Table of Contents

 

 

 

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **

**(Mark one)**

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended November 28, 2009**

** **

**or**

** **

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

** **

**For the transition period from          to               .**

 

**Commission file number 333-111407**

 

**NATIONAL BEEF PACKING COMPANY, LLC**

(Exact name of registrant asspecified in its charter)

 

| **DELAWARE**                    | ** ** | **48-1129505**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. employer       |
| incorporation or  organization) |       | identification number) |

 

**12200 North Ambassador Drive**

**Kansas City, MO 64163**

(Address of principal executive offices)

 

**Telephone: (800) 449-2333**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.    Yes x No o

 

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

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmall reporting company.  See definitionof “accelerated filer,” “large accelerated filer” and “small reporting company”in Rule 12b-2 of the Exchange Act.

 

| Large Accelerated Filer o |   | Accelerated Filer o       |
|---------------------------|--------|---------------------------|
|                      |   |                      |
| Non-Accelerated Filer x   |   | Small Reporting Company o |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).    Yeso No x

 

There is no market for the Registrant’s equity.  As of February 29, 2009, there were203,990,136 Class A units and 15,545,948 Class B units outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **        | ** ** | ** **                                                                                   | **Page No.** |
|-------------------|------------|----------------------------------------------------------------------------------------------|-------------------|
| **PART I.**  | ** ** | **FINANCIAL  INFORMATION**                                                                   |              |
| ** **        | ** ** | ** **                                                                                   |              |
| 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.                                 | 17                |
|              |       |                                                                                         |              |
| Item  4T.         |       | Controls and  Procedures.                                                                    | 19                |
|              |       |                                                                                         |              |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                        |              |
|              |       |                                                                                         |              |
| Item 1.           |       | Legal Proceedings.                                                                           | 20                |
|              |       |                                                                                         |              |
| Item 1A.          |       | Risk Factors.                                                                                | 20                |
|              |       |                                                                                         |              |
| Item 6.           |       | Exhibits.                                                                                    | 20                |
|              |       |                                                                                         |              |
|              |       | Signatures.                                                                                  | 21                |

 

Unless the contextindicates or otherwise requires, the terms “National Beef,” “NBP,” “Company,” “we,”“our,” and “us” refer to National Beef Packing Company, LLC and itsconsolidated subsidiaries.  As used inthis report, the term “U.S. Premium Beef” refers to U.S. Premium Beef, LLC, aDelaware limited liability company, formerly U.S. Premium Beef, Ltd., a Kansascooperative, which owns a majority interest in National Beef.

 

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**PART I. FINANCIAL INFORMATION**

 

**Item1.  Financial Statements.**

 

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**NATIONAL BEEF PACKING COMPANY,LLC**

**AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**(in thousands)**

 
| ** **                                                                                              | ** ** | **November 28, 2009** | ** ** | ** **               | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                                                                                              | ** ** | **(unaudited)**            | ** ** | **August 29, 2009** | ** ** |
| **Assets**                                                                                              |       |                       |       |                     |       |
| Current assets:                                                                                         |       |                       |       |                     |       |
| Cash and cash equivalents                                                                               |       | $                          | 13,699     |                     | $          | 17,373 |   |
| Accounts receivable, less allowance for returnsand doubtful  accounts of $1,876 and$1,511, respectively |       | 164,847                    |       | 172,420                  |       |
| Due from affiliates                                                                                     |       | 3,550                      |       | 4,532                    |       |
| Other receivables                                                                                       |       | 9,656                      |       | 7,165                    |       |
| Inventories                                                                                             |       | 187,320                    |       | 175,300                  |       |
| Other current assets                                                                                    |       | 16,115                     |       | 16,602                   |       |
| Total current assets                                                                                    |       | 395,187                    |       | 393,392                  |       |
|                                                                                                    |       |                       |       |                     |       |
| Property, plant and equipment, at cost                                                                  |       | 488,740                    |       | 479,926                  |       |
| Less accumulated depreciation                                                                           |       | 185,296                    |       | 174,295                  |       |
| Net property, plant, and equipment                                                                      |       | 303,444                    |       | 305,631                  |       |
| Goodwill                                                                                                |       | 81,242                     |       | 81,242                   |       |
| Other intangibles, net of accumulated amortization  of$11,996 and $11,450, respectively                 |       | 24,216                     |       | 24,760                   |       |
| Other assets                                                                                            |       | 6,075                      |       | 4,120                    |       |
| Total assets                                                                                            |       | $                          | 810,164    |                     | $          | 809,145 |   |
| **Liabilities and Members’  Capital**                                                              |       |                       |       |                     |       |
| Current liabilities:                                                                                    |       |                       |       |                     |       |
| Current installments of long-term debt                                                                  |       | $                          | 27,766     |                     | $          | 11,458 |   |
| Cattle purchases payable                                                                                |       | 68,148                     |       | 49,806                   |       |
| Accounts payable – trade                                                                           |       | 70,262                     |       | 69,073                   |       |
| Due to affiliates                                                                                       |       | 846                        |       | 1,042                    |       |
| Accrued compensation and benefits                                                                       |       | 27,119                     |       | 50,857                   |       |
| Accrued insurance                                                                                       |       | 15,775                     |       | 16,344                   |       |
| Other accrued expenses and liabilities                                                                  |       | 13,976                     |       | 14,585                   |       |
| Distributions payable                                                                                   |       | 10,459                     |       | 35,183                   |       |
| Total current liabilities                                                                               |       | 234,351                    |       | 248,348                  |       |
| Long-term debt, excluding current installments                                                          |       | 272,520                    |       | 287,370                  |       |
| Other liabilities                                                                                       |       | 2,302                      |       | 2,364                    |       |
| Total liabilities                                                                                       |       | 509,173                    |       | 538,082                  |       |
| Capital subject to redemption                                                                           |       | 207,677                    |       | 183,407                  |       |
| Members’ capital:                                                                                  |       |                       |       |                     |       |
| Members’ capital attributable to NBP                                                               |       | 90,704                     |       | 85,290                   |       |
| Accumulated other comprehensive income(loss)  attributable to NBP                                       |       | 21                         |       | (1                       | )          |
| Non-controlling interest in Kansas City SteakCompany, LLC                                               |       | 2,589                      |       | 2,367                    |       |
| Total members’ capital                                                                             |       | 93,314                     |       | 87,656                   |       |
| Commitments and contingencies                                                                           |       | —                     |       | —                   |       |
| Total liabilities, capital subject toredemption and  members’ capital                              |       | $                          | 810,164    |                     | $          | 809,145 |   |

 

See accompanying notes to consolidated financial statements.

