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 EXCHANGE ACT OF 1934
For the quarterly period ended January 1, 2000
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 January 31, 2000 was 16,594,400 shares.
<PAGE>
PART 1. 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 January 1, December 26,
2000 1998
<S> <C> <C>
Net sales $218,803 $229,276
Cost of sales 184,181 191,486
------- -------
Gross profit 34,622 37,790
Selling, general and administrative expenses 26,388 22,696
------- -------
Operating income 8,234 15,094
Other expense (income):
Interest expense 1,182 3,003
Gain on sale of Goldsboro complex - 118
Other expense (income), net (633) 325
------- -------
Other expense, net 549 3,446
------- -------
Earnings before income taxes 7,685 11,648
Income tax expense 2,901 4,426
------- -------
Net earnings before extraordinary charge 4,784 7,222
Extraordinary charge on early extinguishment of
debt, net of tax - (954)
------- -------
Net earnings $4,784 $6,268
======= =======
Basic net earnings per common share, before
extraordinary charge $0.28 $0.43
<PAGE>
Basic net loss per common share, extinguishment
of debt - (0.06)
------- -------
Total basic net earnings per common share $0.28 $0.37
======= =======
Diluted net earnings per common share, before
extraordinary charge $0.28 $0.43
Diluted net loss per common share, extinguishment
of debt - (0.06)
------- -------
Total diluted net earnings per common share $0.28 $0.37
======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Twenty-six weeks ended
In thousands, except per share data January 1, December 26,
2000 1998
<S> <C> <C>
Net sales $420,810 $467,216
Cost of sales 356,886 388,129
------- -------
Gross profit 63,924 79,087
Selling, general and administrative expenses 50,744 48,103
------- -------
Operating income 13,180 30,984
Other expense (income):
Interest expense 2,415 7,889
Gain on sale of Goldsboro complex - (7,754)
Other expense (income), net (1,004) 303
------- -------
Other expense, net 1,411 438
------- -------
Earnings before income taxes 11,769 30,546
Income tax expense 4,443 11,608
------- -------
Net earnings from continuing operations 7,326 18,938
Earnings from discontinued operations, net of tax - 664
Gain on disposal of discontinued operations, net
of tax - 15,499
------- -------
Total earnings from discontinued operations - 16,163
Extraordinary charge on early extinguishment of
debt, net of tax - (2,559)
------- -------
Net earnings $7,326 $32,542
======= =======
3
<PAGE>
Basic net earnings per common share, continuing
operations $0.43 $1.12
Basic net earnings per common share, discontinued
operations - 0.97
Basic net loss per common share, extinguishment
of debt - (0.15)
------- -------
Total basic net earnings per common share $0.43 $1.94
======= =======
Diluted net earnings per common share, continuing
operations $0.43 $1.12
Diluted net earnings per common share,
discontinued operations - 0.95
Diluted net loss per common share, extinguishment
of debt - (0.15)
------- -------
Total diluted net earnings per common share $0.43 $1.92
======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Dollars in thousands
January 1, July 3,
2000 1999
ASSETS (unaudited)
Current Assets
<S> <C> <C>
Cash and cash equivalents $340 $210
Accounts receivable, less allowance for
doubtful accounts of $2,433 and $1,909. 51,563 59,026
Inventories (Note 2) 105,617 106,679
Income taxes receivable - 355
Other current assets 3,057 6,427
------- -------
Total current assets 160,577 172,697
Property, plant and equipment, net 103,780 107,945
Deferred income taxes 1,486 3,009
Other assets 5,625 5,446
------- -------
TOTAL ASSETS $271,468 $289,097
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $5,575 $5,046
Excess checks over bank balances 8,631 13,912
Trade accounts payable 26,384 26,500
Accrued payroll and related benefits 14,760 24,729
Other accrued expenses 10,679 8,677
Deferred income taxes 9,243 9,817
------- -------
Total current liabilities 75,272 88,681
Long-term debt, excluding current maturities 38,412 48,845
Other liabilities and deferred credits 6,726 7,636
5
<PAGE>
Shareholders' equity:
Common stock, no par value 68,922 69,125
Additional paid-in capital 2,974 2,974
Retained earnings 79,162 71,836
------- -------
Total shareholders' equity 151,058 143,935
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $271,468 $289,097
