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 |
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For the quarterly period ended May 29, 2010 |
or |
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o |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to . |
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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 |
The registrant’s units are not traded on an exchange or in any public market. As of June 26, 2010, there were 735,385 Class A units and 755,385 Class B units outstanding.
| TABLE OF CONTENTS
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PART I. | FINANCIAL INFORMATION | Page No. |
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Item 1. | 1 | |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 11 |
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Item 3. | 16 | |
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Item 4. | 17 | |
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PART II. | OTHER INFORMATION |
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Item 1. | 19 | |
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Item 1A. | 19 | |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 19 |
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Item 3. | 19 | |
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Item 4. | 19 | |
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Item 5. | 19 | |
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Item 6. | 19 | |
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| 20 |
Unless the context indicates or otherwise requires, the terms “the Company”, “we”, “our” and “us” refer to U.S. Premium Beef, LLC (formerly known as U.S. Premium Beef, Ltd.) and its consolidated subsidiaries. As used in this report, the terms “NBP” and “National Beef” refer to National Beef Packing Company, LLC (formerly known as Farmland National Beef Packing Company, LP), a Delaware limited liability company, and “USPB” refers to U.S. Premium Beef, LLC (formerly known U.S. Premium Beef, Ltd.) prior to consolidation.
ii |
Item 1. Financial Statements.
1 |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||
Consolidated Balance Sheets | |||||||
(in thousands, except unit data) | |||||||
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| May 29, |
| August 29, | ||
Assets | 2010 |
| 2009 | ||||
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| (unaudited) |
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Current assets: |
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| Cash and cash equivalents | $ | 24,744 |
| $ | 18,853 | |
| Accounts receivable, less allowance for returns and doubtful accounts |
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| of $3,391 and $1,511, respectively | 205,786 |
| 172,421 | ||
| Due from affiliates | 3,886 |
| 4,586 | |||
| Other receivables | 7,070 |
| 7,165 | |||
| Inventories | 216,706 |
| 175,300 | |||
| Other current assets | 18,596 |
| 16,602 | |||
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| Total current assets | 476,788 |
| 394,927 | ||
Property, plant, and equipment, at cost | 527,330 |
| 499,977 | ||||
| Less accumulated depreciation | 210,688 |
| 175,103 | |||
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| Net property, plant, and equipment | 316,642 |
| 324,874 | ||
Goodwill | 86,251 |
| 86,251 | ||||
Other intangible assets, net of accumulated amortization |
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| of $15,147 and $12,123, respectively | 59,589 |
| 62,302 | |||
Other assets | 5,473 |
| 4,594 | ||||
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| Total assets | $ | 944,743 |
| $ | 872,948 |
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Liabilities and Capital Shares and Equities |
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Current liabilities: |
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| Current installments of long-term debt | $ | 7,665 |
| $ | 12,488 | |
| Cattle purchases payable | 63,100 |
| 49,806 | |||
| Accounts payable - trade | 66,691 |
| 69,303 | |||
| Due to affiliates | 1,128 |
| 1,048 | |||
| Accrued compensation and benefits | 65,472 |
| 56,553 | |||
| Accrued insurance | 15,162 |
| 16,344 | |||
| Other accrued expenses and liabilities | 12,333 |
| 15,160 | |||
| Distributions payable | 28,606 |
| 10,942 | |||
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| Total current liabilities | 260,157 |
| 231,644 | ||
Long-term liabilities: |
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| Long-term debt, excluding current installments | 280,373 |
| 293,400 | |||
| Other liabilities | 2,155 |
| 2,364 | |||
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| Total long-term liabilities | 282,528 |
| 295,764 | ||
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| Total liabilities | 542,685 |
| 527,408 | ||
| Noncontrolling interest in NBP | 264,371 |
| 183,407 | |||
Capital shares and equities: |
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| Members' capital, 735,385 Class A units and 755,385 Class B units |
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| authorized, issued and outstanding | 86,350 |
| 111,085 | ||
| Patronage notices | 48,682 |
| 48,682 | |||
| Accumulated other comprehensive income (loss) attributable to USPB | 6 |
| (1) | |||
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| Total capital shares and equities attributable to USPB | 135,038 |
| 159,766 | ||
| Noncontrolling interest in Kansas City Steak Company, LLC | 2,649 |
| 2,367 | |||
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| Total Capital Shares and Equities | 137,687 |
| 162,133 | ||
Commitments and contingencies | - |
| - | ||||
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| Total liabilities, noncontrolling interest in NBP and capital shares and equities | $ | 944,743 |
| $ | 872,948 |
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See accompanying notes to consolidated financial statements. |
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2 |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | |||||||||||||||||
Consolidated Statements of Operations | |||||||||||||||||
(in thousands, except per unit and per unit data) | |||||||||||||||||
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| 13 weeks ended |
| 13 weeks ended |
| 39 weeks ended |
| 39 weeks ended | ||||
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| May 29, 2010 |
| May 30, 2009 |
| May 29, 2010 |
| May 30, 2009 | ||||
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| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) | ||||
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Net sales |
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| $ | 1,537,879 |
| $ | 1,318,020 |
| $ | 4,221,415 |
| $ | 4,045,215 | ||
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Costs and expenses: |
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| Cost of sales |
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| 1,429,435 |
| 1,242,304 |
| 3,962,607 |
| 3,882,639 | ||||||
| Selling, general, and administrative expenses |
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| 14,734 |
| 12,426 |
| 41,520 |
| 35,333 | |||||||
| Depreciation and amortization |
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| 13,320 |
| 11,948 |
| 39,303 |
| 33,186 | ||||||
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| Total costs and expenses |
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| 1,457,489 |
| 1,266,678 |
| 4,043,430 |
| 3,951,158 | |||||
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| Operating income |
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| 80,390 |
| 51,342 |
| 177,985 |
| 94,057 | ||||
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Other income (expense): |
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| Interest income |
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| 6 |
| 47 |
| 43 |
| 291 | ||||||
| Interest expense |
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| (3,539) |
| (5,884) |
| (11,640) |
| (18,337) | ||||||
| Equity in loss of aLF Ventures, LLC |
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| - |
| (8) |
| - |
| (57) | ||||||
| Termination Fee |
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| - |
| - |
| - |
| 14,572 | ||||||
| Other, net |
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| 256 |
| (585) |
| (3,524) |
| (4,431) | ||||||
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| Income before taxes |
