----

 

 **UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington****, D.C. 20549**

**Form 10-Q**

** **

**     (Markone)**

| þ |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|--------|--------|----------------------------------------------------------------------------------------------|
|   |   |                                                                                         |
|   |   | **For the quarterly period  ended February 28, 2009**                                        |

**or**

 

| o      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                          |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                   |
|   | **For the transition  period from            to          .** |

 

**Commission file number 333-111407**

 

**NATIONAL BEEF PACKING COMPANY, LLC**

*(Exact name of registrant as specified in its charter)*

 

| **DELAWARE**                                                            |   | **48-1129505**                                   |
|-------------------------------------------------------------------------|--------|--------------------------------------------------|
| **(State or other jurisdiction of**

**incorporation or organization)** |   | **(I.R.S. employer**

**identification number)** |

 

**12200 North Ambassador Drive******

**Kansas City****,  MO 64163******

(Address of principal executive offices) 

 

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

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes þ Noo

 

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

 

| LargeAccelerated Filer o | Accelerated Filer o | Non-Accelerated Filer þ  | Small Reporting Company o |
|--------------------------|---------------------|------------------------------------|---------------------------|

 

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

 

There is no market for the Registrant’s equity.  As ofApril 14, 2009, there were 203,990,136 Class A units and 15,545,948 Class Bunits 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. | 12           |
|     |                                                                                         |         |
| Item 3.  | Quantitative and Qualitative Disclosures About Market Risk.                                  | 22           |
|     |                                                                                         |         |
| Item 4T. | Controls and Procedures.                                                                     | 23           |
|     |                                                                                         |         |
|     |                                                                                         |         |
| PART II. | OTHER INFORMATION                                                                            |         |
|     |                                                                                         |         |
| Item 1.  | Legal Proceedings.                                                                           | 24           |
|     |                                                                                         |         |
| Item 1A. | Risk Factors.                                                                                | 24           |
|     |                                                                                         |         |
| Item 2.  | Unregistered Sales of Equity Securities and Use of Proceeds.                                 | 24           |
|     |                                                                                         |         |
| Item 3.  | Defaults Upon Senior Securities.                                                             | 24           |
|     |                                                                                         |         |
| Item 4.  | Submission of Matters to a Vote of Security Holders.                                         | 24           |
|     |                                                                                         |         |
| Item 5.  | Other Information.                                                                           | 24           |
|     |                                                                                         |         |
| Item 6.  | Exhibits.                                                                                    | 24           |
|     |                                                                                         |         |
|     | Signatures.                                                                                  | 26           |

 

 

                                                                                    

                                                                                                                                                                              

                                                                                                                    

                               

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”refers to U.S. Premium Beef, LLC, a Delaware limited liability company,formerly U.S. Premium Beef, Ltd., a Kansas cooperative, which owns a majorityinterest in National Beef.  

 

 

**                                                                                               **

| ii |
|----|

 

----

 

 

 

 

 

                                                                                                                                                                                                                                                                 

**PART I.  FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements.**

 

|   |
|--------|

 

 

 

 

 

1

 

----

 

 

 

 

 

**NATIONAL BEEFPACKING COMPANY, LLC**

**AND SUBSIDIARIES**

** **

**Consolidated Balance Sheets**

**(in thousands)**

| ** **                                                                                                                                                                                          | **February 28, 2009** |    |                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|---------|---------------------|
| ** **                                                                                                                                                                                          | **(unaudited)**       |    | **August 30, 2008** |
| **Assets**                                                                                                                                                                                          |                  |    |                |
| Current  assets:                                                                                                                                                                                    |                  |    |                |
| Cash  and cash equivalents                                                                                                                                                                          | $                     | 16,185  |                | $ | 25,466 |
| Accounts  receivable, less allowance for returns

         and doubtful accounts of $1,768 and

         $1,665, respectively | 165,783               |    | 218,022             |
| Due  from affiliates                                                                                                                                                                                | 2,888                 |    | 7,071               |
| Other  receivables                                                                                                                                                                                  | 6,047                 |    | 5,392               |
| Inventories                                                                                                                                                                                         | 167,530               |    | 192,480             |
| Other  current assets                                                                                                                                                                               | 28,506                |    | 12,765              |
| Total  current assets                                                                                                                                                                               | 386,939               |    | 461,196             |
|                                                                                                                                                                                                |                  |    |                |
|     Property, plant and  equipment, at cost                                                                                                                                          | 447,389               |    | 431,360             |
| Less  accumulated depreciation                                                                                                                                                                      | 152,508               |    | 133,238             |
|  Net  property, plant and equipment                                                                                                                                                            | 294,881               |    | 298,122             |
| Goodwill                                                                                                                                                                                            | 80,642                |    | 80,642              |
| Other  intangibles, net of accumulated amortization of

              $10,394 and $9,347, respectively                                  | 25,650                |    | 26,690              |
| Other  assets                                                                                                                                                                                       | 9,260                 |    | 9,252               |
|                            Total assets                                | $                     | 797,372 |                | $ | 875,902 |
| **Liabilities and Members’ Capital**                                                                                                                                                           |                  |    |                |
| Current  liabilities:                                                                                                                                                                               |                  |    |                |
| Current  installments of long-term debt                                                                                                                                                             | $                     | 8,971   |                | $ | 3,590 |
| Cattle  purchases payable                                                                                                                                                                           | 50,916                |    | 65,378              |
| Accounts  payable – trade                                                                                                                                                                      | 56,063                |    | 71,280              |
| Due  to affiliates                                                                                                                                                                                  | 355                   |    | 878                 |
| Accrued  compensation and benefits                                                                                                                                                                  | 21,345                |    | 44,455              |
| Accrued  insurance                                                                                                                                                                                  | 13,824                |    | 12,918              |
| Other  accrued expenses and liabilities                                                                                                                                                             | 30,366                |    | 10,036              |
| Distributions  payable                                                                                                                                                                              | 1,181                 |    | 43,011              |
|          Total current liabilities                                                                                                                               | 183,021               |    | 251,546             |
| Long-term  debt, excluding current installments                                                                                                                                                     | 340,396               |    | 374,239             |
| Other  liabilities                                                                                                                                                                                  | 2,212                 |    | 2,327               |
| Total  liabilities                                                                                                                                                                                  | 525,629               |    | 628,112             |
| Minority  interest                                                                                                                                                                                  | 1,909                 |    | 1,464               |
| Capital  subject to redemption                                                                                                                                                                      | 255,634               |    | 186,533             |
| Members’  capital:                                                                                                                                                                             |                  |    |                |
| Members’  capital                                                                                                                                                                              | 14,251                |    | 59,770              |
| Accumulated  other comprehensive (loss) / income                                                                                                                                                    | (51)                  |    | 23                  |
| Total  members’ capital                                                                                                                                                                        | 271,743               |    | 247,790             |
| Commitments  and contingencies                                                                                                                                                                      | -                     |    | -                   |
|                           Total liabilities and members’ capital       | $                     | 797,372 |                | $ | 875,902 |
|                                                                                                                                                                                                |                  |    |                |
| See accompanying notes to  consolidated financial statements.                                                                                                                                       |                  |    |

2

 

----

 

 

 

 

 

**NATIONAL BEEFPACKING COMPANY, LLC**

**AND SUBSIDIARIES**

** **

**Consolidated Statements of Operations**

**(in thousands)**

** **

|   |   | **13 weeks ended** | **13 weeks ended** | **26 weeks ended** |   | **26 weeks ended** |  
 

 

**February 28, 2009**

**February 23, 2008**

**February 28, 2009**

 

**February 23, 2008**

 
 

 

**(unaudited)**

**(unaudited)**

**(unaudited)**

 

**(unaudited)**

 
 
Net  sales

 

$

1,298,218

 

 

$

1,305,950

 

 

$

2,727,195

 

 

$

2,704,052

 

 
Costs  and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 
Cost  of sales

 

1,236,297

 

 

1,288,194

 

 

2,640,335

 

 

2,681,887

 

 
Selling,  general and administrative

 

10,341

 

 

10,671

 

 

21,204

 

 

21,446

 

 
Depreciation  and amortization

 

11,264

 

 

8,751

 

 

21,230

 

 

17,577

 

 
      Total costs and expenses

 

1,257,902

 

 

1,307,616

 

 

2,682,769

 

 

2,720,910

 

 
Operating  income (loss)

 

                      40,316

 

 

(1,666

)

 

44,426

 

 

(16,858

)

 
Other  income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 
Interest  income

 

50

 

 

135

 

 

106

 

 

305

 

 
Interest  expense

 

(5,567

)

 

(9,120

)

 

(12,376

)

 

(18,262

)

 
Minority  owners' interest in net

     income of  Kansas City Steak

     Company, LLC

 

(546

)

 

(421

)

 

(717

)

 

(446

)

 
Equity  in loss of aLF Ventures, LLC

 

(24

)

 

(25

)

 

(49

)

 

(50

)

 
Other,  net

 

(4,237

)

 

1,538

 

 

(3,835

)

 

1,805

 

 
Income  / (loss) before taxes

 

29,992

 

 

(9,559

)

 

27,555

 

 

(33,506

)

 
  Income tax expense 

 

192

 

 

530

 

 

561

 

 

1,080

 

 
Net  income / (loss)

 

$

29,800

 

 

$

(10,089

)

 

$

26,994

 

 

$

(34,586

)

 
 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

 

 

 
See accompanying notes to consolidated financial  statements.

