EX-99.1 11 seb-20151231ex99157dc86.htm EX-99.1 seb_Ex99_1

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Exhibit 99.1

 

 

BUTTERBALL, LLC

 

Financial Statements

 

January 3, 2016 and December 28, 2014

 

(With Independent Auditors Report Thereon)

 

 

 


 

Picture 2

 

KPMG LLP

Suite 1200

150 Fayetteville Street

Raleigh, NC 27601

 

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 3, 2016 and December 28, 2014, and the related statements of comprehensive income (loss), members equity, and cash flows for each of the years ended January 3, 2016, December 28, 2014 and December 29, 2013, and the related notes to the financial statements.

 

Managements 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 entitys 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 entitys 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 3, 2016 and December 28, 2014, and the results of its operations and its cash flows for each of the years ended January 3, 2016, December 28, 2014 and December 29, 2013, in accordance with U.S. generally accepted accounting principles.

 

Picture 1

 

Raleigh, North Carolina
February 12, 2016

 

KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity

 

 

 


 

 

BUTTERBALL, LLC

 

Balance Sheets

 

(In thousands)

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016

 

2014

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

162,322 

 

125,438 

 

Accounts receivable, less allowance for doubtful accounts of $1,971 and $3,060 at January 3, 2016 and December 28, 2014, respectively

 

 

93,089 

 

116,089 

 

Other receivables

 

 

6,573 

 

8,262 

 

Inventories

 

 

277,142 

 

276,728 

 

Other current assets

 

 

14,563 

 

5,199 

 

Total current assets

 

 

553,689 

 

531,716 

 

Net property, plant and equipment

 

 

319,840 

 

273,043 

 

Other assets:

 

 

 

 

 

 

Trade names

 

 

111,000 

 

111,000 

 

Goodwill

 

 

73,667 

 

73,667 

 

Intangible assets with finite lives

 

 

6,068 

 

8,931 

 

Other assets

 

 

22,717 

 

22,825 

 

Total other assets

 

 

213,452 

 

216,423 

 

Total assets

 

$

1,086,981 

 

1,021,182 

 

Liabilities and Members’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

68,175 

 

76,145 

 

Accrued expenses

 

 

88,349 

 

65,934 

 

Current maturities of long-term debt

 

 

6,724 

 

29,789 

 

Total current liabilities

 

 

163,248 

 

171,868 

 

Long-term debt, less current maturities

 

 

193,164 

 

200,870 

 

Notes payable – Members, net of debt discount

 

 

165,939 

 

148,865 

 

Pension plan liability

 

 

4,406 

 

8,958 

 

Other liabilities

 

 

14,112 

 

16,837 

 

Total liabilities

 

 

540,869 

 

547,398 

 

Members’ equity:

 

 

 

 

 

 

Members’ equity

 

 

551,536 

 

479,224 

 

Accumulated other comprehensive loss

 

 

(5,424)

 

(5,440)

 

Total Members’ equity

 

 

546,112 

 

473,784 

 

Total liabilities and Members’ equity

 

$

1,086,981 

 

1,021,182 

 

 

See accompanying notes to financial statements.

 

2


 

 

BUTTERBALL, LLC

 

Statements of Comprehensive Income (Loss)

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

    

January 3,

    

December 28,

    

December 29,

 

 

 

2016

 

2014

 

2013

 

Net sales

 

$

1,901,805 

 

1,833,141 

 

1,729,568 

 

Cost of goods sold

 

 

1,557,401 

 

1,578,502 

 

1,626,766 

 

Gross profit

 

 

344,404 

 

254,639 

 

102,802 

 

Selling and marketing expenses

 

 

62,993 

 

59,728 

 

52,696 

 

General and administrative expenses

 

 

50,406 

 

53,921 

 

45,214 

 

Operating income

 

 

231,005 

 

140,990 

 

4,892 

 

Net finance expense

 

 

9,919 

 

13,894 

 

3,303 

 

