UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q


(Mark one)
 
 þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended February 26, 2011
 or
 
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period fromto.
 
 Commission file number 333-111407
 
 NATIONAL BEEF PACKING COMPANY, LLC
 (Exact name of registrant as specified in its charter)
 
 DELAWARE

48-1129505(State or other jurisdiction of incorporation or organization)

(I.R.S. employer identification number)
 
 12200 North Ambassador Drive
 Kansas City, MO 64163
 (Address of principal executive offices)
 
 Telephone: (800) 449-2333
 (Registrant’s telephone number, including area code)
 
 Indicate by check mark whether the registrant (1)  has filed all reports required to be filed by Section  13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12  months (or for such shorter period that the registrant was required to file such reports), and (2)  has been subject to such filing requirements for the past 90  days. Yes þ No o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule  405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).        Yes o No o
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule  12b-2 of the Exchange Act.
 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule  12b-2 of the Exchange Act.





Large accelerated filer £
Accelerated filer £
Non-accelerated filer þ
Smaller Reporting Company o





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





There is no market for the Registrant’s equity.  As of April 8, 2011, there were 203,990,136 Class A units and 15,545,948 Class B units outstanding.












TABLE OF CONTENTSPART I.
FINANCIAL INFORMATION
Page No.Item 1.
Financial Statements.
1Item 2.
Management’s Discussion and Analysis of Financial Conditionand Results of Operations.
11Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
18Item 4.
Controls and Procedures.
20PART II.
OTHER INFORMATIONItem 1.
Legal Proceedings.
21Item 1A.
Risk Factors.
21Item 6.
Exhibits.
21Signatures.
22





Unless the context indicates or otherwise requires, the terms “National Beef,” “NBP,” “Company,” “we,” “our,” and “us” refer to National Beef Packing Company, LLC and its consolidated subsidiaries.  As used in this report, the term “U.S. Premium Beef” or “USPB” refers to U.S. Premium Beef, LLC, a Delaware limited liability company, formerly U.S. Premium Beef, Ltd., a Kansas cooperative, which owns a majority interest in National Beef.


ii
 Table of Contents





PART I.  FINANCIAL INFORMATION





Item 1.  Financial Statements (unaudited).


1
 Table of Contents





NATIONAL BEEF PACKING COMPANY, LLC


AND SUBSIDIARIES





Consolidated Balance Sheets


(in thousands)





February 26,2011


August 28,2010AssetsCurrent assets:Cash and cash equivalents

$
32,235


$
20,405Accounts receivable, less allowance for returns and doubtful accounts of $2,961 and $2,891, respectively


191,853



182,234Due from affiliates


6,031



4,961Other receivables


7,965



7,399Inventories


245,905



232,943Other current assets


95,246



45,999Total current assets


579,235



493,941Property, plant and equipment, at cost


556,171



526,712Less accumulated depreciation


243,707



220,274Net property, plant and equipment


312,464



306,438Goodwill


81,242



81,242Other intangibles, net of accumulated amortization of $13,812 and $13,661, respectively


22,717



22,858Other assets


8,053



8,213$
1,003,711


$
912,692Liabilities and Members’ CapitalCurrent liabilities:Current installments of long-term debt

$
38,451


$
21,382Cattle purchases payable


77,429



70,208Accounts payable – trade


72,253



73,522Due to affiliates


1,189



718Accrued compensation and benefits


44,984



78,401Accrued insurance


16,624



15,048Other accrued expenses and liabilities


51,112



27,091Distributions payable


30,931



27,364Total current liabilities


332,973



313,734Long-term debt, excluding current installments


398,189



225,090Other liabilities


2,483



2,443Total liabilities


733,645



541,267Capital subject to redemption


310,501



291,746Members’ (deficit) / capital:Members’ (deficit) / capital attributable to NBP


(43,459
)


76,894Accumulated other comprehensive attributable to NBP


44



23Noncontrolling interest in Kansas City Steak Company, LLC


2,980



2,762Total members’ (deficit) / capital


(40,435
)


79,679$
1,003,711


$
912,692


See accompanying notes to consolidated financial statements.


2
 Table of Contents





NATIONAL BEEF PACKING COMPANY, LLC


AND SUBSIDIARIES





Consolidated Statements of Operations


(in thousands)





13 weeks ended


13 weeks ended


26 weeks ended


26 weeks endedFebruary 26, 2011


February 27, 2010


February 26, 2011


February 27, 2010Net sales

$
1,652,606


$
1,340,926


$
3,239,926


$
2,683,536Costs and expenses:Cost of sales


1,562,350



1,259,860



3,067,789



2,533,171Selling, general and administrative


12,733



12,063



25,620



23,293Depreciation and amortization


12,570



12,376



24,783



24,284Total costs and expenses


1,587,653



1,284,299



3,118,192



2,580,748Operating income


64,953



56,627



121,734



102,788Other income (expense):Interest income


4



6



11



34Interest expense


(3,475
)


(3,519
)


(6,073
)


(8,051
)Other, net


236



(3,784
)


833



(3,776
)Income before taxes


61,718



49,330



116,505



90,995Income tax expense (benefit)


383



(48
)


718



352Net income


61,335



49,378



115,787



90,643Net income attributable to the noncontrolling interest


(372
)


(568
)


(433
)


(791
)Net income attributable to NBP

$
60,963


$
48,810


$
115,354


$
89,852




See accompanying notes to consolidated financial statements.


