2 0 1 9 A n n u a l R e p o r t t o S h a r e h o l d e r s
Sanderson Farms, Inc. is engaged in the production, processing, marketing and distribution of
fresh, frozen and minimally prepared chicken. The Company sells its fresh and frozen chicken
products primarily under the Sanderson Farms® brand name to retailers, distributors and casual
dining operators. Through its prepared chicken division, the Company also sells, primarily under
the Sanderson Farms® brand name, minimally prepared chicken to distributors and food service
establishments.
The common shares of Sanderson Farms, Inc. are traded on the NASDAQ Global Select Market
under the symbol SAFM.
13 Processing
Locations
Georgia: Moultrie Louisana: Hammond
Mississippi: Collins, Flowood, Hazlehurst,
Laurel and McComb North Carolina: Kinston
and St. Pauls Texas: Bryan, Palestine, Tyler
and Waco
Note: The forward looking statements warning that appears in our Annual Report on Form 10-K under Item 7, “Cautionary statements regarding
risks and uncertainties that may affect future performance,” also applies to forward looking statements made in this annual report.
The Sanderson Farms®’ brand name and logo are registered trademarks of Sanderson Farms, Inc. All rights reserved.
TO OUR FELLOW SHAREHOLDERS
Sanderson Farms faced market challenges over the course of fiscal 2019, especially during the fourth quarter of the fiscal
year. Our results reflect a mixed poultry market with a favorable supply and demand balance for our products sold to retail
grocery stores, but continued pricing pressure for larger birds processed for our food service customers, as chicken competed
with an abundant supply of competing proteins. As a result, market prices for boneless breast meat produced at our plants that
process a larger bird reached historical lows at the end of each of our last two fiscal years. In both the retail and food service
customer market sectors, sales were affected by less than normal promotional activity for chicken due to the availability and
favorable pricing of other proteins.
Despite the challenging environment, we achieved record sales and production in fiscal 2019. We continued to execute our
strategy with a commitment to responsible growth, sustainable operations and the reputation of our brand, supported by the
strong relationships we have with our valued customers, employees, independent contract producers, and communities where
we operate. Equally important to our mission are our care and respect for the planet on which we live and the ethical treatment
of the animals under our care. Everything we do at Sanderson Farms reflects these values, and we are proud of our favorable
reputation in the marketplace. Above all, we have continued to focus on our responsibility to build long-term shareholder value
through our organic growth strategy, conservative financial management and operational efficiency.
For the year, our revenues were $3.4 billion, compared with $3.2 billion last year. Our increased sales reflect the additional
volume from our newest poultry complex in Tyler, Texas, and a modest increase in overall market prices for our products. We
earned net income of $53.3 million, or $2.41 per share, for our shareholders, and we paid $28.4 million in dividend payments.
Importantly, we ended the year with a solid financial position, providing the flexibility to continue to pursue additional growth
opportunities and support our operations through the cycles that characterize our industry. As of October 31, 2019, our balance
sheet reflected $1.774 billion in assets, stockholders’ equity of $1.418 billion and net working capital of $365.4 million.
Overall, realized prices for poultry products were up 3.5 percent in fiscal 2019 compared to the prior year. Average market
prices for our products sold to retail grocery store customers were higher, while prices for larger birds processed for our food
service customers were mixed. Compared with fiscal 2018, jumbo boneless breast meat market prices were lower by 3.4
percent, the average market price for bulk leg quarters was up 1.3 percent, and jumbo wing market prices were up 19.9 percent.
We were encouraged to see market prices move higher following the end of the fiscal year.
These combined market price dynamics resulted in an overall increase of 2.4 cents per pound in our average sales price per
pound of poultry products sold in fiscal 2019 compared with the prior year. Prices paid for corn and soybean meal, our primary
feed ingredients, were slightly higher for the year; however, feed costs per pound of chicken processed were relatively flat as
improved efficiencies partially offset the higher prices paid for feed grain. Overall the average cost per pound in our poultry
business increased 3.3 percent, reflecting flat feed costs and higher non-feed related costs.
Operating efficiencies at our processing plants improved as we moved through the year, and we ended the year in a strong
position compared with our industry peers in terms of volume and operating efficiencies. However, during fiscal 2019 we had
planned downtime in several facilities for equipment replacement and upgrades, which negatively affected our efficiencies. We
believe we will benefit from these investments with improved operational efficiencies, better yields and higher product quality.
We were pleased to commence operations at our newest poultry complex in Tyler, Texas, during the first quarter, although we
incurred typical operating inefficiencies as we worked toward moving the complex to full production, which we expect to reach
in the second quarter of fiscal 2020.
All of Sanderson Farms’ production is focused on the two most historically profitable customer markets in our industry –
big bird deboning for food service customers and tray pack products for retail grocery customers. Wherever it is sold, the
Sanderson Farms® brand represents the freshest, highest quality, 100% natural chicken on the market, and our favorable
product mix has remained a strong competitive advantage. With 13 poultry complexes across five states, we processed a record
4.61 billion pounds in fiscal 2019, a 2.5 percent increase compared with 4.50 billion pounds during fiscal 2018. We sold a
record 4.53 billion pounds of dressed poultry, up 2.0 percent compared with the previous year’s sales of 4.44 billion pounds.
Our prepared chicken business contributed to our growth for the year as well, increasing pounds sold by 22.6 percent over last
year, although the average sales price for these products declined 4.9 percent from fiscal 2018.
We are proud of our ability to compete at the top of our industry, and we continue to focus on ways to improve our operating
performance and identify new markets and growth opportunities. At the same time, we have continued to drive innovation
across our operations and identify more efficient ways to produce the highest quality chicken products available in the market
while reducing our use of natural resources and meeting our obligation to protect the environment. Additionally, we have over
1,000 independent poultry producers who are focused on utilizing sustainable farming practices. Our commitment to protecting
the environment makes us a valued member of the communities where we do business and is demonstrated by our leading
conservation efforts to minimize our use of natural resources like water, electricity and natural gas. Across our operations,
we also have programs in place that adhere to the highest animal welfare standards, further supporting our position as a
sustainability leader in the poultry industry.
At Sanderson Farms, we recognize that people are our most valuable asset, and we are committed to providing a safe
workplace environment and competitive compensation and benefits, as well as ongoing training programs and continuing
education support. We are proud that our employees voted us one of Forbes Magazine’s “America’s Best Large Employers” in
2019. As we continue to grow and build for the future, we are making important investments in our next generation of leaders
with a dedicated management training program, quarterly leadership meetings for our top managers, and a mentoring program
for young managers with guidance from more seasoned employees. At the end of fiscal 2019, as we do every year, we met with
our key managers to review all aspects of our operations and identified ways to improve how we do business in the year ahead.
Our performance in fiscal 2019, as in past years, includes sharing the value we create by giving back to our communities. We
are proud of our reputation as a trusted community partner, and we are fortunate to have both the financial and human resources
to make a difference. Our employees serve as active volunteers in their communities, and we contribute chicken products to local
food banks and feeding programs throughout the year. We also believe it is our responsibility to help and support our people and
communities in times of crisis. Our most popular community event, The Sanderson Farms Championship, celebrated its seventh
year in October 2019 as an annual stop on the PGA TOUR. We are proud to note that 100 percent of the proceeds from the
Sanderson Farms Championship go to various Mississippi charities. We are pleased that the primary benefactor, the University
of Mississippi’s Blair E. Batson Hospital for Children, has received over $7.5 million since Sanderson Farms became the title
sponsor in 2013.
We are proud of our ability to move the Company forward in fiscal 2019 despite the challenges we faced. As always, we will
continue to manage our business consistently, regardless of market cycles. As we look to fiscal 2020, we have many reasons to
be optimistic about an improved poultry market and our prospects for growth. Market prices for boneless breast meat produced
at our plants that process a larger bird have improved counter-cyclically since the end of the fiscal year, and grain prices are
relatively flat. The outbreak of African swine fever in Asia has affected the worldwide supply of pork, creating a protein deficit
that should ultimately benefit United States protein markets. We are also encouraged that we might resume exports to China and
realize a material benefit from the return to an open market. Additionally, increased promotional activity for chicken sandwiches
at popular quick serve restaurants and expected higher retail pork and beef prices should all support stronger poultry markets as
we move into 2020.
We are well positioned to continue our organic growth strategy with quality products and a respected brand, supported by
the scale of our efficient and sustainable operations, exceptional customer service and a strong financial position. At the same
time, we will stay true to the traditional values that are synonymous with the Sanderson Farms brand. Above all, we are fortunate
to have many extraordinary people who represent Sanderson Farms across our operations every day – our dedicated managers,
employees and independent contract producers. We also recognize the outstanding leadership and support of our management
team and board of directors, with a shared commitment to our shareholders to continue to pursue operational excellence and stay
on the right path for long-term sustainable growth. Together, we look forward to the opportunities ahead for Sanderson Farms in
fiscal 2020 and beyond.
To our shareholders, we thank you for your trust and the support your investment provides.
Sincerely,
Joe F. Sanderson, Jr.
Chairman and Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-K
___________________________
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended October 31, 2019
for the transition period from to
Commission file number: 1-14977
___________________________
SANDERSON FARMS INC.
(Exact name of registrant as specified in its charter)
___________________________
Mississippi
(State or other jurisdiction of
incorporation or organization)
127 Flynt Road, Laurel, Mississippi
(Address of principal executive offices)
64-0615843
(IRS Employer
Identification No.)
39443
(Zip Code)
Registrant’s telephone number, including area code: (601) 649-4030
Title of each Class:
Common Stock, $1 par value per
share
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol
SAFM
Name of exchange on which registered:
NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
___________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (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 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated
filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes No
Aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant computed
by reference to the closing sales price of the common equity in The NASDAQ Stock Market on the last business day of the
Registrant’s most recently completed second fiscal quarter: $2,824,148,315.
Number of shares outstanding of the Registrant’s common stock as of December 12, 2019: 22,229,817 shares of
common stock, $1.00 per share par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement filed or to be filed in connection with its 2020 Annual Meeting
of Stockholders are incorporated by reference into Part III.
3
3
14
22
22
23
27
27
28
28
28
29
42
44
69
69
69
71
71
71
71
72
72
73
73
76
76
79
PART I
TABLE OF CONTENTS
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Item 4A. Executive Officers of the Registrant
Properties
Legal Proceedings
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EXHIBITS
SIGNATURES
2
INTRODUCTORY NOTE
Definitions. This Annual Report on Form 10-K (the "Annual Report") is filed by Sanderson Farms, Inc., a Mississippi
corporation. Except where the context indicates otherwise, the terms “Registrant,” “Company,” “Sanderson Farms,” “we,”
“us,” or “our” refer to Sanderson Farms, Inc. and its subsidiaries and predecessor organizations. The use of these terms to
refer to Sanderson Farms, Inc. and its subsidiaries collectively does not suggest that Sanderson Farms and its subsidiaries
have abandoned their separate identities or the legal protections given to them as separate legal entities. “Fiscal year” means
the fiscal year ended October 31, 2019, which is the year for which this Annual Report is filed.
Presentation and Dates of Information. Except for Item 4A herein, the Item numbers and letters appearing in this
Annual Report correspond with those used in Securities and Exchange Commission Form 10-K (and, to the extent that it is
incorporated into Form 10-K, those used in SEC Regulation S-K) as effective on the date hereof, which specifies the
information required to be included in Annual Reports to the SEC. Item 4A (“Executive Officers of the Registrant”) has been
included by the Registrant in accordance with General Instruction G(3) of Form 10-K and Instruction 3 of Item 401(b) of
Regulation S-K. The information contained in this Annual Report is, unless indicated to be given as of a specified date or for
a specified period, given as of the date of this Annual Report, which is December 19, 2019.
Business
Item 1.
(a) GENERAL DEVELOPMENT OF THE REGISTRANT’S BUSINESS
PART I
The Registrant was incorporated in Mississippi in 1955, and is a fully, vertically-integrated poultry processing
company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. In addition,
the Registrant is engaged in the processing, marketing and distribution of processed and minimally prepared chicken.
The Registrant sells ice-packed, chill-packed, bulk-packed and frozen chicken, in whole, cut-up and boneless form,
primarily under the Sanderson Farms® brand name to retailers, distributors, and casual dining operators principally in the
southeastern, southwestern, northeastern and western United States, and to customers who resell frozen chicken into export
markets. During its fiscal year ended October 31, 2019, the Registrant processed approximately 623 million chickens, or
approximately 4.6 billion dressed pounds. According to 2019 industry statistics, the Registrant was the third largest processor
of dressed chicken in the United States based on average weekly processed pounds.
The Registrant’s fresh and frozen chicken operations presently encompass 11 hatcheries, 9 feed mills and 12
processing plants, including the facilities at its new Tyler, Texas complex. The Registrant began operations at the new Tyler
hatchery in October 2018, and began processing chickens at the new processing plant in February 2019. The new facilities
are currently operating at approximately seventy-five percent of capacity, and the Company estimates the new facilities will
reach full capacity during April 2020. The Registrant has one prepared chicken plant.
