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EX-31 - U. S. Premium Beef, LLCex31-2.htm
EX-31 - U. S. Premium Beef, LLCex31-1.htm
EX-32 - U. S. Premium Beef, LLCex32-1.htm
EX-32 - U. S. Premium Beef, LLCex32-2.htm

 

 


 

 

 

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended November 26, 2011

or

 

 

 

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

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)

DELAWARE

 

20-1576986

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

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 small 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 Small 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 December 31, 2011, there were 735,385 Class A units and 755,385 Class B units outstanding.    



 


 

 

 

 

 

 

TABLE OF CONTENTS

 

 

PART I.

FINANCIAL INFORMATION

Page No.

 

 

 

Item 1.

Financial Statements (unaudited).

1

 

 

 

Item 2.

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

12

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

17

 

 

 

Item 4.

Controls and Procedures.

18

 

 

 

 

 

 

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.

21

 

 

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.

 

 

 

 

 

                                                                                               

ii


 


 


 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements (unaudited).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1


                                                                                               


 


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Consolidated Balance Sheets

(thousands of dollars, except unit data)

 

 

 

 

 

November 26,

 

August 27,

 

 

 

 

Assets

2011

 

2011

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,437 

 

$

78,567 

 

Accounts receivable, less allowance for returns and doubtful accounts

 

 

 

 

 

of $3,200 and $3,368, respectively

179,109 

 

200,254 

 

Due from affiliates

 

5,764 

 

5,868 

 

Other receivables

 

9,986 

 

7,448 

 

Inventories

 

 

302,329 

 

276,783 

 

Other current assets

 

31,140 

 

25,975 

 

 

Total current assets

 

585,765 

 

594,895 

Property, plant, and equipment, at cost

 

619,042 

 

608,261 

 

Less accumulated depreciation

 

282,016 

 

271,877 

 

 

Net property, plant, and equipment

337,026 

 

336,384 

Goodwill

 

 

86,251 

 

86,251 

Other intangible assets, net of accumulated amortization

 

 

 

 

of $18,757 and $ 18,230, respectively

55,995 

 

56,520 

Other assets

 

 

8,342 

 

8,119 

 

 

Total assets

 

$

1,073,379 

 

$

1,082,169 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Capital Shares and Equities

 

 

 

Current liabilities:

 

 

 

 

 

 

Current installments of long-term debt

$

38,505 

 

$

38,486 

 

Cattle purchases payable

 

98,757 

 

73,407 

 

Accounts payable - trade

 

85,866 

 

81,245 

 

Due to affiliates

 

684 

 

486 

 

Accrued compensation and benefits

 

33,218 

 

83,124 

 

Accrued insurance

 

20,092 

 

17,271 

 

Other accrued expenses and liabilities

18,805 

 

19,946 

 

Distributions payable

 

629 

 

8,199 

 

 

Total current liabilities

 

296,556 

 

322,164 

Long-term liabilities:

 

 

 

 

 

Long-term debt, excluding current installments

340,617 

 

321,926 

 

Other liabilities

 

1,871 

 

1,954 

 

 

Total long-term liabilities

 

342,488 

 

323,880 

 

 

Total liabilities

 

639,044 

 

646,044 

 

Non-controlling interest in NBP

 

314,329 

 

351,071 

Capital shares and equities:

 

 

 

 

 

Members' capital, 735,385 Class A units and 755,385 Class B units

 

 

 

 

 

authorized, issued and outstanding

74,681 

 

39,768 

 

Patronage notices

 

42,122 

 

42,130 

 

Accumulated other comprehensive income

40 

 

68 

 

 

Total capital shares and equities attributable to USPB

116,843 

 

81,966 

 

Non-controlling interest in Kansas City Steak Company, LLC

3,163 

 

3,088 

 

 

Total Capital Shares and Equities

 

120,006 

 

85,054 

 

 

Total liabilities, noncontrolling interest in NBP and capital shares and equities

$

1,073,379 

 

$

1,082,169 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

2


 


U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Consolidated Statements of Operations

(thousands of dollars, except per unit and per unit data)

 

 

 

 

 

 

 

13 weeks ended

 

13 weeks ended

 

 

 

 

 

 

 

November 26, 2011

 

November 27, 2010

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

 

 

 

$

1,775,715 

 

$

1,587,320 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

1,733,255 

 

1,505,439 

 

Selling, general, and administrative expenses

 

15,342 

 

14,421 

 

Depreciation and amortization

 

11,138 

 

13,062 

 

 

Total costs and expenses

 

1,759,735 

 

1,532,922 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

15,980 

 

54,398 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

12 

 

Interest expense

 

 

 

 

(2,300)

 

(2,609)

 

Other, net

 

 

 

 

955 

 

592 

 

 

 

Income before taxes

 

14,643 

 

52,393 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

 

 

(566)

 

(334)

 

 

 

Net income

 

 

 

14,077 

 

52,059 

Less: Net income attibutable to noncontrolling interest in:

 

 

 

 

 

Kansas City Steak Company, LLC

 

(75)

 

(62)

 

National Beef Packing Company, LLC

 

(5,074)

 

