----

 

 **UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington****, D.C. 20549**

**FORM 10-Q**

**(Mark one)**

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

 

 

**For the quarterly period ended February 26, 2011**

**or**

 

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

 

 

**For the transition period from       ___      to       ___    .**

** **

**Commission file number 333-115164**

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

| **DELAWARE**                                                        |   | **20-1576986**                            |
|---------------------------------------------------------------------|--------|-------------------------------------------|
| **(State  or other jurisdiction of incorporation or organization)** |   | **(I.R.S.  Employer Identification No.)** |

**12200  North Ambassador Drive****Kansas  City****, MO 64163****(Addressof principal executive offices)**

**Telephone:(866) 877-2525(Registrant’stelephone number, including area code)**

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

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company.  See definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer o   | Accelerated Filer o | Non-Accelerated Filer þ | Smaller Reporting Company o |
|---------------------------------------|---------------------|------------------------------|-----------------------------|

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

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

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|                  | TABLE OF CONTENTS

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

 

 

Unless the context indicates orotherwise 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 itsconsolidated subsidiaries. As used in this report, the terms “NBP” and“National Beef” refer to National Beef Packing Company, LLC (formerly known asFarmland National Beef Packing Company, LP), a Delaware limited liabilitycompany, and “USPB” refers to U.S. Premium Beef, LLC (formerly known U.S.Premium Beef, Ltd.) prior to consolidation. 

**                                                                                               **

| ii |
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**PART I.  FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements (unaudited).**

 

 

 

 

 

 

 

 

 

 

 

**  **

 

 

 

 

 

 

 

| 1 |
|---|

                              

 

 

 

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** **

| **U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES**                       |
|--------------------------------------------------------------------------------------------|
| **Consolidated Balance Sheets**                                                  |
| (thousands of dollars, except unit data)                          |
|                                                                                       |   |   | **February 26,** |   | **August 28,** |
| **Assets**                                                                                 | **2011** |   | **2010** |
|                                                                                       |   |   |   |   |   |
| Current assets:                                                                       |   |   |   |
|                                                                                       | Cash and cash equivalents | $ | 50,621  |   | $ | 35,439  |
|                                                                                       | Accounts receivable, less allowance for returns and doubtful accounts |   |   |   |
|                                                                                       |   | of $2,961 and $2,891, respectively | 191,853  |   | 182,237  |
|                                                                                       | Due from affiliates | 6,090  |   | 5,089  |
|                                                                                       | Other receivables | 7,965  |   | 7,399  |
|                                                                                       | Inventories | 245,905  |   | 232,943  |
|                                                                                       | Other current assets | 95,246  |   | 45,999  |
|                                                                                       |   | Total current assets | 597,680  |   | 509,106  |
| Property, plant, and equipment, at cost                           | 576,215  |   | 546,756  |
|                                                                                       | Less accumulated depreciation | 246,909  |   | 222,677  |
|                                                                                       |   | Net property, plant, and equipment | 329,306  |   | 324,079  |
| Goodwill                                                                                   | 86,251  |   | 86,251  |
| Other intangible assets, net of accumulated amortization     |   |   |   |
|                                                                                       | of $17,176 and $16,128, respectively | 57,568  |   | 58,606  |
| Other assets                                                                          | 8,558  |   | 8,695  |
|                                                                                       |   | Total assets | $ | 1,079,363  |   | $ | 986,737  |
|                                                                                       |   |   |   |   |   |
| **Liabilities and Capital Shares and Equities**                   |   |   |   |
| Current liabilities:                                                                  |   |   |   |
|                                                                                       | Current installments of long-term debt | $ | 38,966  |   | $ | 22,412  |
|                                                                                       | Cattle purchases payable | 77,429  |   | 70,208  |
|                                                                                       | Accounts payable - trade | 72,341  |   | 73,562  |
|                                                                                       | Due to affiliates | 1,215  |   | 738  |
|                                                                                       | Accrued compensation and benefits | 49,306  |   | 82,474  |
|                                                                                       | Accrued insurance | 16,624  |   | 15,048  |
|                                                                                       | Other accrued expenses and liabilities | 52,765  |   | 27,747  |
|                                                                                       | Distributions payable | 22,871  |   | 8,350  |
|                                                                                       |   | Total current liabilities | 331,517  |   | 300,539  |
| Long-term liabilities:                                                                |   |   |   |
|                                                                                       | Long-term debt, excluding current installments | 398,189  |   | 225,090  |
|                                                                                       | Other liabilities | 2,483  |   | 2,443  |
|                                                                                       |   | Total long-term liabilities | 400,672  |   | 227,533  |
|                                                                                       |   | Total liabilities | 732,189  |   | 528,072  |
|                                                                                       | Noncontrolling interest in NBP | 310,501  |   | 291,746  |
| Capital shares and equities:                                                |   |   |   |
|                                                                                       | Members' (deficit) / capital, 735,385 Class A units and 755,385 Class B units |   |   |   |
|                                                                                       |   | authorized, issued and outstanding | (8,481) |   | 115,452  |
|                                                                                       | Patronage notices | 42,130  |   | 48,682  |
|                                                                                       | Accumulated other comprehensive income attributable to USPB | 44  |   | 23  |
|                                                                                       |   | Total capital shares and equities attributable to USPB | 33,693  |   | 164,157  |
|                                                                                       | Noncontrolling interest in Kansas City Steak Company, LLC | 2,980  |   | 2,762  |
|                                                                                       |   | Total Capital Shares and Equities | 36,673  |   | 166,919  |
|                                                                                       |   | Total liabilities, noncontrolling interest in NBP and capital shares and equities | $ | 1,079,363  |   | $ | 986,737  |
|                                                                                       |   |   |   |   |   |
| See accompanying notes to consolidated financial statements. |   |   |   |