The Registrant has contracts with operators of approximately 818 grow-out farms and 231 breeder farms that provide it
with sufficient housing capacity for its current operations.
The Company’s prepared chicken product line includes approximately 130 institutional and consumer packaged
partially cooked or marinated chicken items that it sells nationally, primarily to distributors and food service establishments.
A majority of the prepared chicken items are made to the specifications of food service users.
Since the Registrant completed the initial public offering of its common stock in May 1987, the Registrant has
significantly expanded its operations by expanding existing facilities, adding second shifts and constructing new facilities to
increase production capacity, product lines and marketing flexibility.
The Company changed its marketing strategy in 1997 to move away from growing small-sized birds serving primarily
the fast food industry to concentrate its production in the medium-sized and larger-sized birds serving the retail grocery and
food service industries, respectively. This shift resulted in larger average bird weights of the chickens processed by the
Company, and substantially increased the number of pounds processed by the Company. In addition, the Company
continually evaluates internal and external expansion opportunities to continue its growth in poultry and/or related food
products.
3
In the second quarter of fiscal 2015, the Company began initial operations at a new poultry processing complex in
Palestine, Texas. The complex consists of a hatchery, feed mill, processing plant and waste water treatment facility with the
capacity to process 1.3 million chickens per week, and the facility is currently operating at full capacity.
In the first quarter of fiscal 2017, the Company began initial operations at a new poultry processing complex in St.
Pauls, North Carolina. The completed complex consists of a hatchery, processing plant and waste water treatment facility,
with the capacity to process 1.3 million chickens per week, and an expansion of the Company's existing feed mill in Kinston,
North Carolina. The facility is currently operating at full capacity and processed approximately 528.4 million pounds of
dressed poultry meat during fiscal 2019. During fiscal 2018, the St. Pauls processing plant processed approximately 522.5
million pounds of dressed poultry meat, as compared to 249.0 million pounds during fiscal 2017.
In the first quarter of fiscal 2019, the Company began initial operations at its new poultry processing complex in and
around Tyler, Texas. The completed complex consists of a hatchery, feed mill, processing plant and waste water treatment
facility, with the capacity to process 1.3 million chickens per week. The facility steadily increased production throughout
fiscal 2019 and is currently operating at approximately seventy-five percent (75%) of capacity. During the fourth quarter of
fiscal 2019, the Tyler processing plant processed approximately 73.5 million pounds of dressed poultry meat, as compared to
46.9 million pounds and 18.8 million pounds during the third and second quarters of fiscal 2019, respectively.
Capital expenditures for fiscal 2019 were funded by cash on hand, cash provided by operations and borrowings from
the Company's revolving credit facility. The Company is a party to a revolving credit facility dated March 21, 2019, with a
maximum available borrowing capacity of $1.0 billion. Under the credit facility, the Company may not exceed a maximum
debt to total capitalization ratio of 50%. The Company has a one-time right, at any time during the term of the agreement, to
increase the maximum debt to total capitalization ratio then in effect by five absolute percentage points in connection with the
construction of a new poultry complex for the four fiscal quarters beginning on the first day of the fiscal quarter during which
the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The facility
also sets a minimum net worth requirement that at October 31, 2019, was $998.6 million. The credit is unsecured and, unless
extended, will expire on March 21, 2024. As of October 31, 2019, the Company had borrowed $55.0 million, and had
approximately $21.6 million outstanding in letters of credit, leaving $923.4 million of borrowing capacity available under the
facility. As of December 18, 2019, the Company had borrowed $85.0 million under the facility and had approximately $23.1
million outstanding in letters of credit, leaving $891.9 million of borrowing capacity available under the facility. For more
information about the facility, see Item 1.01 of our Current Report on Form 8-K filed March 27, 2019.
(c) NARRATIVE DESCRIPTION OF REGISTRANT’S BUSINESS
General
The Registrant is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and the
preparation, processing, marketing and distribution of processed and minimally prepared chicken items. The Registrant has
one reporting segment, poultry products.
The Registrant sells chill-packed, ice-packed, bulk-packed and frozen chicken, in whole, cut-up and boneless form,
primarily under the Sanderson Farms® brand name, to retailers, distributors and casual dining operators principally in the
southeastern, southwestern, northeastern and western United States. During its fiscal year ended October 31, 2019, the
Registrant processed approximately 623 million chickens, or approximately 4.6 billion dressed pounds. In addition, the
Registrant purchased and further processed 4.1 million pounds of poultry products during fiscal 2019. According to 2019
industry statistics, the Registrant was the third largest processor of dressed chicken in the United States based on average
weekly processed pounds.
The Registrant conducts its chicken operations through Sanderson Farms, Inc. (Production Division) and Sanderson
Farms, Inc. (Processing Division), both of which are wholly-owned subsidiaries of Sanderson Farms, Inc. The production
subsidiary, Sanderson Farms, Inc. (Production Division), which has facilities in Laurel, Collins, Hazlehurst and McComb,
Mississippi; Bryan, Waco, Palestine, Freestone County, Robertson County, Lindale and Mineola, Texas; Adel, Georgia; and
Kinston and Lumberton, North Carolina, is engaged in the production of chickens to the broiler stage. Sanderson Farms, Inc.
(Processing Division), which has facilities in Laurel, Collins, Hazlehurst and McComb, Mississippi; Hammond, Louisiana;
Bryan, Palestine, Waco and Smith County, Texas; Moultrie, Georgia; and Kinston and St. Pauls, North Carolina, is engaged
in the processing, sale and distribution of chicken products.
4
The Registrant conducts its prepared chicken business through its wholly-owned subsidiary, Sanderson Farms, Inc.
(Foods Division), which has a facility in Flowood, Mississippi. This facility is engaged in the processing, marketing and
distribution of approximately 130 processed and minimally prepared chicken items, which it sells nationally and regionally,
principally to distributors and national food service accounts. The facility is managed by the same senior management team
that manages our Processing Division.
Products
The Registrant has the ability to produce a wide range of processed chicken products and prepared chicken items.
Processed chicken is first salable as an ice-packed, whole chicken. The Registrant adds value to its ice-packed, whole
chickens by removing the giblets, weighing, packaging and labeling the product to specific customer requirements and
cutting and deboning the product based on customer specifications. The additional processing steps of giblet removal, close
tolerance weighing and cutting increase the value of the product to the customer over whole, ice-packed chickens by reducing
customer handling and cutting labor and capital costs, reducing the shrinkage associated with cutting, and ensuring
consistently sized portions.
The Registrant adds additional value to the processed chicken by deep chilling and packaging whole chickens in bags
or combinations of fresh chicken parts, including boneless product, in various sized, individual trays under the Registrant’s
brand name, which then may be weighed and pre-priced, based on each customer’s needs. This chill-pack process increases
the value of the product by extending shelf life, reducing customer weighing and packaging labor, and providing the
customer with a wide variety of products with uniform, well designed packaging, all of which enhance the customer’s ability
to merchandise chicken products.
To satisfy some customers’ merchandising needs, the Registrant freezes the chicken product, which adds value by
meeting the customers’ handling, storage, distribution and marketing needs and by permitting shipment of product overseas
where transportation time may be as long as 60 days.
The following table sets forth, for the periods indicated, the contribution, as a percentage of net sales dollars, of each of
the Registrant’s major product lines.
2019
Fiscal Year Ended October 31,
2017
2016
2018
2015
Registrant processed chicken:
Value added:
Fresh vacuum-sealed
Fresh chill-packed
Fresh bulk-packed
Frozen
Subtotal
Non-value added:
Fresh ice-packed
Subtotal
Total Company processed chicken
Minimally prepared chicken
Total
Markets and Pricing
38.3 %
32.9
14.4
6.2
91.8
1.2
1.2
93.0
7.0
100.0 %
35.2 %
35.6
15.1
6.5
92.4
1.2
1.2
93.6
6.4
100.0 %
39.8 %
31.0
16.4
6.7
93.9
1.0
1.0
94.9
5.1
100.0 %
37.6 %
34.7
15.1
5.1
92.5
0.9
0.9
93.4
6.6
100.0 %
35.2 %
36.9
13.9
6.3
92.3
1.0
1.0
93.3
6.7
100.0 %
The three largest customer markets in the fresh and frozen chicken industry are food service customers that purchase
fresh, bulk-packed products produced from a relatively big bird, retail grocery store customers that purchase fresh, tray-
packed products produced from a medium-sized bird, and quick-serve food service customers that purchase products
produced from relatively small birds.
5
The following table sets forth, for each of the Company’s poultry processing plants, the general customer market to
Industry Bird Size
Capacity Per Week
which the plant is devoted, the weekly capacity of each plant at full capacity expressed in number of head processed, and the
industry's average size of birds processed in the relevant market.
Plant Location
Market
Laurel, Mississippi
Hammond, Louisiana
Hazlehurst, Mississippi
Collins, Mississippi
Waco, Texas
Palestine, Texas
St. Pauls, North Carolina
McComb, Mississippi
Bryan, Texas
Moultrie, Georgia
Kinston, North Carolina
Tyler, Texas
Big Bird
Big Bird
Big Bird
Big Bird
Big Bird
Big Bird
Big Bird
Chill-Pack Retail
Chill-Pack Retail
Chill-Pack Retail
Chill-Pack Retail
Chill-Pack Retail
650,000
650,000
650,000
1,300,000
1,300,000
1,300,000
1,300,000
1,300,000
1,300,000
1,300,000
1,300,000
1,300,000
8.95
8.95
8.95
8.95
8.95
8.95
8.95
6.52
6.52
6.52
6.52
6.52
Our big bird plants process a relatively large bird. The chicken products produced at these plants is generally sold as
fresh, bulk-packed chicken cut into a variety of products, including boneless breast meat, chicken tenders, whole and cut
wings and boneless thigh meat, and is sold primarily to restaurants, food service customers and further processors at
negotiated spreads from quoted commodity market prices for those products. We have long-term contracts with many of our
customers for these products produced at our big bird plants, but prices for products sold pursuant to those contracts fluctuate
based on quoted commodity market prices. The contracts do not require the customers to purchase, or the Company to sell,
any specific quantity of product. The dark meat from these birds that is not deboned is sold primarily as frozen leg quarters in
the export market or as fresh whole legs to further processors. While we have long-standing relationships with many of our
export partners, virtually all of our export sales are at negotiated or spot commodity prices, which prices exhibit fluctuations
typical of commodity markets. We have few long-term contracts for this product.
As of October 31, 2019, the Company had the capacity to process 7.1 million head per week in its big bird plants, and
its results are materially affected by fluctuations in the commodity market prices for boneless breast meat, chicken tenders,
wings, leg quarters and boneless thigh meat as quoted by Urner Barry.
Urner Barry is an independent company specializing in the timely, accurate and independent reporting on market news
and market price quotations to its customers in various food and protein industries, including poultry. The Urner Barry spot
market prices for boneless breast meat, chicken tenders, leg quarters, whole wings and boneless thighs for the past five
calendar years are set forth below and are published with Urner Barry's permission. Realized prices will not necessarily equal
quoted market prices since most contracts offer negotiated discounts to quoted market prices, which discounts are negotiated
on a customer by customer basis and are influenced by many factors. Selection of a particular market price benchmark is
largely customer driven:
6
7
8
Our chill-pack plants process medium sized birds and cut and package the product in various sized individual trays to
customers’ specifications. The trays are weighed and pre-priced primarily for customers to resell through retail grocery
outlets. While the Company sells some of its chill-pack product under store brand names, most of its chill-pack production is
sold under the Company’s Sanderson Farms® brand name. The Company has long-term contracts with most of its chill-pack
customers. These agreements typically provide for the pricing of product based on agreed upon, flat prices or on negotiated
formulas that use an agreed upon, regularly quoted market price as the base, as well as various other guidelines for the
relationship between the parties. All of our contracts with retail grocery store customers also provide for the sale of
negotiated quantities of product at periodically negotiated prices, rather than the flat and formula-driven prices discussed
above. None of our contracts with retail grocery store customers require the customers to purchase, or the Company to sell,
any specific quantity of product. As of October 31, 2019, the Company had the capacity to process 6.5 million head per week
at its chill-pack plants, and its results are materially affected by fluctuations in Urner Barry prices and other market
benchmarks.
As with products produced at our big bird plants, selection of the desired methodology for pricing chill-pack products
is largely customer driven. Prior to the discontinuation in November 2016 of the Georgia Dock index, which had been
published by the Georgia Department of Agriculture, many of our chill-pack customers used that index as the base for pricing
formulas. As new and renewing contracts have been negotiated, many of our chill-pack customers chose to negotiate flat
prices for the life of the contracts, while some of our customers have chosen to use an index published by Express Markets,
Inc. ("EMI").
Almost all of our products sold by our prepared chicken plant are sold under long-term contracts at fixed prices related
to the spot commodity price of chicken at the time the contract is negotiated, plus a premium for additional processing.
Sales and Marketing
The Registrant’s chicken products are sold primarily to retailers (including national and regional supermarket chains
and local supermarkets) and distributors located principally in the southeastern, southwestern, northeastern and western
United States. The Registrant also sells its chicken products to casual dining operators, foreign customers, and United States
based customers who resell the products outside of the continental United States. This wide range of customers, together with
the Registrant’s product mix, provides the Registrant with flexibility in responding to changing market conditions in its effort
to maximize profits. This flexibility also assists the Registrant in its efforts to reduce its exposure to market volatility,
although its ability to do so is limited.
