UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
 

 **FORM 10-Q
 

(Mark One)

[X]     QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES            EXCHANGE ACT OF 1934           For the quarterly periodended September 30, 2000

               OR

[]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE 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 otherjurisdiction                                           (I.R.S.Employerofincorporation)                                                        IdentificationNo.)**P.O. Box 7000Broadway, Virginia 22815(Address including Zip Code of Registrant'sPrincipal Executive offices)**(540) 896-7001(Registrant's telephone number, including area code)
Indicate by cross markwhether the Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes (X) No ( )

The number of shares outstandingof Registrant's Common Stock, no par value, at November 3, 2000 was 16,458,056 shares.

 
**PART 1.     FINANCIAL INFORMATION

 

Item1.     Financial Statements
**WLR    Foods, Inc. and Subsidiaries****Consolidated    Statements of Operations**(unaudited)
Thirteen    weeks endedIn thousands, except per share    data**September 30,
October 2,**2000
1999Net sales**$ 211,881 
$ 202,007 Cost of sales**179,265 
172,705 Gross profit**32,616 
29,302 Selling, general and    administrative expenses**25,218 
24,355 Operating income **7,398 
4,947 Other expense (income):Interest expense**1,506 
1,233 Other expense (income), net**(26)
(371)Other expense (income), net**1,480 
862 Earnings before income taxes **5,918 
4,085 Income tax expense**2,012 
1,542 Net earnings**$ 3,906 
$ 2,543 Basic and diluted net earnings per    common share**$ 0.24 
$ 0.15 See accompanying Notes    to Consolidated Financial Statements.
 
**WLR    Foods, Inc. and Subsidiaries****Consolidated    Balance Sheets**Dollars in thousands**September 30,
July 1,**2000
2000**(unaudited)**Assets**Current AssetsCash and cash equivalents**$ 120 
$ 85 Accounts receivable, less    allowance for doubtful **63,220 
59,541 accounts of $1,886 and $1,628Inventories**108,244 
110,980 Income taxes receivable**- 
323 Other current assets**3,975 
2,709 Total current assets**175,559 
173,638 Property, plant and equipment, net    **99,915 
102,070 Deferred income taxes**1,259 
2,910 Other assets**4,417 
4,897 Total Assets**$ 281,150 
$ 283,515 **Liabilities and Shareholders'    Equity**Current LiabilitiesCurrent maturities of long-term    debt **$ 6,299 
$ 6,052 Excess checks over bank balances**13,031 
14,014 Trade accounts payable**21,847 
24,627 Accrued payroll and related    benefits**14,891 
15,148 Other accrued expenses**15,079 
12,659 Deferred income taxes**6,920 
8,725 Total current liabilities**78,067 
81,225 Long-term debt, excluding current    maturities**50,229 
51,036 Other liabilities and deferred    credits**7,652 
7,250 Shareholders' equityCommon stock, no par value**67,119 
66,961 Additional paid-in capital**2,974 
2,974 Retained earnings**77,975 
74,069 Accumulated other comprehensive    loss, net of taxes**(2,866)
- Total shareholders' equity**145,202 
144,004 Total Liabilities and    Shareholders' Equity**$ 281,150 
$ 283,515 
See accompanying notes to Consolidated Financial Statements.
 
**WLR    Foods, Inc. and Subsidiaries****Consolidated    Statement of Shareholders' Equity and Comprehensive Income (Loss)**
Accumulated
Additional
Other
Total
Common    Stock
Paid-In
Retained
Comprehensive
Shareholder'sDollars in thousands
Shares
Amount
Capital
Earnings
Loss
EquityBalance at July 1, 200016,172$ 66,961$ 2,974$ 74,069- $ 144,004Comprehensive Income:     Net    earnings**- **- **- 
3,906 **- 
3,906         Net deferred loss on option          contracts, net of tax effect          of $1,476**- **- **- **- 
(2,866)
(2,866)     Total    Comprehensive Income
1,040Common stock issued
37 
158 
- 
- 
- 
158 **Balance at September 30, 2000****16,209 **$ 67,119 **$ 2,974 **$ 77,975 **$ (2,866)**$ 145,202 
 
