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 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

 

 

For the quarterly period ended February 26, 2011

or

 

 

 

For the transition period from       ___     to       ___    .

 

Commission file number 333-115164

U.S. PREMIUM BEEF, LLC
(Exact name of registrant as specified in its charter)

12200 North Ambassador Drive
Kansas City, MO 64163
(Address of principal executive offices)

Telephone: (866) 877-2525
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer þ

Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant’s units are not traded on an exchange or in any public market.  As of April 6, 2011, there were 735,385 Class A units and 755,385 Class B units outstanding.    

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	TABLE OF CONTENTS
PART I.	FINANCIAL INFORMATION	Page No.
Item 1.	Financial Statements.	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	16
Item 4.	Controls and Procedures.	17
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings.	19
Item 1A.	Risk Factors.	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19
Item 3.	Defaults Upon Senior Securities.	19
Item 4.	Submission of Matters to a Vote of Security Holders.	19
Item 5.	Other Information.	19
Item 6.	Exhibits.	19
	Signatures.	20

 

 

Unless the context indicates or otherwise requires, the terms “the Company”, “we”, “our” and “us” refer to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.) and its consolidated subsidiaries. As used in this report, the terms “NBP” and “National Beef” refer to National Beef Packing Company, LLC (formerly known as Farmland National Beef Packing Company, LP), a Delaware limited liability company, and “USPB” refers to U.S. Premium Beef, LLC (formerly known U.S. Premium Beef, Ltd.) prior to consolidation.

                                                                                               

 

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements (unaudited).

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

                              

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                               

 

 

 

 

 

 

 

 

 

                                                                                               

 

 

 

 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(1) Interim Financial Statements

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), for interim financial information; therefore, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included using management’s best estimates and judgments where appropriate.  These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period.  Actual results could differ materially from these estimates and judgments.  For further information, refer to the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements, which are included in the Company’s Annual Report on Form 10-K on file with the Securities and Exchange Commission (SEC), for the fiscal year ended August 28, 2010.  The results of operations for the interim periods presented are not necessarily indicative of the results for a full fiscal year.

(2) New Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures.  The ASU issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3 of the fair value measurement hierarchy.  This guidance will become effective for the Company’s year ending in fiscal year 2012.  The adoption of ASU No. 2010-06 should not significantly impact the Company’s consolidated financial position or results of operations.

(3) Inventories

Inventories at February 26, 2011 and August 28, 2010 consisted of the following (thousands of dollars):

	February 26, 2011				August 28, 2010
Dressed and boxed meat products		$	160,970		$	154,927
Beef by-products		42,290			46,891
Supplies and other		42,645			31,125
		$	245,905		$	232,943

 

(4) Comprehensive Income Attributable to USPB

Comprehensive income, which consists of net income and foreign currency translation adjustments, was as follows for the periods indicated (thousands of dollars):

		13 weeks ended				13 weeks ended			26 weeks ended			26 weeks ended
		February 26, 2011				February 27, 2010			February 26, 2011			February 27, 2010
	Net income		$	56,987		$	46,975		$	109,046		$	85,398
	Other comprehensive income (loss):
	Foreign currency translation adjustments		11			(4)			21			18
	Comprehensive income		$	56,998		$	46,971		$	109,067		$	85,416
	Comprehensive income attibutable to noncontrolling interest in:
	Kansas City Steak Company, LLC		(372)			(568)			(433)			(791)
	National Beef Packing Company, LLC		(18,564)			(15,174)			(35,113)			(27,909)
	Comprehensive income attributable to USPB		$	38,062		$	31,229		$	73,521		$	56,716

 

                                                                                               

 

 

 

 

 

 

 

(5) Noncontrolling Interests In NBP

At any time after certain dates, the earliest being July 31, 2010 in the case of NBPCo Holdings, the latest being July 31, 2011 in the case of certain affiliates of NBP’s Chief Executive Officer, Timothy M. Klein, (Klein Affiliates), NBPCo Holdings and the Klein Affiliates have the right to request that NBP repurchase their interests, the value of which is to be determined by a mutually agreed appraisal process or a specified formula.  If NBP is unable to effect the repurchase within a specified time, the requesting member(s) have the right to cause a sale process to commence.

Generally accepted accounting principles require the Company to determine the fair value of the noncontrolling interest in NBP at the end of each reporting period.  To the extent this value increases, the change in fair value is accreted over the redemption period.  In determining the fair value of the noncontrolling interest in NBP held by NBPCo Holdings as of February 26, 2011, management has considered previous redemption prices, valuations of peer companies and other factors.  The noncontrolling interest in NBP held by the Klein Affiliates as of February 26, 2011 was valued based upon a contractually stipulated formula.