 

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**NATIONAL BEEF PACKING COMPANY,LLC**

**AND SUBSIDIARIES**

 

**Consolidated Statements ofOperations**

**(in thousands)**

** **
| ** **                                               | ** ** | **13 weeks ended**         | ** ** | **13 weeks ended**         | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **November 28, 2009** | ** ** | **November 29, 2008** | ** ** |
| ** **                                               | ** ** | **(unaudited)**            | ** ** | **(unaudited)**            | ** ** |
| Net sales                                                |       | $                          | 1,342,610  |                       | $          | 1,428,977 |   |
| Costs and expenses:                                      |       |                       |       |                       |       |
| Cost of sales                                            |       | 1,273,312                  |       | 1,404,038                  |       |
| Selling, general and administrative                      |       | 11,229                     |       | 10,863                     |       |
| Depreciation and amortization                            |       | 11,908                     |       | 9,965                      |       |
| Total costs and expenses                                 |       | 1,296,449                  |       | 1,424,866                  |       |
| Operating income                                         |       | 46,161                     |       | 4,111                      |       |
| Other income (expense):                                  |       |                       |       |                       |       |
| Interest income                                          |       | 29                         |       | 55                         |       |
| Interest expense                                         |       | (4,532                     | )          | (6,808                     | )          |
| Equity in loss of aLF Ventures, LLC                      |       | —                     |       | (25                        | )          |
| Other, net                                               |       | 7                          |       | 402                        |       |
| Income (loss) before taxes                               |       | 41,665                     |       | (2,265                     | )          |
| Income tax expense                                       |       | (400                       | )          | (369                       | )          |
| Net income (loss)                                        |       | 41,265                     |       | (2,634                     | )          |
| Net income attributable to the non-controlling  interest |       | (223                       | )          | (172                       | )          |
| Net income (loss) attributable to NBP                    |       | $                          | 41,042     |                       | $          | (2,806 | ) |

 

See accompanying notes to consolidated financial statements.

 

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**NATIONAL BEEF PACKING COMPANY,LLC**

**AND SUBSIDIARIES**

 

**Consolidated Statements of CashFlows**

**(in thousands)**

** **
| ** **                                                                       | ** ** | **13 weeks ended**         | ** ** | **13 weeks ended**         | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                       | ** ** | **November 28, 2009** | ** ** | **November 29, 2008** | ** ** |
| ** **                                                                       | ** ** | **(unaudited)**            | ** ** | **(unaudited)**            | ** ** |
| Cash flows from operating activities:                                            |       |                       |       |                       |       |
| Net income (loss)                                                                |       | $                          | 41,265     |                       | $          | (2,634 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                       |       |                       |       |
| Depreciation and amortization                                                    |       | 11,908                     |       | 9,965                      |       |
| Gain on disposal of property, plant and equipment                                |       | (128                       | )          | (57                        | )          |
| Change in assets and liabilities:                                                |       |                       |       |                       |       |
| Accounts receivable                                                              |       | 7,573                      |       | 39,677                     |       |
| Due from affiliates                                                              |       | 982                        |       | 1,566                      |       |
| Other receivables                                                                |       | (2,491                     | )          | (318                       | )          |
| Inventories                                                                      |       | (12,020                    | )          | (7,598                     | )          |
| Other assets                                                                     |       | (451                       | )          | (19,423                    | )          |
| Cattle purchases payable                                                         |       | 8,713                      |       | 3,095                      |       |
| Accounts payable                                                                 |       | (1,887                     | )          | (710                       | )          |
| Due to affiliates                                                                |       | (196                       | )          | (251                       | )          |
| Accrued compensation and benefits                                                |       | (23,738                    | )          | (30,413                    | )          |
| Accrued insurance                                                                |       | (569                       | )          | 827                        |       |
| Other accrued expenses and liabilities                                           |       | (671                       | )          | 30,580                     |       |
| Net cash provided by operating activities                                        |       | 28,290                     |       | 24,306                     |       |
|                                                                             |       |                       |       |                       |       |
| Cash flows from investing activities:                                            |       |                       |       |                       |       |
| Capital expenditures, including interest  capitalized                            |       | (9,532                     | )          | (6,925                     | )          |
| Proceeds from sale of property, plant and equipment                              |       | 484                        |       | 360                        |       |
| Net cash used in investing activities                                            |       | (9,048                     | )          | (6,565                     | )          |
|                                                                             |       |                       |       |                       |       |
| Cash flows from financing activities:                                            |       |                       |       |                       |       |
| Net receipts under revolving credit lines                                        |       | (29,168                    | )          | 23,633                     |       |
| Borrowings under term note payable                                               |       | 75,000                     |       | —                     |       |
| Change in overdraft balances                                                     |       | 12,705                     |       | 7,393                      |       |
| Purchase and cancellation of senior notes                                        |       | (39,798                    | )          | (2,340                     | )          |
| Repayments of other indebtedness/capital leases                                  |       | (4,576                     | )          | (1,280                     | )          |
| Cash paid for financing costs                                                    |       | (1,018                     | )          | —                     |       |
| Member distributions                                                             |       | (36,083                    | )          | (43,536                    | )          |
| Net cash used in financing activities                                            |       | (22,938                    | )          | (16,130                    | )          |
|                                                                             |       |                       |       |                       |       |
| Effect of exchange rate changes on cash                                          |       | 22                         |       | (67                        | )          |
| Net (decrease) increase in cash                                                  |       | (3,674                     | )          | 1,544                      |       |
| Cash and cash equivalents at beginning of period                                 |       | 17,373                     |       | 25,466                     |       |
| Cash and cash equivalents at end of period                                       |       | $                          | 13,699     |                       | $          | 27,010 |   |
|                                                                             |       |                       |       |                       |       |
| Supplemental disclosures:                                                        |       |                       |       |                       |       |
| Cash paid during the period for interest                                         |       | $                          | 3,516      |                       | $          | 2,681 |   |
| Cash paid during the period for taxes                                            |       | $                          | 79         |                       | $          | 136 |   |
| Supplemental non-cash disclosures of investing and  financing activities:        |       |                       |       |                       |       |
| Assets acquired through capital lease                                            |       | $                          | 55         |                       | $          | 44 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**(1) Interim FinancialStatements**

 

**Basis of Presentation**

 

Theaccompanying unaudited Consolidated Financial Statements have been prepared inaccordance with U.S. generally accepted accounting principles (GAAP) forinterim financial information; therefore, they do not include all of theinformation and footnotes required by GAAP for complete financial statements.In the opinion of management, all adjustments considered necessary for a fairpresentation have been included using management’s best estimates and judgmentswhere appropriate.  These estimates andjudgments affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the financialstatements.  The estimates and judgmentswill also affect the reported amounts for certain revenues and expenses duringthe reporting period.  Actual resultscould differ materially from these estimates and judgments.  For further information, refer to the auditedConsolidated Financial Statements and Notes to Consolidated FinancialStatements, which are included in NBP’s Annual Report on Form 10-K on file with theSecurities and Exchange Commission (SEC) for the fiscal year ended August 29,2009.  The results of operations for theinterim periods presented are not necessarily indicative of the results for afull fiscal year.

 

NBFinance Corp., a wholly-owned finance subsidiary of NBP, is a co-issuer on ajoint and several basis with NBP of the senior notes, which are our seniorunsecured obligations, ranking equal in right of payment with all of our othersenior unsecured obligations.  NB FinanceCorp. has nominal assets and conducts no business or operations. There are nosignificant restrictions on the ability of subsidiaries to transfer funds toNBP.