** **

** **

** **

** **

 

3

 

 

 

 

 

 

** NATIONAL BEEFPACKING COMPANY, LLC**

**AND SUBSIDIARIES**

** **

**Consolidated Statements of Cash Flows**

**(in thousands)**

** **

 

**26 weeks ended**

 

**26 weeks ended**

 

**February 28, 2009**

 

**February 23, 2008**

 

**(unaudited)**

 

**(unaudited)**

Cash  flows from operating activities:

 

 

 

 

 

  Net income / (loss)

$

26,994

 

 

$

(34,586

)

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

 
 
 

 
 
  Depreciation and amortization

21,230
 
 

17,577
 
  Loss on disposal of property, plant and equipment

                       132

 

 

13

 

  Gain on disposal of investment

-

 

 

(1,342

)

  Minority interest

445
 
 

318
 
  Change in assets and liabilities:

 
 
 

 
 
       Accounts receivable

52,239

 

 

19,963

 

       Due from affiliates

4,183

 

 

(672

)

       Other receivables

(655

)

 

2,354

 

       Inventories

24,950

 

 

8,468

 

       Other assets

(15,755

)

 

(431

)

       Cattle purchases payable

(561

)

 

3,232

 

       Accounts payable

(11,735

)

 

7,750

 

       Due to affiliates

(523

)

 

(137

)

       Accrued compensation and benefits

(23,110

)

 

(2,863

)

       Accrued insurance

906

 

 

(3,714

)

       Other accrued expenses and liabilities

20,215

 

 

(321

)

           Net cash provided by operating activities

98,955

 

 

15,609

 

 

 
 
 

 
 
Cash flows from investing activities:

 
 
 

 
 
Capital expenditures, including interest capitalized

(17,969

)

 

(25,510

)

Proceeds from sale of property, plant and equipment

894
 
 

121
 
Proceeds from redemption of investment

-
 
 

1,342
 
                Net cash used in investing activities

(17,075

)

 

(24,047

)

 

 
 
 

 
 
Cash flows from financing activities:

 
 
 

 
 
Net receipts under revolving credit lines

1,451

 

 

26,761

 

Repayments of term note payable

(25,713

)

 

-

 

Change in overdraft balances

(17,383

)

 

(12,835

)

Repayments of other indebtedness

(4,200

)

 

(1,698

)

Member distributions

(45,242

)

 

(8,609

)

                Net cash (used in) / provided by financing  activities

(91,087

)

 

3,619

 

 

 

 

 

 
 
Effect of exchange rate changes on cash

(74

)

 

3
 
                     Net decrease in cash

(9,281

)

 

(4,816

)

Cash and cash equivalents at beginning of period

25,466

 

 

30,444
 
Cash and cash equivalents at end of period

$

16,185

 

 

$

25,628
         Supplemental disclosures:       
Cash paid during the period for interest$
12,008  $
18,693 
Cash  (received) / paid during the period for taxes, net of $925 and $0   refunds, respectively$
(798
) $
979
   
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**

 

                Theaccompanying unaudited Consolidated Financial Statements have been prepared inaccordance with U.S. generally accepted accounting principles (GAAP) forinterim financial information; therefore, they do not include all of theinformation and footnotes required by GAAP for complete financial statements.In the opinion of management, all adjustments considered necessary for a fairpresentation have been included using management’s best estimates and judgmentswhere appropriate.  These estimates and judgments affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements.  The estimates and judgments will alsoaffect the reported amounts for certain revenues and expenses during thereporting period.  Actual results could differ materially from these estimatesand judgments.  For further information, refer to the audited ConsolidatedFinancial Statements and Notes to Consolidated Financial Statements, which areincluded in NBP’s Annual Report on Form10-K on file with the Securities andExchange Commission (SEC) for the fiscal year ended August 30, 2008.  Theresults of operations for the interim periods presented are not necessarilyindicative of the results for a full fiscal year.

 

                NBFinance Corp., a wholly-owned finance subsidiary of NBP, is a co-issuer on ajoint and several basis with NBP of the Senior Notes, which are our seniorunsecured obligations, ranking equal in right of payment with all of our othersenior unsecured obligations.  NB Finance Corp. has nominal assets and conductsno business or operations. There are no significant restrictions on the abilityof subsidiaries to transfer funds to NBP.

 

 

** (2)New Accounting Pronouncements**

** **

                InDecember 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.141R, *Business Combinations*(SFAS 141R)*. *This statement requiresan acquirer to recognize the assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree at the acquisition date to be measuredat their fair value as of that date.  An acquirer is required to recognizeassets or liabilities arising from all other contingencies (contractualcontingencies) as of the acquisition date, measured at their acquisition-datefair values, only if it is more likely than not that they meet the definitionof an asset or a liability in FASB Concepts Statement No. 6, *Elements ofFinancial 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.  The impactto the Company from the adoption of SFAS 141R in fiscal year 2010 will dependon acquisitions at the time.

           

                InDecember 2007, the FASB issued SFAS No. 160,*Noncontrolling Interests inConsolidated Financial Statements - an Amendment of ARB No. 51* (SFAS 160). SFAS 160 establishes accounting and reporting standards for the noncontrollinginterest (minority interest) in a subsidiary.  SFAS 160 requiresnoncontrolling interests held by parties other than the parent in subsidiariesbe clearly identified, labeled, and presented in the consolidated balance sheetwithin equity, but separate from the parent's equity.   SFAS 160 iseffective for fiscal years beginning after December 15, 2008.  The Companyis currently assessing the impact SFAS 160 may have, if any, on itsconsolidated financial statements.

 

                InFebruary 2008, the FASB issued FASB Staff  Position (FSP) No. 157-2 whichdefers the effective date of SFAS No. 157, *Fair Value Measurements* (SFAS157), for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in an entity’s financialstatements on a recurring basis, at least annually.   The Company will berequired to adopt for these nonfinancial assets and nonfinancial liabilities asof August 30, 2009.  The Company believes the adoption of SFAS 157 deferralprovisions will not have a material impact on the Company’s financial positionor net earnings.

 

           

5

 

 

 

 

 

 

**(3)  Termination ofMembership Interest Purchase Agreement with JBS**

 

                As previouslyreported, on February 29, 2008, the Company, JBS, S.A. (JBS), U.S. PremiumBeef, our majority owner, and the other holders of our membership interests,including NBPCO Holdings and parties controlled by three executive officers,John R. Miller, Timothy M. Klein and Scott H. Smith (the Sellers), entered intoa Membership Interest Purchase Agreement, as amended from time to time (MIPA). Under the MIPA, if the closing of the transactions contemplated under the MIPA hadnot occurred for any reason on or before the date 360 days after the date ofexecution of the MIPA, either JBS or the Sellers could terminate the MIPA. Accordingly, on February 19, 2009, the Sellers delivered a termination noticeto JBS to terminate the MIPA effective as of February 23, 2009.  On February23, 2009, JBS paid to the Sellers a termination fee in the amount of $19.9million as per the terms of the MIPA.  Subsequent to the termination of theMIPA, the Company wrote off approximately $3.6 million of legal fees related tothe MIPA in February 2009, which are included in Other, net. 

 

 

**(4)Inventories**

 

Inventories at February 28, 2009 and August 30, 2008consisted of the following (in thousands):

 

 

**February 28, 2009**

** **

**August 30, 2008**

Dressed  and boxed meat products

$

                   115,421

 

$

                144,885

Beef  by-products

 

25,319

** **

** **

20,886

Supplies  and other

 

26,790

** **

** **

26,709

 

     Total inventory

 

$

      

             167,530

 

 

$

     

           192,480

 

** **

** (5)Comprehensive Income / (Loss)**

 

Comprehensive income / (loss), which consists of netincome / (loss) and foreign currency translation adjustments, was as followsfor the periods indicated (in thousands):

 

 

**13 weeks ended**

** **

**13 weeks ended**

** **

**26 weeks ended**

** **

**26 weeks ended**

 

**February 28, 2009**

** **

**February 23, 2008**

** **

**February 28, 2009**

** **

**February 23, 2008**

Net  income / (loss)

$

29,800

 

$

(10,089)

 

$

26,994

 

$

(34,586)

Other  comprehensive income / (loss):

 

 

 

 

 

 

 

   Foreign currency translation

     adjustments

                          (8)

 

                          (2)

 

(74)

 

            3    			

Comprehensive  income / (loss)

$

29,792

 

$

(10,091)

 

$

26,920

 

$

(34,583)

 

 

 

 

 

 

 

 

 

 

**(6)Contingencies**

** **

**           **    The Company is a party to a number of lawsuits andclaims arising out of the operation of its business.  Management believes theultimate resolution of such matters should not have a material adverse effecton the Company’s financial condition, results of operations or liquidity.

** **

**               **The Company's wholly owned subsidiary, NationalCarriers, has various independent contractor drivers who are involved inaccidents from time to time, which in the aggregate could result in a materialliability for the Company.

