors as current economic conditions and historic and anticipated customer performance. In addition, if needed, the Company provides an allowance for potentially uncollectible amounts that have not been specifically identified. While management believes the Company’s processes effectively address its exposure to doubtful accounts, changes in economic, industry or specific customer conditions may require adjustment to the allowance recorded by the Company. Management has included amounts believed to be uncollectible, as well as short pays and deductions incurred in the normal course of business, in the allowance for doubtful accounts.

(g)

Inventories

Processed meat inventories (finished goods) are stated at the lower of actual cost or net realizable value. Live turkey inventory is valued at the total cost accumulated on the flock as of the end of the fiscal year. Accumulated cost includes poult cost, feed, supplies and other costs related to individual flocks. Feed and feed ingredient inventories, supplies and other materials are stated at the lower of weighted average cost or net realizable value.

(h)

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is calculated using the straight‑line method over the useful lives of the assets. Gains and losses from sale of property, plant and equipment are included in cost of sales.

The estimated useful lives are as follows:

 

 

 

 

Site improvements

    

10–25 years

 

Buildings

 

15–40 years

 

Water utility systems

 

10–20 years

 

Equipment

 

1–15 years

 

Furniture, fixtures and office equipment

 

1–10 years

 

Vehicles

 

1–5 years

 

 

(i)

Long‑Lived Assets

The Company reviews the carrying value of long‑lived assets for impairment whenever triggering events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If a triggering event or changes in circumstances occur, the impairment to be recognized is measured by the excess of the carrying amount over the fair value of the assets. The Company did not identify any triggering events during the period ended January 1, 2017.

(j)

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a transaction accounted for as a business combination. The fair value of identifiable intangible assets is estimated

 

 

 

 

7

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

based upon discounted future cash flow projections. While the Butterball trade names are not amortized because the Company expects the cash flows from these intangible assets to continue indefinitely, the Gusto trade name, grower and customer relationship assets are amortized over 5 or 10 years.

Goodwill and the Butterball trade names are tested for impairment annually or sooner if impairment indicators arise. This determination consists of first assessing qualitative factors to determine the existence of events and circumstances that would indicate the likelihood of the carrying amount of assets exceeding its fair value. If such events or circumstances are determined to exist, the Company determines the fair value and compares it to its carrying amount. If the carrying amount exceeds its fair value, an impairment loss is recognized for any excess carrying amount of goodwill or the indefinite‑lived trade names over the implied value.

Intangible assets with finite lives are amortized using the straight‑line method over their estimated useful lives. When indicators of impairment are present, they are reviewed for recoverability using estimated future undiscounted cash flows related to those assets. The Company has determined that no impairment existed at January 1, 2017 or January 3, 2016. The Company uses the last day of its fiscal year to perform its annual impairment review of goodwill and trade names.

(k)

Debt Issuance Costs

The Company adopted Accounting Standards Update (ASU) 2015‑03, Interest‑Imputation of Interest (Subtopic 835‑30), during the period ended January 1, 2017. As a result, debt issuance costs are classified within the debt balance they pertain to, and are being amortized as additional interest expense over the life of the underlying debt using either the effective interest or straight‑line methods, which the Company believes approximates the effective interest method. Amortization of debt issuance costs was $1,978, $1,952 and $1,848 for the years ended January 1, 2017,  January 3, 2016, and December 28, 2014, respectively.

(l)

Derivative Financial Instruments

The Company enters into interest rate swap contracts to manage its exposure to fluctuations in interest rates and grain hedges to manage the changes in commodity prices. The Company has not designated the contracts as an accounting “hedge”. Accordingly, these contracts are measured at fair value with the resulting gain or loss recognized in net finance expense (for interest rate swap contracts) and cost of goods sold (for grain hedges) in the accompanying statements of comprehensive income.