The Company accounts for changes in the redemption value of these interests by accreting the change in value from the date of change through the earliest redemption date of the respective interests.  At February 26, 2011, the value of the noncontrolling interest in NBP was determined to be $315.9 million, which was in excess of its carrying value.  The total value of the noncontrolling interest in NBP at February 26, 2011, increased by approximately $42.0 million and $18.7 million compared to the value at November 27, 2011 and August 28, 2010, respectively.  The carrying value of the noncontrolling interest in NBP increased through accretion during the thirteen and twenty-six week periods ending February 26, 2011 by approximately $35.7 million and $49.9 million, respectively.  Offsetting the change in value of noncontrolling interest in NBP is a corresponding change in members’ capital.      

(6) Contingencies

NBP is a party to a number of lawsuits and claims arising out of the operation of its business.  Management believes the ultimate resolution of such matters should not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

(7)  Fair Value Measurements

The Company determines fair value utilizing a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.  The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3).  The three levels of inputs used to measure fair value are as follows:

• Level 1 – quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.

• Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

• Level 3 – unobservable inputs for an asset or liability.  Unobservable inputs should only be used to the extent observable inputs are not available.

The following table details the assets and liabilities measured at fair value on a recurring basis as of February 26, 2011 and August 28, 2010 and also the level within the fair value hierarchy used to measure each category of assets (thousands of dollars).

 

                                                                                               

 

					Quoted Prices in
					Active Markets				Significant Other			Significant
					for Identical				Observable			Unobservable
Description		February 26, 2011			Assets (Level 1)				Inputs (Level 2)			Inputs (Level 3)
Other current assets - derivatives		$	40,013			$	2,226		$	37,787		$	-
Other accrued expenses and
liabilities - derivatives		$	38,090			$	38,090		$	-		$	-
Noncontrolling interests in NBP		$	310,501			$	-		$	61,220		$	249,281
					Quoted Prices in
					Active Markets				Significant Other			Significant
					for Identical				Observable			Unobservable
Description		August 28, 2010			Assets (Level 1)				Inputs (Level 2)			Inputs (Level 3)
Other current assets - derivatives		$	15,563			$	61		$	15,502		$	-
Other accrued expenses and
liabilities - derivatives		$	14,672			$	14,672		$	-		$	-
Noncontrolling interests in NBP		$	291,746			$	-		$	61,854		$	229,892

 

Management has used certain contractual redemption prices in measuring the fair value of the Klein Affiliates share of the noncontrolling interest in NBP, which is included in level 2 as of February 26, 2011 and August 28, 2010.  NBPCo Holdings share of the noncontrolling interest in NBP is based upon unobservable inputs, thus included in level 3 as of February 26, 2011 and August 28, 2010.

The following table presents a reconciliation of noncontrolling interests measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the thirteen and twenty-six weeks ended February 26, 2011 (thousands of dollars).  

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		13 weeks ended			26 weeks ended
		February 26, 2011			February 26, 2011
Beginning Balance		$	211,571		$	229,892
	Allocation of year-to-date net income	15,103			28,590
	Class A priority distribution	(736)			(1,472)
	Class B distributions	(9,117)			(15,138)
	Equity distributions	-			(37,156)
	Appraisal valuation adjustment	32,460			44,565
Balance at February 26, 2011		$	249,281		$	249,281

 

(8) Disclosure about Derivative Instruments and Hedging Activities

As part of NBP’s ongoing operations, NBP is exposed to market risks such as changes in commodity prices.  To manage these risks, NBP may enter into the following derivative instruments pursuant to its established policies:

• Forward purchase contracts for cattle for use in the beef plants

• Exchange traded futures contracts for cattle

• Exchange traded futures contracts for grain

 

                                                                                               

 

While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive recordkeeping requirements associated with hedge accounting.  Accordingly, the gains and losses associated with the change in fair value of the instruments are recorded to net sales and cost of goods sold in the period of change.  Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as normal purchases and sales and not recorded at fair value.

NBP enters into certain commodity derivatives, primarily with a diversified group of highly rated counterparties.  The maximum amount of loss due to the credit risk of the counterparties, should the counterparties fail to perform according to the terms of the contracts, is deemed to be immaterial as of February 26, 2011.  The exchange-traded contracts have been entered into under a master netting agreement.  None of the derivatives entered into have credit-related contingent features.  NBP has $43.6 million in cash collateral posted on its derivative liabilities.  