** **

** **

 

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| **U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES**                                   |
|--------------------------------------------------------------------------------------------------------|
| **Consolidated Statements of Operations**                                               |
| (thousands of dollars, except per unit and per unit data) |
|                                                                                                   |   |   |   | **13 weeks ended** |   | **13 weeks ended** |   | **26 weeks ended** |   | **26 weeks ended** |
|                                                                                                   |   |   |   | **February 26, 2011** |   | **February 27, 2010** |   | **February 26, 2011** |   | **February 27, 2010** |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                                                         |   | $ | 1,652,606  |   | $ | 1,340,926  |   | $ | 3,239,926  |   | $ | 2,683,536  |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                                          |   |   |   |   |   |   |   |
|                                                                                                   | Cost of sales | 1,562,350  |   | 1,259,860  |   | 3,067,789  |   | 2,533,171  |
|                                                                                                   | Selling, general, and administrative expenses | 16,222  |   | 13,596  |   | 30,643  |   | 26,786  |
|                                                                                                   | Depreciation and amortization | 13,419  |   | 13,225  |   | 26,481  |   | 25,983  |
|                                                                                                   |   | Total costs and expenses | 1,591,991  |   | 1,286,681  |   | 3,124,913  |   | 2,585,940  |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                   |   |   | Operating income | 60,615  |   | 54,245  |   | 115,013  |   | 97,596  |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Other income (expense):                                                                      |   |   |   |   |   |   |   |
|                                                                                                   | Interest income | 12  |   | 6  |   | 24  |   | 36  |
|                                                                                                   | Interest expense | (3,485) |   | (3,539) |   | (6,094) |   | (8,102) |
|                                                                                                   | Other, net | 228  |   | (3,785) |   | 821  |   | (3,780) |
|                                                                                                   |   |   | Income before taxes | 57,370  |   | 46,927  |   | 109,764  |   | 85,750  |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Income tax (expense) benefit                                                            | (383) |   | 48  |   | (718) |   | (352) |
|                                                                                                   |   |   | Net income | 56,987  |   | 46,975  |   | 109,046  |   | 85,398  |
| Less: Net income attibutable to noncontrolling interest in:         |   |   |   |   |   |   |   |
|                                                                                                   | Kansas City Steak Company, LLC | (372) |   | (568) |   | (433) |   | (791) |
|                                                                                                   | National Beef Packing Company, LLC | (18,564) |   | (15,174) |   | (35,113) |   | (27,909) |
| Net income attributable to U.S. Premium Beef, LLC                   | $ | 38,051  |   | $ | 31,233  |   | $ | 73,500  |   | $ | 56,698  |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Earnings per unit:                                                                           |   |   |   |   |   |   |   |
|                                                                                                   | Basic |   |   |   |   |   |   |   |   |
|                                                                                                   |   | Class A units | $ | 5.17  |   | $ | 4.25  |   | $ | 9.99  |   | $ | 13.95  |
|                                                                                                   |   | Class B units | $ | 45.34  |   | $ | 37.21  |   | $ | 87.57  |   | $ | 61.48  |
|                                                                                                   | Diluted |   |   |   |   |   |   |   |   |
|                                                                                                   |   | Class A units | $ | 5.09  |   | $ | 4.18  |   | $ | 9.85  |   | $ | 13.72  |
|                                                                                                   |   | Class B units | $ | 45.34  |   | $ | 37.21  |   | $ | 87.57  |   | $ | 61.48  |
|                                                                                                   |   |   |   |   |   |   |   |   |   |   |
| Outstanding weighted-average Class A and Class B units:             |   |   |   |   |   |   |   |
|                                                                                                   | Basic |   |   |   |   |   |   |   |   |
|                                                                                                   |   | Class A units | 735,385  |   | 735,385  |   | 735,385  |   | 735,385  |
|                                                                                                   |   | Class B units | 755,385  |   | 755,385  |   | 755,385  |   | 755,385  |
|                                                                                                   | Diluted |   |   |   |   |   |   |   |   |
|                                                                                                   |   | Class A units | 746,981  |   | 747,471  |   | 746,546  |   | 747,471  |
|                                                                                                   |   | Class B units | 755,385  |   | 755,385  |   | 755,385  |   | 755,385  |
| See accompanying notes to consolidated financial statements.             |   |   |   |   |   |   |   |

** **

 

 

