UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q


(Mark one)


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





For the quarterly period ended November 27, 2010


or





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








For the transition period from __________ to __________.





Commission file number 333-111407





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 T No o





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





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





Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer T
Small 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 T





There is no market for the Registrant’s equity.  As of January 7, 2011, there were 203,990,136 Class A units and 15,381,317 Class B units outstanding.












TABLE OF CONTENTS





PART I.
FINANCIAL INFORMATION
Page No.Item 1.
Financial Statements.
1Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
11Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
17Item 4.
Controls and Procedures.
18PART II.
OTHER INFORMATIONItem 1.
Legal Proceedings.
19Item 1A.
Risk Factors.
19Item 6.
Exhibits.
19Signatures.
20





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” 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





Item1.Financial Statements (unaudited).


1
 Table of Contents





NATIONAL BEEF PACKING COMPANY, LLC


AND SUBSIDIARIES





Consolidated Balance Sheets


(in thousands)





November 27, 2010


August 28, 2010AssetsCurrent assets:Cash and cash equivalents

$
26,209


$
20,405Accounts receivable, less allowance for returns and doubtful accounts of $2,971 and $2,891, respectively


177,462



182,234Due from affiliates


4,896



4,961Other receivables


7,860



7,399Inventories


240,811



232,943Other current assets


68,431



45,999Total current assets


525,669



493,941Property, plant and equipment, at cost


538,923



526,712Less accumulated depreciation


231,630



220,274Net property, plant and equipment


307,293



306,438Goodwill


81,242



81,242Other intangibles, net of accumulated amortization of $13,735 and $13,661, respectively


22,795



22,858Other assets


7,612



8,213$
944,611


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

$
21,413


$
21,382Cattle purchases payable


88,713



70,208Accounts payable – trade


69,374



73,522Due to affiliates


942



718Accrued compensation and benefits


31,362



78,401Accrued insurance


17,841



15,048Other accrued expenses and liabilities


34,910



27,091Distributions payable


171,144



27,364Total current liabilities


435,699



313,734Long-term debt, excluding current installments


257,771



225,090Other liabilities


2,482



2,443Total liabilities


695,952



541,267Capital subject to redemption


268,291



291,746Members’ capital:Members’ capital attributable to NBP


(22,489
)


76,894Accumulated other comprehensive income attributable to NBP


33



23Noncontrolling interest in Kansas City Steak Company, LLC


2,824



2,762Total members’ capital


(19,632
)


79,679Commitments and contingencies


-



-$
944,611


$
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 endedNovember 27, 2010


November 28, 2009Net sales

$
1,587,320


$
1,342,610Costs and expenses:Cost of sales


1,505,439



1,273,312Selling, general and administrative


12,887



11,229Depreciation and amortization


12,213



11,908Total costs and expenses


1,530,539



1,296,449Operating income


56,781



46,161Other income (expense):Interest income


7



29Interest expense


(2,598
)


(4,532
)Other, net


596



7Income before taxes


54,786



41,665Income tax expense


334



400Net income


54,452



41,265Net income attributable to noncontrolling interest


(62
)


(223
)Net income attributable to NBP

$
54,390


$
41,042





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)





13 weeks ended


13 weeks endedNovember 27, 2010


November 28, 2009Cash flows from operating activities:Net income

$
54,452


$
41,265Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization


12,213



11,908Gain on disposal of property, plant and equipment


(365
)


(128
)Amortization of debt issuance costs


345



195Change in assets and liabilities:Accounts receivable


4,772



7,573Due from affiliates


65



982Other receivables


(461
)


(2,491
)Inventories


(7,868
)


(12,020
)Other assets


(22,187
)


(646
)Cattle purchases payable


15,986



8,713Accounts payable


(747
)


(1,887
)Due to affiliates


224



(196
)Accrued compensation and benefits


(47,039
)


(23,738
)Accrued insurance


2,793



(569
)Other accrued expenses and liabilities


7,858



(671
)Net cash provided by operating activities


20,041



28,290Cash flows from investing activities:Capital expenditures, including interest capitalized


(13,405
)


(9,532
)Proceeds from sale of property, plant and equipment


776



484Net cash used in investing activities


(12,629
)