 

**(2) New AccountingPronouncements**

 

On June 29, 2009,the Financial Accounting Standards Board (“FASB”) issued *FASBAccounting Standards Codification* (the “ASC”) under ASC 105-10 asthe source of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities. This pronouncement was effective for financial statements issued forinterim and annual periods ending after September 15, 2009 for mostentities.  On the effective date, allnon-SEC accounting and reporting standards was superseded.  Rules and interpretive releases of theSEC under the authority of federal securities laws are also sources ofauthoritative U.S. generally accepted accounting principles (“GAAP”) for SECregistrants.  All other accountliterature is considered non-authoritative. The switch to ASC affects the manner in which companies refer to U.S.GAAP in financial statements and note disclosures.  The Company adopted this body of accountingfor the quarterly period ended November 28, 2009, as required, andadoption did not have a material impact on our consolidated financialstatements taken as a whole.

 

In December 2007,the FASB issued *Business Combinations*under ASC805.* *Thisstatement requires an acquirer to recognize the assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree at theacquisition date to be measured at their fair value as of that date.  An acquirer is required to recognize assetsor liabilities arising from all other contingencies (contractual contingencies)as of the acquisition date, measured at their acquisition-date fair values,only if it is more likely than not that they meet the definition of an asset ora liability in FASB Concepts Statement No. 6, *Elements ofFinancial Statements.*  Anyacquisition-related costs are to be expensed instead of capitalized.  The Company adopted ASC 805 on August 30,2009 and the impact will depend on future acquisitions at the time.

 

Also in December 2007,the FASB issued *Noncontrolling Interests inConsolidated Financial Statements - an Amendment of ARB No. 51*under ASC 810-10-65 which establishes accounting and reporting standards forthe noncontrolling interest (minority interest) in a subsidiary.  ASC810-10-65 

 

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requires non-controlling interests held by partiesother than the parent in subsidiaries be clearly identified, labeled, andpresented in the consolidated balance sheet within equity, but separate fromthe parent’s equity.  The Company’s adoption of ASC 810-10-65 as of August 30,2009 changed the presentation of the non-controlling interest.

 

In February 2008,the FASB issued *Fair Value Measurements* under ASC820-10 which deferred the effective date of fair value measurement fornonfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in an entity’s financial statements on arecurring basis, at least annually.  There was no impact when the Company adopted for these nonfinancialassets and nonfinancial liabilities on August 30, 2009.  These assets and liabilities are measured atfair value on an ongoing basis but are reported at fair value only in certaincircumstances.

 

**(3) Inventories**

 

Inventoriesat November 28, 2009 and August 29, 2009 consisted of the following(in thousands):

 
| ** **                       | ** ** | **November 28,  2009** | ** **    | **August 29,  2009** | ** ** |
|----------------------------------|------------|-----------------------------|---------------|---------------------------|------------|
| Product  inventories:            |       |                        |          |                      |       |
| Dressed  and boxed meat products |       | $                           |  125,761 | ** **                | **$**      | ** **119,274 | ** ** |
| Beef  by-products                |       | 33,798                      |          | 29,756                    |       |
| Supplies  and other              |       | 27,761                      |          | 26,270                    |       |
| Total  inventory                 |       | $                           | 187,320       |                      | $          | 175,300 |   |

 

**(4) Comprehensive Income(Loss) Attributable to NBP**

 

Comprehensiveincome (loss), which consists of net income (loss) and foreign currencytranslation adjustments, was as follows for the periods indicated (in thousands):

 
| ** **                                                         | ** ** | **13 weeks ended**    | ** ** | **13 weeks ended**    | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **November 28, 2009** | ** ** | **November 29, 2008** | ** ** |
| Net income (loss)                                                  |       | $                               | 41,265     |                            | $          | (2,634 | ) |
| Other comprehensive loss:                                          |       |                            |       |                            |       |
| Foreign currency translation adjustments                           |       | (20                             | )          | (67                             | )          |
| Comprehensive income (loss)                                        |       | 41,245                          |       | (2,701                          | )          |
| Comprehensive income attributable to the  non-controlling interest |       | (223                            | )          | (172                            | )          |
| Comprehensive income (loss) attributable to NBP                    |       | $                               | 41,022     |                            | $          | (2,873 | ) |

 

**(5) Contingencies**

 

National Beef LeathersLLC (NBL), a wholly-owned subsidiary of NBP, has been named as a defendant infourteen currently pending lawsuits involving NBL’s tannery located in St.Joseph, Missouri.  NBL purchased certainassets of the tannery from Prime Tanning in March 2009.  The lawsuits are pending in the CircuitCourts of Buchanan County, Clinton County, Ray County, and DeKalb County,Missouri and in the U.S. District Court for the Western District of Missouriand were filed between April 22, 2009 and December 17, 2009.  The lawsuits allege that Prime and NBL spreadwastewater sludge containing hexavalent chromium in four counties in northwestMissouri.  The lawsuits currently includetwelve actions filed by individuals and two purported class actions.  The plaintiffs are seeking an unspecifiedamount of damages for wrongful death, personal injury, pain and suffering,economic damages, punitive damages, diminished property values and medicalmonitoring.  NBL is vigorously defendingthe cases.

 

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The Company is a party toa number of other lawsuits and claims arising out of the operation of itsbusiness.  Management believes theultimate resolution of such matters should not have a material adverse effecton the Company’s financial condition, results of operations or liquidity.

 

**(6)  Fair Value Measurements**

 

The Company determinesfair value utilizing a three-level fair value hierarchy that prioritizes theinputs used to measure fair value.  The fairvalue hierarchy gives the highest priority to quoted market prices (Level 1)and the lowest priority to unobservable inputs (Level 3).  The three levels of inputs used to measurefair 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 shouldonly be used to the extent observable inputs are not available.

 

The following tabledetails the assets and liabilities measured at fair value on a recurring basisas of November 28, 2009 and also the level within the fair value hierarchyused to measure each category of assets (in thousands).

 
| **Description**                                            | ** ** | **November 28,********2009** | ** ** | **Quoted  Prices in********Active Markets for********Identical Assets********(Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs********(Level 3)** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                       |       |                              |       |                                                                                     |       |                                                 |       |                                                   |       |
| Other  current assets – derivatives                   |       | $                                 | 542        |                                                                                     | $          | 542                                                  |       | $                                                      | —     |   | $ | — |   |
| Other  accrued expenses and liabilities – derivatives |       | $                                 | 4,287      |                                                                                     | $          | 3,628                                                |       | $                                                      | 659        |   | $ | — |   |
| Capital subject to  redemption                             |       | $                                 | 207,  677  |                                                                                     | $          | —                                               |       | $                                                      | 207,677    |   | $ | — |   |

 

The Company has not elected the option to report anyof the selected financial assets and liabilities at fair value.

 

**(7) Disclosure aboutDerivative Instruments and Hedging Activities**

 

As part of the Company’songoing operations, the Company is exposed to market risks such as changes incommodity prices.  To manage these risks,the Company may enter into the following derivative instruments pursuant to ourestablished policies:

 

·                  Forward purchase contracts for cattle for use in ourbeef plants

·                  Exchange traded futures contracts for cattle

·                  Exchange traded futures contracts for grain

 

While management believeseach of these instruments helps mitigate various market risks, they are notdesignated and accounted for as hedges as a result of the extensiverecordkeeping requirements associated with hedge accounting.  Accordingly, the gains and losses associatedwith the change in fair value of the instruments are recorded to net sales andcost of goods sold in the period of change. Certain firm commitments for live cattle purchases and all firm commitmentsfor boxed beef sales are treated as normal purchases and sales and not recordedat fair value.

