UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 1996
OR
[ ] 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 0-17060
WLR FOODS, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1295923
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
P.O. Box 7000
Broadway, Virginia 22815
(Address including Zip Code of Registrant's
principal executive offices)
(540) 896-7001
(Registrant's telephone number, including area code)
Indicate by cross mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes (X) No ()
The number of shares outstanding of Registrant's Common Stock, no par
value, at February 6, 1997 was 16,903,321 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(unaudited) Thirteen weeks ended
In thousands, except per share data December 28, December 30,
1996 1995
<S> <C> <C>
Net sales $264,424 $267,795
Cost of sales 246,307 233,533
-------- --------
Gross profit 18,117 34,262
Selling, general and administrative expenses 24,342 24,343
-------- --------
Operating income (loss) (6,225) 9,919
Other expense:
Interest expense 3,029 2,097
Miscellaneous income (818) (62)
-------- --------
Other expense 2,211 2,035
-------- --------
Earnings (loss) before income taxes and minority interest (8,436) 7,884
Income tax expense (benefit) (3,081) 3,036
Minority interest in net earnings of consolidated subsidiary 13 5
-------- --------
NET EARNINGS (LOSS) $(5,368) $4,843
======== ========
NET EARNINGS (LOSS) PER COMMON SHARE ($0.30) $0.28
AVERAGE COMMON SHARES OUTSTANDING 17,739 17,591
DIVIDENDS DECLARED PER COMMON SHARE $0.12 $0.06
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
(unaudited) Twenty-six weeks ended
In thousands, except per share data December 28, December 30,
1996 1995
<S> <C> <C>
Net sales $536,559 $518,593
Cost of sales 504,821 449,344
-------- --------
Gross profit 31,738 69,249
Selling, general and administrative expenses 47,584 50,383
-------- --------
Operating income (loss) (15,846) 18,866
Other expense:
Interest expense 6,109 4,182
Miscellaneous income (793) (203)
-------- --------
Other expense 5,316 3,979
-------- --------
Earnings (loss) before income taxes and minority interest (21,162) 14,887
Income tax expense (benefit) (7,725) 5,727
Minority interest in net earnings of consolidated subsidiary 26 21
-------- --------
NET EARNINGS (LOSS) $(13,463) $9,139
======== ========
NET EARNINGS (LOSS) PER COMMON SHARE ($0.76) $0.52
AVERAGE COMMON SHARES OUTSTANDING 17,718 17,413
DIVIDENDS DECLARED PER COMMON SHARE $0.12 $0.12
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Dollars in thousands
December 28, June 29,
1996 1996
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $320 $724
Accounts receivable, less allowance for
doubtful accounts of $1,257 and $708 79,076 79,932
Inventories (Note 2) 136,476 171,946
Income taxes receivable 1,212 10,802
Other current assets 7,366 4,275
-------- --------
Total current assets 224,450 267,679
Property, plant and equipment, net 167,459 176,691
Other assets 6,598 6,751
-------- --------
TOTAL ASSETS $398,507 $451,121
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable to banks $30,000 $30,776
Current maturities of long-term debt 7,829 7,983
Excess checks over bank balances 13,514 14,788
Trade accounts payable 35,543 31,989
Accrued expenses 22,030 23,887
Deferred income taxes 10,673 12,574
Other current liabilities 1,066 1,061
-------- --------
Total current liabilities 120,655 123,058
Long-term debt, excluding current maturities 103,018 138,510
Deferred income taxes 8,406 8,849
Minority interest in consolidated subsidiary 578 552
Other liabilities and deferred credits 3,448 3,392
Common stock subject to repurchase (Note 4) 17,750 17,750
Shareholders' equity :
Common stock, no par value 62,642 61,407
Additional paid-in capital 2,974 2,974
Retained earnings 79,036 94,629
-------- --------
Total shareholders' equity 144,652 159,010
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $398,507 $451,121
======== ========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(unaudited) Twenty-six weeks ended
Dollars in thousands December 28, December 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss) $(13,463) $9,139
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 14,289 13,776
(Gain) loss on sale of property, plant and equipment 6 (2)
Deferred income taxes (2,344) (242)
Other, net 939 299
Change in operating assets and liabilities:
(net of acquired assets)
(Increase) decrease in accounts receivable 307 (2,670)
Decrease in inventories 35,475 2,393
Decrease in other current assets 6,499 1,446