(16,548)

Net income attributable to U.S. Premium Beef, LLC

 

$

8,928 

 

$

35,449 

 

 

 

 

 

 

 

 

 

 

 

Earnings per unit:

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

$

1.21 

 

$

4.82 

 

 

Class B units

 

 

 

 

$

10.64 

 

$

42.24 

 

Diluted

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

$

1.19 

 

$

4.75 

 

 

Class B units

 

 

 

 

$

10.64 

 

$

42.24 

 

 

 

 

 

 

 

 

 

 

 

Outstanding weighted-average Class A and Class B units:

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

735,385 

 

735,385 

 

 

Class B units

 

 

 

 

755,385 

 

755,385 

 

Diluted

 

 

 

 

 

 

 

 

 

 

Class A units

 

 

 

 

748,139 

 

746,063 

 

 

Class B units

 

 

 

 

755,385 

 

755,385 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3


 


 

 

U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(thousands of dollars)

 

 

 

 

 

 

 

 

13 weeks ended

 

13 weeks ended

 

 

 

 

 

 

 

 

November 26, 2011

 

November 27, 2010

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

 

 

 

$

14,077 

 

$

52,059 

 

Adjustments to reconcile net income to net cash (used in) provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,138 

 

13,062 

 

 

Gain on disposal of property, plant, and equipment

 

(747)

 

(365)

 

 

Amortizaton of debt issuance costs

 

318 

 

345 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

21,145 

 

4,767 

 

 

 

Due from affiliates

 

 

 

106 

 

177 

 

 

 

Other receivables

 

 

 

(2,538)

 

(461)

 

 

 

Inventories

 

 

 

(25,546)

 

(7,868)

 

 

 

Other assets

 

 

 

(5,714)

 

(22,177)

 

 

 

Cattle purchases payable

 

 

16,625 

 

15,986 

 

 

 

Accounts payable

 

 

 

2,693 

 

(608)

 

 

 

Due to affiliates

 

 

 

196 

 

202 

 

 

 

Accrued compensation and benefits

 

(49,906)

 

(48,431)

 

 

 

Accrued insurance

 

 

 

2,821 

 

2,793 

 

 

 

Other accrued expenses and liabilities

 

(1,224)

 

7,993 

 

 

 

 

Net cash (used in) provided by operating activities

(16,556)

 

17,474 

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures, including interest capitalized

 

(12,415)

 

(13,407)

 

Proceeds from sale of property, plant, and equipment

 

1,913 

 

776 

 

 

Net cash used in investing activities

 

(10,502)

 

(12,631)

Cash flows from financing activities:

 

 

 

 

 

 

Net receipts under revolving credit lines

 

28,242 

 

37,991 

 

Payments of term notes payable

 

 

 

(9,250)

 

(5,258)

 

Repayments of other indebtedness / capital leases

 

(282)

 

(279)

 

Payments of patronage notices

 

 

 

(8)

 

 

Change in overdraft balances

 

 

 

10,653 

 

(882)

 

Distributions to noncontrolling interests in National Beef Packing Company, LLC

(10,720)

 

(10,132)

 

Member distributions

 

 

 

(12,679)

 

(13,417)

 

 

 

 

Net cash provided by financing activities

 

5,956 

 

8,023 

 

Effect of exchange rate changes on cash

 

(28)

 

10 

 

 

 

 

Net (decrease) increase in cash

 

(21,130)

 

12,876 

Cash and cash equivalents at beginning of the period

 

78,567 

 

35,439 

Cash and cash equivalents at end of the period

 

$

57,437 

 

$

48,315 

Supplemental cash disclosures:

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$

2,163 

 

$

2,450 

 

Cash paid during the period for taxes, net of refunds

 

$

118 

 

$

14 

Supplemental non-cash disclosures of investing and financing activities:

 

 

 

 

Assets acquired through capital lease

 

$

 

$

52 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

4


 


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 27, 2011.  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 May 2011, the Financial Accounting Standards Board (FASB), issued Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS under ASU 2011-04, or ASU 2011-04.  ASU 2011-04 amends ASC 820, Fair Value Measurements (ASC 820), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 will be effective for the Company's third quarter of fiscal year 2012.  The amendments in ASU 2011-04 are to be applied prospectively.  The adoption of ASU 2011-04 is not expected to have a material effect on the Company's consolidated financial statements, but may require certain additional disclosures.

In June 2011, the FASB issued Presentation of Comprehensive Income under ASU 2011-05 or ASU 2011-05.  ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for the Company's first quarter of fiscal year 2013.  The adoption of ASU 2011-05 may require a change in the presentation of the Company's comprehensive income from the statement of capital shares and equities to the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The amendments in ASU 2011-05 are to be applied retrospectively.   The adoption of ASU 2011-05 is not expected to have a material effect on the Company's consolidated financial statements.

In September 2011, the FASB issued Testing Goodwill for Impairment under ASU 2011-08, which is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities with the option of performing a qualitative assessment to determine whether impairment testing is necessary.  The revised standard will be effective for annual and interim goodwill impairment tests performed beginning in the first quarter of fiscal year 2013, with early adoption permitted under certain circumstances.  The Company is currently evaluating options related to early adoption.