During 2013, the Company entered into a series of 5‑7 year interest rate swap agreements with a total notional amount of $150,000 to effectively fix the interest rate at 1.38% on a portion of its floating rate indebtedness which had prescribed a variable interest rate formula based on the one‑month London Interbank Offered Rate (LIBOR). During October 2016, the Company entered into a series of 5‑7 year forward‑starting interest rate swap agreements with a total notional amount of $75,000 to effectively fix the interest rate at 1.49% related to a scheduled Member note refinancing in December 2017. These new swap agreements have terms similar to those for the other interest rate exchange agreements referred to above.

At January 1, 2017 and January 3, 2016, the fair market value of the interest rate swaps was an asset of $2,895 and a liability of $751, respectively.

The Company has entered into multiple grain future contracts. At January 1, 2017 and January 3, 2016, the fair market value of these grain contracts was an asset of $2,304 and a liability of $4,862, respectively.

 

 

 

 

8

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

(m)

Income Taxes

The Company is not subject to federal or certain state income taxes; however, the Company is required to make periodic tax distributions for its Members based on the highest tax rate between the Members. The Company’s net income or loss is reported on the Members’ federal income tax returns. The Company is subject to certain state taxes primarily consisting of gross margin tax and commercial activity, and records these within general and administrative expenses. The Company records unrecognized tax liabilities for known or anticipated tax issues based on its analysis of whether, and the extent to which, additional taxes will be due. The Company accrues interest and penalties related to unrecognized tax liabilities as accrued expenses and recognizes the related expense as tax expense included in general and administrative expenses.

(n)

Revenue Recognition

The Company recognizes revenue when delivery has occurred or services have been rendered; persuasive evidence of an agreement exists; the Company’s price to the buyer is fixed or determinable; and collection on transaction is reasonably assured.

(o)

Advertising

The Company expenses the cost of advertising as incurred. Advertising expense was $31,827, $26,719 and $27,499, respectively, for the years ended January 1, 2017,  January 3, 2016 and December 28, 2014.

(p)

Shipping and Handling

All shipping and handling costs are included in cost of goods sold in the accompanying statements of comprehensive income.

(q)

Fair Value of Financial Instruments

Fair value is a market‑based measurement, not an entity‑specific measurement. Therefore, a fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:

·

Level 1  – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

·

Level 2  – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

·

Level 3  – Unobservable inputs for the asset or liability, which are typically based on the Company’s own assumptions, as there is little, if any, related market activity.

For certain classes of the Company’s financial instruments, the carrying amounts approximate fair value due to their short‑term nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. See note 12 for fair value measurements of other classes of financial instruments made on a recurring and nonrecurring basis.

 

 

 

 

9

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

(r)

Recently Issued Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued guidance to develop a single, comprehensive revenue recognition model for all contracts with customers. This guidance requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods and services. This guidance supersedes nearly all existing revenue recognition guidance under GAAP. The Company will adopt this guidance on January 1, 2018, using the cumulative effect transition method, where any cumulative effect of initially adopting the guidance is recognized at the date of adoption. The Company is evaluating the impact this new guidance with have on its financial statements.

In February 2016, the FASB issued guidance that a lessee should record a right‑of‑use (ROU) asset and a lease liability 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 recognition, measurement, and presentation of expenses and cash flows arising from a financing lease have not significantly changed from the previous guidance. For operating leases, a lessee is required to: (1) recognize a ROU asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet, (2) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight‑line basis and (3) classify all cash payments within operating activities in the statement of cash flows. The Company will adopt this guidance on January 1, 2019. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. The Company is in the preliminary stages of the assessment of the effect the guidance will have on its existing accounting policies and the financial statements, but expects there will be an increase in assets and liabilities on the balance sheets at adoption due to the recording of right‑of‑use assets and corresponding lease liabilities, which may be material. Refer to note 11 for information about the Company’s lease obligations.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flow, and Other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company does not expect the adoption of this guidance to have a material impact on its financial statements.