3
 Table of Contents





NATIONAL BEEF PACKING COMPANY, LLC


AND SUBSIDIARIES





Consolidated Statements of Cash Flows


(in thousands)




26 weeks ended


26 weeks endedFebruary 26, 2011


February 27, 2010Cash flows from operating activities:Net income

$
115,787


$
90,643Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


24,783



24,284Gain on disposal of property, plant and equipment


(645
)


(120
)Amortization of debt issuance costs


757



484Write-off of debt issuance costs


-



418Change in assets and liabilities:Accounts receivable


(9,619
)


742Due from affiliates


(1,070
)


557Other receivables


(566
)


(199
)Inventories


(12,962
)


(13,252
)Other assets


(49,345
)


(2,290
)Cattle purchases payable


1,924



223Accounts payable


(2,539
)


(4,705
)Due to affiliates


471



6Accrued compensation and benefits


(33,417
)


(9,974
)Accrued insurance


1,576



(221
)Other accrued expenses and liabilities


24,061



(5,266
)Net cash provided by operating activities


59,196



81,330Cash flows from investing activities:Capital expenditures, including interest capitalized


(31,658
)


(17,986
)Proceeds from sale of property, plant and equipment


1,645



683Net cash used in investing activities


(30,013
)


(17,303
)Cash flows from financing activities:Net receipts under revolving credit lines


30,000



21,100Repayments of term note payable


(14,250
)


(23,102
)Borrowings of term note payable


175,000



75,000Purchase and cancellation of senior notes


-



(66,855
)Change in overdraft balances


6,567



(936
)Repayments of other indebtedness


(582
)


(5,245
)Cash paid for financing costs


(509
)


(1,103
)Member distributions


(213,385
)


(68,728
)Distributions paid to noncontrolling interest


(215
)


(490
)Net cash used in financing activities


(17,374
)


(70,359
)Effect of exchange rate changes on cash


21



18Net increase (decrease) in cash


11,830



(6,314
)Cash and cash equivalents at beginning of period


20,405



17,373Cash and cash equivalents at end of period

$
32,235


$
11,059Supplemental disclosures:Cash paid during the period for interest

$
5,327


$
8,154Cash paid during the period for taxes

$
722


$
9Supplemental non-cash disclosures of investing and financing activities;Assets acquired through capital lease

$
129


$
111




See accompanying notes to consolidated financial statements.


4
 Table of Contents





NATIONAL BEEF PACKING COMPANY, LLC AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




(1)  Interim Financial Statements





Basis of Presentation





The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information; therefore, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included using management’s best estimates and judgments where appropriate.  These estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affect the reported amounts for certain revenues and expenses during the reporting period.  Actual results could differ materially from these estimates and judgments.  For further information, refer to the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements, which are included in NBP’s Annual Report on Form 10-K on file with the Securities and Exchange Commission, or SEC for the fiscal year ended August 28, 2010.  The results of operations for the interim periods presented are not necessarily indicative of the results for a full fiscal year.




(2)  New Accounting Pronouncements





In January 2010, the Financial Accounting Standards Board, or FASB issued Accounting Standards Update, or ASU No. 2010-06, Fair Value Measurements and Disclosures.  The Update issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3 of the fair value measurement hierarchy.  This guidance will become effective for the Company’s year ending in fiscal 2012.  The adoption of ASU No. 2010-06 should not significantly impact the Company’s consolidated financial position or results of operations.





(3)  Inventories





Inventories at February 26, 2011 and August 28, 2010 consisted of the following (in thousands):





February 26, 2011


August 28, 2010Dressed and boxed meat products

$
160,970


$
154,927Beef by-products


42,290



46,891Supplies and other


42,645



31,125Total inventory

$
245,905


$
232,943




5
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(4)  Comprehensive Income





Comprehensive income, which consists of net income and foreign currency translation adjustments, was as follows for the periods indicated (in thousands):





13 weeks ended


13 weeks ended


26 weeks ended


26 weeks endedFebruary 26, 2011


February 27, 2010


February 26, 2011


February 27, 2010Net income

$
61,335


$
49,378


$
115,787


$
90,643Other comprehensive income / (loss):Foreign currency translation adjustments


11



(4
)


21



18Comprehensive income


61,346



49,374



115,808



90,661Comprehensive income attributable to the noncontrolling interest


(372
)


(568
)


(433
)


(791
)Comprehensive income attributable to NBP

$
60,974


$
48,806


$
115,375


$
89,870





(5)  Contingencies





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




(6)  Capital Subject to Redemption





At any time after certain dates, the earliest being July 31, 2010 in the case of NBPCo Holdings, the latest being July 31, 2011 in the case of certain affiliates of our Chief Executive Officer, Timothy M. Klein, or the Klein Affiliates, NBPCo Holdings and the Klein Affiliates have the right to request that the Company repurchase their interests, the value of which is to be determined by a mutually agreed appraisal process or a specified formula.  If the Company is unable to effect the repurchase within a specified time, the requesting member(s) have the right to cause a sale process to commence.