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| 77,113 |
| 44,912 |
| 162,864 |
| 86,095 | ||||
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Income tax expense |
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| (376) |
| (380) |
| (728) |
| (941) | |||||||
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| Net income |
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| 76,737 |
| 44,532 |
| 162,136 |
| 85,154 | ||||
Less: Net income attibutable to noncontrolling interest in: |
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| Kansas City Steak Company, LLC |
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| (58) |
| (232) |
| (850) |
| (950) | ||||||
| National Beef Packing Company, LLC |
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| (24,687) |
| (16,608) |
| (52,595) |
| (28,327) | ||||||
Net income attributable to U.S. Premium Beef, LLC |
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| $ | 51,992 |
| $ | 27,692 |
| $ | 108,691 |
| $ | 55,877 | ||||
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Earnings per unit: |
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| Basic |
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| Class A units |
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| $ | 7.07 |
| $ | 12.43 |
| $ | 22.75 |
| $ | 25.07 | |
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| Class B units |
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| $ | 61.95 |
| $ | 25.23 |
| $ | 121.74 |
| $ | 50.91 | |
| Diluted |
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| Class A units |
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| $ | 6.96 |
| $ | 12.24 |
| $ | 22.38 |
| $ | 24.70 | |
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| Class B units |
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| $ | 61.95 |
| $ | 24.84 |
| $ | 121.74 |
| $ | 50.16 | |
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Outstanding weighted-average Class A and Class B units: |
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| Basic |
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| Class A units |
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| 735,385 |
| 735,385 |
| 735,385 |
| 735,385 | |||||
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| Class B units |
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| 755,385 |
| 735,385 |
| 755,385 |
| 735,385 | |||||
| Diluted |
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| Class A units |
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| 747,471 |
| 746,838 |
| 747,471 |
| 746,435 | |||||
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| Class B units |
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| 755,385 |
| 746,838 |
| 755,385 |
| 746,435 | |||||
See accompanying notes to consolidated financial statements. |
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3 |
U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES | ||||||||||
Consolidated Statements of Cash Flows | ||||||||||
(in thousands) | ||||||||||
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| 39 weeks ended |
| 39 weeks ended | ||
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| May 29, 2010 |
| May 30, 2009 | ||
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| (unaudited) |
| (unaudited) | ||
Cash flows from operating activities: |
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| Net income |
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| $ | 162,136 |
| $ | 85,154 | ||
| Adjustments to reconcile net income to net cash provided by |
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| operating activities: |
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| Depreciation and amortization |
| 40,075 |
| 33,186 | ||||
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| Termination fee |
| - |
| (14,572) | ||||
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| (Gain) loss on disposal of property, plant, and equipment |
| (154) |
| 119 | ||||
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| Write-off of debt issuance costs |
| 418 |
| 1,317 | ||||
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| Changes in assets and liabilities: |
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| Accounts receivable |
| (33,365) |
| 29,192 | |||
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| Due from affiliates |
| 702 |
| 3,771 | |||
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| Other receivables |
| 95 |
| (2,316) | |||
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| Inventories |
| (41,406) |
| 11,702 | |||
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| Other assets |
| (3,357) |
| (3,990) | |||
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| Cattle purchases payable |
| 5,505 |
| 7,767 | |||
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| Accounts payable |
| (1,680) |
| (4,542) | |||
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| Due to affiliates |
| 78 |
| (99) | |||
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| Accrued compensation and benefits |
| 8,919 |
| (10,443) | |||
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| Accrued insurance |
| (1,182) |
| (87) | |||
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| Other accrued expenses and liabilities |
| (3,060) |
| 7,591 | |||
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| Net cash provided by operating activities |
| 133,724 |
| 143,750 | ||
Cash flows from investing activities: |
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| Capital expenditures, including interest capitalized |
| (28,867) |
| (35,600) | |||||
| Termination fee |
| - |
| 14,572 | |||||
| Proceeds from sale of property, plant, and equipment |
| 974 |
| 1,240 | |||||
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| Net cash used in investing activities |
| (27,893) |
| (19,788) | ||||
Cash flows from financing activities: |
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| Net receipts under revolving credit lines |
| 3,718 |
| 62,723 | |||||
| Borrowings under term note payable |
| 75,000 |
| - | |||||
| Payments of term notes payable |
| (23,875) |
| (26,485) | |||||
| Repayments of other indebtedness / capital leases |
| (5,838) |
| (3,104) | |||||
| Purchase and cancellation of senior notes |
| (66,855) |
| (45,479) | |||||
| Member capital redeemed |
| - |
| (125,484) | |||||
| Payments of patronage notices |
| - |
| (1,960) | |||||
| Minority owner capital contribution |
| - |
| 19,643 | |||||
| Cash paid for financing costs |
| (1,017) |
| - | |||||
| Change in overdraft balances |
| 6,883 |
| (1,750) | |||||
| Distributions to noncontrolling interests in National Beef Packing Company, LLC | (32,531) |
| (22,395) | ||||||
| Member distributions |
| (55,432) |
| (42,093) | |||||
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| Net cash used in financing activities |
| (99,947) |
| (186,384) | ||
| Effect of exchange rate changes on cash |
| 7 |
| (32) | |||||
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| Net change in cash |
| 5,891 |
| (62,454) | ||
Cash and cash equivalents at beginning of the period |
| 18,853 |
| 77,399 | ||||||
Cash and cash equivalents at end of the period |
| $ | 24,744 |
| $ | 14,945 | ||||
Supplemental cash disclosures: |
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| Cash paid during the period for interest |
| $ | 11,369 |
| $ | 15,916 | |||
| Cash paid/(received) during the period for taxes, net of $0 and $925 refunds, | $ | 779 |
| $ | (729) | ||||
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See accompanying notes to consolidated financial statements. |
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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 29, 2009. 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
On June 29, 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) under ASC 105-10 as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities. This pronouncement was effective for financial statements issued for interim and annual periods ending after September 15, 2009 for most entities. On the effective date, all non-SEC accounting and reporting standards were superseded. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to ASC affects the manner in which companies refer to U.S. GAAP in financial statements and note disclosures. The Company adopted this body of accounting for the quarterly period ended November 28, 2009, as required, and adoption did not have a material impact on our consolidated financial statements taken as a whole.