(2)

Inventories

Inventories consist of the following:

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017  

 

2016  

 

Live birds, feed and feed ingredients

 

$

143,864 

 

130,216 

 

Finished goods

 

 

156,066 

 

121,866 

 

Materials and supplies

 

 

28,392 

 

25,060 

 

 

 

$

328,322 

 

277,142 

 

 

 

 

 

10

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

(3)

Property, Plant, and Equipment

Property, plant, and equipment consists of the following:

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017 

 

2016 

 

Land

 

$

22,365 

 

22,105 

 

Site improvements

 

 

14,089 

 

13,167 

 

Buildings

 

 

177,597 

 

144,237 

 

Water utility systems

 

 

3,305 

 

3,156 

 

Equipment

 

 

232,514 

 

201,110 

 

Furniture, fixtures and office equipment

 

 

16,112 

 

15,262 

 

Vehicles

 

 

10,781 

 

10,450 

 

Construction in progress

 

 

61,395 

 

57,427 

 

Held for sale

 

 

8,909 

 

8,909 

 

 

 

 

547,067 

 

475,823 

 

Accumulated depreciation

 

 

(193,895)

 

(155,983)

 

Net property, plant and equipment

 

$

353,172 

 

319,840 

 

Depreciation expense for the years ended January 1, 2017, January 3, 2016 and December 28, 2014 was $39,042, $36,695 and $33,185, respectively.

On February 19, 2015, the Company purchased land, buildings, and other tangible personal property of a turkey further processing facility located in Raeford, North Carolina (Raeford) from a private farm cooperative for $17,000. The Raeford facility provides the Company with additional capacity to support its further processed turkey offerings.

(4)

Acquisition

Effective December 30, 2016, the Company purchased a feed mill operation in Farmville, North Carolina from a Member for  total cash consideration of $15,724. The mill is intended to supply feed for the Company’s turkey growing operations in the area. The purchase price allocation resulted in $14,731 allocated to property, plant and equipment and $993 allocated to inventories. No material intangible assets were identified.

(5)

Intangible Assets

Intangible assets subject to amortization were as follows:

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017

 

 

    

 

    

Accumulated

    

Net

 

 

 

Gross cost

 

amortization

 

carrying value

 

Grower relationships

 

$

2,400 

 

1,280 

 

1,120 

 

Customer lists

 

 

11,500 

 

10,015 

 

1,485 

 

Trade name-Gusto

 

 

3,000 

 

2,400 

 

600 

 

 

 

$

16,900 

 

13,695 

 

3,205 

 

 

 

 

 

 

11

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

 

 

 

 

 

 

 

 

 

 

 

January 3, 2016

 

 

    

 

    

Accumulated

    

Net

 

 

 

Gross cost

 

amortization

 

carrying value

 

Grower relationships

 

$

2,400 

 

1,040 

 

1,360 

 

Customer lists

 

 

11,500 

 

7,992 

 

3,508 

 

Trade name-Gusto

 

 

3,000 

 

1,800 

 

1,200 

 

 

 

$

16,900 

 

10,832 

 

6,068 

 

Amortization expense in the accompanying statements of comprehensive income totaled $2,863 in each of the years ended January 1, 2017, January 3, 2016 and December 28, 2014.

Future amortization expense of finite‑lived intangible assets is estimated as follows:

 

 

 

 

 

2017

    

$

2,325 

 

2018

 

 

240 

 

2019

 

 

240 

 

2020

 

 

240 

 

2021

 

 

160 

 

 

 

$

3,205 

 

(6)

Other Assets

Other assets consists of the following:

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017 

 

2016 

 

Deferred compensation program assets

 

$

13,436 

 

15,986 

 

Other

 

 

7,811 

 

2,419 

 

 

 

$

21,247 

 

18,405 

 

(7)

Accrued Expenses

Accrued expenses consists of the following:

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017 

 

2016 

 

Employee-related accruals

 

$

43,758 

 

42,016 

 

Sales promotion reserves

 

 

30,161 

 

28,106 

 

Other

 

 

9,121 

 

18,227 

 

 

 

$

83,040 

 

88,349 

 

 

 

 

 

12

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

(8)

Notes Payable – Member

Notes payable – Member consists of the following:

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017 

 

2016 

 

Subordinated note, net of debt discount

 

$

97,171 

 

94,328 

 

Accrued payment-in-kind interest

 

 

64,251 

 

64,080 

 