Increase in accounts payable 3,546 7,079
Decrease in accrued expenses and other (1,801) (5,466)
-------- -------
Net Cash Provided by Operating Activities 43,453 25,752
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,583) (10,415)
Cash used in acquisition, (including costs) - (10,563)
Proceeds from sales of property, plant and equipment 97 252
(Investments in) disposals of other assets (237) 158
Minority interest in net earnings of consolidated subsidiary 26 21
-------- -------
Net Cash Used in Investing Activities (4,697) (20,547)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (35,646) (12,548)
Notes payable to banks (net of principal payments) (776) 2,750
Increase (decrease) in checks drawn not presented (1,274) 8,830
Issuance of common stock 661 629
Repurchase of common stock - (2,820)
Dividends paid (2,125) (2,092)
-------- -------
Net Cash Used in Financing Activities (39,160) (5,251)
-------- -------
Decrease in Cash and Cash Equivalents (404) (46)
Cash and Cash Equivalents at Beginning of Fiscal Year 724 706
-------- -------
Cash and Cash Equivalents at End of Period $320 $660
======== =======
Supplemental cash flow information:
Cash paid (refunded) for :
Interest $4,604 $4,042
Income taxes (10,091) 2,401
</TABLE>
The Company considers all highly liquid investments with an original maturity
of 3 months or less at purchase to be cash equivalents.
Non cash transactions in:
Fiscal 1997:
The Company issued 45,000 shares of common stock valued at $0.6 million for
the acquisition of Jennings Ice, Inc. in December 1996. (Note 3)
Fiscal 1996:
The Company issued 411,216 shares of common stock valued at $5.4 million,
for the acquisition of New Hope Feeds, Inc. on September 29, 1995.
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
Notes to Consolidated Financial Statements
WLR Foods, Inc. and Subsidiaries
1. Accounting Policies
The consolidated financial statements presented herein, include the
accounts of WLR Foods, Inc. and its wholly-owned and majority-owned
subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation. The consolidated balance sheet as of
December 28, 1996, and the consolidated statements of operations for
the thirteen and twenty-six weeks ended December 28, 1996 and December
30, 1995, and the consolidated statements of cash flows for the
twenty-six weeks ended December 28, 1996 and December 30, 1995 are
unaudited. In the opinion of management, all adjustments necessary for
the fair presentation of such consolidated financial statements have
been included. Such adjustments consisted only of normal recurring
accruals and the use of estimates. Interim results are not
necessarily indicative of results for the entire fiscal year.
The consolidated financial statements and notes are presented in
conformity with the requirements of Form 10-Q and do not contain
certain information included in the Company's annual consolidated
financial statements and notes.
The Company's unaudited interim consolidated financial statements
should be read in conjunction with the consolidated financial
statements included in the Annual Report to Shareholders for the
fiscal year ended June 29, 1996. In both, the accounting policies and
principles used are consistent in all material respects. Certain
fiscal 1996 amounts have been reclassified to conform with fiscal 1997
presentations.
2. Inventories
A summary of inventories at December 28, 1996 and June 29, 1996
follows:
(unaudited)
Dollars in thousands December 28, June 29,
1996 1996
Live poultry and breeder flocks $72,191 $71,263
Processed poultry and meat products 36,075 66,895
Packaging supplies, parts and other 16,534 18,046
Feed, grain and eggs 11,676 15,742
------- -------
Total inventories $136,476 $171,946
======== ========
3. Acquisition
In December 1996, the Company issued 45,000 shares of common stock to
acquire the ice operation in Lynchburg, Virginia. The acquisition was
recorded as a purchase by the Company's subsidiary, Cassco Ice & Cold
Storage, Inc. The total value of the transaction including costs was
$581,000.
4. Subsequent Event
Following the close of the quarter, the company entered into an
agreement to repurchase 1,774,999 shares of its common stock, which
were reflected as common stock subject to repurchase in the balance
sheet. The stock is being repurchased at $10 per share, in a private
transaction. The repurchase will occur over the next six months with
50% repurchased in January 1997, 25% to be repurchased in late March
1997, and the final 25% to be repurchased in late June 1997.