In December 2007, the FASB issued Business Combinations under ASC 805. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date to be measured at their fair value as of that date. An acquirer is required to recognize assets or liabilities arising from all other contingencies (contractual contingencies) as of the acquisition date, measured at their acquisition-date fair values, only if it is more likely than not that they meet the definition of an asset or a liability in FASB Concepts Statement No. 6, Elements of Financial Statements. Any acquisition-related costs are to be expensed instead of capitalized. The Company adopted ASC 805 on August 30, 2009 and the impact will depend on future acquisitions at the time.
Also in December 2007, the FASB issued Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51 under ASC 810-10-65, which establishes accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary. ASC 810-10-65 requires non-controlling interests held by parties other than the parent in subsidiaries be clearly identified, labeled, and presented in the consolidated balance sheet within equity, but separate from the parent's equity. The Company’s adoption of ASC 810-10-65 as of August 30, 2009 changed the presentation of the non-controlling interest.
In February 2008, the FASB issued Fair Value Measurements under ASC 820-10, which deferred the effective date of fair value measurement for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis, at least annually. There was no impact when the Company adopted for these nonfinancial assets and nonfinancial liabilities on August 30, 2009. These assets and liabilities are measured at fair value on an ongoing basis but are reported at fair value only in certain circumstances.
5 |
(3) Inventories
Inventories consist primarily of meat products and supplies. Product inventories are considered commodities and are recorded based on quoted commodity prices, which approximate net realizable value. Supply and other inventories are valued on the basis of first-in, first-out, specific or average cost methods. Product inventories are relieved from inventory utilizing the first-in, first-out method.
Inventories at May 29, 2010 and August 29, 2009 consisted of the following (in thousands):
| May 29, 2010 |
| August 29, 2009 | |||
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Dressed and boxed meat products |
| $ | 141,139 |
| $ | 119,274 |
Beef by-products |
| 39,546 |
| 29,756 | ||
Supplies and other |
| 36,021 |
| 26,270 | ||
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| $ | 216,706 |
| $ | 175,300 |
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(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 (in thousands):
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| 13 weeks ended |
| 13 weeks ended |
| 39 weeks ended |
| 39 weeks ended | ||||
|
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| May 29, 2010 |
| May 30, 2009 |
| May 29, 2010 |
| May 30, 2009 | ||||
Net income | $ | 76,737 |
| $ | 44,532 |
| $ | 162,136 |
| $ | 85,154 | ||
Other comprehensive (loss) income: |
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| Foreign currency translation adjustments | (11) |
| 42 |
| (7) |
| (32) | |||||
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| Comprehensive income | $ | 76,726 |
| $ | 44,574 |
| $ | 162,129 |
| $ | 85,122 |
Comprehensive income attibutable to noncontrolling interest in: |
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| Kansas City Steak Company, LLC | (58) |
| (232) |
| (850) |
| (950) | |||||
| National Beef Packing Company, LLC | (24,687) |
| (16,608) |
| (52,595) |
| (28,327) | |||||
Comprehensive income attributable to USPB | $ | 51,981 |
| $ | 27,734 |
| $ | 108,684 |
| $ | 55,845 | ||
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(5) Noncontrolling Interests In NBP
At any time after certain dates, the earliest being July 31, 2010, the latest being July 31, 2011, NBP’s Chief Executive Officer, Timothy M. Klein (Klein Affiliates), and/or NBPCo Holdings have the right to request that NBP repurchase their interests in NBP, 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.
GAAP requires the Company to determine the fair value of the noncontrolling interests in NBP at the end of each reporting period. To the extent this value increases, the change in fair value is accreted over the redemption period. In determining the fair value of the noncontrolling interests in NBP held by NBPCo Holdings as of May 29, 2010, management has considered previous redemption prices, valuations of peer companies and other factors. A portion of the Klein Affiliates’ noncontrolling interest in NBP as of May 29, 2010 was valued based upon the redemption that occurred on June 2, 2010, as described in Note 10 below. The remaining noncontrolling interest in NBP held by the Klein Affiliates as of May 29, 2010 was valued based upon a contractually stipulated valuation formula.
The Company accounts for changes in the redemption value of the noncontrolling interests in NBP by accreting the change in value from the date of change through the earliest redemption date of the respective interests in NBP. At May 29, 2010, the value of the noncontrolling interests in NBP was determined to be $295.4 million, which was in excess of its carrying value. Accordingly, the carrying value of the noncontrolling interests in NBP increased by approximately $31.2 million through accretion during the thirty-nine weeks ended May 29, 2010, resulting in the $264.4 million carrying value, as reflected in the accompanying consolidated balance sheet as of May 29, 2010.
6 |
The total value of the noncontrolling interests in NBP at May 29, 2010 increased by approximately $54.9 million compared to the value at August 29, 2009. Offsetting the change in the value of the noncontrolling interests in NBP is a corresponding change in members’ capital.
(6) Contingencies
National Beef Leathers, LLC (NBL), a wholly-owned subsidiary of NBP, is a named defendant in two currently pending purported class actions involving NBL's tannery located in St. Joseph, Missouri, which NBL purchased in March 2009. These lawsuits were filed on July 22, 2009 in the U.S. District Court for the Western District of Missouri. The lawsuits allege that NBL spread wastewater sludge containing hexavalent chromium in four counties in northwest Missouri. The plaintiffs are seeking an unspecified amount of damages for economic damages, punitive damages, diminished property values and medical monitoring. On May 11, 2010, the court issued an order ruling that NBL is not liable under a successor liability theory for the conduct of the tannery’s previous owner and another party prior to NBL’s purchase of the tannery. As a result of this ruling, the plaintiffs in 15 lawsuits filed between April 22, 2009 and April 29, 2010, in the Circuit Courts of Buchannan County, Clinton County, and DeKalb County, Missouri seeking damages for economic damages, punitive damages, diminished property values and medical monitoring voluntarily dismissed their claims against NBL in June 2010. NBL believes it has meritorious defenses to the claims in the remaining two lawsuits and intends to defend them vigorously.