======= =======
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
WLR FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Twenty-six weeks ended
Dollars in thousands January 1, December 26,
2000 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $7,326 $32,542
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss on early extinguishment of
debt, net of tax - 2,559
Depreciation and amortization 9,471 11,421
(Gain) loss on sale of property, plant and
equipment (632) 142
Gain on sale of Goldsboro complex - (7,754)
Gain on sale of discontinued operation - (24,998)
Deferred income taxes 950 12,261
Valuation allowance on assets held for sale - 1,380
Other, net (5) (284)
Change in operating assets and liabilities:
Decrease in accounts receivable 7,463 7,697
Decrease in inventories 1,062 19,343
(Increase) decrease in other current assets (25) 345
Increase in long-term assets (601) (682)
Decrease in accounts payable (116) (804)
Increase (decrease) in accrued expenses and
other (8,877) 6,097
------- -------
Net Cash Provided by Operating
Activities 16,016 59,265
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,034) (15,032)
7
<PAGE>
Notes receivable 3,750 -
Proceeds from sale of discontinued operation - 53,928
Proceeds from sale of Goldsboro complex - 37,582
Proceeds from sale of property, plant and
equipment 781 95
------- -------
Net Cash Provided by (Used in) Investing (503) 76,573
Activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of revolver and long-term
debt 366,084 218,113
Payments on revolver and long-term debt (375,983) (353,386)
Financing costs paid - (1,767)
Increase (decrease) in checks drawn not presented (5,281) 703
Repurchase of common stock (466) -
Issuance of common stock 263 361
------- -------
Net Cash Used in Financing Activities (15,383) (135,976)
------- -------
Increase (decrease) in Cash and Cash Equivalents 130 (138)
Cash and Cash Equivalents at Beginning of Fiscal
Year 210 335
------- -------
Cash and Cash Equivalents at End of Period $340 $197
======= =======
Supplemental cash flow information:
Cash paid for:
Interest $2,262 $10,241
Income taxes 4,104 5,811
The Company considers all highly liquid investments with maturities of 3
months or less at purchase to be cash equivalents.
Non-cash financing activities:
In fiscal 1999:
8
<PAGE>
The Company recorded 142,384 stock warrants at a value of $904,136 which
related to the February 1998 debt refinancing in the first quarter.
The Company had 28,180 stock warrants expired at a value of $178,943 when a
portion of the February 1998 debt was repaid in the first quarter.
The Company incurred an extraordinary charge, net of tax on early
extinguishment of debt in the amount of $2.6 million.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
9
<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 subsidiaries. All
material balances and transactions have been eliminated in
consolidation. The consolidated balance sheet as of January 1, 2000,
and the consolidated statements of operations for the thirteen and
twenty-six weeks ended January 1, 2000 and December 26, 1998, and the
consolidated statements of cash flows for the twenty-six weeks ended
January 1, 2000 and December 26, 1998 are unaudited. In the opinion of
management, all adjustments necessary for 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 for 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 July 3, 1999. In both, the accounting policies and
principles used are consistent in all material respects.
2. Inventories
A summary of inventories at January 1, 2000 and July 3, 1999 follows:
(unaudited)
Dollars in thousands January 1, July 3,
2000 1999
Live poultry and breeder flocks $50,366 $48,275
Processed poultry and meat products 26,375 31,510
Packaging supplies, parts and other 12,678 12,859
Feed, grain and eggs 16,198 14,035
------- -------
Total inventories $105,617 $106,679
======= =======
10
<PAGE>
3. Stockholders' Equity
On December 14, 1999, the Company's Board of Directors authorized the
repurchase of up to $10 million of the Company's common stock in the
open market. As of January 1, 2000, the Company had repurchased
79,450 shares of its common stock for $465,505.
Subsequent to January 1, 2000 and through February 4, 2000, the
Company repurchased 99,725 additional shares of its common stock in
connection with its repurchase program.