 

6

 

 

 

 

 

 

                TheDepartment of Justice, joined by state attorneys general from seventeen statesfiled a civil antitrust suit against JBS and the Company in October 2008 in theU.S. District Court for the Northern District of Illinois, Eastern Division,seeking a permanent injunction against the proposed acquisition of the Companyby JBS.  In November 2008, Ranchers Cattlemen Action Legal Fund, United Stockgrowersof America and the Organization for Competitive Markets filed a civil antitrustsuit against JBS and the Company in the U.S. District Court for the NorthernDistrict of Illinois, Eastern Division, seeking a permanent injunction againstthe proposed acquisition of the Company by JBS.  Subsequent to the terminationof the proposed acquisition in February 2009, these suits have been dismissed.

 

 

**(7) Fair Value Measurements**

** **

**               **In September 2006, the FASB issued SFAS 157,*FairValue Measurements*.  This statement establishes a single authoritativedefinition of fair value to be used when accounting rules require the use offair value, sets out a framework for measuring fair value and requiresadditional disclosures about fair value measurement.  SFAS 157 clarifies thatfair value is an exit price, representing the amount that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants.

 

                OnAugust 31, 2008, the Company adopted portions of SFAS 157, *Fair ValueMeasurements*, except for the non-financial assets and liabilities withinthe scope of the deferral provided by FSP No. FAS 157-2 as discussed in Note 2.

 

                SFAS157 establishes a three-level fair value hierarchy that prioritizes the inputsused 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 three levels of inputs used to measure fairvalue are as follows:

 

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

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

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

 

                Thefollowing table details the assets and liabilities measured at fair value on arecurring basis as of February 28, 2009 and also the level within the fairvalue hierarchy used to measure each category of assets (in thousands).

 

** **

** **

** **

**Description**

**February 28,**

**2009**

**Quoted Prices in**

**Active Markets for**

**Identical Assets**

**(Level 1)**

** **

**Significant Other	Observable Inputs (Level 2)**

**Significant	Unobservable Inputs**

**(Level 3)**

 

 

 

 

 

Other  current assets – derivatives

$
10,007
$
10,007
$
-
$
-
Other  accrued expenses and 

    liabilities – derivatives

 

$
20,799
 

$
12,327
 

$
 8,472
 

$
-
Capital  subject to redemption

$
255,634
$
-
$
255,634
$
-
 

                Becausethe Company’s equity is not publicly traded, there are typically significant unobservableinputs used in valuing the Company’s capital subject to redemption.  With theappraisal election notices of February 2, 2009 and the subsequent agreement on pricebetween certain redeeming members and the Company, the value of these interestswere deemed to provide a significant observable input to assist in thevaluation of all interests subject to future redemption.  For a more detailed discussion ofcapital subject to redemption and the key components that are used to value it,see Note 9.  The table below represents the Company’s capital subject toredemption measured at fair value on a recurring basis using significantunobservable inputs (Level 3) as defined in SFAS 157 and transfer to Level 2 asof February 28, 2009:

 

 

 

 

 

 

7

 

 

 

 

 

 

**Fair Value Measurements Using Significant UnobservableInputs (Level 3)**

 

**(in thousands)**

**Capital Subject**

**to Redemption**

Balance  at August 30, 2008

$
186,533 
    Allocation of year-to-date net income
 11,719 
    Class A priority distribution
  (1,051)
    			Valuation adjustment

 
58,433 
    Transfers to Level 2

 
(255,634)
Balance  at February 28, 2009

$
-
 

                InFebruary 2007, the FASB issued Statement of Financial Accounting Standards No.159 (SFAS 159), *The Fair Value Option for Financial Assets and Liabilities*. This statement provided companies with an option to report selected financialassets and liabilities at fair value.  This statement was effective for theCompany as of August 31, 2008, however, the Company did not elect the option toreport any of the selected financial assets and liabilities at fair value.

 

 

**(8)Disclosure about Derivative Instruments and Hedging Activities**

** **

                Aspart of the Company’s ongoing operations, the Company is exposed to marketrisks such as changes in commodity prices.  To manage these risks, the Companymay enter into the following derivative instruments pursuant to our establishedpolicies:

 
-  Forward     purchase contracts for cattle for use in our beef plantsExchange     traded futures contracts for cattle Exchange     traded futures contracts 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 associated with the change in fair value of the instrumentsare recorded to net sales and cost of goods sold in the period of change. Certain firm commitments for live cattle purchases and all firm commitments forboxed beef sales are treated as normal purchases and sales and not  recorded atfair value.

 

*           *    The Company enters into certain commodityderivatives, primarily with a diversified group of highly ratedcounterparties.  The maximum amount of loss due to the credit risk of thecounterparties, should the counterparties fail to perform according to theterms of the contracts, is deemed to be immaterial as of February 28, 2009 asall derivatives in an asset position are exchange-traded contracts.  Theexchange-traded contracts have been entered into under a master nettingagreement.  None of the derivatives entered into have credit-relatedcontingent features.  The Company has $17.6 million in cash collateral postedon its derivative liabilities.  

 

                The followingtable presents the fair values as discussed in Note 7 and other information regarding derivative instrumentsnot designated as hedging instruments as of February 28, 2009 (in thousands ofdollars):

 

 

**Derivative Asset**

** **

**Derivative Liability**

 

**As of February 28, 2009**

** **

**As of February 28, 2009**

 

**Balance Sheet**

**Location**

**Fair Value**

** **

**Balance Sheet**

**Location**

**Fair Value**

   

 

   

 Commodity contracts

 

 

Other current assets

 

 

 

$
10,007
 

 

Other accrued	expenses and   liabilities

 

 

 

$
20,799
       Totals

 

$
10,007
 

 

$
20,799
 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

           The following table presents the impact of derivative instrumentson the Consolidated Statement of Operations for the thirteen and twenty-sixweek periods ended February 28, 2009 (in thousands of dollars):

 

** **

**Derivatives Not Designated as**

**Hedging Instruments**

**Location of Gain or (Loss)**

**Recognized in Income**

**on Derivative**

**Amount of Gain or (Loss)**

**Recognized in**

** Income on Derivative**

 

 

**13 Weeks ended**

**February 28, 2009**

**26 Weeks ended**

**February 28, 2009**

Commodity contracts

Net sales

$
(6,025)
$
(29,549)
Commodity contracts

Cost of sales

 
6,850 
 
9,813 
   Totals            			

 

$
825 
$
(19,736)
 

 

 

 

** **

** **

**(9)Capital Subject to Redemption  **

** **

Atany time after certain dates, the earliest being July 31, 2008, the latestbeing July 31, 2011, certain members of management and/or NBPCo Holdings havethe right to request that the Company repurchase their interests, the value ofwhich is to be determined by a mutually agreed appraisal process. If theCompany is unable to effect the repurchase within a specified time, therequesting member(s) have the right to cause a sale process to commence.  On April13, 2009, the Company entered into two Unit Redemption Agreements pursuant toSection 12.5 of our Limited Liability Company Agreement, dated as ofAugust 6, 2003 (as amended from time to time, the “LLC Agreement”) toredeem at agreed upon redemption prices all ofthe membership interests in the Company that are owned or controlled by ourChief Executive Officer, John R. Miller, and an affiliate of our GeneralCounsel, Scott H. Smith (referred to herein as "Mr. Smith"), as well as 25% of the membership interests in theCompany that are owned by affiliates of our President and Chief OperatingOfficer, Timothy M. Klein.  As a result, Mr. Miller andMr. Smith and their affiliates received approximately $91.3 million and$22.8 million, respectively, for their units and are no longer members of theCompany although they each retained their positions with the Company. Mr. Klein’s affiliates received approximately $11.4 million for theirredeemed units, and he retained his position with the Company as well. 

 

TheCompany accounts for changes in the redemption value of these interests byaccreting the change in value from the date of change through the earliestredemption date of the respective interests.  At February 28, 2009, the valueof the capital subject to redemption**was determined to be $255.6 million,which was in excess of its carrying value.  Accordingly, the carrying value ofthe capital subject to redemption increased by approximately $58.4 millionthrough accretion, as detailed in Note 7, during the twenty-six weeks endedFebruary 28, 2009, resulting in the $255.6 million carrying value, as reflectedin the accompanying consolidated balance sheet as of February 28, 2009. 

** **

                Generallyaccepted accounting principles require the Company to determine the fair valueof the capital subject to redemption at the end of each reporting period.  Tothe extent that this value increases, this change in fair value is accretedover the redemption period as discussed above.  In the past, the Company has usedStern Brothers Valuation Advisors to assist management inmeasuring fair value of the capital subject to redemption.  Effective February 28, 2009, management used the agreedupon redemption prices that were used in the Unit Redemption Agreementsdiscussed above in measuring the fair value of the capital subject toredemption.

** **

                The total valueof the capital subject to redemption at February 28, 2009, increased by approximately$83.7 million compared to the value at August 30, 2008.  Offsetting the changein the value of the capital subject to redemption is a corresponding change inmembers’ capital.  

** **

** **

** **

** **

9

 

 

 

 

 

 

**(10) Segments**

** **

                The Company’soperating 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 SFAS No.131, *Disclosures about Segments of an Enterprise and Related Information*. 