Generally accepted accounting principles require the Company to determine the fair value of the capital subject to redemption at the end of each reporting period.  To the extent this value increases, this change in fair value is accreted over the redemption period.  In determining the fair value of the capital subject to redemption held by NBPCo Holdings as of February 26, 2011, management has considered previous redemption prices, valuations of peer companies and other factors.  The capital subject to redemption held by the Klein Affiliates as of February 26, 2011 was valued based upon a contractually stipulated formula.





The Company accounts for changes in the redemption value of these interests by accreting the change in value from the date of change through the earliest redemption date of the respective interests.  At February 26, 2011, the value of the capital subject to redemptionwas determined to be $315.9 million, which was in excess of its carrying value.  The total value of the capital subject to redemption at February 26, 2011, increased by approximately $42.0 and $18.7 million compared to the value at November 27, 2011 and August 28, 2010, respectively.  The carrying value of the capital subject to redemption increased through accretion during the thirteen and twenty-six week periods ending February 26, 2011 by approximately $35.7 million and $49.9 million respectively, resulting in the $310.5 million carrying value, as reflected in the accompanying consolidated balance sheet as of February 26, 2011.  Offsetting the change in value of capital subject to redemption is a corresponding change in members’ capital.


6
 Table of Contents





(7)  Fair Value Measurements





The Company determines fair value utilizing a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.  The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3).  The three levels of inputs used to measure fair value are as follows:





•
Level 1 – quoted prices in active markets for identical assets or liabilities accessible by the reporting entity.


•
Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.


•
Level 3 – unobservable inputs for an asset or liability.  Unobservable inputs should only be used to the extent observable inputs are not available.





The following table details the assets and liabilities measured at fair value on a recurring basis as of February 26, 2011 and August 28, 2010 and also the level within the fair value hierarchy used to measure each category of assets (in thousands).





Description

February 26,

2011


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

$
40,013


$
2,226


$
37,787


$
-Other accrued expenses and liabilities – derivatives

$
38,090


$
38,090


$
-


$
-Capital subject to redemption

$
310,501


$
-


$
61,220


$
249,281





Description

August 28,

2010


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

$
15,563


$
61


$
15,502


$
-Other accrued expenses and liabilities – derivatives

$
14,672


$
14,672


$
-


$
-Capital subject to redemption

$
291,746


$
-


$
61,854


$
229,892





Management has used certain contractual redemption prices in measuring the fair value of the Klein Affiliates capital subject to redemption, which is included in level 2 as of February 26, 2011 and August 28, 2010.  NBPCo Holdings capital subject to redemption is based upon unobservable inputs, thus included in level 3 as of February, 26, 2011 and August 28, 2010.


7
 Table of Contents





The following table presents a reconciliation of capital subject to redemption measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the thirteen and twenty-six weeks ended February 26, 2011 (in thousands).





Thirteen weeks ended

February 26, 2011


Twenty-six weeks ended

February 26, 2011Beginning Balance

$
211,571


$
229,892Allocation of net income


15,103



28,590Class A 5% priority distributions


(736
)


(1,472
)Class B distributions


(9,117
)


(15,138
)Equity distribution


-



(37,156
)Appraisal valuation adjustment


32,460



44,565Balance, February 26, 2011

$
249,281


$
249,281





(8)  Disclosure about Derivative Instruments and Hedging Activities





As part of the Company’s ongoing operations, the Company is exposed to market risks such as changes in commodity prices.  To manage these risks, the Company may enter into the following derivative instruments pursuant to our established policies:





·
Forward purchase contracts for cattle for use in our beef plants


·
Exchange traded futures contracts for cattle


·
Exchange traded futures contracts for grain





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





The Company enters into certain commodity derivatives, primarily with a diversified group of highly rated counterparties.  The maximum amount of loss due to the credit risk of the counterparties, should the counterparties fail to perform according to the terms of the contracts, is deemed to be immaterial as of February 26, 2011.  The exchange-traded contracts have been entered into under a master netting agreement.  None of the derivatives entered into have credit-related contingent features.  The Company has $43.6 million in cash collateral posted on its derivative liabilities.





The following table presents the fair values as discussed in Note 7 and other information regarding derivative instruments not designated as hedging instruments as of February 26, 2011 and August 28, 2010 (in thousands):





Derivative Asset

Derivative LiabilityAs of February 26, 2011

As of February 26, 2011Balance Sheet Location

Fair Value

Balance Sheet Location

Fair ValueCommodity contracts
Other current assets

$
40,013

Other accrued expenses and  liabilities

$
38,090Totals


$
40,013



$
38,090




8
 Table of Contents




Derivative Asset

Derivative LiabilityAs of August 28, 2010

As of August 28, 2010Balance Sheet Location

Fair Value

Balance Sheet Location

Fair ValueCommodity contracts
Other current assets

$
15,563

Other accrued expenses and  liabilities

$
14,672Totals


$
15,563



$
14,672





The following table presents the impact of derivative instruments on the Consolidated Statement of Operations for the thirteen and twenty-six week periods ended February 26, 2011 and February 27, 2010, respectively (in thousands):