The following table presents the fair values as discussed in Note 7 and other information regarding derivative instruments not designated as hedging instruments as of February 26, 2011 and August 28, 2010 (thousands of dollars):

February 26, 2011

Derivative Asset

Derivative Liability

Balance Sheet

Balance Sheet

Location

Fair Value

Location

Fair Value

Other current

Accrued expenses and

Commodity contracts

assets

$

40,013

other liabilities

$

38,090

Total

$

40,013

$

38,090

August 28, 2010

Derivative Asset

Derivative Liability

Balance Sheet

Balance Sheet

Location

Fair Value

Location

Fair Value

Other current

Accrued expenses and

Commodity contracts

assets

$

15,563

other liabilities

$

14,672

Total

$

15,563

$

14,672

 

The following table presents the impact of derivative instruments on the Consolidated Statement of Operations for the thirteen and twenty-six week periods ended February 26, 2011 and February 27, 2010, respectively (thousands of dollars):

 

Derivatives Not						Location of Gain (Loss)
Designated as Hedging						Recognized in Income			Amount of Gain (Loss) Recognized in
Instruments						on Derivatives			Income On Derivatives
								13 weeks ended				26 weeks ended
								February 26, 2011				February 26, 2011
Commodity contracts						Net sales			$	2,959		$	9,929
Commodity contracts						Cost of sales			(11,482)			(17,971)
		Total							$	(8,523)		$	(8,042)
								13 weeks ended				26 weeks ended
								February 27, 2010				February 27, 2010
Commodity contracts						Net sales			$	3,588		$	(3,169)
Commodity contracts						Cost of sales			4,393			7,937
		Total							$	7,981		$	4,768

 

 

(9) Income Attributable to USPB Per Unit

Under the LLC structure, earnings of the Company are to be distributed to unitholders based on their proportionate share of underlying equity, and, as a result, income attributable to USPB per unit (EPU) has been presented in the accompanying Consolidated Statement of Operations and in the table that follows.

Basic EPU excludes dilution and is computed by first allocating a portion of net income (loss) attributable to USPB to Class A units and the remainder is allocated to Class B units. On November 2, 2009, the Company’s members approved changing the allocation of income from 33% to the Class A’s and 67% to the Class B’s to 10% to the Class A’s and 90% to the Class B’s.  Accordingly, for the thirteen week period ended February 27, 2010, income was allocated 10% to the Class A’s and 90% to the Class B’s.  For the twenty-six week period ended February 27, 2010, the pro-rata share of income earned through November 1, 2009 was allocated 33% to the Class A’s and 67% to the Class B’s and the remainder of the income for the period was allocated 10% to the Class A’s and 90% to the Class B’s.  For the thirteen and twenty-six week periods ended February 26, 2011 income was allocated 10% to the Class A’s and 90% to the Class B’s.  Income (loss) allocated to the Class A and Class B units is then divided by the weighted-average number of Class A and Class B units outstanding for the period to determine the basic EPU for each respective class of unit.  Class A units and Class B units shall be issued, redeemed, and transferred together on a one for one basis until the board of directors determines the extent and conditions under which Class A units and Class B units may be issued, redeemed, and transferred separately.

Diluted EPU reflects the potential dilution that could occur if potential Class A unit purchase rights were exercised or contractual appreciation rights were converted into units.   Upon termination of the CEO employment agreement and until eighteen months after the termination of the CEO employment agreement, at the election of the CEO, or upon mutual agreement of the Board of the Company and the CEO, the CEO may purchase up to 20,000 Class A units, or upon agreement of the CEO and the Board of the Company, the CEO may convert the contractual unit appreciation rights to up to 20,000 Class A units.  The diluted EPU reflects the circumstances of termination of the CEO employment agreement, and the election of CEO or agreement by the Board of the Company and the CEO for the CEO to purchase or convert contractual rights to the maximum 20,000 Class A units at $55 per unit for the periods as provided in the CEO employment agreement. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10) Debt

 

10

                                                                                               

 

 

 

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report.

Disclosure Regarding Forward-Looking Statements

This report contains “forward-looking statements,” which are subject to a number of risks and uncertainties, many of which are beyond our control.  Forward-looking statements are typically identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions.  Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including economic conditions generally and in our principal markets, the availability and prices of live cattle and commodities, food safety, livestock disease, including the identification of cattle with Bovine Spongiform Encephalopathy (BSE), competitive practices and consolidation in the cattle production and processing industries, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers, loss of key employees, labor relations, and consolidation among our customers.

In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors.  See also Part II. Item 1A, Risk Factors, included in this report, and Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended August 28, 2010 on Form 10-K filed with the Securities and Exchange Commission for other important factors that could cause actual results to differ materially from those in any such forward-looking statements, and which should be read in conjunction with this report.