(3) Inventories

Inventories at November 26, 2011 and August 27, 2011 consisted of the following (thousands of dollars):

5


 


 

 

 

 

 

 

November 26, 2011

 

August 27, 2011

 

 

 

 

 

Dressed and boxed meat products

 

$

184,970 

 

$

173,853 

Beef by-products

 

56,595 

 

57,009 

Supplies and other

 

60,764 

 

45,921 

 

 

$

302,329 

 

$

276,783 

(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

 

 

 

November 26, 2011

 

November 27, 2010

Net income

 

$

14,077 

 

$

52,059 

Other comprehensive (loss) income:

 

 

 

 

 

Foreign currency translation adjustments

 

(28)

 

10 

 

 

Comprehensive income

 

$

14,049 

 

$

52,069 

Comprehensive income attibutable to noncontrolling interest in:

 

 

 

 

 

Kansas City Steak Company, LLC

 

(75)

 

(62)

 

National Beef Packing Company, LLC

 

(5,074)

 

(16,548)

Comprehensive income attributable to USPB

 

$

8,900 

 

$

35,459 

 

 

 

 

 

 

 

 

(5) Non-controlling Interests In NBP

At any time after certain dates, the earliest being July 31, 2010, the latest being July 31, 2011, certain affiliates of NBP’s Chief Executive Officer, Timothy M. Klein (collectively referred to herein as “the Klein Affiliates”), and/or NBPCo Holdings, LLC (NBPCo Holdings) have the right to request that NBP repurchase their interests, the value of which is to be determined by a specified formula or a mutually agreed appraisal process.  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 non-controlling interest in NBP at the end of each reporting period.  The carrying value of non-controlling interest in NBP reflects fair value.  In determining the fair value of the non-controlling interest in NBP held by NBPCo Holdings as of November 26, 2011 management considered the negotiated equity value for the transaction with Leucadia National Corporation (Leucadia) (see Note 10); in determining the fair value as of August 27, 2011, management considered previous redemption prices, valuations of peer companies and other factors.  The non-controlling interest in NBP held by the Klein Affiliates as of November 26, 2011 and August 27, 2011 was valued based upon a contractually stipulated valuation formula. 

At November 26, 2011, the value of the non-controlling interest in NBP was determined to be $314.3 million, which was equal to its carrying value.  The total value of the non-controlling interest in NBP at November 26, 2011, decreased by approximately $36.7 million compared to the value at August 27, 2011.  The carrying value of the non-controlling interest in NBP decreased approximately $38.2 million through valuation changes during the fiscal quarter ending November 26, 2011, resulting in the $314.3 million carrying value, as reflected in the accompanying consolidated balance sheet as of November 26, 2011.  Offsetting the change in the value of the non-controlling interest in NBP is a corresponding change in the members’ capital.      

(6) Contingencies

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

6


 


 

 

(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 November 26, 2011 and August 27, 2011 and also the level within the fair value hierarchy used to measure each category of assets (thousands of dollars).

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

 

Identical Assets

 

Observable Inputs

 

Unobservable

Description

 

November 26, 2011

 

(Level 1)

 

(Level 2)

 

Inputs (Level 3)

 

 

 

 

 

 

 

 

 

Other current assets - derivatives

 

$

5,085 

 

$

 

$

5,085 

 

$

 

 

 

 

 

 

 

 

 

Other accrued expenses and liabilities - derivatives

 

$

4,662 

 

$

4,662 

 

$

 

$

 

 

 

 

 

 

 

 

 

Non-controlling interests in NBP

$

314,329 

 

$

 

$

75,947 

 

$

238,382 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

Active Markets for

 

Significant Other

 

Significant

 

 

 

 

Identical Assets

 

Observable Inputs

 

Unobservable

Description

 

August 27, 2011

 

(Level 1)

 

(Level 2)

 

Inputs (Level 3)

 

 

 

 

 

 

 

 

 

Other current assets - derivatives

 

$

4,022 

 

$

 

$

4,022 

 

$

 

 

 

 

 

 

 

 

 

Other accrued expenses and liabilities - derivatives

 

$

5,860 

 

$

5,860 

 

$

 

$

 

 

 

 

 

 

 

 

 

Non-controlling interests in NBP

$

351,071 

 

$

 

$

75,922 

 

$

275,149 

 

 

 

 

 

 

 

 

 

 

Management has used certain agreed-upon contractual redemption prices in measuring the fair value of the Klein Affiliates non-controlling interest, which is included in Level 2 as of November 26, 2011 and August 27, 2011. 

 

Management considered the negotiated equity value for the transaction with Leucadia and other unobservable inputs in measuring the fair value of the NBPCo Holdings non-controlling interest in NBP, which is included in level 3 as of November 26, 2011.  As of August 27, 2011, NBPCo Holdings non-controlling interest was based upon unobservable inputs and was included in Level 3.

