**UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C.20549**

**Form 10-Q**

| **(Mark one)**           
þ

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

 

 

**For the quarterly period  ended May 31, 2008**

**or**

 

 

 

 

o

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

 

 

**For the transition  period from             to           .**

** **

**Commissionfile 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)**

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

**Telephone:(800) 449-2333 (Registrant’stelephone number, including area code)**

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

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

Large Accelerated Filer o       Accelerated Filer o          Non-AcceleratedFiler þ  Small Reporting Company o

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

There is no marketfor the Registrant’s equity.  As of June 30, 2008, there were 127,748,923 ClassA units and 19,474,520 Class B units outstanding.     

 

 

 

 

 

 

 

 

TABLE OF CONTENTS

** **

 

 

PART I.

FINANCIAL INFORMATION

**Page No.**

 

 

 

Item 1.

Financial Statements.

1

 

 

 

Item 2.

Management’s  Discussion and Analysis of Financial Condition 

and Results of Operations.

10

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

20

 

 

 

Item 4T.

Controls and Procedures.

21

 

 

 

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings.

22

 

 

 

Item 1A.

Risk Factors.

22

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

22

 

 

 

Item 3.

Defaults Upon Senior Securities.

22

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders.

22

 

 

 

Item 5.

Other Information.

22

 

 

 

Item 6.

Exhibits. 

22

 

 

 

 

Signatures.

24

 

 

 

                                

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

**                                                                                               **

ii

 

 

 

 

 

 

                                                                                                                                                                                                                                                                

**PART I.  FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements.**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

**NATIONAL BEEFPACKING COMPANY, LLC**

**AND SUBSIDIARIES**

** **

**Consolidated Balance Sheets**

**(in thousands)**

** **

**May 31, 2008**

 

 

** **

**(unaudited)**

 

**August 25, 2007**

**Assets**

 

 

 

Current  assets:

 

 

 

Cash  and cash equivalents

$

27,043

 

$

30,444

Accounts  receivable, less allowance for returns and

         doubtful accounts of $3,343 and

         $4,642, respectively

199,226

 

189,725

Due  from affiliates

4,762

 

4,394

Other  receivables

6,141

 

8,389

Inventories

198,055

 

177,244

Other  current assets

19,607

 

14,144

Total  current assets

454,834

 

424,340

 

 

 

 

    Property, plant and  equipment, at cost

411,865

 

372,148

Less  accumulated depreciation

124,976

 

99,358

 Net  property, plant and equipment

286,889

 

272,790

Goodwill

80,042

 

80,042

Other  intangibles, net of accumulated amortization of

               $8,823 and $7,214, respectively

27,228

 

28,659

Other  assets

9,755

 

9,672

                           Total assets

$

858,748

 

$

815,503

**Liabilities and Members’ Capital**

 

 

 

Current  liabilities:

 

 

 

Current  installments of long-term debt

$

                 3,553

 

$

3,391

Cattle  purchases payable

86,407

 

62,995

Accounts  payable – trade

63,170

 

60,187

Due  to affiliates

179

 

355

Accrued  compensation and benefits

25,504

 

16,088

Accrued  insurance

12,854

 

14,550

Other  accrued expenses and liabilities

15,887

 

11,027

Distributions  payable

32,391

 

6,405

         Total current liabilities

239,945

 

174,998

Long-term  debt, excluding current installments

410,063

 

435,455

Other  liabilities

2,365

 

2,559

Total  liabilities

652,373

 

613,012

Minority  interest

1,369

 

952

Capital  subject to redemption

133,334

 

76,938

Members’  capital:

 

 

 

Members’  capital

71,635

 

124,541

Accumulated  other comprehensive income 

37

 

60

Total  members’ capital 

71,672

 

124,601

Commitments  and contingencies

-

 

-

                          Total liabilities and members’ capital

$

858,748

 

$

815,503

 

 

 

 

See accompanying notes to  consolidated financial statements. 

 

 

2

 

 

 

 

 

 

**NATIONAL BEEFPACKING COMPANY, LLC**

**AND SUBSIDIARIES**

** **

**Consolidated Statements of Operations**

**(in thousands)**

** **
      
**14 weeks ended**
   
**13 weeks ended**
   
**40 weeks ended**
   
**39 weeks ended**
      
**May 31, 2008**
   
**May 26, 2007**
   
**May 31, 2008**
   
**May 26, 2007**
      
**(unaudited)**
   
**(unaudited)**
   
**(unaudited)**
   
**(unaudited)**

Net  sales

 

$

1,529,624

 

 

$

1,479,676

 

 

$

4,233,676

 

 

$

4,066,020

 

Costs  and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost  of sales

 

1,428,059

 

 

1,436,361

 

 

4,109,947

 

 

3,993,987

 

Selling,  general and administrative

 

12,018

 

 

11,517

 

 

33,463

 

 

31,097

 

Depreciation  and amortization

 

9,816

 

 

8,245

 

 

27,394

 

 

24,056

 

      Total costs and expenses

 

1,449,893

 

 

1,456,123

 

 

4,170,804

 

 

4,049,140

 

Operating  income 

 

                     79,731

 

 

23,553

 

 

62,872

 

 

16,880

 

Other  income/(expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest  income

 

71

 

 

136

 

 

376

 

 

506

 

Interest  expense

 

(8,680

)

 

(10,543

)

 

(26,942

)

 

(29,505

)

Minority  owners' interest in net 

      loss/(income) of  Kansas City

      Steak, LLC

 

(162

)

 

90

 

 

(608

)

 

(262

)

Equity  in loss of aLF Ventures, LLC

 

(26

)

 

(23

)

 

(76

)

 

(77

)

Other,  net

 

4,289

 

 

884

 

 

6,094

 

 

1,561

 

Income/(loss)  before taxes

 

75,223

 

 

14,097

 

 

41,716

 

 

(10,897

)

Income tax expense

 

958

 

 

536

 

 

2,037

 

 

1,421

 

Net  income/(loss)

 

$

74,265

 

 

$

13,561

 

 

$

39,679

 

 

$

(12,318

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial  statements.

	 

	 

	 

	 

	 

 

	 

	 

	 

 

** **

** **

** **

** **

 

3

 

 

 

 

 

 

** NATIONAL BEEFPACKING COMPANY, LLC**

**AND SUBSIDIARIES**

** **

**Consolidated Statements of Cash Flows**

**(in thousands)**

** **

	 

**40 weeks ended**

	 

**39 weeks ended**

	 

**May 31, 2008**

	 

**May 26, 2007**

	 

**(unaudited)**

	 

**(unaudited)**

Cash  flows from operating activities:               
  Net income/(loss)

$

39,679 

 

$

(12,318)

Adjustments to reconcile net income/(loss) to net  cash 	provided by/(used in) operating activities:

 

 

 

  Depreciation and amortization

27,394 

 

24,056 

  Gain on disposal of property, plant and equipment

(1)

 

(137)

  Gain on disposal of investment

(1,342)

 

- 

  Minority interest

417 

 

124 

  Change in assets and liabilities:

 

 

 

       Accounts receivable

(9,501)

 

(17,997)

       Due from affiliates

(368)

 

(1,185)

       Other receivables

2,248 

 

(2,901)

       Inventories

(20,811)

 

(30,698)

       Other assets

(5,724)

 

10,722 

       Cattle purchases payable

9,216 

 

1,853 

       Accounts payable

9,269 

 

(1,602)

       Due to affiliates

(176)

 

12 

       Accrued compensation and benefits

9,416 

 

(10,577)

       Accrued insurance

(1,696)

 

(4,907)

       Other accrued expenses and liabilities

4,666 

 

2,383 

           Net cash provided by/(used in) operating  activities

62,686 

 

(43,172)

 

 

 

 

Cash flows from investing activities:

 

 

 

Capital expenditures, including interest capitalized

(40,058)

 

(30,959)

Acquisition of businesses, final purchase price  adjustment

- 

 

1,248 

Proceeds from sale of property, plant and equipment

175 

 

381 

Proceeds from redemption of investment

1,342 

 

- 

                Net cash used in investing activities

(38,541)

 

(29,330)

 

 

 

 

Cash flows from financing activities:

 

 

 

Net (payments)/receipts under revolving credit lines

(22,368)

 

42,854 

Repayments of term note payable

- 

 

(7,384)

Borrowings under term note payable

- 

 

40,000 

Change in overdraft balances

7,910 

 

12,881 

Net repayments of other indebtedness

(2,862)

 

(1,963)

Member distributions

(10,203)

 

(15,056)

                Net cash (used in)/provided by financing  activities

(27,523)

 

71,332 

 

 

 

 

Effect of exchange rate changes on cash

(23)

 

9 

                     Net decrease in cash

(3,401)

 

(1,161)

Cash and cash equivalents at beginning of period

30,444 

 

32,686 

Cash and cash equivalents at end of period

$

27,043 

 

$

31,525 

 

 

 

 

Supplemental disclosures:

 

 

 

Cash paid during the period for interest

$

23,336 

 

$

25,125 

Cash  paid during the period for taxes

 

1,062 

 

 

734 

Supplemental non-cash disclosure of investing  activities: 

 
  
        Assets acquired  through capital lease

 

- 

 

  

49 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial  statements.