Related party finance expense

 

 

27,088 

 

24,370 

 

22,907 

 

Other income

 

 

(1,309)

 

(1,404)

 

(1,762)

 

Net income (loss)

 

 

195,307 

 

104,130 

 

(19,556)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

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

 

 

16 

 

(8,729)

 

12,961 

 

Comprehensive income (loss)

 

$

195,323 

 

95,401 

 

(6,595)

 

 

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 30, 2012

 

$

438,326 

 

(9,672)

 

428,654 

 

Distributions to Members

 

 

(19,636)

 

 

(19,636)

 

Net loss

 

 

(19,556)

 

 

(19,556)

 

Unrecognized actuarial gain of defined benefit plan

 

 

 

12,961 

 

12,961 

 

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 

 

 

See accompanying notes to financial statements.

 

4


 

 

BUTTERBALL, LLC

 

Statements of Cash Flows

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

    

January 3,

    

December 28,

    

December 29,

 

 

 

2016

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

195,307 

 

104,130 

 

(19,556)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

36,695 

 

33,185 

 

32,545 

 

Amortization

 

 

4,815 

 

4,711 

 

4,583 

 

(Gain) loss on disposition of property, plant and equipment

 

 

180 

 

(85)

 

304 

 

Paid-in-kind interest and accretion on notes payable – Members

 

 

17,148 

 

15,178 

 

13,452 

 

Impairment of long-lived assets

 

 

 

 

6,974 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

23,000 

 

(18,549)

 

(11,772)

 

Inventories

 

 

(14)

 

25,220 

 

(3,005)

 

Other current assets

 

 

(7,675)

 

1,444 

 

(1,440)

 

Other assets

 

 

(1,844)

 

(1,645)

 

(3,249)

 

Accounts payable

 

 

(7,970)

 

7,523 

 

(19,751)

 

Accrued expenses

 

 

22,015 

 

16,188 

 

(7,098)

 

Other liabilities

 

 

(7,261)

 

259 

 

980 

 

Net cash provided (used) by operating activities

 

 

274,396 

 

187,559 

 

(7,033)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sales of property, plant and equipment

 

 

297 

 

6,007 

 

790 

 

Purchases of property, plant and equipment

 

 

(83,969)

 

(41,960)

 

(36,711)

 

Acquisition of business

 

 

 

 

(73,736)

 

Net cash used by investing activities

 

 

(83,672)

 

(35,953)

 

(109,657)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net (payments) proceeds in revolving line of credit

 

 

(24,000)

 

2,000 

 

6,000 

 

Proceeds of long-term debt

 

 

 

 

201,500 

 

Payments of long-term debt

 

 

(6,771)

 

(5,760)

 

(132,390)

 

Debt issuance costs

 

 

 

 

(2,376)

 

Proceeds of notes payable – Members

 

 

 

 

81,231 

 

Payments of notes payable – Members

 

 

(74)

 

(1,300)

 

(81,396)

 

Distributions to Members

 

 

(122,995)

 

(24,040)

 

(19,636)

 

Net cash (used) provided by financing activities

 

 

(153,840)

 

(29,100)

 

52,933 

 

Net increase (decrease) in cash and cash equivalents

 

 

36,884 

 

122,506 

 

(63,757)

 

Cash and cash equivalents – beginning of year

 

 

125,438 

 

2,932 

 

66,689 

 

Cash and cash equivalents – end of year

 

$

162,322 

 

125,438 

 

2,932 

 

 

 

 

 

 

 

 

 

 

Supplementary disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the year for interest

 

$

14,624 

 

16,809 

 

16,248 

 

 

See accompanying notes to financial statements.

 

 

 

5


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

(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, valueadded turkey and pork products and commodity turkey products that are distributed through retail, foodservice, industrial, and international channels.