Derivatives Not Designated asHedging Instruments
Location of Gain or (Loss)Recognized in Incomeon Derivatives

Amount of Gain or (Loss)Recognized inIncome on Derivatives13 Weeks ended

February 26, 2011


26 Weeks ended

February 26, 2011Commodity contracts
Net sales

$
2,959


$
9,929Commodity contracts
Cost of sales


(11,482
)


(17,971
)Totals


$
(8,523
)

$
(8,042
)





Derivatives Not Designated asHedging Instruments
Location of Gain or (Loss)Recognized in Incomeon Derivatives

Amount of Gain or (Loss)Recognized inIncome on Derivatives13 Weeks ended

February 27, 2010


26 Weeks ended

February 27, 2010Commodity contracts
Net sales

$
3,588


$
(3,169
)Commodity contracts
Cost of sales


4,393



7,937Totals


$
7,981


$
4,768





(9)  Debt





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





(10)  Segments





The Company’s operating segments are based on segment profit and evaluated by the Chief Executive Officer, who also serves as the Chief Operating Decision Maker, or CODM.  Segment profit is measured as operating income for NBP’s two reporting segments, Core Beef and Other, based on the definitions provided in ASC 280, Disclosures about Segments of an Enterprise and Related Information.


9
 Table of Contents





Core Beef—the majority of NBP’s revenues are generated from the sale of fresh meat, which include chuck cuts, rib cuts, loin cuts, round cuts, thin meats, ground beef, and other products. In addition, we also sell beef by-products including hides to the variety meat, feed processing, fertilizer and pet food industries. Aggregation criteria were applied to determine the constituents of the Core Beef segment.





Other—the Other segment of NBP consists of the operations of National Carriers, Inc., a refrigerated and livestock contract carrier company, National Elite Transportation, LLC, a provider of transportation logistics services,  and Kansas City Steak Company, LLC, a portion control steak cutting operation.





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





The following table represents segment results for the periods indicated (in thousands):





13 weeks ended


13 weeks ended


26 weeks ended


26 weeks endedFebruary 26, 2011


February 27, 2010


February 26, 2011


February 27, 2010Net sales:Core beef

$
1,681,632


$
1,367,189


$
3,302,420


$
2,730,320Other


69,240



65,088



122,886



120,008Eliminations


(98,266
)


(91,351
)


(185,380
)


(166,792
)Total net sales

$
1,652,606


$
1,340,926


$
3,239,926


$
2,683,536Operating income:Core beef

$
63,176


$
54,931


$
119,608


$
99,659Other


1,777



1,696



2,126



3,129Total operating income


64,953



56,627



121,734



102,788Interest income


4



6



11



34Interest expense


(3,475
)


(3,519
)


(6,073
)


(8,051
)Other expense,  net


236



(3,784
)


833



(3,776
)Total income before  taxes

$
61,718


$
49,330


$
116,505


$
90,995February 26, 2011


February 27, 2010Assets:Core beef

$
958,051


$
769,251Other


47,114



43,534Eliminations


(1,454
)


(2,172
)Total assets

$
1,003,711


$
810,613


10
 Table of Contents





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





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





Disclosure Regarding Forward-Looking Statements





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





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





Industry Outlook





We anticipate strong beef demand to offset possible negative implications of year over year increases in fed cattle supplies into mid-summer.     Cattle placement has been active during the first calendar quarter as dry conditions in the Central and South Plains moved larger numbers of lightweight cattle onto feed.   We anticipate this early placement of calves combined with smaller calf crops to contribute to a decline in cattle supplies during the second half of calendar 2011.  The long term cattle industry outlook remains essentially unchanged though herd liquidation appears to be easing.    Export of beef products is expected to remain strong supported by an improving global economy and the value of the dollar relative to other major currencies.





Beef Export Markets





Export markets for U.S. beef products remain constrained since the discovery of a single case of BSE in the State of Washington in December 2003, as well as other isolated cases.  In July 2006, Japan agreed to reopen its market to U.S. beef from cattle aged 20 months and younger.   South Korea announced a provisional opening of its border to U.S. beef from animals 30 months and younger in September 2006 but subsequently closed its border again in October 2007.  South Korea reopened its border and started inspecting U.S. beef near the end of June 2008.  These constraints and uncertainties have historically had a negative impact on beef demand during the periods in which they occurred.





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


11
 Table of Contents





In December 2010, the United States Department of Agriculture, or USDA, announced that China has agreed to resume talks with the United States regarding beef market access and that technical talks will resume with the goal of re-opening China’s market for U.S. beef under the age of 30 months in early 2011.  We cannot presently assess the full economic impact of the re-opening of China’s market to age verified beef on the U.S. beef packing industry or our operations, and there can be no assurance that such talks will occur or result in re-opening of China’s market to U.S. beef products.





In March 2011, a major earthquake followed by a tsunami hit the east coast of Japan and caused significant damage to parts of the country.  A portion of our export sales are delivered to Japan, and while we cannot presently assess the full long-term economic impact of the earthquake and tsunami on our operations, so far there have been few interruptions.