Industry Outlook

We anticipate strong beef demand to offset possible negative implications of year-over-year increases in fed cattle supplies into mid-summer.  Cattle placement has been active during the first calendar quarter as dry conditions in the Central and South Plains moved larger numbers of lightweight cattle onto feed.  We anticipate this early placement of calves, combined with smaller calf crops, to contribute to a decline in cattle supplies during the second half of calendar year 2011.  The long term cattle industry outlook remains essentially unchanged, although herd liquidation appears to be easing.   Export of beef products is expected to remain strong supported by an improving global economy and the value of the dollar relative to other major currencies.

Beef Export Markets

Export markets for U.S. beef products remain constrained since the discovery of a single case of BSE in the State of Washington in December 2003, as well as other isolated cases.  In July 2006, Japan agreed to reopen its market to U.S. beef from cattle aged 20 months and younger.  South Korea announced a provisional opening of its border to U.S. beef from animals 30 months and younger in September 2006 but subsequently closed its border again in October 2007.  South Korea reopened its border and started inspecting U.S. beef near the end of June 2008.  These constraints and uncertainties have historically had a negative impact on beef demand during the periods in which they occurred.

We cannot presently assess the full economic impact of the consequences of BSE on the U.S. beef packing industry or on our operations.  Existing or new import restrictions or additional regulatory restrictions or disruptions in domestic and foreign consumer demand for beef may have a material adverse effect on our revenues and net income.

 

 

                                                                                               

 

 

 

 

 

In December 2010, the United States Department of Agriculture (USDA) announced that China has agreed to resume talks with the Unites States regarding beef market access and that technical talks will resume with the goal of re-opening China’s market for U.S. beef under the age of 30 months in early 2011.  We cannot presently assess the full economic impact of the re-opening of China’s market to age verified beef on the U.S. beef packing industry or our operations, and there can be no assurance that such talks will occur or result in re-opening of China’s market to U.S. beef products.

In March 2011 a major earthquake followed by a tsunami hit the east coast of Japan and caused significant damage to parts of the country.  A portion of our export sales are delivered to Japan, and while we cannot presently assess the full long-term economic impact of the earthquake and tsunami on our operations, so far there have been few interruptions. 

Regulatory Developments

On June 22, 2010, the Grain Inspection and Packers and Stockyards Administration published a proposed rule adding new regulations under the Packers and Stockyards Act.  If adopted as currently proposed, the new regulations could have a significant impact on marketing and procurement practices in the beef processing industry and could affect how we procure cattle for our value-added programs and how we process and market value-added beef products. We cannot presently assess the full economic impact of the proposed rule on the beef processing industry or on our operations.

Results of Operations

Thirteen weeks ended February 26, 2011 compared to thirteen weeks ended February 27, 2010

General.  Net income for the thirteen weeks ended February 26, 2011 was approximately $57.0 million compared to net income of approximately $47.0 million for the thirteen weeks ended February 27, 2010, an improvement of approximately $10.0 million, or 21.3%.  Net sales were higher in the thirteen weeks ended February 26, 2011 compared to the thirteen weeks ended February 27, 2010 primarily due to a 20.1% increase in the net sales per head, as well as a 2.4% increase in the volume of cattle processed. 

Total costs and expenses of approximately $1,592.0 million for the thirteen weeks ended February 26, 2011, were 96.3% of net sales compared to approximately $1,286.7 million for the thirteen weeks ended February 27, 2010, or 96.0% of net sales.  Continued stable demand for beef products and increases in cattle prices during the second quarter of fiscal year 2011 as compared to the same period of fiscal year 2010 resulted in a slight increase in the percentage of total costs to net sales during the period.

Net Sales.  Net sales were approximately $1,652.6 million for the thirteen weeks ended February 26, 2011 compared to approximately $1,340.9 million for the thirteen weeks ended February 27, 2010, an increase of approximately $311.7 million, or 23.2%.  The increase in net sales resulted primarily from a 20.1% increase in the net sales per head during the thirteen weeks ended February 26, 2011 compared to the same period in the prior year, as the demand for beef products remained strong, and the price of beef products increased during the period.  Also contributing to the increase in net sales was an approximately 2.4% increase in the number of cattle processed compared to the same period of the prior year. 