4. Earnings Per Share
The following is a reconciliation between the calculation of basic and
diluted net earnings per common share:
In thousands, except for per 13 Weeks Ended 13 Weeks Ended
share data January 1, December 26,
2000 1998
Basic EPS Computation
Numerator - Net earnings $4,784 $6,268
====== ======
Denominator:
Common shares outstanding 16,568 16,466
Effect of outstanding stock warrants 320 322
------ ------
Basic weighted average common shares
outstanding 16,888 16,788
====== ======
Basic earnings per common share $0.28 $0.37
====== ======
Diluted EPS Computation
Numerator - Net earnings $4,784 $6,268
====== ======
Denominator:
Common shares outstanding 16,568 16,466
Effect of outstanding stock options - 15
Effect of outstanding stock warrants 320 322
------ ------
Diluted weighted average common
shares outstanding 16,888 16,803
====== ======
Diluted earnings per common share $0.28 $0.37
====== ======
11
<PAGE>
In thousands, except for per 26 Weeks Ended 26 Weeks Ended
share data January 1, December 26,
2000 1998
Basic EPS Computation
Numerator - Net earnings $7,326 $32,542
====== =======
Denominator:
Common shares outstanding 16,559 16,447
Effect of outstanding stock
warrants 312 297
------ ------
Basic weighted average common
shares outstanding 16,871 16,744
====== ======
Basic earnings per common share $0.43 $1.94
====== ======
Diluted EPS Computation
Numerator - Net earnings $7,326 $32,542
====== =======
Denominator:
Common shares outstanding 16,559 16,447
Effect of outstanding stock
options - 10
Effect of outstanding stock
warrants 312 515
------ ------
Diluted weighted average common
shares outstanding 16,871 16,972
====== ======
Diluted earnings per common share $0.43 $1.92
====== ======
5. Sale of Assets
The Company completed the sale of its Cassco Ice & Cold Storage
subsidiary on July 31, 1998 for net proceeds of approximately $54
million, resulting in a gain of approximately $25 million ($15 million
after tax). Earnings from operations in the first quarter of fiscal
1999 were approximately $1 million ($0.7 million after tax). Both
items relating to the sale have been segregated from continuing
operations and reported as separate line items on the statement of
operations.
12
<PAGE>
In August 1998, the Company completed the sale of its Goldsboro, North
Carolina chicken complex. Net proceeds of approximately $37 million
resulted in a gain of approximately $8 million ($5 million after tax).
Due to the permanent reduction in long-term debt resulting from the
sale of the Cassco subsidiary and the Goldsboro complex, the Company
incurred an extraordinary loss of approximately $2.6 million ($1.6
million after tax) on the write-off of capitalized debt costs.
6. Segment Information
The Company retroactively adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" for the year ended
July 3, 1999. This statement requires companies to report certain
information about operating segments in their financial statements and
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by
management in deciding how to allocate resources and in assessing
performance.
The Company has two reportable segments: Chicken and Turkey. The
third segment, Other, includes revenues from the Company's protein
conversion plants, unallocated corporate related items and other
miscellaneous items. Chicken segment revenues are primarily sales of
chicken related products, such as retail tray pack items, whole birds
cut up for fast food restaurants and portion-controlled products for
food service distributors. Turkey segment revenues are primarily
sales of turkey related products and further processed products,
including both turkey and chicken items, produced at the Company's
further processing plants. These items include fresh and frozen whole
birds and parts, including retail tray pack items, turkey burgers and
a full line of further processed products, including deli meats,
frankfurters and salads. To better utilize its feed manufacturing
capabilities, the Company sells feed to other users, primarily from
its Marshville, NC feedmill. Sales from this mill were included in
Turkey segment sales through the first quarter of fiscal 1999, when
the complex was converted to chicken processing and the sales since
then have been included in the Chicken segment. Each segment is
evaluated by management based on operating profit (loss) and net
earnings (loss).