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** **

| **U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES**                                        |
|-------------------------------------------------------------------------------------------------------------|
| **Consolidated Statements of Cash Flows**                                               |
| (thousands of dollars)                                                                            |
|                                                                                                        |   |   |   |   | **26 weeks ended** |   | **26 weeks ended** |
|                                                                                                        |   |   |   |   | **February 26, 2011** |   | **February 27, 2010** |
|                                                                                                        |   |   |   |   |   |   |   |
| Cash flows from operating activities:                                                   |   |   |   |
|                                                                                                        | Net income |   | $ | 109,046  |   | $ | 85,398  |
|                                                                                                        | Adjustments to reconcile net income to net cash provided by |   |   |   |
|                                                                                                        |   | operating activities: |   |   |   |
|                                                                                                        |   | Depreciation and amortization | 26,481  |   | 25,983  |
|                                                                                                        |   | Gain on disposal of property, plant, and equipment | (645) |   | (120) |
|                                                                                                        |   | Amortization of debt issuance costs | 757  |   | 484  |
|                                                                                                        |   | Write-off of debt issuance costs | -  |   | 418  |
|                                                                                                        |   | Changes in assets and liabilities: |   |   |   |
|                                                                                                        |   |   | Accounts receivable | (9,616) |   | 741  |
|                                                                                                        |   |   | Due from affiliates | (1,001) |   | 501  |
|                                                                                                        |   |   | Other receivables | (566) |   | (199) |
|                                                                                                        |   |   | Inventories | (12,962) |   | (13,252) |
|                                                                                                        |   |   | Other assets | (49,366) |   | (2,302) |
|                                                                                                        |   |   | Cattle purchases payable | 1,924  |   | 223  |
|                                                                                                        |   |   | Accounts payable | (2,491) |   | (4,818) |
|                                                                                                        |   |   | Due to affiliates | 477  |   | 22  |
|                                                                                                        |   |   | Accrued compensation and benefits | (33,168) |   | (12,627) |
|                                                                                                        |   |   | Accrued insurance | 1,576  |   | (221) |
|                                                                                                        |   |   | Other accrued expenses and liabilities | 25,058  |   | (4,912) |
|                                                                                                        |   |   |   | Net cash provided by operating activities | 55,504  |   | 75,319  |
| Cash flows from investing activities:                                                   |   |   |   |
|                                                                                                        | Capital expenditures, including interest capitalized | (31,660) |   | (17,986) |
|                                                                                                        | Proceeds from sale of property, plant, and equipment | 1,645  |   | 683  |
|                                                                                                        |   | Net cash used in investing activities | (30,015) |   | (17,303) |
| Cash flows from financing activities:                                                   |   |   |   |
|                                                                                                        | Net receipts under revolving credit lines | 30,000  |   | 16,100  |
|                                                                                                        | Borrowings under term note payable | 175,000  |   | 75,000  |
|                                                                                                        | Payments of term notes payable | (14,765) |   | (23,617) |
|                                                                                                        | Repayments of other indebtedness / capital leases | (582) |   | (5,245) |
|                                                                                                        | Payment of patronage notices | (6,552) |   | -  |
|                                                                                                        | Purchase and cancellation of senior notes | -  |   | (66,855) |
|                                                                                                        | Cash paid for financing costs | (509) |   | (1,103) |
|                                                                                                        | Change in overdraft balances | 6,567  |   | 14,191  |
|                                                                                                        | Distributions to noncontrolling interests in National Beef Packing Company, LLC | (65,396) |   | (21,767) |
|                                                                                                        | Member distributions | (134,091) |   | (38,068) |
|                                                                                                        |   |   |   | Net cash used in financing activities | (10,328) |   | (51,364) |
|                                                                                                        | Effect of exchange rate changes on cash | 21  |   | 18  |
|                                                                                                        |   |   |   | Net increase in cash | 15,182  |   | 6,670  |
| Cash and cash equivalents at beginning of the period                | 35,439  |   | 18,853  |
| Cash and cash equivalents at end of the period                      | $ | 50,621  |   | $ | 25,523  |
| Supplemental cash disclosures:                                                                    |   |   |   |
|                                                                                                        | Cash paid during the period for interest | $ | 5,340  |   | $ | 8,212  |
|                                                                                                        | Cash paid during the period for taxes | $ | 722  |   | $ | 9  |
| Supplemental non-cash disclosures fo investing and financing activities: |   |   |   |
|                                                                                                        | Assets acquired dthorugh capital lease | $ | 129  |   | $ | 111  |
| See accompanying notes to consolidated financial statements.                  |   |   |   |

** **

 

 

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**U.S. PREMIUM BEEF, LLC AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

**(1)Interim Financial Statements**

**Basisof Presentation**

The accompanying unaudited Consolidated FinancialStatements have been prepared in accordance with U.S. generally acceptedaccounting principles (GAAP), for interim financial information; therefore,they do not include all of the information and footnotes required by GAAP forcomplete financial statements. In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included usingmanagement’s best estimates and judgments where appropriate.  These estimatesand judgments affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements.  The estimates and judgments will also affect the reported amountsfor certain revenues and expenses during the reporting period.  Actual resultscould differ materially from these estimates and judgments.  For furtherinformation, refer to the audited Consolidated Financial Statements and Notesto 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), forthe fiscal year ended August 28, 2010.  The results of operations for theinterim periods presented are not necessarily indicative of the results for afull fiscal year. 

**(2)New Accounting Pronouncements**

In January 2010, the Financial Accounting StandardsBoard (FASB) issued Accounting Standards Update (ASU) No. 2010-06, *FairValue Measurements and Disclosures*.  The ASU issued guidance to amend thedisclosure requirements related to recurring and nonrecurring fair valuemeasurements.  The guidance requires additional disclosures about the differentclasses of assets and liabilities measured at fair value, the valuation techniquesand inputs used, the activity in Level 3 fair value measurements, and thetransfers between Levels 1, 2, and 3 of the fair value measurement hierarchy. This guidance will become effective for the Company’s year ending in fiscal year2012.  The adoption of ASU No. 2010-06 should not significantly impact theCompany’s consolidated financial position or results of operations.