 

 

** **

4

 

 

 

 

 

 

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

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

** **

** **

**(1)Interim Financial Statements**

** **

**Basisof Presentation**

 

The accompanying unaudited Consolidated FinancialStatements have been prepared in accordance with U.S. generally acceptedaccounting principles (GAAP) for interim financial information; therefore, theydo not include all of the information and footnotes required by GAAP forcomplete financial statements. In the opinion of management, all adjustmentsconsidered necessary for a fair presentation have been included usingmanagement’s best estimates and judgments where appropriate.  These estimatesand judgments affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements.  The estimates and judgments will also affect the reported amountsfor certain revenues and expenses during the reporting period.  Actual resultscould differ materially from these estimates and judgments.  For furtherinformation, refer to the audited Consolidated Financial Statements and Notesto Consolidated Financial Statements, which are included in NBP’s Annual Report on Form 10-K on file with the Securities and Exchange Commission (SEC) forthe fiscal year ended August 25, 2007.  The results of operations for theinterim periods presented are not necessarily indicative of the results for afull fiscal year.  

 

NB Finance Corp., a wholly-owned finance subsidiary ofNBP, is a co-issuer on a joint and several basis with NBP of the Senior Notes,which are our senior unsecured obligations, ranking equal in right of paymentwith all of our other senior unsecured obligations.  NB Finance Corp. hasnominal assets and conducts no business or operations. There are no significantrestrictions on the ability of subsidiaries to transfer funds to NBP.

 

                TheCompany’s fiscal year ends on the last Saturday in August.  For financialreporting purposes, fiscal year 2008 will consist of 53 weeks, whereas fiscalyear 2007 consisted of 52 weeks.  The additional week is included in the thirdquarter of fiscal year 2008.  As a result, the quarterly and nine-month periodsended May 31, 2008 consisted of fourteen and thirty-nine weeks, respectively,as compared to the quarterly and nine-month periods ended May 26, 2007 whichconsisted of thirteen weeks and thirty-nine weeks, respectively.

 

 

**(2)New Accounting Pronouncements**

** **

In July 2006, the Financial Accounting Standards Board(FASB) issued Interpretation No. 48, *Accounting for Uncertainty in IncomeTaxes, an Interpretation of FASB Statement No. 109*(FIN 48).  FIN 48provides guidance on the financial statement recognition and measurement of atax position taken or expected to be taken in a tax return.  FIN 48 alsoprovides guidance on derecognition, classifications, interest and penalties,accounting in interim periods, disclosures and transition.  FIN 48 waseffective for fiscal years beginning after December 15, 2006.  The Companyadopted the provisions of FIN 48 effective August 26, 2007, which had no impacton the financial statements of the Company. The Company’s subsidiary, NationalCarriers, Inc. (NCI), has concluded an examination of its U.S. federal incometaxes for the 2005 fiscal year.  Based on federal income tax statute oflimitations, NCI remains subject to examination of its income taxes for fiscal years2006 and 2007.     

** **

5

 

 

 

 

 

 

                InDecember 2007, the FASB issued Statement of Financial Accounting Standard No.141R, *Business Combinations”*(SFAS 141R)*. *This statementrequires an acquirer to recognize the assets acquired, the liabilities assumed,and any noncontrolling interest in the acquiree at the acquisition date to bemeasured at their fair value as of that date.  An acquirer is required torecognize assets or liabilities arising from all other contingencies(contractual contingencies) as of the acquisition date, measured at theiracquisition-date fair values, only if it is more likely than not that they meetthe definition of an asset or a liability in FASB Concepts Statement No. 6, *Elementsof Financial Statements.*  Any acquisition-related costs are to be expensedinstead of capitalized.  This statement applies prospectively to businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008.  Theimpact to the Company from the adoption of SFAS 141R in fiscal year 2010 willdepend on acquisitions at the time.

 

                InSeptember 2006, the FASB issued Statement of Financial Accounting Standard No.157, *Fair Value Measurements* (SFAS 157).  This statement establishes asingle authoritative definition of fair value, sets out a framework formeasuring fair value, and requires additional disclosures about fair valuemeasurements.  SFAS 157 will apply to fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  In February 2008,however, the FASB issued FASB Staff Position 157-2 (FSP 157-2) which defers theeffective date of SFAS 157 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inan entity’s financial statements on a recurring basis (at least annually).  FSP157-2 will apply to fiscal years beginning after November 15, 2008, and interimperiods within those fiscal years.  NBP is currently evaluating the impact SFAS157 may have, if any, on its Consolidated Financial Statements.

 

                InFebruary 2007, the FASB issued Statement of Financial Accounting Standard No.159, *The Fair Value Option for Financial Assets and Financial Liabilities*(SFAS 159).  This statement provides companies with an option to reportselected financial assets and liabilities at fair value.  SFAS 159 will applyto fiscal years beginning after November 15, 2007.  NBP is currently evaluatingthe impact SFAS 159 may have, if any, on its Consolidated Financial Statements.

 

In December 2007, the FASB issued Statement ofFinancial Accounting Standard No. 160,*Noncontrolling Interests inConsolidated Financial Statements - an Amendment of ARB No. 51*(SFAS 160).  SFAS 160 establishes accounting andreporting standards for the noncontrolling interest (minority interest) in asubsidiary.  SFAS 160 requires noncontrolling interests held by partiesother than the parent in subsidiaries be clearly identified, labeled, andpresented in the consolidated balance sheet within equity, but separate fromthe parent's equity.   SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008.  The Company is currently assessing theimpact SFAS 160 may have, if any, on its Consolidated Financial Statements.

 

                InMarch 2008, the FASB issued Statement of Financial Accounting Standard No. 161,*Disclosures about Derivative Instruments and Hedging Activities - anamendment of FASB Statement No. 133*(SFAS 161).  SFAS 161 establishesenhanced disclosure requirements about: 1)  how and why an entity usesderivative instruments; 2) how derivative instruments and related hedged itemsare accounted for under Statement 133 and its related interpretations; and 3)how derivative instruments and related hedged items affect an entity’sfinancial position, financial performance and cash flows.  SFAS 161 iseffective for financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008.  The Company is currently assessing theimpact SFAS 161 will have on its Consolidated Financial Statements.**

 

**(3)Inventories**

 

Inventories at May 31, 2008 and August 25, 2007consisted of the following (in thousands):

 

 

**May 31, 2008**

** **

**August 25, 2007**

Dressed  and boxed beef

$

                          153,611

 

$

               144,766

Beef  by-products

 

27,911

** **

** **

19,540

Supplies

 

16,533

** **

** **

12,938

     Total inventory

$

                             198,055

 

$

                177,244

 

** **

6

 

 

 

 

 

 

** (4)Comprehensive Income/(Loss)**

 

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

 

 

**14 weeks ended**

** **

**13 weeks ended**

** **

**40 weeks ended**

** **

**39 weeks ended**

 

**May 31, 2008**

** **

**May 26, 2007**

** **

**May 31, 2008**

** **

**May 26, 2007**

Net  income/(loss)