Regulatory Developments





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





Results of Operations





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





General.  Net income for the thirteen weeks ended February 26, 2011 was approximately $61.3 million compared to net income of approximately $49.4 million for the thirteen weeks ended February 27, 2010, an improvement of approximately $11.9 million, or 24.1%.  Net sales were higher in the thirteen weeks ended February 26, 2011 compared to the thirteen weeks ended February 27, 2010 primarily due to a 20.1% increase in the net sales per head, as well as a 2.4% increase in the volume of cattle processed.





Total costs and expenses of approximately $1,587.7 million for the thirteen weeks ended February 26, 2011, were 96.1% of net sales compared to approximately $1,284.3 million for the thirteen weeks ended February 27, 2010, or 95.8% of net sales.  Continued stable demand for beef products and increases in cattle prices during the second quarter of fiscal 2011 as compared to the same period of fiscal 2010 resulted in an increase in the percentage of total costs to net sales during the period.





Net Sales.  Net sales were approximately $1,652.6 million for the thirteen weeks ended February 26, 2011 compared to approximately $1,340.9 million for the thirteen weeks ended February 27, 2010, an increase of approximately $311.7 million, or 23.2%.  The increase in net sales resulted primarily from a 20.1% increase in the net sales per head during the thirteen weeks ended February 26, 2011 compared to the same period in the prior year, as the demand for beef products remained strong, and price of beef products increased during the period.  Also contributing to the increase in net sales was an approximately 2.4% increase in the number of cattle processed compared to the same period of the prior year.





Cost of Sales.  Cost of sales was approximately $1,562.4 million for the thirteen weeks ended February 26, 2011 compared to approximately $1,259.9 million for the thirteen weeks ended February 27, 2010, an increase of approximately $302.5 million, or 24.0%.   The increase was primarily a result of an approximately 23.9% increase in average cattle prices during the period compared to the prior period.  In addition, the cost of sales increase was partially due to the 2.4% increase in the volume of cattle processed.





Selling, General and Administrative Expenses.  Selling, general and administrative expenses were approximately $12.7 million for the thirteen weeks ended February 26, 2011 compared to approximately $12.1 million for the thirteen weeks ended February 27, 2010, an increase of approximately $0.6 million, or 5.0%.


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Depreciation and Amortization Expense.  Depreciation and amortization expenses were approximately $12.6 million for the thirteen weeks ended February 26, 2011 compared to approximately $12.4 million for the thirteen weeks ended February 27, 2010, an increase of approximately $0.2 million, or 1.6%.  Depreciation expense increased due to assets being placed into service, primarily at our three beef plants and two case ready plants, during fiscal year 2011.





Operating Income.  Operating income was approximately $65.0 million for the thirteen weeks ended February 26, 2011 compared to operating income of approximately $56.6 million for the thirteen weeks ended February 27, 2010, an improvement of approximately $8.4 million, or 14.8%.  The increased operating income resulted from an approximately 20.1% increase in net sales per head for and a 2.4% increase in the volume of cattle processed.  These increases are partially offset by an approximately 23.9% increase in average cattle prices during the period.





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





Income Tax Expense/Benefit.  Income tax expense was $0.4 million for the thirteen weeks ended February 26, 2011 compared to an income tax benefit of $0.1 million for the same period of fiscal year 2010, a tax expense increase of $0.5 million.  Income tax expense is recorded on taxable income from National Carriers, which is organized as a C Corporation, and the apportioned taxable income of NBP by certain states which impose privilege taxes.





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





General.  Net income for the twenty-six weeks ended February 26, 2011 was approximately $115.8 million compared to net income of approximately $90.6 million for the twenty-six weeks ended February 27, 2010, an improvement of approximately $25.2 million, or 27.8%.  Net sales were higher in the twenty-six weeks ended February 26, 2011 compared to those of the prior period primarily due to an increase in net sales per head of approximately 17.2%, and an approximately 3.2% increase in the volume of cattle processed.





Total costs and expenses of $3,118.2 million for the twenty-six weeks ended February 26, 2011 were 96.2% of net sales compared to $2,580.7 million for the twenty-six weeks ended February 27, 2010, or 96.2% of net sales.  Total costs as a percentage of net sales are similar primarily due to the increase in net sales per head of approximately 17.2%, offset by an increase in average cattle prices of approximately 19.6% for the comparable periods.





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





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





Selling, General and Administrative Expenses.  Selling, general and administrative expenses were approximately $25.6 million for the twenty-six weeks ended February 26, 2011 compared to approximately $23.3 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $2.3 million, or 9.9%.  The increase for the period is primarily due to an approximately $0.8 million increase in consulting expenses, approximately $0.7 million increase in salaries expense and an increase in travel expenses of approximately $0.5 million during the current period as compared to the same period of the prior year.  These increases are offset by a decrease in bad debt expense of approximately $0.3 million during the period.


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Depreciation and Amortization Expense.  Depreciation and amortization expenses were approximately $24.8 million for the twenty-six weeks ended February 26, 2011 compared to approximately $24.3 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $0.5 million, or 2.1%.  Depreciation expense increased due to assets being placed into service, primarily at our three beef plants and two case ready plants, during fiscal year 2011.