(9,048
)Cash flows from financing activities:Net receipts under revolving credit lines


37,991



(29,168
)Repayments under term note payable


(5,000
)


-Borrowings under term note payable


-



75,000Change in overdraft balances


(882
)


12,705Purchase and cancellation of Senior Notes


-



(39,798
)Repayments of other indebtedness/capital leases


(279
)


(4,576
)Cash paid for financing costs


-



(1,018
)Member distributions


(33,448
)


(36,083
)Net cash used in financing activities


(1,618
)


(22,938
)Effect of exchange rate changes on cash


10



22Net increase (decrease) in cash


5,804



(3,674
)Cash and cash equivalents at beginning of period


20,405



17,373Cash and cash equivalents at end of period

$
26,209


$
13,699Supplemental disclosures:Cash paid during the period for interest

$
2,437


$
3,516Cash paid during the period for taxes

$
14


$
79Supplemental non-cash disclosures of investing and financing activities;Assets acquired through capital lease

$
52


$
55





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 (“FASB”) issued Accounting Standards Update (“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 consist primarily of meat products and supplies.  Product inventories are considered commodities and are recorded based on quoted commodity prices, which approximate net realizable value.  Supply and other inventories are valued on the basis of first-in, first-out, specific or average cost methods.  Product inventories are relieved from inventory utilizing the first-in, first-out method.





Inventories at November 27, 2010 and August 28, 2010 consisted of the following (in thousands):





November 27, 2010


August 28, 2010Dressed and boxed meat products

$
157,490


$
154,927Beef by-products


45,863



46,891Supplies and other


37,458



31,125Total inventory

$
240,811


$
232,943


5
 Table of Contents





(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 endedNovember 27, 2010


November 28, 2009Net income

$
54,452


$
41,265Other comprehensive income (loss):Foreign currency translation adjustments


10



22Comprehensive income


54,462



41,287Comprehensive income attributable to the noncontrolling interest


(62
)


(223
)Comprehensive income attributable to NBP

$
54,400


$
41,064





(5) Contingencies





National Beef Leathers, LLC, or NBL, a wholly-owned subsidiary of NBP, has been a named defendant in two purported class actions involving NBL's tannery located in St. Joseph, Missouri, which NBL purchased in March 2009.  These lawsuits were filed on July 22, 2009 in the U.S. District Court for the Western District of Missouri. The lawsuits alleged that NBL spread wastewater sludge containing hexavalent chromium in four counties in northwest Missouri. The plaintiffs were seeking an unspecified amount of damages for economic damages, punitive damages, diminished property values and medical monitoring. The claims against NBL in these lawsuits were dismissed on December 2, 2010 and December 10, 2010.  As a result of these dismissals, NBL is no longer a party to these lawsuits.





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





(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 November 27, 2010, 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 November 27, 2010 was valued based upon a contractually stipulated valuation 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 November 27, 2010, the value of the capital subject to redemptionwas determined to be $273.9 million, which was in excess of its carrying value.  The total value of the capital subject to redemption at November 27, 2010, decreased by approximately $23.3 million compared to the value at August 28, 2010, primarily related to distributions offset by net income.  The carrying value of the capital subject to redemption increased by approximately $14.2 million through accretion during the three months ended November 27, 2010, resulting in the $268.3 million carrying value, as reflected in the accompanying consolidated balance sheet as of November 27, 2010.  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 November 27, 2010 and August 28, 2010 and also the level within the fair value hierarchy used to measure each category of assets (in thousands).





Description

November 27, 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

$
27,639


$
4,966


$
22,673


$
-Other accrued expenses and liabilities – derivatives

$
22,925


$
22,925


$
-


$
-Capital subject to redemption

$
268,291


$
-


$
56,720


$
211,571








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 November 27, 2010 and August 28, 2010.  NBPCo Holdings capital subject to redemption is based upon unobservable inputs, thus included in level 3 as of November 27, 2010 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 three months ended November 27, 2010 (in thousands).