$

74,265 

 

$

13,561

 

$

39,679 

 

$

(12,318)

Other  comprehensive income/(loss):

 

 

 

 

 

 

 

   Foreign currency translation

     Adjustments

(26)

 

                              2

 

(23)

 

                           9 

Comprehensive  income/(loss)

$

74,239 

 

$

13,563

 

$

39,656 

 

$

(12,309)

 

 

 

 

 

 

 

 

 

** **

**(5)Capital Subject to Redemption  **

** **

At any time after certain dates, the earliest beingJuly 31, 2008, the latest being July 31, 2011, certain members of managementand/or NBPCo Holdings, LLC have the right to request that NBP repurchase theirinterests, the value of which is to be determined by a mutually agreedappraisal process. If NBP is unable to effect the repurchase within a specifiedtime, the requesting member(s) have the right to cause a sale process tocommence.  NBP accounts for changes in the redemption value of these interestsby accreting the change in value over the current period through the earliestredemption date of the respective interests.  At May 31, 2008, the capitalsubject to redemption was revalued by an independent appraisal process, and thevalue was determined to be $194.8 million, which was in excess of its carryingvalue.  Accordingly, the carrying value of the capital subject to redemptionincreased by approximately $29.1 million through accretion during the fourteenweeks ended May 31, 2008, resulting in the $133.3 million carrying value, asreflected in the accompanying Consolidated Balance Sheet as of May 31, 2008.

** **

The value of the capital subject to redemption at May31, 2008, increased by approximately $122.7 million compared to the value atAugust 25, 2007 primarily as a result of the indication of fair value from theMembership Interest Purchase Agreement (the Agreement) that was entered into onFebruary 29, 2008 with JBS S.A. (JBS).  Under the agreement, JBS will acquireall of the outstanding membership interests in NBP for an aggregate value of$560.0 million.  Generally accepted accounting principles require the Companyto determine the fair value of the capital subject to redemption at the end ofeach reporting period.  This change in fair value is accreted over theredemption period as discussed above.  The value arrived at through theindependent appraisal process considers certain estimates of managementregarding future performance as well as an estimated probability of theAgreement reaching a successful conclusion.  Offsetting the change in the valueof the capital subject to redemption is a corresponding change in members’capital.  

 

 

**(6)Contingencies**

** **

*Schumacher v. Tyson Foods, et al.* OnJuly 1, 2002, a lawsuit was filed against Farmland National Beef PackingCompany, L.P. (FNBPC or the predecessor to NBP), ConAgra Beef Company, TysonFoods, Inc. and Excel Corporation in the United States District Court for theDistrict of South Dakota seeking certification of a class of all persons whosold cattle to the defendants for cash, or on a basis affected by the cash pricefor cattle, during the period from April 2, 2001 through May 11, 2001 and forsome period up to two weeks thereafter. The case was filed by three namedplaintiffs on behalf of a putative nationwide class that plaintiffs estimate iscomprised of hundreds or thousands of members. The complaint alleged that thedefendants, in violation of the Packers and Stockyards Act of 1921, knowinglyused, without correction or disclosure, incorrect and misleading boxed beefprice information generated by the USDA to purchase cattle offered for sale bythe plaintiffs at a price substantially lower than was justified by the actualand correct price of boxed beef during this period. Plaintiffs also soughtrecovery against all defendants under a theory of unjust enrichment. The casewas certified as a class-action matter in June of 2004.  After a trial, atwhich the Company prevailed, a judgment against the other defendants wasreversed by the Court of Appeals and the District Court has entered judgment forthe defendants.  The only remaining issue in the case is the amount ofcourt costs to be assessed against the plaintiffs.  

 

7

 

 

 

 

 

 

** **

**               **The Company’s wholly owned subsidiary, NCI, hasvarious independent contractor drivers who are involved in accidents from timeto time.  Management believes the ultimate resolution of such matters shouldnot have a material adverse effect on our financial condition, results ofoperations or liquidity.

** **

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

 

 

**(7) Segments**

** **

TheCompany’s operating segments are based on segment profit and evaluated by the ChiefExecutive Officer, who also serves as the Chief Operating Decision Maker (CODM). Segment profit is measured as operating income for NBP’s two reportingsegments, Core Beef and Other, based on the definitions provided in Statementof Financial Accounting Standard No. 131, *Disclosures about Segments of anEnterprise and Related Information*. 

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

*Other*—the Other segment of NBP consists of the operationsof National Carriers, Inc., a refrigerated and livestock contract carriercompany, and Kansas City Steak Company, LLC, a portion control steak cuttingoperation. 

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

 

8

 

 

 

 

 

 

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

 

 

**14 weeks ended**

** **

**13 weeks ended**

** **

**40 weeks ended**

** **

**39 weeks ended**

 

**May 31, 2008**

 

**May 26, 2007**

 

**May 31, 2008**

 

**May 26, 2007**

Net sales:

 

 

 

 

 

 

 

Core  beef

$             1,541,215 

 

$              1,480,266 

 

$             4,247,457 

 

$             4,057,271 

Other  (1)

67,589 

 

                 54,280 

 

 180,618 

 

                 168,434 

Eliminations  (1)

      (79,180)

 

(54,870)

 

(194,399)

 

             (159,685)

      Total net sales

$             1,529,624 

 

$              1,479,676 

 

$              4,233,676 

 

$             4,066,020 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

Core  beef

$                  77,374 

 

$                  22,485 

 

$                   55,946 

 

$                 10,962 

Other

                    2,357 

 

                       1,068 

 

                    6,926 

 

                    5,918 

      Total operating

        Income

                 79,731 

 

23,553 

 

                  62,872 

 

                      16,880 

 

 

 

 

 

 

 

 

Interest income

71 

 

                       136 

 

376 

 

              506 

Interest expense

(8,680)

 

(10,543)

 

(26,942)

 

                  (29,505)

Other income, net (2)

4,263 

 

                861 

 

6,018 

 

                1,484 

Minority interest

(162)

 

90 

 

(608)

 

                   (262)

      Total income/(loss)

        before taxes

$                 75,223 

 

$                14,097 

 

$                41,716 

 

$                (10,897)

 

 

 

 

 

 

 

 

 

**May 31, 2008**

** **

**May 26, 2007**

** **

** **

** **

** **

Assets:

 

 

 

 

 

 

 

Core  beef

$                819,276 

 

$              774,311 

 

 

 

 

Other

39,355 

 

                    30,314 

 

 

 

 

Eliminations

117 

 

(406)

 

 

 

 

      Total assets

$                858,748 

 

$              804,219 

 

 

 

 

 

1)  Net sales – Other, as previously presented in NBP’sfinancial statements, was decreased by approximately $1.2 million with anoffsetting increase to Net sales – Eliminations for the thirteen and thirty-nineweek periods ended May 26, 2007 to correctly present the impact of transferpricing adjustments.

** **

2) Other income, net for the fourteen and forty week periods ended May 31, 2008includes an approximate $3.4 million settlement related tocorrugated packaging materials.

** **

**8. Subsequent Event**

 

                OnJune 27, 2008, the Company amended its existing amended and restated creditagreement with a consortium of banks.  The credit agreement was amended byincreasing the amount of permitted net capital expenditures (as defined in thecredit agreement) to $60.0 million during the fiscal year 2008 from $50.0million.

 

9

 

 

 

 

 

 

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

** **

            The followingdiscussion should be read in conjunction with our Consolidated Financial Statementsand related notes and other financial information appearing elsewhere in thisreport.

 

**Disclosure RegardingForward-Looking Statements**

 

Thisreport contains “forward-looking statements,” which are subject to a number ofrisks and uncertainties, many of which are beyond our control. Forward-lookingstatements are typically identified by the words “believe,” “expect,”“anticipate,” “intend,” “estimate” and similar expressions. Actual resultscould differ materially from those contemplated by these forward-lookingstatements as a result of many factors, including the satisfaction of allconditions to close the transaction with JBS S.A. (JBS) described below under“Recent Developments,” economic conditions generally and in our principalmarkets, the availability and prices of live cattle and commodities, foodsafety, livestock disease, including the identification of cattle with BovineSpongiform Encephalopathy (BSE), competitive practices and consolidation in thecattle production and processing industries, actions of domestic or foreigngovernments, hedging risk, changes in interest rates and foreign currencyexchange rates, consumer demand and preferences, the cost of compliance withenvironmental and health laws, loss of key customers, loss of key employees,labor relations, and consolidation among our customers. 