 

 

 

7


                                                                                               


 


The following table represents a reconciliation of non-controlling interests in NBP measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the fiscal quarter ended November 26, 2011 (thousands of dollars):

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

 

Non-controlling Interest 

 

 

In NBP

 

 

 

Balance at August 27, 2011

$

275,149 

 

Allocation of year-to-date net income

4,216 

 

Class A priority distribution

(736)

 

Class B distributions

(2,016)

 

Appraisal valuation adjustment

(38,231)

Balance at November 26, 2011

$

238,382 

 

 

 

(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 helps 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 November 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 $12.3 million and $14.5 million in cash collateral posted on its derivative liabilities included in other assets on the consolidated balance sheet as of November 26, 2011 and August 27, 2011, respectively.  

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 November 26, 2011 and August 27, 2011 (thousands of dollars):

November 26, 2011

Derivative Asset

 

Derivative Liability

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

 

Location

 

Fair Value

 

Location

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other accrued

 

 

 

 

Other current

 

 

 

expenses and

 

 

Commodity contracts

assets

 

$

5,085 

 

liabilities

 

$

4,662 

 

Total

 

 

 

 

$

5,085 

 

 

 

$

4,662 

August 27, 2011

Derivative Asset

 

Derivative Liability

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

 

Location

 

Fair Value

 

Location

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other accrued

 

 

 

 

Other current

 

 

 

expenses and

 

 

Commodity contracts

assets

 

$

4,022 

 

liabilities

 

$

5,860 

 

Total

 

 

 

 

$

4,022 

 

 

 

$

5,860 

 

 

 

 

 

 

 

 

 

 

 

 

8


                                                                                               


 


 

 

 

 

 

 

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

 

Derivatives Not

 

Location of Gain (Loss)

 

 

 

 

 

Designated as Hedging

 

Recognized in Income on

 

 

Amount of Gain (Loss) Recognized in

Instruments

 

Derivatives

 

 

Income On Derivatives

 

 

 

 

 

 

 

13 weeks ended

 

13 weeks ended

 

 

 

 

 

 

 

November 26, 2011

 

November 27, 2010

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Net sales

 

 

$

3,390 

 

$

6,970 

Commodity contracts

 

Cost of sales

 

 

(5,014)

 

(6,489)

 

Total

 

 

 

 

$

(1,624)

 

$

481 

 

(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 Statements 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.  For the thirteen week periods ended November 26, 2011 and November 27, 2010, 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 the 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. 

 

 

 

 

 

 

9


                                                                                               


 


 

Income Per Unit Calculation

 

 

 

 

 

 

13 weeks ended

 

13 weeks ended

(thousands of dollars, except unit and per unit data)

November 26, 2011

 

November 27, 2010

 

 

 

(unaudited)

 

(unaudited)

Basic income per unit

 

 

 

Income attributable to USPB available to

 

 

 

 

unitholders (numerator)

 

 

 

 

 

Class A

$

893 

 

$

3,545 

 

 

Class B

$

8,035 

 

$

31,904 

 

 

 

 

 

 

Weighted average outstanding units (denominator)

 

 

 

 

Class A

735,385 

 

735,385 

 

Class B

755,385 

 

755,385 

 

 

 

 

 

 

Per unit amount

 

 

 

 

Class A

$

1.21 

 

$

4.82 

 

Class B

$

10.64 

 

$

42.24 

 

 

 

 

 

 

Diluted income per unit:

 

 

 

Income attributable to USPB available to

 

 

 

 

unitholders (numerator)

 

 

 

 

 

Class A

$

893 

 

$

3,545 

 

 

Class B

$

8,035 

 

$

31,904 

 

 

 

 

 

 

Weighted average outstanding Class A units

735,385 

 

735,385 

Effect of dilutive securities - Class A unit options

12,754 

 

10,678 

 

Units (denominator)

748,139 

 

746,063 

 

 

 

 

 

 

Weighted average outstanding Class B units

755,385 

 

755,385 

Effect of dilutive securities - Class B unit options

 

 

Units (denominator)

755,385 

 

755,385 

 

 

 

 

 

 

Per unit amount

 

 

 

 

Class A

$

1.19 

 

$

4.75 

 

Class B

$

10.64 

 

$

42.24 

 

(10) Subsequent Events

On December 5, 2011, USPB and the other members of NBP entered into a Membership Interest Purchase Agreement with Leucadia National Corporation (Leucadia) (Purchase Agreement), pursuant to which Leucadia agreed to purchase from USPB and NBPCo Holdings a substantial portion of the issued and outstanding membership interests in NBP. 

 

 

10


                                                                                               


 


 

 

 

 

Following approval of the Purchase Agreement and the related transactions by the Company’s members on December 29, 2011, the transactions contemplated by the Purchase Agreement were completed on December 30, 2011.  Pursuant to the Purchase Agreement, Leucadia purchased 56.2415% of the membership interests in NBP (National Interests) from the Company for approximately $646.8 million and 19.8775% of the National Interests from NBPCo Holdings for approximately $228.6 million.  As contemplated by the Purchase Agreement and pursuant to pre-existing put rights, NBP purchased from TKK Investments, LLC (TKK) and TMKCo, LLC (TMKCo) all National Interests owned by TKK and TMKCo for approximately $75.9 million.  Simultaneously, Leucadia sold to TMK Holdings, LLC 0.6522% of the National Interests for $7.5 million.  Following consummation of the various transactions contemplated by the Purchase Agreement, the parties now own the following percentage membership interests in NBP: Leucadia 78.9477%; the Company 15.0729%; NBPCo Holdings 5.3272%; and TMK Holdings, LLC 0.6522%.