**(3)Inventories**

Inventories at February 26, 2011 and August 28, 2010 consistedof the following (thousands of dollars):
|                                                |                            |         |                          |         |   |          |
|-----------------------------------------------------|---------------------------------|--------------|-------------------------------|--------------|--------|---------------|
|                                                | **February 26, 2011** |         | **August 28, 2010** |
|                                                |                            |         |                          |         |
| Dressed and boxed meat products |                            | $            | 160,970                  |         | $      | 154,927  |
| Beef by-products                               |                            | 42,290  |                          | 46,891  |
| Supplies and other                        |                            | 42,645  |                          | 31,125  |
|                                                |                            | $            | 245,905                  |         | $      | 232,943  |
|                                                |                            |         |                          |         |

** **

**(4)Comprehensive Income Attributable to USPB**

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

 

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** **

**(5)Noncontrolling Interests In NBP**

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

Generallyaccepted accounting principles require the Company to determine the fair valueof the noncontrolling interest in NBP at the end of each reporting period.  Tothe extent this value increases, the change in fair value is accreted over the redemptionperiod.  In determining the fair value of the noncontrolling interest in NBPheld by NBPCo Holdings as of February 26, 2011, management has consideredprevious redemption prices, valuations of peer companies and other factors. The noncontrolling interest in NBP held by the Klein Affiliates as of February26, 2011 was valued based upon a contractually stipulated formula. 

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

**(6)Contingencies**

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

**(7) Fair Value Measurements**

The Company determines fair value utilizing athree-level fair value hierarchy that prioritizes the inputs used to measurefair value.  The fair value hierarchy gives the highest priority to quotedmarket prices (Level 1) and the lowest priority to unobservable inputs (Level3).  The three levels of inputs used to measure fair value are as follows:
    -  Level 1 – quoted prices in active markets foridentical assets or liabilities accessible by the reporting entity. 
    -  Level 2 – observable inputs other than quoted pricesincluded in Level 1, such as quoted prices for similar assets and liabilitiesin active markets; quoted prices for identical or similar assets andliabilities in markets that are not active; or other inputs that are observableor can be corroborated by observable market data.
    -  Level 3 – unobservable inputs for an asset orliability.  Unobservable inputs should only be used to the extent observableinputs are not available.

The following table details the assets and liabilitiesmeasured at fair value on a recurring basis as of February 26, 2011 and August28, 2010 and also the level within the fair value hierarchy used to measureeach category of assets (thousands of dollars).

 

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

 

Management has used certain contractual redemptionprices in measuring the fair value of the Klein Affiliates share of thenoncontrolling interest in NBP, which is included in level 2 as of February 26,2011 and August 28, 2010.  NBPCo Holdings share of the noncontrolling interestin NBP is based upon unobservable inputs, thus included in level 3 as of February26, 2011 and August 28, 2010.

The following table presents a reconciliation of noncontrollinginterests measured at fair value on a recurring basis using significantunobservable inputs (Level 3) during the thirteen and twenty-six weeks ended February26, 2011 (thousands of dollars). ** **
| **Fair Value Measurements Using Significant Unobservable Inputs (Level 3)** |
|---------------------------------------------------------------------------------------------------------------------|
|                                                                                                                |   | **13 weeks ended** |   | **26 weeks ended** |
|                                                                                                                |   | **February 26, 2011** |   | **February 26, 2011** |
|                                                                                                                |   |   |   |   |
| Beginning Balance                                                                                              | $ | 211,571  |   | $ | 229,892  |
|                                                                                                                | Allocation of year-to-date net income | 15,103  |   | 28,590  |
|                                                                                                                | Class A priority distribution | (736) |   | (1,472) |
|                                                                                                                | Class B distributions | (9,117) |   | (15,138) |
|                                                                                                                | Equity distributions | -  |   | (37,156) |
|                                                                                                                | Appraisal valuation adjustment | 32,460  |   | 44,565  |
| Balance at February 26, 2011                                                                    | $ | 249,281  |   | $ | 249,281  |

** **

**(8)Disclosure about Derivative Instruments and Hedging Activities**

As part of NBP’s ongoing operations, NBP is exposed tomarket risks such as changes in commodity prices.  To manage these risks, NBPmay enter into the following derivative instruments pursuant to its establishedpolicies:
    -  Forward purchase contracts forcattle for use in the beef plants
    -  Exchange traded futures contractsfor cattle 
    -  Exchange traded futures contractsfor grain 

 

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

NBPenters into certain commodity derivatives, primarily with a diversified groupof highly rated counterparties.  The maximum amount of loss due to the creditrisk of the counterparties, should the counterparties fail to perform accordingto the terms of the contracts, is deemed to be immaterial as of February 26,2011.  The exchange-traded contracts have been entered into under a masternetting agreement.  None of the derivatives entered into have credit-relatedcontingent features.  NBP has $43.6 million in cash collateral posted on itsderivative liabilities.   

Thefollowing table presents the fair values as discussed in Note 7 and otherinformation regarding derivative instruments not designated as hedginginstruments as of February 26, 2011 and August 28, 2010 (thousands of dollars):
| **February 26, 2011** | **Derivative Asset** |                   | **Derivative Liability** |
|---------------------------------|---------------------------|------------------------|-------------------------------|
|                            |                      | **Balance Sheet** |                          |   |   | **Balance Sheet** |   |   |
|                            |                      | **Location**           |                          | **Fair Value** |   | **Location** |   | **Fair Value** |
|                            |                      |                   |                          |   |   |   |   |   |   |   |
|                            |                      | Other current     |                          |   |   | Accrued expenses and |   |   |
| Commodity contracts        | assets                    |                   | $                             | 40,013  |   | other liabilities |   | $ | 38,090  |
|                            | Total                     |                   |                          |   |   | $ | 40,013  |   |   |   | $ | 38,090  |
| **August 28, 2010**   | **Derivative Asset** |                   | **Derivative Liability** |
|                            |                      | **Balance Sheet** |                          |   |   | **Balance Sheet** |   |   |
|                            |                      | **Location**           |                          | **Fair Value** |   | **Location** |   | **Fair Value** |
|                            |                      |                   |                          |   |   |   |   |   |   |   |
|                            |                      | Other current     |                          |   |   | Accrued expenses and |   |   |
| Commodity contracts        | assets                    |                   | $                             | 15,563  |   | other liabilities |   | $ | 14,672  |
|                            | Total                     |                   |                          |   |   | $ | 15,563  |   |   |   | $ | 14,672  |
|                            |                      |                   |                          |   |   |   |   |   |   |   |