 

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.  Seealso the Risk Factors in Item 1A. Business of our Annual Report for theyear ended August 25, 2007 on Form 10-K filed with the Securities and ExchangeCommission for other important factors that could cause actual results todiffer materially from those in any such forward-looking statements, and whichshould be read in conjunction with this report.

 

**Industry Outlook**

 

                Continuedrising input costs at the cow-calf sector have resulted in further industrycontraction.  Liquidation of the beef cow herd in the United States (U.S.) remainedactive during the first six months of calendar 2008 and will result in asmaller U.S. beef herd going forward.  The new placement of cattle into feedlots has slowed as producers look to minimize feed costs given the sharpincrease in grain prices.  With seasonal grass availability, steers and heiferswill likely remain on pasture longer into the summer quarter which could resultin larger placements of heavier cattle in the late summer and early fall. Currently, deferred live cattle futures are pricing record high live cattle andbeef prices now and into the foreseeable future.  It remains unknown whetherthe beef industry will be able to pass these record high live cattle and beefprices through to the consumer given the current weak status of the U.S.economy and consumers’ available disposable income.

 

**Beef Export Markets**

 

Exportmarkets for U.S. beef products remain significantly constrained since thediscovery of a case of BSE in the State of Washington in December 2003, as wellas other isolated cases.  In July 2006, Japan agreed to reopen its market toU.S. beef from cattle aged 20 months and younger.  Our Brawley facility wassuspended from shipping beef to Japan in April 2008 following the discovery ofa short loin which included a portion of a spinal column, a specified riskmaterial, prohibited by Japan.  We have supplied information, per theirrequest, to the United States Department of Agriculture related to thisshipment and we believe that the suspension will be lifted by the end ofAugust, 2008, although there can be no assurance that the ban will be lifted bythen.  South Korea announced a provisional opening of its border to U.S. beeffrom animals 30 months and younger in September 2006, however, its border wassubsequently closed on October 5, 2007.  South Korea re-opened its border and startedinspecting U.S. beef on June 27, 2008.  These constraints and uncertaintieshave had a negative impact on beef margins.

 

10

 

 

 

 

 

 

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

** **

**Recent Developments**

 

            *CollectiveBargaining Agreement: *The collective bargaining agreement with the UnitedFood and Commercial Workers International Union and the Teamsters InternationalUnion for the Brawley, California facility that expired on May 31, 2008 wasmutually extended by all parties while negotiations continue.  On June 27,2008, a tentative agreement in principal was reached, subject to the preparationof an agreement in writing and ratification by the members at a date to bedetermined in July 2008.

 

                *ProductionCutbacks*:  On May 28, 2008, we announced production cutbacks from six tofive production days a week at our beef processing facilities in Liberal andDodge City, Kansas and in Brawley, California.  Production cuts began that weekand have reduced slaughter by approximately 15,000 head per week.  Management’sdecision to regulate production hours is driven by market conditions.

 

                *MembershipInterest Purchase Agreement with JBS*: On February 29, 2008, we, JBS, USPB,our majority owner, and the other holders of our membership interests,including NBPCO Holdings, LLC (NBPCO) and parties controlled by three executiveofficers, John R. Miller, Timothy M. Klein and Scott H. Smith, entered into aMembership Interest Purchase Agreement (the Agreement). Under the Agreement,JBS will acquire all of our outstanding membership interests (including themembership interests issuable pursuant to deferred equity incentivecompensation agreements with our Chief Executive Officer and Chief OperatingOfficer) for a combination of approximately $465.0 million cash and $95.0million in common stock of JBS (the Purchase Price).

 

                Pursuant tothe Agreement, at closing USPB and certain other members of ours will receivetheir proportionate share of the Purchase Price with 80.0% to be paid in cashand 20.0% to be paid in shares of common stock of JBS (the JBS Stock), whichwill be freely transferable on the Novo Mercado segment of the BOVESPA stockexchange in Brazil. The number of shares of JBS Stock will be determined basedon its volume weighted average closing price during the 20 trading days priorto closing, subject to certain adjustments. Certain of our members have electedto receive or, under certain circumstances, have the right to receive theirportion of the Purchase Price entirely in cash. If JBS is unable to deliver JBSStock on an unencumbered and freely transferable basis at closing, the sellersmay still demand to close, but be paid entirely in cash.

 

                Consummationof the Agreement is subject to customary conditions, including approval of theAgreement by the members of USPB and the shareholders of JBS and the expirationor termination of the applicable waiting periods under the Hart-Scott-RodinoAntitrust Improvements Act of 1976 and possible approvals by certain foreignjurisdictions.  The members of USPB approved the Agreement on March 14, 2008and the shareholders of JBS approved the Agreement on April 11, 2008. 

 

                The Agreementcontains certain termination rights and provides that under certaincircumstances, JBS or we may be required to pay our members or the members ofJBS, respectively, a termination fee of $25 million plus certain costs.  Theparties have agreed on the payment of certain fees and expenses, includingthose related to antitrust filings and compliance.

 

** **

11

 

 

 

 

 

 

**Resultsof Operations**

** **

***Fourteen weeks ended May 31, 2008 compared to thirteen weeks ended May 26,2007***

 

*General.* Net income for the fourteen weeks ended May 31, 2008 was approximately $74.3million compared to approximately $13.6 million for the thirteen weeks ended May26, 2007, an increase of approximately $60.7 million.  Sales were higher in thefourteen weeks ended May 31, 2008 compared to the thirteen week period endedMay 26, 2007 primarily due to the extra week in the current reporting period ascompared to last year.  While the average volume of cattle processed per weekfell by approximately 7.0%, average sales prices per head increased approximately3.4% during this reporting period.  Improved demand of beef products duringthis quarter allowed the increase in sales prices to cover the continued highcost of live cattle that we processed as compared to the same quarter of lastyear.

 

Total costs and expenses of approximately $1,449.9 millionfor the fourteen weeks ended May 31, 2008 were 94.8% as a percent of salescompared to approximately $1,456.1 million for the thirteen weeks ended May 26,2007, or 98.4% as a percent of sales.  Lower live cattle prices byapproximately 5.8% put less strain on gross margin resulting in increased operatingincome of approximately $56.1 million for this fourteen week period of fiscal2008 as compared to the thirteen week period of fiscal 2007. 

 

*Net Sales*. Net sales were approximately $1,529.6 million for the fourteen weeks ended May 31,2008 compared to approximately $1,479.7 million for the thirteen weeks ended May26, 2007, an increase of approximately $49.9 million, or 3.4%.  The increase innet sales resulted primarily from an extra week of sales activity as comparedto the same period of last year.  Also contributing to the increase in saleswas an increase in average sales prices per head of about 3.4% during thecurrent fourteen week period of fiscal 2008 as compared to the thirteen weekperiod of fiscal 2007 while the average volume of cattle processed per weekfell by approximately 7.0%.

* *

*Cost of Sales*. Cost of sales was approximately $1,428.1 million for the fourteen weeks ended May31, 2008 compared to approximately $1,436.4 million for the thirteen weeksended May 26, 2007, a decrease of approximately $8.3 million, or 0.6%.  The decreaseresulted primarily from an approximate 5.8% decrease in live cattle prices.  Althoughcattle prices declined in comparison of the current quarter to the same quarterof last year, cattle prices remain historically high due to tight supplies ofmarket-ready cattle.   Also contributing to this decrease was an approximate7.0% decrease in the number of live cattle purchased on a per week basis due tothe current reporting period reflecting an additional week compared to the sameperiod of last year.  Partially offsetting these decreases was an increase inthe average cattle weights by approximately 2.1% during this fourteen weekperiod of fiscal 2008 as compared to the thirteen week period of fiscal 2007.  