9
Sales and distribution of the Registrant’s chicken products are conducted primarily by sales personnel at the
Registrant’s general corporate offices in Laurel, Mississippi, by customer service representatives at each of its processing
plants and its prepared chicken plant and through independent food brokers. Each plant has individual on-site distribution
centers and uses contract carriers for distribution of its products.
Generally, the Registrant prices much of its chicken products based upon weekly and daily market prices reported by
private firms such as EMI and Urner Barry. The Registrant’s profitability is affected by such market prices, which may
fluctuate substantially and exhibit cyclical and seasonal characteristics. The Registrant will adjust base prices depending upon
value added, volume, product mix and other factors. While base prices may change weekly and daily, the Registrant’s
adjustments to those base prices are generally negotiated from time to time with the Registrant’s customers. The Registrant’s
sales are generally made on an as-ordered basis, and the Registrant maintains some long-term sales contracts with its
customers. These agreements, which provide the pricing structure of product, as well as various other guidelines for the
relationship between the parties, do not require the customers to purchase or the Company to sell any specific quantity of
product.
From time to time, the Registrant may use television, radio and newspaper advertising, point of purchase material,
social media and other marketing techniques to develop consumer awareness of and brand recognition for its Sanderson
Farms® products. The Registrant has achieved a high level of public awareness and acceptance of its products in its core
markets. Brand awareness is an important element of the Registrant’s marketing philosophy, and it intends to continue brand
name merchandising of its products. During calendar 2004, the Company launched an advertising campaign designed to
distinguish the Company’s fresh chicken products from competitors’ products. The campaign noted that the Company’s
product is a natural product free from salt, water and other additives that some competitors inject into their fresh chicken. The
Company continues to use various media to communicate this message today. During fiscal 2016, the Company launched a
multi-media advertising campaign designed to explain and support the Company's position regarding the judicious use of
antibiotics to prevent illness and treat chickens that become ill. During fiscal 2017, the Company launched a multi-media
advertising campaign designed to dispel many of the myths about poultry production. The Company regularly evaluates the
success of this campaign and, while not currently advertising aggressively on television, expects to continue to use the
campaign in other media, at least for the near term.
The Registrant’s prepared chicken items are sold nationally, primarily to distributors and national food service
accounts. Sales of such products are handled by sales personnel of the Registrant and by independent food brokers. Prepared
chicken items are distributed from the Registrant’s plant in Flowood, Mississippi, through arrangements with contract
carriers.
Production and Facilities
General. The Registrant is a fully, vertically-integrated producer of fresh, frozen and minimally prepared chicken
products, controlling the production of hatching eggs, hatching, feed manufacturing, growing, processing and packaging of
its product lines.
Breeding and Hatching. The Registrant maintains its own breeder flocks for the production of hatching eggs. The
Registrant’s breeder flocks are acquired as one-day old chicks (known as pullets and cockerels) from primary breeding
companies that specialize in the production of genetically designed breeder stock. As of October 31, 2019, the Registrant
maintained contracts with 70 independent contract pullet producers for the grow-out of pullets (growing the pullet to the
point at which it is capable of egg production, which takes approximately six months). Thereafter, the mature breeder flocks
are transported by the Registrant’s vehicles to breeder farms that are maintained, as of October 31, 2019, by 161 independent
contractors under the Registrant’s supervision. Eggs produced on the farms of independent contract breeder producers are
transported to the Registrant’s hatcheries in the Registrant’s vehicles.
The Registrant owns and operates eleven hatcheries located in Mississippi, Texas, Georgia and North Carolina where
eggs are incubated, vaccinated and hatched in a process requiring 21 days. The chicks are vaccinated against common poultry
diseases and are transported by the Registrant’s vehicles to independent contract grow-out farms. As of October 31, 2019, the
Registrant’s hatcheries were capable of producing an aggregate of approximately 14.0 million chicks per week.
Grow-out. The Registrant places its chicks on the farms of 818 independent contract broiler producers, as of
October 31, 2019, located in Mississippi, Texas, Georgia and North Carolina, where broilers are grown to an age of
approximately seven to nine weeks. The farms provide the Registrant with sufficient housing capacity for its operations, and
are typically family-owned farms operated under contract with the Registrant. The farm owners provide facilities, utilities
and labor; the Registrant supplies the day-old chicks, feed and veterinary and technical services. The independent contract
poultry producers are compensated pursuant to an incentive formula designed to promote production cost efficiency.
10
Historically, the Registrant has been able to accommodate expansion in grow-out facilities through additional contract
arrangements with independent contract producers.
Feed Mills. An important factor in the grow-out of chickens is the rate at which chickens convert feed into body
weight. The Registrant purchases primary feed ingredients on the open market. Ingredients include corn and soybean meal,
which are the largest cost components of the Registrant’s total feed costs. The quality and composition of the feed are critical
to the conversion rate, and accordingly, the Registrant formulates and produces its own feed. As of October 31, 2019, the
Registrant operated nine feed mills, four of which are located in Mississippi, three in Texas, one in Georgia and one in North
Carolina. The Registrant’s annual feed requirements for fiscal 2019 were approximately 4.9 million tons, and it has the
capacity to produce approximately 6.6 million tons of finished feed annually under current configurations.
Feed grains are commodities subject to volatile price changes caused by weather, size of harvest, transportation and
storage costs, domestic and export demand and the agricultural and energy policies of the United States and foreign
governments. On October 31, 2019, the Registrant had the capacity to store approximately 4.4 million bushels of corn at its
feed mills, which was sufficient to store approximately one week's requirements for corn. Generally, the Registrant purchases
its corn and other feed ingredients at current prices from suppliers and, to a limited extent, directly from farmers. Feed grains
are available from an adequate number of sources. Although the Registrant has not experienced and does not anticipate
problems in securing adequate supplies of feed grains, price fluctuations of feed grains have a direct and material effect upon
the Registrant’s profitability. Although the Registrant attempts to manage the risk of volatile price changes in grain markets
by sometimes purchasing grain at current prices for future delivery, it cannot eliminate the potentially adverse effect of grain
price increases.
Processing. Once broilers reach processing weight, they are transported in the Registrant's vehicles to the Registrant’s
processing plants. These plants use modern, highly automated equipment to process and package the chickens. The
Registrant’s McComb and Collins, Mississippi; Moultrie, Georgia; Kinston and St. Pauls, North Carolina and Bryan, Waco,
Palestine and Tyler, Texas processing plants operate two processing lines on a double shift basis with the capacity to process
approximately 1,300,000 chickens per week as of October 31, 2019. The Registrant’s Laurel and Hazlehurst, Mississippi and
Hammond, Louisiana processing plants operate on a double shift basis with the capacity to process approximately 650,000
chickens per week as of October 31, 2019. At October 31, 2019, the Company’s deboning facilities were operating on a
double shift basis and had the capacity to produce approximately 19.8 million pounds of big bird boneless breast and tenders
finished product and 12.3 million pounds of chill-pack boneless breast and tenders finished product each week.
Prepared Chicken. The Company's prepared chicken plant is located in Flowood, Mississippi and has approximately
85,000 square feet of refrigerated manufacturing and storage space. The plant uses highly automated equipment to prepare,
process and freeze prepared chicken items.
Executive Offices; Other Facilities. The Registrant’s laboratory and corporate offices are located on separate sites in
Laurel, Mississippi. The office buildings house the Company’s corporate offices, meeting facilities and computer equipment
and constitute the corporate headquarters. As of October 31, 2019, the Registrant operated 16 automotive maintenance shops,
which service over 1,300 over-the-road and farm vehicles used to support the Registrant's operations. In addition, the
Registrant has one child care facility located near its Collins, Mississippi processing plant, serving on average approximately
210 children as of October 31, 2019.
Quality Control
The Registrant believes that quality control is important to its business and conducts quality control activities
throughout all aspects of its operations. The Registrant believes these activities are beneficial to efficient production and in
assuring its customers receive wholesome, high quality products.
From its laboratory in Laurel, Mississippi, the Company's Director of Technical Services supervises the operation of a
laboratory which, among other things, monitors sanitation at the hatcheries, quality and purity of the Registrant’s feed
ingredients and feed, the health of the Registrant’s breeder and broiler flocks, and conducts microbiological tests on live
chickens, facilities and finished products. The Registrant conducts on-site quality control activities at each of its twelve
processing plants and the prepared chicken plant.
11
Regulation
The Registrant’s facilities and operations are subject to regulation by various federal and state agencies, including, but
not limited to, the Federal Food and Drug Administration (“FDA”), the United States Department of Agriculture (“USDA”),
the Environmental Protection Agency ("EPA"), the Occupational Safety and Health Administration (“OSHA”) and
corresponding state agencies. The Registrant’s chicken processing plants are subject to continuous on-site inspection by the
USDA. The Registrant's prepared chicken plant operates under the USDA’s Total Quality Control Program, which is a strict
self-inspection plan written in cooperation with and monitored by the USDA. The FDA inspects the production at the
Registrant’s feed mills.
Compliance with existing regulations has not had a material adverse effect upon the Registrant’s earnings or
competitive position in the past. Management believes that the Registrant is in substantial compliance with existing laws and
regulations relating to the operation of its facilities and does not know of any major capital expenditures necessary to comply
with such statutes and regulations.
The Registrant takes extensive precautions to ensure that its flocks are healthy and that its processing plants and other
facilities operate in a healthy and environmentally sound manner. Events beyond the control of the Registrant, however, such
as an outbreak of disease in its flocks or the adoption by governmental agencies of more stringent regulations, could
materially and adversely affect its operations.
Competition
The Registrant is subject to significant competition from regional and national firms in all markets in which it
competes. Some of the Registrant’s competitors have greater financial and marketing resources than the Registrant.
The primary methods of competition are price, product quality, number of products offered, brand awareness and
customer service. The Registrant has emphasized product quality and brand awareness through its advertising strategy. See
“Business — Sales and Marketing.” Although poultry is relatively inexpensive in comparison with other meats, the
Registrant competes indirectly with the producers of other meats and fish, since changes in the relative prices of these foods
may alter consumer buying patterns.
Customers
Two customers each accounted for more than 10% of the Registrant’s consolidated sales for the years ended
October 31, 2019, and October 31, 2018, and one customer accounted for more than 10% of consolidated sales for the year
ended October 31, 2017. Sales to the two customers in fiscal 2019 accounted for 15.8% and 11.8%, respectively, of the
Company's consolidated net sales and in 2018 accounted for 14.3% and 10.5%, respectively, of the Company's consolidated
net sales. Sales to the customer in fiscal 2017 accounted for 17.0% of the Company’s consolidated net sales. The Company
does not believe the loss of these or any other single customer would have a material adverse effect on the Company because
it could sell poultry earmarked for any single customer to alternative customers at market prices.
Sources of Supply
During fiscal 2019, the Registrant purchased its pullets and cockerels from a single major breeder. The Registrant has
found the genetic breeds or cross breeds supplied by this company produce chickens most suitable to the Registrant’s
purposes. The Registrant has no written contracts with this breeder for the supply of breeder stock. Other sources of breeder
stock are available, and the Registrant continually evaluates these sources of supply.
Should breeder stock from its present supplier not be available for any reason, the Registrant believes that it could
obtain adequate breeder stock from other suppliers.
Other major raw materials used by the Registrant include feed grains and other feed ingredients, cooking ingredients
and packaging materials. The Registrant purchases these materials from a number of vendors and believes that its sources of
supply are adequate for its present needs. The Registrant does not anticipate any difficulty in obtaining these materials in the
future.
12
Seasonality
The demand for the Registrant’s chicken products generally is greatest during the spring and summer months and
lowest during the winter months.
Trademarks
The Registrant has registered with the United States Patent and Trademark Office the trademark Sanderson Farms®,
which it uses in connection with the distribution of its prepared chicken and premium grade chill-pack products. The
Registrant considers the protection of this trademark to be important to its marketing efforts due to consumer awareness of
and loyalty to the Sanderson Farms® label. The Registrant also has registered with the United States Patent and Trademark
Office six other trademarks that are used in connection with the distribution of chicken and other products and for other
competitive purposes.
The Registrant, over the years, has developed important non-public proprietary information regarding product-related
matters. While the Registrant has internal safeguards and procedures to protect the confidentiality of such information, it does
not generally seek patent protection for its technology.
Employee and Labor Relations
As of October 31, 2019, the Registrant had 17,055 employees, including 1,947 salaried and 15,108 hourly employees.
A collective bargaining agreement with the United Food and Commercial Workers International Union covering 576 hourly
employees who work at the Registrant’s processing plant in Hammond, Louisiana expires on November 30, 2022.
The production, maintenance and clean-up employees at the Company’s Bryan, Texas poultry processing facility are
represented by the United Food and Commercial Workers Union Local #408, AFL-CIO. A collective bargaining agreement
covering 1,470 employees expires on December 31, 2023. The collective bargaining agreement has a grievance procedure
and no strike-no lockout clause that should assist in maintaining stable labor relations at the Bryan, Texas processing facility.