5. Debt Refinancing and Modification
The Company completed the refinancing of its bank debt during early
February. The new facility is a three year $160 million revolver,
which will be used for general corporate purposes. The new facility
replaces the revolving credit note and two bank term notes.
Negotiations are progressing on modifying the senior debt facilities
with completion anticipated within the third quarter.
4
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
WLR Foods, Inc. (the Company) is a fully integrated poultry
production, processing and marketing business with operations in
Virginia, West Virginia, Pennsylvania and North Carolina.
Grain costs in the poultry processed during the quarter remained high,
increasing approximately $15 million as compared to the second quarter
last year after adjusting for changes in volume. Higher market prices
increased feed costs for the first half of 1997 by approximately $45
million as compared to the first half of fiscal 1996. Although prices
for corn and soybean meal remain above their five year average, they
have now settled substantially below their summer highs. Moreover,
sales prices of turkey products in the quarter and the first half were
not sufficient to offset the effects of higher costs.
Although developments in chicken have been encouraging, operating
results in turkey will require further improvement in order to return
to historical levels of profitability. Although feed costs are coming
down, dramatically improved results in turkey will be dependent on
selling prices which are more reflective of the costs to produce the
product, the maintenance of more normal levels of grain pricing
overall, and improved turkey health; particularly in our Carolina
operations.
Subsequent to the close of the second quarter, WLR Foods announced a
private agreement to purchase 1,774,999 shares (approximately 10 % of
the outstanding shares of its common stock) from Cuddy Farms, Inc. for
$10 per share. Fifty percent of the shares were purchased in mid
January, and the remaining shares will be purchased in March (25%) and
June (25%) of 1997. The purchase will be financed through the
Company s revolving credit facility.
On February 6, 1997, the Company completed the refinancing of its Bank
Revolving Credit Agreement. Borrowings under the new facility
replaced those under the previous revolving credit facility, a $30
million borrowing made in June 1996 and approximately $19 million of
long term debt. The new facility amends certain financial covenants
and will mature in the year 2000.
Results of operations
Net sales decreased $3.4 million or 1.3%, while overall sales pounds
decreased 2.7% for the quarter ended December 28, 1996 compared to the
same period last year. Chicken sales pounds decreased 5.4 % compared
to the second quarter last year, due to the impact of production cuts
announced last spring. The average realized sales price for chicken
was up 6.0% compared to the same quarter last year. Commodity turkey
sales pounds increased 6.2%, while the average realized sales price
decreased 5.0% compared to the same quarter last year. Further
processed sales pounds decreased 7.3%, while the average realized
sales price for further processed products was approximately the same
as last year.
For the twenty-six weeks, net sales increased $17.9 million or 3.5%,
primarily due to a 5.4% increase in chicken sales pounds and a 3.5%
increase in the average selling price of chicken. The volume increase
in chicken was due to the acquisition of the Goldsboro operations in
September 1995 which is not reflected for the full first half of
fiscal 1996. Sales pounds for commodity and further processed turkey
decreased 1.3%. Average quoted commodity prices were mixed for the
first six months with chicken 8.8% higher and turkey 6.6% lower.
Cost of sales was up $12.8 million or 5.5% for the quarter. After
adjusting for volume differences, feed costs were approximately $15
million higher in the poultry processed during the quarter as compared
to the same period last year. Delivered corn prices averaged 5.2%
lower while delivered soybean meal increased 24.7% on a quarter to
quarter comparison with last year.
For the first six months, cost of sales was up $55.5 million or 12.3%
primarily due to increased feed costs. The delivered cost for corn and
soybean meal have decreased significantly since the beginning of the
5
<PAGE>
fiscal year, but they were still 22.9% and 36.3%, respectively, higher
for the six months ended December 1996 than in the prior year.
Disease continued to adversely impact the Company s live turkey
operations during the second quarter. The combination of excessive
mortality and poor feed conversion increased live production costs
over those of unaffected flocks. The poor live operating results are
expected to improve with the onset of cooler weather, although poor
live performance may return during the hotter months. Management
continues to support public and private research to find acceptable
solutions to reduce the financial impact of the disease.