The following tables set forth specific operating information about
each segment as reviewed by the Company's management. Net earnings
(loss) for segment reporting is prepared on the same basis as that
used for consolidated net earnings (loss). Administrative services
13
<PAGE>
provided by the corporate offices are primarily allocated to the
individual segments based on levels of inventories and property, plant
and equipment. Due to certain assets which are shared between
segments, management evaluates assets and capital expenditures on a
consolidated basis; therefore, such information is not presented on a
segment basis.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Chicken Turkey Other Elimina - Total
Dollars in thousands tions
Thirteen Weeks ended
January 1, 2000
External segment revenues $93,957 $122,879 $1,967 $ - $218,803
Intersegment revenues - - 3,135 (3,135) -
------ ------- ------ ------ -------
Total revenues 93,957 122,879 5,102 (3,135) 218,803
Interest expense 587 619 - (24) 1,182
Depreciation expense 2,428 1,658 349 - 4,435
Interest income - 100 30 (24) 106
Income taxes (benefit) (1,858) 4,215 544 - 2,901
Net earnings (loss) from
continuing operations (3,063) 6,951 896 - 4,784
Thirteen Weeks ended
December 26, 1998
External segment revenues $105,539 $121,821 $1,916 $ - $229,276
Intersegment revenues - - 3,313 (3,313) -
------- ------- ------- ------- -------
Total revenues 105,539 121,821 5,229 (3,313) 229,276
Interest expense 1,423 1,590 8 (18) 3,003
Depreciation expense 2,491 1,953 349 - 4,793
Gain on sale of Goldsboro
complex 118 - - - 118
Interest income - 2 17 (18) 1
Income taxes 1,990 1,767 669 - 4,426
Net earnings from
continuing operations 3,247 2,883 1,092 - 7,222
Extraordinary charge - - (954) - (954)
14
<PAGE>
Chicken Turkey Other Elimina - Total
Dollars in thousands tions
Twenty-six Weeks ended
January 1, 2000
External segment revenues $196,308 $220,650 $3,852 $ - $420,810
Intersegment revenues - - 6,278 (6,278) -
------- ------- ------- ------- -------
Total revenues 196,308 220,650 10,130 (6,278) 420,810
Interest expense 1,214 1,248 - (47) 2,415
Depreciation expense 4,952 3,420 678 - 9,050
Interest income - 198 88 (47) 239
Income taxes (benefit) (1,895) 5,235 1,103 - 4,443
Net earnings (loss) from
continuing operations (3,124) 8,633 1,817 - 7,326
Twenty-six Weeks ended
December 26, 1998
External segment revenues $224,764 $238,348 $4,104 $ - $467,216
Intersegment revenues - - 6,675 (6,675) -
------- ------- ------- ------- -------
Total revenues 224,764 238,348 10,779 (6,675) 467,216
Interest expense 3,338 4,409 180 (38) 7,889
Depreciation expense 4,419 4,233 726 - 9,378
Gain on sale of Goldsboro
complex 7,754 - - - 7,754
Interest income 1 4 37 (38) 4
Income taxes (benefit) 11,184 (202) 626 - 11,608
Net earnings (loss) from
continuing operations 18,247 (330) 1,021 - 18,938
Extraordinary charge - - (2,559) - (2,559)
</TABLE>
15
<PAGE>
A reconciliation of total segment profits to consolidated net earnings is as
follows:
<TABLE>
<CAPTION>
Thirteen Thirteen Twenty-six Twenty-six
Weeks Weeks Weeks Weeks
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
<S> <C> <C> <C> <C>
Segment profit $4,784 $7,222 $7,326 $18,938
Unallocated:
Earnings from discontinued
operations, net of tax - - - 664
Gain on sale of
discontinued operations,
net of tax - - - 15,499
Extraordinary charge on
early extinguishment of
debt, net of tax - (954) - (2,559)
------- ------- ------- -------
Net earnings $4,784 $6,268 $7,326 $32,542
======= ======= ======= =======
</TABLE>
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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.
Operating income for the second quarter of fiscal 2000 was $8.2
million, a decrease of $6.9 million when compared to the same quarter
last year. The decrease is primarily due to lower chicken segment
pricing of $14.7 million and increased selling, general and
administrative expenses of $3.7 million, offset by increased turkey
segment pricing of $0.5 million, lower accrued employee incentives of
$2.9 million, operational savings of approximately $5.5 million, and
other improvements of approximately $2.6 million.
RESULTS OF OPERATIONS
The Company's results are reported on a consolidated basis. The
following analysis of operating results emphasizes the chicken and
turkey segments, which account for approximately 99% of the Company's
revenues. Any revenues and expenses not included in the chicken and
turkey segments are reported in the Company's other segment for
purposes of segment reporting.