Level 3 Fair Value Measurements at November 27, 2010Capital Subject to RedemptionBalance, August 28, 2010

$
229,892Allocation of net income


13,486Class A 5% priority distributions


(736
)Class B distributions


(6,021
)Equity distribution


(37,156
)Appraisal valuation adjustment


12,106Balance, November 27, 2010

$
211,571





(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 helps mitigate various market risks, they are not designated and accounted for as hedges as a result of the extensive recordkeeping requirements associated with hedge accounting.  Accordingly, the gains and losses associated with the change in fair value of the instruments are recorded to net sales and cost of 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 November 27, 2010 as all derivatives in an asset position are exchange-traded contracts.  The exchange-traded contracts have been entered into under a master netting agreement.  None of the derivatives entered into have credit-related contingent features.  The Company has $27.9 million in cash collateral posted on its derivative liabilities.





The following table presents the fair values as discussed in Note 6 and other information regarding derivative instruments not designated as hedging instruments as of November 27, 2010, and August 28, 2010 (in thousands):





Derivative Asset

Derivative LiabilityAs of November 27, 2010

As of November 27, 2010Balance Sheet Location

Fair Value

Balance Sheet Location

Fair ValueCommodity contracts
Other current assets

$
27,639

Other accrued expenses and liabilities

$
22,925Totals


$
27,639



$
22,925


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-week period ended November 27, 2010 and November 28, 2009 (in thousands):





Derivatives Not Designated as Hedging Instruments
Location of Gain or (Loss) Recognized in Income on Derivatives

Amount of Gain or (Loss) Recognized in Income on Derivatives


Amount of Gain or (Loss) Recognized in Income on Derivatives13 Weeks Ended

November 27, 2010


13 Weeks Ended

November 28, 2009Commodity contracts
Net sales

$
6,970


$
(6,757
)Commodity contracts
Cost of sales


(6,489
)


3,543Totals


$
481


$
(3,214
)





(9) 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.  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, Segment Reporting.





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 sell beef by-products including hides to the variety meat, feed processing, fertilizer, pet food and leather tanning 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, National Elite Transportation, LLC, or National Elite, a provider of transportation logistics services, and Kansas City Steak.





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


9
 Table of Contents





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





13 weeks ended


13 weeks endedNovember 27, 2010


November 28, 2009Net sales:Core beef

$
1,620,788


$
1,363,131Other


53,646



54,920Eliminations


(87,114
)


(75,441
)Total net sales

$
1,587,320


$
1,342,610Operating income:Core beef

$
56,432


$
44,729Other


349



1,432Total operating income


56,781



46,161Interest income


7



29Interest expense


(2,598
)


(4,532
)Other income, net


596



7Total income before taxes

$
54,786


$
41,665November 27, 2010


November 28, 2009Assets:Core beef

$
899,616


$
766,041Other


46,885



45,027Eliminations


(1,890
)


(904
)Total assets

$
944,611


$
810,164





(10) Subsequent Events





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 constitutes the last of a series of term loans under the Credit Facility not to exceed $375 million in the aggregate.  The total amount of term loans outstanding under the Credit Facility immediately following the draw was approximately $370 million.





On November 29, 2010, the Company paid an approximately $141.2 million cash distribution to certain members based on approval by the Board of Managers on October 27, 2010 of a $150 million cash distribution.  The remaining $8.8 million was paid to certain members on January 3, 2011.





On December 17, 2010, the Company entered into a series of agreements with the City of St. Joseph, Missouri to provide Missouri Chapter 100 bonds in the amount of $14.5 million.  The Company agreed to purchase the bonds which would effectively provide property tax abatement on certain equipment, which will be leased to the Company by the City of St. Joseph under a capital lease, located at the Company’s hide processing facilities in St. Joseph, Missouri.  Additionally, the Company entered into a Payment in Lieu of Taxes Agreement related to the abatement.  As a result of the legal right of offset, the capital lease obligation and corresponding bond investment will be eliminated in consolidation.


10
 Table of Contents





Item2.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 issues, livestock disease, including the identification of cattle with Bovine Spongiform Encephalopathy, or BSE, product contamination and recall concerns, competitive practices and consolidation in the cattle production and processing industries and among our customers, actions of domestic or foreign governments, hedging risk, changes in interest rates and foreign currency exchange rates, trade barriers and exchange controls, consumer demand and preferences, the cost of compliance with environmental and health laws, loss of key customers, loss of key employees, labor relations, and consolidation among our customers.