When the transaction closed, the Company received consideration of approximately $646.8 million; of that amount approximately $609.8 million was immediately paid to USPB in cash.  The remaining amount of approximately $37.0 million was deposited in an escrow account to satisfy potential indemnification claims from Leucadia under the Purchase Agreement.  If no indemnification claims arise during a period of two years after the closing of the Purchase Agreement, those remaining funds (or any portion remaining after payment of any indemnification claims) will be distributed to USPB.  USPB will distribute a portion of the cash consideration received at closing to each unitholder in the amount of approximately $70 (before applicable tax withholding, if any) for each USPB Class A unit and $617 for each USPB Class B unit held by such unitholder.  The total distribution to Class A and Class B unitholders will be approximately $517.7 million.  The Company also will repay all outstanding patronage notices, which total approximately $42.1 million.  In addition, the Company’s fiscal year has been changed to the last Saturday in December. 

As part of the transactions with Leucadia, the Company entered into a Cattle Purchase and Sale Agreement with NBP, pursuant to which the Company will facilitate the delivery of cattle from the Company’s unitholders and associates to NBP.  NBP, in the aggregate, will purchase on an annual basis, a base amount of 735,385 head of cattle annually, subject to an adjustment of plus or minus ten percent (10%).  The Cattle Purchase and Sale Agreement will remain in effect for an initial term of five years. 

In connection with completion of the transactions governed by the Purchase Agreement, the Company entered into a Pledge Agreement with NBP (Pledge Agreement).  The Pledge Agreement was entered into in order to secure the payment and performance of the Company’s obligations under the Cattle Purchase and Sale Agreement. Under the terms of the Pledge Agreement, the Company has granted NBP a perfected security interest in and to the Company’s Membership Interests in NBP (Collateral), subject only to the prior first priority security interest in the Collateral held by CoBank, ACB (CoBank), up to a maximum principal amount of $15.0 million plus fees and expenses, pursuant to Pledge Agreement dated July 26, 2011 by and between the Company and CoBank. 

On December 2, 2011, NBP and its subsidiaries National Beef California, LP and National Carriers, Inc. entered into the Third Amendment to the Amended and Restated Credit Agreement and Limited Consent with CoBank, ACB and various other lenders (Third Amendment). The Third Amendment amends the Amended and Restated Credit Agreement dated as of June 4, 2010 (Credit Facility). The Third Amendment became effective contemporaneously with the closing of the Purchase Agreement. The primary purpose of the Third Amendment was to amend the Credit Facility to (i) consent to the Purchase Agreement, (ii) take into account the formation of National Beef Pennsylvania, LLC (National Beef PA) and the corresponding contribution by NBP of certain assets to National Beef PA, (iii) provide for the addition of National Beef PA as a borrower under the Credit Facility, and (iv) permit NBP’s fiscal year to change to a fifty-two or fifty-three week period ending on the last Saturday in December. The principal provisions of the Credit Facility are unchanged by the Third Amendment.


11

 


 


 

 

 

 

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 issues, livestock disease, including the identification of cattle with Bovine Spongiform Encephalopathy, or BSE, product contamination and recall concerns, competitive practices and consolidation in the cattle production and processing industries and among our customers, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, trade barriers and exchange controls, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers, loss of key employees, labor relations, and consolidation among our customers.

In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors.  Please review Part II. Item 1A, Risk Factors, included in this report, for other important factors that could cause actual results to differ materially from those in any such forward-looking statements.

Recent Events 

On December 5, 2011, USPB and the other members of NBP entered into a Membership Interest Purchase Agreement with Leucadia National Corporation (Purchase Agreement), pursuant to which Leucadia agreed to purchase from USPB and NBPCo Holdings a substantial portion of the issued and outstanding membership interests in NBP. 

Following approval of the Purchase Agreement and the related transactions by the Company’s members on December 29, 2011, the transactions contemplated by the Purchase Agreement were completed on December 30, 2011.  Pursuant to the Purchase Agreement, Leucadia purchased 56.2415% of the membership interests in NBP (National Interests) from the Company for approximately $646.8 million and 19.8775% of the National Interests from NBPCo Holdings for approximately $228.6 million.  As contemplated by the Purchase Agreement and pursuant to pre-existing put rights, NBP purchased from TKK Investments, LLC (TKK) and TMKCo, LLC (TMKCo) all National Interests owned by TKK and TMKCo for approximately $75.9 million.  Simultaneously, Leucadia sold to TMK Holdings, LLC 0.6522% of the National Interests for $7.5 million.  Following consummation of the various transactions contemplated by the Purchase Agreement, the parties now own the following percentage membership interests in NBP: Leucadia 78.9477%; the Company 15.0729%; NBPCo Holdings 5.3272%; and TMK Holdings, LLC 0.6522%.

