UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark one)

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

For the quarterly period ended September 29, 2018
or

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

For the transition period from ___ to ___ .

Commission file 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 ☑ No ☐

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

     Indicate by check mark 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 ☐   Accelerated Filer ☐    Non-Accelerated Filer  ☑    Small Reporting Company ☐

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

     The registrant’s units are not traded on an exchange or in any public market. As of October 27, 2018, there were 735,385 Class A units and 755,385 Class B units outstanding.

     Unless the context indicates or otherwise requires, the terms “USPB”, “the Company”, “we”, “our”, and “us” refer to U.S. Premium Beef, LLC. As used in this report, the terms “NBP” and “National Beef” refer to National Beef Packing Company, LLC, a Delaware limited liability company.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited).

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U.S. PREMIUM BEEF, LLC
Balance Sheets
(thousands of dollars, except unit information)

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U.S. PREMIUM BEEF, LLC
Statements of Operations
(thousands of dollars, except per unit and per unit data)

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U.S. PREMIUM BEEF, LLC
Statements of Cash Flows
(thousands of dollars)

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U.S. PREMIUM BEEF, LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

(1) Interim Financial Statements

Basis of Presentation and Significant Accounting Policies

     The accompanying unaudited 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 Financial Statements and Notes to 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 December 30, 2017. The results of operations for the interim periods presented are not necessarily indicative of the results for a full fiscal year.

     USPB’s 15.0729% investment in NBP is accounted for using the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operational control.

     In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, Leases. The new standard requires the recognition of all leases that are longer than one year on the balance sheet, which will result in the recognition of a right-of-use asset and a corresponding lease liability. The right-of -use asset and lease liability will be measured initially using the present value of the remaining rental payments. The new standard is effective for annual and interim periods beginning after December 15, 2018. We are currently evaluating the impact of the new guidance but do not believe it will have a material impact on our financial statements.

(2) Members’ Capital

     The following table represents a reconciliation of Members’ Capital for the thirty-nine week period ended September 29, 2018 (thousands of dollars).

(3) Earnings Per Unit

     Under the LLC structure, earnings of the Company are to be allocated to unitholders based on their proportionate share of underlying equity. Earnings Per Unit (EPU) has been presented in the accompanying Statements of Operations and in the table that follows.

     Basic EPU excludes dilution and is computed by first allocating a portion of USPB’s comprehensive income to Class A units and the remainder is allocated to Class B units. For the thirteen and thirty-nine week periods ended September 29, 2018 and fourteen and thirty-nine week periods ended September 30, 2017, 10% of USPB’s comprehensive income was allocated to the Class A’s and 90% to the Class B’s. The comprehensive income allocated to the Class A and Class B units were 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.

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     Diluted EPU reflects the potential dilution that could occur to the extent that any outstanding dilutive Class A or Class B units were exercised. There are no potentially dilutive Class A or Class B units outstanding.

(4) Investment in National Beef Packing Company, LLC

     USPB’s investment in NBP is accounted for using the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operational control. Below is a summary of the results of operations for NBP for the thirteen and thirty-nine week periods ended September 29, 2018 and fourteen and thirty-nine week periods ended September 30, 2017 (thousands of dollars):

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

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

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, 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.

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     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.

Investment in National Beef Packing Company, LLC

     NBP processes and markets fresh and chilled boxed beef, ground beef, beef by-products, consumer-ready beef and pork, and wet blue leather for domestic and international markets. NBP operates two beef processing facilities, three consumer-ready facilities and a wet blue tanning facility, all located in the U.S. NBP operates one of the largest wet blue tanning facilities in the world that sells processed hides to tanners that produce finished leather for the automotive, luxury goods, apparel and furniture industries. NBP owns Kansas City Steak Company, LLC, which sells portioned beef and other products directly to customers through the internet, direct mail and direct response television. NBP also owns a refrigerated and livestock transportation and logistics company that provides transportation services for NBP and third parties.