Net sales from continuing operations for the quarter were $218.8
million, a decrease of $10.5 million, or 4.6%, from the second quarter
of fiscal 1999. The $10.5 million decrease is from reductions in
chicken segment net sales of $11.6 million, partially offset by
increases in turkey segment net sales of $1.1 million.
For the first six months of fiscal 2000, net sales from continuing
operations decreased $46.4 million, or 9.9%, to $420.8 million, compared
to $467.2 million for the same period last year. The $46.4 million
decrease is from declines in chicken, turkey and other segment
revenues of $28.5 million, $17.7 million, and $0.2 million,
respectively.
In the chicken segment, the decrease in net sales of $11.6 million,
or 11.0%, to $94.0 million in the second quarter of fiscal 2000, is
due to decreased poultry product sales. Net sales of poultry products,
primarily chicken, decreased 11.3% to $90.7 million for the second
quarter of fiscal 2000. The 11.3% decrease was the result of a price
decrease of 14.4%, partially offset by a volume increase of 3.1%. For
the first six months of fiscal 2000, the decrease in net sales of
$28.5 million is due primarily from decreased poultry product sales
of approximately $28 million and decreased feed sales of approximately
17
<PAGE>
$0.5 million. The $28 million decrease, or 12.8%, in poultry product
sales, is the result of a 17.9% decrease in pricing partially offset
by increased volumes of 5.1%.
The turkey segment net sales improvement of $1.1 million, or 0.9%, to
$122.9 million in sales for the second quarter of fiscal 2000 is
primarily from increased poultry product sales. Poultry product sales
in the turkey segment increased 0.7%, or $0.9 million, to $122.3
million in the second quarter of fiscal 2000. The 0.7% increase is the
result of increased pricing and volumes of 0.4% and 0.3%,
respectively. For the first six months of fiscal 2000, turkey segment
sales decreased $17.7 million, primarily due to decreased poultry
product sales of $15.4 million, or 6.5%, the result of an 7.5%
decrease in volume, partially offset by increased pricing of 1.0%.
Cost of sales from continuing operations were $184.2 million, a
decrease of $7.3 million, or 3.8% from the second quarter of fiscal
1999. The decrease of $7.3 million results from lower cost of sales in
the chicken, turkey and other segments of $2.7 million, $4.5 million
and $0.1 million, respectively.
For the first six months of fiscal 2000, cost of sales from continuing
operations were $356.9 million, a decrease of $31.2 million, or 8.0%,
from the same period last year. The decrease of $31.2 million is the
result of decreases in the chicken, turkey and other segments of $3.3
million, $27.5 million, and $0.4 million, respectively.
In the chicken segment, cost of sales were $87.9 million in the second
quarter, a decrease of $2.7 million, or 3.0%, when compared to the
same quarter last year. This decrease is primarily attributable to
increased operating efficiencies at the Marshville, North Carolina
plant, which was only in the start up phase during last year's second
quarter. For the first six months of fiscal 2000, chicken segment
cost of sales decreased $3.3 million, or 1.8%, to $179.6 million. This
decrease is primarily attributable to lower corn and soybean meal
costs of approximately $3.0 million and lower processing costs at the
Marshville plant, partially offset by increased production volumes
through the Marshville complex.
Cost of sales in the turkey segment decreased $4.5 million, or 4.5%,
to $95.4 million in the second quarter of fiscal 2000. This decrease
when compared to the same quarter last year is primarily due to
improvements in operating efficiencies at the Franconia, Pennsylvania
further processing plant of approximately $2 million and an
improvement in live performance (excluding feed costs) of almost $2
million. The Franconia improvements are the result of consolidating
the smaller Monroe, North Carolina plant into the Franconia facility
during the third quarter of fiscal 1999. For the first six months of
18
<PAGE>
fiscal 2000, turkey segment cost of sales decreased $27.5 million, or
13.5%, to $175.5 million. This decrease is primarily the result of
planned decreases in production and sales volumes in turkey products
of approximately $14 million, lower corn and soybean meal costs of
approximately $3 million, improvements of approximately $2.6 million
in live bird performance (excluding feed costs) and savings of
approximately $3.5 million from improved operating efficiencies at the
Franconia further processing plant.