When the transaction closed, the Company received consideration of approximately $646.8 million; of that amount approximately $609.8 million was immediately paid to USPB in cash.  The remaining amount of approximately $37.0 million was deposited in an escrow account to satisfy potential indemnification claims from Leucadia under the Purchase Agreement.  If no indemnification claims arise during a period of two years after the closing of the Purchase Agreement, those remaining funds (or any portion remaining after payment of any indemnification claims) will be distributed to USPB.  USPB will distribute a portion of the cash consideration received at closing to each unitholder in the amount of approximately $70 (before applicable tax withholding, if any) for each USPB Class A unit and $617 for each USPB Class B unit held by such unitholder.  The total distribution to Class A and Class B unitholders will be approximately $517.7 million.  The Company also will repay all outstanding patronage notices, which total approximately $42.1 million.  In addition, the Company’s fiscal year has been changed to the last Saturday in December. 

12


                                                                                               


 


 

 

 

 

As part of the transactions with Leucadia, the Company entered into a Cattle Purchase and Sale Agreement with NBP, pursuant to which the Company will facilitate the delivery of cattle from the Company’s unitholders and associates to NBP.  NBP, in the aggregate, will purchase on an annual basis, a base amount of 735,385 head of cattle annually, subject to an adjustment of plus or minus ten percent (10%).  The Cattle Purchase and Sale Agreement will remain in effect for an initial term of five years. 

In connection with completion of the transactions governed by the Purchase Agreement, the Company entered into a Pledge Agreement with NBP (Pledge Agreement).  The Pledge Agreement was entered into in order to secure the payment and performance of the Company’s obligations under the Cattle Purchase and Sale Agreement.  Under the terms of the Pledge Agreement, the Company has granted NBP a perfected security interest in and to the Company’s Membership Interests in NBP (Collateral), subject only to the prior first priority security interest in the Collateral held by CoBank, ACB (CoBank), up to a maximum principal amount of $15.0 million plus fees and expenses, pursuant to Pledge Agreement dated July 26, 2011 by and between the Company and CoBank.

The events described in this “Recent Events” section were disclosed by USPB in reports on Form 8-K filed with the Securities and Exchange Commission on December 6, 2011 and December 30, 2011, respectively. 

Overall Industry Outlook

Growing global demand and a positive net beef trade continues to provide strong underlying support for record cattle and beef prices. Cattle on feed continue to be higher than prior year led by drought related placements out of the Southern Plains and Southwest. The drought has kept herd liquidation active, although slowing during the winter months, and will be a key area of focus going into 2012 in this very important cow-calf region. As inventory levels remain restricted and global trade positive, we expect cattle and beef prices to remain at record levels through at least 2012. 

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.

Results of Operations

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

13


                                                                                               


 


 

 

 

 

General.  Net income for the thirteen weeks ended November 26, 2011 was approximately $14.1 million compared to net income of approximately $52.1 million for the thirteen weeks ended November 27, 2010, a decrease of approximately $38.0 million, or 72.9%

Total costs and expenses of approximately $1,759.7 million for the thirteen weeks ended November 26, 2011, were 99.1% of net sales compared to approximately $1,532.9 million for the thirteen weeks ended November 27, 2010, or 96.6% of net sales.  Continued stable demand for beef products and increases in cattle prices during the first quarter of fiscal year 2012 as compared to the same period of fiscal year 2011 resulted in an increase in the percentage of total costs to net sales during the period. 

Net Sales.  Net sales were approximately $1,775.7 million for the thirteen weeks ended November 26, 2011 compared to approximately $1,587.3 million for the thirteen weeks ended November 27, 2010, an increase of approximately $188.4 million, or 11.9%.  The increase in net sales resulted primarily from a 16.3% increase in the net sales per head during the thirteen weeks ended November 26, 2011 compared to the same period in the prior year, as the demand for beef products remained strong, and price of beef products increased during the period. 

Cost of Sales.  Cost of sales was approximately $1,733.3 million for the thirteen weeks ended November 26, 2011 compared to approximately $1,505.4 million for the thirteen weeks ended November 27, 2010, an increase of approximately $227.9 million, or 15.1%.   The increase was primarily a result of an approximately 21.3% increase in average cattle prices during the period compared to the prior period, partially offset by an approximately 2.4% decrease in the total amount of cattle processed during the period. 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were approximately $15.3 million for the thirteen weeks ended November 26, 2011 compared to approximately $14.4 million for the thirteen weeks ended November 27, 2010, an increase of approximately $0.9 million, or 6.3%.  This increase is primarily related to a $0.7 million increase in legal expenses and a $0.6 million increase in salaries expense.     

Depreciation and Amortization Expense.  Depreciation and amortization expenses were approximately $11.1 million for the thirteen weeks ended November 26, 2011 compared to approximately $13.1 million for the thirteen weeks ended November 27, 2010, a decrease of approximately $2.0 million, or 15.3%.  Depreciation expense decreased primarily due to approximately $102.1 million of machinery and equipment that was put into service in prior periods becoming fully depreciated during the period.  