 

*                CoreBeef*—the majority of NBP’s revenuesare generated from the sale of fresh meat, which include chuck cuts, rib cuts,loin cuts, round cuts, thin meats, ground beef, and other products. Inaddition, we also sell beef by-products to the variety meat, feed processing,fertilizer and pet food industries. Aggregation criteria were applied todetermine 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 controlsteak cutting operation. 

* *

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

 

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

 

 
 
**13 weeks ended**

** **
 
**13 weeks ended**

** **
 
**26 weeks ended**

** **
 
**26 weeks ended**

 
 
**February 28, 2009**

 
 
**February 23, 2008**

 
 
**February 28, 2009**

 
 
**February 23, 2008**

Net sales:
 
 

 
 
 

 
 
 

 
 
 

Core  beef
$
1,300,714

 
$
1,306,957

 
$
          2,738,573

 
$
            2,706,242

Other  
 
61,715

 
 
                 61,379

 
 
119,469

 
 
              113,029

Eliminations  
 
      (64,211)

 
 
(62,386)

 
 
(130,847)

 
 
             (115,219)

      Total net sales
$
    1,298,218

 
$
           1,305,950

 
$
          2,727,195

 
$
            2,704,052

 
 
 

 
 
 

 
 
 

 
 
 

Operating income (loss):
 
 

 
 
 

 
 
 

 
 
 

Core  beef
$
                38,095

 
$
                 (4,819)

 
$
              40,505

 
$
              (21,428)

Other
 
             2,221

 
 
 3,153

 
 
               3,921

 
 
4,570

      Total operating income

         (loss)      			
 
                 40,316

 
 
(1,666)

 
 
                  44,426

 
 
                      (16,858)

 
 
 

 
 
 

 
 
 

 
 
 

Interest income
 
50

 
 
                       135

 
 
106

 
 
              305

Interest expense
 
(5,567)

 
 
(9,120)

 
 
(12,376)

 
 
             (18,262)

Other (expense) income,

  Net
 
(4,261)

 
 
                1,513

 
 
(3,884)

 
 
                1,755

Minority interest
 
(546)

 
 
(421)

 
 
(717)

 
 
                   (446)

      Total income (loss)

         before taxes
$
               29,992

 
$
              (9,559)

 
$
              27,555

 
$
              (33,506)

 
 
 

 
 
 

 
 
 

 
 
 

 
 
**February 28, 2009**

** **
 
**February 23, 2008**

** **
 
** **

** **
 
** **

Assets:
 
 

 
 
 

 
 
 

 
 
 

Core  beef
$
              757,124

 
$
751,672

 
 
 

 
 
 

Other
 
41,078

 
 
                 37,462

 
 
 

 
 
 

Eliminations
 
(830)

 
 
                     (330)

 
 
 

 
 
 

      Total assets
$
             797,372

 
$
788,804

 
 
 

 
 
 

** **

** **

** **

10

 

 

 

 

 

 

**(11)Subsequent Events**

** **

                OnMarch 9, 2009, the Company’s newly formed, wholly-owned subsidiary, NationalBeef Leathers, LLC, acquired certain assets and assumed certain liabilities ofPrime Tanning Corp. located in St. Joseph, Missouri.  This transaction expandsthe Company’s value-based marketing strategy into the quality wet blue hidecategory.

** **

OnApril 13, 2009, the Company entered into two Unit Redemption Agreementspursuant to Section 12.5 of our LLC Agreement to redeem at agreed upon redemption prices allof the membership interests in the Company that are owned or controlled by ourChief Executive Officer, John R. Miller, and Mr. Smith, as well as 25% of the membership interests in theCompany that are owned by affiliates of our President and Chief OperatingOfficer, Timothy M. Klein.  As a result, Mr. Miller and Mr. Smithand their affiliates received approximately $91.3 million and $22.8 million,respectively, for their units and are no longer members of the Company althoughthey each retained their positions with the Company.  Mr. Klein’saffiliates received approximately $11.4 million for their redeemed units, andhe retained his position with the Company as well. 

 

Inconnection with these transactions, the LLC Agreement was amended to providethat (i) the existing appraisal processfor the valuation of the Company to be used for the remaining unitscontrolled by Mr. Klein for his rights under Section 12.5 of the LLCAgreement has been replaced with an amount equal to a two-year average of ourEBITDA (as defined in the LLC Agreement) multiplied by six minus ouroutstanding debt; and (ii) for purposes of redemption or liquidation, theClass B units controlled by Mr. Klein will be paid a non-dilution premium.

 

In order to partially finance such redemptions, theCompany created a new series of Class A units (referred to as “Class A1Units”)that were issued to U.S. Premium Beef and NBPCo Holdings, LLC for approximately$55.8 million and $19.6 million, respectively.  Class A1 Units are nonvotingand are entitled to a priority distribution of 7% per year on the face amountof the Class A1 Units payable with payment in kind Class A1 units in lieu of cash if theCompany's EBITDA does not meet certain tests.  For purposes of determiningClass B ownership for liquidation or redemption, the Class A1 Units will bedeemed to be converted to Class B units at a ratio stated in the LLC Agreement,but will remain Class A1 Units after such determination.

 

Asa result of these transactions, the ownership of our Class B votings interests isnow held as follows:

 

            		Beneficial Owner

Class B Interests (1)

Percentage of Class

 

U.S. Premium Beef, LLC

NBPCo Holdings, LLC

Affiliates of Timothy M. Klein 

 

12,537,001.0612

 4,468,723.0518

1,071,429.0000

 

63.3527%

24.7203%

   5.9270%

_____________

                (1) For purposes of a redemption orliquidation event assuming no redemptions of any Class A1 Units.

 

The Company also financed a portion of the redemptions with $50.0million of new borrowings under the revolving line of creditof itsexisting credit facility (as amended, the "Credit Facility"). The Company’sCredit Facility was amended on April 13, 2009 to permit these redemptions, increase theborrowings under our term loan by up to $75.0****million, increase therevolving line of credit by $25.0 million, increase the interest rates of theterm loan and revolving line of credit,  shorten the maturity date of the termloan to July 2012 and revise the payment schedule of the term loan, among otherthings.  The related financing charges, an upfront fee of approximately $0.8million and an arrangement fee of approximately $0.5 million, will be amortizedover the life of the loan.  

 

11

 

 

 

 

 

 

**Item2.  Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

** **

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

** **

** **

**DisclosureRegarding Forward-Looking Statements**

**                               **

                This report contains “forward-lookingstatements,” which are subject to a number of risks and uncertainties, many ofwhich are beyond our control.  Forward-looking statements are typicallyidentified by the words “believe,” “expect,” “anticipate,” “intend,” “estimate”and similar expressions.  Actual results could differ materially from thosecontemplated by these forward-looking statements as a result of many factors, includingeconomic conditions generally and in our principal markets, the availabilityand prices of live cattle and commodities, food safety, livestock disease,including the identification of cattle with Bovine Spongiform Encephalopathy (BSE),competitive practices and consolidation in the cattle production and 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. 

** **

                In light of these risks and uncertainties,there can be no assurance that the results and events contemplated by theforward-looking information contained in this report will in fact transpire.Readers are cautioned not to place undue reliance on these forward-lookingstatements. We do not undertake any obligation to update or revise anyforward-looking statements. All subsequent written or oral forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by these factors.  See also the *Risk Factors*in Item 1A. Business of our Annual Report for the year ended August 30,2008 on 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**

 

**           **Concernabout consumer spending and the demand for all proteins, specifically beef,will continue to dominate the industry outlook over the coming months. Declining cattle and competing meat supplies have been well documented andshould be supportive to prices, however, demand continues to take centerstage.  The global economic concerns remain unchanged while the value of theU.S. dollar has declined and could begin to be supportive to beef exports whileslowing the recent improvements in import volume.  Beef by-products remainunder severe pressure and it will take several months before inventories becomemanageable on several key items.  Boxed beef will continue to be required tocarry a larger percentage of total processing returns, particularly relative tothe levels realized over the past two years. 

**               **

 

**RecentDevelopments**

** **

                Continuedworld financial instability and foreign currency deviations have decreased thedemand and value of certain industry products and inventories.

** **

                On February 19,2009, U. S. Premium Beef, our majority owner, and the other holders of ourmembership interests, including NBPCO Holdings and parties controlled by threeexecutive officers, John R. Miller, Timothy M. Klein and Scott H. Smith (theSellers), delivered a termination notice to JBS, S.A. to terminate theMembership Interest Purchase Agreement, as amended (MIPA), effective as ofFebruary 23, 2009.  On February 23, 2009, JBS paid to the Sellers a terminationfee in the amount of $19.9 million as per the terms of the MIPA.  Subsequent tothe termination of the MIPA, the Company wrote off approximately $3.6 millionof legal fees related to the MIPA in February 2009, which are included inOther, net. 