Operating Income.  Operating income was approximately $121.7 million for the twenty-six weeks ended February 26, 2011 compared to operating income of approximately $102.8 million for the twenty-six weeks ended February 27, 2010, an improvement of approximately $18.9 million, or 18.4%.  The increased operating income primarily resulted from an approximately 17.2% increase in net sales per head and a 3.2% increase in the volume of cattle processed.  These increases are partially offset by an approximately 19.6% increase in average cattle prices during the period.





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





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





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





Segment Results





The Company’s operating segments are based on segment profit and evaluated by the Chief Executive Officer, who also serves as the Chief Operating Decision Maker (CODM).  Segment profit is measured as operating income for NBP’s two reporting segments, Core Beef and Other, based on the definitions provided in ASC 280, Disclosures about Segments of an Enterprise and Related Information.





Core Beef—the majority of NBP’s revenues are generated from the sale of fresh meat, which include chuck cuts, rib cuts, loin cuts, round cuts, thin meats, ground beef, and other products.  In addition, we also sell beef by-products including hides to the variety meat, feed processing, fertilizer and pet food industries.  Aggregation criteria were applied to determine the constituents of the Core Beef segment.





Other—the Other segment of NBP consists of the operations of National Carriers, Inc., a refrigerated and livestock contract carrier company, National Elite Transportation, LLC, a provider of transportation logistics services,  and Kansas City Steak Company, LLC, a portion control steak cutting operation.





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


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The following table represents segment results for the periods indicated (in thousands):





13 weeks ended


13 weeks ended


26 weeks ended


26 weeks endedFebruary 26, 2011


February 27, 2010


February 26, 2011


February 27, 2010Net sales:Core beef

$
1,681,632


$
1,367,189


$
3,302,420


$
2,730,320Other


69,240



65,088



122,886



120,008Eliminations


(98,266
)


(91,351
)


(185,380
)


(166,792
)Total net sales

$
1,652,606


$
1,340,926


$
3,239,926


$
2,683,536Operating income:Core beef

$
63,176


$
54,931


$
119,608


$
99,659Other


1,777



1,696



2,126



3,129Total operating income


64,953



56,627



121,734



102,788Interest income


4



6



11



34Interest expense


(3,475
)


(3,519
)


(6,073
)


(8,051
)Other expense,  net


236



(3,784
)


833



(3,776
)Total income before taxes

$
61,718


$
49,330


$
116,505


$
90,995February 26, 2011


February 27, 2010Assets:Core beef

$
958,051


$
769,251Other


47,114



43,534Eliminations


(1,454
)


(2,172
)Total assets

$
1,003,711


$
810,613





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





Core Beef





Net Sales.  Net sales for Core Beef were approximately $1,681.6 million for the thirteen weeks ended February 26, 2011 compared to approximately $1,367.2 million for the thirteen weeks ended February 27, 2010, an increase of approximately $314.4 million, or 23.0%.  The increase in net sales resulted primarily from an increase in net sales per head of 20.1% as well as a 2.4% increase in the number of cattle processed for the current thirteen week period as compared to the same period of the prior year.





Operating Income.  The operating income for Core Beef was approximately $63.2 million for the thirteen weeks ended February 26, 2011 compared to operating income of approximately $54.9 million for the thirteen weeks ended February 27, 2010, an improvement of approximately $8.3 million.  The improved operating income resulted from an increase in net sales per head of approximately 20.1% and 2.4% increase in the number of cattle processed, offset by an approximately 23.9% increase in average cattle prices during the period.


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Other





Net Sales.  Net sales for Other were approximately $69.2 million for the thirteen weeks ended February 26, 2011 compared to approximately $65.1 million for the thirteen weeks ended February 27, 2010, an increase of approximately $4.1 million, or 6.3%.  The increase was primarily due to increased net sales at our portion control beef facility and transportation operations during the thirteen week period of fiscal 2011 as compared to the same period of the prior year.





Operating Income.  Operating income for Other was approximately $1.8 million for the thirteen weeks ended February 26, 2011 compared to approximately $1.7 million for the thirteen weeks ended February 27, 2010, an increase of approximately $0.1 million.





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





Core Beef





Net Sales.  Net sales for Core Beef were approximately $3,302.4 million for the twenty-six weeks ended February 26, 2011 compared to approximately $2,730.3 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $572.1 million, or 21.0%.  The increase in net sales resulted primarily from an approximately 17.2% increase in net sales per head for the twenty-six weeks ended February 26, 2011 as compared to the same period of the prior year, and a 3.2% increase in the number of cattle processed.





Operating Income.  Operating income for Core Beef was approximately $119.6 million for the twenty-six weeks ended February 26, 2011 compared to operating income of approximately $99.7 million for the twenty-six weeks ended February 27, 2010, an improvement of approximately $19.9 million, or 20.0%.  The improved operating income resulted from a 17.2% increase in net sales per head and a 3.2% increase in the volume of cattle processed, offset by an approximately 19.6% increase in average cattle prices compared to the prior year.