Operating Income.  Operating income was approximately $16.0 million for the thirteen weeks ended November 26, 2011 compared to operating income of approximately $54.4 million for the thirteen weeks ended November 27, 2010, a decrease of approximately $38.4 million, or 70.6%.  The decreased operating income primarily resulted from an approximately 21.3% increase in average cattle prices during the period. 

Interest Expense.  Interest expense was $2.3 million for the thirteen weeks ended November 26, 2011 compared to $2.6 million for the thirteen weeks ended November 27, 2010, a decrease of $0.3 million, or 11.5%.  

Income Tax Expense.  Income tax expense was $0.6 million and $0.3 million for the thirteen weeks ended November 26, 2011 and November 27, 2010, respectively.  Income tax expense is recorded on taxable income from National Carriers, which is organized as a C Corporation and the apportioned taxable income of NBP by certain states which impose privilege taxes. 

Net Income.  As a result of the factors described above, net income for the thirteen-week period ended November 26, 2011 was approximately $14.1 million compared to net income of approximately $52.1 million for the thirteen-week period ended November 27, 2010, a decrease of approximately $38.0 million, or 72.9%.

Net Income Attributable to Noncontrolling Interest in NBP.  Noncontrolling interest in the net income of NBP for the thirteen weeks ended November 26, 2011 was $5.1 million compared to $16.5 million in the same period a year ago, a decrease of $11.4 million. The noncontrolling interest in NBP represents the minority owners’ interest in NBP’s earnings.

14


                                                                                               


 


 

 

 

 

Net Income Attributable to USPB.  Net income attributable to USPB for the thirteen-week period ended November 26, 2011 was approximately $8.9 million compared to net income of approximately $35.4 million for the thirteen-week period ended November 27, 2010, a decrease of approximately $26.5 million, or 74.9%.

Liquidity and Capital Resources

As of November 26, 2011, we had net working capital of approximately $289.2 million, which included $0.6 million in distributions payable, and cash and cash equivalents of $57.4 million.  As of August 27, 2011, we had net working capital of approximately $272.7 million, which included cash and cash equivalents of $78.6 million, with $8.2 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 November 26, 2011, we had $379.1 million of long-term debt, of which $38.5 million was classified as a current liability.  As of November 26, 2011, our Credit Facility consisted of a term loan, of which $333.0 million was outstanding, and a $250.0 million revolving line of credit loan, which had outstanding borrowings of $28.2 million, outstanding letters of credit of $22.2 million and available borrowings of $199.6 million, based on the most restrictive financial covenant calculations.  We also had a $15.0 million revolving term loan 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 November 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 lease and other obligations of $5.7 million as of November 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 27, 2011.

Operating Activities

Net cash used in operating activities in the thirteen weeks ended November 26, 2011 was approximately $16.6 million compared to net cash provided by operating activities of approximately $17.5 million in the thirteen weeks ended November 27, 2010.  The $34.1 million change was primarily due to an approximately $38.0 million decrease in net income during the period.  The remaining difference is the result of various working capital changes during the period.  

Investing Activities

Net cash used in investing activities was approximately $10.5 million in the thirteen weeks ended November 26, 2011 compared to approximately $12.6 million in the thirteen weeks ended November 27, 2010.  This change in cash used was primarily attributable to an approximate $1.0 million decrease in expenditures for property, plant and equipment during the thirteen weeks ended November 26, 2011 as compared to the thirteen weeks ended November 27, 2010.

Financing Activities

Net cash provided by financing activities was approximately $6.0 million in the thirteen weeks ended November 26, 2011 compared to net cash provided by financing activities of approximately $8.0 million in the thirteen weeks ended November 27, 2010.  There were various financing activity changes during the period, including an additional $4.0 million paid on the term loan during the thirteen weeks ended November 26, 2011 compared to the prior year period.  In addition, net receipts under revolving credit lines decreased approximately $9.8 million during the thirteen weeks ended November 26, 2011, compared to the prior year.  These increases in cash provided by financing activities were partially offset by an $11.5 million change in overdraft balances during the thirteen weeks ended November 26, 2011 compared to the thirteen weeks ended November 27, 2010. 

 

 

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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 $4.2 million are being amortized over the life of the loan. 

On June 10, 2011, NBP’s Credit Facility was amended and restated to: (1) reduce the applicable margin by up to 0.75% for “LIBOR Rate” advances and “Base Rate” advances, (2) revise the “fixed charge coverage ratio” covenant provisions to provide NBP credit of up to $30 million for maintaining net asset borrowing base levels that exceed the lenders' aggregate credit commitments under the Credit Facility and (3) extend the maturity date of the Credit Facility to June 4, 2016.  The related financing charges of approximately $0.8 million will be amortized over the life of the loan.

On December 2, 2011, NBP and its subsidiaries National Beef California, LP and National Carriers, Inc. entered into the Third Amendment to the Amended and Restated Credit Agreement and Limited Consent with CoBank, ACB and various other lenders (Third Amendment). The Third Amendment amends the Amended and Restated Credit Agreement dated as of June 4, 2010 (Credit Facility). The Third Amendment became effective contemporaneously with the closing of the Purchase Agreement. The primary purpose of the Third Amendment was to amend the Credit Facility to (i) consent to the Purchase Agreement, (ii) take into account the formation of National Beef Pennsylvania, LLC (National Beef PA) and the corresponding contribution by NBP of certain assets to National Beef PA, (iii) provide for the addition of National Beef PA as a borrower under the Credit Facility, and (iv) permit NBP’s fiscal year to change to a fifty-two or fifty-three week period ending on the last Saturday in December. The principal provisions of the Credit Facility are unchanged by the Third Amendment.