Real estate loan

 

 

7,531 

 

7,531 

 

 

 

 

168,953 

 

165,939 

 

Less current maturities

 

 

(161,422)

 

— 

 

Total member notes payable, less current maturities

 

$

7,531 

 

165,939 

 

The Company has a subordinated note agreement with Seaboard with an original principal amount of $100 million. As additional consideration for this note, the Company issued Seaboard detachable warrants exercisable for 5% of the issued and outstanding units (currently 50 units are available for issue, 950 units are outstanding) of the Company for an exercise price of $0.01 per unit (effectively $0.50 for the 50 units). The units associated with these warrants have identical rights of the remaining units, with the exception that the warrants do not carry any voting rights, however, in the event of acquisition, sale or other similar transaction, these warrants will be granted full Member unit rights. These warrants met the criteria for in‑substance units and were accounted for as a portion of contributed capital in Members’ equity. The Company maintains the option to purchase these units at fair value. These warrants were valued at $10,586 at the date of the issuance.

As a result of the fair value allocated to the warrants, the note was valued initially at $89,414. The note contained a stated interest rate of 15%, with 10% to be accrued as payment in‑kind (PIK) payable at maturity, and the remaining 5% to be paid every six months. Effective January 4, 2016, the Company amended both its subordinated debt and warrant agreements with Seaboard. The new debt agreement reduces the stated interest rate to 10%, with all interest incurred after the amendment date being paid every six months. All other terms under the note agreement remained similar. The elimination of the PIK interest accrual reduces the total cumulative estimated payment at maturity on December 6, 2017 to $164,251.

The revised warrant agreement delays exercise of the warrants held by Seaboard until after December 31, 2018, while extending the period to exercise until December 31, 2025. The revision in the warrant terms did not result in a valuation change to the Company from its original issuance value. For the years ended January 1, 2017, January 3, 2016 and December 28, 2014 the Company incurred interest expense on this note totaling $19,346, $24,775 and $22,096, respectively.

During 2011, the Company entered into a real estate loan agreement with Seaboard. Under the terms of this agreement, the Company makes principal payments against the loan as the parcels of underlying real estate are sold, with any remaining balance on the loan maturing February 1, 2018. Under this arrangement, the Company incurred interest of $1,146, $1,098 and $1,164 for the years ended January 1, 2017,  January 3, 2016 and December 28, 2014 respectively.

 

 

 

 

13

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

(9)

Debt

Long‑term debt consists of the following:

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017 

 

2016 

 

 

 

 

 

 

 

Note payable due to banks, modified on June 22, 2016, with interest payable monthly at LIBOR plus 200 basis points (2.42% at January 3, 2016) and varies based on certain performance criteria, secured by substantially all assets of the Company

 

$

— 

 

145,875 

 

Note payable due to banks, maturing June 22, 2021, with interest payable monthly at LIBOR plus 175 basis points (2.52% at January 1, 2017) and varies based on certain performance criteria, secured by substantially all assets of the Company

 

 

145,136 

 

— 

 

Note payable due to banks, extinguished June 22, 2016, with interest payable monthly at LIBOR plus 175 basis points (2.17% at January 3, 2016) and varies based on certain performance criteria, secured by substantially all assets of the Company

 

 

— 

 

43,125 

 

Acquisition note payable, maturing August 29, 2021, with interest payable annually at Prime minus 2% (1.75% at January 1, 2017)

 

 

8,089 

 

9,700 

 

Note payable due to municipalities, maturing November 1, 2023, with interest payable monthly at 1%

 

 

1,042 

 

1,188 

 

Unamortized debt issuance costs

 

 

(3,257)

 

(4,312)

 

 

 

 

151,010 

 

195,576 

 

Less current maturities

 

 

3,605 

 

6,724 

 

Total long-term debt, less current maturities

 

$

147,405 

 

188,852 

 

 

Aggregate maturities of long‑term debt are as follows:

 

 

 

 

2017

    

$

3,605 

2018

 

 

3,214 

2019

 

 

3,216 

2020

 

 

3,230 

2021

 

 

140,716 

Thereafter

 

 

286 

 

 

$

154,267 

 

Effective June 22, 2016, the Company entered into a new credit facility, consisting of one term loan with an original balance of $145,500, and a revolving line of credit of $225,000. The outstanding balance on the credit facility was $20,000, and the availability under the line of credit was $200,497 at January 1, 2017. The revolving line of credit balance bears interest at LIBOR plus an amount based on certain performance criteria (currently 162 basis points), for a rate of 2.38% at January 1, 2017.