(e) AVAILABLE INFORMATION
The Company's website is http://www.sandersonfarms.com. The information on our website is not a part of this
document. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and all
amendments to those reports are available, free of charge, through our website as soon as reasonably practicable after they are
filed with the SEC. Our corporate code of conduct is also available, free of charge, through our website. Information
concerning corporate governance matters is also available on the website.
13
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the following factors, which could
materially affect our business, financial condition or results of operations in future periods. The risks described below are
not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial
also may materially adversely affect our business, financial condition or results of operations in future periods.
Industry volatility can affect our earnings, especially due to fluctuations in commodity prices of feed ingredients and chicken.
Profitability in the poultry industry is materially affected by the commodity prices of feed ingredients, chicken, and, to
a lesser extent, alternative proteins. These prices are determined by supply and demand factors, and supply and demand
factors related to feed ingredients and chicken may not correlate. As a result, the poultry industry is subject to wide
fluctuations in profitability. Typically we do well when chicken prices are high and feed prices are low. We are less
profitable, and sometimes have losses, when chicken prices are low and feed prices are high. For example, grain prices during
2011 were high, while prices for chicken products did not increase proportionally, and the Company lost money. During
2012 and 2013, grain prices remained high, but market prices for chicken also increased, and the Company was profitable.
During fiscal 2014 and fiscal 2015, grain prices declined while market prices for chicken increased, and the Company earned
near record-high margins.
Various factors that are beyond our control can affect the supply of corn and soybean meal, our primary feed
ingredients. In particular, global weather patterns, including adverse weather conditions that may result from climate change,
the global level of supply inventories and demand for feed ingredients, currency fluctuations and the agricultural and energy
policies of the United States and foreign governments all affect the supply of feed ingredients. Weather patterns often change
agricultural conditions in an unpredictable manner. A sudden and significant change in weather patterns could affect supplies
of feed ingredients, as well as both the industry’s and our ability to obtain feed ingredients, grow chickens or deliver
products. For example, historic drought conditions in the Midwestern United States in 2012 had a significant adverse effect
on the supply and price of feed grains in fiscal 2012 and the first three quarters of 2013. Additionally, an increase in ethanol
producers' demand for corn has historically resulted in increases in the costs for corn and other grains.
Increases in the prices of feed ingredients will result in increases in raw material costs and operating costs. Because
prices for our products are related to the commodity prices of chickens, which depend on the supply and demand dynamics of
fresh chicken, we typically are not able to increase our product prices to offset increased grain costs. Although we
periodically enter into contracts to purchase feed ingredients at current prices for future delivery to manage our feed
ingredient costs, this practice does not eliminate the risk of increased operating costs from commodity price increases. In
addition, if we are unsuccessful in our grain buying strategy, we could actually pay a higher cost for feed ingredients than we
would if we purchased at current prices for current delivery.
It is very difficult to predict how the chicken and grain markets will perform. The exposure of our business to the
cyclical nature and volatility of commodities markets for raw materials and poultry could adversely affect our profitability,
financial condition and results of operations.
Our stock price may be volatile.
The market price of our common stock could be subject to wide fluctuations in response to factors such as the
following, many of which are beyond our control:
• market volatility and fluctuations in the price of feed grains and chicken products, as described above;
•
quarterly variations in our operating results, or results that vary from the expectations of securities analysts
and investors;
changes in investor perceptions of the poultry industry in general, including our competitors; and
general economic and competitive conditions.
•
•
In addition, purchases or sales of large quantities of our stock, or significant short positions in our stock, could have an
unusual or adverse effect on our market price.
We may be required to write down the value of our inventories if the net realizable value of our inventories is less than their
accumulated cost at the end of a fiscal period.
14
Prepared chicken and poultry inventories, and inventories of feed, eggs, medication, packaging supplies and live
chickens, are stated on our balance sheet at the lower of cost (average method) or net realizable value. Our cost of sales is
calculated during a period by adding the value of our inventories at the beginning of the period to the cost of growing,
processing and distributing products produced during the period and subtracting the value of our inventories at the end of the
period. If the net realizable values of our inventories are below the accumulated cost of those inventories at the end of a
period, we record adjustments to write down the carrying value of the inventory from cost to net realizable value. These
write-downs directly increase our cost of sales by the amount of the write-downs. This risk is greatest when the costs of feed
ingredients are high and the market value for finished poultry products is declining.
Any such adjustment we may make in one period effectively absorbs into that period a portion of the costs to grow,
process and distribute chickens that we would have otherwise incurred in the next fiscal period, thereby benefiting the next
period. Any such adjustments that we make in the future could be material, and could materially adversely affect our
financial condition and results of operations. The Company recorded a charge of $2.8 million at October 31, 2019 and of $9.6
million at October 31, 2018 to reduce the values of live inventories on hand at those dates from cost to net realizable value.
The Company recorded no such charge at October 31, 2017.
Inclement weather, such as excessive heat or storms, or other disasters, could have a material adverse effect on our results of
operations.
Extreme weather in the areas where we operate or where our feed grains are grown, such as extreme temperatures,
drought, hurricanes or other storms, or other natural disasters or calamities such as terrorist attacks or pandemics, could
increase our costs, impair the health or growth of our flocks or interfere with our hatching, production or shipping operations.
Some scientists believe that climate change could increase the frequency and severity of adverse weather events. Extreme
weather, regardless of its cause, or other adverse events, could affect our business by causing, among other things:
•
•
•
•
•
• water shortages;
•
•
•
shortages or high prices of corn, soybeans or other grains we use to make feed;
power outages;
fuel shortages;
damage to infrastructure or our facilities;
damage or destruction of live, raw material, or finished goods inventories;
disruption of shipping channels;
less efficient or non-routine operating practices necessitated by adverse events; or
increased costs of insurance coverage in the aftermath of such events.
Any of these factors could materially and adversely affect our results of operations. We may not be able to recover
through insurance all of the damages, losses or costs that may result from such adverse events, including those that may be
caused by climate change.
Outbreaks of avian disease, such as avian influenza, or the perception that outbreaks may occur, can significantly restrict
our ability to conduct our operations and can significantly affect demand for our products.
Events beyond our control, such as the outbreak of avian disease or the perception that an outbreak may occur, even if it
does not affect our flocks, could significantly restrict our ability to conduct our operations or our sales. An outbreak of
disease could result in governmental restrictions on the import and export of fresh and frozen chicken, including our fresh
and frozen chicken products, or other products to or from our suppliers, facilities or customers, or require us to destroy one or
more of our flocks. This could result in the cancellation of orders by our customers and create adverse publicity that may
have a material adverse effect on our business, reputation and prospects. In addition, world-wide fears about avian disease,
such as avian influenza, have, in the past, depressed demand for fresh chicken, which adversely affected our sales during and
around that time.
In past years there has been substantial publicity regarding a highly pathogenic Asian strain of avian influenza, or AI,
known as H5N1, which has affected Asia since 2002 and which has been found in Europe, the Middle East and Africa. It is
widely believed that this strain of AI is spread by migratory birds, such as ducks and geese. There have also been some cases
where this strain of AI is believed to have passed from birds to humans as humans came into contact with live birds that were
infected with the disease.
15
Although the Asian strains of AI described above have not been identified in North America, there have been outbreaks
of both low and high pathogenic strains of non-Asian avian influenza in North America, including in the U.S. in 2002, 2004,
2006, 2015, 2017 and 2018, and in Mexico in 2005, 2012, 2013, 2015 and 2017.
Until 2015, the outbreaks in North America had not generated the same level of concern, or received the same level of
publicity, or been accompanied by the same reduction in demand for poultry products in certain countries, as that associated
with the Asian strains. Beginning in January 2015, however, the United States experienced what some industry observers
believe was the worst avian influenza outbreak in United States history. According to the United States Animal and Plant
Health Inspection Service (APHIS), approximately 7.8 million turkeys and 40.3 million chickens were affected in the United
States by this avian influenza outbreak, and the last reported case was in June 2015. The affected chickens were almost all
hens that lay eggs for the table egg industry, and not broiler chickens such as those we raise. We have a high degree of
confidence in our industry’s biosecurity program, but we cannot be certain our flocks or others in our industry will not be
affected. Given our high degree of confidence in our biosecurity programs, we believe the primary risks associated with
domestic outbreaks of avian influenza are market risks, as many countries to which our industry sells product imposed partial
or total bans on the import of broiler meat produced in the United States as a result of the outbreak.
All AI related bans that were imposed following the 2015 outbreak in the United States have been lifted, the last of
which was lifted by China on November 14, 2019. While these bans were in place, the market price for leg quarters fell
significantly below historical averages. For more information on the impact of this outbreak on exports, please see the risk
factor below entitled “A decrease in demand for our products in the export markets could materially and adversely affect our
results of operations.”
While domestic demand for broiler meat was not materially affected by the 2015 outbreak, we cannot assure you that
further spread of AI or the outbreak of the Asian strains of AI either in other countries or in the United States will not
materially adversely affect both domestic and international demand for poultry products produced in the United States.
Because the virus is carried by migratory water fowl, it is possible the virus could be spread to domestic poultry flocks during
any seasonal migration of those water fowl. If AI were to affect a significant number of our flocks, or materially reduce
domestic demand for our products, either or both of these events could have a material adverse effect on our business,
reputation or prospects.
A decrease in demand for our products in the export markets could materially and adversely affect our results of operations.
Nearly all of our customers are based in the United States, but some of our product is sold directly to foreign
customers, and some of our United States based customers resell poultry products in the export markets. Our chicken
products have been sold in Russia and other former Soviet countries, China and Mexico, among other countries.
Approximately 8.1% of our gross sales in fiscal 2019 were to export markets, including approximately $156.6 million to
Mexico, $43.6 million to countries in Central Asia and $29.0 million to Cuba. Any disruption to the export markets, such as
trade embargoes, tariffs, import bans, duties, quotas, currency fluctuations, adverse political and economic conditions in
countries to which we export our products, disruptions in shipping channels, or changes in governmental trade policies or
agreements with countries to which we sell products, can materially affect our sales or create an oversupply of chicken in the
United States. This, in turn, can cause domestic poultry prices to decline. Any quotas or bans can materially and adversely
affect our sales and our results of operations.
On February 5, 2010, China announced that it would impose anti-dumping duties on U.S. chicken products beginning
on February 13, 2010. The duty applicable to Sanderson Farms products was 64.5%. On April 28, 2010, China imposed
countervailing duties on United States chicken products, raising the duty applicable to Sanderson Farms’ products by 6.1% to
70.6%. A challenge to China’s anti-dumping determination was filed by the U.S. government with the World Trade
Organization (WTO), which ruled in favor of the U.S. on September 25, 2013. China did not appeal the WTO ruling. On July
8, 2014, China announced that it had re-investigated charges that United States chicken exporters dump product in the
Chinese domestic market, causing substantial harm to the local industry. Despite the WTO’s findings, China announced that
its re-investigation revealed that United States exporters continue to dump product into the local Chinese market. While
China announced lower anti-dumping tariffs on certain United States producers in its July 8, 2014 announcement, the tariffs
actually increased on most United States producers, including Sanderson Farms. The United States government continued to
challenge China’s actions at the WTO, and in February 2018, China announced that it would eliminate the anti-dumping
duties.
16
On January 8, 2015, China announced a ban on the import of United States poultry meat following the discovery of
avian influenza in a wild bird in the Pacific Northwest. Avian influenza was later detected in commercial poultry flocks in
fifteen states. China lifted the ban on November 14, 2019. During fiscal 2014, the Company sold approximately 74.9 million
pounds of poultry meat, primarily chicken paws and wing tips, to customers who resold the product in China, reflecting
approximately $62.1 million in total sales. Because there were no material domestic or export markets for these products
other than China, the Company began rendering most of those products for significantly lower returns after imposition of the
Chinese ban. As a result, during fiscal 2015 before the ban's effective date, the Company sold only approximately 22.8
million pounds of poultry meat, primarily chicken paws and wing tips, to customers who resold the product in China,
reflecting approximately $20.0 million in total sales. Now that the ban has been lifted, the Company is once again selling
poultry meat, primarily chicken paws and wing tips, to customers who resell the product in China. At full production, the
Company has the capacity to produce approximately 87.0 million pounds of chicken paws annually.
The loss of our major customers could have a material adverse effect on our results of operations.
Our sales to our top ten customers represented approximately 54.0% of our net sales during fiscal 2019. Our contracts
with our customers provide pricing structures, but do not require customers to purchase any specific quantity of product.
Therefore, our customers could significantly reduce or cease their purchases from us with little or no advance notice, which
could materially and adversely affect our sales and results of operations.
We must identify changing consumer preferences, trends and purchasing behaviors, and offer food products that consumers
want.
Our success depends, in part, on our ability to offer products that appeal to our customers and to respond to evolving
consumer preferences, trends and purchasing behaviors. Consumer behavior is influenced by factors such as, among other
things:
•
•
•
•
perceptions about the health and social implications of food products;
safety and quality of food products;
price; and
distribution channels.