**WLR    Foods, Inc. and Subsidiaries****Consolidated    Statements of Cash Flows**
Thirteen    weeks ended(unaudited)**September 30,
October 2,Dollars in thousands**2000
1999Cash Flows from Operating    Activities:Net earnings**$ 3,906 
$ 2,543 Adjustments to reconcile net    earnings to net cash providedby (used in) operating activities:Depreciation and amortization**4,583 
4,831 Gain on sales of property, plant    and equipment**(4)
(131)Deferred income taxes**1,322
(1,172)Payment on closed option contracts**(4,342)
- Change in operating    assets and liabilities:(Increase) decrease in accounts    receivable**(3,679)
654 (Increase) decrease in inventories**2,736 
(5,749)(Increase) decrease in other    current assets**(943)
350 (Increase) decrease in long term    assets**275 
(44)Decrease in accounts payable**(2,780)
(483)Increase (decrease) in accrued    expenses and other**2,566 
(1,874)Net cash provided by (used in )    operating activities**3,640 
(1,075)Cash Flows from Investing    Activities:Additions to property, plant and    equipment**(2,237)
(2,254)Proceeds from sales of property,    plant and equipment**18 
241 Net cash used in investing    activities**(2,219)
(2,013)Cash flows from Financing    Activities:Proceeds from issuance of revolver    and long-term debt**206,081 
199,213 Payments on revolver and long-term    debt**(206,642)
(193,872)Issuance of common stock**158 
146 Decrease in excess checks over    bank balances**(983)
(2,351)Net cash provided by (used in)    financing activities**(1,386)
3,136 Increase in cash and cash    equivalents**35 
48 Cash and cash equivalents at    beginning of period**85 
210 Cash and cash equivalents at end    of period**$ 120 
$ 258 Supplemental cash flow    information:Cash paid for :Interest**$ 1,381 
$ 1,146 Income taxes**78 
456 The Company considers    all highly liquid investments with maturities of 3 months or less at    purchase to be cash equivalents.See accompanying Notes to    Consolidated Financial Statements.
 
**Notes to Consolidated Financial StatementsWLR Foods, Inc. and Subsidiaries**
1.     Accounting Policies

The consolidated financial statements presented herein, include theaccounts of WLR Foods Inc. and its wholly-owned subsidiaries. All material inter-companybalances and transactions have been eliminated in consolidation. The consolidated balancesheet as of September 30, 2000; the consolidated statements of operations for the thirteenweeks ended September 30, 2000 and October 2, 1999; the consolidated statement ofshareholders' equity and comprehensive income (loss) for the thirteen weeks endedSeptember 30, 2000, and the consolidated statements of cash flows for the thirteen weeksended September 30, 2000 and October 2, 1999 are unaudited. In the opinion of management,all adjustments necessary for fair presentation of such consolidated financial statementshave been included. Such adjustments consisted only of normal recurring accruals and theuse of estimates. Interim results are not necessarily indicative of results for the entirefiscal year.

The consolidated financial statements and notes are presented inconformity with the requirements for Form 10-Q and do not contain certain informationincluded in the Company’s annual consolidated financial statements and notes.

The Company’s unaudited interim consolidated financial statementsshould be read in conjunction with the consolidated financial statements included in theAnnual Report on Form 10-K filed with the Securities and Exchange Commission for thefiscal year ended July 1, 2000. In both, the accounting policies and principles used areconsistent in all material respects.

 
2.        InventoriesA summary of    inventories at September 30, 2000 and July 1, 2000 follows:
(unaudited)
September 30,
July 1,Dollars in thousands
2000
2000Live poultry and breeder flocks
$ 48,412 
$ 51,283 Processed poultry and meat    products
35,313 
30,655 Packaging supplies, parts and    other
12,873 
12,654 Feed, grain and eggs
11,646 
16,388 Total inventories
$ 108,244 
$ 110,980 
3.     Earnings per share
The following is a    reconciliation between the calculation of basic and diluted net earnings per share:
13    Weeks EndedIn thousands, except for per share    data
September 30,
October 2,
2000
1999Basic EPS ComputationNumerator - Net earnings 
$        3,906 
$       2,543 Denominator:Common shares outstanding
16,193 
16,550 Effect of outstanding stock    warrants 
320 
302 Basic weighted average common    shares outstanding
16,513 
16,852 Basic earnings per common share 
$       0.24 
$      0.15 Diluted EPS ComputationNumerator - Net earnings 
$        3,906 
$       2,543 Denominator:Common shares outstanding
16,193 
16,550 Effect of outstanding stock    options 
3 
5 Effect of outstanding stock    warrants 
320 
302 Diluted weighted average common    shares outstanding
16,516 
16,857 Diluted earnings per common share 
$      0.24 
$      0.15 
4.  Comprehensive Income (Loss)
The Financial Accounting Standards Board issued Statement No. 133, "Accounting forDerivative Instruments and Hedging Activities"**in June 1998. The statementestablishes accounting and reporting standards for derivative instruments and activitiesand requires, among other things, that an entity recognize all derivatives as eitherassets or liabilities in the balance sheet and measure those instruments at fair value.  The implementation of this statement in the first quarter of fiscal 2001 resultedin a charge of approximately $2.9 million to accumulated other comprehensive loss,representing the deferred losses, net of tax, on grain options and futures contracts atSeptember 30, 2000.