Other





Net Sales.  Net sales for Other were approximately $122.9 million for the twenty-six weeks ended February 26, 2011 compared to approximately $120.0 million for the twenty-six weeks ended February 27, 2010, an increase of approximately $2.9 million, or 2.4%.  The increase in net sales was primarily due to higher net sales in our transportation operations during the twenty-six week period of fiscal 2010 as compared to the same period of the prior year.





Operating Income.  Operating income for Other was approximately $2.1 million for the twenty-six weeks ended February 26, 2011 compared to approximately $3.1 million for the twenty-six weeks ended February 27, 2010, a reduction of approximately $1.0 million.  The decrease was due primarily to a reduction of operating income at our portion control beef facility partially offset by improved operating income at our transportation operations facility during the current twenty-six week period of fiscal 2011 as compared to the same period of the prior year.





Liquidity and Capital Resources





As of February 26, 2011, we had net working capital of approximately $246.3 million, which included $30.9 million in distributions payable and cash and cash equivalents of $32.2 million.  As of August 28, 2010, we had net working capital of approximately $180.2 million, which included cash and cash equivalents of $20.4 million, with $27.4 million in distributions payable.  Our primary sources of liquidity are cash flows from operations and available borrowings under our amended and restated credit facility, or Credit Facility.





As of February 26, 2011, we had $436.6 million of long-term debt, of which $38.5 million was classified as a current liability.  As of February 26, 2011, our Credit Facility consisted of a term loan, of which $360.8 million was outstanding, and a $250.0 million revolving line of credit loan, which had outstanding borrowings of $57.0 million, outstanding letters of credit of $24.1 million and available borrowings of $168.9 million, based on the most restrictive financial covenant calculations.  Cash flows from operations and borrowings under our Credit Facility have funded our working capital requirements, acquisitions, capital expenditures and other general corporate purposes.  We were in compliance with all of our financial covenants under our Credit Facility as of February 26, 2011.


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In addition to outstanding borrowings under our Credit Facility, we had outstanding borrowings under industrial revenue bonds of $12.2 million and capital leases and other obligations of $6.6 million as of February 26, 2011.





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





Operating Activities





Net cash provided by operating activities in the twenty-six weeks ended February 26, 2011 was approximately $59.2 million compared to net cash provided by operating activities of approximately $81.3 million in the twenty-six weeks ended February 27, 2010.  The $22.1 million change was primarily due to a decrease in working capital changes during the period.  The working capital changes were primarily related to an increase in cash paid in fiscal year 2011 for bonuses earned in fiscal year 2010 and an increase in cash collateral posted on derivatives liabilities.  These decreases are partially offset by an increase in net income of approximately $25.1 million during the twenty-six weeks ended February 26, 2011 as compared to the twenty-six weeks ended February 27, 2010.





Investing Activities





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





Financing Activities





Net cash used in financing activities was approximately $17.4 million in the twenty-six weeks ended February 26, 2011 compared to net cash used in financing activities of approximately $70.4 million in the twenty-six weeks ended February 27, 2010.  The change was primarily attributed to additional $100.0 million of borrowings on the term loan during the twenty-six weeks ended February 26, 2011 compared to the prior year period.  In addition, the remaining $66.9 million was purchased and cancelled on our senior notes during the twenty-six weeks ended February 27, 2010.  These increases in cash provided by financing activities were partially offset by an additional $144.7 million in member distributions made during the twenty-six weeks ended February 26, 2011 compared to the twenty-six weeks ended February 27, 2010.





Amended and Restated Senior Credit Facility





Effective as of June 4, 2010, the Credit Facility was amended and restated to: (1) increase the borrowings under the Credit Facility by providing for a term loan facility of up to $375 million and a revolving line of credit of up to $250 million; (2) reduce the applicable margin on the rates of interest of the term loan and revolving line of credit; (3) revise the payment schedule of the term loan; (4) extend the maturity date of the Credit Facility to June 4, 2015; (5) remove limitations on capital expenditures; (6) add new financial covenants regarding adjusted net worth and a fixed charge coverage ratio; and (7) add two wholly owned subsidiaries, National Beef California, LP and National Carriers, Inc., as loan parties and guarantors. The lender financing charges for the amended and restated Credit Facility of approximately $4.7 million are being amortized over the life of the loan.


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On November 29, 2010, the Company drew $175 million under the Credit Facility. The draw was made to fund distributions to the Company’s members and for general corporate purposes. The draw constitutes the last of a series of term loans under the Credit Facility not to exceed $375 million in the aggregate.





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





The borrowings under the revolving loan are available for our working capital requirements, capital expenditures and other general corporate purposes. The advance rates under the borrowing base are 90% on eligible accounts and 70% on eligible inventory. The Credit Facility is secured by a first priority lien on substantially all of our assets and the assets of our subsidiaries.





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





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





The Credit Facility contains customary events of default, including, without limitation, failure to make payment when due, materially incorrect representations and warranties, breach of covenants, events of bankruptcy, default of other indebtedness that would permit acceleration of such indebtedness, the occurrence of one or more unstayed or undischarged judgments in excess of $3.0 million, changes in custody or control of NBP LLC’s property, changes in control of National Beef or the Company, failure of any of the loan documents to remain in full force, and the Company’s failure to properly fund its employee benefit plans. The Credit Facility also includes customary provisions protecting the lenders against increased costs or loss of yield resulting from changes in tax, reserve, capital adequacy and other requirements of law.




