Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 

**(Markone)**

 

x       **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended May 29, 2010**

**or**

 

o          **TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from                to                .**

 

**Commission file number 333-111407**

 

**NATIONALBEEF 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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x No o

 

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

 

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

 

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

 

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

 

Thereis no market for the Registrant’s equity. As of July 9, 2010, there were 203,990,136 Class A units and15,381,317 Class B units outstanding.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                   | **Page No.** |
|-------------------|----------------------------------------------------------------------------------------------|-------------------|
| ** **        | ** **                                                                                   | ** **        |
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                   | ** **        |
|              |                                                                                         |              |
| Item 1.           | Financial Statements.                                                                        | 1                 |
|              |                                                                                         |              |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations. | 11                |
|              |                                                                                         |              |
| Item 3.           | Quantitative  and Qualitative Disclosures About Market Risk.                                 | 19                |
|              |                                                                                         |              |
| Item 4.           | Controls and  Procedures.                                                                    | 20                |
|              |                                                                                         |              |
|              |                                                                                         |              |
| **PART II.** | **OTHER INFORMATION**                                                                        |              |
|              |                                                                                         |              |
| Item 1.           | Legal Proceedings.                                                                           | 21                |
|              |                                                                                         |              |
| Item 1A.          | Risk Factors.                                                                                | 21                |
|              |                                                                                         |              |
| Item 6.           | Exhibits.                                                                                    | 21                |
|              |                                                                                         |              |
|              | Signatures.                                                                                  | 22                |

 

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

 

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**PART I.  FINANCIALINFORMATION**

 

**Item 1.  Financial Statements.**

 

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**NATIONAL BEEF PACKING COMPANY, LLC**

**AND SUBSIDIARIES**

 

**Consolidated Balance Sheets**

**(in thousands)**

 
| ** **                                                                                                | ** ** | **May 29, 2010** | ** ** | ** **               | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| ** **                                                                                                | ** ** | **(unaudited)**       | ** ** | **August 29, 2009** | ** ** |
| **Assets**                                                                                                |       |                  |       |                     |       |
| Current assets:                                                                                           |       |                  |       |                     |       |
| Cash and cash equivalents                                                                                 |       | $                     | 20,082     |                     | $          | 17,373 |   |
| Accounts receivable, less allowance for returns  and doubtful accounts of $3,391 and $1,511, respectively |       | 205,784               |       | 172,420                  |       |
| Due from affiliates                                                                                       |       | 3,837                 |       | 4,532                    |       |
| Other receivables                                                                                         |       | 7,070                 |       | 7,165                    |       |
| Inventories                                                                                               |       | 216,706               |       | 175,300                  |       |
| Other current assets                                                                                      |       | 18,596                |       | 16,602                   |       |
| Total current assets                                                                                      |       | 472,075               |       | 393,392                  |       |
|                                                                                                      |       |                  |       |                     |       |
| Property, plant and equipment, at cost                                                                    |       | 507,286               |       | 479,926                  |       |
| Less accumulated depreciation                                                                             |       | 208,685               |       | 174,295                  |       |
| Net property, plant and equipment                                                                         |       | 298,601               |       | 305,631                  |       |
| Goodwill                                                                                                  |       | 81,242                |       | 81,242                   |       |
| Other intangibles, net of accumulated amortization  of $13,129 and $11,450, respectively                  |       | 23,392                |       | 24,760                   |       |
| Other assets                                                                                              |       | 4,976                 |       | 4,120                    |       |
| Total assets                                                                                              |       | $                     | 880,286    |                     | $          | 809,145 |   |
| **Liabilities and Members’  Capital**                                                                |       |                  |       |                     |       |
| Current liabilities:                                                                                      |       |                  |       |                     |       |
| Current installments of long-term debt                                                                    |       | $                     | 6,635      |                     | $          | 11,458 |   |
| Cattle purchases payable                                                                                  |       | 63,100                |       | 49,806                   |       |
| Accounts payable — trade                                                                             |       | 66,671                |       | 69,073                   |       |
| Due to affiliates                                                                                         |       | 1,101                 |       | 1,042                    |       |
| Accrued compensation and benefits                                                                         |       | 61,751                |       | 50,857                   |       |
| Accrued insurance                                                                                         |       | 15,162                |       | 16,344                   |       |
| Other accrued expenses and liabilities                                                                    |       | 11,353                |       | 14,585                   |       |
| Distributions payable                                                                                     |       | 32,698                |       | 35,183                   |       |
| Total current liabilities                                                                                 |       | 258,471               |       | 248,348                  |       |
| Long-term debt, excluding current installments                                                            |       | 280,116               |       | 287,370                  |       |
| Other liabilities                                                                                         |       | 2,155                 |       | 2,364                    |       |
| Total liabilities                                                                                         |       | 540,742               |       | 538,082                  |       |
| Capital subject to redemption                                                                             |       | 264,371               |       | 183,407                  |       |
| Members’ capital:                                                                                    |       |                  |       |                     |       |
| Members’ capital attributable to NBP                                                                 |       | 72,518                |       | 85,290                   |       |
| Accumulated other comprehensive income / (loss)  attributable to NBP                                      |       | 6                     |       | (1                       | )          |
| Non-controlling interest in Kansas City Steak  Company, LLC                                               |       | 2,649                 |       | 2,367                    |       |
| Total members’ capital                                                                               |       | 75,173                |       | 87,656                   |       |
| Commitments and contingencies                                                                             |       | —                |       | —                   |       |
| Total liabilities, capital subject to redemption  and members’ capital                               |       | $                     | 880,286    |                     | $          | 809,145 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**NATIONAL BEEF PACKING COMPANY, LLC**

**AND SUBSIDIARIES**

 

**Consolidated Statements of Operations**

**(in thousands)**

 
| ** **                                               | ** ** | **13 weeks ended**    | ** ** | **13 weeks ended**    | ** ** | **39 weeks ended**    | ** ** | **39 weeks ended**    | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **May 29, 2010** | ** ** | **May 30, 2009** | ** ** | **May 29, 2010** | ** ** | **May 30, 2009** | ** ** |
| ** **                                               | ** ** | **(unaudited)**       | ** ** | **(unaudited)**       | ** ** | **(unaudited)**       | ** ** | **(unaudited)**       | ** ** |
| Net sales                                                |       | $                     | 1,537,879  |                  | $          | 1,318,020             |       | $                     | 4,221,415  |   | $ | 4,045,215 |   |
| Costs and expenses:                                      |       |                  |       |                  |       |                  |       |                  |       |
| Cost of sales                                            |       | 1,429,435             |       | 1,242,304             |       | 3,962,607             |       | 3,882,639             |       |
| Selling, general and administrative                      |       | 13,196                |       | 10,862                |       | 36,489                |       | 32,066                |       |
| Depreciation and amortization                            |       | 12,471                |       | 11,594                |       | 36,756                |       | 32,823                |       |
| Total costs and expenses                                 |       | 1,455,102             |       | 1,264,760             |       | 4,035,852             |       | 3,947,528             |       |
| Operating income                                         |       | 82,777                |       | 53,260                |       | 185,563               |       | 97,687                |       |
| Other income (expense):                                  |       |                  |       |                  |       |                  |       |                  |       |
| Interest income                                          |       | 4                     |       | 40                    |       | 39                    |       | 145                   |       |
| Interest expense                                         |       | (3,513                | )          | (5,816                | )          | (11,563               | )          | (18,191               | )          |
| Equity in loss of aLF Ventures, LLC                      |       | —                |       | (8                    | )          | —                |       | (57                   | )          |
| Other, net                                               |       | 217                   |       | (617                  | )          | (3,559                | )          | (4,452                | )          |
| Income before taxes                                      |       | 79,485                |       | 46,859                |       | 170,480               |       | 75,132                |       |
| Income tax expense                                       |       | 326                   |       | 338                   |       | 678                   |       | 899                   |       |
| Net income                                               |       | 79,159                |       | 46,521                |       | 169,802               |       | 74,233                |       |
| Net income attributable to the non-controlling  interest |       | (58                   | )          | (232                  | )          | (850                  | )          | (950                  | )          |
| Net income attributable to NBP                           |       | $                     | 79,101     |                  | $          | 46,289                |       | $                     | 168,952    |   | $ | 73,283 |   |

 

See accompanying notes to consolidated financial statements.