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.
(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 May 29, 2010 and August 29, 2009 and also the level within the fair value hierarchy used to measure each category of assets (in thousands).
7 |
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|
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| Quoted Prices in |
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| ||||
|
|
|
| Active Markets for |
| Significant Other |
| Significant | ||||
|
|
|
| Identical Assets |
| Observable Inputs |
| Unobservable | ||||
Description |
| May 29, 2010 |
| (Level 1) |
| (Level 2) |
| Inputs (Level 3) | ||||
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| ||||
Other current assets - derivatives |
| $ | 4,629 |
| $ | 4,629 |
| $ | - |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Other accrued expenses and |
|
|
|
|
|
|
|
| ||||
liabilities - derivatives |
| $ | 3,008 |
| $ | 261 |
| $ | 2,747 |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Noncontrolling interests in NBP |
| $ | 264,371 |
| $ | - |
| $ | 61,963 |
| $ | 202,408 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
| Quoted Prices in |
|
|
|
| ||||
|
|
|
| Active Markets for |
| Significant Other |
| Significant | ||||
|
|
|
| Identical Assets |
| Observable Inputs |
| Unobservable | ||||
Description |
| August 29, 2009 |
| (Level 1) |
| (Level 2) |
| Inputs (Level 3) | ||||
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
| ||||
Other current assets - derivatives |
| $ | 1,442 |
| $ | 1,442 |
| $ | - |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Other accrued expenses and |
|
|
|
|
|
|
|
| ||||
liabilities - derivatives |
| $ | 5,087 |
| $ | 3,535 |
| $ | 1,552 |
| $ | - |
|
|
|
|
|
|
|
|
| ||||
Noncontrolling interests in NBP |
| $ | 183,407 |
| $ | - |
| $ | 183,407 |
| $ | - |
|
|
|
|
|
|
|
|
|
Management has used certain agreed-upon redemption prices in measuring the fair value of the Klein Affiliates noncontrolling interest in NBP, which is classified as level 2 as of May 29, 2010. NBPCo Holdings shares are based upon unobservable inputs, thus classified as level 3 as of May 29, 2010. Management has used certain agreed-upon redemption prices in measuring the noncontrolling interest in NBP as of August 29, 2009. During the 3 months ended May 29, 2010 we have transferred the calculated fair value of NBPCo’s noncontrolling interests in NBP from level 2 to level 3 based upon the change in valuation techniques due to the amount of time lapsed and changes in business from the previous agreed-upon redemption price.
(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 transactions 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 sales 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 May 29, 2010 as all derivatives in an asset position are exchange-traded contracts. The exchange-traded contracts have been entered into under a master netting agreement, and are netted on the consolidated balance sheets. None of the derivatives entered into have credit-related contingent features. NBP has $3.4 million in cash collateral posted on its derivative liabilities.
8 |
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 May 29, 2010 and August 29, 2009 (in thousands of dollars):
May 29, 2010 | Derivative Asset |
| Derivative Liability | |||||||||
|
| Balance Sheet |
|
|
| Balance Sheet |
|
| ||||
|
| Location |
| Fair Value |
| Location |
| Fair Value | ||||
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| Accrued expenses |
|
| ||
|
| Other current |
|
|
| and other |
|
| ||||
Commodity contracts | assets |
| $ | 4,629 |
| liabilities |
| $ | 3,008 | |||
| Total |
|
|
|
| $ | 4,629 |
|
|
| $ | 3,008 |
August 29, 2009 | Derivative Asset |
| Derivative Liability | |||||||||
|
| Balance Sheet |
|
|
| Balance Sheet |
|
| ||||
|
| Location |
| Fair Value |
| Location |
| Fair Value | ||||
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| Accrued expenses |
|
| ||
|
| Other current |
|
|
| and other |
|
| ||||
Commodity contracts | assets |
| $ | 1,442 |
| liabilities |
| $ | 5,087 | |||
| Total |
|
|
|
| $ | 1,442 |
|
|
| $ | 5,087 |
The following table presents the impact of derivative instruments on the Consolidated Statement of Operations for the thirteen and thirty-nine week period ended May 29, 2010 (in thousands of dollars):
|
|
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|
|
|
|
|
|
|
|
|
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 |
| 39 weeks ended | ||
|
|
|
|
|
|
| May 29, 2010 |
| May 29, 2010 | ||
|
|
|
|
|
|
|
|
|
| ||
Commodity contracts |
| Net sales |
| $ | (11,866) |
| $ | (8,697) | |||
Commodity contracts |
| Cost of sales |
| 8,794 |
| 857 | |||||
| Total |
|
|
| $ | (3,072) |
| $ | (7,840) | ||
|
|
|
|
|
|
|
|
|
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(9) Income Attributable to USPB Per Unit
Under the LLC structure, earnings of the Company are to be distributed to unitholders based on their proportionate share of underlying equity, and, as a result, income attributable to USPB per unit (EPU) has been presented in the accompanying Consolidated Statement of Operations and in the table that follows.
Basic EPU excludes dilution and is computed by first allocating a portion of net income attributable to USPB to Class A units and the remainder is allocated to Class B units. On November 2, 2009, the Company’s members approved changing the allocation of income from 33% to the Class A’s and 67% to the Class B’s to 10% to the Class A’s and 90% to the Class B’s. Accordingly, for the thirteen week period ended May 29, 2010, the pro-rata share of income earned was allocated 10% to the Class A’s and 90% to the Class B’s. For the thirty-nine week period ended May 29, 2010, the pro-rata share of income earned through November 1, 2009 was allocated 33% to the Class A’s and 67% to the Class B’s and the remainder of the income for the thirty-nine week period was allocated 10% to the Class A’s and 90% to the Class B’s. Income 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. On March 27, 2010, the Class A and Class B units were de-linked, allowing the transfer of each class of units without a concurrent transfer of a unit of the other Class.