 

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TheCompany enters into certain commodity derivatives, primarily with a diversifiedgroup of highly rated counterparties. The maximum amount of loss due to the credit risk of the counterparties,should the counterparties fail to perform according to the terms of thecontracts, is deemed to be immaterial as of November 28, 2009 as allderivatives in an asset position are exchange-traded contracts.  The exchange-traded contracts have beenentered into under a master netting agreement. None of the derivatives entered into have credit-related contingentfeatures.  The Company has $6.0 millionin cash collateral posted on its derivative liabilities.

 

Thefollowing table presents the fair values as discussed in Note 6 and otherinformation regarding derivative instruments not designated as hedginginstruments as of November 28, 2009 (in thousands of dollars):

 
| ** **          | ** ** | **Derivative Asset**              | ** ** | **Derivative Liability**    | ** ** |
|---------------------|------------|-----------------------------------|------------|-----------------------------|------------|
| ** **          | ** ** | **As of November 28, 2009**       | ** ** | **As of November 28, 2009** | ** ** |
| ** **          | ** ** | **Balance Sheet********Location** | ** ** | **Fair Value**              | ** ** | **Balance Sheet********Location** | ** ** | **Fair Value** | ** ** |
| Commodity contracts |       | Other  current assets             |       | $                           | 542        |   | Other  accrued expenses and liabilities |   | $ | 4,287 |   |
| Totals              |       |                              |       | $                           | 542        |   |   |   | $ | 4,287 |   |

 

Thefollowing table presents the impact of derivative instruments on theConsolidated Statement of Operations for the thirteen-week period ended November 28,2009 (in thousands of dollars):

 
| ** **                                                    | ** ** | **Location of Gain or (Loss)**                 | ** ** | **Amount of Gain or  (Loss)********Recognized in********Income on Derivatives** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Derivatives  Not Designated as********Hedging Instruments** | ** ** | **Recognized in Income********on Derivatives** | ** ** | **13 Weeks Ended********November 28, 2009**                                | ** ** |
| Commodity contracts                                           |       | Net  sales                                     |       | $                                                                               | (6,757     | ) |
| Commodity contracts                                           |       | Cost  of sales                                 |       | 3,543                                                                           |       |
| Totals                                                        |       |                                           |       | $                                                                               | (3,214     | ) |

 

**(8) Capital Subject to Redemption**

 

At any time after certain dates, the earliest being July 31,2010, the latest being July 31, 2011, our Chief Executive Officer, TimothyM. Klein (referred to herein as “Mr. Klein”), and/or NBPCo Holdings havethe right to request that the Company repurchase their interests, the value ofwhich is to be determined by a specified formula or a mutually agreedprocess.  If the Company is unable toeffect the repurchase within a specified time, the requesting member(s) havethe right to cause a sale process to commence.

 

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 November 28, 2009, the value of the capital subject toredemption**was determined to be $253.9 million,which was in excess of its carrying value. After giving effect to the accretion of value, the carrying value ofcapital subject to redemption at November 28, 2009 was $207.7million.  Offsetting the change in thevalue of the capital subject to redemption is a corresponding change in themembers’ capital.

 

Generallyaccepted accounting principles require the Company to determine the fair valueof the capital subject to redemption at the end of each reporting period.  To the extent that this value increases, thischange in fair value is accreted over the redemption period as discussedabove.  Since the second 

 

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quarter of fiscal year2009, management has used certain agreed upon redemption prices that were usedin the Unit Redemption Agreements in measuring the fair value of the capitalsubject to redemption held by NBPCo Holdings. The Unit Redemption Agreement between the Company and Timothy Klein andaffiliates provides for a formula-based method of calculating their Class Binterests which was used in valuing the interest of Timothy Klein andaffiliates at November 28, 2009.

 

The total value of the capital subject to redemptionat November 28, 2009 increased by approximately $13.4 million compared tothe value at August 29, 2009.  Theincrease in the value of the capital subject to redemption recorded on thebalance sheet reflects the increase in the unit value represented by the UnitRedemption Agreements.

 

**(9)  Segments**

 

The Company’s operatingsegments are based on segment profit and evaluated by the Chief ExecutiveOfficer, who also serves as the Chief Operating Decision Maker.  Segment profit is measured as operatingincome for NBP’s two reporting segments, Core Beef and Other, based on thedefinitions provided in SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*.

 

*Core Beef*—the majority of NBP’s revenues aregenerated from the sale of fresh meat, which include chuck cuts, rib cuts, loincuts, round cuts, thin meats, ground beef, and other products.  In addition, we sell beef by-productsincluding hides to the variety meat, feed processing, fertilizer, pet food andleather tanning industries.  Aggregationcriteria were applied to determine the constituents of the Core Beef segment.

 

*Other*—the Other segment of NBP consists of theoperations of National Carriers, National Elite Transportation, LLC (NationalElite), a provider of transportation logistics services, and Kansas City Steak.

 

*Eliminations*—this line item includes eliminations ofinter-segment and intra-segment activity resulting from the consolidation process.

 

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The followingtable represents segment results for the periods indicated (amounts inthousands):

 
| ** **                       | ** ** | **13 weeks ended**              | ** ** | **13 weeks ended**              | ** ** |
|----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **November 28, 2009**      | ** ** | **November 29, 2008**      | ** ** |
| Net sales:                       |       |                            |       |                            |       |
| Core beef                        |       | $                               | 1,363,131  |                            | $          | 1,437,858 |   |
| Other                            |       | 54,920                          |       | 57,755                          |       |
| Eliminations                     |       | (75,441                         | )          | (66,636                         | )          |
| Total net sales                  |       | $                               | 1,342,610  |                            | $          | 1,428,977 |   |
|                             |       |                            |       |                            |       |
| Operating income:                |       |                            |       |                            |       |
| Core beef                        |       | $                               | 44,729     |                            | $          | 2,410 |   |
| Other                            |       | 1,432                           |       | 1,701                           |       |
| Total operating income           |       | 46,161                          |       | 4,111                           |       |
|                             |       |                            |       |                            |       |
| Interest income                  |       | 29                              |       | 55                              |       |
| Interest expense                 |       | (4,532                          | )          | (6,808                          | )          |
| Other income, net                |       | 7                               |       | 377                             |       |
| Total income (loss) before taxes |       | $                               | 41,665     |                            | $          | (2,265 | ) |
|                             |       |                            |       |                            |       |
| ** **                       | ** ** | **November 28, 2009** | ** ** | **November 29, 2008** | ** ** |
| Assets:                          |       |                            |       |                            |       |
| Core beef                        |       | $                               | 766,041    |                            | $          | 819,104 |   |
| Other                            |       | 45,027                          |       | 42,034                          |       |
| Eliminations                     |       | (904                            | )          | (939                            | )          |
| Total assets                     |       | $                               | 810,164    |                            | $          | 860,199 |   |

 

**(10) Subsequent Events**

 

The Company has evaluated subsequent events forpotential disclosure or recognition through January 8, 2010, the issuancedate of the financial statements.

 

On December 11,2009, the Company provided notice of its intent to redeem the remaining $27.1million aggregate principal amount of its senior notes on January 11,2010.  This $27.1 million in senior notesis recorded in long-term debt, excluding current maturities.