 

Thefollowing table presents the impact of derivative instruments on the ConsolidatedStatement of Operations for the thirteen and twenty-six week periods ended February26, 2011 and February 27, 2010, respectively (thousands of dollars):

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

|  

 

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** **

**(9)Income Attributable to USPB Per Unit**

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

Basic EPUexcludes dilution and is computed by first allocating a portion of net income (loss)attributable to USPB to Class A units and the remainder is allocated to Class Bunits. On November 2, 2009, the Company’s members approved changing theallocation 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 weekperiod ended February 27, 2010, income was allocated 10% to the Class A’s and90% to the Class B’s.  For the twenty-six week period ended February 27, 2010,the pro-rata share of income earned through November 1, 2009 was allocated 33%to the Class A’s and 67% to the Class B’s and the remainder of the income forthe period was allocated 10% to the Class A’s and 90% to the Class B’s.  Forthe thirteen and twenty-six week periods ended February 26, 2011 income wasallocated 10% to the Class A’s and 90% to the Class B’s.  Income (loss) allocatedto the Class A and Class B units is then divided by the weighted-average numberof Class A and Class B units outstanding for the period to determine the basicEPU for each respective class of unit.  Class A units and Class B units shallbe issued, redeemed, and transferred together on a one for one basis until theboard of directors determines the extent and conditions under which Class Aunits and Class B units may be issued, redeemed, and transferred separately.

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

 

 

 

 

 

 

 

 

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| **Income Per Unit Calculation**                                                |                            |          |                            |          |                            |          |                            |
|-----------------------------------------------------------------------------------------------|---------------------------------|---------------|---------------------------------|---------------|---------------------------------|---------------|---------------------------------|
|                                                                                          |                            |          | **13 weeks ended**    |          | **13 weeks ended**    |          | **26 weeks ended**    |   | **26 weeks ended** |
| (thousands of dollars, except unit and per unit data) | **February 26, 2011** |          | **February 27, 2010** |          | **February 26, 2011** |          | **February 27, 2010** |
|                                                                                          |                            |          | (unaudited)                     |          | (unaudited)                     |          | (unaudited)                     |   | (unaudited) |
| **Basic income per unit**                                                      |                            |          |                            |          |                            |          |                            |
| Income attributable to USPB available to                             |                            |          |                            |          |                            |          |                            |
|                                                                                          | unitholders (numerator)    |          |                            |          |                            |          |                            |   |
|                                                                                          |                            | Class A  | $                               | 3,805    |                            | $             | 3,125                      |   | $ | 7,350  |   | $ | 10,258  |
|                                                                                          |                            | Class B  | $                               | 34,246   |                            | $             | 28,108                     |   | $ | 66,150  |   | $ | 46,440  |
|                                                                                          |                            |          |                            |          |                            |          |                            |   |   |
| Weighted average outstanding units (denominator)                          |                            |          |                            |          |                            |          |                            |
|                                                                                          | Class A                    | 735,385  |                            | 735,385  |                            | 735,385  |                            | 735,385  |
|                                                                                          | Class B                    | 755,385  |                            | 755,385  |                            | 755,385  |                            | 755,385  |
|                                                                                          |                            |          |                            |          |                            |          |                            |   |   |
| Per unit amount                                                                     |                            |          |                            |          |                            |          |                            |
|                                                                                          | Class A                    | $             | 5.17                       |          | $                               | 4.25     |                            | $ | 9.99  |   | $ | 13.95  |
|                                                                                          | Class B                    | $             | 45.34                      |          | $                               | 37.21    |                            | $ | 87.57  |   | $ | 61.48  |
|                                                                                          |                            |          |                            |          |                            |          |                            |   |   |
| **Diluted income per unit:**                                                   |                            |          |                            |          |                            |          |                            |
| Income attributable to USPB available to                             |                            |          |                            |          |                            |          |                            |
|                                                                                          | unitholders (numerator)    |          |                            |          |                            |          |                            |   |
|                                                                                          |                            | Class A  | $                               | 3,805    |                            | $             | 3,125                      |   | $ | 7,350  |   | $ | 10,258  |
|                                                                                          |                            | Class B  | $                               | 34,246   |                            | $             | 28,108                     |   | $ | 66,150  |   | $ | 46,440  |
|                                                                                          |                            |          |                            |          |                            |          |                            |   |   |
| Weighted average outstanding Class A units                           | 735,385                    |          | 735,385                    |          | 735,385                    |          | 735,385                    |
| Effect of dilutive securities - Class A unit options  | 11,596                     |          | 12,086                     |          | 11,161                     |          | 12,086                     |
|                                                                                          | Units (denominator)        | 746,981  |                            | 747,471  |                            | 746,546  |                            | 747,471  |
|                                                                                          |                            |          |                            |          |                            |          |                            |   |   |
| Weighted average outstanding Class B units                           | 755,385                    |          | 755,385                    |          | 755,385                    |          | 755,385                    |
| Effect of dilutive securities - Class B unit options  | -                          |          | -                          |          | -                          |          | -                          |
|                                                                                          | Units (denominator)        | 755,385  |                            | 755,385  |                            | 755,385  |                            | 755,385  |
|                                                                                          |                            |          |                            |          |                            |          |                            |   |   |
| Per unit amount                                                                     |                            |          |                            |          |                            |          |                            |
|                                                                                          | Class A                    | $             | 5.09                       |          | $                               | 4.18     |                            | $ | 9.85  |   | $ | 13.72  |
|                                                                                          | Class B                    | $             | 45.34                      |          | $                               | 37.21    |                            | $ | 87.57  |   | $ | 61.48  |