Consumers are sometimes influenced by negative publicity about food production, including stories that are inaccurate
or misleading. The expanding role of social and digital media has increased the speed and extent to which people can share
information (whether or not accurate) and opinions about our products. If we do not identify and react timely to negative
publicity, or inaccurate or misleading stories, we may experience reduced demand and pricing for our products. Prolonged
negative perceptions about our products, our brand or our Company, or a loss of confidence by consumers in our products,
could materially and adversely affect our reputation, sales, financial condition and results of operations.
We may also introduce new products and improved products from time to time to satisfy evolving consumer
preferences, trends and purchasing behaviors, and may incur significant development and marketing costs in doing so. If our
products fail to meet evolving consumer preferences, trends and purchasing behaviors, then these products and our marketing
strategy will be less successful. Additionally, because we produce only chicken products, we may be limited in our ability to
respond to changes in consumer preferences towards other animal proteins or away from animal proteins entirely.
We have devoted significant resources to marketing and public relations programs that inform consumers about the
safety and quality of our products and our production practices, including our use of antibiotics in raising live chickens.
However, we are subject to legal and regulatory restrictions on the marketing and labeling of our products, which may
hamper our marketing efforts. We must also keep pace with a rapidly changing media environment and advertising and
marketing channels. If our marketing and public relations efforts are not effective, if consumers believe we have acted
irresponsibly, or we are not successful in developing and marketing new products, then our competitive position, reputation
and market share may suffer. This, in turn, could lead to lower sales and profits, which could materially and adversely affect
our results of operations and financial condition.
Failure of our information technology infrastructure or software could adversely affect our day-to-day operations and decision
making processes and have an adverse effect on our performance.
17
We depend on accurate and timely information and numerical data from key software applications to aid our day-to-
day business, financial reporting and decision-making and, in many cases, proprietary and custom-designed software is
necessary to operate equipment in our feed mills, hatcheries and processing plants. In our day-to-day business, we depend on
information technology for, among other things, electronic communications between our facilities, personnel, customers and
suppliers, and for digital marketing and public information.
We have put in place disaster recovery plans for our critical systems. However, any disruption caused by the failure of
these systems, the underlying equipment, or communication networks could delay or otherwise adversely impact our day-to-
day business and decision making, could make it impossible for us to operate critical equipment, and could have a materially
adverse effect on our performance, if our disaster recovery plans do not mitigate the disruption. Disruptions could be caused
by a variety of factors, such as catastrophic events or weather, natural disasters, power or telecommunications outages,
viruses, terrorist attacks, unauthorized access or cyber-attacks on our systems by outside parties. In addition, a breach of our
cyber-security measures could result in the loss, destruction or theft of confidential or proprietary data or other consequences,
and could expose us to material losses or liability to third parties. Similar risks exist with respect to third parties who may
possess our confidential data, such as our IT support providers, third party benefit and other administrators, professional
advisors and consultants, and our financial institutions.
Cyber-attacks and other cyber incidents are occurring more frequently, and are constantly evolving in nature and
sophistication. Our failure to maintain our cyber-security measures and keep abreast of new and evolving threats may make
our systems vulnerable. The vulnerability of our systems and our failure to identify or respond timely to cyber incidents
could have an adverse effect on our operations and reputation and expose us to liability or regulatory enforcement actions.
We would be adversely affected if we expand our business by acquiring other businesses or by building new facilities, but fail
to successfully integrate the acquired business or run a new facility efficiently.
We regularly evaluate expansion opportunities such as acquiring other businesses or building new facilities. Significant
expansion involves risks such as:
•
•
•
•
•
•
•
the availability and terms of additional debt or equity financing and its effect on our financial condition;
increases in our expenses and working capital needs;
integrating the acquired business or new facilities into our operations;
attracting and retaining growers;
streamlining overlapping supply chains;
identifying customers for additional product we produce and retaining existing customers; and
identifying and training our key managers and employees to run the new business or facility, while continuing to
operate our existing facilities efficiently.
Additional risks related to acquisition transactions may include:
difficulty identifying suitable candidates for acquisitions or consummating transactions on terms that are favorable;
implementing and maintaining consistent standards, controls, procedures and information systems;
potential loss of key employees or customers of any acquired business;
•
•
•
• managing the geographic distance of an acquired business from our other facilities; and
•
exposure to unforeseen or undisclosed liabilities of any acquired business.
Successful expansion depends on our ability to timely integrate the acquired business or efficiently operate the new
facility, to devote significant management attention to the project and its integration in our business, and to manage a larger
overall company efficiently. If we are unable to do this, expansion could adversely affect our operations, financial results
and prospects, and we might not realize the cost savings and synergies we expected from the expansion. Additionally, the
diversion of management’s attention from day-to-day business operations and the execution of our strategic plan could
adversely impact our performance.
The construction and potential benefits of our new facilities are subject to risks and uncertainties.
For any new facility that we build, our ability to complete construction on a timely basis and within budget is subject to
a number of risks and uncertainties described below. In addition, when a new facility becomes operational, it may not
18
generate the benefits we expect if demand for the products to be produced by the facility is different from what we expect or
we do not operate the facility efficiently.
In order to complete construction of a new facility, we need to take a significant number of steps and obtain a number
of approvals and permits, none of which we can assure you will be obtained. For example, for each new fresh and frozen
chicken complex, we need to:
•
•
•
•
•
•
identify a site and purchase or lease such site;
obtain a number of licenses and permits;
enter into construction contracts;
identify and enter into contracts with a sufficient number of independent contract poultry producers;
complete construction on time; and
hire and train our workforce.
If we are unable to complete construction on schedule, attract independent contract poultry producers, find customers
for the additional product produced by the new facility, run the facility efficiently, or otherwise achieve the expected benefits
of our new facilities, our business could be negatively affected.
The poultry industry is highly competitive.
In general, the competitive factors in the U.S. poultry industry include:
•
•
•
•
•
•
price;
product quality;
brand identification;
innovation;
breadth of product line; and
customer service.
Competitive factors vary by major customer markets. Some of our competitors have greater financial and marketing
resources than we have. In the food service market, competition is based on consistent quality, product development,
customer service and price. In the U.S. retail grocery market, we believe that competition is based on product quality, brand
awareness, price and customer service. Our success depends in part on our ability to manage costs and be efficient in the
highly competitive poultry industry.
We depend on the availability of, and good relations with, our employees and contract growers.
We have approximately 17,055 employees, approximately 2,046 of which are covered by collective bargaining
agreements. In addition, we contract with approximately 1,049 independent contract poultry producers in Mississippi, Texas,
North Carolina and Georgia for the grow-out of our breeder and broiler stock and the production of broiler eggs. Our
operations depend on the availability of labor and contract growers and maintaining good relations with these persons and
with labor unions. If we fail to maintain good relations with our employees or with the unions, we may experience labor
strikes or work stoppages. If we do not attract and maintain contracts with our growers, including new growers for our new
poultry complexes, our production operations could be negatively impacted and/or our growth could be constrained.
Immigration legislation and enforcement may affect our ability to hire hourly workers.
Immigration reform continues to attract significant attention in the public arena and the United States Congress. If new
immigration legislation is enacted at the federal level or in states in which we do business, such legislation may contain
provisions that could make it more difficult or costly for us to hire United States citizens and/or legal immigrant workers. In
such case, we may incur additional costs to run our business or may have to change the way we conduct our operations, either
of which could have a material adverse effect on our business, operating results and financial condition. Also, despite our
past and continuing efforts to hire only United States citizens and/or persons legally authorized to work in the United States,
increased enforcement efforts with respect to existing immigration laws by governmental authorities may disrupt a portion of
our workforce or our operations at one or more of our facilities, thereby negatively affecting our business. Officials with the
Bureau of Immigration and Customs Enforcement have informally indicated intent to focus their enforcement efforts on meat
and poultry processors.
19
If our poultry products become contaminated, we may be subject to product liability claims and product recalls.
Poultry products may contain disease-producing organisms, or pathogens, such as Listeria monocytogenes, Salmonella
and generic E. coli. These pathogens are generally found in the environment and, as a result, there is a risk that they could be
present in our processed poultry products as a result of food processing. In addition, it is possible foreign material such as
metal, plastic or other material used in our processing plants could contaminate product during processing. Pathogens or
foreign material can also be introduced as a result of improper handling by our customers, consumers or third parties after we
have shipped the products. We control these risks through careful processing and testing of our finished product, but we
cannot entirely eliminate them. We have little, if any, control over proper handling once the product has been shipped.
Nevertheless, contamination that results from improper handling by our customers, consumers or third parties, or tampering
with our products by those persons, may be blamed on us. Any publicity regarding product contamination or resulting illness
or death, even if we did not cause the contamination, could lead to increased scrutiny by regulators and could have a material
adverse effect on our business, reputation and future prospects.
If our products are contaminated or damaged, we could also be required to recall our products or close our plants, and
product liability claims could be asserted against us. A widespread product recall could be costly and could cause significant
losses, the destruction of product inventory, lost sales or customers due to the unavailability of product, adverse publicity,
damage to our reputation, and a loss of consumer confidence in our products.
We are exposed to risks relating to product liability, product recalls, property damage and injuries to persons, for which
insurance coverage is expensive, limited and potentially inadequate.
Our business operations entail a number of risks, including risks relating to product liability claims, product recalls,
property damage and injuries to persons. The insurance we maintain with respect to certain of these risks, including product
liability and recall insurance, property insurance, workers compensation insurance and general liability insurance, is
expensive and difficult to obtain. We cannot assure you that we can maintain on reasonable terms sufficient coverage to
protect us against losses due to any of these events.
Governmental regulation and litigation are constant factors affecting our business.
The poultry industry is subject to federal, state, local and foreign governmental regulation relating to production of
food animals and the processing, packaging, storage, distribution, advertising, labeling, quality and safety of food products.
We are also subject to laws and regulations affecting businesses and public companies generally, including domestic and
foreign regulations that affect our export activity, such as the Foreign Corrupt Practices Act. Unknown matters, new laws
and regulations, or stricter interpretations of existing laws or regulations may materially affect or restrict our business and
operations or increase our costs in the future. Our failure to comply with applicable laws and regulations could subject us to
administrative, civil and criminal penalties, including fines, injunctions and recalls of our products. Our loss or failure to
obtain necessary permits and registrations could delay or prevent us from meeting customer demand, introducing new
products, or implementing our growth plan.
Our operations are also subject to extensive regulations administered by the Environmental Protection Agency, which,
among other things, pertain to the discharge of materials into the environment and the handling and disposition of wastes.
Failure to comply with these regulations can have serious consequences, including civil and administrative penalties and
negative publicity. Future discovery of contamination of property underlying or in the vicinity of our present or former
facilities could require us to incur additional expenses. Any of these events could adversely affect our financial results.
In addition to the risk of regulatory enforcement actions, we are subject to risk of private legal claims arising out of our
or our employees' failure or alleged failure to comply with applicable laws and regulations, including claims such as those
described in "Item 3. Legal Proceedings" of this report and the notes to our financial statements included in this report.
Trends in litigation may include class actions by consumers, shareholders, employees or injured persons, and claims relating
to commercial, labor, employment, antitrust, securities or environmental matters.
Although we believe we have implemented strict compliance programs and policies, along with effective internal
controls to guard against intentional and unintentional violations of law by our personnel, contractors and agents, we cannot
assure you that such persons will not violate our policies or the law, or be alleged to have done so. Our failure to maintain
effective control processes or to strictly enforce our policies may prevent us from detecting and preventing violations of law.
20
Defending regulatory enforcement actions and private litigation may be costly, and any adverse outcomes of actions or
litigation against us could materially and adversely affect our reputation, results of operation and financial condition.
Weak or unstable national or global economic conditions could negatively impact our business.
Our business may be adversely affected by:
• weak or volatile national or global economic conditions, including inflation;
•
•
•
•
•
•
unfavorable currency exchange rates and interest rates;
the lack of availability of credit on reasonable terms;
restricted access to capital markets;
changes in consumer spending rates and habits;
unemployment and underemployment; and
a tight energy supply and high energy costs.
Our business could be negatively affected if efforts and initiatives of the governments of the United States and other
countries to manage and stimulate the economy fail or result in worsening economic conditions. Deteriorating economic
conditions could negatively affect consumer demand for protein generally or our products specifically, consumers’ ability to
afford our products, consumer habits with respect to how they spend their food dollars, and the cost and availability of raw
materials we need.
Disruptions in credit and other financial markets caused by deteriorating or weak national and international economic
conditions could, among other things:
• make it more difficult for us, our customers or our growers or prospective growers to obtain financing and
•
•
•
credit on reasonable terms;
cause lenders to change their practice with respect to the industry generally or our company specifically in
terms of granting credit extensions and terms;
impair the financial condition of our customers, suppliers or growers making it difficult for them to meet their
obligations and supply raw material; or
impair the financial condition of our insurers, making it difficult or impossible for them to meet their
obligations to us.
We are, and in the future may become, involved in legal proceedings related to our alleged violations of antitrust, securities
fraud, and unfair competition and false advertising laws and, as a result, may incur substantial costs in connection with those
proceedings.