 

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**NATIONAL BEEF PACKING COMPANY, LLC**

**AND SUBSIDIARIES**

 

**Consolidated Statements of Cash Flows**

**(in thousands)**

** **
| ** **                                                                                  | ** ** | **39 weeks ended**    | ** ** | **39 weeks ended**    | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                  | ** ** | **May 29, 2010** | ** ** | **May 30, 2009** | ** ** |
| ** **                                                                                  | ** ** | **(unaudited)**       | ** ** | **(unaudited)**       | ** ** |
| Cash flows from operating activities:                                                       |       |                  |       |                  |       |
| Net income                                                                                  |       | $                     | 169,802    |                  | $          | 74,233 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:          |       |                  |       |                  |       |
| Depreciation and amortization                                                               |       | 37,528                |       | 32,823                |       |
| (Gain) / loss on disposal of property, plant and  equipment                                 |       | (154                  | )          | 119                   |       |
| Write-off of debt issuance costs                                                            |       | 418                   |       | 1,317                 |       |
| Change in assets and liabilities:                                                           |       |                  |       |                  |       |
| Accounts receivable                                                                         |       | (33,364               | )          | 29,247                |       |
| Due from affiliates                                                                         |       | 695                   |       | 3,758                 |       |
| Other receivables                                                                           |       | 95                    |       | (2,316                | )          |
| Inventories                                                                                 |       | (41,406               | )          | 11,702                |       |
| Other assets                                                                                |       | (3,334                | )          | (3,970                | )          |
| Cattle purchases payable                                                                    |       | 5,505                 |       | 7,767                 |       |
| Accounts payable                                                                            |       | (1,470                | )          | (4,569                | )          |
| Due to affiliates                                                                           |       | 59                    |       | 9                     |       |
| Accrued compensation and benefits                                                           |       | 10,894                |       | (10,465               | )          |
| Accrued insurance                                                                           |       | (1,182                | )          | (87                   | )          |
| Other accrued expenses and liabilities                                                      |       | (3,441                | )          | 8,387                 |       |
| Net cash provided by operating activities                                                   |       | 140,645               |       | 147,955               |       |
|                                                                                        |       |                  |       |                  |       |
| Cash flows from investing activities:                                                       |       |                  |       |                  |       |
| Capital expenditures, including interest  capitalized                                       |       | (28,867               | )          | (35,573               | )          |
| Proceeds from sale of property, plant and  equipment                                        |       | 974                   |       | 1,240                 |       |
| Net cash used in investing activities                                                       |       | (27,893               | )          | (34,333               | )          |
|                                                                                        |       |                  |       |                  |       |
| Cash flows from financing activities:                                                       |       |                  |       |                  |       |
| Net receipts under revolving credit lines                                                   |       | 8,718                 |       | 52,448                |       |
| Repayments under term note payable                                                          |       | (23,102               | )          | (25,713               | )          |
| Borrowings of term note payable                                                             |       | 75,000                |       | —                |       |
| Change in overdraft balances                                                                |       | 6,857                 |       | (1,750                | )          |
| Purchase and cancellation of Senior Notes                                                   |       | (66,855               | )          | (45,479               | )          |
| Net repayments of other indebtedness                                                        |       | (5,838                | )          | (3,104                | )          |
| Member capital redeemed                                                                     |       | —                |       | (125,484              | )          |
| Member capital contribution                                                                 |       | —                |       | 75,484                |       |
| Cash paid for financing costs                                                               |       | (1,017                | )          | —                |       |
| Member distributions                                                                        |       | (103,245              | )          | (50,369               | )          |
| Distributions paid to non-controlling interest                                              |       | (568                  | )          | (390                  | )          |
| Net cash used in financing activities                                                       |       | (110,050              | )          | (124,357              | )          |
|                                                                                        |       |                  |       |                  |       |
| Effect of exchange rate changes on cash                                                     |       | 7                     |       | (32                   | )          |
| Net increase (decrease) in cash                                                             |       | 2,709                 |       | (10,767               | )          |
| Cash and cash equivalents at beginning of period                                            |       | 17,373                |       | 25,466                |       |
| Cash and cash equivalents at end of period                                                  |       | $                     | 20,082     |                  | $          | 14,699 |   |
|                                                                                        |       |                  |       |                  |       |
| Supplemental disclosures:                                                                   |       |                  |       |                  |       |
| Cash paid during the period for interest                                                    |       | $                     | 11,285     |                  | $          | 15,802 |   |
| Cash paid/(received) during the period for taxes,  net of $0 and $925 refunds, respectively |       | 729                   |       | (771                  | )          |

 

Seeaccompanying notes to consolidated financial statements.

 

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**NATIONALBEEF PACKING COMPANY, LLC AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

 

**(1) Interim FinancialStatements**

 

**Basis of Presentation**

 

The accompanying unauditedConsolidated Financial Statements have been prepared in accordance with U.S.generally accepted accounting principles (GAAP) for interim financialinformation; therefore, they do not include all of the information and footnotesrequired by GAAP for complete financial statements. In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included using management’s best estimates and judgments whereappropriate.  These estimates and judgmentsaffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements.  The estimates and judgments will also affectthe reported amounts for certain revenues and expenses during the reportingperiod.  Actual results could differmaterially from these estimates and judgments. For further information, refer to the audited Consolidated FinancialStatements and Notes to Consolidated Financial Statements, which are includedin NBP’s Annual Report on Form 10-K on file with the Securities andExchange Commission (SEC) for the fiscal year ended August 29, 2009.  The results of operations for the interimperiods presented are not necessarily indicative of the results for a fullfiscal year.

 

**(2) New AccountingPronouncements**

 

OnJune 29, 2009, the Financial Accounting Standards Board (“FASB”) issued *FASB Accounting Standards Codification* (the ASC) under ASC105-10 as the source of authoritative accounting principles recognized by the FASBto be applied by nongovernmental entities. This pronouncement was effective for financial statements issued forinterim and annual periods ending after September 15, 2009 for mostentities.  On the effective date, allnon-SEC accounting and reporting standards were superseded.  Rules and interpretive releases of theSEC under the authority of federal securities laws are also sources ofauthoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative.  The switch to ASC affects the manner in whichcompanies refer to U.S. GAAP in financial statements and note disclosures.  The Company adopted this body of accountingfor the quarterly period ended November 28, 2009, as required, andadoption did not have a material impact on our consolidated financialstatements taken as a whole.

 

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

 

Alsoin December 2007, the FASB issued *NoncontrollingInterests in Consolidated Financial Statements - an Amendment of ARB No. 51*under ASC 810-10-65, which establishes accounting and reporting standards forthe noncontrolling interest (minority interest) in a subsidiary.  ASC810-10-65 requires non-controlling interests held by parties other than theparent in subsidiaries be clearly identified, labeled, and presented in theconsolidated balance sheet within equity, but separate from the parent’sequity.  The Company’s adoption of ASC 810-10-65 as of August 30,2009 changed the presentation of the non-controlling interest.

 

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InFebruary 2008, the FASB issued *Fair Value Measurements*under ASC 820-10, which deferred the effective date of fair value measurementfor nonfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in an entity’s financial statements on arecurring basis, at least annually.  There was no impact when the Company adopted for these nonfinancialassets and nonfinancial liabilities on August 30, 2009.  These assets and liabilities are measured atfair value on an ongoing basis but are reported at fair value only in certaincircumstances.

 

**(3) Inventories**

 

Inventories consistprimarily of meat products and supplies. Product inventories are considered commodities and are recorded based onquoted commodity prices, which approximate net realizable value.  Supply and other inventories are valued onthe basis of first-in, first-out, specific or average cost methods.  Product inventories are relieved frominventory utilizing the first-in, first-out method.