 

*Selling, General and Administrative Expenses*.  Selling, general and administrative expenses were approximately$12.0 million for the fourteen weeks ended May 31, 2008 compared to approximately$11.5 million for the thirteen weeks ended May 26, 2007, an increase of approximately$0.5 million, or 4.3%.  While comparing the current quarter of fiscal 2008 tothe comparable quarter of fiscal 2007, payroll and related expenses increasedby approximately $0.8 million and marketing expense increased by approximately$0.5 million while legal expenses decreased by approximately $0.3 million and repairsand maintenance decreased by an approximate $0.2 million.  The increase inselling, general and administrative expenses primarily reflects an extra weekof expense in the current reporting period as compared to the same period oflast year.  

 

*Depreciation and Amortization Expense*.  Depreciation and amortization expenses were approximately$9.8 million for the fourteen weeks ended May 31, 2008 compared to approximately$8.2 million for the thirteen weeks ended May 26, 2007, an increase of approximately$1.6 million, or 19.5%.  Depreciation expense increased due to assets beingplaced into service, primarily at the Dodge City and Liberal beef plants,during the fiscal year 2007 and to assets being placed into service at our CaseReady plants during the current quarter.  In addition, the current reportingperiod reflects an extra week of expense as compared to the same period of lastyear.

 

12

 

 

 

 

 

 

*Operating Income*.  Operating income was approximately $79.7 million for the fourteenweeks ended May 31, 2008 compared to approximately $23.6 million for the thirteenweeks ended May 26, 2007, an increase of approximately $56.1 million.  The improvedoperating income resulted primarily from lower live cattle prices during the fourteenweek period ended May 31, 2008, as compared to the thirteen week period endedMay 26, 2007, and increased average selling prices of beef products.  Inaddition, the current reporting period reflects an extra week of operatingincome as compared to the same period of last year.

 

                *InterestExpense*.  Interest expense was approximately $8.7 million for the fourteenweeks ended May 31, 2008 compared to approximately $10.5 million for the thirteenweeks ended May 26, 2007, a decrease of approximately $1.8 million, or 17.1%. The decrease in interest expense was due primarily to lower interest rates onour variable rate debt, a decrease of approximately 345 basis points.  Inaddition, our weighted average of variable rate debt decreased approximately $16.6million at May 31, 2008 as compared to May 26, 2007.  Partially offsettingthese decreases was an extra week of interest expense in the current reportingperiod as compared to the same period of last year.

 

                *Other,net. *Other, net non-operating income was approximately $4.3 million forthe fourteen weeks ended May 31, 2008 compared to approximately $0.9 millionfor the thirteen weeks ended May 26, 2007, an increase of approximately $3.4million.  The increase in other, net non-operating income was primarily relatedto an approximate $3.4 million in income for a settlement of a lawsuit relatedto corrugated packaging materials.  

 

                *IncomeTax Expense/Benefit*.  Income tax expense was approximately $1.0 million forthe fourteen weeks ended May 31, 2008 compared to income tax expense of approximately$0.5 million for the thirteen weeks ended May 26, 2007, an increase in expenseof approximately $0.5 million.  Beginning in calendar year 2008, some states inwhich we conduct business, modified their business taxes, using net income, ora modification of net income, as the basis.  The modification of these statetaxes necessitated the inclusion of approximately $0.3 million of thesebusiness taxes in income tax expense during the current reporting period ascompared to the same period of last year.  The remaining increase in incometaxes for the period of approximately $0.2 million is related to oursubsidiary, National Carriers, Inc. (NCI).  Income tax expense is recorded onincome from NCI, which is organized as a C Corporation.

 

 

***Forty weeks ended May 31, 2008 compared to thirty-nine weeks ended May26, 2007***

 

*General.* Net income for the forty weeks ended May 31, 2008 was approximately $39.7 millioncompared to a net loss of approximately $12.3 million for the thirty-nine weeksended May 27, 2006, an increase of approximately $52.0 million.  Sales werehigher in the forty week period ended May 31, 2008 compared to the thirty-nineweek period ended May 26, 2007 primarily due to increased average sales pricesper head of approximately 4.1%.  Also contributing to this increase in saleswas an extra week during the current reporting period as compared to the sameperiod of last year.  Partially offsetting these increases in sales was aslight decline in the number of cattle processed, about 0.8%, during the firstforty weeks of fiscal 2008 as compared to the first thirty-nine weeks of fiscal2007.  An overall improved demand for beef products drove an increase in ouroperating income for this reporting period. 

 

Total costs and expenses of approximately $4,170.8million for the forty weeks ended May 31, 2008 were 98.5% as a percent of salescompared to approximately $4,049.1 million for the thirty-nine weeks ended May26, 2007, or 99.6% as a percent of sales.  Continued high cattle prices, about1.0% higher in the current reporting period as compared to last year, andincreased depreciation and amortization expense contributed to the increase intotal costs and expenses for this forty week period of fiscal 2008 as comparedto the thirty-nine week period of fiscal 2007.   

 

13

 

 

 

 

 

 

*Net Sales*. Net sales were approximately $4,233.7 million for the forty weeks ended May 31,2008 compared to approximately $4,066.0 million for the thirty-nine weeks endedMay 26, 2007, an increase of approximately $167.7 million, or 4.1%.  The moderateincrease in net sales resulted primarily from an average increase in beef salesprices per head of 4.1% in the forty week period ended May 31, 2008 as comparedto the thirty-nine week period in the prior year.  In addition, the currentreporting period reflects an extra week of sales activity as compared to the sameperiod of last year.  Partially offsetting these increases in net sales was anapproximate 0.8% decrease in the volume of cattle processed during the currentforty-week period of fiscal 2008 as compared to the thirty-nine week period offiscal 2007.   

 

*Cost of Sales*. Cost of sales was approximately $4,109.9 million for the forty weeks ended May 31,2008 compared to approximately $3,994.0 million for the thirty-nine weeks endedMay 26, 2007, an increase of approximately $115.9 million, or 2.9%.  The increasewas primarily a result of an extra week of costs in the current reportingperiod as compared to the same period of last year.  Also contributing to theincrease in cost of sales was increased live cattle prices that wereapproximately 1.0% higher due to the continued tight supply of market-readycattle and to the cattle being heavier, at average weights 1.1% more, duringthe forty week period of fiscal 2008 than the thirty-nine week period of lastyear.  Partially offsetting these increases was a decrease in the volume of cattleprocessed by approximately 0.8% during the current forty week period of fiscal2008 as compared to the thirty-nine week period of fiscal 2007. 

 

*Selling, General and Administrative Expenses*.  Selling, general and administrative expenses were approximately$33.5 million for the forty weeks ended May 31, 2008 compared to approximately $31.1million for the thirty-nine weeks ended May 26, 2007, an increase of approximately$2.4 million, or 7.7%.  The increase for this period is primarily due to anincrease in payroll and benefit expenses of approximately $1.6 million and anincrease in marketing expense of approximately $0.8 million.  The currentreporting period reflects an extra week of expense as compared to the sameperiod of last year which contributed to the increases in the payroll andbenefit and marketing expenses discussed above as well as the selling, generaland administrative expenses in general.

 

*Depreciation and Amortization Expense*.  Depreciation and amortization expenses were approximately$27.4 million for the forty weeks ended May 31, 2008 compared to approximately $24.1million for the thirty-nine weeks ended May 26, 2007, an increase of approximately$3.3 million, or 13.7%.  Depreciation expense increased due to assets beingplaced into service, primarily at the Dodge City and Brawley beef plants,during the fiscal year 2007 and to assets being placed into service at the CaseReady plants during the third quarter of fiscal 2008.  In addition, the currentreporting period reflects an extra week of expense as compared to the sameperiod of last year.

* *

*Operating Income*.  Operating income was approximately $62.9 million for the forty weeksended May 31, 2008 compared to approximately $16.9 million for the thirty-nine weeksended May 26, 2007, an increase of approximately $46.0 million.  The improvementin operating income during the forty week period ended May 31, 2008 resultedprimarily from increased demand and selling prices of beef products as comparedto the thirty-nine week period ended May 26, 2007.