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 November 26, 2011, the interest rates for the term loan and revolving loan were approximately 2.00% and 4.00%, respectively. 

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.

Effective as of the June 10, 2011 amendment, the principal amount outstanding under the term loan is due and payable in equal quarterly installments of $9.25 million. All outstanding loan amounts are due and payable on June 4, 2016. Prepayment of the loans is allowed at any time.

The Credit Facility contains customary affirmative covenants relating to NBP LLC 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. 

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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 NBP’s 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 NBP’s 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. 

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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 November 26, 2011 and August 27, 2011, 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 $2.0 million and $11.6 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. 

NBP has 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.  NBP’s variable interest expense is sensitive to changes in the general level of interest rates.  As of November 26, 2011, the weighted average interest rate on NBP’s $373.5 million of variable rate debt was approximately 2.12%. As of August 27, 2011, the weighted average interest rate on NBP’s $254.5 million of variable interest debt was approximately 1.90%. 

NBP had total interest expense of approximately $2.3 million during the thirteen week period ending November 26, 2011.  The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $1.8 million in the thirteen week period ending November 26, 2011

Foreign Operations.  Transactions denominated in a currency other than an entity’s functional currency may expose that entity to currency risk.  Although NBP operates 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 November 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.

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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 Proxy Statement filed with the Securities and Exchange Commission on December 6, 2011, which was filed as Exhibit 20.1 to our report on Form 8-K, have not materially changed.  Please refer to the Company’s Proxy Statement with respect to the Leucadia transaction 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.

A Special Meeting of Members of the Company was held on December 29, 2011.  December 5, 2011 was fixed as the record date for determining those members of the Company entitled to vote at the Special Meeting and any adjournments or postponements of the meeting.  Two proposals were presented for member consideration.  The first was to consider and vote upon a proposal to adopt and approve the Purchase Agreement and the various transactions contemplated by the Purchase Agreement.  The second proposal was to grant the persons named as proxies discretionary authority to vote to adjourn the Special Meeting, if necessary, for the purpose of soliciting additional proxies to vote in favor of the approval and adoption of the Purchase Agreement and approval of the proposed transaction.

Under the Company’s Certificate of Formation, Limited Liability Company Agreement (as amended) and applicable Delaware law, the affirmative vote of members holding a majority of the voting power of each class of units was required to approve the Purchase Agreement and the contemplated transactions.  The Company’s members holding Class A units are each entitled to one vote per member, and the Company’s members holding Class B units are each entitled to one vote per Class B unit owned by such member.  For the Class A members, out of 451 votes, 428 members voted for the first proposal and 427 members voted for the second proposal.  For the Class B units, out of 754,230 votes, 748,061 units were voted for the first proposal and 747,861 units voted for the second proposal.  Therefore each proposal was adopted by the Company’s members.

Item 5. Other Information.

None.        

Item 6. Exhibits.

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(A)

 

Exhibits

10.1

 

Second Amendment to CEO Employment Agreement between U.S. Premium Beef, LLC and Steven D. Hunt (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 6, 2011).

 

       
10.2   Escrow Agreement dated December 30, 2011 between and among the Company, Leucadia National Corporation, NBPCo Holdings, LLC, and Marshall & Ilsley Trust Company, N.A. (incorporated herein by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 20111).  
       
10.3   Cattle Purchase and Sale Agreement dated December 30, 2011  between the Company and National Beef Packing Company, LLC(incorporated herein by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 2011).  
       
10.4  

Pledge Agreement dated December 30, 2011 between the Company and National Beef Packing Company, LLC, with attached Consent and First Amendment to Pledge Agreement and Security Agreement dated December 30, 2011 between the Company and CoBank, ACB(incorporated herein by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K (File No. 333-115164) filed with the SEC on December 30, 2011).

 
       
20.1   Proxy Statement regarding proposed transaction sent by U.S. Premium Beef, LLC to it members on or about December 5, 2011(incorporated herein by reference to Exhibit 20.1 to Company's Current Report on Form 8-K (File No. 333-111407) filed with the SEC on December 6, 2011).  
       
31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).  

 

 

 

 

31.2

 

Certification of the 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).

 

 

 

 

 

 

 

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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.

 

 

                                                                                                              

 

  U.S. Premium Beef, LLC
     

 

 

 

By:

 

/s/ Steven D. Hunt

 

 

 

 

 

Steven D. Hunt
Chief Executive Officer

(Principal Executive Officer)

     
     
     

By:

 

/s/ Scott J. Miller

   

Scott J. Miller
 Chief Financial Officer

(Principal Financial and Accounting Officer)

     
     

 

 

 

 

 

 

 

Date: January 10, 2012