For the second quarter gross profit decreased $16.2 million or 47.2%,
while the gross margin decreased from 12.8% to 6.9%. The decrease is
attributed primarily to higher feed costs and lower selling prices for
commodity turkey. The sales volume of commodity turkey increased
6.2%, however the average realized selling price decreased 5.0%.
For the twenty-six weeks gross profit decreased $37.5 million or
54.2%. The gross margin decreased from 13.4% to 5.9%. Higher sales
volume and prices for chicken were offset by significantly higher feed
costs and lower sales volume for turkey .
Selling, general and administrative expenses were flat compared to the
second quarter last year, but increased from 9.1% to 9.2% as a percent
of sales. Year to date selling, general and administrative expenses
decreased $2.8 million, a drop from 9.7% to 8.9% as a percentage of
sales. The cut in spending reflects the effects of cost reductions
and a 14% decrease in volume of further processed turkey for the first
six months.
Interest expense was up $0.9 million for the quarter and $1.9 million
for the fiscal year due to higher levels of borrowing necessary to
carry increased working capital levels.
For the quarter, income taxes changed from an expense of $3.0 million
to a benefit of $3.1 million due to the current quarter loss. For the
first six months, income taxes decreased from an expense of $5.7
million to a benefit of $7.7 million due to the loss for the year.
The tax rate decrease for both periods in 1997 was due to limitations
on the use of operating losses in some states where the Company does
business.
Financial Condition and Liquidity
WLR Foods closed the second quarter of fiscal 1997 with a strong
balance sheet. Total inventory decreased $35.5 million compared to
the end of fiscal 1996. It is expected that debt levels will increase
during the second half of the fiscal year due to the repurchase of
Cuddy Farms, Inc. stock and seasonal increases in finished goods
inventories. Net working capital was $103.8 million, down from $144.6
million at June 29, 1996, due largely to lower inventory levels. The
ratio of total debt to total capital, including common stock subject
to repurchase as debt, was 52.3%, down from 55.1% at the end of fiscal
1996. As of December 28, 1996, total debt has been reduced by $36.4
million since fiscal year-end.
Capital Resources
The Company s capital spending for the quarter was $2.1 million,
primarily for replacement of existing equipment, safety requirements,
or projects with rapid pay backs. Depreciation expense was $7.1
million. On a year to date basis, capital spending was $4.6 million
and depreciation expense was $14.3 million. The projected capital
budget for fiscal 1997 remains at $15 million, although this amount
may be increased based on long-term strategic projects and industry
conditions.
On December 18, 1996, the Board of Directors approved the regular
quarterly dividend of $0.06 per share payable on February 7, 1997.
Management negotiated a waiver of the fixed charge covenant for the
quarter ended December 28, 1996 from its senior note lenders. The
Company is continuing discussions to modify certain of its senior note
agreements. The modifications to the senior note agreements are
expected to give the Company the flexibility necessary to meet the
demands of the current difficult operating environment.
6
<PAGE>
The Company remains in material compliance with all regulatory
requirements at the present time. WLR Foods will adopt SFAS No. 123,
Accounting for Stock Based Compensation in fiscal 1997, and will elect
the disclosure provisions of the statement and continue to account for
stock-based compensation in accordance with APB Opinion No. 25. This
accounting standard is not anticipated to materially impact the
financial position of the Company or results of operations at the time
of adoption.
Company performance expectations or forward looking statements
expressed from time to time are always subject to the possible
material impact of any risks of the business. These risks include
weather conditions impacting grain production and harvesting and live
growout of poultry; feed supplies and prices; supplies and selling
prices of poultry and competing meats; consumer preferences;
governmental and regulatory intervention in the export/import of
poultry; changes in the regulations governing production processes;
and fluctuations in the general business climate.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On December 2, 1996, the registrant issued 45,000 shares of its no par
common stock to Jennings Ice Company of Lynchburg, Virginia
(Jennings), in connection with the acquisition by the Registrant's
wholly owned subsidiary, Cassco Ice & Cold Storage, Inc. (Cassco) of
substantially all the assets of Jennings. The acquired assets
included Jennings' ice merchandisers, inventory, machinery and
equipment, and ice inventories. The shares, which were issued to a
single purchaser with no general advertising, were not registered
under the Securities Act of 1933, but were instead issued in reliance
on Section 4(2) of the Securities Act. Consequently, the resale of
the shares is restricted, and the certificates are legended
accordingly.