 

**(10)Debt**

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

 

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

The following discussion shouldbe read in conjunction with our consolidated financial statements and relatednotes and other financial information appearing elsewhere in this report.

**DisclosureRegarding Forward-Looking Statements**

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

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

**IndustryOutlook**

We anticipate strong beef demand to offset possiblenegative implications of year-over-year increases in fed cattle supplies intomid-summer.  Cattle placement has been active during the first calendarquarter as dry conditions in the Central and South Plains moved larger numbersof lightweight cattle onto feed.  We anticipate this early placement ofcalves, combined with smaller calf crops, to contribute to a decline in cattlesupplies during the second half of calendar year 2011.  The long term cattleindustry outlook remains essentially unchanged, although herd liquidationappears to be easing.   Export of beef products is expected to remainstrong supported by an improving global economy and the value of the dollarrelative to other major currencies.

**BeefExport Markets**

Exportmarkets for U.S. beef products remain constrained since the discovery of asingle case of BSE in the State of Washington in December 2003, as well asother 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 aprovisional opening of its border to U.S. beef from animals 30 months andyounger in September 2006 but subsequently closed its border again in October2007.  South Korea reopened its border and started inspecting U.S. beef nearthe end of June 2008.  These constraints and uncertainties have historicallyhad a negative impact on beef demand during the periods in which they occurred.

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

 

 

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InDecember 2010, the United States Department of Agriculture (USDA) announcedthat China has agreed to resume talks with the Unites States regarding beefmarket access and that technical talks will resume with the goal of re-openingChina’s market for U.S. beef under the age of 30 months in early 2011.  Wecannot presently assess the full economic impact of the re-opening of China’smarket to age verified beef on the U.S. beef packing industry or our operations,and there can be no assurance that such talks will occur or result in re-openingof China’s market to U.S. beef products.

InMarch 2011 a major earthquake followed by a tsunami hit the east coast of Japanand caused significant damage to parts of the country.  A portion of our exportsales are delivered to Japan, and while we cannot presently assess the fulllong-term economic impact of the earthquake and tsunami on our operations, sofar there have been few interruptions.  

**RegulatoryDevelopments**

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

**Resultsof Operations**

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

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

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

*Net Sales*. Net sales were approximately $1,652.6 million for the thirteen weeks endedFebruary 26, 2011 compared to approximately $1,340.9 million for the thirteenweeks ended February 27, 2010, an increase of approximately $311.7 million, or23.2%.  The increase in net sales resulted primarily from a 20.1% increase inthe net sales per head during the thirteen weeks ended February 26, 2011compared to the same period in the prior year, as the demand for beef productsremained strong, and the price of beef products increased during the period. Also contributing to the increase in net sales was an approximately 2.4%increase in the number of cattle processed compared to the same period of theprior year.  

*Cost of Sales*. Cost of sales was approximately $1,562.4 million for the thirteen weeks endedFebruary 26, 2011 compared to approximately $1,259.9 million for the thirteenweeks ended February 27, 2010, an increase of approximately $302.5 million, or24.0%.   The increase was primarily a result of an approximately 23.9% increasein average cattle prices during the period compared to the prior period.  Inaddition, the cost of sales increase was partially due to the 2.4% increase inthe volume of cattle processed. 

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

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*Depreciation and Amortization Expense*.  Depreciation and amortization expenses wereapproximately $13.4 million for the thirteen weeks ended February 26, 2011compared to approximately $13.2 million for the thirteen weeks ended February27, 2010, an increase of approximately $0.2 million, or 1.5%.  Depreciationexpense increased due to assets being placed into service, primarily at ourthree beef plants and two case ready plants, during fiscal year 2011.

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

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

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

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

*General.* Net income for the twenty-six weeks ended February 26, 2011 was approximately $109.0million compared to net income of approximately $85.4 million for thetwenty-six weeks ended February 27, 2010, an improvement of approximately $23.6million, or 27.6%.  Net sales were higher in the twenty-six weeks ended February26, 2011 compared to those of the prior period primarily due to an increase in netsales per head of approximately 17.2%, and an approximately 3.2% increase inthe volume of cattle processed. 

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

*Net Sales*. Net sales were approximately $3,239.9 million for the twenty-six weeks ended February26, 2011 compared to approximately $2,683.5 million for the twenty-six weeksended February 27, 2010, an increase of approximately $556.4 million, or 20.7%. The increase in net sales resulted primarily from an average increase in net salesper head of 17.2%, and an increase in the volume of cattle processed byapproximately 3.2% in the twenty-six weeks ended February 26, 2011, as comparedto the same period in the prior year.