 

Inventories at May 29,2010 and August 29, 2009 consisted of the following (in thousands):

 
| ** **                       | ** ** | **May 29,  2010** | ** ** | **August 29,  2009** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------|------------|
| Dressed  and boxed meat products |       | $                      | 141,139    |                      | $          | 119,274 |   |
| Beef  by-products                |       | 39,546                 |       | 29,756                    |       |
| Supplies  and other              |       | 36,021                 |       | 26,270                    |       |
|                             |       |                   |       |                      |       |
| Total  inventory                 |       | $                      | 216,706    |                      | $          | 175,300 |   |

 

**(4) Comprehensive Income**

 

Comprehensive income, whichconsists of net income and foreign currency translation adjustments, was asfollows for the periods indicated (in thousands):

 
| ** **                                                         | ** ** | **13 weeks ended**    | ** ** | **13 weeks ended**    | ** ** | **39 weeks ended**    | ** ** | **39 weeks ended**    | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **May 29, 2010** | ** ** | **May 30, 2009** | ** ** | **May 29, 2010** | ** ** | **May 30, 2009** | ** ** |
| Net income                                                         |       | $                     | 79,159     |                  | $          | 46,521                |       | $                     | 169,802    |   | $ | 74,233 |   |
| Other comprehensive income / (loss):                               |       |                  |       |                  |       |                  |       |                  |       |
| Foreign currency translation Adjustments                           |       | (11                   | )          | 42                    |       | 7                     |       | (32                   | )          |
| Comprehensive income                                               |       | 79,148                |       | 46,563                |       | 169,809               |       | 74,201                |       |
| Comprehensive income attributable to the  non-controlling interest |       | (58                   | )          | (232                  | )          | (850                  | )          | (950                  | )          |
| Comprehensive income attributable to NBP                           |       | $                     | 79,090     |                  | $          | 46,331                |       | $                     | 168,959    |   | $ | 73,251 |   |

 

**(5) Contingencies**

 

NationalBeef Leathers, LLC, or NBL, a wholly-owned subsidiary of NBP LLC, isa named defendant in two currently pending purported class actions involvingNBL’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. Thelawsuits allege that NBL spread wastewater sludge containing hexavalentchromium in four counties in northwest Missouri. The plaintiffs are seeking anunspecified amount of damages for economic damages, punitive damages,diminished property values and medical monitoring. On May 11, 2010, thecourt issued an order ruling that NBL is not liable under a successor liabilitytheory for the conduct of the tannery’s previous owner and another party priorto NBL’s purchase of the tannery.   As aresult of this ruling, the plaintiffs in 15 lawsuits filed between April 22,2009 and April 29, 2010, in the Circuit Courts of Buchannan County,Clinton County, and DeKalb County, Missouri seeking damages for economicdamages, punitive damages, diminished property values and

 

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medicalmonitoring voluntarily dismissed their claims against NBL in June 2010.  NBL believes it has meritorious defenses tothe claims in the remaining two lawsuits and intends to defend them vigorously.

 

TheCompany is a party to a number of other lawsuits and claims arising out of theoperation of its business. Management believes the ultimate resolution of suchmatters should not have a material adverse effect on the Company’s financialcondition, results of operations or liquidity.

 

**(6) Capital Subject toRedemption**

 

Atany time after certain dates, the earliest being July 31, 2010, the latestbeing July 31, 2011, certain affiliates of our Chief Executive officer,Timothy M. Klein (collectively referred to herein as the “Klein Affiliates”),and/or NBPCo Holdings have the right to request that the Company repurchasetheir interests, the value of which is to be determined by a specified formulaor a mutually agreed appraisal process. If the Company is unable to effect the repurchase within a specifiedtime, the requesting member(s) have the right to cause a sale process tocommence.

 

Generally accepted accounting principles require the Company todetermine the fair value of the capital subject to redemption at the end ofeach reporting period.  To the extentthis value increases, the change in fair value is accreted over the redemptionperiod.  In determining the fair value ofthe capital subject to redemption held by NBPCo Holdings as of May 29,2010, management has considered previous redemption prices, valuations of peercompanies and other factors.  A portionof the Klein Affiliates’ capital subject to redemption as of May 29, 2010was valued based upon the redemption that occurred on June 2, 2010, asdescribed in Note 10 below.  Theremaining capital subject to redemption held by the Klein Affiliates as of May 29,2010 was valued based upon a contractually stipulated valuation formula.

 

The Company accounts for changes in the redemption value of theseinterests by accreting the change in value from the date of change through theearliest redemption date of the respective interests.  At May 29, 2010, the value of thecapital subject to redemption**was determinedto be $295.4 million, which was in excess of its carrying value.  Accordingly, the carrying value of thecapital subject to redemption increased by approximately $31.2 million throughaccretion during the thirteen weeks ended May 29, 2010, resulting in the$264.4 million carrying value, as reflected in the accompanying consolidatedbalance sheet as of May 29, 2010.

 

The total value of thecapital subject to redemption at May 29, 2010, increased by approximately$54.9 million compared to the value at August 29, 2009.  Offsetting the change in the value of thecapital subject to redemption is a corresponding change in members’ capital.

 

**(7)  Fair Value Measurements**

 

TheCompany determines fair value utilizing a three-level fair value hierarchy thatprioritizes the inputs used to measure fair value.  The fair value hierarchy gives the highestpriority to quoted market prices (Level 1) and the lowest priority tounobservable inputs (Level 3).  The threelevels of inputs used to measure fair value are as follows:

 

·                  Level 1 —quoted prices in active markets for identical assets or liabilities accessibleby the reporting entity.

 

·                  Level 2 —observable inputs other than quoted prices included in Level 1, such as quotedprices for similar assets and liabilities in active markets; quoted prices foridentical or similar assets and liabilities in markets that are not active; orother inputs that are observable or can be corroborated by observable marketdata.

 

·                  Level 3 —unobservable inputs for an asset or liability. Unobservable inputs should only be used to the extent observable inputsare not available.

 

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Thefollowing table details the assets and liabilities measured at fair value on arecurring basis as of May 29, 2010 and August 29, 2009 and also thelevel within the fair value hierarchy used to measure each category of assets(in thousands).

 
| **Description**                                            | ** ** | **May 29,  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                   |       | $                      | 4,629      |                                                                   | $          | 4,629                                                  |       | $                                                   | —     |   | $ | — |   |
| Other  accrued expenses and liabilities — derivatives |       | $                      | 3,008      |                                                                   | $          | 261                                                    |       | $                                                   | 2,747      |   | $ | — |   |
| Capital  subject to redemption                             |       | $                      | 264,371    |                                                                   | $          | —                                                 |       | $                                                   | 61,963     |   | $ | 202,408 |   |

 
| **Description**                                            | ** ** | **August 29,  2009** | ** ** | **Quoted  Prices in  Active Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other   Observable   Inputs (Level 2)** | ** ** | **Significant    Unobservable   Inputs  (Level 3)** | ** ** |
|------------------------------------------------------------|------------|---------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                                       |       |                      |       |                                                                   |       |                                                   |       |                                                |       |
| Other  current assets — derivatives                   |       | $                         | 1,442      |                                                                   | $          | 1,442                                                  |       | $                                                   | —     |   | $ | — |   |
| Other  accrued expenses and liabilities — derivatives |       | $                         | 5,087      |                                                                   | $          | 3,535                                                  |       | $                                                   | 1,552      |   | $ | — |   |
| Capital  subject to redemption                             |       | $                         | 183,407    |                                                                   | $          | —                                                 |       | $                                                   | 183,407    |   | $ | — |   |

 

Management has used certainagreed-upon redemption prices in measuring the fair value of the KleinAffiliates capital subject to redemption, which is classified as level 2 as of May 29,2010.  NBPCo Holdings shares are basedupon unobservable inputs, thus classified as level 3 as of May 29,2010.  Management has used certainagreed-upon redemption prices in measuring the fair value of the capitalsubject to redemption as of August 29, 2009.  During the 3 months ended May 29, 2010we have transferred the calculated fair value of NBPCO’s capital subject toredemption from level 2 to level 3 based upon the change in valuationtechniques due to the amount of time lapsed and changes in business from theprevious agreed-upon redemption price.