 

On October 13,2009, National Beef, Inc. (“NBI”) filed a registration statement on Form S-1with the U.S. Securities and Exchange Commission regarding a proposed initialpublic offering (IPO) of shares of its Class A common stock.  On December 17,2009, NBI postponed the IPO for an indefinite period of time. The Company hasincurred approximately $2.1 million in IPO-related costs.  TheseIPO-related costs have been included in other receivables and other assets asthey were to be reimbursed by NBI at the completion of the IPO.  These costs will be expensed if the Companydoes not proceed with the IPO during the second quarter of fiscal year 2010.

 

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

 

Thefollowing discussion should be read in conjunction with our consolidatedfinancial statements and related notes and other financial informationappearing elsewhere in this report.

 

**Disclosure RegardingForward-Looking Statements**

 

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

 

In light of these risksand uncertainties, 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.  Please review Part II. Item 1A, *Risk Factors*, included in this report, for other importantfactors that could cause actual results to differ materially from those in anysuch forward-looking statements.

 

**Overall Industry Outlook**

 

Although improving global and domestic economicconditions should begin to support beef demand in 2010, the overall UnitedStates (U.S.) employment situation is expected to keep potential gains incheck.  Fed cattle supplies are expected to decline again during calendaryear 2010 as the cattle industry continues to grapple with a slowing butongoing herd liquidation.  The competing protein situation is expected toimprove on projected smaller 2010 pork production and a slight increase inbroiler output.  Absolute price levels for both cattle and beef areexpected to increase modestly in calendar year 2010 from calendar year 2009 ledprimarily by contracting supply.  Any sustained gains in cattle and beefprices will require a much more robust demand than the past twelvemonths.  Global beef and beef by-product demand should continue to postmodest year-on-year gains given the currency spreads to the U.S. dollar andimproved overall economic conditions.

 

**Beef Export 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 andyounger.   In April 2008, ourBrawley facility was suspended from shipping beef to Japan following thediscovery of a short loin which included a portion of a spinal column, aspecified risk material, prohibited by Japan. Our Brawley facility was subsequently cleared to resume shipments toJapan on September 19, 2008.  SouthKorea announced a provisional opening of its border to U.S. beef from animals30 months and younger in September 2006 but subsequently closed its borderagain in October 2007.  South Koreareopened its border and started inspecting U.S. beef near the end of June 2008.  Our Dodge City facility was removed for twodays from 

 

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the eligible supplierlist to Mexico beginning on December 23, 2008 for an alleged issue thatarose in September of 2008 on a basis which we believe to be untrue andunfounded.  These constraints anduncertainties have historically had a negative impact on beef margins duringthe 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 importrestrictions or additional regulatory restrictions or disruptions in domesticand foreign consumer demand for beef could have a material adverse effect onthe Company’s revenues and net income.

 

**Recent Events**

 

On November 3,2009, the United Food and Commercial Workers Union (the “UFCWU”) filed apetition with the Regional Office of the National Labor Relations Board (the “NLRB”)in Kansas City, Missouri seeking to represent 2,200 employees who work at ourDodge City, Kansas facility.  The UFCWUdoes not currently represent any employees at this location.  We estimate that there are approximately2,700 to 2,800 eligible employees at our Dodge City facility to vote per NLRBstandards.  The NLRB has set January 21and 22, 2010 as the dates for the election.

 

**Results of Operations**

 

***Thirteen weeks ended November 28,2009 compared to thirteen weeks ended November 29, 2008***

 

*General.*  Net incomefor the thirteen weeks ended November 28, 2009 of approximately $41.3million was generated compared to a net loss of approximately $2.6 million forthe thirteen weeks ended November 29, 2008, an improvement of $43.9million.  Sales were lower in thethirteen weeks ended November 28, 2009 compared to the thirteen weeksended November 29, 2008 due in part to an approximate 2.7% decrease in theaverage volume of cattle processed.  Theaverage sales prices per head decreased approximately 2.6% during thisreporting period as the demand for beef products during this quarter was not asstrong as compared to the same quarter of last year.

 

Total costs and expenses of $1,296.4 million and $1,424.9 million forthe thirteen weeks ended November 28, 2009 and November 29, 2008,respectively, were 96.6% and 99.7% as a percentage of net sales.  A drop in live cattle prices of approximately10.5% was able to offset the drop in the volume of cattle processed and thedrop in average sales prices per head, resulting in improved operating incomeof approximately $42.1 million for the thirteen-week period ended November 28,2009 as compared to the thirteen-week period ended November 29, 2008.

 

*Net Sales*.  Net saleswere $1,342.6 million for the thirteen weeks ended November 28, 2009compared to $1,429.0 million for the thirteen weeks ended November 29,2008, a decrease of $86.4 million or 6.0%. The decrease in net sales principally resulted from an approximate 2.6%decrease in the average sales prices per head during the  first quarter of fiscal 2010 as the demandfor beef products during the thirteen weeks ended November 28, 2009 wasnot as strong as compared to the thirteen weeks ended November 29,2008.  Also contributing to the decreasein net sales was an approximate 2.7% decline in the average volume of cattleprocessed.  Offsetting these decreaseswas an approximate $15.7 million loss on the mark to market adjustment oncattle futures contracts that we entered into during the first quarter offiscal 2009 to offset the risk of fixed-price sales commitments that did notrecur in the first quarter of fiscal 2010.

 

*Cost of Sales*.  Costof sales was $1,273.3 million for the thirteen weeks ended November 28,2009 compared to $1,404.0 million for the thirteen weeks ended November 29,2008, a decrease of approximately $130.7 million or 9.3%.  The decrease was primarily a result of anapproximate 10.5% decrease in cattle prices for the comparable periods.  Also contributing to the decrease was adecline in the volume of cattle processed of approximately 2.7% during thefirst quarter of fiscal 2010 as compared to the same period of fiscal 2009.

 

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*Selling,General and Administrative Expenses*.  Selling, general and administrative expenseswere $11.2 million for the thirteen weeks ended November 28, 2009 comparedto $10.9 million for the thirteen weeks ended November 29, 2008, a slightincrease of $0.3 million or 2.8%.

 

*Depreciationand Amortization Expense*. Depreciation and amortization expenses were $11.9 million for thethirteen weeks ended November 28, 2009 compared to $10.0 million for thethirteen weeks ended November 29, 2008, an increase of $1.9 million or19.0%.  Depreciation expense increaseddue to fixed assets being placed into service, primarily at our Dodge City andLiberal beef plants, during fiscal year 2009.

 

*OperatingIncome.*  Operating income wasapproximately $46.2 million for the thirteen weeks ended November 28, 2009compared to operating income of approximately $4.1 million for the thirteenweeks ended November 29, 2008, an improvement of $42.1 million. This improvement in operating incomeduring the first quarter of fiscal 2010 resulted primarily from lower livecattle prices relative to the prices received for beef products and a lowernegative mark to market adjustment on cattle futures contracts as compared tothe first quarter of fiscal 2009.