5.     Segment Information

The Company has two reportable segments: Chicken and Turkey. The thirdsegment, Other, includes revenues from the Company’s protein conversion plants,unallocated corporate-related items and other miscellaneous items. Chicken segmentrevenues 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 forfoodservice distributors. Turkey segment revenues are primarily sales of turkey relatedproducts and further processed products, including both turkey and chicken items, producedat the Company’s further processing plants. These items include fresh and frozenwhole birds and parts, including retail tray pack items, turkey burgers and a full line offurther processed products, including deli meats, frankfurters and salads. To betterutilize its feed manufacturing capabilities, the Company sells feed to other users,primarily from its Marshville, North Carolina feedmill. Each segment is evaluated bymanagement based on operating profit (loss) and net earnings (loss).

Administrative services provided by the corporate offices are primarilyallocated to the individual segments based on levels of inventories and property, plantand equipment. Due to certain assets that are shared between segments, managementevaluates assets and capital expenditures on a consolidated basis; therefore, suchinformation is not presented on a segment basis.

The following tables set forth specific operating information abouteach segment as reviewed by the Company’s management. Net earnings (loss) for segmentreporting is prepared on the same basis as that used for consolidated net earnings (loss).

 

Elimina -Dollars in thousands
Chicken
Turkey
Other
tions
TotalThirteen Weeks ended September 30, 2000External segment revenues
$ 106,978 
$ 102,835 
$ 2,068 
$            -  
$ 211,881 Intersegment revenues
- 
- 
3,080 
(3,080)
- Total revenues
106,978 
102,835 
5,148 
(3,080)
211,881 Interest expense
757 
776 
-  
(27)
1,506 Interest income
- 
1 
27 
(27)
1 Income taxes 
158 
1,444 
410 
-  
2,012 Net earnings 
306 
2,802 
798 
          -  
3,906 Depreciation expense
2,438 
1,635 
305 
-  
4,378 Thirteen Weeks ended October 2, 1999External segment revenues
$ 102,351 
$ 97,771 
$ 1,885 
$           -  
$ 202,007 Intersegment revenues
- 
- 
3,143 
(3,143)
- Total revenues
102,351 
97,771 
5,028 
(3,143)
202,007 Interest expense
627 
629 
- 
(23)
1,233 Interest income
-  
98 
58 
(23)
133 Income taxes (benefit)
(37)
1,020 
559 
-  
1,542 Net earnings (loss) 
           (61)
       1,682 
        922 
         -  
2,543 Depreciation expense
2,524 
1,762 
329 
-  
4,615 
  **Item 2.     Management’s Discussion andAnalysis 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, Pennsylvaniaand North Carolina.

On September 27, 2000, the Company entered into an Agreement and Planof Merger with Pilgrim’s Pride Corporation (Pilgrim’s) whereby the Company willbecome a wholly-owned subsidiary of Pilgrim’s and the Company’s shareholderswill receive $14.25 cash for each share of Company common stock owned by them at theeffective time of the merger. The Company’s Board of Directors has unanimouslyapproved the agreement. The agreement is subject to regulatory and shareholder approvalsand other customary closing conditions. The merger is expected to be completed as soon aspracticable thereafter.
***Summary of Performance***
Operating income for the first quarter of fiscal 2001 was $7.4 million,an increase of $2.5 million when compared to the same quarter last year. The increase isprimarily due to approximately $1.6 million of improvements in turkey sales mix andprofitability, increased turkey commodity pricing of $1.1 million, improvements in livebird performance of $1.1 million and other net improvements of approximately $2.4 million,partially offset by decreased chicken segment pricing of $1.5 million, and higher graincosts approximating $2.2 million. 
***Results of Operations***
The Company’s results are reported on a consolidated basis.Portions of the following discussions of operating results pertain to the chicken andturkey segments, which account for over 99% of the Company’s revenues. Any revenuesand expenses not included in the chicken and turkey segments are reported in theCompany’s other segment for purposes of segment reporting.