 

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

 

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

 

·                  Forward purchase contractsfor cattle for use in our beef plants

 

·                  Exchange traded futurescontracts for cattle

 

·                  Exchange traded futurescontracts for grain

 

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

 

The Company enters into certain commodity derivatives, primarily with adiversified group of highly rated counterparties.  The maximum amount of loss due to the creditrisk of the counterparties, should the counterparties fail to perform accordingto the terms of the contracts, is deemed to be immaterial as of May 29,2010 as all derivatives in an asset position are exchange-tradedcontracts.  The exchange-traded contractshave been entered into under a master netting agreement, and are netted on the

 

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consolidatedbalance sheets.  None of the derivativesentered into have credit-related contingent features.  The Company has $3.4 million in cash collateralposted on its derivative liabilities.

 

The following table presents the fair values as discussed in Note 6 andother information regarding derivative instruments not designated as hedginginstruments as of May 29, 2010 and August 29, 2009 (in thousands ofdollars):

 
| ** **          | ** ** | **Derivative Asset**        | ** ** | **Derivative Liability**    | ** ** |
|---------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **          | ** ** | **As of May 29, 2010** | ** ** | **As of May 29, 2010** | ** ** |
| ** **          | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value**              | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value** | ** ** |
| Commodity contracts |       | Other  current assets       |       | $                           | 4,629      |   | Other  accrued expenses and liabilities |   | $ | 3,008 |   |
| Totals              |       |                        |       | $                           | 4,629      |   |   |   | $ | 3,008 |   |

 
| ** **          | ** ** | **Derivative Asset**           | ** ** | **Derivative Liability**       | ** ** |
|---------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **          | ** ** | **As of August 29, 2009** | ** ** | **As of August 29, 2009** | ** ** |
| ** **          | ** ** | **Balance Sheet  Location**    | ** ** | **Fair Value**                 | ** ** | **Balance Sheet  Location** | ** ** | **Fair Value** | ** ** |
| Commodity contracts |       | Other  current assets          |       | $                              | 1,442      |   | Other  accrued expenses and liabilities |   | $ | 5,087 |   |
| Totals              |       |                           |       | $                              | 1,442      |   |   |   | $ | 5,087 |   |

 

The following table presents the impact of derivative instruments onthe Consolidated Statement of Operations for the thirteen and thirty-nine weekperiods ended May 29, 2010 (in thousands of dollars):

 
| **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** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                              | ** ** | ** **                                                           | ** ** | **13 Weeks ended  May 29, 2010**                              | ** ** | **39 Weeks ended  May 29, 2010** | ** ** |
| Commodity contracts                                     |       | Net  sales                                                           |       | $                                                                  | (11,866    | ) | $ | (8,697 | ) |
| Commodity contracts                                     |       | Cost  of sales                                                       |       | 8,794                                                              |       | 857 |   |
| Totals                                                  |       |                                                                 |       | $                                                                  | (3,072     | ) | $ | (7,840 | ) |

 

**(9)  Segments**

 

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

 

*Core Beef*—the majority of NBP’s revenues are generated fromthe sale of fresh meat, which include chuck cuts, rib cuts, loin cuts, roundcuts, thin meats, ground beef, and other products. In addition, we also sellbeef by-products to the variety meat, feed processing, fertilizer and pet foodindustries.  Aggregation criteria wereapplied to determine the constituents of the Core Beef segment.

 

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*Other*—the Other segment of NBP consists of the operationsof National Carriers, Inc., a refrigerated and livestock contract carriercompany, National Elite Transportation, LLC, a provider of transportationlogistics services, and Kansas City Steak Company, LLC, a portion control steakcutting operation.

 

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

 

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

 
| ** **                    | ** ** | **13 weeks ended**     | ** ** | **13 weeks ended**     | ** ** | **39 weeks ended**    | ** ** | **39 weeks ended**    | ** ** |
|-------------------------------|------------|------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **May 29, 2010**  | ** ** | **May 30, 2009**  | ** ** | **May 29, 2010** | ** ** | **May 30, 2009** | ** ** |
| Net sales:                    |       |                   |       |                   |       |                  |       |                  |       |
| Core beef                     |       | $                      | 1,575,926  |                   | $          | 1,331,722             |       | $                     | 4,306,246  |   | $ | 4,070,295 |   |
| Other                         |       | 53,954                 |       | 61,387                 |       | 173,962               |       | 180,857               |       |
| Eliminations                  |       | (92,001                | )          | (75,089                | )          | (258,793              | )          | (205,937              | )          |
| Total net sales               |       | $                      | 1,537,879  |                   | $          | 1,318,020             |       | $                     | 4,221,415  |   | $ | 4,045,215 |   |
|                          |       |                   |       |                   |       |                  |       |                  |       |
| Operating income:             |       |                   |       |                   |       |                  |       |                  |       |
| Core beef                     |       | $                      | 82,252     |                   | $          | 51,865                |       | $                     | 181,911    |   | $ | 92,370 |   |
| Other                         |       | 525                    |       | 1,395                  |       | 3,652                 |       | 5,317                 |       |
| Total operating income        |       | 82,777                 |       | 53,260                 |       | 185,563               |       | 97,687                |       |
|                          |       |                   |       |                   |       |                  |       |                  |       |
| Interest income               |       | 4                      |       | 40                     |       | 39                    |       | 145                   |       |
| Interest expense              |       | (3,513                 | )          | (5,816                 | )          | (11,563               | )          | (18,191               | )          |
| Other (expense) / income, net |       | 217                    |       | (625                   | )          | (3,559                | )          | (4,509                | )          |
| Total income before taxes     |       | $                      | 79,485     |                   | $          | 46,859                |       | $                     | 170,480    |   | $ | 75,132 |   |
|                          |       |                   |       |                   |       |                  |       |                  |       |   |   |   |   |
| ** **                    | ** ** | **May 29,  2010** | ** ** | **May 30,  2009** | ** ** |                  |       |                  |       |
| Assets:                       |       |                   |       |                   |       |                  |       |                  |       |
| Core beef                     |       | $                      | 836,339    |                   | $          | 784,636               |       |                  |       |   |   |
| Other                         |       | 44,155                 |       | 42,668                 |       |                  |       |                  |       |
| Eliminations                  |       | (208                   | )          | (516                   | )          |                  |       |                  |       |
| Total assets                  |       | $                      | 880,286    |                   | $          | 826,788               |       |                  |       |   |   |
|                               |            |                        |            |                        |            |                       |            |                       |            |  |  |  |  |  |

 

**(10)  Subsequent Events**

 

OnJune 2, 2010, the Company entered into a Unit Redemption Agreementpursuant to Section 12.5 of our LLC Agreement to redeem at agreed-uponredemption prices a portion of the membership interests in the Company that areowned or controlled by our Chief Executive Officer, Timothy M. Klein.   As a result, Mr. Klein’s affiliatesreceived $8.0 million for their redeemed units, and he retained his positionwith the Company.

 

Inaddition, the Company’s Credit Facility was amended and restated on June 4,2010.  The amendment and restatementincreased the available borrowings under our term loan to $375.0****million, increased the revolving line ofcredit to $250.0 million, reduced the applicable margin of the term loan andrevolving line of credit, extended the maturity date of the term loan to June 2015and revised the payment schedule of the term loan, among other things. The related bank financing charges of approximately $4.1 million will beamortized over the life of the loan.  