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

 

 

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*Selling, General and Administrative Expenses*.  Selling, general and administrative expenses wereapproximately $30.6 million for the twenty-six weeks ended February 26, 2011compared to approximately $26.8 million for the twenty-six weeks ended February27, 2010, an increase of approximately $3.8 million, or 14.2%.  The increasefor the period is primarily due to an approximately $1.6 million increase incompensation expense associated with ahigher estimated enterprise value for NBP, which impacts the compensation expense recorded for the CEO phantomunit plan, and the implementation of a management phantom unit plan in the current fiscalyear, a $0.8 million increase in consulting expenses, approximately $0.7million increase in salaries expense and an increase in travel expenses ofapproximately $0.5 million during the current period as compared to the sameperiod of the prior year.  These increases are offset by a decrease in bad debtexpense of approximately $0.3 million during the period.   

*Depreciation and Amortization Expense*.  Depreciation and amortization expenses wereapproximately $26.5 million for the twenty-six weeks ended February 26, 2011compared to approximately $26.0 million for the twenty-six weeks ended February27, 2010, an increase of approximately $0.5 million, or 1.9%.  Depreciationexpense increased due to assets being placed into service, primarily at ourthree beef plants and two case ready plants, during fiscal year 2011.

*Operating Income*.  Operating income was approximately $115.0 million for the twenty-sixweeks ended February 26, 2011 compared to operating income of approximately $97.6million for the twenty-six weeks ended February 27, 2010, an improvement ofapproximately $17.4 million, or 17.8%.  The increased operating incomeprimarily resulted from an approximately 17.2% increase in net sales per headand a 3.2% increase in the volume of cattle processed.  These increases arepartially offset by an approximately 19.6% increase in average cattle pricesduring the period.    

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

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

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

**Liquidityand Capital Resources**

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

As of February 26, 2011, we had $437.2 million of long-term debt, $39.0 million of which wasclassified as a current liability.  As of February 26, 2011, NBP’s CreditFacility consisted of a term loan, of which $360.8 million was outstanding anda $250.0 million revolving line of credit loan, which had outstanding borrowings of $57.0 million, outstandingletters of credit of $24.1 million and available borrowings of $168.9 million,based on the most restrictive financial covenant calculations.  We also had aterm loan with CoBank of which $0.6 million was outstanding and a $10.0 millionrevolving line of credit with CoBank all of which was available.  Cash flowsfrom operations and borrowings under NBP’s Credit Facility have funded itsworking capital requirements, acquisitions, capital expenditures and other generalcorporate purposes.  USPB and NBP were in compliance with all of the financialcovenants under the Credit Facilities as of February 26, 2011.

 

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In addition to outstanding borrowings under NBP CreditFacility, NBP had outstanding borrowings under industrial revenue bonds of $12.2million and capital leases and other obligations of $6.6 million as of February26, 2011.

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

*OperatingActivities*

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

*InvestingActivities*

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

*FinancingActivities*

Net cash used in financing activities was approximately$10.3 million during the twenty-six weeks ended February 26, 2011 compared to approximately$51.4 million during the twenty-six weeks ended February 27, 2010.  The changewas primarily attributed to additional $100.0 million of borrowings on the termloan during the twenty-six weeks ended February 26, 2011 compared to the prioryear period.  In addition, the remaining $66.9 million was purchased andcancelled on NBP’s senior notes during the twenty-six weeks ended February 27,2010.  These increases in cash provided by financing activities were partiallyoffset by an additional $139.7 million in member distributions made during the twenty-sixweeks ended February 26, 2011 compared to the twenty-six weeks ended February27, 2010.  

*Amendedand Restated Senior Credit Facility*

Effective as of June 4,2010, NBP’s Credit Facility was amended and restated to: (1) increase theborrowings under the Credit Facility by providing for a term loan facility ofup 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 andrevolving line of credit; (3) revise the payment schedule of the term loan; (4)extend the maturity date of the Credit Facility to June 4, 2015; (5) removelimitations on capital expenditures; (6) add new financial covenants regardingadjusted net worth and a fixed charge coverage ratio; and (7) add two whollyowned subsidiaries, National Beef California, LP and National Carriers, Inc.,as loan parties and guarantors. The lender financing charges for the amendedand restated Credit Facility of approximately $4.7 million are being amortizedover the life of the loan.

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

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

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

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

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

The Credit Facilitycontains customary events of default, including, without limitation, failure tomake payment when due, materially incorrect representations and warranties,breach of covenants, events of bankruptcy, default of other indebtedness thatwould permit acceleration of such indebtedness, the occurrence of one or moreunstayed or undischarged judgments in excess of $3.0 million, changes incustody or control of NBP’s property, changes in control of NBP, failure of anyof the loan documents to remain in full force, and NBP’s failure to properlyfund its employee benefit plans. The Credit Facility also includes customaryprovisions protecting the lenders against increased costs or loss of yieldresulting from changes in tax, reserve, capital adequacy and other requirementsof law.

**Item3. Quantitative and Qualitative Disclosures about Market Risk.**

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

*Commodities.*NBPuses various raw materials, many of which are commodities. Raw materials aregenerally available from several different sources, and NBP presently believesthat it can obtain them as needed.  Commodities are subject to pricefluctuations that may create price risk. When appropriate, NBP may hedgecommodities in order to mitigate this price risk. While this may tend to limit itsability to participate in gains from commodity price fluctuations, it alsotends to reduce the risk of loss from changes in commodity prices.  To theextent the contracts are not designated as normal purchases, NBP reflectscommodity contract gains and losses as adjustments to the basis of underlyingcommodities purchased; gains or losses are recognized in the statement ofoperations as a component of costs of goods sold.