Cost of Sales.  Cost of sales was approximately $1,562.4 million for the thirteen weeks ended February 26, 2011 compared to approximately $1,259.9 million for the thirteen weeks ended February 27, 2010, an increase of approximately $302.5 million, or 24.0%.   The increase was primarily a result of an approximately 23.9% increase in average cattle prices during the period compared to the prior period.  In addition, the cost of sales increase was partially due to the 2.4% increase in the volume of cattle processed.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were approximately $16.2 million for the thirteen weeks ended February 26, 2011 compared to approximately $13.6 million for the thirteen weeks ended February 27, 2010, an increase of approximately $2.6 million, or 19.1%.   The increase is primarily driven by a $1.7 million increase in accrued compensation associated with a higher estimated enterprise value for NBP, which impacts the compensation expense recorded for the CEO phantom unit plan, and the implementation of a management phantom unit plan in the current fiscal year.   

 

 

 

 

 

Depreciation and Amortization Expense.  Depreciation and amortization expenses were approximately $13.4 million for the thirteen weeks ended February 26, 2011 compared to approximately $13.2 million for the thirteen weeks ended February 27, 2010, an increase of approximately $0.2 million, or 1.5%.  Depreciation expense increased due to assets being placed into service, primarily at our three beef plants and two case ready plants, during fiscal year 2011.

Operating Income.  Operating income was approximately $60.6 million for the thirteen weeks ended February 26, 2011 compared to operating income of approximately $54.2 million for the thirteen weeks ended February 27, 2010, an improvement of approximately $6.4 million, or 11.8%.  The increased operating income resulted from an approximately 20.1% increase in net sales per head for and a 2.4% increase in the volume of cattle processed.  These increases are partially offset by an approximately 23.9% increase in average cattle prices during the period.   

Other, net.  Other, net non-operating income was approximately $0.2 million for the thirteen weeks ended February 26, 2011 compared to other, net non-operating expense of approximately $3.8 million for the thirteen weeks ended February 27, 2010, an improvement of  approximately $4.0 million.  During the thirteen weeks ended February 27, 2010, we expensed $2.2 million incurred in connection with the attempted IPO by National Beef, Inc. in December 2009.  In addition, during the thirteen weeks ended February 27, 2010, we expensed approximately $1.8 million of legal fees, and the remaining senior notes issuance fees of $0.2 million.

Income Tax Expense/Benefit.  Income tax expense was $0.4 million for the thirteen weeks ended February 26, 2011 compared to an income tax of $0.0 million for the same period of fiscal year 2010, a tax expense increase of $0.4 million.  Income tax expense is recorded on taxable income from National Carriers, Inc., which is organized as a C Corporation, and the apportioned taxable income of USPB by certain states which impose privilege taxes. 

Twenty-six weeks ended February 26, 2011 compared to twenty-six weeks ended February 27, 2010

General.  Net income for the twenty-six weeks ended February 26, 2011 was approximately $109.0 million compared to net income of approximately $85.4 million for the twenty-six weeks ended February 27, 2010, an improvement of approximately $23.6 million, or 27.6%.  Net sales were higher in the twenty-six weeks ended February 26, 2011 compared to those of the prior period primarily due to an increase in net sales per head of approximately 17.2%, and an approximately 3.2% increase in the volume of cattle processed. 

Total costs and expenses of $3,124.9 million for the twenty-six weeks ended February 26, 2011 were 96.5% of net sales compared to $2,585.9 million for the twenty-six weeks ended February 27, 2010, or 96.4% of net sales.  Total costs as a percentage of sales are similar primarily due to the increase in net sales per head of approximately 17.2%, offset by an increase in cattle prices of approximately 19.6% for the comparable periods. 

Net Sales.  Net sales were approximately $3,239.9 million for the twenty-six weeks ended February 26, 2011 compared to approximately $2,683.5 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $556.4 million, or 20.7%.  The increase in net sales resulted primarily from an average increase in net sales per head of 17.2%, and an increase in the volume of cattle processed by approximately 3.2% in the twenty-six weeks ended February 26, 2011, as compared to the same period in the prior year.

Cost of Sales.  Cost of sales was approximately $3,067.8 million for the twenty-six weeks ended February 26, 2011 compared to approximately $2,533.2 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $534.6 million, or 21.1%.  The increase was primarily a result of an approximately 19.6% increase in average cattle prices during the period, and an approximately 3.2% increase in the number of cattle processed during the period. 

 

 

                                                                                               

 

 

 

 

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were approximately $30.6 million for the twenty-six weeks ended February 26, 2011 compared to approximately $26.8 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $3.8 million, or 14.2%.  The increase for the period is primarily due to an approximately $1.6 million increase in compensation expense associated with a higher estimated enterprise value for NBP, which impacts the compensation expense recorded for the CEO phantom unit plan, and the implementation of a management phantom unit plan in the current fiscal year, a $0.8 million increase in consulting expenses, approximately $0.7 million increase in salaries expense and an increase in travel expenses of approximately $0.5 million during the current period as compared to the same period of the prior year.  These increases are offset by a decrease in bad debt expense of approximately $0.3 million during the period.  