 

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

 

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

 

**DisclosureRegarding Forward-Looking Statements**

 

This report contains “forward-looking statements,” which are subject toa number of risks and uncertainties, many of which are beyond our control.  Forward-looking statements are typicallyidentified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate”and similar expressions.  Actual resultscould differ materially from those contemplated by these forward-lookingstatements as a result of many factors, including economic conditions generallyand in our principal markets; the availability and prices of live cattle,natural resources and commodities; food safety; livestock disease, includingthe identification of cattle with Bovine Spongiform Encephalopathy (BSE);competitive practices and consolidation in the cattle production and processingindustries; actions of domestic or foreign governments; hedging risk; changesin interest rates and foreign currency exchange rates; consumer demand andpreferences; the cost of compliance with environmental and health laws; loss ofkey customers; loss of key employees; labor relations; and consolidation amongour customers.

 

Inlight of these risks and uncertainties, there can be no assurance that theresults and events contemplated by the forward-looking information contained inthis report will in fact transpire. Readers are cautioned not to place unduereliance on these forward-looking statements. We do not undertake anyobligation to update or revise any forward-looking statements. All subsequentwritten or oral forward-looking statements attributable to us or persons actingon our behalf are expressly qualified in their entirety by these factors.  See also the *Risk Factors*in Item 1A. of our Annual Report for the year ended August 29, 2009on Form 10-K filed with the Securities and Exchange Commission for otherimportant factors that could cause actual results to differ materially fromthose in any such forward-looking statements, and which should be read inconjunction with this report.

 

**IndustryOutlook**

 

Year-to-yearincreases in placement of cattle on feed during the spring quarter will provideadequate fed cattle supplies going into the fall quarter.  However,industry herd liquidation persists and from a macro perspective keeps longerterm cattle supplies in a downward trend.   The lack of expansion inpork output and very modest growth in poultry will keep per capita proteinsupplies in check and provide underlying support to cattle and beefprices.  General economic conditions remain tenuous and will continue todominate market potential over the coming months.  Global trade prospectsremain positive on similar global supply issues as well as the potential forstronger economic performance.

 

**Recent Developments**

 

OnJune 22, 2010, the Grain Inspection and Packers and StockyardsAdministration published a proposed rule adding new regulations under thePackers and Stockyards Act.  If adopted,the new regulations could have a significant impact on marketing andprocurement practices in the beef processing industry and could affect how weprocure cattle for our value-added programs and how we process and marketvalue-added beef products. We cannot presently assess the full economic impactof the proposed rule on the beef processing industry or on our operations.

 

**BeefExport Markets**

 

Exportmarkets for U.S. beef products remain constrained since the discovery of a caseof BSE in the State of Washington in December 2003, as well as otherisolated cases.  In July 2006, Japanagreed to reopen its market to U.S. beef from cattle aged 20 months andyounger.   South Korea announced aprovisional opening of its border to U.S. beef from animals 30 months andyounger in September 2006,

 

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however,its border was subsequently closed in October 2007.  South Korea reopened its border and startedinspecting U.S. beef near the end of June 2008.  These constraints and uncertainties have hada negative impact on beef export demand.

 

Wecannot presently assess the full economic impact of the consequences of BSE onthe U.S. beef packing industry or on our operations.  Existing or newimport restrictions or additional regulatory restrictions or disruptions indomestic and foreign consumer demand for beef could have a material adverseaffect on our revenues and net income.

 

**Results of Operations**

 

***Thirteen weeks ended May 29,2010 compared to thirteen weeks ended May 30, 2009***

 

*General.*  Net income for the thirteen weeks ended May 29,2010 was approximately $79.2 million compared to approximately $46.5 millionfor the thirteen weeks ended May 30, 2009, an increase of approximately$32.7 million.  Sales were higher in thethirteen weeks ended May 29, 2010 compared to the thirteen weeks ended May 30,2009 due in part to an approximate 3.1% increase in the average volume ofcattle processed per week and increase in the average sales prices per head ofapproximately 14.8% during this reporting period.

 

Total costs and expenses ofapproximately $1,455.1 million for the thirteen weeks ended May 29, 2010were 94.6% as a percent of sales compared to approximately $1,264.8 million forthe thirteen weeks ended May 30, 2009, or 96.0% as a percent of sales.  An increase in the volume of cattle processedand cost of live cattle, and a decrease in total costs as a percentage of salesresulted in increased operating income of approximately $29.5 million for thethirteen week period of fiscal 2010 as compared to the thirteen week period offiscal 2009.

 

*Net Sales*.  Net sales were approximately $1,537.9 millionfor the thirteen weeks ended May 29, 2010 compared to approximately$1,318.0 million for the thirteen weeks ended May 30, 2009, an increase ofapproximately $219.9 million, or 16.7%. The increase in net sales resulted from an approximate 3.1% increase inthe average volume of cattle processed per week.  Also contributing to the increase in saleswas an increase in average sales prices per head of about 14.8% during thethirteen week period ended May 29, 2010 compared to the similar thirteenweek period of fiscal 2009. .

 

*Cost of Sales*.  Cost of sales was approximately $1,429.4million for the thirteen weeks ended May 29, 2010 compared toapproximately $1,242.3 million for the thirteen weeks ended May 30, 2009,an increase of approximately $187.1 million, or 15.1%.  The increase resulted primarily from anapproximate 3.1% increase in the number of cattle processed, and an increase inlive cattle prices of approximately 14.2%. Partially offsetting these increases was a decrease in the averagecattle weights of approximately 1.2% during the thirteen week period of fiscal2010 as compared to the thirteen week period of fiscal 2009.

 

*Selling, General and AdministrativeExpenses*.  Selling,general and administrative expenses were approximately $13.2 million for thethirteen weeks ended May 29, 2010 compared to approximately $10.9 millionfor the thirteen weeks ended May 30, 2009, an increase of approximately $2.3million, or 21.1%.  The increase reflectsan increase in bad debt expense of approximately $1.4 million, advertising andpromotion expense of approximately $0.4 million, and an increase in salaries ofapproximately $0.3 million.

 

*Depreciation and AmortizationExpense*.  Depreciation and amortizationexpenses were approximately $12.5 million for the thirteen weeks ended May 29,2010 compared to approximately $11.6 million for the thirteen weeks ended May 30,2009, an increase of approximately $0.9 million, or 7.8%.  Depreciation expense increased due to assetsbeing placed into service, primarily at our three beef plants and two caseready plants, during fiscal year 2010.

 

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*Operating Income*.  Operating income was approximately $82.8million for the thirteen weeks ended May 29, 2010 compared toapproximately $53.3 million for the thirteen weeks ended May 30, 2009, anincrease of approximately $29.5 million. The increase in operating income for the thirteen week period ending May 29,2010, resulted primarily from a decrease in the percentage of costs as apercentage of sales of approximately 1.4%, driven by improved demandcharacteristics for beef products, as compared to the thirteen week periodended May 30, 2009.

 

*Interest Expense*.  Interest expense was approximately $3.5million for the thirteen weeks ended May 29, 2010 compared toapproximately $5.8 million for the thirteen weeks ended May 30, 2009, adecrease of approximately $2.3 million, or 39.7%.  The decrease in interest expense during thethirteen weeks ended May 29, 2010 as compared to the thirteen week periodended May 30, 2009 was due primarily to the purchase and cancellation ofthe remaining $66.9 million of our Senior Notes during the 2nd quarter of fiscal 2010 resulting in a decreaseof approximately $3.0 million in interest expense compared to the thirteen weekperiod ended May 30, 2009.

 

*Other, net. *Other, net non-operatingincome was approximately $0.2 million for the thirteen weeks ended May 29,2010 compared to other, net non-operating expense of approximately $0.6 millionfor the thirteen weeks ended May 30, 2009, an increase of approximately$0.8 million.

 

***Thirty-nine weeks ended May 29,2010 compared to thirty-nine weeks ended May 30, 2009***

 

*General.*  Net income for the thirty-nine weeks ended May 29,2010 was approximately $169.8 million compared to net income of approximately$74.2 million for the thirty-nine weeks ended May 30, 2009, an increase ofapproximately $95.6 million.  Sales were4.4% higher in the thirty-nine week period ended May 29, 2010 compared tothe thirty-nine week period ended May 30, 2009 primarily due in part to anapproximate 1.1% increase in the number of cattle processed, and a 4.6%increase in the average sales price per head.