In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking information contained in this report will in fact transpire. Readers are cautioned not to place undue reliance on these forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors.  Please review Part II. Item 1A, Risk Factors, included in this report, for other important factors that could cause actual results to differ materially from those in any such forward-looking statements.





Industry Outlook





We anticipate fed cattle supplies to remain above prior year levels through the winter quarter following active late summer placements and very favorable cattle feeding conditions through the fall.  The anticipated greater supplies and heavier weights should contribute to gains in beef production compared to the prior year.  Beyond the first calendar quarter of 2011, we expect fed cattle supplies to tighten following placement of cattle with more diverse placement weights and the continuing calf crop decline.  Larger cow and bull slaughter during 2010 continues to imply herd liquidation and the trend of smaller cattle supplies into the coming years.  While the cattle supply may appear negative to our operation, recent beef demand, supported by beef export tonnage near that of pre-BSE (2003) levels and encouraging domestic economic conditions, appears positive.   Absent significant deterioration in domestic and global economic conditions, we expect cattle and beef prices to remain strong throughout 2011.





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.


11
 Table of Contents





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.





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.





Recent Events





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 November 27, 2010 compared to thirteen weeks ended November 28, 2009





General.  Net income for the thirteen weeks ended November 27, 2010 was approximately $54.5 million compared to net income of approximately $41.3 million for the thirteen weeks ended November 28, 2009, an increase of $13.2 million.  Sales were higher in the thirteen weeks ended November 27, 2010 compared to the thirteen weeks ended November 28, 2009 due in part to an approximate 4.0% increase in the volume of cattle processed and increase in the average sales price per head of approximately14.3% during the current reporting period.





Total costs and expenses of $1,530.5 million for the thirteen weeks ended November 27, 2010 were 96.4% of sales compared to approximately $1,296.4 million for the thirteen weeks ended November 28, 2009, or 96.6% of sales.  An increase in the volume of cattle processed, and a decrease in total costs as a percentage of sales resulted in increased operating income of approximately $10.6 million for the thirteen weeks ended November 27, 2010 compared to the thirteen weeks ended November 28, 2009.





Net Sales.  Net sales were $1,587.3 million for the thirteen weeks ended November 27, 2010 compared to $1,342.6 million for the thirteen weeks ended November 28, 2009, an increase of $244.7 million or 18.2%.  The increase in net sales primarily resulted from an approximately 14.3% increase in the average sales price per head during the thirteen weeks ended November 27, 2010 as the demand for beef products was stronger as compared to the thirteen weeks ended November 28, 2009.  Also contributing to the increase in net sales was an approximately 4.0% increase in the volume of cattle processed.





Cost of Sales.  Cost of sales was $1,505.4 million for the thirteen weeks ended November 27, 2010 compared to $1,273.3 million for the thirteen weeks ended November 28, 2009, an increase of $232.1 million or 18.2%.  The increase was primarily a result of an approximate 15.3% increase in cattle prices for the comparable periods.  Also contributing to the increase was an increase in the volume of cattle processed of approximately 4.0% during the 13 weeks ended November 27, 2010 compared to the thirteen weeks ended November 28, 2009.





Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $12.9 million for the thirteen weeks ended November 27, 2010 compared to $11.2 million for the thirteen weeks ended November 28, 2009, an increase of approximately $1.7 million or 15.2%.  The increase primarily reflects an increase of approximately $0.5 million in both consulting and salaries expense for the period.


12
 Table of Contents





Depreciation and Amortization Expense.  Depreciation and amortization expenses were $12.2 million for the thirteen weeks ended November 27, 2010 compared to $11.9 million for the thirteen weeks ended November 28, 2009, an increase of $0.3 million or 2.5%.  The slight increase in depreciation expense was primarily related to fixed assets being placed into service during fiscal year 2011.





Operating Income.  Operating income was approximately $56.8 million for the thirteen weeks ended November 27, 2010 compared to operating income of approximately $46.2 million for the thirteen weeks ended November 28, 2009, an increase of $10.6 million or 22.9%. The improvement in operating income during the first quarter of fiscal 2010 resulted primarily from an increase in the sales per head of approximately 14.3% and increase in the volume of cattle processed of approximately 4.0% during the thirteen weeks ended November 27, 2010.  These increases were offset by an increase in average live cattle prices of approximately 15.3% during the period.