Net sales for the quarter were $211.9 million, an increase of $9.9million, or 4.9% from the first quarter of fiscal 2000. The $9.9 million improvement isfrom increases in chicken, turkey and other segment net sales of $4.6 million, $5.1million and $0.2 million, respectively.

In the chicken segment, the increase in net sales of $4.6 million, or4.5%, to $107.0 million in the first quarter of fiscal 2001 is due to increased poultryproduct sales of $5.2 million, partially offset by decreases in other sales, primarilyfeed, of $0.6 million. The $5.2 million increase, or 5.2%, in net sales of poultryproducts, primarily chicken, resulted in first quarter poultry product sales of $104.0million for fiscal 2001. The 5.2% increase is the result of a volume increase of 6.7%,partially offset by a price decrease of 1.5%. 

The turkey segment net sales increase of $5.1 million, or 5.2%, to$102.8 million in sales for the first quarter of fiscal 2001 is primarily from increasedpoultry product sales. Poultry products, primarily value-added and commodity turkeyproducts, are the largest component of turkey segment revenues. Poultry product sales inthe turkey segment increased 5.0%, or $4.8 million, to $102.2 million in the first quarterof fiscal 2001. The 5.0% increase is the result of a volume increase of 1.9%, coupled witha price increase of 3.1%. 

Cost of sales were $179.3 million, an increase of $6.6 million, or 3.8%from the first quarter of fiscal 2000. In the chicken segment, cost of sales increased4.2%, or $3.9 million, to $95.6 million in the first quarter of fiscal 2001. This increaseis primarily attributable to increased production and higher grain costs, partially offsetby improved live bird performance and decreased processing costs. Cost of sales in theturkey segment increased 2.9%, or $2.3 million, to $82.5 million in the first quarter offiscal 2001. This increase is primarily the result of planned shifts in production to moreprofitable, higher-cost, value-added products and increased grain costs. Cost of sales inthe other segment increased $0.4 million during the first quarter of fiscal 2001.

Gross profit was $32.6 million, an increase of $3.3 million, or 11.3%from the same quarter last year. Improved turkey sales mix provided additional grossprofits of approximately $1.6 million. Increases in commodity turkey prices of $1.1million were offset by chicken market decreases of approximately $1.5 million. Improvedlive bird performance provided an additional $1.1 million. Other improvements ofapproximately $3.2 million in gross profits were primarily the result of increased chickensales, higher plant utilization, and other feed ingredient inventory and formulations.Higher grain costs for soybean meal of approximately $3.0 million, partially offset bylower corn costs of approximately $0.8 million, decreased profits by $2.2 million duringthe quarter. 

Selling, general and administrative expenses for the first quarter were$25.2 million, an increase of $0.9 million, or 3.5% when compared to the same quarter lastyear. The increase is primarily due to additional promotional spending as a result ofincreased sales volumes in chicken and value-added products. 

Interest expense was $1.5 million for the first quarter of fiscal 2001,an increase of $0.3 million, or approximately 22%, when compared to the same quarter infiscal 2000. The increase is the result of higher interest rates and slightly higher debtlevels throughout the period. 

Net earnings were $3.9 million, or $0.24 per diluted share, for thefirst quarter of fiscal 2001, an increase of $1.4 million as compared to the net earningsof $2.5 million, or $0.15 per diluted share, for the first quarter of fiscal 2000. Netearnings from the chicken and turkey segments increased $0.4 million and $1.1 million,respectively, offset partially by decreased net earnings in other segment of $0.1 million.
***Financial Condition and Liquidity***
Accounts receivable increased $3.7 million and total inventory is $2.7million lower at the end of the first quarter of fiscal 2001 when compared to the end offiscal year 2000. Live and feed inventories decreased $2.9 million and $4.7 million,respectively, partially offset by increased processed and supply inventories of $4.7million and $0.2 million, respectively.