 

 

12

 

 

 

 

 

 

OnApril 13, 2009, we entered into two Unit Redemption Agreements pursuant toSection 12.5 of our Limited Liability Company Agreement, dated as ofAugust 6, 2003 (as amended from time to time, the “LLC Agreement”) toredeem at agreed upon redemption prices all ofthe membership interests in us that are owned or controlled by our ChiefExecutive Officer, John R. Miller, and an affiliate of our General Counsel, ScottH. Smith (referred to herein as, "Mr. Smith"), as well as 25% of the membership interests in us that are ownedby affiliates of our President and Chief Operating Officer, Timothy M.Klein.  As a result, Mr. Miller and Mr. Smith and their affiliatesreceived approximately $91.3 million and $22.8 million, respectively, for theirunits and are no longer members of us although they each retained theirpositions with us.  Mr. Klein’s affiliates received approximately $11.4million for their redeemed units, and he retained his position with us as well.

 

Inconnection with these transactions, the LLC Agreement was amended to providethat (i) the existing appraisal processfor the valuation of us to be used for the remaining units controlled byMr. Klein for his rights under Section 12.5 of the LLC Agreement hasbeen replaced with an amount equal to a two-year average of our EBITDA (asdefined in the LLC Agreement) multiplied by six minus our outstanding debt; and(ii) for purposes of redemption or liquidation, the Class B units controlledby Mr. Klein will be paid a non-dilution premium.

 

In order to partially finance such redemptions, we createda new series of Class A units (referred to as “Class A1Units”) that were issuedto U.S. Premium Beef and NBPCo Holdings, LLC for approximately $55.8 millionand $19.6 million, respectively.  Class A1 Units are nonvoting and are entitledto a priority distribution of 7% per year on the face amount of the Class A1Units payable with payment in kind Class A1 Units in lieu of cash if our EBITDA does notmeet certain tests.  For purposes of determining Class B ownership forliquidation or redemption, the Class A1 Units will be deemed to be converted toClass B units at a ratio stated in the LLC Agreement, but will remain Class A1Units after such determination.

 

Asa result of these transactions, the ownership of our Class B voting interests isas follows:

 

      Beneficial Owner

Class B Interests (1)

Percentage of Class

 

U.S. Premium Beef, LLC

NBPCo Holdings, LLC

Affiliates of Timothy M.

Klein 

 

12,537,001.0612

 4,468,723.0518

  

1,071,429.0000

 

69.3527%

24.7203%

 

  5.9270%

_____________

                (1) For purposes of a redemption or liquidationevent assuming no redemptions of any Class A1 Units.

 

Wealso financed a portion of the redemptions with $50.0 million of new borrowingsunder the revolving line of credit of our existing creditfacility (as amended, the "Credit Facility").  Our Credit Facilitywas amended on April 13, 2009 to permit these redemptions, increase theborrowings under our term loan by up to $75.0****million, increase therevolving line of credit by $25.0 million, increase the interest rates of theterm loan and revolving line of credit, shorten the maturity date of the termloan to July 2012 and revise the payment schedule of the term loan, among otherthings.  For a more complete description of the material amendments to ourCredit Facility, see “Liquidity and Capital Resources–Amended and RestatedSenior Credit Facility.”

 

 

**BeefExport Markets**

 

                Exportmarkets for U.S. beef products remain constrained since the discovery of a caseof Bovine Spongiform Encephalopathy (BSE) in the State of Washington inDecember 2003, as well as other isolated cases.  In July 2006, Japan agreed toreopen its market to U.S. beef from cattle aged 20 months and younger.   InApril 2008, our Brawley facility was suspended from shipping beef to Japanfollowing the discovery of a short loin which included a portion of a spinalcolumn, a specified risk material, prohibited by Japan.  Our Brawley facilitywas subsequently cleared to resume shipments to Japan on September 19, 2008.  SouthKorea announced a provisional opening of its border to U.S. beef from animals30 months and younger in September 2006, however, its border was subsequentlyclosed in October 2007.  South Korea reopened its border and started inspectingU.S. beef near the end of June 2008.  Our Dodge City facility was removed fromthe eligible supplier list to Mexico on December 23, 2008 for two days for analleged ink issue in September of 2008 which we believe to be untrue andunfounded.  These constraints and uncertainties have had a negative impact onbeef margins.

** **

13

 

 

 

                We cannotpresently assess the full economic impact of the consequences of BSE on theU.S. beef packing industry or on our operations.  Existing or new importrestrictions or additional regulatory restrictions or disruptions in domesticconsumer demand for beef may continue to have a material adverse affect on ourrevenues and net income.

** **

** **

**Resultsof Operations**

** **

***Thirteen weeks ended February 28, 2009 compared to thirteen weeks endedFebruary 23, 2008***

 

*General.* Net income for the thirteen weeks ended February 28, 2009 was approximately $29.8million compared to a net loss of approximately $10.1 million for the thirteenweeks ended February 23, 2008, an improvement of approximately $39.9 million. Total costs and expenses of approximately $1,257.9 million and $1,307.6 millionfor the thirteen weeks ended February 28, 2009 and February 23, 2008,respectively, were 96.9% as a percent of sales for the thirteen weeks endedFebruary 28, 2009 compared to 100.1% for the thirteen weeks ended February 23,2008.  A relatively stable demand for beef products and a decline in cattleprices during the second quarter of fiscal 2009 as compared to the same periodof fiscal 2008 allowed the sales prices to cover the cost of the live cattlethat we processed.

 

*Net Sales*. Net sales were approximately $1,298.2 million for the thirteen weeks endedFebruary 28, 2009 compared to approximately $1,306.0 million for the thirteenweeks ended February 23, 2008, a decrease of approximately $7.8 million, or 0.6%. The slight decrease in net sales resulted primarily from an average decrease insales prices per head of 0.5% in the thirteen weeks ended February 28, 2009than the same period in the prior year while the volume of cattle processedremained relatively unchanged.   

 

               *Costof Sales*.  Cost of sales was approximately $1,236.3 million for thethirteen weeks ended February 28, 2009 compared to approximately $1,288.2million for the thirteen weeks ended February 23, 2008, a decrease ofapproximately $51.9 million, or 4.0%.   The decrease was primarily a result ofdecreased live cattle prices that were approximately 8.8% lower than the sameperiod of last year. 

 

               *Selling,General and Administrative Expenses*.  Selling, general and administrativeexpenses were approximately $10.3 million for the thirteen weeks ended February28, 2009 compared to approximately $10.7 million for the thirteen weeks endedFebruary 23, 2008, a decrease of approximately $0.4 million, or 3.7%.  Thedecrease primarily reflects a decrease in legal expense of approximately $0.8million, a decrease in travel and related expenses of approximately $0.2million and a decrease in consulting expense of approximately $0.2 million. Offsetting these decreases was an increase in the provision for bad debts ofapproximately $0.5 million and an increase in payroll and related expenses ofapproximately $0.3 million.

 

               *Depreciationand Amortization Expense*.  Depreciation and amortization expenses wereapproximately $11.3 million for the thirteen weeks ended February 28, 2009compared to approximately $8.8 million for the thirteen weeks ended February23, 2008, an increase of approximately $2.5 million, or 28.4%.  Depreciationexpense increased due to assets being placed into service, primarily at ourthree beef plants and two case ready plants, during fiscal year 2008 and toassets being placed into service, primarily at our two Kansas beef plants, latein the first quarter of fiscal 2009.

* *

*Operating Income/Loss*.  Operating income was approximately $40.3 millionfor the thirteen weeks ended February 28, 2009 compared to an operating loss ofapproximately $1.7 million for the thirteen weeks ended February 23, 2008, animprovement of approximately $42.0 million.  The increased operating income resultedfrom a relatively stable demand for beef products and lower cattle prices whichallowed the sales prices to cover the cost of the live cattle that we processedduring the second quarter of fiscal 2009 as compared to the same period of lastyear.  

 

14

 

 

 

 

               *InterestExpense*.  Interest expense was approximately $5.6 million for the thirteenweeks ended February 28, 2009 compared to $9.1 million for the thirteen weeksended February 23, 2008, a decrease of $3.5 million or 38.5%.  The decrease ininterest expense during the thirteen weeks ended February 28, 2009 as comparedto the same period last year was due primarily to the purchase and cancellationof our Senior Notes of approximately $30.6 million and $2.3 million during thefourth quarter of fiscal 2008 and the first quarter of fiscal 2009, respectively. The repayment of approximately $25.7 million of our term note in December 2008also contributed to the decline in interest expense for the current quarter.  Inaddition, the weighted average principal amount of our variable rate debtdecreased by approximately $19.1 million at February 28, 2009 as compared toFebruary 23, 2008.   Also contributing to the decrease in interest expense waslower interest rates on our variable rate debt, a decrease of approximately 347basis points, during the thirteen weeks ended February 28, 2009 as compared tothe same period of last year. 

 

               *Other,net. *Other, net non-operating expense was approximately $4.2 million forthe thirteen weeks ended February 28, 2009 compared to other, net non-operatingincome of approximately $1.5 million for the thirteen weeks ended February 23,2008, a decrease of approximately $5.7 million.  The decrease in other, netnon-operating income was primarily related to the write-off of approximately$3.6 million of legal fees related to the termination of the MIPA in February2009.  Also contributing to the decrease was the approximate $0.7 millionwrite-off of obsolete parts at our case ready facilities during the currentquarter.  In addition, we had recorded $1.3 million in proceeds received inredemption of an investment interest in which our basis had previously beenwritten down to zero during the second quarter of fiscal 2008 which did notrecur in the current quarter.  