 

 

 

 

14

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

The current credit facility contains covenants including total debt to capitalization ratio and fixed charge coverage ratio. The Company was in compliance with all covenants at January 1, 2017 and January 3, 2016.

(10)

Transactions with Members

The Company purchases finished feed, feed ingredients, and raw materials from its Members. The cost of materials purchased from companies affiliated with the Members was $221,407,  $229,217, and $263,523 for the periods ended January 1, 2017, January 3, 2016, and December 28, 2014, respectively.

As discussed in note 4, the Company acquired a feed mill operation on December 30, 2016 from a Member.

(11)

Commitments and Contingencies

a.Operating lease and rent expenses were $8,134, $7,898 and $7,099 for the years ended January 1, 2017,  January 3, 2016, and December 28, 2014, respectively. As of January 1, 2017, minimum rental payments under noncancelable operating leases for real estate, machinery and equipment are summarized as follows:

 

 

 

 

 

    

Lease

 

 

commitments

2017

 

$

8,330 

2018

 

 

5,712 

2019

 

 

3,150 

2020

 

 

2,012 

2021

 

 

481 

Thereafter

 

 

1,100 

 

 

$

20,785 

 

b.The Company enters into third‑party contracts for the purchase of poults, the supply of grain and other feed ingredients, and various critical supplies and services utilized in its live and processing operations. Commitment amounts listed in the table below are based on projected market prices and usage expectations as of January 1, 2017, and are summarized as follows:

 

 

 

 

 

    

Purchase

 

 

commitments

2017

 

$

136,058 

2018

 

 

31,034 

2019

 

 

29,315 

2020

 

 

25,420 

2021

 

 

24,630 

Thereafter

 

 

1,347 

 

 

$

247,804 

 

c.The Company maintains self‑insurance programs for health care and workers’ compensation coverages. The Company is liable for health care claims up to $500 each year per plan participant and workers’ compensation claims up to $750 to $1,000 per occurrence, depending on state law. Self‑insurance costs are accrued based upon the aggregate of recognized liabilities for claims reported but not yet paid, and estimated liabilities for claims incurred but not yet reported. The accompanying statements of comprehensive income include expenses relating to self‑insurance plans of $41,463,  $38,122, and $32,672 for the years ended January 1, 2017,  

 

 

 

 

15

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

January 3, 2016 and December 28, 2014, respectively. A letter of credit in the amount of $4,194 has been issued as security for the workers’ compensation program.

d.The Company, from time to time, is involved in lawsuits which occur in the normal course of business. Management intends to vigorously defend these actions when they occur and believes no material losses will occur.

(12)

Retirement Plans

a.The Company has a defined benefit pension plan that was frozen effective January 15, 2006. The Company has historically based pension contributions on minimum funding standards to avoid the Pension Benefit Guaranty Corporation (PBGC) variable rate premiums established by the Employee Retirement Income Security Act (ERISA) of 1974. For the years ended January 1, 2017 and January 3, 2016, the Company made deductible contributions of $2,350 and $4,000, respectively, principally to avoid future PBGC variable rate premiums established pursuant to the ERISA. The Company does not anticipate making any contributions to the plan during fiscal year 2017.

The future benefit payments expected to be paid to plan participants are as follows:

 

 

 

 

 

2017

    

$

1,511 

 

2018

 

 

1,584 

 

2019

 

 

1,673 

 

2020

 

 

1,770 

 

2021

 

 

1,865 

 

Thereafter

 

 

10,800 

 

 

 

$

19,203 

 

Balances in accumulated other comprehensive loss are as follows:

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

2017 

 

2016 

Unrecognized actuarial loss

 

$

(6,432)

 

(5,424)

 

The Company expects to recognize $227 of accumulated other comprehensive loss into net periodic benefit cost in fiscal year 2017.