     NBP’s profitability is dependent, in large part, on the spread between its cost for live cattle, the primary raw material for its business, and the value received from selling boxed beef and other products, coupled with its overall volume. NBP operates in a large and liquid commodity market and it does not have much influence over the price it pays for cattle or the selling price it receives for the products it produces. NBP’s profitability typically fluctuates seasonally, with relatively higher margins in the spring and summer months and during times of ample cattle availability. NBP's fiscal year consists of 52 or 53 weeks, ending on the last Saturday in December and its quarters range from twelve to fourteen weeks ending on the last Saturday of March, June, September or December.

     Revenues in the thirty-nine weeks ended September 29, 2018 increased 2% in comparison to the same period in 2017, primarily due to an increase in the number of cattle processed. Cost of sales were virtually unchanged, as the effect of an increase in the number of cattle processed was offset by a lower average cost per head, for the thirty-nine weeks ended September 29, 2018 as compared to the same period in 2017. The combined effects of increased margin per head and an increase in volume processed led to higher profitability in 2018, as compared to 2017.

     On December 30, 2011, USPB entered into a Cattle Purchase and Sale Agreement with NBP. Per the terms and conditions of this agreement, NBP is required to purchase through USPB from its owners and associates, and USPB is required to sell and deliver from its owners and associates to NBP, a base amount of 735,385 (subject to adjustment) head of cattle per year with prices based on those published by the U.S. Department of Agriculture, subject to adjustments for cattle performance. NBP obtained approximately 26% and 24% of its cattle requirements under this agreement during the thirty-nine weeks ended September 29, 2018 and thirty-nine weeks ended September 30, 2017, respectively.

USPB Results of Operations

Thirteen weeks ended September 29, 2018 compared to fourteen weeks ended September 30, 2017

     Net Sales. There were no Net Sales in the thirteen week period ended September 29, 2018 and the fourteen week period ended September 30, 2017.

     Cost of Sales. There were no Cost of Sales in the thirteen week period ended September 29, 2018 and the fourteen week period ended September 30, 2017.

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     Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $0.8 million for the thirteen weeks ended September 29, 2018 compared to approximately $0.9 million for the fourteen weeks ended September 30, 2017. The $0.1 million decrease is due to lower expenses for the phantom unit plans.

     Operating Loss. Operating loss was approximately $0.8 million for the thirteen weeks ended September 29, 2018 compared to approximately $0.9 million for the fourteen weeks ended September 30, 2017.

     Equity Interest in Net Income of National Beef Packing Company, LLC. Equity in NBP net income was $29.5 million for the thirteen weeks ended September 29, 2018 compared to $26.2 million for the fourteen weeks ended September 30, 2017. The improvement in fiscal year 2018 is primarily due to higher gross margins at NBP. USPB carries its 15.0729% investment in NBP under the equity method of accounting.

     Interest Income. Interest income was $0.3 million for the thirteen weeks ended September 29, 2018 compared to $0.1 million for the fourteen weeks ended September 30, 2017. The increase was primarily due to higher interest rates.

     Other, net. Other income was $0.0 million for the thirteen weeks ended September 29, 2018 compared to $0.0 million for the fourteen weeks ended September 30, 2017.

     Comprehensive Income. Comprehensive income for the thirteen week period ended September 29, 2018 was approximately $28.9 million compared to approximately $25.5 million for the fourteen week period ended September 30, 2017.

Thirty-nine ended September 29, 2018 compared to thirty-nine weeks ended September 30, 2017

     Net Sales. There were no Net Sales in the thirty-nine week periods ended September 29, 2018 and September 30, 2017.

     Cost of Sales. There were no Cost of Sales in the thirty-nine week periods ended September 29, 2018 and September 30, 2017.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $3.3 million for the thirty-nine weeks ended September 29, 2018 compared to approximately $2.8 million for the thirty-nine weeks ended September 30, 2017. The $0.5 million increase is due to higher expenses for the phantom unit plans.

     Operating Loss. Operating loss was approximately $3.4 million for the thirty-nine weeks ended September 29, 2018 compared to approximately $2.8 million for the thirty-nine weeks ended September 30, 2017.

     Equity Interest in Net Income of National Beef Packing Company, LLC. Equity in NBP net income was $68.1 million for the thirty-nine weeks ended September 29, 2018 compared to $46.6 million for the thirty-nine weeks ended September 30, 2017. The improvement in fiscal year 2018 is primarily due to higher gross margins at NBP.