9 |
Diluted EPU reflects the potential dilution that could occur if potential Class A unit purchase rights were exercised or contractual appreciation rights were converted into units. Upon termination of the CEO employment agreement and until eighteen months after the termination of the CEO employment agreement, at the election of the CEO, or upon mutual agreement of the Board of the Company and the CEO, the CEO may purchase up to 20,000 Class A units, or upon agreement of the CEO and the Board of the Company, the CEO may convert the contractual unit appreciation rights to up to 20,000 Class A units. The diluted EPU reflects the circumstances of termination of the CEO employment agreement, and the election of CEO or agreement by the Board of the Company and the CEO for the CEO to purchase or convert contractual rights to the maximum 20,000 Class A units at $55 per unit for the periods as provided in the CEO employment agreement.
Income Per Unit Calculation |
|
|
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|
|
| |||||
|
| 13 weeks ended |
| 13 weeks ended |
| 39 weeks ended |
| 39 weeks ended | ||||
(In thousands, except unit and per unit data) | May 29, 2010 |
| May 30, 2009 |
| May 29, 2010 |
| May 30, 2009 | |||||
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) | ||||
Basic income per unit |
|
|
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|
|
|
| |||||
Income attributable to USPB available to |
|
|
|
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|
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| |||||
| unitholders (numerator) | $ | 51,992 |
| $ | 27,692 |
| $ | 108,691 |
| $ | 55,877 |
|
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|
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|
|
|
| ||||
Weighted average outstanding units (denominator) |
|
|
|
|
|
|
| |||||
| Class A | 735,385 |
| 735,385 |
| 735,385 |
| 735,385 | ||||
| Class B | 755,385 |
| 735,385 |
| 755,385 |
| 735,385 | ||||
|
|
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|
|
|
|
| ||||
Per unit amount |
|
|
|
|
|
|
| |||||
| Class A | $ | 7.07 |
| $ | 12.43 |
| $ | 22.75 |
| $ | 25.07 |
| Class B | $ | 61.95 |
| $ | 25.23 |
| $ | 121.74 |
| $ | 50.91 |
|
|
|
|
|
|
|
|
| ||||
Diluted income per unit: |
|
|
|
|
|
|
| |||||
Income attributable to USPB available to |
|
|
|
|
|
|
| |||||
| unitholders (numerator) | $ | 51,992 |
| $ | 27,692 |
| $ | 108,691 |
| $ | 55,877 |
|
|
|
|
|
|
|
|
| ||||
Weighted average outstanding Class A units | 735,385 |
| 735,385 |
| 735,385 |
| 735,385 | |||||
Effect of dilutive securities - Class A unit options | 12,086 |
| 11,453 |
| 12,086 |
| 11,050 | |||||
| Units (denominator) | 747,471 |
| 746,838 |
| 747,471 |
| 746,435 | ||||
|
|
|
|
|
|
|
|
| ||||
Weighted average outstanding Class B units | 755,385 |
| 735,385 |
| 755,385 |
| 735,385 | |||||
Effect of dilutive securities - Class B unit options | - |
| 11,453 |
| - |
| 11,050 | |||||
| Units (denominator) | 755,385 |
| 746,838 |
| 755,385 |
| 746,435 | ||||
|
|
|
|
|
|
|
|
| ||||
Per unit amount |
|
|
|
|
|
|
| |||||
| Class A | $ | 6.96 |
| $ | 12.24 |
| $ | 22.38 |
| $ | 24.70 |
| Class B | $ | 61.95 |
| $ | 24.84 |
| $ | 121.74 |
| $ | 50.16 |
|
|
|
|
|
|
|
|
|
(10) Subsequent Events
On June 2, 2010, NBP entered into a Unit Redemption Agreement pursuant to Section 12.5 of its LLC Agreement to redeem at agreed upon redemption prices a portion of the membership interests in NBP that are owned or controlled by its Chief Executive Officer, Timothy M. Klein. As a result, Mr. Klein’s affiliates received $8.0 million for their redeemed units, and he retained his position with NBP.
In addition, NBP’s Credit Facility was amended and restated on June 4, 2010. The amendment and restatement increased the available borrowings under NBP’s term loan to $375.0 million, increased the revolving line of credit to $250.0 million, reduced the applicable margin of the term loan and revolving line of credit, extended the maturity date of the term loan to June 2015 and revised the payment schedule of the term loan, among other things. The related bank financing charges of approximately $4.1 million will be amortized over the life of the loan.
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report.
Disclosure Regarding Forward-Looking Statements
This report contains “forward-looking statements,” which are subject to a number of risks and uncertainties, many of which are beyond our control. Forward-looking statements are typically identified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate” and similar expressions. Actual results could differ materially from those contemplated by these forward-looking statements as a result of many factors, including economic conditions generally and in our principal markets; the availability and prices of live cattle, natural resources and commodities; food safety; livestock disease, including the identification of cattle with Bovine Spongiform Encephalopathy (BSE); competitive practices and consolidation in the cattle production and processing industries; actions of domestic or foreign governments; hedging risk; changes in interest rates and foreign currency exchange rates; consumer demand and preferences; the cost of compliance with environmental and health laws; loss of key customers; loss of key employees; labor relations; and consolidation among our customers.
In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. See also Part II. Item 1A, Risk Factors, included in this report, and Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for other important factors that could cause actual results to differ materially from those in any such forward-looking statements, and which should be read in conjunction with this report.
Industry Outlook
Year-to-year increases in placement of cattle on feed during the spring quarter will provide adequate fed cattle supplies going into the fall quarter. However, industry herd liquidation persists and from a macro perspective keeps longer term cattle supplies in a downward trend. The lack of expansion in pork output and very modest growth in poultry will keep per capita protein supplies in check and provide underlying support to cattle and beef prices. General economic conditions remain tenuous and will continue to dominate market potential over the coming months. Global trade prospects remain positive on similar global supply issues as well as the potential for stronger economic performance.
Recent Developments
On June 22, 2010, the Grain Inspection and Packers and Stockyards Administration published a proposed rule adding new regulations under the Packers and Stockyards Act. If adopted, the new regulations could have a significant impact on marketing and procurement practices in the beef processing industry and could affect how we procure cattle for our value-added programs and how we process and market value-added beef products. We cannot presently assess the full economic impact of the proposed rule on the beef processing industry or on our operations.
Beef Export Markets
Export markets for U.S. beef products remain constrained since the discovery of a 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, however, its border was subsequently closed 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 had a negative impact on beef export demand.