Total debt to total capital at the end of the first quarter of fiscal2001 was 28.0%, a slight improvement from 28.4% at the end of fiscal 2000. Debt levelsdecreased $0.6 million during the quarter, from $57.1 million at fiscal 2000 year-end to$56.5 million at the end of the first quarter of fiscal 2001. The decrease is primarilythe result of $3.6 million in cash flow from operations and $0.2 million from issuance ofCompany stock, partially offset by $2.2 million in capital expenditures and a $1.0 millionin reduction of excess checks over bank balances. 
***Capital Resources***
The Company’s capital spending for the quarter was $2.2 million.The majority of the capital spending was primarily for the replacement of existingequipment and for safety and regulatory requirements. Depreciation expense was $4.4million for the quarter. Projected capital spending for fiscal 2001 is expected to rangefrom $12 to $15 million for normal replacements and upgrades of existing facilities.
***Accounting Matters***
The Financial Accounting Standards Board issued Statement No. 133, "Accounting forDerivative Instruments and Hedging Activities"**in June 1998. The statementestablishes accounting and reporting standards for derivative instruments and activitiesand requires, among other things, that an entity recognize all derivatives as eitherassets or liabilities in the balance sheet and measure those instruments at fair value.  The implementation of this statement in the first quarter of fiscal 2001 resultedin a charge of approximately $2.9 million to accumulated other comprehensive loss,representing the deferred losses, net of tax, on grain options and futures contracts atSeptember 30, 2000.

**Item 3.     Quantitative and Qualitative Disclosures aboutMarket Risk**

Market risks relating to the Company's operations result primarily from changes ininterest rates and commodity prices. To address these risks, the Company enters intovarious hedging transactions as described below. The Company does not use financialinstruments 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 financialinstruments. The Company may enter into interest rate cap agreements to effectively limitthe Company's exposure to increases in interest rates. As of September 30, 2000, therewere no outstanding  interest rate cap agreements.

The table below provides information about the Company's financial instruments that aresensitive to changes in interest rates. For debt obligations, the table presents principalcash flows and related weighted average interest rates by expected maturity dates. 

Expected    Maturity DateLiabilities:
FairDollars in thousands
2001
2002
2003
2004
2005
Total
ValueLiabilities:Long-term debt, including Current    PortionFixed Rate
$183 
$215 
$89 
$94 
$50 
$631 
$631 Average interest rate
6.00%
6.00%
6.00%
6.00%
6.00%
6.00%Variable Rate
$4,575 
$51,322 
$0 
$0 
$0 
$55,897 
$55,897 Average interest rate
8.26%
8.45%
- 
- 
- 
8.43%***Commodity Price Sensitivity***
The Company is a purchaser of certain commodities, primarily corn and soybean meal. TheCompany uses commodity futures contracts, grain options and forward purchasing for hedgingpurposes to reduce the effect of changing commodity prices on a portion of its commoditypurchases. The contracts that effectively meet risk reduction and correlation criteria arerecorded using hedge accounting. Gains and losses on hedge transactions are recorded as acomponent of the underlying inventory purchase and are expensed during the time period forwhich the hedge was intended.

There were no outstanding futures contracts, grain options or forward purchasingcontracts on September 30, 2000.

 
**PART II.      OTHER INFORMATION**

 
*Item6.     Exhibits and Reports on Form 8-K

(a) Exhibits 

See attached Exhibit Index 

(b) Form 8-K 

                          Reporting Date September 27, 2000. Item Reported - Item 5, Other Events. WLR Foods, Inc.announced that it had signed a definitive agreement with Pilgrim’s Pride for the saleof the outstanding stock of WLR Foods in a cash merger valued at approximately$300,000,000, or $14.25 per common share.

 

 

SIGNATURE

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report is signed this 14th day of November, 2000by the Registrant's principal financial officer who is also authorized by the Registrantto sign on its behalf.

            WLR FOODS, INC.

 

  /s/  Dale S. Lam                                                       Dale S. Lam, Chief Financial Officer            and duly authorized signator for Registrant

 

  

**EXHIBIT INDEX**

 

Exhibit No.                   Description    27                            Financial Data Schedule***********************************************************************************************************************************************************************************