NBP purchases cattle for use in its processingbusinesses. From time to time, NBP enters into forward purchase contracts atprices determined prior to the delivery of the cattle. The commodity price riskassociated with these activities can be hedged by selling (or buying) theunderlying commodity, or by using an appropriate commodity derivativeinstrument. The particular hedging instrument NBP uses depends on a number offactors, including availability of appropriate derivative instruments.

 

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

From time to time, NBP purchases cattle futures andoptions contracts.  Its primary use of these contracts is to partially fix itsfuture input costs when NBP has committed forward sales purchase orders fromcustomers at a specified fixed price.  The longest duration futures contractowned is sixteen months.  In accordance with ASC Topic 815, *Accounting forDerivative Instruments and Hedging Activities*, as amended, NBP accounts forfutures contracts and their related firm purchase commitments at fair value.  Certainfirm commitments for live cattle purchases and all firm commitments for boxedbeef sales are treated as “normal purchases and sales” and not marked tomarket.  ASC Topic 815 imposes extensive recordkeeping requirements in order totreat a derivative instrument as a hedge for accounting purposes. Derivativesqualify for treatment as hedges when there is a high correlation between thechange in fair value of the instrument and the related change in fair value ofthe underlying commitment. For derivatives that qualify as effective hedges,the change in fair value has no net effect on earnings until the hedgedtransaction affects earnings. For derivatives that are not designated ashedging instruments, or for the ineffective portion of a hedging instrument,the change in fair value does affect current period net earnings.

While management believes each of these instrumentshelp mitigate various market risks, they are not designated and accounted foras hedges as a result of the extensive recordkeeping requirements of thisstatement. Accordingly, the gains and losses associated with the change in fairvalue of the instrument and the offsetting gains and losses associated withchanges in the market value of certain of the firm purchase commitments relatedto the futures contracts are recorded to income and expense in the period ofchange.

NBPuses a sensitivity analysis to evaluate the effect that changes in the marketvalue of commodities will have on these commodity derivative instruments.  NBPfeels the sensitivity analysis appropriately reflects the potential marketvalue exposure associated with the use of derivative instruments.  As of February26, 2011 and August 28, 2010, the potential change in the fair value of thederivative instruments NBP holds that are not designated as normal purchases orsales, assuming a hypothetical 10% decrease in the underlying commodity pricein each year, was $4.0 million and $0.3 million, respectively.  

*Interest Rates.*  As a result of our normal borrowing andleasing activities, our operating results are exposed to fluctuations ininterest rates, which we manage primarily through our regular financingactivities. We generally maintain limited investments in cash and cashequivalents.

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

We had totalinterest expense of approximately $6.1 million during the twenty-six weekperiod ending February 26, 2011.  The estimated increase in interest expensefrom a hypothetical 200 basis point increase in applicable variable interestrates would have been approximately $3.4 million during in the twenty-six weekperiod ending February 26, 2011.

*ForeignOperations.*  Transactionsdenominated in a currency other than an entity’s functional currency may exposethat entity to currency risk. Although we operate in international marketsincluding Japan and South Korea, product sales are predominately made in UnitedStates dollars, and therefore, currency risks are limited.

 

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**Item4.  Controls and Procedures.**

 

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

 

 

 

 

 

 

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**PARTII. OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

For informationregarding legal proceedings, see Note 6. *Contingencies* to our ConsolidatedFinancial 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 setforth in our Annual Report on Form 10-K for the fiscal year ended August 28,2010 have not materially changed.  Please refer to the Company’s report on Form10-K for the fiscal year ended August 28, 2010 to consider those risk factors.

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.**

None.

**Item 3. Defaults UponSenior Securities.**

None. 

**Item4. Submission of Matters to a Vote of Security Holders.**

None

**Item 5. Other Information.**

None.         

**Item 6. Exhibits.**
| (A)                                   | Exhibits                                                                                                                                                                                                                                  |
|---------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  |                                                                                                                                                                                                                                      |
| 3.0                                   | Amended and Restated  Limited Liability Company Agreement of U.S. Premium Beef, LLC, dated as of March  2, 2011 (incorporated herein by reference to Exhibit 3.1 to Form 8-K (File  No. 333-115164) filed with the SEC on March 7, 2011). |
|                                  |                                                                                                                                                                                                                                      |
|  31.1                            | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (filed herewith).                                                                                                           |
|                                  |                                                                                                                                                                                                                                      |
| 31.2                                  | Certification of the  Principal Financial and Accounting Officer pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                        |
|                                  |                                                                                                                                                                                                                                      |
| 32.1                                  | Certification of the Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                       |
|                                  |                                                                                                                                                                                                                                      |
| 32.2 

 

 

 

  | Certification of the  Principal Financial and Accounting Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (filed herewith).                                   |

** **

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 

                                                                                                               

 

|   | U.S. Premium Beef, LLC |
|--------|------------------------|
|   |                   |   |
|   |                   |   |
|   |                   |   |
|   |  By:              | /s/ Steven D. Hunt |
|   |                   |   |
|   |                   | Steven D. Hunt*Chief Executive Officer*

*(Principal Executive Officer)* |

 

|   |      |                                                                                           |
|--------|-----------|------------------------------------------------------------------------------------------------|
|   |  By: | /s/ Scott J. Miller                                                                            |
|   |      |                                                                                           |
|   |      | Scott J. Miller* Chief Financial Officer*

*(Principal Financial and Accounting Officer)* |

 

 

 

Date:April 8, 2011

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