As reported on Form 8-K, filed by the Registrant with the Securities
Exchange Commission on October 10, 1995, on September 29, 1995 and
January 11, 1996, the Registrant issued a total of 456,936 shares of
its no par common stock in connection with its acquisition of the
chicken processing assets of New Hope Feeds, Inc. and its affiliate,
Economy Truck Leasing, Inc. Valued for purposes of this transaction
at $6,028,700, the issued shares represented a portion of the total
purchase price of $16,103,222. The stock was issued to Crestar Bank
as trustee for the benefit of New Hope Feeds, Inc. and Economy Truck
Leasing, Inc, and is subject to the terms of a Voting Trust Agreement
which will expire in September 1999. Given the limited number of
investors, the acquisitive nature of the transaction and the fact
that, pursuant to the terms of the voting trust, the stock may not be
resold to the public for a period of four years except under limited
circumstances, the stock was not registered, but was issued in
reliance on the exemption afforded by Section 4(2) of the Securities
Act of 1933.
On June 22, 1995, the Registrant issued for cash $22,000,000 of its
7.47% Senior Notes, Series B, due June 1, 2007 to a syndicate of 13
institutional investors. First Union National Bank of North Carolina
served as placement agent for the Registrant. The securities were
sold to a limited number of sophisticated, accredited investors, all
of whom represented that they were purchasing the Notes for the
purpose of investing and not with a view toward resale or
distribution, and were sold with extensive disclosure and without
general advertising. Consequently, the Notes were issued in reliance
on Section 4(2) of the Securities Act. In addition, the Registrant
took advantage of the safe harbor provided by Rule 506, filing Form D
with the Securities Exchange Commission on August 21, 1995.
On August 29, 1994, the Registrant acquired substantially all the
assets of the turkey processing division of Cuddy Farms, Inc. (Cuddy),
in exchange for 1,774,999 shares (as adjusted for a 3 for 2 stock
split on May 12, 1995) of its no par value common stock. The stock
was issued to Crestar Bank as trustee for the benefit of Cuddy
pursuant to a Voting Trust Agreement dated August 29, 1994, which
Agreement will terminate August 29, 1998. The stock issued in
connection with the Cuddy acquisition was exempt from registration
under Section 4(2), given the single purchaser, the acquisitive nature
of the transaction and the four-year holding period imposed by virtue
of the voting trust. The transaction was reported by the Registrant
on Form 8-K, filed with the Commission on September 13, 1994.
7
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Form 8-K
None.
8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed this 11th day of February, 1997, by the
Registrant's principal financial officer who is also authorized by the
Registrant to sign on its behalf.
WLR FOODS, INC.
___/s/ Robert T. Ritter___________
Robert T. Ritter, Chief
Financial Officer and duly
authorized signator for
Registrant
9
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-END> DEC-28-1996
<EXCHANGE-RATE> 1
<CASH> $320
<SECURITIES> 0
<RECEIVABLES> $79,076
<ALLOWANCES> $1,257
<INVENTORY> 136,476
<CURRENT-ASSETS> 224,450
<PP&E> 347,122
<DEPRECIATION> 179,663
<TOTAL-ASSETS> $398,507
<CURRENT-LIABILITIES> 120,655
<BONDS> 110,847
0
0
<COMMON> 80,392
<OTHER-SE> 82,010
<TOTAL-LIABILITY-AND-EQUITY> 398,507
<SALES> 264,424
<TOTAL-REVENUES> 264,424
<CGS> 246,307
<TOTAL-COSTS> 246,307
<OTHER-EXPENSES> 24,342
<LOSS-PROVISION> 550
<INTEREST-EXPENSE> 3,029
<INCOME-PRETAX> (8,436)
<INCOME-TAX> (3,081)
<INCOME-CONTINUING> (5,368)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,368)
<EPS-PRIMARY> $(0.30)
<EPS-DILUTED> $(0.30)
</TABLE>