 

 

 

 

16

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

The following table presents a reconciliation of the beginning and ending balances of the benefit obligation, fair value of plan assets and the funded status of the aforementioned pension plan to the net amounts measured and recognized in the balance sheet.

 

 

 

 

 

 

 

 

    

January 1,

    

January 3,

 

 

 

2017 

 

2016 

 

Change in benefit obligation:

 

 

 

 

 

Benefit obligation – beginning of year

 

$

40,822 

 

43,008 

Interest cost

 

 

1,747 

 

1,697 

Actuarial loss (gain)

 

 

1,348 

 

(2,577)

Benefits paid

 

 

(1,145)

 

(1,306)

Benefit obligation – end of year

 

 

42,772 

 

40,822 

Change in plan assets:

 

 

 

 

 

Fair value of plan assets – beginning of year

 

$

36,416 

 

34,050 

Actual return on plan assets

 

 

2,607 

 

(328)

Employer contributions

 

 

2,350 

 

4,000 

Benefits paid

 

 

(1,145)

 

(1,306)

Fair value of plan assets – end of year

 

 

40,228 

 

36,416 

Funded status

 

 

(2,544)

 

(4,406)

Net liability recognized in the balance sheet

 

$

(2,544)

 

(4,406)

 

Components of net periodic income are:

 

 

Year ended

 

    

January 1,

    

January 3,

    

December 28,

 

 

2017

 

2016

 

2014

Interest cost on projected benefit obligation

 

$

1,747 

 

1,697 

 

1,744 

Expected return on assets

 

 

(2,403)

 

(2,342)

 

(2,464)

Net amortization loss

 

 

136 

 

111 

 

— 

Net periodic pension income

 

 

(520)

 

(534)

 

(720)

One-time additional expense from settlement accounting

 

 

 

 

241 

Total pension income

 

$

(520)

 

(534)

 

(479)

 

The following are accounting assumptions used to determine benefit obligations and net periodic benefit costs:

 

 

Benefit obligations

 

Benefit costs

 

 

 

year ended

 

year ended

 

 

    

January 1,

    

January 3,

    

January 1,

    

January 3,

 

 

 

2017

 

2016

 

2017

 

2016

 

Discount rate

 

4.1 

%  

4.4 

%  

4.4 

%  

4.0 

%

Expected long-term rate of return on assets

 

6.5 

 

7.0 

 

6.5 

 

7.0 

 

Rate of increase in maximum benefit and compensation limits

 

4.0 

 

4.0 

 

4.0 

 

4.0 

 

 

 

 

 

 

17

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

The Company’s expected long‑term return on plan assets assumption is based on a periodic review and modeling of the plan’s asset allocation and liability structure over a long‑term horizon. The expected long‑term rate of return on assets was selected from within the reasonable range of rates determined by (a) historical real returns, net of inflation, for the asset classes covered by the investment policy, and (b) projections of inflation over the long‑term period during which benefits are payable to plan participants.

The plan provides for investments in various investment securities which, in general, are exposed to various risks, such as interest rate, credit and overall market volatility risk. The Company is guided by an investment committee whose primary focus is to minimize the volatility of the funding ratio by aligning the plan assets with its liabilities in terms of how they both respond to interest rate changes, in order to achieve a satisfactory rate of return based on the long‑term asset allocation profile to adequately fund the plan’s benefit obligations, while incurring an acceptable pension cost to the Company.