We are involved in the legal proceedings that are described in detail in Part I, Item 3 of this report entitled “Legal
Proceedings.” In general, those proceedings involve class actions and/or individual actions against us, and in one case
against certain of our officers, concerning:
•
•
•
•
•
allegations that we and other poultry producers conspired to fix the price of broiler chickens in violation of
state and federal antitrust laws, federal and state RICO laws, and other state laws;
allegations that we made statements in our SEC filings and press releases that were materially false and
misleading in light of our alleged, undisclosed violations of federal antitrust laws in order to, among other
things, “artificially inflate and maintain the market price of Sanderson Farms securities”;
allegations that we and other poultry producers unlawfully conspired to suppress the compensation of broiler
growers below competitive levels and to not solicit or hire broiler growers providing services for other poultry
producers;
allegations that we and other poultry producers unlawfully conspired to fix and depress the compensation paid
to certain broiler chicken processing plant employees; and
allegations that we are violating California and North Carolina unfair competition and false advertising laws
by, among other things, representing that our poultry products are “100% Natural” and that our chickens were
raised in “natural” conditions.
Additionally, we are complying with a grand jury subpoena from the United States Department of Justice, Antitrust
Division, related to the antitrust litigation mentioned above and a civil investigative demand from the Attorney General of the
State of Florida related to the Georgia Dock price index for poultry products. We have also received a demand from a
21
putative shareholder that we take action against current and former officers and directors for alleged breaches of their
fiduciary duties related to the antitrust and securities fraud allegations described above.
An adverse resolution of any proceedings related to the matters summarized above and described in more detail in Item
3, "Legal Proceedings" could subject us to significant monetary damages and other penalties, which could have a material
adverse effect on our results of operations, financial condition, and liquidity.
For additional information regarding the nature and status of these and other material legal proceedings, see Item 3,
"Legal Proceedings” and the notes to our financial statements included in this report.
Our business could be negatively impacted as a result of the actions of activist stockholders and others.
We occasionally receive shareholder proposals and voting recommendations from proxy advisory firms requesting
changes to our business operations. Additionally, we are occasionally the target of media campaigns requesting changes to
our business operations. Responding to such proposals and campaigns is costly and time-consuming, and may divert the
attention of our Board of Directors and senior management from the pursuit of our current business strategies. Additionally,
implementing any changes in response could have the effect of increasing our operating costs, and result in capital
expenditures to modify our facilities. We cannot assure you that we would be able to pass any such costs onto our customers.
Accordingly, such activism could adversely affect our profitability, financial condition and results of operations.
We rely heavily on the services of key personnel.
We depend substantially on the leadership of a small number of executive officers and other key employees. We have
employment agreements with only three of these persons (our Chairman of the Board and Chief Executive Officer, our
President and Chief Operating Officer, and our Treasurer and Chief Financial Officer), and those with whom we have no
agreement would not be bound by non-competition agreements or non-solicitation agreements if they were to leave us. The
loss of the services of these persons could deplete our institutional knowledge and could have a material adverse effect on our
business, results of operations and financial condition. In addition, we may not be able to attract, retain and train the new
management personnel we need for our new complexes, or do so at the pace necessary to sustain our significant company
growth.
Anti-takeover provisions in our charter and by-laws, as well as certain provisions of Mississippi law, may make it difficult for
anyone to acquire us without approval of our board of directors.
Our articles of incorporation and by-laws contain provisions that may discourage attempts to acquire control of our
company without the approval of our board of directors. These provisions, among others, include a classified board of
directors, advance notification requirements for stockholders to nominate persons for election to the board and to make
stockholder proposals, and special stockholder voting requirements. These measures, and any others we may adopt in the
future, as well as applicable provisions of Mississippi law, may discourage offers to acquire us and may permit our board of
directors to choose not to entertain offers to purchase us, even offers that are at a substantial premium to the market price of
our stock. Our stockholders may therefore be deprived of opportunities to profit from a sale of control of our company, and
as a result, the marketability and market price of our common stock may be adversely affected.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
The Registrant’s principal properties are as follows:
22
Use
Poultry processing plant, hatchery and feed mill
Poultry processing plant, hatchery and feed mill
Poultry processing plant, hatchery and feed mill
Poultry processing plant, hatchery and feed mill
Poultry processing plant, hatchery and feed mill
Poultry processing plant, hatchery and feed mill
Poultry processing plant, hatchery and feed mill
Poultry processing plant, hatchery and feed mill
Poultry processing plant and hatchery
Poultry processing plant and hatchery
Poultry processing plant
Poultry processing plant, hatchery, child care facility and feed mill
Prepared chicken plant
Corporate general offices and technical laboratory
Location (City, State)
Laurel, Mississippi
McComb, Mississippi
Hazlehurst and Gallman, Mississippi
Bryan and Robertson Counties, Texas
Moultrie and Adel, Georgia
Kinston and Lenoir County, North Carolina
Palestine and Freestone County, Texas
Smith County, Lindale and Mineola, Texas
Waco, Texas
Lumberton and St. Pauls, North Carolina
Hammond, Louisiana
Collins, Mississippi
Flowood, Mississippi
Laurel, Mississippi
There are no material encumbrances on the major operating facilities owned by the Registrant, except that, under the
terms of the Company’s revolving credit agreement, the Registrant may not pledge any additional assets as collateral other
than fixed assets not to exceed $5.0 million at any one time.
Management believes that the Company’s facilities are suitable for its current purposes, and believes that current
renovations and expansions will enhance present operations and allow for future internal growth.
Item 3.
Legal Proceedings
Between September 2, 2016 and October 13, 2016, Sanderson Farms, Inc. and our subsidiaries were named as
defendants, along with 13 other poultry producers and certain of their affiliated companies, in multiple putative class action
lawsuits filed by direct and indirect purchasers of broiler chickens in the United States District Court for the Northern District
of Illinois. The complaints allege that the defendants conspired to unlawfully fix, raise, maintain, and stabilize the price of
broiler chickens, thereby violating federal and certain states’ antitrust laws, and also allege certain related state-law claims.
The complaints also allege that the defendants fraudulently concealed the alleged anticompetitive conduct in furtherance of
the conspiracy. The complaints seek damages, including treble damages for the antitrust claims, injunctive relief, costs, and
attorneys’ fees. As detailed below, the Court has consolidated all of the direct purchaser complaints into one case, and the
indirect purchaser complaints into two cases, one on behalf of commercial and institutional indirect purchaser plaintiffs and
one on behalf of end-user consumer plaintiffs. The cases are part of a coordinated proceeding captioned In re Broiler Chicken
Antitrust Litigation.
On October 28, 2016, the direct and indirect purchaser plaintiffs filed consolidated, amended complaints, and on
November 23, 2016, the direct and indirect purchaser plaintiffs filed second amended complaints. On December 16, 2016, the
indirect purchaser plaintiffs separated into two cases. On that date, the commercial and institutional indirect purchaser
plaintiffs filed a third amended complaint, and the end-user consumer plaintiffs filed an amended complaint.
On January 27, 2017, the defendants filed motions to dismiss the amended complaints in all of the cases, and on
November 20, 2017, the motions to dismiss were denied. On February 7, 2018, the direct purchaser plaintiffs filed their third
amended complaint, adding three additional poultry producers as defendants. On February 12, 2018, the end-user consumer
plaintiffs filed their second amended complaint, in which they also added three additional poultry producers as defendants,
along with Agri Stats. On February 20, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fourth
amended complaint. On November 13, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fifth
amended complaint, adding three additional poultry producers as defendants. On November 28, 2018, the end-user consumer
plaintiffs filed their third amended complaint. On January 15, 2019, the direct purchaser plaintiffs filed their fourth amended
complaint, and the commercial and institutional indirect purchaser plaintiffs filed their sixth amended complaint. Both the
direct purchaser plaintiffs and the commercial and institutional indirect purchaser plaintiffs added two new poultry producers
as defendants, as well as Agri Stats. On April 29, 2019, the end-user consumer plaintiffs filed their fourth amended
complaint. The parties are currently engaged in discovery, subject to the limited stay discussed below.
23
Between December 8, 2017 and September 13, 2019, additional purported direct-purchaser entities individually brought
thirty-three separate suits against 19 poultry producers, including Sanderson Farms, and Agri Stats in the United States
District Court for the Northern District of Illinois, the United States District Court for the District of Kansas, the United
States District Court for the Western District of Arkansas, and the United States District Court for the District of Puerto Rico.
These suits allege substantially similar claims to the direct purchaser class complaint described above; certain of the suits
additionally allege related state-law and common law claims, and related claims under federal and Georgia RICO statutes.
Those suits filed in the Northern District of Illinois are now pending in front of the same judge as the putative class action
lawsuits. On June 26, 2018, the defendants filed a motion to transfer the case filed in the District of Kansas to the Northern
District of Illinois, and that motion was granted on September 13, 2018. On June 7, 2019, the plaintiffs filed a motion to
transfer the case filed in the Western District of Arkansas to the Northern District of Illinois, and that motion was granted on
June 11, 2019. On July 24, 2019, one of the defendants filed a motion to transfer the case filed in the District of Puerto Rico
to the Northern District of Illinois, and that motion was granted on July 25, 2019. On July 22, 2019, the Company moved to
dismiss in part those direct-purchaser complaints that allege claims under federal and Georgia RICO statutes against it. The
motion was fully briefed on September 20, 2019, and a hearing on the motion is scheduled for December 18, 2019. On
October 18, 2019, defendants moved to dismiss the case filed by the Commonwealth of Puerto Rico on its behalf and on
behalf of its citizens. The motion will be fully briefed on January 21, 2020. The parties are currently engaged in discovery,
subject to the limited stay discussed below. It is possible additional individual actions may be filed.
The Company is aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the
United States Department of Justice, Antitrust Division, a subpoena that included a request to produce all discovery in the
case to a grand jury. On June 27, 2019, the Court in In re Broiler Chicken Antitrust Litigation permitted the United States
Department of Justice to intervene in the case, as well as ordered certain discovery stayed until September 27, 2019. Before
the discovery stay expired on September 27, 2019, the United States Department of Justice asked the Court in In re Broiler
Chicken Antitrust Litigation to extend the discovery stay for an additional six months. On September 25, 2019, the Court
granted the additional stay of not less than three months. On October 16, 2019, after further consideration, the Court extended
the stay until June 27, 2020.
The Company received a grand jury subpoena in connection with the United States Department of Justice Antitrust
Division investigation on September 9, 2019. The Company is complying with the subpoena and producing documents as
requested.
We intend to continue to defend the lawsuits vigorously; however, the Company cannot predict the outcome of these
actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse
effect on our financial position and results of operations.
Sanderson Farms, Inc.; Joe F. Sanderson, Jr., the Chairman of the Registrant’s Board of Directors and its Chief
Executive Officer; and D. Michael Cockrell, director and Chief Financial Officer, were named as defendants in a putative
class action lawsuit filed on October 28, 2016, in the United States District Court for the Southern District of New York. On
March 30, 2017, the lead plaintiff filed an amended complaint adding Lampkin Butts, director, Chief Operating Officer, and
President, as a defendant, and on June 15, 2017, the lead plaintiff filed a second amended complaint. The complaint alleges
that the defendants made statements in the Company’s SEC filings and press releases, and other public statements, that were
materially false and misleading in light of the Company’s alleged, undisclosed violation of the federal antitrust laws
described above. The complaint also alleges that the material misstatements were made in order to, among other things,
“artificially inflate and maintain the market price of Sanderson Farms securities.” The complaint alleges the defendants
thereby violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder, and, for the individual defendants, Section 20(a) of the Exchange Act,
and seeks damages, interest, costs and attorneys’ fees. On January 19, 2018, the Court granted the defendants’ motion to
dismiss and entered judgment for the defendants. On January 31, 2018, the plaintiff filed a notice of appeal to the United
States Court of Appeals for the Second Circuit. The appeal was fully briefed, and the Court of Appeals heard oral argument
on August 31, 2018. On December 10, 2019, the Court of Appeals affirmed the District Court's decision granting the
defendants' motion to dismiss.
On January 30, 2017, the Company received a letter from an attorney representing a putative shareholder demanding
that the Company take action against current and/or former officers and directors of the Company for alleged breach of their
fiduciary duties. The shareholder asserted that the officers and directors (i) failed to take any action to stop the alleged
antitrust conspiracy described above, despite their alleged knowledge of the conspiracy, and (ii) made and/or caused the
Company to make materially false and misleading statements by failing to disclose the alleged conspiracy. The shareholder
also asserted that certain directors engaged in “insider sales” from which they improperly benefited. In addition to demanding
that the officers and directors be sued, the shareholder also demanded that the Company adopt unspecified corporate
governance improvements. On February 9, 2017, pursuant to statutory procedures available in connection with demands of
this type, the Company’s board of directors appointed a special committee of qualified directors to determine, after
24
conducting a reasonable inquiry, whether it was in the Company’s best interests to pursue any of the actions demanded in the
shareholder’s letter. On April 26, 2017, the special committee reported to the Company’s board of directors its determination
that it was not in the Company’s best interests to take any of the demanded actions at that time, and that no governance
improvements related to the subject matter of the demand were needed. On May 5, 2017, the special committee’s counsel
informed the shareholder’s counsel of the committee’s determination. As of the date of filing of this report, and to the
Company’s knowledge, no legal proceedings related to the shareholder’s demand have been filed. However, we are
voluntarily disclosing the existence of the shareholder demand for the sake of completeness, in light of its relationship to the
putative antitrust and securities class action lawsuits described above.