 

               *IncomeTax Expense*.  Income tax expense was $0.2 million for the thirteen weeksended February 28, 2009 compared to $0.5 for the same period of fiscal year2008, a decrease of $0.3 million, or 60.0%.  Beginning in calendar year 2008,some states in which we conduct business, modified their business taxes, usingnet income, or a modification of net income, as the basis.  The modification ofthese state taxes necessitated the inclusion of approximately $0.1 million ofthese business taxes in income tax expense during the thirteen weeks ended February28, 2009 as compared to the same period of fiscal 2008.  A decrease in incometaxes for the period of approximately $0.4 million was related to oursubsidiary, National Carriers.  Income tax expense is recorded on income fromNational Carriers, which is organized as a C Corporation.  

** **

*** ***

***Twenty-six weeks ended February 28, 2009 compared to twenty-six weeksended February 23, 2008***

 

*General.* Net income for the twenty-six weeks ended February 28, 2009 was approximately$27.0 million compared to a net loss of approximately $34.6 million for thetwenty-six weeks ended February 23, 2008, an improvement of approximately $61.6million.  Net sales were higher in the twenty-six weeks ended February 28, 2009compared to those of the prior period primarily due to an average increase insales prices per head of approximately 2.8%.  The number of cattle processedduring the current twenty-six week period was 1.6% less than the same period oflast year. 

 

Total costs and expenses of approximately $2,682.8million and $2,720.9 million for the twenty-six weeks ended February 28, 2009and February 23, 2008, respectively, were 98.4% as a percent of sales for thetwenty-six weeks ended February 23, 2008 compared to 100.6% for the twenty-sixweeks ended February 23, 2008.  A relatively stable demand for beef products andlower cattle prices allowed for increased sales prices to cover the cost of thelive cattle that we processed during the twenty-six week period of fiscal 2009as compared to the same period of fiscal 2008.

* *

*Net Sales*. Net sales were approximately $2,727.2 million for the twenty-six weeks endedFebruary 28, 2009 compared to approximately $2,704.1 million for the twenty-sixweeks ended February 23, 2008, an increase of approximately $23.1 million, or 0.9%. The slight increase in net sales resulted primarily from an average increase insales prices per head of 2.8% in the twenty-six weeks ended February 28, 2009  ascompared to the same period in the prior year while the volume of cattleprocessed decreased by approximately 1.6%.  Partially offsetting the increasein average sales prices per head was an approximate $12.2 million loss on the fairvalue adjustment on cattle futures contracts that we entered into during thefirst quarter of fiscal 2009 to offset the risk of fixed-price salescommitments.  This $12.2 million loss excludes the impact from related physicalpurchase and sales transactions which will impact future periods operatingresults.

 

15

 

 

 

 

 

 

               *Costof Sales*.  Cost of sales was approximately $2,640.3 million for thetwenty-six weeks ended February 28, 2009 compared to approximately $2,681.9million for the twenty-six weeks ended February 23, 2008, a decrease ofapproximately $41.6 million, or 1.6%.  The decrease was primarily a result of decreasedlive cattle prices that were approximately 3.5% lower than the twenty-six weekperiod of last year.  Also contributing to this decrease was decreased cattleprocessing of approximately 1.6% for the current twenty-six week period endedFebruary 28, 2009 as compared to the same period of fiscal 2008.

 

               *Selling,General and Administrative Expenses*.  Selling, general and administrativeexpenses were approximately $21.2 million for the twenty-six weeks endedFebruary 28, 2009 compared to approximately $21.4 million for the twenty-sixweeks ended February 23, 2008, a decrease of approximately $0.2 million, or0.9%.  The decrease for this period is primarily due to an approximate $0.8million decrease in legal fees, a decrease in advertising expense ofapproximately $0.3 million, a decrease in travel and related expenses ofapproximately $0.3 million, and an approximate $0.2 million decrease inconsulting expense.  Partially offsetting these decreases was an increase inpayroll and benefit expenses of approximately $0.8 million and an approximate$0.5 million increase in the provision for bad debts during the current periodas compared to the same period of last year. 

 

               *Depreciationand Amortization Expense*.  Depreciation and amortization expenses wereapproximately $21.2 million for the twenty-six weeks ended February 28, 2009compared to approximately $17.6 million for the twenty-six weeks ended February23, 2008, an increase of approximately $3.6 million, or 20.5%.  Depreciationexpense increased due to assets being placed into service, primarily at ourthree beef plants and two case ready plants, during fiscal year 2008 and toassets being placed into service, primarily at our two Kansas beef plants, latein the first quarter of fiscal 2009.

 

*Operating Income/Loss*.  Operating income was approximately $44.4 millionfor the twenty-six weeks ended February 28, 2009 compared to operating loss ofapproximately $16.9 million for the twenty-six weeks ended February 23, 2008,an improvement of approximately $61.3 million.  The improved operating incomeresulted from a relatively stable demand for beef products and lower cattleprices which allowed the sales prices to cover the cost of the live cattle thatwe processed in the current twenty-six week period as compared to the sameperiod of last year.  

 

               *InterestExpense*.  Interest expense was approximately $12.4 million for the twenty-sixweeks ended February 28, 2009 compared to $18.3 million for the twenty-sixweeks ended February 23, 2008, a decrease of approximately $5.9 million or 32.2%. The decrease in interest expense during the twenty-six weeks ended February 28,2009 as compared to the same period last year was due primarily to the purchaseand cancellation of our Senior Notes of approximately $30.6 million and $2.3million during the fourth quarter of fiscal 2008 and the first quarter offiscal 2009, respectively.   The repayment of approximately $25.7 million ofour term note in December 2008 also contributed to the decline in interestexpense for the twenty-six week period.  In addition, the weighted averageprincipal amount of our variable rate debt decreased by approximately $18.9million at February 28, 2009 as compared to February 23, 2008.   Alsocontributing to the decrease in interest expense was lower interest rates onour variable rate debt, a decrease of approximately 290 basis points, duringthe twenty-six weeks ended February 28, 2009 as compared to the same period oflast year. 

 

               *Other,net.*  Other, net non-operating expense was approximately $3.8 million forthe twenty-six weeks ended February 28, 2009 compared to other, netnon-operating income of approximately $1.8 million for the twenty-six weeksended February 23, 2008, a decrease of approximately $5.6 million.  Thedecrease in other, net non-operating income was primarily related to thewrite-off of approximately $3.6 million of legal fees related to the terminationof the MIPA in February 2009.  Also contributing to the decrease was theapproximate $0.7 million write-off of obsolete parts at our case readyfacilities during the current quarter.  In addition, we had recorded $1.3million in proceeds received in redemption of an investment interest in whichour basis had previously been written down to zero during the twenty-six weekperiod of fiscal 2008 as compared to the same period of fiscal 2009. 

 

16

 

 

 

 

 

 

               *Income Tax Expense*.  Income tax expense was $0.6 million for the twenty-six weeks endedFebruary 28, 2009 compared to $1.1 million for the same period of fiscal year2008, a decrease of $0.5 million, or 45.5%.  Beginning in calendar year 2008,some states in which we conduct business, modified their business taxes, usingnet income, or a modification of net income, as the basis.  The modification ofthese state taxes necessitated the inclusion of approximately $0.1 million ofthese business taxes in income tax expense during the twenty-six weeks ended February28, 2009 as compared to the same period of fiscal 2008.  A decrease in incometaxes for the period of approximately $0.7 million was related to oursubsidiary, National Carriers.  Income tax expense is recorded on income fromNational Carriers, which is organized as a C Corporation.  

** **

** **

**SegmentResults**

** **

                The Company’soperating 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 SFAS No.131, *Disclosures about Segments of an Enterprise and Related Information*. 

 

*                CoreBeef*—the majority of NBP’s revenuesare generated from the sale of fresh meat, which include chuck cuts, rib cuts,loin cuts, round cuts, thin meats, ground beef, and other products.  Inaddition, we also sell beef by-products to the variety meat, feed processing,fertilizer and pet food industries.  Aggregation criteria were applied todetermine 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 controlsteak cutting operation. 