 

The Company is owned and operated as a joint venture by Maxwell Farms, LLC (50% and an affiliate of Goldsboro Milling Company (Maxwell)), and BB Kansas Holdings, Inc. (50% 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 (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 managements 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 their primary raw materials cause sales prices and purchase costs to fluctuate, often on a shortterm basis, due to the worldwide supply and demand situation for those commodities. The 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 shortterm basis.

 

(c)

Fiscal Year

 

The Company follows a 52/53week fiscal year that ends the Sunday closest to December 31st. The fiscal periods reflected in the accompanying financial statements consist of the periods December 29, 2014 to January 3, 2016, a 53week fiscal year, December 30, 2013 to December 28, 2014, and December 31, 2012 to December 29, 2013, both 52week fiscal years.

 

(d)

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

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

(e)

Accounts Receivable

 

Accounts receivable consist of credit extended to the Companys 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 significant 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 Companys 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.

 

(f)

Inventories

 

Processed meat inventories (finished product) are stated at the lower of actual cost or market. 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. Grain inventories, supplies and other materials are stated at the lower of cost (weighted average cost) or market.

 

(g)

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost. Depreciation is calculated using the straightline method over the useful lives of the assets. Gains and losses from disposition 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

 

 

 

 

7

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

(h)

LongLived Assets

 

The Company reviews the carrying value of longlived 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 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.

 

(i)

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 based upon discounted future cash flow projections. Intangible assets with finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. 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 name 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 over the implied value.

 

Intangible assets with finite lives are amortized using the straightline method over their 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 3, 2016 or December 28, 2014. The Company uses the last day of its fiscal year to perform its annual impairment review of goodwill and trade names.

 

Intangible assets subject to amortization were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

 

 

 

8

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

December 28, 2014

 

 

    

 

    

Accumulated

    

Net

 

 

 

Gross cost

 

amortization

 

carrying value

 

Grower relationships

 

$

2,400 

 

800 

 

1,600 

 

Customer lists

 

 

11,500 

 

5,969 

 

5,531 

 

Trade name-Gusto

 

 

3,000 

 

1,200 

 

1,800 

 

 

 

$

16,900 

 

7,969 

 

8,931 

 

 

Amortization expense in the accompanying statement of comprehensive income (loss) totaled $2,863 in each of the years ended January 3, 2016, December 28, 2014 and December 29, 2013.

 

Future amortization expense of finitelived intangible assets is estimated as follows:

 

 

 

 

 

 

2016

    

$

2,863 

 

2017

 

 

2,325 

 

2018

 

 

240 

 

2019

 

 

240 

 

2020

 

 

240 

 

Thereafter

 

 

160 

 

 

 

$

6,068 

 

 

(j)

Debt Issuance Costs

 

Debt issuance costs are classified within other assets and are being amortized as additional interest expense over the life of the underlying debt using either the effective interest or straightline methods. Amortization of debt issuance costs was $1,952, $1,848 and $1,720 for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively.

 

(k)

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 currently in the net finance expense and cost of goods sold in the accompanying statement of comprehensive income (loss).

 

 

 

9

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

In 2010, the Company entered into two forward interest rate swap agreements with notional amounts of $37,500 each. Under the terms of the two $37,500 swap agreements, the Company paid a fixed interest rate of 2.48% and received a variable interest rate based on the onemonth London Interbank Offered Rate (LIBOR) commencing on January 6, 2012 until maturity on December 6, 2015. On April 30, 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 the floating rate indebtedness under its Amended and Restated Credit Agreement dated March 28, 2013. The effective date for $75,000 of the swap agreements was May 2, 2013 and the remaining $75,000 had an effective date of December 7, 2015. The new swap agreements have terms similar to those for the other interest rate exchange agreements referred to above. At January 3, 2016 and December 28, 2014, the fair market value of the interest swaps was a liability of $751 and an asset of $508, respectively.

 

The Company has entered into multiple grain future, put and call contracts. At January 3, 2016 and December 28, 2014, the fair market value of these grain contracts was a liability of $4,862 and an asset of $2,376, respectively.