     Interest Income. Interest income was $0.7 million for the thirty-nine weeks ended September 29, 2018 compared to $0.2 million for the thirty-nine weeks ended September 30, 2017. The increase was due to higher interest rates.

     Other, net. Other income was $0.4 million for the thirty-nine weeks ended September 29, 2018 compared to $0.0 million for the thirty-nine weeks ended September 30, 2017. The increase was primarily due to higher lease income on Company owned cattle delivery rights.

     Comprehensive Income. Comprehensive income for the thirty-nine week period ended September 29, 2018 was approximately $65.9 million compared to approximately $44.0 million for the thirty-nine week period ended September 30, 2017.

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Liquidity and Capital Resources

     As of September 29, 2018, USPB had net working capital (the excess of current assets over current liabilities) of approximately $74.5 million, which included cash and cash equivalents of $78.4 million. As of December 30, 2017, we had net working capital of approximately $87.9 million, which included cash and cash equivalents of $119.1 million. Our primary sources of liquidity for the first three quarters of fiscal year 2018 and fiscal year 2017 were cash and available borrowings under the Master Loan Agreement.

     As of September 29, 2018, USPB had no long-term debt outstanding. We had a $5.0 million revolving term loan with CoBank all of which was available. USPB was in compliance with all of the financial covenants under its Master Loan Agreement as of September 29, 2018.

     USPB believes available borrowings under the Master Loan Agreement and cash will be sufficient to support its working capital and cash flow requirements.

     We believe our cash and available borrowings under our Master Loan Agreement will be sufficient to support our cash needs for the foreseeable future. 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 fiscal year 2017.

Operating Activities

     Net cash provided by operating activities in the thirty-nine weeks ended September 29, 2018 was $53.1 million compared to net cash provided of $15.9 million in the thirty-nine weeks ended September 30, 2017. The $37.2 million change was primarily due to higher distributions from NBP that were classified as an operating activity (return on investment).

Investing Activities

     Net cash provided by investing activities was $18.2 million in the thirty-nine weeks ended September 29, 2018 compared to $7.4 million in the thirty-nine weeks ended September 30, 2017. The $10.8 million change was primarily due to an increase in distributions from NBP that were classified as an investing activity (return of investment).

Financing Activities

     Net cash used in financing activities was $112.0 million in the thirty-nine weeks ended September 29, 2018 compared to $27.1 million in the thirty-nine weeks ended September 30, 2017. The change was the result of checks clearing from a fiscal year 2017 distribution, and a higher level of distributions made in fiscal year 2018.

Master Loan Agreement

     On June 13, 2017, USPB and CoBank entered into a Revolving Term Loan Supplement to the Master Loan Agreement dated July 26, 2011. The Revolving Term Loan Supplement provides for a $5 million revolving credit commitment. The new commitment carries a term of three years, maturing on June 30, 2020.

     All of the $5 million revolving credit commitment was available as of September 29, 2018. Borrowings under the revolving credit commitment bear interest at the base rate or LIBOR rate plus applicable margin.

     On December 30, 2011, in connection with the closing of the Leucadia Transaction, the Company and CoBank entered into the Consent and First Amendment to Pledge Agreement and Security Agreement, by which CoBank agreed to (i) consent to the Membership Interest Sale and the PA Distribution, (ii) release its security interest in, and liens on, the Membership Interests being sold pursuant to the Membership Interest Sale, (iii) consent to the NBP Pledge and (iv) consent to the amendments and restatements of the NBP Operating Agreement and the PA Newco Operating Agreement. The NBP Pledge grants NBP a perfected security interest in and to USPB’s membership interests in, and distributions from, NBP, subject only to the prior first priority security interest held by CoBank.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

     The principal market risks affecting USPB’s business are exposure to interest rate risk, to the extent the Company has debt outstanding. As of September 29, 2018, the Company did not have any outstanding debt.

Item 4. Controls and Procedures.

     We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the Financial Statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, as of the end of the period covered by this 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 September 29, 2018 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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** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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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.

Date: November 8, 2018

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