* *

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

 

 

 

 

** **

 

17

 

 

 

 

 

 

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

 

 
 
**13 weeks ended**

** **
 
**13 weeks ended**

** **
 
**26 weeks ended**

** **
 
**26 weeks ended**

 
 
**February 28, 2009**

 
 
**February 23, 2008**

 
 
**February 28, 2009**

 
 
**February 23, 2008**

Net sales:
 
 

 
 
 

 
 
 

 
 
 

Core  beef
$
1,300,714

 
$
1,306,957

 
$
          2,738,573

 
$
2,706,242

Other  
 
61,715

 
 
                 61,379

 
 
119,469

 
 
              113,029

Eliminations  
 
      (64,211)

 
 
(62,386)

 
 
(130,847)

 
 
             (115,219)

      Total net sales
$
    1,298,218

 
$
1,305,950

 
$
          2,727,195

 
$
2,704,052

 
 
 

 
 
 

 
 
 

 
 
 

Operating income (loss):
 
 

 
 
 

 
 
 

 
 
 

Core  beef
$
                38,095

 
$
                 (4,819)

 
$
              40,505

 
$
(21,428)

Other
 
             2,221

 
 
 3,153

 
 
               3,921

 
 
4,570

      Total operating income

         (loss)      		
 
                 40,316

 
 
(1,666)

 
 
                  44,426

 
 
                      (16,858)

 
 
 

 
 
 

 
 
 

 
 
 

Interest income
 
50

 
 
                       135

 
 
106

 
 
              305

Interest expense
 
(5,567)

 
 
(9,120)

 
 
(12,376)

 
 
             (18,262)

Other (expense) income,

  Net
 
(4,261)

 
 
                1,513

 
 
(3,884)

 
 
                1,755

Minority interest
 
(546)

 
 
(421)

 
 
(717)

 
 
                   (446)

      Total income (loss)

         before taxes
$
               29,992

 
$
              (9,559)

 
$
              27,555

 
$
(33,506)

 
 
 

 
 
 

 
 
 

 
 
 

 
 
**February 28, 2009**

** **
 
**February 23, 2008**

** **
 
** **

** **
 
** **

Assets:
 
 

 
 
 

 
 
 

 
 
 

Core  beef
$
              757,124

 
$
               751,672

 
 
 

 
 
 

Other
 
41,078

 
 
                 37,462

 
 
 

 
 
 

Eliminations
 
(830)

 
 
                     (330)

 
 
 

 
 
 

      Total assets
$
             797,372 		

 
$
               788,804

 
 
 

 
 
 

** **

*** ***

***Thirteen weeks ended February 28, 2009 compared to thirteen weeks endedFebruary 23, 2008***

 

***Core Beef***

 

*Net Sales*. Net sales for Core Beef were approximately $1,300.7 million for the thirteenweeks ended February 28, 2009 compared to approximately $1,307.0 million forthe thirteen weeks ended February 23, 2008, a decrease of approximately $6.3million, or 0.5%.  The slight decrease in net sales resulted primarily from anaverage decrease in sales prices per head of 0.5% for the current thirteen weekperiod as compared to the same period of last year while the volume of cattleprocessed remained relatively unchanged.  

 

*Operating Income / Loss*.  The operating income for Core Beef wasapproximately $38.1 million for the thirteen weeks ended February 28, 2009compared to an operating loss of approximately $4.8 million for the thirteenweeks ended February 23, 2008, an improvement of approximately $42.9 million.  Thisincreased operating income resulted from a relatively stable demand for beef productsand lower cattle prices which allowed the sales prices to cover the cost of thelive cattle that we processed during the current thirteen week period ascompared to the same period of last year.

 

 

 

 

18

 

 

 

 

 

 

***Other***

 

               *NetSales*.  Net sales for Other were approximately $61.7 million for thethirteen weeks ended February 28, 2009 compared to approximately $61.4 millionfor the thirteen weeks ended February 23, 2008, an increase of approximately$0.3 million, or 0.5%.  The increase was primarily due to increased salesvolume in our portion control beef facility which was offset by a reduction insales in our transportation operations during the thirteen week period offiscal 2009 as compared to the same period of last year.

 

*Operating Income*.  Operating income for Other was approximately $2.2 million for thethirteen weeks ended February 28, 2009 compared to approximately $3.2 millionfor the thirteen weeks ended February 23, 2008, a decrease of approximately$1.0 million, or 31.3%.  The decrease was due primarily to a reduction ofoperating income of our transportation operations due to increased cost ofsales which was offset by improved operating income of our portion control beeffacility during the thirteen week period of fiscal 2009 as compared to the sameperiod of last year.

 

 

***Twenty-six weeks ended February 28, 2009 compared to twenty-six weeksended February 23, 2008***

 

***Core Beef***

 

*Net Sales*. Net sales for Core Beef were approximately $2,738.6 million for the twenty-sixweeks ended February 28, 2009 compared to approximately $2,706.2 million forthe twenty-six weeks ended February 23, 2008, an increase of approximately $32.4million, or 1.2%.  The slight increase in net sales resulted primarily from anaverage increase in sales prices per head of 2.8% for the twenty-six weeksended February 28, 2009 as compared to the same period of last year, partiallyoffset by a 1.6% decrease in the number of cattle slaughtered.  Partiallyoffsetting the increase in average sales prices per head was an approximate$12.2 million loss on the mark-to-market adjustment on cattle futures contractsthat we entered into during the first quarter of fiscal 2009 to offset the riskof fixed-price sales commitments.

 

*Operating Income /Loss*.  Operating income for Core Beef was approximately$40.5 million for the twenty-six weeks ended February 28, 2009 compared tooperating loss of approximately $21.4 million for the twenty-six weeks endedFebruary 23, 2008, an improvement of approximately $61.9 million.  The improvedoperating income resulted from  a relatively stable demand for beef products andlower cattle prices which allowed the sales prices to cover the cost of thelive cattle that we processed in the current twenty-six week period as comparedto the same period of last year.  

 

***Other***

 

               *NetSales*.  Net sales for Other were approximately $119.5 million for thetwenty-six weeks ended February 28, 2009 compared to approximately $113.0million for the twenty-six weeks ended February 23, 2008, an increase ofapproximately $6.5 million, or 5.8%.  The increase in net sales was primarily dueto increased sales volume in our portion control facility while the sales inour transportation operations remained relatively unchanged during thetwenty-six week period of fiscal 2009 as compared to the same period of lastyear.

 

*Operating Income*.  Operating income for Other was approximately $3.9 million for thetwenty-six weeks ended February 28, 2009 compared to approximately $4.6 millionfor the twenty-six weeks ended February 23, 2008, a slight decrease ofapproximately $0.7 million.  The decrease was due primarily to a reduction ofoperating income of our transportation operations due to increased total costswhich was offset by improved operating income of our portion control beeffacility during the current twenty-six week period of fiscal 2009 as comparedto the same period of last year.

 

 

19

 

 

 

 

 

 

**Liquidityand Capital Resources**

 

As of February 28, 2009, we had net working capital ofapproximately $203.9 million, which included $1.2 million in distributionspayable and cash and cash equivalents of $16.2 million.  As of August 30, 2008,we had net working capital of approximately $209.6 million, which included$43.0 million in distributions payable and cash and cash equivalents of $25.5million.  Our primary sources of liquidity are cash flows from operations andavailable borrowings under our amended and restated credit facility (CreditFacility).

 

As of February 28, 2009, we had $349.4 million oflong-term debt, of which $9.0 million was classified as a current liability. As of February 28, 2009, our Credit Facility consisted of a $176.9 million termloan, all of which was outstanding, and a $200.0 million revolving line ofcredit loan, which had outstanding borrowings of $12.8 million, outstandingletters of credit of $42.2 million and available borrowings of $145.0 million,based on the most restrictive financial covenant calculations.  Cash flows fromoperations and borrowings under our Credit Facility have funded our workingcapital requirements, acquisitions, capital expenditures and other generalcorporate purposes.  We were in compliance with all of our financial covenantsunder our Credit Facility as of February 28, 2009.

 

Effective April 13, 2009, we amended our CreditFacility to increase the available borrowings under the facility by increasingthe revolving line of credit by $25.0 million and the term loan by  up to $75.0million.  We used $50.0 million from the revolver and $75.5million from the issuance of Class A1 Units to finance the redemption of themembership interests from certain members of management and their affiliatespursuant to their rights under the LLC Agreement.

 

In addition to outstanding borrowings under our CreditFacility, we had outstanding borrowings under industrial revenue bonds of $20.7million, senior notes of $127.1 million and capital leases and otherobligations of $11.9 million as of February 28, 2009.  

 

                Webelieve that available borrowings under our Credit Facility and cash providedby operating activities will be sufficient to support our working capital,capital expenditures and debt service requirements for the foreseeable future.  Weare required to purchase or redeem $100.0 million of our outstanding SeniorNotes on or before December 31, 2009.  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 ofour 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 30, 2008.

* *

*OperatingActivities*

 

                Netcash provided by operating activities in the twenty-six weeks ended February28, 2009 was approximately $99.0 million compared to net cash provided byoperating activities of approximately $15.6 million in the twenty-six weeksended February 23, 2008.  The $83.4 million change was primarily due to a netincome of approximately $27.0 million during the twenty-six week period offiscal year 2009 as compared to the net loss of $34.6 million during the sameperiod of fiscal 2008.  Also contributing to the improvement was net cash beingprovided in operating activities through accounts receivable, inventory, andother accrued expenses and liabilities, which was offset by net cash used inoperating activities through accrued compensation and benefits, accountspayable and other assets in the current year.

 

*InvestingActivities*

 

Net cash used in investing activities wasapproximately $17.1 million in the twenty-six weeks ended February 28, 2009compared to approximately $24.0 million in the twenty-six weeks ended February23, 2008.  This decrease in cash used was primarily attributable to a reductionin expenditures for property, plant and equipment related to improvingoperating efficiencies in the current year.