 

(l)

Income Taxes

 

The Company is not subject to federal or certain state income taxes; however, the Company is required to make an annual tax distribution for its Member based on the highest tax rate between the Members. The Companys 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.

 

(m)

Revenue Recognition

 

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

 

(n)

Advertising

 

The Company expenses the cost of advertising as incurred. Advertising expense was $26,719, $27,499 and $20,989, respectively, for the years ended January 3, 2016, December 28, 2014 and December 29, 2013.

 

(o)

Shipping and Handling

 

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

 

 

10

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

(p)

Fair Value of Financial Instruments

 

Fair value is a marketbased measurement, not an entityspecific 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 entitys 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 Companys own assumptions, as there is little, if any, related market activity.

 

For certain classes of the Companys financial instruments, the carrying amounts approximate fair value due to their shortterm nature. These instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. See note 9 for fair value measurements of other classes of financial instruments made on a recurring and nonrecurring basis.

 

(q)

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 the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The Company is currently evaluating the impact this new guidance will have on its consolidated financial statements and related disclosures. The Company will be required to adopt this guidance on January 1, 2018 and it is currently anticipated that we will apply this guidance using the cumulative effect transition method.

 

In July 2015, the FASB issued guidance to simplify the subsequent measurement of inventory; excluding inventory measured using lastin, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new guidance is effective annual periods beginning after December 15, 2016 with early adoption permitted. The Company is analyzing the impact of this new standard and, at this time, cannot estimate the impact of adoption on net earnings.

 

 

11

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

(2)

Inventories

 

Inventories consist of the following:

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016 

 

2014 

 

Live birds, feed and feed ingredients

 

$

130,216 

 

136,560 

 

Finished goods

 

 

121,866 

 

116,220 

 

Materials and supplies

 

 

25,060 

 

23,948 

 

 

 

$

277,142 

 

276,728 

 

 

(3)

Property, Plant, and Equipment

 

Property, plant, and equipment consists of the following:

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016 

 

2014 

 

Land

 

$

22,105 

 

20,978 

 

Site improvements

 

 

13,167 

 

10,863 

 

Buildings

 

 

144,237 

 

120,125 

 

Water utility systems

 

 

3,156 

 

2,861 

 

Equipment

 

 

201,110 

 

152,283 

 

Furniture, fixtures and office equipment

 

 

15,262 

 

11,355 

 

Vehicles

 

 

10,450 

 

6,398 

 

Construction in progress

 

 

57,427 

 

59,673 

 

Held for sale

 

 

8,909 

 

8,987 

 

 

 

 

475,823 

 

393,523 

 

Accumulated depreciation

 

 

(155,983)

 

(120,480)

 

Net property, plant and equipment

 

$

319,840 

 

273,043 

 

 

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. It is managements intention that the Raeford facility will provide the Company with additional capacity to support its further processed turkey offerings.

 

 

12

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

(4)

Other Assets

 

Other assets consists of the following:

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016 

 

2014 

 

Deferred compensation program assets

 

$

15,986 

 

14,939 

 

Capitalized debt issuance costs

 

 

4,312 

 

6,264 

 

Other

 

 

2,419 

 

1,622 

 

 

 

$

22,717 

 

22,825 

 

 

(5)

Notes Payable – Members

 

Notes payable – Members consists of following:

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016 

 

2014 

 

Subordinated note, net of debt discount

 

$

94,328 

 

92,435 

 

Accrued payment-in-kind interest

 

 

64,080 

 

48,825 

 

Real estate loan

 

 

7,531 

 

7,605 

 

 

 

$

165,939 

 

148,865 

 

 

During 2010, the Company entered into a subordinated note agreement with Seaboard. The principal amount of this note was $100 million. As additional consideration for this note, the Company issued to Seaboard detachable warrants exercisable for 5.0% of the issued and outstanding units (currently 50 units are available for issue, 950 units are outstanding) of the Company for an initial exercise price of $0.01 per unit (effectively $0.50 for the 50 units). Based on written notes from the Company to Seaboard, these warrants will expire December 6, 2020. 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 units will be given full Member unit rights. These warrants met the criteria for insubstance 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 the warrants, the note was valued initially at $89,414. The note contains a stated interest rate of 15%, with 10% to be accrued as payment inkind (PIK), and the remaining 5% to be paid every six months. As a result of the fair value allocated to the warrants, the effective interest rate of the note is 16.8%. The note also contains a prepayment penalty until December 2016 of 3.75%; subsequent to December 2016 there is no prepayment penalty.