For the second quarter of fiscal 2000, gross profit from continuing
operations was $34.6 million, a decrease of $3.2 million, or 8.5% from
the same quarter last year. The net effect of product pricing was a
decline of $14.2 million for the quarter, with lower chicken pricing
of $14.7 million more than offsetting higher turkey prices of $0.5
million. Grain costs for corn and soybean meal were virtually
unchanged when comparing this year's second quarter performance to the
same period last year. Operational changes at Marshville and
Franconia produced combined savings of approximately $5.5 million.
Other improvements of approximately $5.5 million in gross profits were
primarily the result of improved live bird performance and decreases
in accrued employee incentives due to decline in profitability.
Gross profit from continuing operations for the first six months of
fiscal 2000 was $63.9 million, a 19.2% decrease, or $15.2 million from
the same period last year. The net effect of product pricing was a
decline of $36.6 million for the six months, with lower chicken
pricing of $38.9 million partially offset by improved turkey prices of
$2.3 million. Lower grain costs for corn and soybean meal contributed
approximately $6 million of improvements for the six months. Other
improvements of approximately $15 million in gross profits were
primarily the result of improved live bird performance, lower plant
costs due to higher utilizations, improvements in other feed
ingredient costs and formulations, and decreases in accrued employee
incentives.
Selling, general and administrative expenses for the second quarter
were $26.4 million, an increase of $3.7 million, or 16.3% when
compared to the same quarter last year, primarily the result of
increased promotional spending. For the first six months of fiscal
2000, selling, general and administrative expenses increased $2.6
million, or 5.5%, to $50.7 million. The increase is primarily the
result of increased promotional spending, partially offset by
decreases in accrued employee expenses and a one-time charge of $1.5
million during the first quarter of fiscal 1999 for assets, primarily
at the Monroe facility, that could not be utilized in the Company's
turkey operations.
Interest expense was $1.2 million for the second quarter of fiscal
2000, a decrease of $1.8 million, or approximately 61%, when compared
19
<PAGE>
to the same quarter in fiscal 1999. For the first six months of
fiscal 2000, interest expense was $2.4 million, a decrease of $5.5
million, or approximately 69%, when compared to the same period last
year. The decreases, for the quarter and the six months, are the
result of substantially lower debt levels and lower interest rates
resulting from a new credit facility entered into during November of
1998.
In the prior year, the gain on the sale of the Goldsboro complex
resulted from the Company's sale, on August 14, 1998, of its
Goldsboro, North Carolina chicken processing plant, feed mill and
hatchery for approximately $37 million in net proceeds, which were
used to reduce long term debt. The pre-tax gain on the sale was
approximately $8 million.
Net earnings from continuing operations were $4.8 million (or $0.28
per diluted share) for the second quarter of fiscal 2000, a decrease
of $2.4 million as compared to the net earnings of $7.2 million (or
$0.43 per diluted share) for the second quarter of fiscal 1999. Net
earnings from the chicken segment decreased $6.3 million, offset
partially by increased net earnings in the turkey segment and
decreased net earnings in the other segments of $4.1 million and $0.2
million, respectively. For the first six months of fiscal 2000, net
earnings from continuing operations were $7.3 million, or $0.43 per
diluted share, versus net earnings from continuing operations of $18.9
million, or $1.12 per diluted share in the same period last year. Net
earnings from the chicken segment decreased $21.4 million, offset
partially by increased net earnings in the turkey and other segments
of $9.0 million and $0.8 million, respectively.
On July 31, 1998 the Company sold its Cassco Ice and Cold Storage,
Inc. subsidiary for approximately $54 million in net proceeds. The
net proceeds from the sale were used to reduce long-term debt. During
the first quarter of fiscal 1999, the Company recorded a $15.5 million
after-tax gain on the sale. The after-tax Cassco income from
discontinued operations was $0.7 million in the first quarter of
fiscal 1999.
During the first quarter of fiscal 1999, the Company recorded an
extraordinary after-tax charge of $1.6 million for the early
extinguishment of debt, due to the permanent reduction in long-term
debt resulting from the sale of the Cassco subsidiary and the
Goldsboro complex.
In conjunction with the November 20, 1998 debt refinancing, the
Company recorded an extraordinary after-tax charge of $1.0 million
during the second quarter of fiscal 1999, representing the write-off
of remaining capitalized debt costs pertaining to the prior credit
facility.