11 |
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 could have a material adverse affect on the Company’s revenues and net income.
Results of Operations
Thirteen weeks ended May 29, 2010 compared to thirteen weeks ended May 30, 2009
General. Net income for the thirteen weeks ended May 29, 2010 was approximately $76.7 million compared to approximately $44.5 million for the thirteen weeks ended May 30, 2009, an increase of approximately $32.2 million. Sales were higher in the thirteen weeks ended May 29, 2010 compared to the thirteen weeks ended May 30, 2009 due in part to an approximate 3.1% increase in the average volume of cattle processed per week and increase in the average sales prices per head of approximately 14.8% during this reporting period.
Total costs and expenses of approximately $1,457.5 million for the thirteen weeks ended May 29, 2010 were 94.8% as a percent of sales compared to approximately $1,266.7 million for the thirteen weeks ended May 30, 2009, or 96.1% as a percent of sales. An increase in the volume of cattle processed and cost of live cattle, and a decrease in total costs as a percentage of sales resulted in increased operating income of approximately $29.1 million for the thirteen week period of fiscal year 2010 as compared to the thirteen week period of fiscal year 2009.
Net Sales. Net sales were approximately $1,537.9 million for the thirteen weeks ended May 29, 2010 compared to approximately $1,318.0 million for the thirteen weeks ended May 30, 2009, an increase of approximately $219.9 million, or 16.7%. The increase in net sales resulted from an approximate 3.1% increase in the average volume of cattle processed per week. Also contributing to the increase in sales was an increase in average sales prices per head of about 14.8% during the thirteen week period ended May 29, 2010 compared to the similar thirteen week period of fiscal year 2009.
Cost of Sales. Cost of sales was approximately $1,429.4 million for the thirteen weeks ended May 29, 2010 compared to approximately $1,242.3 million for the thirteen weeks ended May 30, 2009, an increase of approximately $187.1 million, or 15.1%. The increase resulted primarily from an approximate 3.1% increase in the number of cattle processed, and an increase in live cattle prices of approximately 14.2%. Partially offsetting these increases was a decrease in the average cattle weights of approximately 1.2% during the thirteen week period of fiscal year 2010 as compared to the thirteen week period of fiscal year 2009.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $14.7 million for the thirteen weeks ended May 29, 2010 compared to approximately $12.4 million for the thirteen weeks ended May 30, 2009, an increase of approximately $2.3 million, or 18.5%. The increase reflects an increase in bad debt expense of approximately $1.4 million, advertising and promotion expense of approximately $0.4 million, and an increase in salaries of approximately $0.3 million.
Depreciation and Amortization Expense. Depreciation and amortization expenses were approximately $13.3 million for the thirteen weeks ended May 29, 2010 compared to approximately $11.9 million for the thirteen weeks ended May 30, 2009, an increase of approximately $1.4 million, or 11.8%. Depreciation expense increased due to assets being placed into service, primarily at our three beef plants and two case ready plants, during fiscal year 2010.
Operating Income. Operating income was approximately $80.4 million for the thirteen weeks ended May 29, 2010 compared to approximately $51.3 million for the thirteen weeks ended May 30, 2009, an increase of approximately $29.1 million, or 56.7%. The increase in operating income for the thirteen week period ending May 29, 2010, resulted primarily from a decrease in expenses as a percentage of sales of approximately 1.4%, driven by improved demand characteristics for beef products, as compared to the thirteen week period ended May 30, 2009.
12 |
Interest Expense. Interest expense was approximately $3.5 million for the thirteen weeks ended May 29, 2010 compared to approximately $5.9 million for the thirteen weeks ended May 30, 2009, a decrease of approximately $2.4 million, or 40.7%. The decrease in interest expense during the thirteen weeks ended May 29, 2010 as compared to the thirteen week period ended May 30, 2009 was due primarily to the purchase and cancellation of the remaining $66.9 million of NBP’s senior notes during the second quarter of fiscal year 2010 resulting in a decrease of approximately $3.0 million in interest expense compared to the thirteen week period ended May 30, 2009.
Other, net. Other, net non-operating income was approximately $0.3 million for the thirteen weeks ended May 29, 2010 compared to other net non-operating expense of approximately $0.6 million for the thirteen weeks ended May 30, 2009, an increase of approximately $0.9 million.
Income Tax Expense. Income tax expense was approximately $0.4 million for the thirteen weeks ended May 29, 2010 compared to income tax expense of $0.4 million for the thirteen weeks ended May 30, 2009. Income taxes for the period was primarily related to NBP’s subsidiary, National Carriers, Inc. (National Carriers). Income tax expense is recorded on income from National Carriers, which is organized as a C Corporation.
Net Income Attributable to Noncontrolling Interest in NBP. Noncontrolling interest in the net income of NBP for the thirteen weeks ended May 29, 2010 was $24.7 million compared to noncontrolling interest in the net income for the thirteen weeks ended May 30, 2009 of $16.6 million, a change of $8.1 million. The noncontrolling interest in NBP represents the minority owners’ interest in NBP’s earnings.
Thirty-nine weeks ended May 29, 2010 compared to thirty-nine weeks ended May 30, 2009
General. Net income for the thirty-nine weeks ended May 29, 2010 was approximately $162.1 million compared to net income of approximately $85.2 million for the thirty-nine weeks ended May 30, 2009, an increase of approximately $76.9 million. Sales were 4.4% higher in the thirty-nine week period ended May 29, 2010 compared to the thirty-nine week period ended May 30, 2009 primarily due in part to an approximate 1.1% increase in the number of cattle processed, and a 4.6% increase in the average sales price per head.
Total costs and expenses of approximately $4,043.4 million for the thirty-nine weeks ended May 29, 2010 were 95.8% as a percent of sales compared to approximately $3,951.2 million for the thirty-nine weeks ended May 30, 2009, or 97.7% as a percent of sales. An increase in the volume of cattle processed and cost of live cattle, and a decrease in total costs as a percentage of sales resulted in increased operating income of approximately $83.9 million for the thirty nine weeks ended May 29, 2010 compared to the same thirty nine week period of fiscal year 2009.