Item 3. Quantitative and Qualitative Disclosures About Market Risk.





The principal market risks affecting our business are exposure to changes in prices for commodities, such as livestock and boxed beef, and interest rate risk.





Commodities.We use various raw materials, many of which are commodities. Raw materials are generally available from several different sources, and we presently believe that we can obtain them as needed.  Commodities are subject to price fluctuations that may create price risk. When appropriate, we may hedge commodities in order to mitigate this price risk. While this may tend to limit our ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity prices.  To the extent the contracts are not designated as normal purchases, we reflect commodity contract gains and losses as adjustments to the basis of underlying commodities purchased; gains or losses are recognized in the statement of operations as a component of costs of goods sold.





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


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We sell commodity beef products in our business. Commodity beef products are subject to price fluctuations that may create price risk. From time to time, we enter into forward sales contracts at prices determined prior to shipment. We may hedge the commodity price risk associated with these activities in order to mitigate this price risk.  While this may tend to limit our ability to participate in gains from commodity price fluctuations, it also tends to reduce the risk of loss from changes in commodity beef prices.  To the extent the contracts are not designated as normal sales, we reflect commodity contract gains and losses as adjustments to the basis of underlying commodities sold; gains or losses are recognized in the statement of operations as a component of net sales.





From time to time, we purchase cattle futures and options contracts.   Our primary use of these contracts is to partially fix our future input costs when we have committed forward sales purchase orders from customers at a specified fixed price.   The longest duration futures contract owned is sixteen months.   In accordance with ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities, as amended, we account for futures contracts and their related firm purchase commitments at fair value. Certain firm commitments for live cattle purchases and all firm commitments for boxed beef sales are treated as “normal purchases and sales” and not marked to market.  ASC Topic 815 imposes extensive recordkeeping requirements in order to treat a derivative instrument as a hedge for accounting purposes. Derivatives qualify for treatment as hedges when there is a high correlation between the change in fair value of the instrument and the related change in fair value of the underlying commitment. For derivatives that qualify as effective hedges, the change in fair value has no net effect on earnings until the hedged transaction affects earnings. For derivatives that are not designated as hedging instruments, or for the ineffective portion of a hedging instrument, the change in fair value does affect current period net earnings.





While management believes each of these instruments help mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive recordkeeping requirements of this statement. Accordingly, the gains and losses associated with the change in fair value of the instrument and the offsetting gains and losses associated with changes in the market value of certain of the firm purchase commitments related to the futures contracts are recorded to income and expense in the period of change.





We use a sensitivity analysis to evaluate the effect that changes in the market value of commodities will have on these commodity derivative instruments.  We feel the sensitivity analysis appropriately reflects the potential market value exposure associated with the use of derivative instruments.  As of February 26, 2011 and August 28, 2010, the potential change in the fair value of the derivative instruments we hold that are not designated as normal purchases or sales, assuming a hypothetical 10% decrease in the underlying commodity price in each year, was $4.0 million and $0.3 million, respectively.





Interest Rates.As a result of our normal borrowing and leasing activities, our operating results are exposed to fluctuations in interest rates, which we manage primarily through our regular financing activities. We generally maintain limited investments in cash and cash equivalents.





We have long-term debt with variable interest rates. Short-term debt is primarily comprised of the current portion of long-term debt maturing twelve months from the balance sheet date.  Our variable interest expense is sensitive to changes in the general level of interest rates.  As of February 26, 2011, the weighted average interest rate on our $430.0 million of variable rate debt was approximately 2.45%. As of August 28, 2010, the weighted average interest rate on our $239.2 million of variable interest debt was approximately 2.77%.





We had total interest expense of approximately $6.1 million during the twenty-six week period ending February 26, 2011.  The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $3.4 million in the twenty-six week period ending February 26, 2011.





Foreign Operations.  Transactions denominated in a currency other than an entity’s functional currency may expose that entity to currency risk.  Although we operate in international markets including Japan and South Korea, product sales are predominately made in United States dollars, and therefore, currency risks are limited.


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Item 4.  Controlsand Procedures





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


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PART II. OTHER INFORMATION





Item 1. Legal Proceedings.





For information regarding legal proceedings, see Note 5, “Contingencies” to our Consolidated Financial Statements included in Part  I, Item 1 of this Form 10-Q.





Item 1A. Risk Factors.





The risk factors set forth in our Annual Report on Form 10-K for the year ended August 28, 2010 have not materially changed.





Item 6. Exhibits.





(A)
Exhibits





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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SIGNATURES





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




National Beef Packing Company, LLCBy:
/s/ Timothy M. KleinTimothy M. KleinChief Executive Officer and Manager(Principal Executive Officer)By:
/s/ Simon P. McGeeSimon P. McGeeChief Financial Officer(Principal Financial Officer)By:
/s/ Jay D. NielsenJay D. NielsenChief Accounting Officer(Principal Accounting Officer)Date: April 8, 2011





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