20
<PAGE>
Net earnings for the second quarter of fiscal 2000 were $4.8 million,
or $0.28 per diluted share, compared with net earnings for the same
quarter of fiscal 1999 of $6.3 million, or $0.37 per diluted share.
The prior year net earnings included an extraordinary after-tax non-
cash charge related to the write-off of debt costs pertaining to the
Company's prior credit facility. Net earnings for the first six
months of fiscal 2000 were $7.3 million, or $0.43 per diluted share,
compared with net earnings for the same period of fiscal 1999 of $32.5
million, or $1.92 per diluted share.
Financial Condition and Liquidity
Accounts receivable and total inventory at the end of the first six
months of fiscal 2000 were $7.5 million and $1.1 million lower,
respectively, when compared to the end of fiscal year 1999. Processed
inventories decreased $5.1 million primarily from the seasonal sale of
turkey products, while live inventories and feed inventories increased
$2.1 million and $2.2 million, respectively.
Debt levels decreased $9.9 million during the first six months of
fiscal 2000, from $53.9 million at year-end to $44.0 million at the
end of the first six months of fiscal 2000. The decrease is the
result of the $3.8 million payment received on the note receivable
from the sale of the Monroe plant and $6.1 million in cash flow from
operations.
Capital Resources
The Company's capital spending for the quarter was $2.8 million and
$5.0 million for the six months of fiscal 2000. The majority of the
capital spending was primarily for the replacement of existing
equipment and for safety and regulatory requirements. Depreciation
expense was $4.4 million for the quarter and $9.1 million year-to-
date. Projected capital spending for fiscal 2000 is expected to total
$15 to $18 million.
Year 2000 Matters
Through February 14th, there were no significant operational problems
resulting from the transition to the Year 2000.
The Company began addressing Year 2000 issues in 1995 and elected to
replace its multiple financial and order management systems with one
set of integrated software from Oracle Corporation. An upgrade to a
newer release of the Oracle software that supports the Year 2000 was
completed in March 1999. The Company assessed all personal computers
21
<PAGE>
and communication networks and found no significant Year 2000 problems
in those areas.
A review of operational systems, including processing plants, feed
mills, warehouses and hatcheries was performed, and resulted in a plan
for minor upgrades or replacements of equipment prior to the new
millennium.
To ensure that WLR Foods' business with its vendors and customers
would continue without interruption in the Year 2000, the Company
began assessing vendor and customer Year 2000 readiness by written
questionnaires in November of 1998. Questionnaires were sent to
customers comprising a majority of sales revenue and to all
significant vendors. The Company received favorable responses from
most of its significant vendors and key customers, and no significant
problems have arisen in this area as of February 14, 2000.
The Company believed that its most significant exposure related to the
Year 2000 issue was from reliance upon third parties for
transportation services to deliver feed grains and for utilities such
as electricity, natural gas and water that are necessary for operating
the Company's plants. The Company's supply of feed grain on hand does
not usually exceed that used in a matter of days. Shipping routes
normally involve, at one or more points, rail transportation for which
alternate suppliers are not readily available. Similarly, there are
no effective alternative suppliers of utilities. As of February 14,
2000, there appeared to be no disruptions of service from third party
vendors that were Year 2000 related.
The Company developed contingency plans, where practical, to help
mitigate the effects of potential Year 2000 problems. Those plans
included increasing supplies of feed grains and ingredients, preparing
for manual, instead of electronic, operating procedures and the
appointment of adequate personnel to test systems and address problems
that might arise on January 1, 2000.
Accounting Matters
The Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities in June
1998. The statement establishes accounting and reporting standards for
derivative instruments and hedging activities and requires, among
other things, that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those
instruments at fair value. The Company does not believe the adoption
of this statement, which is required to be adopted by the Company in
fiscal 2001, will have a significant impact on the consolidated
financial statements.
22
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Market risks relating to the Company's operations result primarily
from changes in interest rates and commodity prices. To address these
risks, the Company enters into various hedging transactions as
described below. The Company does not use financial instruments for
trading purposes and is not party to any leveraged derivatives.
Interest Rate Sensitivity
The Company hedges exposures to changes in interest rates on certain
of its financial instruments. The Company may enter into interest
rate cap agreements to effectively limit the Company's exposure to
increases in interest rates. As of January 1, 2000, there were no
outstanding cap agreements.