Net Sales. Net sales were approximately $4,221.4 million for the thirty-nine weeks ended May 29, 2010 compared to approximately $4,045.2 million for the thirty-nine weeks ended May 30, 2009, an increase of approximately $176.2 million, or 4.4%. Net sales increased primarily due to an approximate 1.1% increase in the number of cattle processed, and a 4.6% increase in the average sales price per head, during the thirty-nine weeks ended May 29, 2010 as compared to the thirty-nine weeks ended May 30, 2009.
Cost of Sales. Cost of sales was approximately $3,962.6 million for the thirty-nine weeks ended May 29, 2010 compared to approximately $3,882.6 million for the thirty-nine weeks ended May 30, 2009, an increase of approximately $80.0 million, or 2.1%. The increase in cost of sales for the thirty-nine weeks ended May 29, 2010 resulted primarily from an approximate 1.1% increase in the number of cattle processed, and an increase of approximately 0.9% in live cattle prices as compared to the thirty-nine week period of fiscal year 2009.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $41.5 million for the thirty-nine weeks ended May 29, 2010 compared to approximately $35.3 million for the thirty-nine weeks ended May 30, 2009, an increase of approximately $6.2 million, or 17.6%. The increase for this period is primarily due to an increase in legal fees of $2.1 million, increase in bad debt expense of approximately $1.6 million, increase in marketing of approximately $1.1 million, increase in travel for the period of approximately $0.9 million, and increased consulting expenses of approximately $0.8 million.
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Depreciation and Amortization Expense. Depreciation and amortization expenses were approximately $39.3 million for the thirty-nine weeks ended May 29, 2010 compared to approximately $33.2 million for the thirty-nine weeks ended May 30, 2009, an increase of approximately $6.1 million, or 18.4%. Depreciation expense increased due to assets being placed into service, primarily at our three beef plants and two case ready plants during fiscal year 2010.
Operating Income. Operating income was approximately $178.0 million for the thirty-nine weeks ended May 29, 2010 compared to approximately $94.1 million for the thirty-nine weeks ended May 30, 2009, an increase of approximately $83.9 million. The increase in operating income for the thirty-nine week period ended May 29, 2010, resulted primarily from a decrease in the expenses as a percentage of sales of approximately 2.0%, as compared to the thirty-nine week period ended May 30, 2009.
Interest Expense. Interest expense was approximately $11.6 million for the thirty-nine weeks ended May 29, 2010 compared to approximately $18.3 million for the thirty-nine weeks ended May 30, 2009, a decrease of approximately $6.7 million, or 36.6%. The decrease in interest expense during the thirty-nine weeks ended May 30, 2009 as compared to the thirty-nine week period ended May 30, 2009 was due primarily to the purchase and cancellation of the remaining $66.9 million of NBP’s senior notes during the second quarter of fiscal year 2010 resulting in a decrease of approximately $7.6 million in interest expense compared to the thirty-nine week period ended May 30, 2009.
Termination Fee. The termination fee was $0.0 million in the thirty-nine weeks ended May 29, 2010 as compared to $14.6 million in the thirty-nine weeks ended May 30, 2009. The one-time termination fee was received in the fiscal year 2009 as a result of the termination of the Membership Interest Purchase Agreement dated February 29, 2008, between and among USPB, NBP, JBS S.A., and the other holders of membership interests in NBP.
Other, net. Other, net non-operating expense was approximately $3.5 million for the thirty-nine weeks ended May 29, 2010 compared to other, net non-operating expense of approximately $4.4 million for the thirty-nine weeks ended May 30, 2009, a decrease of approximately $0.9 million.
Income Tax Expense. Income tax expense was approximately $0.7 million for the thirty-nine weeks ended May 29, 2010 compared to approximately $0.9 million for the thirty-nine weeks ended May 30, 2009, a decrease of approximately $0.2 million, or 22.2%. This decrease in income taxes was primarily related to NBP’s subsidiary, National Carriers. Income tax expense is recorded on income from National Carriers, which is organized as a C Corporation.
Net Income Attributable to Noncontrolling Interest in NBP. Noncontrolling interest in the net income of NBP for the thirty-nine weeks ended May 29, 2010 was $52.6 million compared to noncontrolling interest in the net income for the thirty-nine weeks ended May 30, 2009 of $28.3 million, a change of $24.3 million. The noncontrolling interest in NBP represents the minority owners’ interest in NBP’s earnings.
Liquidity and Capital Resources
As of May 29, 2010, we had net working capital of approximately $216.6 million, which included $28.6 million in distributions payable and cash and cash equivalents of $24.7 million. As of August 29, 2009, we had net working capital of approximately $163.3 million, which included $10.9 million in distributions payable and cash and cash equivalents of $18.9 million. Our primary sources of liquidity are cash flows from operations and available borrowings under our amended and restated credit facility (Credit Facility).
As of May 29, 2010, we had $288.0 million of long-term debt, of which $7.7 million was classified as a current liability. As of May 29, 2010, NBP’s Credit Facility consisted of a $228.8 million term loan, all of which was outstanding, and a $225.0 million revolving line of credit loan, which had outstanding borrowings of $37.9 million, outstanding letters of credit of $26.0 million and available borrowings of $161.2 million, based on the most restrictive financial covenant calculations. Cash flows from operations and borrowings under our Credit Facility have funded our working capital requirements, acquisitions, capital expenditures and other general corporate purposes. NBP was in compliance with all of our financial covenants under our Credit Facility as of May 29, 2010. USPB was in compliance with all of the financial covenants under its Amended and Restated Credit Agreement as of May 29, 2010.
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In addition to outstanding borrowings under its Credit Facility, the Company had outstanding borrowings under industrial revenue bonds of $12.2 million, a term loan with CoBank, of which approximately $1.2 million was outstanding, a $13.0 million revolving line of credit loan, which had no outstanding borrowings, and capital leases and other obligations of $7.9 million as of May 29, 2010. During the quarter ended May 29, 2010, NBP redeemed the entire outstanding borrowings under its senior notes in the amount of $27.1 million.
As noted within Note 10, NBP amended and restated the terms of its Credit Facility as of June 4, 2010. See the “Amended and Restated Senior Credit Facility” section below for additional details related to the amendment and restatement.