 

Total costs and expenses ofapproximately $4,035.9 million for the thirty-nine weeks ended May 29,2010 were 95.6% as a percent of sales compared to approximately $3,947.5million for the thirty-nine weeks ended May 30, 2009, or 97.6% as apercent of sales.  An increase in thevolume of cattle processed and cost of live cattle and a decrease in totalcosts as a percentage of sales resulted in increased operating income ofapproximately $87.8 million for the thirty nine weeks ended May 29, 2010compared to the same thirty nine week period of fiscal 2009.

 

*Net Sales*.  Net sales were approximately $4,221.4 millionfor the thirty-nine weeks ended May 29, 2010 compared to approximately$4,045.2 million for the thirty-nine weeks ended May 30, 2009, an increaseof approximately $176.2 million, or 4.4%. Net sales increased primarily due to an approximate 1.1% increase in thenumber of cattle processed, and a 4.6% increase in the average sales price perhead, during the thirty-nine weeks ended May 29, 2010 as compared to thethirty-nine weeks ended May 30, 2009.

 

*Cost of Sales*.  Cost of sales was approximately $3,962.6million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $3,882.6 million for the thirty-nine weeks ended May 30,2009, an increase of approximately $80.0 million, or 2.1%.  The increase in cost of sales for thethirty-nine weeks ended May 29, 2010 resulted primarily from an approximate1.1% increase in the number of cattle processed, and an increase ofapproximately 0.9% in live cattle prices as compared to the thirty-nine weekperiod of fiscal 2009.

 

*Selling, General andAdministrative Expenses*. Selling, general and administrative expenses were approximately $36.5million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $32.1 million for the thirty-nine weeks ended May 30, 2009,an increase of approximately $4.4 million, or 13.7%.  The increase for this period is primarily dueto an increase in bad debt expense of approximately $1.6 million, increase inmarketing of approximately $1.1 million, increase in travel for the period ofapproximately $0.9 million, and increased consulting expenses of approximately$0.8 million.

 

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*Depreciation and AmortizationExpense*.  Depreciation and amortizationexpenses were approximately $36.8 million for the thirty-nine weeks ended May 29,2010 compared to approximately $32.8 million for the thirty-nine weeks ended May 30,2009, an increase of approximately $4.0 million, or 12.2%.  Depreciation expense increased due to assetsbeing placed into service, primarily at our three beef plants and two caseready plants, during fiscal year 2010.

 

*Operating Income*.  Operating income was approximately $185.6million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $97.7 million for the thirty-nine weeks ended May 30, 2009,an increase of approximately $87.9 million. The increase in operating income for the thirty-nine week period ended May 29,2010, resulted primarily from a decrease in the percentage of costs as a percentageof sales of approximately 2.0%, as compared to the thirty-nine week periodended May 30, 2009.

 

*Interest Expense*.  Interest expense was approximately $11.6million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $18.2 million for the thirty-nine weeks ended May 30, 2009,a decrease of approximately $6.6 million, or 36.3%.  The decrease in interest expense during thethirty-nine weeks ended May 30, 2009 as compared to the thirty-nine weekperiod ended May 30, 2009 was due primarily to the purchase andcancellation of the remaining $66.9 million of our Senior Notes during the 2nd quarter of fiscal 2010 resulting in a decreaseof approximately $7.6 million in interest expense compared to the thirty-nineweek period ended May 30, 2009.

 

*Other, net.*  Other, net non-operating expense wasapproximately $3.6 million for the thirty-nine weeks ended May 29, 2010compared to other, net non-operating expense of approximately $4.5 million forthe thirty-nine weeks ended May 30, 2009, a decrease of approximately $0.9million.

 

*Income Tax Expense*.  Income tax expense was approximately $0.7million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $0.9 million for the thirty-nine weeks ended May 30, 2009, adecrease of approximately $0.2 million, or 22.2%.  This decrease in income taxes for the periodof approximately $0.2 million was related to our subsidiary, NationalCarriers.  Income tax expense is recordedon income from National Carriers, which is organized as a C Corporation.

 

**Segment Results**

 

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

 

*Core Beef*—the majority of NBP’s revenues are generated fromthe sale of fresh meat, which include chuck cuts, rib cuts, loin cuts, roundcuts, thin meats, ground beef, and other products. In addition, we also sellbeef by-products to the variety meat, feed processing, fertilizer and pet foodindustries.  Aggregation criteria wereapplied to determine the constituents of the Core Beef segment.

 

*Other*—the Other segment of NBP consists of the operationsof National Carriers, Inc., a refrigerated and livestock contract carriercompany, National Elite Transportation, LLC, a provider of transportationlogistics services, and Kansas City Steak Company, LLC, a portion control steakcutting operation.

 

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

 

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

 
| ** **                    | ** ** | **13 weeks ended**     | ** ** | **13 weeks ended**     | ** ** | **39 weeks ended**    | ** ** | **39 weeks ended**    | ** ** |
|-------------------------------|------------|------------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **May 29, 2010**  | ** ** | **May 30, 2009**  | ** ** | **May 29, 2010** | ** ** | **May 30, 2009** | ** ** |
| Net sales:                    |       |                   |       |                   |       |                  |       |                  |       |
| Core beef                     |       | $                      | 1,575,926  |                   | $          | 1,331,722             |       | $                     | 4,306,246  |   | $ | 4,070,295 |   |
| Other                         |       | 53,954                 |       | 61,387                 |       | 173,962               |       | 180,857               |       |
| Eliminations                  |       | (92,001                | )          | (75,089                | )          | (258,793              | )          | (205,937              | )          |
| Total net sales               |       | $                      | 1,537,879  |                   | $          | 1,318,020             |       | $                     | 4,221,415  |   | $ | 4,045,215 |   |
|                          |       |                   |       |                   |       |                  |       |                  |       |
| Operating income:             |       |                   |       |                   |       |                  |       |                  |       |
| Core beef                     |       | $                      | 82,252     |                   | $          | 51,865                |       | $                     | 181,911    |   | $ | 92,370 |   |
| Other                         |       | 525                    |       | 1,395                  |       | 3,652                 |       | 5,317                 |       |
| Total operating income        |       | 82,777                 |       | 53,260                 |       | 185,563               |       | 97,687                |       |
|                          |       |                   |       |                   |       |                  |       |                  |       |
| Interest income               |       | 4                      |       | 40                     |       | 39                    |       | 145                   |       |
| Interest expense              |       | (3,513                 | )          | (5,816                 | )          | (11,563               | )          | (18,191               | )          |
| Other (expense) / income, net |       | 217                    |       | (625                   | )          | (3,559                | )          | (4,509                | )          |
| Total income before taxes     |       | $                      | 79,485     |                   | $          | 46,859                |       | $                     | 170,480    |   | $ | 75,132 |   |
|                          | ** ** | ** **             | ** ** | ** **             | ** ** | ** **            | ** ** | ** **            | ** ** |
|                          | ** ** | **May 29,  2010** | ** ** | **May 30,  2009** | ** ** | ** **            | ** ** | ** **            | ** ** |
| Assets:                       |       |                   |       |                   |       |                  |       |                  |       |
| Core beef                     |       | $                      | 836,339    |                   | $          | 784,636               |       |                  |       |   |   |
| Other                         |       | 44,155                 |       | 42,668                 |       |                  |       |                  |       |
| Eliminations                  |       | (208                   | )          | (516                   | )          |                  |       |                  |       |
| Total assets                  |       | $                      | 880,286    |                   | $          | 826,788               |       |                  |       |   |   |
|                               |            |                        |            |                        |            |                       |            |                       |            |  |  |  |  |  |

 

***Thirteen weeks ended May 29,2010 compared to thirteen weeks ended May 30, 2009***

 

***Core Beef***

 

*Net Sales*.  Net sales for Core Beef were approximately$1,575.9 million for the thirteen weeks ended May 29, 2010 compared toapproximately $1,331.7 million for the thirteen weeks ended May 30, 2009,an increase of approximately $244.2 million, or 18.3%.  The increase in net sales resulted from anapproximate 3.1% increase in the average volume of cattle processed per week,and an increase in average sales per head of approximately 14.8% during thecurrent thirteen week period of fiscal 2010 as compared to the thirteen weekperiod of fiscal 2009.