Depreciation and Amortization Expense.  Depreciation and amortization expenses were approximately $26.5 million for the twenty-six weeks ended February 26, 2011 compared to approximately $26.0 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $0.5 million, or 1.9%.  Depreciation expense increased due to assets being placed into service, primarily at our three beef plants and two case ready plants, during fiscal year 2011.

Operating Income.  Operating income was approximately $115.0 million for the twenty-six weeks ended February 26, 2011 compared to operating income of approximately $97.6 million for the twenty-six weeks ended February 27, 2010, an improvement of approximately $17.4 million, or 17.8%.  The increased operating income primarily resulted from an approximately 17.2% increase in net sales per head and a 3.2% increase in the volume of cattle processed.  These increases are partially offset by an approximately 19.6% increase in average cattle prices during the period.   

Interest Expense.  Interest expense was approximately $6.1 million for the twenty-six weeks ended February 26, 2011 compared to $8.1 million for the twenty-six weeks ended February 27, 2010, a decrease of approximately $2.0 million, or 24.7%.  The decrease in interest expense during the twenty-six weeks ended February 26, 2011 as compared to the same period in the prior fiscal year was due primarily to an average daily interest rate reduction from 4.5% to 2.8%.  This decrease was primarily the result of purchasing and cancelling the remaining $66.9 million of our Senior Notes during the twenty-six weeks ended February 27, 2010.

Other, net.  Other, net non-operating income was approximately $0.8 million for the twenty-six weeks ended February 26, 2011 compared to other, net non-operating expense of approximately $3.8 million for the twenty-six weeks ended February 27, 2010, an improvement of  approximately $4.6 million.  During the twenty-six weeks ended February 27, 2010, we expensed $2.2 million incurred in connection with the attempted IPO by National Beef, Inc. in December 2009.  In addition, during the twenty-six weeks ended February 27, 2010, we expensed approximately $1.8 million of legal fees, and the remaining senior notes issuance fees of $0.4 million.

Income Tax Expense.  Income tax expense was $0.7 million for the twenty-six weeks ended February 26, 2011 compared to $0.4 million for the same period of fiscal year 2010, an increase of $0.3 million.  Income tax expense is recorded on taxable income from National Carriers, Inc., which is organized as a C Corporation, and the apportioned taxable income of NBP by certain states which impose privilege taxes.

Liquidity and Capital Resources

As of February 26, 2011, we had net working capital of approximately $266.2 million, which included $22.9 million in distributions payable, and cash and cash equivalents of $50.6 million.  As of August 28, 2010, we had net working capital of approximately $208.6 million, which included cash and cash equivalents of $35.4 million, with $8.4 million in distributions payable.  NBP’s primary sources of liquidity are cash flow from operations and available borrowings under its amended and restated credit facility (Credit Facility).

As of February 26, 2011, we had $437.2 million of long-term debt, $39.0 million of which was classified as a current liability.  As of February 26, 2011, NBP’s Credit Facility consisted of a term loan, of which $360.8 million was outstanding and a $250.0 million revolving line of credit loan, which had outstanding borrowings of $57.0 million, outstanding letters of credit of $24.1 million and available borrowings of $168.9 million, based on the most restrictive financial covenant calculations.  We also had a term loan with CoBank of which $0.6 million was outstanding and a $10.0 million revolving line of credit with CoBank all of which was available.  Cash flows from operations and borrowings under NBP’s Credit Facility have funded its working capital requirements, acquisitions, capital expenditures and other general corporate purposes.  USPB and NBP were in compliance with all of the financial covenants under the Credit Facilities as of February 26, 2011.

 

                                                                                               

 

 

 

 

 

In addition to outstanding borrowings under NBP Credit Facility, NBP had outstanding borrowings under industrial revenue bonds of $12.2 million and capital leases and other obligations of $6.6 million as of February 26, 2011.

We believe that available borrowings under NBP’s Credit Facility and cash provided by operating activities will be sufficient to support its working capital, capital expenditures and debt service requirements for the foreseeable future.  NBP’s ability to generate sufficient cash, however, is subject to certain general economic, financial, industry, legislative, regulatory and other factors beyond its control.  For a review of our obligations that affect liquidity, please see the “Cash Payment Obligations” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended August 28, 2010.