 

*InterestExpense*.  Interest expense was $4.5million for the thirteen weeks ended November 28, 2009 compared to $6.8million for the thirteen weeks ended November 29, 2008, a decrease of $2.3million or 33.8%.  The decrease ininterest expense during the thirteen weeks ended November 28, 2009 ascompared to the thirteen weeks ended November 29, 2008 was due primarilyto the purchase and cancellation of our senior notes of approximately $100.0million during the twelve-month period ended November 28, 2009.  Also contributing to the decline in interestexpense was (i) a decrease of approximately 98 basis points in interestrates on our variable rate debt during the thirteen weeks ended November 28,2009 compared to the thirteen weeks ended November 29, 2008 and (ii) anapproximate $30.5 million decrease in the weighted average principal amount ofour variable rate debt at November 28, 2009 as compared to November 29,2008.

 

*Income Tax Expense*. Income tax expense was $0.4 million for the thirteen weeks ended November 28,2009 and November 29, 2008, respectively. Income tax expense is recorded on income from National Carriers, whichis organized as a C Corporation.

 

*NetIncome.*  As a result of the factors described above,net income for the thirteen-week period ended November 28, 2009 wasapproximately $41.3 million compared to a net loss of approximately$2.6 million for thirteen-week period ended November 29, 2008, anincrease of approximately $43.9 million.

 

**Segment Results**

 

The Company’s operatingsegments are based on segment profit and evaluated by the Chief ExecutiveOfficer, who also serves as the Chief Operating Decision Maker.  Segment profit is measured as operatingincome for NBP’s two reporting segments, Core Beef and Other, based on thedefinitions provided in SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*.

 

*Core Beef*—the majority of NBP’s revenues aregenerated from the sale of fresh meat, which include chuck cuts, rib cuts, loincuts, round cuts, thin meats, ground beef, and other products.  In addition, we sell beef by-productsincluding hides to the variety meat, feed processing, fertilizer, pet food andleather tanning industries.  Aggregationcriteria were applied to determine the constituents of the Core Beef segment.

 

*Other*—the Other segment of NBP consists of theoperations of National Carriers, National Elite Transportation, LLC (National Elite),a provider of transportation logistics services, and Kansas City Steak.

 

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*Eliminations*—this line item includes eliminations ofinter-segment and intra-segment activity resulting from the consolidationprocess.

 

Thefollowing table represents segment results for the periods indicated (amountsin thousands):

 
| ** **                       | ** ** | **13 weeks ended**              | ** ** | **13 weeks ended**              | ** ** |
|----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **November 28, 2009**      | ** ** | **November 29, 2008**      | ** ** |
| Net sales:                       |       |                            |       |                            |       |
| Core beef                        |       | $                               | 1,363,131  |                            | $          | 1,437,858 |   |
| Other                            |       | 54,920                          |       | 57,755                          |       |
| Eliminations                     |       | (75,441                         | )          | (66,636                         | )          |
| Total net sales                  |       | $                               | 1,342,610  |                            | $          | 1,428,977 |   |
|                             |       |                            |       |                            |       |
| Operating income:                |       |                            |       |                            |       |
| Core beef                        |       | $                               | 44,729     |                            | $          | 2,410 |   |
| Other                            |       | 1,432                           |       | 1,701                           |       |
| Total operating income           |       | 46,161                          |       | 4,111                           |       |
|                             |       |                            |       |                            |       |
| Interest income                  |       | 29                              |       | 55                              |       |
| Interest expense                 |       | (4,532                          | )          | (6,808                          | )          |
| Other income, net                |       | 7                               |       | 377                             |       |
| Total income (loss) before taxes |       | $                               | 41,665     |                            | $          | (2,265 | ) |
|                             |       |                            |       |                            |       |
| ** **                       | ** ** | **November 28, 2009** | ** ** | **November 29, 2008** | ** ** |
| Assets:                          |       |                            |       |                            |       |
| Core beef                        |       | $                               | 766,041    |                            | $          | 819,104 |   |
| Other                            |       | 45,027                          |       | 42,034                          |       |
| Eliminations                     |       | (904                            | )          | (939                            | )          |
| Total assets                     |       | $                               | 810,164    |                            | $          | 860,199 |   |

 

***Thirteen weeks ended November 28,2009 compared to thirteen weeks ended November 29, 2008***

 

***Core Beef***

 

*NetSales*.  Net sales for Core Beef were$1,363.1 million for the thirteen weeks ended November 28, 2009 comparedto $1,437.9 million for the thirteen weeks ended November 29, 2008, adecrease of $74.8 million or 5.2%.  Thedecrease in net sales principally resulted from an approximate 2.6% decrease inthe average sales prices per head during the first quarter of fiscal 2010 asthe demand for beef products during the thirteen weeks ended November 28,2009 was not as strong as compared to the thirteen weeks ended November 29,2008.  Also contributing to the decreasein net sales was an approximate 2.7% decline in the average volume of cattleprocessed.  Offsetting these decreaseswas an approximate $15.7 million loss on the mark to market adjustment oncattle futures contracts that we entered into during the first quarter offiscal 2009 to offset the risk of fixed-price sales commitments that did notrecur in the first quarter of fiscal 2010.

 

*OperatingIncome*.  Operating income for Core Beefwas approximately $44.7 million during the thirteen weeks ended November 28,2009 compared to operating income of approximately $2.4 million during thethirteen weeks ended November 29, 2008, an improvement of approximately$42.3 million.   This significant improvement in operatingincome during the first quarter of fiscal 2010 resulted primarily from lowerlive cattle prices relative to the prices received for beef products and alower negative mark to market adjustment on cattle futurescontracts as compared to the first quarter of fiscal 2009.

 

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***Other***

 

*NetSales*.  Net sales for Other wereapproximately $54.9 million for the thirteen weeks ended November 28, 2009compared to approximately $57.8 million for the thirteen weeks ended November 29,2008, a decrease of approximately $2.9 million or 5.0%.  The decrease was primarily due to reducedrevenues at our transportation company which was offset by increased sales atour portion control facility during the thirteen weeks ended November 28,2009 as compared to the thirteen weeks ended November 29, 2008.

 

*OperatingIncome*.  Operating income for Other wasapproximately $1.4 million for the thirteen weeks ended November 28, 2009compared to approximately $1.7 million for the thirteen weeks ended November 29,2008, a decrease of approximately $0.3 million. This slight decrease was due primarily to a reduction of operatingincome of our transportation company due to lower sales and higher depreciationexpense which was offset by improved operating income of our portion controlfacility.

 

**Liquidity and Capital Resources**

 

Asof November 28, 2009, we had net working capital (the excess of currentassets over current liabilities) of $160.8 million, which included $10.5million in distributions payable, and cash and cash equivalents of $13.7million.  As of August 29, 2009, wehad net working capital of $145.0 million, which included $35.2 million indistributions payable, and cash and cash equivalents of $17.4 million.  Our primary sources of liquidity are cash flowfrom operations and available borrowings under our amended and restated creditfacility (Credit Facility).

 

Asof November 28, 2009, we had $300.3 million of long-term debt, $27.8million of which was classified as a current liability. As of November 28,2009, our Credit Facility consisted of a $251.9 million term loan, all of whichwas outstanding, and a $225.0 million revolving line of credit loan, which hadno outstanding borrowings, outstanding letters of credit of $35.1 million andavailable borrowings of $154.7 million, based on the most restrictive financialcovenant calculations.  Cash flows fromoperations and borrowings under our Credit Facility have funded our workingcapital requirements, acquisitions, capital expenditures and other generalcorporate purposes.  We were incompliance with all of our financial covenants under our Credit Facility as of November 28,2009.