 

*Operating Income*.  Operating income for Core Beef wasapproximately $82.3 million for the thirteen weeks ended May 29, 2010compared to approximately $51.9 million for the thirteen weeks ended May 30,2009, an increase of approximately $30.4 million.  The increase in operating income resultedprimarily from improved demand characteristics for beef products during thethirteen week period ended May 29, 2010, as compared to the thirteen weekperiod ended May 30, 2009.

 

***Other***

 

*Net Sales*.  Net sales for Other were approximately $54.0million for the thirteen weeks ended May 29, 2010 compared toapproximately $61.4 million for the thirteen weeks ended May 30, 2009, adecrease of approximately $7.4 million, or 12.1%.  The decrease was attributable to lower salesvolume within both the transportation operations as well as the portion controlbusiness.

 

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*Operating Income*.  Operating income for Other was approximately$0.5 million for the thirteen weeks ended May 29, 2010 compared tooperating income of approximately $1.4 million for the thirteen weeks ended May 30,2009, a decrease of approximately $0.9 million. The decrease was due primarily to a reduction of net sales within ourtransportation operations and portion controlled business, along with anincrease in depreciation expense within our portion controlled business.

 

***Thirty-nine weeks ended May 29,2010 compared to thirty-nine weeks ended May 30, 2009***

 

***Core Beef***

 

*Net Sales*.  Net sales for Core Beef were approximately$4,306.2 million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $4,070.3 million for the thirty-nine weeks ended May 30,2009, an increase of approximately $235.9 million, or 5.8%.  Net sales increased primarily due to anapproximate 1.1% decrease in the average volume of cattle processed per week,along with an increase in the average sales per head of approximately 4.6%,during the first thirty-nine weeks of fiscal 2010 as compared to the firstthirty-nine weeks of fiscal 2009.

 

*Operating Income*.  Operating income for Core Beef wasapproximately $181.9 million for the thirty-nine weeks ended May 29, 2010compared to approximately $92.4 million for the thirty-nine weeks ended May 30,2009, an increase of approximately $89.5 million.  The improvement in operating income duringthe thirty-nine week period ended May 29, 2010 resulted primarily from anincrease in sales price per head of beef products of approximately 4.6%, with arelatively moderate increase in live cattle costs of approximately 0.9%.

 

***Other***

 

*Net Sales*.  Net sales for Other were approximately $174.0million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $180.9 million for the thirty-nine weeks ended May 30, 2009,a decrease of approximately $6.9 million, or 3.8%.  The slight decrease was primarily due todecreased fuel surcharge revenues at our transportation company, offset by aslight increase in sales at our portion control beef facility during thethirty-nine week period ended May 29, 2010 as compared to the thirty-nineweek period ended May 30, 2009.

 

*Operating Income*.  Operating income for Other was approximately$3.7 million for the thirty-nine weeks ended May 29, 2010 compared toapproximately $5.3 million for the thirty-nine weeks ended May 30, 2009, adecrease of approximately $1.6 million. The decrease was due primarily to our transportation operations lowersales and higher depreciation expense and our portion control beef facilitieshigher depreciation expense during the period resulting in a reduction inoperating income for the current thirty-nine week period ended May 29,2010 as compared to the thirty-nine week period ended May 30, 2009.

 

**Liquidity and Capital Resources**

 

As of May 29, 2010, wehad net working capital of approximately $213.6 million, which included $32.7million in distributions payable and cash and cash equivalents of $20.1million.  As of August 29, 2009, wehad net working capital of approximately $145.0 million, which included $35.2million in distributions payable and cash and cash equivalents of $17.4 million.  Our primary sources of liquidity are cashflows from operations and available borrowings under our amended and restatedcredit facility (Credit Facility).

 

As of May 29, 2010, wehad $286.8 million of long-term debt, of which $6.6 million was classified as acurrent liability.  As of May 29,2010, our Credit Facility consisted of a $228.8 million term loan, all of whichwas outstanding, and a $225.0 million revolving line of credit loan, which hadoutstanding borrowings of $37.9 million, outstanding letters of credit of $26.0million and available

 

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borrowings of $161.2million, based on the most restrictive financial covenant calculations.  Cash flows from operations and borrowingsunder our Credit Facility have funded our working capital requirements,acquisitions, capital expenditures and other general corporate purposes.  We were in compliance with all of ourfinancial covenants under our Credit Facility as of May 29, 2010.

 

In addition to outstandingborrowings under our Credit Facility, we had outstanding borrowings underindustrial revenue bonds of $12.2 million and capital leases and other obligationsof $7.9 million as of May 29, 2010.

 

As noted within Footnote 10,we have amended and restated the terms of our Credit Facility as of June 4,2010.  See the “Amended and RestatedSenior Credit Facility” section below for additional details related to theamendment and restatement.

 

We believe that availableborrowings under our Credit Facility and cash provided by operating activitieswill be sufficient to support our working capital, capital expenditures anddebt 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 affectliquidity, please see the “Cash Payment Obligations” table in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” of our Annual Report on Form 10-K for the year ended August 29,2009.

 

*Operating Activities*

 

Net cash provided byoperating activities in the thirty-nine weeks ended May 29, 2010 was$140.6 million compared to net cash provided by operating activities of $148.0million in the thirty-nine weeks ended May 30, 2009.  The $7.4 million change was primarily due tonet income of approximately $169.8 million during the thirty-nine week periodended May 29, 2010 as compared to the net income of $74.2 million duringthe thirty-nine week period ended May 30, 2009.  The increase in net income is offset by adecrease in cash provided by accounts receivable and inventory of approximatelyof $62.6 and $53.1 million respectively.

 

*Investing Activities*

 

Net cash used in investingactivities was $27.9 million in the thirty-nine weeks ended May 29, 2010compared to $34.3 million in the thirty-nine weeks ended May 30,2009.  The decrease in cash used wasprimarily attributable to a decrease in expenditures for property, plant andequipment related to improving operating efficiencies, primarily at ourLiberal, Dodge City and Case Ready facilities, in the current year.

 

*Financing Activities*

 

Net cash used in financingactivities was approximately $110.1 million in the thirty-nine weeks ended May 29,2010 compared to net cash used in financing activities of $124.4 million in thethirty-nine weeks ended May 30, 2009. The decrease in cash used in financing activities was primarilyattributed to an approximate $125.5 million redemption of member capital in theprior period, and an additional $75.0 million borrowings on the term loanduring the current period.  Thesedecreases are offset by an approximate $52.9 million increase in memberdistributions paid in the current year, the purchase and cancellation ofapproximately $66.9 million aggregate principal amount of our Senior Notescompared to only $45.5 million in the same period of the prior year, $43.7million reduction in net receipts under the revolving loan, and an approximate$75.5 million member capital contribution during the prior reporting period.

 

*Amended and Restated SeniorCredit Facility*

 

Effectiveas of June 4, 2010, our Credit Facility was amended and restated to:  (1) increase the borrowings under theCredit Facility by providing for a term loan facility of up to $375 million anda 

 

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revolvingline of credit of up to $250 million; (2) reduce the applicable margin onthe rates of interest of the term loan and revolving line of credit; (3) revisethe payment schedule of the term loan; (4) extend the maturity date of theCredit Facility to June 4, 2015; and (5) remove the limitations oncapital expenditures; (6) add new financial covenants regarding adjustednet worth and a fixed charge coverage ratio; and (7) add two wholly ownedsubsidiaries, National Beef California, LLP and National Carriers, Inc.,as loan parties and guarantors.  Therelated financing charges, of approximately $4.1 million, will be amortizedover the life of the loan.