Operating Activities

Net cash provided by operating activities in the twenty-six weeks ended February 26, 2011 was approximately $55.5 million compared to net cash provided by operating activities of approximately $75.3 million in the twenty-six weeks ended February 27, 2010.  The $19.8 million change in operating activities was primarily due to a decrease in working capital changes during the period.  The working capital changes were primarily related to an increase in cash paid in fiscal year 2011 for bonuses earned in fiscal year 2010 and an increase in cash collateral posted on derivatives liabilities.  These decreases are partially offset by an increase in net income of approximately $23.6 million during the twenty-six weeks ended February 26, 2011 as compared to the twenty-six weeks ended February 27, 2010. 

Investing Activities

Net cash used in investing activities was approximately $30.0 million in the twenty-six weeks ended February 26, 2011 compared to approximately $17.3 million in the twenty-six weeks ended February 27, 2010.  This increase in cash used was primarily attributable to an approximate $13.7 million increase in expenditures for property, plant and equipment during the twenty-six weeks ended February 26, 2011 as compared to the twenty-six weeks ended February 27, 2010.

Financing Activities

Net cash used in financing activities was approximately $10.3 million during the twenty-six weeks ended February 26, 2011 compared to approximately $51.4 million during the twenty-six weeks ended February 27, 2010.  The change was primarily attributed to additional $100.0 million of borrowings on the term loan during the twenty-six weeks ended February 26, 2011 compared to the prior year period.  In addition, the remaining $66.9 million was purchased and cancelled on NBP’s senior notes during the twenty-six weeks ended February 27, 2010.  These increases in cash provided by financing activities were partially offset by an additional $139.7 million in member distributions made during the twenty-six weeks ended February 26, 2011 compared to the twenty-six weeks ended February 27, 2010. 

Amended and Restated Senior Credit Facility

Effective as of June 4, 2010, NBP’s Credit Facility was amended and restated to: (1) increase the borrowings under the Credit Facility by providing for a term loan facility of up to $375 million and a revolving line of credit of up to $250 million; (2) reduce the applicable margin on the rates of interest of the term loan and revolving line of credit; (3) revise the payment schedule of the term loan; (4) extend the maturity date of the Credit Facility to June 4, 2015; (5) remove limitations on capital expenditures; (6) add new financial covenants regarding adjusted net worth and a fixed charge coverage ratio; and (7) add two wholly owned subsidiaries, National Beef California, LP and National Carriers, Inc., as loan parties and guarantors. The lender financing charges for the amended and restated Credit Facility of approximately $4.7 million are being amortized over the life of the loan.

On November 29, 2010, NBP drew $175 million under the Credit Facility. The draw was made to fund distributions to NBP’s members and for general corporate purposes. The draw constitutes the last of a series of term loans under the Credit Facility not to exceed $375 million in the aggregate.

                                                                                               

 

 

 

 

 

The borrowings under the Credit Facility bear interest at LIBOR or the Base Rate, plus the applicable margin. The applicable margin for the revolving line of credit and the term loan will be as set forth on a grid based on different ratios of funded debt to EBITDA. As of February 26, 2011, the interest rates for the term loan and revolving loan were both approximately 2.52%.

The borrowings under the revolving loan are available for NBP’s working capital requirements, capital expenditures and other general corporate purposes. The advance rates under the borrowing base are 90% on eligible accounts and 70% on eligible inventory. The Credit Facility is secured by a first priority lien on substantially all of NBP’s assets and the assets of its subsidiaries.

The principal amount outstanding under the term loan is due and payable in equal quarterly installments beginning in October 2010, based on a 10-year level amortization of the remaining amount of the term loan. All outstanding loan amounts are due and payable on June 4, 2015. Prepayment of the loans is allowed at any time.

The Credit Facility contains customary affirmative covenants relating to NBP and its subsidiaries, including, without limitation, conduct of business, maintenance of insurance, compliance with laws, maintenance of properties, keeping of books and records, and the furnishing of financial statements.  The facility also contains customary negative covenants relating to NBP and its subsidiaries, including, without limitation, restrictions on: distributions, mergers, asset sales, investments and acquisitions, encumbrances, affiliate transactions, and ERISA matters. The ability of NBP and its subsidiaries to engage in other business, incur debt or grant liens is also restricted.

The Credit Facility contains customary events of default, including, without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of NBP’s property, changes in control of NBP, failure of any of the loan documents to remain in full force, and NBP’s failure to properly fund its employee benefit plans. The Credit Facility also includes customary provisions protecting the lenders against increased costs or loss of yield resulting from changes in tax, reserve, capital adequacy and other requirements of law.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The principal market risks affecting NBP’s business are exposure to changes in prices for commodities, such as livestock and boxed beef, and interest rate risk.