On January 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other
poultry producers and certain of their affiliated companies, in a putative class action lawsuit filed in the United States District
Court for the Eastern District of Oklahoma. On March 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as
defendants, along with four other poultry producers and certain of their affiliated companies, in a second putative class action
lawsuit filed in the United States District Court for the Eastern District of Oklahoma. The Court ordered the suits
consolidated into one proceeding, and on July 10, 2017, the plaintiffs filed a consolidated amended complaint. The
consolidated amended complaint alleges that the defendants unlawfully conspired by sharing data on compensation paid to
broiler farmers, with the purpose and effect of suppressing the farmers’ compensation below competitive levels. The
consolidated amended complaint also alleges that the defendants unlawfully conspired to not solicit or hire the broiler
farmers who were providing services to other defendants. The consolidated amended complaint seeks treble damages, costs
and attorneys’ fees. On September 8, 2017, the defendants filed a motion to dismiss the amended complaint, on October 23,
2017, the plaintiffs filed their response, and on November 22, 2017, the defendants filed a reply. On January 19, 2018, the
Court granted the Sanderson Farms defendants’ motion to dismiss for lack of personal jurisdiction. The motion to dismiss the
complaint filed in the Eastern District of Oklahoma on its merits is pending as to the remaining defendants. On February 21,
2018, the plaintiffs filed a substantially similar lawsuit in the United States District Court for the Eastern District of North
Carolina against Sanderson Farms and our subsidiaries and another poultry producer. The plaintiffs subsequently moved to
consolidate this action with the Eastern District of Oklahoma action in the Eastern District of Oklahoma for pre-trial
proceedings, with the defendants in support thereof. That motion was denied. On July 13, 2018, the defendants moved to
dismiss the lawsuit in the Eastern District of North Carolina, and briefing was completed on September 4, 2018. On January
15, 2019, the Court granted in part the defendants’ motion to dismiss and stayed the action in the Eastern District of North
Carolina pending resolution of the action in the Eastern District of Oklahoma. No discovery has taken place to date. We
intend to defend this case vigorously; however, the Company cannot predict the outcome of this action. If the plaintiffs were
to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position
and results of operations.
On February 21, 2017, Sanderson Farms, Inc. received an antitrust civil investigative demand from the Office of the
Attorney General, Department of Legal Affairs, of the State of Florida. Among other things, the demand seeks information
related to the Georgia Dock Index and other information on poultry and poultry products published by the Georgia
Department of Agriculture and its Poultry Market News division. The Company is cooperating fully with the investigative
demand, and we have responded to all requests received to date; however, we are unable to predict its outcome at this time.
Separately, the Company has become aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation
received from the Office of the Attorney General, Department of Legal Affairs, of the State of Florida, an antitrust civil
investigative demand that includes a request to produce all documents submitted by the recipients to the Department of
Justice relating to In re Broiler Chicken Antitrust Litigation. The Company is also aware that certain plaintiffs’ counsel in In
re Broiler Chicken Antitrust Litigation received from the Louisiana Department of Justice - Office of the Attorney General a
Civil Investigation Demand that included a request to produce all deposition transcripts from the civil litigation.
On June 22, 2017, the Company was named as a defendant in a lawsuit filed in the United States District Court for the
Northern District of California. The complaint, which was brought by three non-profit organizations (the Organic Consumers
Association, Friends of the Earth, and Center for Food Safety) alleged that the Company is violating the California Unfair
Competition Law and the California False Advertising Law by representing that its poultry products are “100% Natural”
products raised with “100% Natural” farming procedures. Among other things, the plaintiffs alleged that the Company’s
products contain residues of human and animal antibiotics, other pharmaceuticals, hormones, steroids, and pesticides.
Plaintiffs sought an order enjoining the Company from continuing its allegedly unlawful marketing program and requiring
the Company to conduct a corrective advertising campaign; an accounting of the Company’s profits derived from the
allegedly unlawful marketing practices; and attorneys’ fees, costs and interest. On August 2, 2017, the Company moved to
dismiss the lawsuit on various grounds. On August 23, 2017, the plaintiffs filed an amended complaint, which included
substantially similar allegations as the original complaint, and the Company filed a motion to dismiss the amended complaint
on September 13, 2017. On February 9, 2018, the Court denied the Company’s motion to dismiss. An initial scheduling
conference was held on March 1, 2018, and discovery started thereafter. On June 25, 2018, the plaintiffs amended their
complaint for a second time, including to remove allegations that USDA had found the Company’s chicken samples to
contain residues of antibiotics or other substances. On July 9, 2018, the Company filed a motion to dismiss the second
25
amended complaint. On July 18, 2018, during the pendency of that motion, the parties stipulated to the voluntary dismissal of
one of the plaintiff organizations (the Organic Consumers Association). The other two plaintiffs continued to prosecute their
claims. On September 11, 2018, the Court granted the motion to dismiss the second amended complaint with leave to amend
the complaint, and on October 2, 2018, the remaining plaintiffs filed a third amended complaint. The third amended
complaint alleged that the Company misleads consumers with regard to (1) the presence of unnatural residues in its chicken
products; (2) the fact that it uses antibiotics in raising its chickens; (3) the conditions in which it raises its chickens; and (4)
the risks of human antibiotic resistance caused by the Company’s use of antibiotics. On October 16, 2018, the Company
filed a motion to dismiss the third amended complaint, and on December 3, 2018, the Court denied that motion. Fact
discovery concluded on March 18, 2019. On April 1, 2019, Sanderson filed a motion to dismiss for lack of subject matter
jurisdiction on grounds that the remaining plaintiffs lacked standing. The Court held a hearing on the Company’s motion on
May 30, 2019. On July 31, 2019, the Court granted Sanderson’s motion without prejudice, stating that dismissal for lack of
standing must be without prejudice, but denied the plaintiffs leave to amend their complaint. On October 8, 2019, the Court
taxed $12,701 in costs in favor of Sanderson as the prevailing party.
On August 30, 2019, plaintiffs filed a notice of appeal of the District Court’s order of dismissal before the United States
Court of Appeals for the Ninth Circuit. Under the briefing schedule ordered by the Court of Appeals, plaintiffs’ opening brief
is due on January 8, 2020, and Sanderson’s response brief is due on February 7, 2020. Briefing is scheduled to be complete
by the end of February 2020, and oral argument is likely to be scheduled for late 2020 or early 2021. We intend to vigorously
defend the appeal. However, the Company cannot predict the outcome of this action. If the plaintiffs were to prevail, the
Company’s reputation and marketing program could be materially, adversely affected, which could have a material, adverse
effect on our financial position and results of operations.
On August 30, 2019, Sanderson Farms, Inc. and its Foods and Processing Divisions, as well as seventeen other poultry
producers and their affiliates; Agri Stats, Inc.; and Webber, Meng, Sahl and Company, Inc. (“WMS”), were named in a
putative class action filed in the United States District Court for the District of Maryland. To date, three other nearly identical
putative class action complaints, each seeking to represent the same putative class, have been filed. The complaints, brought
on behalf of non-supervisory production and maintenance employees at broiler chicken processing plants, allege that the
defendants unlawfully conspired by agreeing to fix and depress the compensation paid to them, including hourly wages and
compensation benefits, from January 1, 2009 to the present. The plaintiffs claim that broiler producers shared competitively
sensitive wage and benefits compensation information in three ways: (1) attending in-person meetings in Destin, Florida; (2)
receiving Agri Stats reports, as well as surveys taken and published by WMS; and (3) directly exchanging wage and benefits
information with plant managers at other defendant broiler producers. Plaintiffs allege that this conduct violated the Sherman
Antitrust Act.
On November 12, 2019, the Court ordered that the four putative class action complaints would be consolidated for all
pretrial purposes. The Court ordered plaintiffs to file their consolidated complaint on or before November 14, 2019.
Defendants’ motions to dismiss the consolidated complaint were filed on November 22, 2019. Briefing was scheduled to be
completed on or before February 28, 2020; however, on November 26, 2019, plaintiffs notified defendants that they intend to
file an amended consolidated complaint. Additional motions to dismiss likely will follow, after which the parties will wait for
a decision on the defendants' motion to dismiss from the trial court. We intend to defend these cases vigorously; however, the
Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for
damages, which could have a material, adverse effect on our financial position and results of operations.
On October 11, 2019, three named plaintiffs - Daniel Lentz, Pam La Fosse, and Marybeth Norman - filed, in the United
States District Court for the Northern District of California, a nationwide class action against Sanderson Farms, Inc. on behalf
of a putative class of all individuals and businesses throughout the United States who purchased one or more Sanderson
chicken products in the prior four years. The lawsuit alleges that the named plaintiffs and other class members purchased
Sanderson chicken products based on misleading representations in Sanderson’s advertising. Specifically, the plaintiffs in this
case allege that Sanderson’s advertising (including, but not limited to, on its website, television commercials, radio
advertisements, social media, print magazines, billboards, and trucks) misleads consumers into believing that (i) Sanderson’s
chickens were not given antibiotics or other pharmaceuticals, (ii) the chickens were raised in a “natural” environment, (iii)
there is no evidence that the use of antibiotics or other pharmaceuticals in poultry contributes to the evolution of antibiotic-
resistant bacteria, and (iv) Sanderson’s chicken products do not contain antibiotic or pharmaceutical residues. Plaintiffs allege
that (i) Sanderson “routinely” feeds antibiotics and pharmaceuticals to its chickens, (ii) Sanderson raises its chickens indoors
in “unnatural” indoor conditions amounting to “intensive confinement” and without natural light (iii) there is “extensive”
reliable evidence that the use of antibiotics in poultry contributes to antibiotic-resistant bacteria, and (iv) Sanderson’s
chickens have been found to contain antibiotic and pharmaceutical residue. The Complaint asserts five causes of action under
California and North Carolina law. The plaintiffs seek injunctive relief directing Sanderson to correct its practices and to
comply with consumer protection laws nationwide. The plaintiffs also seek monetary, compensatory, statutory, and punitive
damages, as well as attorneys’ and experts’ fees, costs, and expenses. Sanderson has not yet responded to the Complaint.
Sanderson’s response is due on December 20, 2019. We intend to defend these cases vigorously; however, the Company
26
cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which
could have a material, adverse effect on our financial position and results of operations.
The Company is involved in various other claims and litigation incidental to its business. Although the outcome of
these matters cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final
outcome of currently pending matters, other than those discussed above, should not have a material effect on the Company's
consolidated results of operations or financial position.
The Company recognizes the costs of legal defense for the legal proceedings to which it is a party in the periods
incurred. After a considerable analysis of each case, the Company has determined that no accrual is required for any of the
foregoing matters as of October 31, 2019. Future reserves may be required if losses are deemed reasonably estimable and
probable due to changes in the Company’s assumptions, the effectiveness of legal strategies, or other factors beyond the
Company’s control. Future results of operations may be materially affected by the creation of reserves or by accruals of
losses to reflect any adverse determinations in these legal proceedings.
Item 4.
Mine Safety Disclosures
Not Applicable
Item 4A. Executive Officers of the Registrant
Name
Joe F. Sanderson, Jr.
Lampkin Butts
Mike Cockrell
Tim Rigney
Office
Age
72 Chairman of the Board of Directors and Chief Executive Officer
68 President and Chief Operating Officer, Director
62 Treasurer, Chief Financial Officer and Chief Legal Officer, Director
55 Secretary and Chief Accounting Officer
Executive
Officer Since
1984 (1)
1996 (2)
1993 (3)
2012 (4)
_________________
(1) Joe F. Sanderson, Jr. has served as Chief Executive Officer of the Registrant since November 1, 1989, and as Chairman
of the Board since January 8, 1998. Mr. Sanderson served as President from November 1, 1989, to October 21, 2004.
From January 1984 to November 1989, Mr. Sanderson served as Vice-President, Processing and Marketing of the
Registrant.
(2) Lampkin Butts was elected President and Chief Operating Officer of the Registrant effective October 21, 2004. From
November 1, 1996, to October 21, 2004, Mr. Butts served as Vice President — Sales and was elected to the Board of
Directors on February 19, 1998. Prior to that time, Mr. Butts served the Registrant in various capacities since 1973.
(3) Mike Cockrell became Treasurer and Chief Financial Officer of the Registrant effective November 1, 1993, and was
elected to the Board of Directors on February 19, 1998. Prior to that time, for more than five years, Mr. Cockrell was a
member and shareholder of the Jackson, Mississippi law firm of Wise Carter Child & Caraway, Professional
Association.
(4) Tim Rigney became Secretary of the Registrant effective November 1, 2012. Mr. Rigney also began service as Chief
Accounting Officer on that date. Prior to that time, Mr. Rigney served the Registrant in various capacities since 1990.