 

                *InterestExpense*.  Interest expense was approximately $26.9 million for the fortyweeks ended May 31, 2008 compared to approximately $29.5 million for the thirty-nineweeks ended May 26, 2007, a decrease of approximately $2.6 million, or 8.8%.  Thedecrease in interest expense during the forty week period of fiscal 2008 ascompared to the thirty-nine week period of fiscal 2007 was due primarily to lowerinterest rates on our variable rate debt, a decrease of approximately 213 basispoints.  Offsetting this decrease in interest rates was an increase in theweighted average of variable rate debt of approximately $17.0 million at May31, 2008 as compared to May 26, 2007.  Also contributing to the offset, was anextra week of interest expense in the current reporting period as compared tothe same period of last year.

 

                *Other,net.*  Other, net non-operating income was approximately $6.1 million forthe forty weeks ended May 31, 2008 compared to other, net non-operating incomeof approximately $1.6 million for the thirty-nine weeks ended May 26, 2007, an increaseof approximately $4.5 million.  The forty weeks ended May 31, 2008 included approximately$3.4 million in income for a settlement of a lawsuit related to corrugatedpackaging materials and about $1.3 million in income related to proceedsreceived in redemption of an investment interest in which our basis hadpreviously been written down to zero.  

 

14

 

 

 

 

 

 

                *IncomeTax Expense/Benefit*.  Income tax expense was approximately $2.0 million forthe forty weeks ended May 31, 2008 compared to approximately $1.4 million forthe thirty-nine weeks ended May 26, 2007, an increase of approximately $0.6million, or 42.9%.  Beginning in calendar year 2008, some states in which weconduct business, modified their business taxes, using net income, or amodification of net income, as the basis.  The modification of these statetaxes necessitated the inclusion of approximately $0.4 million of thesebusiness taxes in income tax expense during the current reporting period ascompared to the same period of last year.  The remaining increase in incometaxes for the period of approximately $1.0 million is related to oursubsidiary, National Carriers, Inc. (NCI). Income tax expense is recorded onincome from NCI, which is organized as a C Corporation.

** **

** **

**SegmentResults**

** **

Ouroperating segments are based on segment profit and evaluated by the ChiefExecutive Officer, who also serves as the Chief Operating Decision Maker(CODM).  Segment profit is measured as operating income for our two reportingsegments, Core Beef and Other, based on the definitions provided in Statementof Financial Accounting Standard (SFAS) No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*.  

*Core Beef*—the majority of our revenues are generated from thesale of fresh meat, which include chuck cuts, rib cuts, loin cuts, round cuts,thin meats, ground beef, and other products. In addition, we also sell beefby-products to the variety meat, feed processing, fertilizer and pet foodindustries.  Aggregation criteria were applied to determine the constituents ofthe Core Beef segment. 

*Other*—our Other segment consists of the operations ofNational Carriers, Inc., a refrigerated and livestock contract carrier company,and Kansas City Steak Company, LLC, a portion control steak cutting operation. 

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

** **

15

 

 

 

 

 

 

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

 

 

**14 weeks ended**

** **

**13 weeks ended**

** **

**40 weeks ended**

** **

**39 weeks ended**

 

**May 31, 2008**

 

**May 26, 2007**

 

**May 31, 2008**

 

**May 26, 2007**

Net sales:

 

 

 

 

 

 

 

Core  beef

$             1,541,215 

 

$              1,480,266 

 

$             4,247,457 

 

$             4,057,271 

Other  (1)

67,589 

 

                 54,280 

 

 180,618 

 

                 168,434 

Eliminations  (1)

      (79,180)

 

(54,870)

 

(194,399)

 

             (159,685)

      Total net sales

$             1,529,624 

 

$              1,479,676 

 

$              4,233,676 

 

$             4,066,020 

 

 

 

 

 

 

 

 

Operating income:

 

 

 

 

 

 

 

Core  beef

$                  77,374 

 

$                  22,485 

 

$                   55,946 

 

$                 10,962 

Other

                    2,357 

 

                       1,068 

 

                    6,926 

 

                    5,918 

      Total operating

        Income

                 79,731 

 

23,553 

 

                  62,872 

 

                      16,880 

 

 

 

 

 

 

 

 

Interest income

71 

 

                       136 

 

376 

 

              506 

Interest expense

(8,680)

 

(10,543)

 

(26,942)

 

                  (29,505)

Other income, net (2)

4,263 

 

                861 

 

6,018 

 

                1,484 

Minority interest

(162)

 

90 

 

(608)

 

                   (262)

      Total income/(loss)

        before taxes

$                 75,223 

 

$                14,097 

 

$                41,716 

 

$                (10,897)

 

 

 

 

 

 

 

 

 

**May 31, 2008**

** **

**May 26, 2007**

** **

** **

** **

** **

Assets:

 

 

 

 

 

 

 

Core  beef

$                819,276 

 

$             774,311 

 

 

 

 

Other

39,355 

 

                    30,314 

 

 

 

 

Eliminations

117 

 

(406)

 

 

 

 

      Total assets

$                858,748 

 

$              804,219 

 

 

 

 

 

1)  Net sales – Other, as previously presented in NBP’sfinancial statements, was decreased by approximately $1.2 million with anoffsetting increase to Net sales – Eliminations for the thirteen and thirty-nineweek periods ended May 26, 2007 to correctly present the impact of transferpricing adjustments.

** **

2) Other income, net for the fourteen and forty week periods ended May 31, 2008includes an approximate $3.4 million settlement related tocorrugated packaging materials.

** **

** **

***Fourteen weeks ended May 31, 2008 compared to thirteen weeks ended May26, 2007***

 

***Core Beef***

 

*Net Sales*. Net sales for Core Beef were approximately $1,541.2 million for the fourteenweeks ended May 31, 2008 compared to approximately $1,480.3 million for the thirteenweeks ended May 26, 2007, an increase of approximately $60.9 million, or 4.1%.  Theincrease in net sales resulted primarily from an extra week of sales activityas compared to the same period of last year.  Also contributing to the increasein sales was an increase in average sales prices per head of about 3.9% duringthe current fourteen week period of fiscal 2008 as compared to the thirteenweek period of fiscal 2007 while the average volume of cattle process per weekfell by approximately 7.0%.

 

*Operating Income*.  Operating income for Core Beef was approximately $77.4 million forthe fourteen weeks ended May 31, 2008 compared to approximately $22.5 millionfor the thirteen weeks ended May 26, 2007, an improvement of approximately $54.9million.  The increase in operating income resulted primarily from improvedlive cattle prices which were approximately 5.8% lower and from increaseddemand and selling prices of beef products during the fourteen week periodended May 31, 2008, as compared to the thirteen week period ended May 26, 2007.

 

16

 

 

 

 

 

 

 

***Other***

 

*Net Sales*. Net sales for Other were approximately $67.6 million for the fourteen weeksended May 31, 2008 compared to approximately $54.3 million for the thirteenweeks ended May 26, 2007, an increase of approximately $13.3 million, or 24.5%. The increase was primarily due to an extra week of sales activity in thecurrent reporting period as compared to the same period of last year.  Inaddition, fuel surcharge revenues at our transportation company increased asdid the sales at our portion control beef facility during the fourteen weekperiod of fiscal 2008 as compared to the thirteen week period of fiscal 2007.

 

                *OperatingIncome/Loss*.  Operating income for Other was approximately $2.4 million forthe fourteen weeks ended May 31, 2008 compared to operating income of approximately$1.1 million for the thirteen weeks ended May 26, 2007, an increase of approximately$1.3 million.  The increase was due primarily to improved operating income of ourportion control beef facility resulting from improved inventory management and marketinginitiatives. 

 

 

***Forty weeks ended May 31, 2008 compared to thirty-nine weeks ended May26, 2007***

 

***Core Beef***

 

*Net Sales*. Net sales for Core Beef were approximately $4,247.5 million for the forty weeksended May 31, 2008 compared to approximately $4,057.3 million for the thirty-nineweeks ended May 26, 2007, an increase of approximately $190.2 million, or 4.7%. The moderate increase in net sales resulted primarily from an average increasein beef sales prices per head of 5.5% during the forty week period ended May 31,2008 as compared to the thirty-nine week period in the prior year.  Inaddition, the current reporting period reflects an extra week of sales activityas compared to the same period of last year.  Partially offsetting theseincreases in net sales was an approximate 0.8% decrease in the volume of cattleprocessed during the current forty-week period of fiscal 2008 as compared tothe thirty-nine week period of fiscal 2007. 