Commodities. NBP uses various raw materials, many of which are commodities. Raw materials are generally available from several different sources, and NBP presently believes that it can obtain them as needed.  Commodities are subject to price fluctuations that may create price risk. When appropriate, NBP may hedge commodities in order to mitigate this price risk. While this may tend to limit its ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity prices.  To the extent the contracts are not designated as normal purchases, NBP reflects commodity contract gains and losses as adjustments to the basis of underlying commodities purchased; gains or losses are recognized in the statement of operations as a component of costs of goods sold.

NBP purchases cattle for use in its processing businesses. From time to time, NBP enters into forward purchase contracts at prices determined prior to the delivery of the cattle. The commodity price risk associated with these activities can be hedged by selling (or buying) the underlying commodity, or by using an appropriate commodity derivative instrument. The particular hedging instrument NBP uses depends on a number of factors, including availability of appropriate derivative instruments.

 

                                                                                               

 

 

 

 

 

NBP sells commodity beef products in its business. Commodity beef products are subject to price fluctuations that may create price risk. From time to time, NBP enters into forward sales contracts at prices determined prior to shipment. NBP may hedge the commodity price risk associated with these activities in order to mitigate this price risk.  While this may tend to limit its ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity beef prices.  To the extent the contracts are not designated as normal sales, NBP reflects commodity contract gains and losses as adjustments to the basis of underlying commodities sold; gains or losses are recognized in the statement of operations as a component of net sales.

From time to time, NBP purchases cattle futures and options contracts.  Its primary use of these contracts is to partially fix its future input costs when NBP has committed forward sales purchase orders from customers at a specified fixed price.  The longest duration futures contract owned is sixteen months.  In accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities, as amended, NBP accounts for futures contracts and their related firm purchase commitments at fair value.  Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as “normal purchases and sales” and not marked to market.  ASC Topic 815 imposes extensive recordkeeping requirements in order to treat a derivative instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.

While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.

NBP uses a sensitivity analysis to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments.  NBP feels the sensitivity analysis appropriately reflects the potential market value exposure associated with the use of derivative instruments.  As of February 26, 2011 and August 28, 2010, the potential change in the fair value of the derivative instruments NBP holds that are not designated as normal purchases or sales, assuming a hypothetical 10% decrease in the underlying commodity price in each year, was $4.0 million and $0.3 million, respectively. 

Interest Rates.  As a result of our normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest rates, which we manage primarily through our regular financing activities. We generally maintain limited investments in cash and cash equivalents.

We have long-term debt with variable interest rates. Short-term debt is primarily comprised of the current portion of long-term debt maturing twelve months from the balance sheet date.  Our variable interest expense is sensitive to changes in the general level of interest rates.   As of February 26, 2011, the weighted average interest rate on our $430.5 million of variable rate debt was approximately 2.45%.  As of August 28, 2010, the weighted average interest rate on our $240.2 million of variable rate debt was approximately 2.77%. 

We had total interest expense of approximately $6.1 million during the twenty-six week period ending February 26, 2011.  The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $3.4 million during in the twenty-six week period ending February 26, 2011.

Foreign Operations.  Transactions denominated in a currency other than an entity’s functional currency may expose that entity to currency risk. Although we operate in international markets including Japan and South Korea, product sales are predominately made in United States dollars, and therefore, currency risks are limited.

 

                                                                                               

 

 

 

Item 4.  Controls and Procedures.

 

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the Consolidated Financial Statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective in alerting them, in a timely manner, to material information required to be included in our periodic Securities and Exchange Commission filings.  There have been no changes in our internal controls over financial reporting during the thirteen weeks ended February 26, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.

 

 

 

 

 

 

                                                                                               

 

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

For information regarding legal proceedings, see Note 6. Contingencies to our Consolidated Financial Statements included in Part I- Item 1 of this Form 10-Q, which is incorporated herein by reference.

Item 1A. Risk Factors.

The risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended August 28, 2010 have not materially changed.  Please refer to the Company’s report on Form 10-K for the fiscal year ended August 28, 2010 to consider those risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None

Item 5. Other Information.

None.        

Item 6. Exhibits.

(A)	Exhibits
3.0	Amended and Restated Limited Liability Company Agreement of U.S. Premium Beef, LLC, dated as of March 2, 2011 (incorporated herein by reference to Exhibit 3.1 to Form 8-K (File No. 333-115164) filed with the SEC on March 7, 2011).
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of the Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

                                                                                               

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

                                                                                                              

 

 

 

 

 

Date: April 8, 2011