* *

* *

* *

20

 

 

 

 

 

 

*FinancingActivities*

 

                Netcash used in financing activities was approximately $91.1 million in thetwenty-six weeks ended February 28, 2009 compared to net cash provided byfinancing activities of approximately $3.6 million in the twenty-six weeksended February 23, 2008.  The change was primarily attributed to an approximate$25.3 million decrease in revolving credit borrowings, an approximate $36.6million increase in member distributions paid and approximately $25.7 millionin repayments on our term note during the current twenty-six week period ascompared to the same period of last year.  

 

*Amendedand Restated Senior Credit Facility*

 

Effective April 13, 2009, our Credit Facility wasamended to permit the redemption of our membership interests in the amount of$125.5 million, including the authorization and issuance of Class A1 Units tohelp fund the redemption.  In addition, the terms of our Credit Facility wereamended to:  (1) increase the borrowings under our Credit Facility by up to$100.0 million; (2) increase the applicable margin on the rates of interest ofthe term loan and revolving line of credit;  (3) revise the payment schedule of the term loan;(4) shorten the maturity date of the term loan; (5) remove the restrictions onpurchasing our Senior Notes and require the repurchase or redemption of $100million of our Senior Notes; (6) increase the amount of capital expenditures wecan make in any fiscal year from $50 million to $60 million, or $65 million ifwe expend less than $55 million in the immediately preceding fiscal year; and (7)add a financial covenant requiring us to maintain a Funded Debt to EBITDAratio.  The related financing charges, an upfront fee of approximately $0.8million and an arrangement fee of approximately $0.5 million, will be amortizedover the life of the loan.

 

               Once the applicable collateral provisions are satisfied, theCredit Facility will consist of up to $251.9 million under a term loan that matures in July2012 and arevolving line of credit loan of $225.0 million that matures in July2012 that is subject to certain borrowing base limitations.  

 

                Borrowingsunder the Credit Facility bear interest at LIBOR or the Base Rate, plus theapplicable margin.  The applicable margin for the revolving line of credit andthe term loan will be based on borrowing base availability with grids greaterthan $150.0 million, $50.0 to $150.0 million and less than $50.0 million.  Asof April 14, 2009, the interest rates for the revolving loan and the term loanwere approximately 5.75% and 6.00%, respectively.  

 

               Our funded debt to EBITDA ratio is not to be more than 3.75 to 1.00 at the endof each fiscal quarter.  If the borrowing base availability is less than $50.0 million for fiveconsecutive business days or less than $35.0 million on any single business dayduring any fiscal quarter, a fixed charge ratio of 1:15 to 1:00 must bemaintained at the end of each subsequent fiscal quarter until the borrowingbase availability has been greater than or equal to $50.0 million for 90consecutive days.   The advance rates under the borrowing base are 90% oneligible accounts and 70% on eligible inventory.  As of April 14, 2009, we hadmet the borrowing base availability requirements under our Credit Facility.

 

                Theborrowings under the revolving loan are available for our working capitalrequirements, capital expenditures and other general corporate purposes,including the purchase of $100.0 million of our Senior Notes on or beforeDecember 31, 2009.  The Credit Facility is secured by a first priority lien onsubstantially all of the Company’s assets.  The principal amount outstandingunder the term loan is due and payable in equal installments of approximately $2.5million on the last business day of each June and December commencing December2009 through December 2010 after which payments increase to approximately $4.8million.  All outstanding amounts of the term loan are due and payable on July25, 2012.  Prepayment is allowed at any time.

                TheCredit Facility contains customary affirmative covenants, including, withoutlimitation, conduct of business, the maintenance of insurance, compliance withlaws, maintenance of properties, keeping of books and records, and thefurnishing of financial statements.  The facility also contains customarynegative covenants, including without limitation, restrictions on thefollowing:  distributions, mergers, sale of assets, investments andacquisitions, encumbrances, indebtedness, affiliate transactions, and ERISAmatters.

21

 

 

 

 

 

 

                TheCredit Facility contains customary events of default, including withoutlimitation, 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, the failure of any of the loandocuments to remain in full force, and the Company’s failure to properly fundits employee benefit plans.  The facility also includes customary provisionsprotecting the lenders against increased cost or loss of yield resulting fromchanges in tax, reserve, capital adequacy and other requirements of law.

 

** **

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

* *

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

 

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

 

                Wepurchase cattle for use in our processing businesses. When appropriate, 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. When appropriate, 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 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 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. 

 

                Wemay use futures contracts in order to reduce exposure associated with enteringinto firm commitments to purchase live cattle at prices determined prior todelivery of the cattle as well as firm commitments to sell certain beefproducts at sales prices determined prior to shipment. In accordance with SFASNo. 133, *Accounting for Derivative Instruments and Hedging Activities*,as amended, we account for futures contracts and their related firm purchasecommitments at fair value. Certain firm commitments for live cattle purchasesand all firm commitments for boxed beef sales are treated as “normal purchasesand sales” and not marked to market.  SFAS No. 133 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 under SFAS No. 133as a result of the extensive recordkeeping requirements of this statement.Accordingly, the gains and losses associated with the change in fair value ofthe instrument and the offsetting gains and losses associated with changes in themarket value of certain of the firm purchase commitments related to the futurescontracts are recorded to income and expense in the period of change.

 

22

 

 

 

 

 

 

                Weuse a sensitivity analysis to evaluate the effect that changes in the marketvalue of commodities will have on these commodity derivative instruments.  Wefeel that sensitivity analysis more appropriately reflects the potential marketvalue exposure associated with the use of derivative instruments.  As of February28, 2009, the potential change in the fair value of applicable commodityprices, assuming a hypothetical 10% decrease in the underlying commodity pricein each year, was $17.1 million.  As of August 30, 2008, the potential changein fair value of applicable commodity prices, assuming a hypothetical 10%decrease in the underlying commodity price, was $1.2 million.  This significantchange was primarily due to the cattle futures contracts that we entered intoduring the first quarter of fiscal 2009 to offset the risk of fixed-price salescommitments.

 

               *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 and South Korea, product salesare predominately made in United States dollars, and therefore, currency risksare limited.

 

*                InterestRates.*As a result of our normalborrowing and leasing activities, our operating results are exposed tofluctuations in interest rates, which we manage primarily through our regularfinancing activities. We generally maintain limited investments in cash andcash 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 variable interest expense is sensitive to changesin the general level of interest rates.  As of February 28, 2009, the weightedaverage interest rate on our $210.4 million of variable rate debt wasapproximately 2.1%.

 

                Wehad total interest expense of approximately $12.4 million during the twenty-sixweek period ending February 28, 2009.  The estimated increase in interestexpense from a hypothetical 200 basis point increase in applicable variableinterest rates would have been approximately $2.5 million in the twenty-sixweek period ending February 28, 2009. 

 

 

**Item4T.  Controls and Procedures**

 

We maintain a system of controls and proceduresdesigned to provide reasonable assurance as to the reliability of theConsolidated Financial Statements and other disclosures included in thisreport, as well as to safeguard assets from unauthorized use or disposition. Weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in the Securities Exchange Act of 1934Rules 13a-15(e) and 15d-15(e) under supervision and with the participationof management, including our Chief Executive Officer and Chief FinancialOfficer. Based upon that evaluation, as of the end of the period covered by thisQuarterly Report on Form 10-Q, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective inalerting them, in a timely manner, to material information required to beincluded in our periodic Securities and Exchange Commission filings.  Therehave been no changes in our internal controls over financial reporting duringthe thirteen weeks ended February 28, 2009 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.  The design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events. 

 

 

 

23

 

 

 

 

 

 

**PART II. OTHER INFORMATION**

** **

**Item1. Legal Proceedings.**

 

                Forinformation regarding legal proceedings, see Note 6, “Contingencies” to ourConsolidated Financial Statements included in Part I, Item 1 of this Form10-Q. 

** **

**Item1A. Risk Factors.**

 

The risk factors set forth in our Annual Report onForm 10-K for the year ended August 30, 2008 have not materially changed. 

** **

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds.**

 

None.

** **

**Item3. Defaults Upon Senior Securities.**

 

None.

** **

**Item4. Submission of Matters to a Vote of Security Holders.**

 

None.

** **

**Item5. Other Information.**

 

None.

** **

**Item6. Exhibits.**

** **

(A)

 

Exhibits

 
3.1(a) Amendment of a portion of Section 6.6 of the LLC			Agreement.			  			 3.1(b) Amendment of a portion of Section 12.5 of the LLC			Agreement.			  			 3.1(c) Summary of Class A1 Units.			  			 
10.1
 
Fourth Amendment  to  Membership Interest Purchase Agreement dated as of February 19, 2009, 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.

 
 
 

10.2
 
Unit Redemption Agreement  dated as of April 13, 2009, among the Company and Timothy M. Klien, TKK			Investments, LLC and TMKCo., LLC.
    10.3 Unit			Redemption Agreement dated as of April 13, 2009, among the Company			and John R. Miller, French Basin Land and Cattle Co., LLC, and S-B			Enterprises V, LLC.
 
 
 

10.4
 
Second amendment to the  Sixth Amended and Restated Credit Agreement dated as of April 13,  2009 by and among the Company and certain agents, lenders and issuers.

 
 
 

31.1 
 
Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.

 
 
 

 

24

 

 

 

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.

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

**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: April 15, 2009 

			26 |
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