 

*Operating Income*.  Operating income for Core Beef was approximately $55.9 million forthe forty weeks ended May 31, 2008 compared to approximately $11.0 million forthe thirty-nine weeks ended May 26, 2007, an increase of approximately $44.9 million. The improvement in operating income during the forty week period ended May 31,2008 resulted primarily from increased demand and selling prices of beefproducts as compared to the thirty-nine week period ended May 26, 2007.

  

 

***Other***

 

*Net Sales*. Net sales for Other were approximately $180.6 million for the thirty-nine weeksended May 31, 2008 compared to approximately $168.4 million for the thirty-nineweeks ended May 26, 2007, an increase of approximately $12.2 million, or 7.2%. The increase was primarily due increased fuel surcharge revenues at ourtransportation company and increased sales at our portion control beef facilityduring the forty week period of fiscal 2008 as compared to the thirty-nine weekperiod of fiscal 2007.  In addition, the current reporting period reflects anextra week of sales activity as compared to the same period of last year.

 

                *OperatingIncome*.  Operating income for Other was approximately $6.9 million for the fortyweeks ended May 31, 2008 compared to approximately $5.9 million for the thirty-nineweeks ended May 26, 2007, an increase of approximately $1.0 million.  Theincrease was due primarily to improved operating income in our portion controlbeef facility resulting from improved inventory management and marketinginitiatives. 

 

17

 

 

 

 

 

 

**Liquidityand Capital Resources**

 

As of May 31, 2008, we had net working capital of $214.9million, which included $32.4 million in distributions payable, and cash andcash equivalents of $27.0 million.  As of August 25, 2007, we had net workingcapital of $249.3 million, which included $6.4 million in distributionspayable, and cash and cash equivalents of $30.4 million.  Our primary sourcesof liquidity are cash flows from operations and available borrowings under ouramended and restated credit facility.

 

As of May 31, 2008, we had $413.6 million of long-termdebt, of which $3.6 million was classified as a current liability. As of May 31,2008, our amended and restated credit facility consisted of a $202.6 millionterm loan and a $200.0 million revolving line of credit loan, which hadoutstanding borrowings of $16.0 million, outstanding letters of credit of $54.7million and available borrowings of $129.3 million, based on the mostrestrictive financial covenant calculations.  Cash flows from operations andborrowings under our amended and restated credit facility have funded ourworking capital requirements, acquisitions, capital expenditures and othergeneral corporate purposes.  We were in compliance with all of our financialcovenants under our amended and restated credit facility as of May 31, 2008.

 

In addition to outstanding borrowings under ouramended and restated credit facility, we had outstanding borrowings underindustrial revenue bonds of $20.7 million, senior notes of $160.0 million andcapital leases and other obligations of $14.3 million as of May 31, 2008.  

 

We believe that available borrowings under our amendedand restated credit facility and cash provided by operating activities will besufficient to support our working capital, capital expenditures and debtservice requirements for the foreseeable future. Our ability to generatesufficient cash, however, is subject to certain general economic, financial,industry, legislative, regulatory and other factors beyond our control.  For areview of our obligations that affect liquidity, please see the “Cash PaymentObligations” table in “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of our Annual Report on Form10-K for the year ended August 25, 2007.

* *

*OperatingActivities*

 

                Netcash provided by operating activities in the forty weeks ended May 31, 2008 was$62.7 million compared to net cash used in operating activities of $43.2million in the thirty-nine weeks ended May 26, 2007.  The improvement wasprimarily due to net cash being provided primarily in operating activitiesthrough accounts receivable, inventory, accounts payable, cattle purchasespayable, and accrued compensation and benefits during the forty week period ofthe current year while net cash was used primarily in operating activitiesthrough accounts receivable, accounts payable, accrued compensation andbenefits, accrued insurance, and other accrued expenses and liabilities duringthe thirty-nine week period of last year.

 

*InvestingActivities*

 

Net cash used in investing activities was $38.5million in the forty weeks ended May 31, 2008 compared to $29.3 million in the thirty-nineweeks ended May 26, 2007.  This increase in cash used was primarily attributableto an increase in expenditures for property, plant and equipment related toimproving operating efficiencies, primarily at our Liberal, Dodge City and CaseReady facilities, in the current year.

 

 

*FinancingActivities*

 

                Netcash used in financing activities was $27.5 million in the forty weeks ended May31, 2008 compared to net cash provided by financing activities of $71.3 millionin the thirty-nine weeks ended May 26, 2007.  The change was primarilyattributed to a $65.2 million difference in net revolving credit borrowings,the borrowing of $40.0 million on our term note in the 2007 period that did notrecur in the 2008 period and a $5.0 million change in the impact of overdraftbalances.   These changes were partially offset by $7.4 million in repayments onour term note, made in the 2007 period that did not recur in the 2008 period,and a $4.9 million decrease in member distributions paid during the forty weekperiod ended May 31, 2008 as compared to the thirty-nine week period ended May26, 2007.  

 

18

 

 

 

 

 

 

 

*Amendedand Restated Senior Credit Facility*

 

                EffectiveJuly 25, 2007, we amended and restated our existing senior credit facility witha consortium of banks.  The facility now consists of a $202.6 million term loanthat matures in May 2016 and a $200.0 million revolving line of credit loanthat matures in July 2012 that is subject to certain borrowing baselimitations.  

 

                Borrowingsunder the facility bear interest at LIBOR or the Base Rate, plus the applicablemargin.  The applicable margin for the revolving line of credit will be basedon borrowing base availability with grids greater than $150.0 million, $50.0 to$150.0 million and less than $50.0 million.  As of May 31, 2008, the interestrate for the revolving loan was approximately 4.6%.   The applicable margin forthe Company’s term loan was also revised to a grid basis with different marginsfor Funded Debt to EBITDA Ratios greater than 3.50 to 1.00 and less than 3.50to 1.00.  As of May 31, 2008, the interest rate for the term loan was approximately5.1%.

         Therevolving line of credit and the term loan have no financial covenants unlessthe borrowing base availability is less than $50.0 million for five consecutivebusiness days or less than $35.0 million on any single business day during anyfiscal quarter.  If the borrowing base availability falls below these amounts,a fixed charge ratio of 1:15 to 1:00 must be maintained at the end of eachsubsequent fiscal quarter until the borrowing base availability has beengreater than or equal to $50.0 million for 90 consecutive days.  The Companywas not subject to the fixed charge ratio test at May 31, 2008.  The advancerates under the borrowing base are 90% on eligible accounts and 70% on eligibleinventory.  

            Theborrowings under the revolving loan are available for the Company’s workingcapital requirements, capital expenditures and other general corporatepurposes.  The amended and restated credit facility is secured by a firstpriority lien on substantially all of the Company’s assets.  The principal amountoutstanding under the term loan is due and payable in equal installments ofapproximately $3.5 million on the last business day of each June and Decembercommencing on June 30, 2011.  All outstanding amounts of the term loan are dueand payable on May 30, 2016.  Prepayment is allowed at any time.

                Theamended and restated credit facility contains customary affirmative covenants,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 alsocontains customary negative covenants, including without limitation,restrictions on the following:  distributions, mergers, sale of assets,investments and acquisitions, encumbrances, indebtedness, affiliatetransactions, and ERISA matters.

                Theamended and restated credit facility contains customary events of default,including without limitation, failure to make payment when due, materiallyincorrect representations and warranties, breach of covenants, events ofbankruptcy, default of other indebtedness that would permit acceleration ofsuch indebtedness, the occurrence of one or more unstayed or undischargedjudgments in excess of $3.0 million, changes in custody or control of theCompany’s property, changes in control of the Company, the failure of any ofthe loan documents to remain in full force, and the Company’s failure toproperly fund its employee benefit plans.  The facility also includes customaryprovisions protecting the lenders against increased cost or loss of yieldresulting from changes in tax, reserve, capital adequacy and other requirementsof law.