 

For the years ended January 3, 2016, December 28, 2014 and December 29, 2013 the Company incurred interest expense on these notes totaling $24,775, $22,096 and $19,728, respectively.

 

 

13

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

During August, 2011, the Company entered into a real estate loan agreement with Seaboard. Under the terms of this agreement, the Company will make principal payments against the loan when the parcels of underlying real estate are sold. Under this arrangement, the Company incurred interest of $1,098, $1,164 and $1,147 for the years ended January 3, 2016, December 28, 2014 and December 29, 2013 respectively.

 

(6)

LongTerm Debt

 

Longterm debt consists of the following:

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016 

 

2014 

 

Note payable due to banks, maturing September 6, 2017, 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 

 

147,750 

 

 

 

 

 

 

 

 

Note payable due to banks, maturing September 6, 2017, 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 

 

46,250 

 

 

 

 

 

 

 

 

Acquisition note payable, maturing August 29, 2021, with interest payable annually at Prime minus 2% (1.5% at January 3, 2016)

 

 

9,700 

 

11,314 

 

 

 

 

 

 

 

 

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

 

 

1,188 

 

1,345 

 

 

 

 

 

 

 

 

Revolving line of credit, maturing September 6, 2017, with variable interest payable based on 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

 

 

 

24,000 

 

 

 

 

199,888 

 

230,659 

 

Less current maturities

 

 

6,724 

 

29,789 

 

Total long-term debt, less current maturities

 

$

193,164 

 

200,870 

 

 

Aggregate maturities of longterm debt are as follows:

 

 

 

 

 

 

2016

    

$

6,724 

 

2017

 

 

185,820 

 

2018

 

 

1,747 

 

2019

 

 

1,773 

 

2020

 

 

1,699 

 

Thereafter

 

 

2,125 

 

 

 

$

199,888 

 

 

 

 

14

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

The Companys credit facility consists of two term loans with a balance of $189,000 at January 3, 2016, and a revolving line of credit of $225,000. Availability under the line of credit was $220,517 at January 3, 2016. The revolving line of credit bears interest at LIBOR plus an amount based on certain performance criteria (currently 175 basis points). The credit facility contains covenants including total debt to capitalization ratio, fixed charge coverage ratio and tangible asset coverage ratio. The Company was in compliance with all covenants at January 3, 2016 and December 28, 2014.

 

(7)

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 $229,217, $263,523 and $248,101 for the periods ended January 3, 2016, December 28, 2014, and December 29, 2013, respectively.

 

(8)

Commitments and Contingencies

 

a.Operating lease and rent expenses were $14,732, $13,392 and $6,628 for the years ended January 3, 2016, December 28, 2014, and December 29, 2013, respectively. As of January 3, 2016, minimum rental payments under noncancelable operating leases for machinery and equipment are summarized as follows:

 

 

 

 

 

 

 

    

Lease

 

 

 

commitments

 

2016

 

$

13,749 

 

2017

 

 

12,794 

 

2018

 

 

6,050 

 

2019

 

 

3,480 

 

2020

 

 

1,098 

 

Thereafter

 

 

4,946 

 

 

 

$

42,117 

 

 

b.The Company enters into thirdparty contracts for the purchase of poults, the supply of grain and other feed ingredients, and various critical supplies utilized in both its live and processing operations. The purchase commitment amounts listed in the table below are based on projected market prices and volume expectations as of January 3, 2016, and are summarized as follows:

 

 

 

 

 

 

 

    

Purchase

 

 

 

commitments

 

2016

 

$

266,620 

 

2017

 

 

4,379 

 

2018

 

 

644 

 

 

 

$

271,643 

 

 

 

 

15

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

c.The Company maintains selfinsurance 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 $550 per occurrence, depending on state law. Selfinsurance costs are accrued based upon the aggregate of the liability for reported claims and an estimated liability for claims incurred, but not yet reported. The accompanying statements of comprehensive income (loss) include expenses relating to selfinsurance plans of $38,122, $32,672, and $31,212 for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, respectively. A letter of credit in the amount of $4,149 has been issued as security for 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.

 

(9)

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. During the fourth quarter of 2015, the Company made a deductible contribution of $4,000, principally to avoid future PBGC variable rate premiums established pursuant to the ERISA. The Company anticipates making sufficient contributions during fiscal year 2016 in order to avoid variable rate premiums imposed by the PBGC.

 

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

 

 

 

 

 

 

2016

    

$

1,327 

 

2017

 

 

1,442 

 

2018

 

 

1,521 

 

2019

 

 

1,610 

 

2020

 

 

1,707 

 

2021–2025

 

 

10,142 

 

 

 

$

17,749 

 

 

Balances in accumulated other comprehensive income (loss) are as follows:

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016 

 

2014 

 

Unrecognized actuarial (loss)

 

$

(5,424)

 

(5,440)

 

 

The Company expects to recognize $136 of accumulated other comprehensive (loss) into net periodic benefit cost in fiscal 2016.

 

 

16

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

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 plans to the net amounts measured and recognized in the balance sheet.

 

 

 

 

 

 

 

 

 

    

January 3,

    

December 28,

 

 

 

2016 

 

2014 

 

Change in benefit obligation:

 

 

 

 

 

 

Benefit obligation – beginning of year

 

$

43,008 

 

35,421 

 

Interest cost

 

 

1,697 

 

1,744 

 

Actuarial (gain) loss

 

 

(2,577)

 

9,089 

 

Provision paid

 

 

(1,306)

 

(2,842)

 

Settlement gain

 

 

 

(404)

*

Benefit obligation – end of year

 

 

40,822 

 

43,008 

 

Change in plan assets:

 

 

 

 

 

 

Fair value of plan assets – beginning of year

 

 

34,050 

 

34,303 

 

Actual return on plan assets

 

 

(328)

 

2,178 

 

Employer contributions

 

 

4,000 

 

411 

 

Benefits paid

 

 

(1,306)

 

(2,842)

 

Fair value of plan assets – end of year

 

 

36,416 

 

34,050 

 

Funded status

 

 

(4,406)

 

(8,958)

 

Net liability recognized in the balance sheet

 

$

(4,406)

 

(8,958)

 


*Lump sum amounts in total were $404 less than the projected benefit obligation.

 

Components of net periodic (income) cost are:

 

 

 

 

 

 

 

 

 

 

 

 

Years ended

 

 

    

January 3,

    

December 28,

    

December 29,

 

 

 

2016

 

2014

 

2013

 

Interest cost on projected benefit obligation

 

$

1,697 

 

1,744 

 

1,611 

 

Expected return on assets

 

 

(2,342)

 

(2,464)

 

(1,716)

 

Net amortization loss

 

 

111 

 

 

506 

 

Net periodic pension (income) expense

 

 

(534)

 

(720)

 

401 

 

One-time additional expense from settlement accounting

 

 

 

241 

 

 

Total pension (income) expense

 

$

(534)

 

(479)

 

401 

 

 

 

 

17

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

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

 

 

 

Benefit obligations

 

Benefit costs

 

 

 

years ended

 

years ended

 

 

    

January 3,

    

December 28,

    

January 3,

    

December 28,

 

 

 

2016

 

2014

 

2016

 

2014

 

Discount rate

 