 

Inaddition to outstanding borrowings under our Credit Facility, we had outstandingborrowings under industrial revenue bonds of $12.2 million, senior notes of$27.1 million and capital lease and other obligations of $9.1 million as of November 28,2009.

 

Webelieve that available borrowings under our Credit Facility and cash provided byoperating activities will be sufficient to support our working capital, capitalexpenditures and debt service requirements for the foreseeable future.  Under the April 13, 2009 amendment to the CreditFacility, we were required to purchase or redeem $100.0 million aggregateprincipal amount of our outstanding senior notes on or before December 31,2009. We financed this required purchase with the increased available line ofcredit of $25.0 million and increased available term borrowings of up to$75.0 million.  As of November 28,2009, we had purchased the entire $100.0 million aggregate principalamount of our senior notes required to be purchased.  On December 11, 2009, we provided noticeof our intent to redeem the remaining $27.1 million aggregate principal amountof our senior notes on January 11, 2010. Our ability to generate sufficient cash, however, is subject to certaingeneral economic, financial, industry, legislative, regulatory and other factorsbeyond our control.  For a review of ourobligations that affect liquidity, please see the “Cash Payment Obligations”table in “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” of our Annual Report on Form 10-K for thefiscal year ended August 29, 2009.

 

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*Operating Activities*

 

Netcash provided through operating activities in the thirteen weeks ended November 28,2009 was $28.3 million compared to net cash provided through operatingactivities of $24.3 million in the thirteen weeks ended November 29,2008.  The $4.0 million increase was dueprimarily to an increase of approximately $43.9 million in net income duringthe thirteen weeks ended November 28, 2009 as compared to the thirteenweeks ended November 29, 2008, offset by a net decrease in cash generatedfrom changes in net current assets during the thirteen-week period ended November 28,2009 as compared to the thirteen week-period ended November 29, 2008.

 

*Investing Activities*

 

Netcash used in investing activities was $9.0 million in the thirteen weeks ended November 28,2009 compared to $6.6 million in the thirteen weeks ended November 29,2008.  This increase in cash used wasprimarily attributable to an approximate $2.6 million increase in expendituresfor property, plant and equipment during the thirteen weeks ended November 28,2009 as compared to the thirteen weeks ended November 29, 2008.

 

*Financing Activities*

 

Netcash used in financing activities was $22.9 million during the thirteen weeksended November 28, 2009 compared to net cash used in financing activitiesof $16.1 million during the thirteen weeks ended November 29, 2008.  The change was primarily attributed to anapproximate $52.8 million change in net revolver credit borrowings and thepurchase and cancellation of an additional $37.5 million of our seniornotes.  This change was partially offsetby an approximate $75.0 million in borrowings under our term note payable andby an approximate $7.5 million reduction in member distributions paid duringthe first quarter of fiscal year 2010.

 

*Amended and Restated SeniorCredit Facility*

 

Effective April 13,2009, our Credit Facility was amended to permit the redemption of ourmembership interests in the amount of $125.5 million, including theauthorization and issuance of Class A1 units to help fund theredemption.  In addition, the terms ofour Credit Facility were amended to: (1) increase the borrowings under ourCredit Facility by up to $100.0 million, of which up to $75.0 million is underour term loan and $25.0 million is under our revolving line of credit; (2) increasethe applicable margin on the rates of interest of the term loan and revolvingline of credit; (3) revise the payment schedule of the term loan; (4) shortenthe maturity date of the term loan; (5) remove the restrictions onpurchasing our senior notes and require the repurchase or redemption of $100million aggregate principal amount of our senior notes; (6) increase theamount of capital expenditures we can make in any fiscal year from $50 millionto $60 million, or $65 million if we expend less than $55 million in theimmediately preceding fiscal year; and (7) add a financial covenant requiringus to maintain a specified Funded Debt to EBITDA ratio.

 

The borrowings under theCredit Facility bear interest at LIBOR or the Base Rate, plus the applicablemargin.  The applicable margin for therevolving line of credit and the term loan will be based on borrowing baseavailability with grids for amounts greater than $150.0 million, $50.0 millionto $150.0 million and less than $50.0 million. As of November 28, 2009, the interest rates for the revolving loanand the term loan were approximately 5.25% and 4.0987%, respectively.

 

Our funded debt to EBITDAratio is not to be more than 3.75 to 1.00 at the end of each fiscalquarter.  If the borrowing baseavailability is less than $50.0 million for five consecutive business days orless than $35.0 million on any single business day during any fiscal quarter, afixed charge ratio of 1:15 to 1:00 must be maintained at the end of eachsubsequent fiscal quarter until the borrowing base availability 

 

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has been greater than or equal to $50.0 million for 90consecutive days.  As of November 28,2009, we had met this borrowing base availability requirement under our CreditFacility.  The advance rates under theborrowing base are 90% on eligible accounts and 70% on eligible inventory.

 

The borrowings under the revolving loan are availablefor our working capital requirements, capital expenditures and other general corporatepurposes.  The Credit Facility is securedby a first priority lien on substantially all of the Company’s assets.  The principal amount outstanding under theterm loan is due and payable in equal installments of approximately $2.5million on the last business day of each June and December commencingDecember 2009 through December 2010, after which required installmentpayments increase to approximately $4.8 million.  All outstanding amounts of the term loan aredue and payable on July 25, 2012. Prepayment of the term loan is allowed at any time.

 

The Credit Facility contains customary affirmativecovenants, including, without limitation, conduct of business, the maintenanceof insurance, compliance with laws, maintenance of properties, keeping of booksand records, and the furnishing of financial statements.  The facility also contains customary negativecovenants, including without limitation, restrictions on the following:distributions, mergers, sale of assets, investments and acquisitions, encumbrances,indebtedness, affiliate transactions, and ERISA matters.

 

The Credit Facility contains customary events ofdefault, including without limitation, failure to make payment when due,materially incorrect representations and warranties, breach of covenants,events of bankruptcy, default of other indebtedness that would permitacceleration of such indebtedness, the occurrence of one or more unstayed orundischarged judgments in excess of $3.0 million, changes in custody or controlof the Company’s property, changes in control of the Company, the failure ofany of the loan documents to remain in full force, and the Company’s failure toproperly fund its employee benefit plans. The facility also includes customary provisions protecting the lendersagainst increased cost or loss of yield resulting from changes in tax, reserve,capital adequacy and other requirements of law.

 

**Item 3. Quantitative and Qualitative Disclosures about Market Risk.**

 

Theprincipal market risks affecting our business are exposure to changes in pricesfor commodities, such as livestock and boxed beef, and interest rate risk.

 

*Commodities.*We use various raw materials, many ofwhich are commodities. Raw materials are generally available from severaldifferent sources, and we presently believe that we can obtain them asneeded.  Commodities are subject to pricefluctuations that may create price risk. From time to time, we may hedgecommodities in order to mitigate this price risk. While this may tend to limitour ability to participate in gains from commodity price fluctuations, it alsotends to reduce the risk of loss from changes in commodity prices.  To the extent the contracts are notdesignated as normal purchases, we reflect commodity contract gains and lossesas adjustments to the basis of underlying commodities purchased; gains orlosses are recognized in the statement of operations as a component of costs ofgoods sold.

