-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aq06YdlBwaWNyzt3bjIsxJG6+8SpM28ZjU1HZyGPdavfeZLhhpv0dKPKjYX+oNmg IO2d2sHeV+X7ndWziHmW5w== 0000760775-00-000021.txt : 20000216 0000760775-00-000021.hdr.sgml : 20000216 ACCESSION NUMBER: 0000760775-00-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WLR FOODS INC CENTRAL INDEX KEY: 0000760775 STANDARD INDUSTRIAL CLASSIFICATION: POULTRY SLAUGHTERING AND PROCESSING [2015] IRS NUMBER: 541295923 STATE OF INCORPORATION: VA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17060 FILM NUMBER: 546459 BUSINESS ADDRESS: STREET 1: P O BOX 7000 CITY: BROADWAY STATE: VA ZIP: 22815 BUSINESS PHONE: 5408967001 MAIL ADDRESS: STREET 1: 800 CO OP DRIVE CITY: TIMBERVILLE STATE: VA ZIP: 22853 FORMER COMPANY: FORMER CONFORMED NAME: WAMPLER LONGACRE ROCKINGHAM INC DATE OF NAME CHANGE: 19881114 FORMER COMPANY: FORMER CONFORMED NAME: WAMPLER LONGACRE INC DATE OF NAME CHANGE: 19880209 10-Q 1 QUARTERLY REPORT 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. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements WLR FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited) Thirteen weeks ended In thousands, except per share data January 1, December 26, 2000 1998 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 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.
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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 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 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.
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WLR FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Dollars in thousands January 1, July 3, 2000 1999 ASSETS (unaudited) Current Assets 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 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.
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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: 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 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 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.
9 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 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 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 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 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.
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 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)
15 A reconciliation of total segment profits to consolidated net earnings is as follows:
Thirteen Thirteen Twenty-six Twenty-six Weeks Weeks Weeks Weeks January 1, December 26, January 1, December 26, 2000 1998 2000 1998 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 ======= ======= ======= =======
16 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 $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 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 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 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 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 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.
Expected Maturity Date ---------------------- 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%
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 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 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 EXHIBIT INDEX Exhibit No. Description 27 Financial Data Schedule 26 EX-27 2 FINANCIAL DATA SCHEDULE
5 Exhibit 27 3-MOS JUL-01-2000 JAN-01-2000 340 0 51,563 2,433 105,617 160,577 296,662 192,882 271,468 75,272 38,412 0 0 68,922 82,136 271,468 218,803 218,803 184,181 184,181 26,388 0 1,182 7,685 2,901 4,784 0 0 0 4,784 .28 .28
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