NBP believes that available borrowings under its 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 the 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 29, 2009.
Operating Activities
Net cash provided by operating activities in the thirty-nine weeks ended May 29, 2010 was $134.0 million compared to net cash provided by operating activities of $143.8 million in the thirty-nine weeks ended May 30, 2009. The $9.8 million change was primarily due to net income of approximately $162.1 million during the thirty-nine week period ended May 29, 2010 as compared to the net income of $85.2 million during the thirty-nine week period ended May 30, 2009. The increase in net income is offset by a decrease in cash provided by accounts receivable and inventory of approximately of $62.6 and $53.1 million respectively.
Investing Activities
Net cash used in investing activities was $27.9 million in the thirty-nine weeks ended May 29, 2010 compared to $19.8 million in the thirty-nine weeks ended May 30, 2009. The decrease in cash used was primarily the result of the $14.6 million termination fee received in the twenty-six week period in the prior year and to a decrease in expenditures for property, plant and equipment related to improving operating efficiencies, primarily at our Liberal, Dodge City and Case Ready facilities, in the current year.
Financing Activities
Net cash used in financing activities was approximately $100.0 million in the thirty-nine weeks ended May 29, 2010 compared to net cash used in financing activities of $186.4 million in the thirty-nine weeks ended May 30, 2009. The decrease in cash used in financing activities was primarily attributed to an approximate $125.5 million redemption of member capital in the prior period, and an additional $75.0 million borrowings on the term loan in the current period. These decreases are offset by an approximate $23.4 million increase in member and non-controlling interest distributions paid in the current year, the purchase and cancellation of approximately $66.9 million aggregate principal amount of NBP’s senior notes compared to $45.5 million in the same period of the prior year, $59.0 million reduction in net receipts under the revolving loan, and an approximate $19.6 million member capital contribution during the prior reporting period.
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; and (5) remove the 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, LLP and National Carriers, Inc., as loan parties and guarantors. The related financing charges, of approximately $4.1 million, will be amortized over the life of the loan.
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 based on funded debt to EBITDA ratio with grids based on different ratios.
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The borrowings under the revolving loan are available for NBP’s working capital requirements, capital expenditures and other general corporate purposes. The Credit Facility is secured by a first priority lien on substantially all of the assets of NPB and its subsidiaries. The principal amount outstanding under the term loan is due and payable in equal quarterly installments, beginning in October 2010, based on a 10-year level amortization of the remaining amount of the term loan. All outstanding loan amounts are due and payable June 4, 2015. Prepayment of the loans is allowed at any time.
The Credit Facility contains customary affirmative covenants relating to NBP and its subsidiaries, including, without limitation, conduct of business, the 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 the following: cash distributions to its members, mergers, sale of assets, investments and acquisitions, encumbrances, indebtedness, affiliate transactions, and ERISA matters. The ability of NBP and its subsidiaries to engage in other business, incur debt or grant liens is also restricted.
The Credit Facility contains customary events of default, including without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of NBP’s property, changes in control of NBP, or 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 cost 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. From time to time, 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 NBP’s 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.
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From time to time, NBP purchases cattle futures and options contracts. NBP’s primary use of these contracts is to partially determine its future input costs when it has committed forward sales purchase orders from customers at a specified fixed price. The longest duration futures contract owned is thirteen 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 management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.
NBP uses a sensitivity analysis to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments. NBP feels that sensitivity analysis more appropriately reflects the potential market value exposure associated with the use of derivative instruments. As of May 29, 2010, the potential change in the fair value of applicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price in each year, was $1.7 million. As of August 30, 2009, the potential change in fair value of applicable commodity prices, assuming a hypothetical 10% decrease in the underlying commodity price, was $16.4 million. This change was primarily due to the cattle futures contracts that NBP entered into during the first quarter of fiscal year 2009 to offset the risk of fixed-price sales commitments.
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.
Interest Rates. As a result of the Company’s normal borrowing and leasing activities, its operating results are exposed to fluctuations in interest rates, which managed primarily through its regular financing activities. The Company generally maintains limited investments in cash and cash equivalents.
The Company 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. Our variable interest expense is sensitive to changes in the general level of interest rates. As of May 29, 2010, the weighted average interest rate on our $278.9 million of variable rate debt was approximately 5.2%.
We had total interest expense of approximately $11.6 million during the thirty-nine week period ending May 29, 2010. The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $4.0 million in the thirty-nine week period ending May 29, 2010.
Item 4. Controls and Procedures.
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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 thirty-nine weeks ended May 29, 2010 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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Item 1. Legal Proceedings.
For information regarding legal proceedings, see Note 6. Contingencies to our Consolidated Financial Statements included in Part I- Item 1 of this Form 10-Q, which is incorporated herein by reference.
Item 1A. Risk Factors.
The risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended August 29, 2009 have not materially changed. Please refer to the Company’s report on Form 10-K for the fiscal year ended August 29, 2009 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.
Item 5. Other Information.
USPB continues to monitor the initial public offering market and may pursue taking National Beef, Inc. public in the future.
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| Exhibits |
10.1 | Amended and Restated Credit Agreement dated as of June 4, 2010 entered into by and between National Beef Packing Company, LLC, certain of its subsidiaries, and various lenders (incorporated by reference to Exhibit 10.1 (File No. 333-111407) to Form 8-K filed with the SEC on June 8, 2010). | ||
10.2 | Unit Redemption Agreement by and between NATIONAL BEEF PACKING COMPANY, LLC, TKK INVESTMENTS, LLC, and TMKCo, LLC, (incorporated herein by reference to Exhibit 10.2 to Form 8-K (File No. 333-115164) filed with the SEC on June 8, 2010). | ||
10.3 | Fifth Amended Exhibit 3.1 to National’s Limited Liability Company Agreement (incorporated herein by reference to Exhibit 10.3 to Form 8-K (File No. 333-115164) filed with the SEC on June 8, 2010). | ||
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). | ||
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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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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 | ||
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By: |
| /s/ Steven D. Hunt |
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| Steven D. Hunt (Principal Executive Officer) |
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By: |
| /s/ Scott J. Miller |
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| Scott J. Miller (Principal Financial and Accounting Officer) |
Date: July 9, 2010