Interest Expense.  Interest expense was $2.6 million for the thirteen weeks ended November 27, 2010 compared to $4.5 million for the thirteen weeks ended November 28, 2009, a decrease of $1.9 million or 42.2%.  The decrease in interest expense during the thirteen weeks ended November 27, 2010 as compared to the thirteen weeks ended November 28, 2009 was due primarily to a decrease in the average borrowings during the period of approximately12.3%, and a decrease of approximately 226 basis points on the average daily interest rate during each of the respective reporting periods.  These decreases are primarily due to the purchase and cancellation of the remaining approximately $66.9 million of our Senior Notes.  Portions of these notes were outstanding during the thirteen weeks ended November 28, 2009, but were retired and cancelled in their entirety prior to the beginning of the thirteen weeks ending November 27, 2010.





Income Tax Expense.  Income tax expense was $0.3 million and $0.4 million for the thirteen weeks ended November 27, 2010 and November 28, 2009, respectively.  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.





Net Income.  As a result of the factors described above, net income for the thirteen-week period ended November 27, 2010 was approximately $54.5 million compared to net income of approximately $41.3 million for the thirteen-week period ended November 28, 2009, an increase of approximately $13.2 million or 32.0%.





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.  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, Segment Reporting.





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 sell beef by-products including hides to the variety meat, feed processing, fertilizer, pet food and leather tanning 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, National Elite, a provider of transportation logistics services, and Kansas City Steak.





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


13
 Table of Contents





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





13 weeks ended


13 weeks endedNovember 27, 2010


November 28, 2009Net sales:Core beef

$
1,620,788


$
1,363,131Other


53,646



54,920Eliminations


(87,114
)


(75,441
)Total net sales

$
1,587,320


$
1,342,610Operating income:Core beef

$
56,432


$
44,729Other


349



1,432Total operating income


56,781



46,161Interest income


7



29Interest expense


(2,598
)


(4,532
)Other income, net


596



7Total income before taxes

$
54,786


$
41,665November 27, 2010


November 28, 2009Assets:Core beef

$
899,616


$
766,041Other


46,885



45,027Eliminations


(1,890
)


(904
)Total assets

$
944,611


$
810,164





Thirteen weeks ended November 27, 2010 compared to thirteen weeks ended November 28, 2009





Core Beef





Net Sales.  Net sales for Core Beef were $1,620.8 million for the thirteen weeks ended November 27, 2010 compared to $1,363.1 million for the thirteen weeks ended November 28, 2009, an increase of $257.7 million or 18.9%.  The increase in net sales primarily resulted from an approximately14.3% increase in the average sales price per head during the thirteen weeks ended November 27, 2010 as the demand for beef products was stronger as compared to the thirteen weeks ended November 28, 2009.  Also contributing to the increase in net sales was an approximately 4.0% increase in the volume of cattle processed.





Operating Income.  Operating income for Core Beef was approximately $56.4 million during the thirteen weeks ended November 27, 2010 compared to operating income of approximately $44.7 million during the thirteen weeks ended November 28, 2009, an improvement of approximately $11.7 million.   The improvement in operating income during the first quarter of fiscal 2010 resulted primarily from an increase in the sales per head of approximately 14.3% and increase in the volume of cattle processed of approximately 4.0% during the thirteen weeks ended November 27, 2010.  These increases were offset by an increase in average live cattle prices of approximately 15.3% during the period.





Other





Net Sales.  Net sales for Other were approximately $53.6 million for the thirteen weeks ended November 27, 2010 compared to approximately $54.9 million for the thirteen weeks ended November 28, 2009, a decrease of approximately $1.3 million or 2.4%.  The decrease in net sales for other was primarily due to reduced revenues at both our transportation company and portion control facility during the thirteen weeks ended November 27, 2010 as compared to the thirteen weeks ended November 28, 2009.


14
 Table of Contents





Operating Income.  Operating income for Other was approximately $0.3 million for the thirteen weeks ended November 27, 2010 compared to approximately $1.4 million for the thirteen weeks ended November 28, 2009, a decrease of approximately $1.1 million.  This decrease was due primarily to a reduction of operating income at both our transportation company and portion control facility due to lower sales at both locations and higher depreciation expense at our transportation company.