 

We purchase cattle foruse in our processing businesses. From time to time, we enter into forwardpurchase contracts at prices determined prior to the delivery of the cattle.The commodity price risk associated with these activities can be hedged byselling (or buying) the underlying commodity, or by using an appropriatecommodity derivative instrument. The particular hedging instrument we usedepends on a number of factors, including availability of appropriatederivative instruments.

 

We sell commodity beefproducts in our business. Commodity beef products are subject to pricefluctuations that may create price risk. From time to time, we enter intoforward sales contracts at prices determined prior to shipment. We may hedgethe commodity price risk associated with these activities in order to mitigatethis price risk.  While this may tend tolimit our ability to participate in gains from commodity price fluctuations, italso tends to reduce the risk of loss from changes in commodity beefprices.  To the extent the contracts arenot designated as normal sales, we reflect commodity contract gains 

 

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and losses as adjustments to the basis of underlyingcommodities sold; gains or losses are recognized in the statement of operationsas a component of net sales.

 

From time to time, wepurchase cattle futures and options contracts. Our primary use of these contracts is to partially determine our futureinput costs when we have committed forward sales purchase orders from customersat a specified fixed price.  On November 28,2009, we held futures contracts covering approximately 136 million pounds ofcattle.  The longest duration futurescontract owned is thirteen months.  Inaccordance with ASC Topic 815, *Accounting for DerivativeInstruments and Hedging Activities*, as amended, we account forfutures contracts and their related firm purchase commitments at fair value.Certain firm commitments for live cattle purchases and all firm commitments forboxed beef sales are treated as “normal purchases and sales” and not marked tomarket.  SFAS No. 133 imposesextensive recordkeeping requirements in order to treat a derivative instrumentas a hedge for accounting purposes. Derivatives qualify for treatment as hedgeswhen there is a high correlation between the change in fair value of theinstrument and the related change in fair value of the underlying commitment.For derivatives that qualify as effective hedges, the change in fair value hasno net effect on earnings until the hedged transaction affects earnings. Forderivatives that are not designated as hedging instruments, or for theineffective portion of a hedging instrument, the change in fair value doesaffect current period net earnings.

 

While management believeseach of these instruments helps mitigate various market risks, they are notdesignated and accounted for as hedges as a result of the extensiverecordkeeping requirements of this statement. Accordingly, the gains and lossesassociated with the change in fair value of the instrument and the offsettinggains and losses associated with changes in the market value of certain of thefirm purchase commitments related to the futures contracts are recorded toincome and expense in the period of change.

 

We use a sensitivityanalysis to evaluate the effect that changes in the market value of commoditieswill have on these commodity derivative instruments.  We feel that sensitivity analysis moreappropriately reflects the potential market value exposure associated with theuse of derivative instruments.  As of November 28,2009 and August 29, 2009, the potential change in the fair value of thederivative instruments we hold that are not designated as normal purchases orsales, assuming a hypothetical 10% decrease in the underlying commodity pricein each year, was $1.2 million and $16.4 million, respectively.  This significant change was primarily due tothe cattle futures contracts that we entered into during the first quarter offiscal 2009 to offset the risk of fixed-price sales commitments.

 

*InterestRates.*  Asa result of our normal borrowing and leasing activities, our operating resultsare exposed to fluctuations in interest rates, which we manage primarilythrough our regular financing activities. We generally maintain limited investmentsin cash and cash equivalents.

 

Wehave long-term debt with variable interest rates. Short-term debt is primarilycomprised of the current portion of long-term debt maturing twelve months fromthe balance sheet date.  Our variableinterest expense is sensitive to changes in the general level of interestrates.  As of November 28, 2009, theweighted average interest rate on our $264.1 million of variable interest debtwas approximately 3.93%.  As of August 29,2009, the weighted average interest rate on our $222.4 million of variable ratedebt was approximately 3.36%.

 

We hadtotal interest expense of approximately $4.5 million during the thirteen weeksended November 28, 2009.  Theestimated increase in interest expense from a hypothetical 200 basis pointincrease in applicable variable interest rates would have been approximately$1.2 million during the thirteen weeks ended November 28, 2009.

 

*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, South Korea and China, product sales are predominately made inUnited States dollars, and therefore, currency risks are limited.

 

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**Item 4T.  Controls andProcedures.**

 

We maintain a system ofcontrols and procedures designed to provide reasonable assurance as to thereliability of the Consolidated Financial Statements and other disclosuresincluded in this report, as well as to safeguard assets from unauthorized useor disposition. We evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as defined in the Securities ExchangeAct of 1934 Rules 13a-15(e) and 15d-15(e) under supervision andwith the participation of management, including our Chief Executive Officer andChief 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 nochanges in our internal controls over financial reporting during the thirteenweeks ended November 28, 2009 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.  The design of any system ofcontrols and procedures is based in part upon certain assumptions about thelikelihood of future events.

 

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**PART II. OTHERINFORMATION**

** **

**Item 1. Legal Proceedings.**

 

For information regardinglegal proceedings, see Note 5, “Contingencies” to our Consolidated Financial Statementsincluded in Part I- Item 1 of this Form 10-Q, which is incorporatedherein by reference.

** **

**Item 1A. Risk Factors.**

 

The risk factors set forthin our Annual Report on Form 10-K for the fiscal year ended August 29,2009 have not materially changed.

** **

**Item 6. Exhibits.**

 

(A)                  Exhibits

 
|   | 10.1   | Third  Amendment to the Sixth Amended and Restated Credit Agreement dated as of  October 8, 2009 by and among National Beef Packing Company, LLC and  certain agents, lenders and issuers (incorporated herein by reference to  Exhibit 10.9 (e) to National Beef, Inc.’s Amendment No. 2  to Registration Statement on Form S-1 filed with the SEC on  December 2, 2009). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10.2   | Fourth  Amendment to the Sixth Amended and Restated Credit Agreement dated as of  November 24, 2009 by and among National Beef Packing Company, LLC and  certain agents, lenders and issuers (incorporated herein by reference to  Exhibit 10.1 to National Beef Packing Company, LLC’s Current Report on  Form 8-K filed with the SEC on December 1, 2009).                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10.3   | National  Beef Packing Company, LLC Management Incentive Program (incorporated herein  by reference to Exhibit 10.18 to National Beef, Inc.’s Registration  Statement on Form S-1 filed with the SEC on October 13, 2009.)*                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 31.1   | Certification  of the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 31.2   | Certification  of the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 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.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 32.2   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                 |

 

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|   | * | Management  contract. |
|--------|---|-----------------------|

 

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**SIGNATURES**

 

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

 

 
|   | National  Beef Packing Company, LLC |
|--------|-------------------------------------|
|   |                                |   |
|   |                                |   |
|   | By:                                 | /s/ Timothy M. Klein |
|   |                                | Timothy M. Klein*Chief Executive Officer and Manager**(Principal Executive Officer)* |

 

 
|   | By:    | /s/ Jay D. Nielsen                                                                    |
|--------|--------|---------------------------------------------------------------------------------------|
|   |   | Jay D. Nielsen*Chief Financial Officer**(Principal Financial and Accounting Officer)* |

 

 

Date:January 8, 2010

 

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