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are
sensitive to changes in interest rates. For debt obligations, the
table presents principal cash flows and related weighted average
interest rates by expected maturity dates.
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities: There- Fair
Dollars in thousands 2000 2001 2002 2003 2004 after Total Value
- -------------------- ---- ---- ---- ---- ---- ----- ----- -----
Long-term debt,
including Current
Portion
Fixed Rate $158 $202 $215 $89 $95 $50 $809 $809
Average
interest rate 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%
Variable Rate $2,550 $5,850 $34,778 $0 $0 $0 $43,178 $43,178
Average
interest rate 7.86% 7.86% 7.88% 0.00 0.00 0.00 7.87%
</TABLE>
Commodity Price Sensitivity
The Company is a purchaser of certain commodities, primarily corn and
soybean meal. The Company uses commodity futures and forward
purchasing for hedging purposes to reduce the effect of changing
commodity prices on a portion of its commodity purchases. The
contracts that effectively meet risk reduction and correlation
criteria are recorded using hedge accounting. Gains and losses on
hedge transactions are recorded as a component of the underlying
inventory purchase.
23
<PAGE>
The following table provides information about the Company's corn,
soybean meal, other feed ingredient inventory and futures contracts
that are sensitive to changes in commodity prices. For inventory, the
table presents the carrying amount and fair value at January 1, 2000.
For the futures contracts the table presents the notional amounts in
bushels, the weighted average contract prices, and the total dollar
contract amount by expected maturity dates, the latest of which occurs
in May 2000. Contract amounts are used to calculate the contractual
payments and quantity of corn and soybean meal to be exchanged under
the futures contracts. There were no outstanding soybean meal
positions on January 1, 2000.
On Balance Sheet Commodity Position
and Related Derivatives
Carrying Fair
Dollars in thousands Amount Value
- -------------------- -------- -----
Corn, Soybean Meal and Other Feed
Ingredient Inventory 13,144 13,144
Contractual Fair
Related Derivatives Amount Value
- ------------------- ----------- -----
Corn Futures Contracts
Contract Volumes (100,000 bushels) 117
Weighted Average Price (per bushel) $2.18 $2.08
Contract Amount (dollars in thousands) 25,593 24,330
24
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ending January 1, 2000, the Company
issued 3,972.722 shares of its common stock to its non-
employee directors, in reliance on Section 4(2) of the
Securities Act of 1933, as payment of their monthly retainer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See attached Exhibit Index
(b) Form 8-K
Reporting Date December 15, 1999. Item Reported -
Item 5, Other Events. The Company issued a press
release reporting the authorization by the Board of the
repurchase of up to $10 million of the Company's common
stock.
Reporting Date January 10, 2000. Item Reported -
Item 5, Other Events. WLR Foods, Inc. announced the
resignation of Keith E. Alessi from its Board of
Directors and Audit Committee due to the demand on his
time from his job and other commitments.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed this 15th day of February, 2000 by the
Registrant's principal financial officer who is also authorized by the
Registrant to sign on its behalf.
WLR FOODS, INC.
__/s/ Dale S. Lam__
Dale S. Lam, Chief Financial
Officer and duly authorized
signator for Registrant
25
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule
26
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-END> JAN-01-2000
<CASH> 340
<SECURITIES> 0
<RECEIVABLES> 51,563
<ALLOWANCES> 2,433
<INVENTORY> 105,617
<CURRENT-ASSETS> 160,577
<PP&E> 296,662
<DEPRECIATION> 192,882
<TOTAL-ASSETS> 271,468
<CURRENT-LIABILITIES> 75,272
<BONDS> 38,412
0
0
<COMMON> 68,922
<OTHER-SE> 82,136
<TOTAL-LIABILITY-AND-EQUITY> 271,468
<SALES> 218,803
<TOTAL-REVENUES> 218,803
<CGS> 184,181
<TOTAL-COSTS> 184,181
<OTHER-EXPENSES> 26,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,182
<INCOME-PRETAX> 7,685
<INCOME-TAX> 2,901
<INCOME-CONTINUING> 4,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,784
<EPS-BASIC> .28
<EPS-DILUTED> .28
</TABLE>