The Company’s defined benefit pension plan weighted average asset allocations by asset category are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017

 

January 3, 2016

 

 

    

Market value

    

Percent

    

Market value

    

Percent

 

Mutual funds

 

$

37,677 

 

93.7 

%  

$

33,912 

 

93.2 

%

Annuities

 

 

2,218 

 

5.5 

 

 

2,151 

 

5.9 

 

Principal cash

 

 

333 

 

0.8 

 

 

353 

 

0.9 

 

 

 

$

40,228 

 

100.0 

%

$

36,416 

 

100.0 

%

The Company’s target allocation by asset category is as follows:

 

 

 

Asset category

    

Range

Fixed income funds

 

25–85%

Equity mutual funds

 

15–75%

Other

 

0–20%

Cash

 

0–5%

 

b.The Company had a frozen nonqualified deferred compensation plan for certain management personnel whereby participants were able to contribute a percentage of their annual salaries to the plan. During the year ended January 1, 2017, all fund liabilities were distributed to participants. Assets in the plan as of January 3, 2016 consisted of life insurance policies with face amounts of approximately $10,365,  and a fair value of $4,431.

c.In 2004, the Company established a nonqualified deferred compensation plan for the same management group which was eligible to participate in the original plan detailed in the above note 12(b). The intent of management is for the new plan to replace the old plan for certain management personnel. The liabilities of the plan consist of the amounts deferred by the participants together with investment earnings from the participants’ investment allocations.

While funding of the plan is not required, the Company has chosen to establish a Rabbi Trust whereby the Company sets aside assets for the plan, thus providing the participants with some level of security. At January 1, 2017 and January 3, 2016, the liability related to this plan was approximately $3,996 and $2,937 respectively, and the assets of the Rabbi Trust consisted of mutual funds and cash and cash equivalents of

 

 

 

 

18

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

approximately $4,020 and $3,107, respectively. The assets are reported in other assets and the liability is included in other liabilities on the accompanying balance sheets.

d.In 2007, the Company established a nonqualified deferred compensation plan for certain members of management. The Company may make discretionary contributions to the plan. Participants begin vesting in the assets of the plan after one year. Plan participants who were members at the time of ownership change are 100% vested. At January 1, 2017 and January 3, 2016, the liability related to this plan was approximately $9,299 and $8,166, respectively. Assets of the plan held in a Rabbi Trust consist of life insurance policies with face amounts of approximately $21,809, and cash values of approximately $9,416 and $8,448 held in underlying investments of cash and various mutual funds, at January 1, 2017 and January 3, 2016, respectively. The assets are reported in other assets and the liability is included in other liabilities on the accompanying balance sheets.

e.The Company sponsors defined contribution benefit plans (401(k) plans) covering substantially all employees meeting eligibility requirements. The Company’s contributions vary depending on the plan, but are based primarily on each participant’s level of contribution and cannot exceed the maximum allowable for tax purposes. Total contributions were $3,808,  $3,066 and $2,748 for the years ended January 1, 2017,  January 3, 2016 and December 28, 2014, respectively.

The fair value levels of all Company‑held retirement plan assets, are as follows:

 

 

 

 

 

 

 

 

 

 

 

    

Quoted prices

    

    

    

    

    

 

 

 

in active

 

 

 

 

 

 

 

 

markets for

 

Other

 

 

 

 

 

 

identical

 

observable

 

Unobservable

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

January 1, 2017:

 

 

 

 

 

 

 

 

 

Pension plan assets:

 

 

 

 

 

 

 

 

 

Cash

 

$

333 

 

 

 

333 

Mutual funds

 

 

6,344 

 

31,333 

 

 

37,677 

Annuities

 

 

 

 

2,218 

 

2,218 

Deferred compensation assets:

 

 

 

 

 

 

 

 

 

Cash

 

 

46 

 

 

 

46 

Mutual funds

 

 

3,975 

 

9,416 

 

 

13,391 

Total assets at fair value

 

$

10,698 

 

40,749 

 

2,218 

 

53,665 

 

 

 

 

 

 

19

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 1, 2017 and January 3, 2016

 

 

 

 

 

 

 

 

 

 

 

    

Quoted prices

    

    

    

    

    

 

 

 

in active

 

 

 

 

 

 

 

 

markets for

 

Other

 

 

 

 

 

 

identical

 

observable

 

Unobservable

 

 

 

 

assets

 

inputs

 

inputs

 

 

 

 

(Level 1)

 

(Level 2)