                OnJune 27, 2008, the Company amended its amended and restated credit facility byincreasing the amount of permitted net capital expenditures (as defined in the creditagreement) to $60.0 million during the fiscal year 2008 from $50.0 million.

 

19

 

 

 

 

 

 

 

**Item 3.Quantitative andQualitative Disclosures About Market Risk.**

* *

The principal market risks affecting our business areexposure to changes in prices for commodities, such as livestock and boxedbeef, and interest rate risk.

 

*Commodities.*Weuse various raw materials, many of which are commodities. Raw materials aregenerally available from several different sources, and we presently believethat we can obtain them as needed.  Commodities are subject to pricefluctuations that may create price risk. When appropriate, we may hedgecommodities in order to mitigate this price risk. While this may tend to limitour ability to participate in gains from commodity price fluctuations, it alsotends to reduce the risk of loss from changes in commodity prices. We reflectcommodity contract gains and losses as adjustments to the basis of underlyingcommodities purchased; gains or losses are recognized in the statement ofoperations as a component of costs of goods sold.

 

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

 

We sell commodity beef products in our business.Commodity beef products are subject to price fluctuations that may create pricerisk. When appropriate, we enter into forward sales contracts at pricesdetermined prior to shipment. We may hedge the commodity price risk associatedwith these activities in order to mitigate this price risk.  While this maytend to limit our ability to participate in gains from commodity price fluctuations,it also tends to reduce the risk of loss from changes in commodity beef prices.We reflect commodity contract gains and losses as adjustments to the basis ofunderlying commodities sold; gains or losses are recognized in the statement ofoperations as a component of net sales.

 

We may use futures contracts in order to reduceexposure associated with entering into firm commitments to purchase live cattleat prices determined prior to delivery of the cattle as well as firmcommitments to sell certain beef products at sales prices determined prior toshipment.  In accordance with SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended, we account for futurescontracts and their related firm purchase commitments at fair value. Certainfirm commitments for live cattle purchases and all firm commitments for boxedbeef sales are treated as “normal purchases and sales” and not marked tomarket.  SFAS No. 133 imposes extensive recordkeeping requirements in order totreat a derivative instrument as a hedge for accounting purposes. Derivativesqualify for treatment as hedges when there is a high correlation between thechange in fair value of the instrument and the related change in fair value ofthe underlying commitment. For derivatives that qualify as effective hedges,the change in fair value has no net effect on earnings until the hedgedtransaction affects earnings. For derivatives that are not designated ashedging instruments, or for the ineffective portion of a hedging instrument,the change in fair value does affect current period net earnings.

 

While management believes each of these instrumentshelp mitigate various market risks, they are not designated and accounted foras hedges under SFAS No. 133 as a result of the extensive recordkeepingrequirements of this statement. Accordingly, the gains and losses associatedwith the change in fair value of the instrument and the offsetting gains andlosses associated with changes in the market value of certain of the firmcommitments related to the futures contracts are recorded to income and expensein 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.  Asof May 31, 2008, the potential change in fair value of applicable commodityprices, assuming a hypothetical 10% decrease in the underlying commodity price,was $13.6 million.  As of August 25, 2007, the potential change in fair valueof applicable commodity prices, assuming a hypothetical 10% decrease in theunderlying commodity price, was $5.2 million. 

 

20

 

 

 

 

 

 

                *ForeignOperations.*  Transactions denominated in a currency other than an entity’sfunctional currency may expose that entity to currency risk.  Although weoperate in international markets including Japan, South Korea and China,product sales are predominately made in United States dollars, and therefore,currency risks are limited.

 

*Interest Rates.*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.  

 

We have long-term debt with variable interest rates.Short-term debt is primarily comprised of the current portion of long-term debtmaturing twelve months from the balance sheet date.  Our variable interestexpense is sensitive to changes in the general level of interest rates.  As ofMay 31, 2008, the weighted average interest rate on our $239.3 million ofvariable rate debt was approximately 4.1%.

 

We had total interest expense of approximately $26.9million during the forty week period ending May 31, 2008.  The estimatedincrease in interest expense from a hypothetical 200 basis point increase inapplicable variable interest rates would have been approximately $4.0 millionin the forty week period ending May 31, 2008. 

 

 

**Item 4T. Controls and Procedures.**

We maintain a systemof controls and procedures designed to provide reasonable assurance as to thereliability of the Consolidated Financial Statements and other disclosuresincluded in this report, as well as to safeguard assets from unauthorized useor disposition. We evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as defined in the Securities ExchangeAct of 1934 Rules 13a-15(e) and 15d-15(e) under supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer. Based upon that evaluation, as of the end of the periodcovered by this Quarterly Report on Form 10-Q, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective in alerting them, in a timely manner, to material informationrequired to be included in our periodic Securities and Exchange Commissionfilings.  There have been no changes in our internal controls over financialreporting during the fourteen weeks ended May 31, 2008 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.  The design of any system of controls and proceduresis based in part upon certain assumptions about the likelihood of futureevents. 

 

21

 

 

 

 

 

 

**PARTII. OTHER INFORMATION**

**Item 1.Legal Proceedings.**

                Forinformation regarding legal proceedings, see Note 6, “Contingencies” to our ConsolidatedFinancial Statements included in Part I, Item 1 of this Form 10-Q. 

**Item 1A.Risk Factors.**

                Otherthan the satisfaction of closing conditions to complete the Agreement and oursubsequent operation by JBS thereafter, the risk factors set forth in ourAnnual Report on Form 10-K for the year ended August 25, 2007 have notmaterially changed. 

**Item 2.Unregistered Sales of EquitySecurities and Use of Proceeds.**

                None.

**Item 3.Defaults UponSenior Securities.**

                None.

**Item 4.Submission ofMatters to a Vote of Security Holders.**

                None.

**Item 5.Other Information.**

                TheCompany may purchase a portion of its outstanding Senior Notes from time totime in accordance with the limits imposed under its senior credit facility. 

**Item 6.Exhibits.**

(A)      Exhibits 

	              2.1

              
Member Interest Purchase  Agreement dated as of February 29, 2008, among JBS S.A.; National Beef  Packing Company, LLC; U.S. Premium Beef, LLC; French Basin Land and Cattle  Co., LLC; TKK Investments, LLC; S-B Enterprises V, LLC; TMKCO, LLC: John R.  Miller; Timothy M. Klein; and NBPCO Holdings, LLC (incorporated by reference  to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC  on March 5, 2008).

 

 

 

  2.2

 

First Amendment of  Membership Interest Purchase Agreement dated as of March 24, 2008, among JBS,  S.A.; National Beef Packing Company, LLC; U.S. Premium Beef, LLC; French  Basin Land and Cattle Co., LLC; TKK Investments, LLC; S-B Enterprises V, LLC;  TMKCO, LLC; John R. Miller; Timothy M. Klein; and NBPCO Holdings, LLC  (incorporated by reference to Exhibit 2.2 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended February 23, 2008, filed with the SEC on  April 4, 2008).

 

 

 

  2.3

 

Second Amendment of  Membership Interest Purchase Agreement dated as of April 3, 2008, among JBS,  S.A.; National Beef Packing Company, LLC; U.S. Premium Beef, LLC; French  Basin Land and Cattle Co., LLC; TKK Investments, LLC; S-B Enterprises V, LLC;  TMKCO, LLC; John R. Miller; Timothy M. Klein; and NBPCO Holdings, LLC  (incorporated by reference to Exhibit 2.2 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended February 23, 2008, filed with the SEC on  April 4, 2008).

 

 

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10.1

            
First Amendment to Sixth  Amended and Restated Credit Agreement dated as of June 27, 2008 by and among  the Company and certain agents, lenders and issuers (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed  with the SEC on June 30, 2008).

 

 

 

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.

 

** **

 

 

 

23

 

 

 

 

 

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 

 
National Beef Packing Company, LLC
 

 

   

By: 

   

/s/ John R. Miller

 

 

 

 

 

John R. Miller*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 11, 2008 

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