4.4 

%  

4.0 

%  

4.0 

%  

4.0 

%

Expected long-term rate of return on assets

 

7.0 

 

7.2 

 

7.0 

 

7.2 

 

Rate of increase in maximum benefit and compensation limits

 

4.0 

 

4.0 

 

4.0 

 

4.0 

 

 

The Companys expected longterm return on plan assets assumption is based on a periodic review and modeling of the plans asset allocation and liability structure over a longterm horizon. The expected longterm 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 longterm 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 longterm asset allocation profile to adequately fund the plans benefit obligations, while incurring an acceptable pension cost to the Company.

 

The Companys defined benefit pension plan weighted average asset allocations by asset category are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 3, 2016

 

December 28, 2014

 

 

    

Market value

    

Percent

    

Market value

    

Percent

 

Mutual funds

 

$

33,912 

 

93.2 

%  

$

31,433 

 

92.3 

%

Annuities

 

 

2,151 

 

5.9 

 

 

2,179 

 

6.4 

 

Common stocks

 

 

 

 

 

 

 

Principal cash

 

 

353 

 

0.9 

 

 

438 

 

1.3 

 

 

 

$

36,416 

 

100.0 

%  

$

34,050 

 

100.0 

%

 

 

 

18

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

The Companys 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 has 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. At January 3, 2016 and December 28, 2014, the liability related to this plan was approximately $3,660 and $3,767, respectively. The assets of the plan consisted of life insurance policies with face amounts of approximately $10,365, and cash values of approximately $4,341 and $4,198, at January 3, 2016 and December 28, 2014, respectively. On the accompanying balance sheet, the asset is reported in other assets. On the balance sheet as of December 28, 2014, the liability was included in other liabilities. Due to managements intention to terminate the plan during early 2016, the liability as of January 3, 2016 has been included in accrued expenses.

 

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 9(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 3, 2016 and December 28, 2014, the liability related to this plan was approximately $3,107 and $3,017, respectively, and the assets of the Rabbi Trust consisted of mutual funds and cash and cash equivalents of approximately $2,937 and $2,834, respectively. The assets are reported in other assets and the liability is included in other liabilities on the accompanying balance sheet.

 

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 3, 2016 and December 28, 2014, the liability related to this plan was approximately $8,166 and $7,227, respectively. Assets of the plan held in a Rabbi Trust consisted of life insurance policies with face amounts of approximately $21,991, and cash values of approximately $8,448 and $7,724 held in underlying investments of cash and various mutual funds, at January 3, 2016 and December 28, 2014, respectively. The assets are reported in other assets and the liability is included in other liabilities on the accompanying balance sheet.

 

 

19

(Continued)

 


 

BUTTERBALL, LLC

Notes to Financial Statements

January 3, 2016 and December 28, 2014

(In thousands)

e.The Company sponsors defined contribution benefit plans (401(k) plans) covering substantially all employees meeting eligibility requirements. The Companys contributions vary depending on the plan, but are based primarily on each participants level of contribution and cannot exceed the maximum allowable for tax purposes. Total contributions were $3,066, $2,748 and $2,482 for the years ended January 3, 2016, December 28, 2014 and December 29, 2013, 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 3, 2016:

 

 

 

 

 

 

 

 

 

 

Pension plan assets:

 

 

 

 

 

 

 

 

 

 

Cash

 

$

353 

 

 

 

353 

 

Mutual funds

 

 

8,155 

 

25,757 

 

 

33,912 

 

Annuities

 

 

 

 

2,151 

 

2,151 

 

Deferred compensation assets:

 

 

 

 

 

 

 

 

 

 

Cash

 

 

785 

 

 

 

785 

 

Mutual funds

 

 

10,770 

 

 

 

10,770 

 

Cash value – life  insurance

 

 

 

 

4,431 

 

4,431 

 

Total assets at fair value

 

$

20,063 

 

25,757 

 

6,582 

 

52,402 

 

 

 

 

20