 

Theborrowings under the Credit Facility bear interest at LIBOR or the Base Rate,plus the applicable margin.  Theapplicable margin for the revolving line of credit and the term loan will bebased on funded debt to EBITDA ratio with grids based on different ratios.

 

The borrowings under the revolving loan are available for our workingcapital requirements, capital expenditures and other general corporatepurposes.  The Credit Facility is securedby a first priority lien on substantially all of the assets of the Company andits subsidiaries.  The principal amountoutstanding under the term loan is due and payable in equal quarterlyinstallments, beginning in October 2010, based on a 10-year levelamortization of the remaining amount of the term loan.  All outstanding loan amounts are due andpayable June 4, 2015.  Prepayment ofthe loans is allowed at any time.

 

The Credit Facility containscustomary affirmative covenants relating to NBP LLC and its subsidiaries,including, without limitation, conduct of business, the maintenance ofinsurance, compliance with laws, maintenance of properties, keeping of booksand records, and the furnishing of financial statements.  The facility also contains customary negativecovenants relating to NBP LLC and its subsidiaries, including, withoutlimitation, restrictions on the following: cash distributions to its members, mergers, sale of assets, investmentsand acquisitions, encumbrances, indebtedness, affiliate transactions, and ERISAmatters.  The ability of NBP LLC and itssubsidiaries to engage in other business, incur debt or grant liens is alsorestricted.

 

The Credit Facility contains customary events of default, includingwithout limitation, failure to make payment when due, materially incorrectrepresentations and warranties, breach of covenants, events of bankruptcy,default of other indebtedness that would permit acceleration of suchindebtedness, the occurrence of one or more unstayed or undischarged judgmentsin excess of $3.0 million, changes in custody or control of the Company’sproperty, changes in control of the Company, or failure of any of the loandocuments to remain in full force, and the Company’s failure to properly fundits employee benefit plans.  The CreditFacility also includes customary provisions protecting the lenders againstincreased cost or loss of yield resulting from changes in tax, reserve, capitaladequacy and other requirements of law.

 

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

 

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

 

*Commodities.*We use various raw materials, many of which are commodities. Rawmaterials are generally available from several different sources, and wepresently believe that we can obtain them as needed.  Commodities are subject to price fluctuationsthat may create price risk. From time to time, we may hedge commodities inorder to mitigate this price risk. While this may tend to limit our ability toparticipate in gains from commodity price fluctuations, it also tends to reducethe risk of loss from changes in commodity prices.  To the extent the contracts are notdesignated as normal purchases, we reflect commodity contract gains and lossesas adjustments to the basis of underlying commodities purchased; gains or lossesare recognized in the statement of operations as a component of costs of goodssold.

 

Wepurchase cattle for use in our processing businesses. From time to time, weenter into forward purchase contracts at prices determined prior to thedelivery of the cattle. The commodity price risk associated with theseactivities can be hedged by selling (or buying) the underlying commodity, or byusing an appropriate commodity derivative instrument. The particular hedginginstrument we use depends on a number of factors, including availability ofappropriate derivative instruments.

 

Wesell commodity beef products in our business. Commodity beef products aresubject to price fluctuations that may create price risk. From time to time, weenter into forward sales contracts at prices determined prior to shipment. Wemay hedge the commodity price risk associated with these activities in order tomitigate this price risk.  While this maytend to limit our ability to participate in gains from commodity pricefluctuations, it also tends to reduce the risk of loss from changes incommodity beef prices.  To the extent thecontracts are not designated as normal sales, we reflect commodity contractgains and losses as adjustments to the basis of underlying commodities sold;gains or losses are recognized in the statement of operations as a component ofnet sales.

 

Fromtime to time, we purchase cattle futures and options contracts.  Our primary use of these contracts is topartially determine our future input costs when we have committed forward salespurchase orders from customers at a specified fixed price.  The longest duration futures contract ownedis thirteen months.  In accordance withASC Topic 815, *Accounting for Derivative Instruments andHedging Activities*, as amended, we account for futures contracts andtheir related firm purchase commitments at fair value. Certain firm commitmentsfor live cattle purchases and all firm commitments for boxed beef sales aretreated as “normal purchases and sales” and not marked to market.  ASC topic 815 imposes extensive recordkeepingrequirements in order to treat a derivative instrument as a hedge foraccounting purposes. Derivatives qualify for treatment as hedges when there isa high correlation between the change in fair value of the instrument and therelated change in fair value of the underlying commitment. For derivatives thatqualify as effective hedges, the change in fair value has no net effect onearnings until the hedged transaction affects earnings. For derivatives thatare not designated as hedging instruments, or for the ineffective portion of ahedging instrument, the change in fair value does affect current period netearnings.

 

Whilemanagement believes each of these instruments help mitigate various marketrisks, they are not designated and accounted for as hedges as a result of theextensive recordkeeping requirements of this statement. Accordingly, the gainsand losses associated with the change in fair value of the instrument and theoffsetting gains and losses associated with changes in the market value ofcertain of the firm purchase commitments related to the futures contracts arerecorded to income and expense in the period of change.

 

Weuse a sensitivity analysis to evaluate the effect that changes in the marketvalue of commodities will have on these commodity derivative instruments.  We feel that sensitivity analysis moreappropriately reflects the potential market value exposure associated with theuse of derivative instruments.  As of May 29,2010, the potential change in the fair value of applicable commodity prices,assuming a hypothetical 10% decrease in the underlying commodity price in eachyear, was $1.7 million.  As of August 30,2009, the potential change in fair value of applicable commodity prices,assuming a hypothetical 10% decrease in the underlying commodity price, was$16.4 million.  This change was

 

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primarily due to the cattlefutures contracts that we entered into during the first quarter of fiscal 2009to offset the risk of fixed-price sales commitments.

 

*ForeignOperations.*  Transactionsdenominated in a currency other than an entity’s functional currency may exposethat entity to currency risk.  Althoughwe operate in international markets including Japan and South Korea, productsales are predominately made in United States dollars, and therefore, currencyrisks are limited.

 

*InterestRates.*As a result of our normal borrowing and leasing activities, ouroperating results are exposed to fluctuations in interest rates, which wemanage primarily through our regular financing activities. We generallymaintain limited investments in cash and cash equivalents.

 

Wehave long-term debt with variable interest rates. Short-term debt is primarilycomprised of the current portion of long-term debt maturing twelve months fromthe balance sheet date.  Our variableinterest expense is sensitive to changes in the general level of interestrates.  As of May 29, 2010, theweighted average interest rate on our $278.9 million of variable rate debt wasapproximately 5.2%.

 

Wehad total interest expense of approximately $11.6 million during thethirty-nine week period ending May 29, 2010.  The estimated increase in interest expensefrom a hypothetical 200 basis point increase in applicable variable interestrates would have been approximately $4.0 million in the thirty-nine week periodending May 29, 2010.

 

**Item 4.  Controls and Procedures.**

 

Wemaintain a system of controls and procedures designed to provide reasonableassurance as to the reliability of the Consolidated Financial Statements andother disclosures included in this report, as well as to safeguard assets fromunauthorized use or disposition. We evaluated the effectiveness of the designand operation of our disclosure controls and procedures as defined in theSecurities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) undersupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer. Based upon that evaluation, asof the end of the period covered by this Quarterly Report on Form 10-Q,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective in alerting them, in a timelymanner, to material information required to be included in our periodicSecurities and Exchange Commission filings. There have been no changes in our internal controls over financialreporting during the thirteen weeks ended May 29, 2010 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. The design of any system of controls and procedures is based in partupon certain assumptions about the likelihood of future events.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings.**

 

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

 

**Item 1A. Risk Factors.**

 

Therisk factors set forth in Item 1A of our Annual Report on Form 10-K forthe year ended August 29, 2009 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 requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

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

 

 

Date:July 9, 2010

 

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