Liquidity and Capital Resources





As of November 27, 2010, we had net working capital of approximately $90.0 million, which included $171.1 million in distributions payable, and cash and cash equivalents of $26.2 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 flow from operations and available borrowings under our amended and restated credit facility, or Credit Facility.





As of November 27, 2010, we had $279.2 million of long-term debt, $21.4 million of which was classified as a current liability. As of November 27, 2010, our Credit Facility originally consisted of a $375.0 million term loan, of which $195.0 million was outstanding and a $250.0 million revolving line of credit loan, which had outstanding borrowings of $65.0 million, outstanding letters of credit of $24.1 million and available borrowings of $159.6 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 November 27, 2010.





In addition to outstanding borrowings under our Credit Facility, we had outstanding borrowings under industrial revenue bonds of $12.2 million and capital lease and other obligations of $7.0 million as of November 27, 2010.





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 fiscal year ended August 28, 2010.





Operating Activities





Net cash provided through operating activities in the thirteen weeks ended November 27, 2010 was $20.0 million compared to net cash provided through operating activities of $28.3 million in the thirteen weeks ended November 28, 2009.    The $8.3 million decrease in operating activities was primarily related to a decrease in working capital changes during the period, 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 $13.2 million during the thirteen weeks ended November 27, 2010 as compared to the thirteen weeks ended November 28, 2009.





Investing Activities





Net cash used in investing activities was $12.6 million in the thirteen weeks ended November 27, 2010 compared to $9.0 million in the thirteen weeks ended November 28, 2009.  This increase in cash used was primarily attributable to an approximate $3.9 million increase in expenditures for property, plant and equipment during the thirteen weeks ended November 27, 2010 as compared to the thirteen weeks ended November 28, 2009.


15
 Table of Contents





Financing Activities





Net cash used in financing activities was $1.6 million during the thirteen weeks ended November 27, 2010 compared to net cash used in financing activities of $22.9 million during the thirteen weeks ended November 28, 2009.  The change was primarily attributed to an approximately $67.2 increase in net receipts under our revolving credit lines during the thirteen weeks ended November 27, 2010 compared to the thirteen weeks ended November 28, 2009, and the purchase and cancellation of approximately $39.8 million of our Senior Notes during the thirteen weeks ended November 28, 2009.  These increases in cash provided by financing activities was partially offset by an approximate $75.0 million in borrowings under our term note payable during the thirteen weeks ended November 28, 2009 and an approximate $13.6 million change in the overdraft balances during the period.





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 $4.2 million are being amortized over the life of the loan.





The borrowings under the Credit Facility bear interest at LIBOR or the Base Rate, plus the applicable margin. The applicable margin for the revolving line of credit and the term loan will be as set forth on a grid based on different ratios of funded debt to EBITDA. As of November 27, 2010, the interest rates for the term loan and revolving loan were approximately 2.76% and 3.53%, respectively.





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.


16
 Table of Contents





Item3. Quantitativeand 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. From time to time, 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.





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 determine 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 815, Derivatives and Hedging, 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 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 helps 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.


17
 Table of Contents





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 that sensitivity analysis more appropriately reflects the potential market value exposure associated with the use of derivative instruments.  As of November 27, 2010 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 $9.3 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 November 27, 2010, the weighted average interest rate on our $272.2 million of variable interest debt was approximately 2.84%.  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 $2.6 million during the thirteen weeks ended November 27, 2010.  The estimated increase in interest expense from a hypothetical 200 basis point increase in applicable variable interest rates would have been approximately $1.3 million during the thirteen weeks ended November 27, 2010.





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





Item4.Controls and 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 November 27, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.


18
 Table of Contents





PART II. OTHER INFORMATION





Item1. 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, which is incorporated herein by reference.





Item1A.Risk Factors.





The risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended August 27, 2010 have not materially changed.





Item6.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.


19
 Table of Contents





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/ Jay D. NielsenJay D. NielsenChief Financial Officer(Principal Financial and Accounting Officer)





Date: January 7, 2011






20