The Company entered into employment agreements with Messrs. Sanderson, Butts and Cockrell dated as of
September 15, 2009. Each of these agreements was amended and restated on November 1, 2015. The term of the agreements
ends when the officers' employment terminates under the provisions of the agreement. The agreements provide for severance
payments to be paid to the officers if their employment is terminated in certain circumstances, as well as provisions
prohibiting them from engaging in certain competitive activity with the Company during their employment and for the two
years after their employment with the Company terminates for any reason other than poor performance.
27
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The Company’s common stock is traded on the NASDAQ Stock Market LLC under the symbol SAFM.
The number of stockholders of record as of December 12, 2019, was 2,742. The number of beneficial owners of our
stock is greater than the number of holders of record, and the exact number is unknown.
The amount of future common stock dividends will depend on our earnings, financial condition, capital requirements,
the effect a dividend would have on the Company's compliance with financial covenants and other factors, which will be
considered by the Board of Directors on a quarterly basis.
During its fourth fiscal quarter, the Company repurchased shares of its common stock as follows:
Period
Aug. 1 - Aug. 31, 2019
Sep. 1 - Sep. 30, 2019
Oct. 1 - Oct. 31, 2019
Total
(a) Total Number
of Shares
Purchased(1)
—
901
34,344
35,245
(b) Average Price
Paid per Share
—
151.33
154.81
154.72
$
$
$
$
(c) Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs(2)
—
901
34,344
35,245
(d) Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
Under the Plans or
Programs(2) (3)
1,176,615
1,176,615
1,176,615
1,176,615
1 All purchases were made pursuant to the Company's Stock Incentive Plan, as amended and restated on February 11,
2016, under which shares were withheld to satisfy tax withholding obligations.
2 On May 31, 2018, the Company’s Board of Directors expanded and extended the share repurchase program originally
approved on October 22, 2009, under which the Company was originally authorized to purchase up to one million shares
of its common stock and is now authorized to purchase up to two million shares of its common stock in open market
transactions or negotiated purchases, subject to market conditions, share price and other considerations. The
authorization will expire on May 31, 2021. During the fourth quarter of fiscal 2018, the Company purchased 823,385
shares in open market transactions under this program. The Company’s repurchases of vested restricted stock to satisfy
tax withholding obligations of its Stock Incentive Plan participants are not made under the 2018 general repurchase plan.
3 Does not include vested restricted shares that may yet be repurchased under the Stock Incentive Plan as described in
Note 1.
Item 6. Selected Financial Data
Net sales
Operating income
Net income
Basic earnings per share
Diluted earnings per share
Working capital
Total assets
Long-term debt, less current maturities
Stockholders’ equity
Cash dividends declared per share
2019
$ 3,440,258
67,994
53,294
2.41
2.41
365,430
1,774,134
55,000
1,417,675
1.28
$
28
Year Ended October 31,
2016
2018
2017
(In thousands, except per share data)
$ 3,236,004
29,700
61,431
2.70
2.70
367,600
1,659,440
—
1,387,893
1.28
$
$ 3,342,226 $ 2,816,057
294,111
188,961
8.37
8.37
465,135
1,422,700
—
1,190,262
1.90
425,239
279,745
12.30
12.30
650,817
1,733,243
—
1,432,862
2.04 $
$
2015
$ 2,803,480
335,998
216,001
9.52
9.52
396,834
1,246,752
—
1,029,861
1.38
$
Various factors affecting the comparability of the information included in the table above are discussed in
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
PERFORMANCE
This Annual Report, and other periodic reports filed by the Company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and other written or oral statements made by it or on its behalf, may include forward-looking
statements within the meaning of the "Safe Harbor" provisions of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act. These forward-looking statements are based on a number of assumptions about future
events and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from
the views, beliefs and estimates expressed in such statements. These risks, uncertainties and other factors include, but are not
limited to, the risks described in the "Risk Factors" section of this Annual Report, and to the following:
(1)
substantially and exhibit cyclical characteristics typically associated with commodity markets.
Changes in the market price for the Company’s finished products and feed grains, both of which may fluctuate
Changes in economic and business conditions, monetary and fiscal policies or the amount of growth, stagnation or
(2)
recession in the global or U.S. economies, any of which may affect the value of inventories, the collectability of accounts
receivable or the financial integrity of customers, and the ability of the end user or consumer to afford protein.
Changes in the political or economic climate, trade policies, laws and regulations or the domestic poultry industry of
(3)
countries to which the Company or other companies in the poultry industry ship product, and other changes that might limit
the Company’s or the industry’s access to foreign markets.
Changes in laws, regulations, and other activities in government agencies and similar organizations applicable to the
(4)
Company and the poultry industry and changes in laws, regulations and other activities in government agencies and similar
organizations related to food safety.
Various inventory risks due to changes in market conditions, including, but not limited to, the risk that net realizable
(5)
values of live and processed poultry inventories might be lower than the cost of such inventories, requiring a downward
adjustment to record the value of such inventories at the lower of cost or net realizable value as required by generally
accepted accounting principles.
Changes in and effects of competition, which is significant in all markets in which the Company competes, and the
(6)
effectiveness of marketing and advertising programs. The Company competes with regional and national firms, some of
which have greater financial and marketing resources than the Company.
(7)
accounting principles generally accepted in the United States.
Changes in accounting policies and practices adopted voluntarily by the Company or required to be adopted by
(8)
the contamination of its products.
Disease outbreaks affecting the production, performance and/or marketability of the Company’s poultry products, or
(9)
Changes in the availability and cost of labor and growers.
(10)
The loss of any of the Company’s major customers.
(11)
changes in global weather patterns that could affect the supply and price of feed grains.
Inclement weather that could hurt Company flocks or otherwise adversely affect the Company's operations, or
(12)
Failure to respond to changing consumer preferences and negative or competitive media campaigns.
(13)
acquire.
Failure to successfully and efficiently start up and run a new plant or integrate any business the Company might
(14)
in the future.
Unfavorable results from currently pending litigation and proceedings, or litigation and proceedings that could arise
29
Readers are cautioned not to place undue reliance on forward-looking statements made by or on behalf of Sanderson
Farms. Each such statement speaks only as of the day it was made. The Company undertakes no obligation to update or to
revise any forward-looking statements. The factors described above cannot be controlled by the Company. When used in this
annual report, the words “believes,” “estimates,” “plans,” “expects,” “should,” “outlook,” and “anticipates” and similar
expressions as they relate to the Company or its management are intended to identify forward-looking statements. Examples
of forward-looking statements include statements about management's beliefs about future growth plans, future earnings,
production levels, capital expenditures, grain prices, global economic conditions, supply and demand factors and other
industry conditions.
GENERAL
The Company’s poultry operations are fully, vertically-integrated through its control of all functions relative to the
production of its chicken products, including hatching egg production, hatching, feed manufacturing, raising chickens to
marketable age (“grow-out”), processing and marketing. Consistent with the poultry industry, the Company’s profitability is
substantially affected by the market price for its finished products and feed grains, both of which may fluctuate substantially
and independent of each other, and exhibit cyclical characteristics typically associated with commodity markets. Other costs,
excluding feed grains, related to the profitability of the Company’s poultry operations, including hatching egg production,
hatching, growing, and processing cost, are responsive to efficient cost containment programs and management practices.
Over the past three fiscal years, these other normal production costs have averaged approximately 59.8% of the Company’s
total production costs.
The Company believes that value-added products are subject to less price volatility and generate higher, more
consistent profit margin than whole chickens ice-packed and shipped in bulk form. To reduce its exposure to market cycles
that have historically characterized commodity chicken market prices, the Company has increasingly concentrated on the
production and marketing of value-added product lines with emphasis on product quality, customer service, and brand
recognition. However, the Company cannot eliminate its exposure to fluctuations in commodity market prices for chicken
since market prices for value-added products also exhibit cycles. The Company adds value to its poultry products by
performing one or more processing steps beyond the stage where the whole chicken is first salable as a finished product, such
as cutting, deboning, deep chilling, packaging and labeling the product.
The Company’s prepared chicken product line includes approximately 130 institutional and consumer-packaged
chicken items that it sells nationally, primarily to distributors and food service establishments. A majority of the prepared
chicken items are made to the specifications of food service users.
Recent Developments
In the second quarter of fiscal 2015, the Company began initial operations at a new poultry processing complex in
Palestine, Texas. The complex consists of a hatchery, feed mill, processing plant and waste water treatment facility with the
capacity to process 1.3 million chickens per week, and the facility is currently operating at full capacity.
In the first quarter of fiscal 2017, the Company began initial operations at a new poultry processing complex in St.
Pauls, North Carolina. The completed complex consists of a hatchery, processing plant and waste water treatment facility,
with the capacity to process 1.3 million chickens per week, and an expansion of the Company's existing feed mill in Kinston,
North Carolina. The facility is currently operating at full capacity and processed approximately 528.4 million pounds of
dressed poultry meat during fiscal 2019. During fiscal 2018, the St. Pauls processing plant processed approximately 522.5
million pounds of dressed poultry meat, as compared to 249.0 million pounds during fiscal 2017.
In the first quarter of fiscal 2019, the Company began initial operations at its new poultry processing complex in and
around Tyler, Texas. The completed complex consists of a hatchery, feed mill, processing plant and waste water treatment
facility, with the capacity to process 1.3 million chickens per week. The facility steadily increased production throughout
fiscal 2019 and is currently operating at approximately seventy-five percent (75%) of capacity. During the fourth quarter of
fiscal 2019, the Tyler processing plant processed approximately 73.5 million pounds of dressed poultry meat, as compared to
46.9 million pounds and 18.8 million pounds during the third and second quarters of fiscal 2019, respectively.
EXECUTIVE OVERVIEW OF RESULTS — 2019
The Company's volume of poultry products sold increased 2.0% compared to fiscal 2018, as the Company began
processing chickens at its new Tyler, Texas poultry complex in early calendar 2019. The complex is currently operating at
seventy-five percent capacity, and is expected to move to full production during the Company's second fiscal quarter of 2020.
30
Average operating margins per pound of poultry products sold improved slightly during fiscal 2019, as compared to fiscal
2018, as the average sales price of poultry products sold increased by 3.5% and feed-related costs remained relatively flat.
However, similar to fiscal 2018, the Company's financial results for the year ended October 31, 2019 reflect relatively weak
market prices for boneless, skinless breast meat produced at the Company's plants that process a larger bird for food service
customers. In addition, the Company's non-feed related cost of sales increased $0.0272 per pound and was negatively
impacted by inefficiencies at the Tyler, Texas complex as that complex moves to full production and inefficiencies at other
plants that experienced planned down time to replace and upgrade equipment. The impact of these factors is discussed in
more detail in the "Results of Operations" section below.
The average feed cost in broiler flocks processed was lower by 0.5% in fiscal 2019, as compared to fiscal 2018.
Current quoted market prices for feed grains are similar to prices paid by the Company during fiscal 2019. The Company has
priced a portion of fiscal 2020 grain needs through February 2020. Had it priced its remaining fiscal 2020 needs at December
18, 2019 cash market prices quoted on the Chicago Board of Trade, the Company estimates its costs of feed grains based on
fiscal 2019 volumes would be approximately $22.4 million higher during fiscal 2020 as compared to fiscal 2019.
RESULTS OF OPERATIONS — 2019
Net sales for fiscal 2019 were $3,440.3 million as compared to $3,236.0 million for fiscal 2018, an increase of $204.3
million or 6.3%. Net sales of poultry products for fiscal 2019 and fiscal 2018 were $3,198.2 million and $3,028.5 million,
respectively, an increase of $169.7 million or 5.6%. The increase in net sales of poultry products resulted from a 3.5%
increase in the average sales price of poultry products sold and a 2.0% increase in the pounds of poultry products sold.
During fiscal 2019, the Company sold 4,531.6 million pounds of poultry products, up from 4,443.4 million pounds during
fiscal 2018. The additional pounds of poultry products sold primarily resulted from a 2.8% increase in the number of
chickens sold and an increase in average bird weights of 1.2%. The new Tyler, Texas processing facility, which began initial
operations during the first quarter of fiscal 2019, processed approximately 22.3 million head during fiscal 2019, or
approximately 3.6% of the total head processed by the Company during the period, and sold approximately 147.9 million
pounds of poultry products during fiscal 2019, or approximately 3.3% of the total poultry pounds sold by the Company
during the period. Overall, market prices for poultry products increased during fiscal 2019 as compared to fiscal 2018. Urner
Barry average market prices for jumbo wings, tenders, boneless thigh meat and bulk leg quarters increased during fiscal 2019
compared to fiscal 2018 by 19.9%, 5.7%, 4.5% and 1.3%, respectively, and boneless breast meat prices decreased during
fiscal 2019 compared to fiscal 2018 by 3.4%. The Company's average selling prices for chicken products sold to retail
grocery store customers decreased slightly during fiscal 2019 as compared to fiscal 2018, but continued to reflect good
demand. Net sales of prepared chicken products during fiscal 2019 and 2018 were $242.1 million and $207.5 million,
respectively, an increase of 16.6%, resulting from a 22.6% increase in the pounds of prepared chicken products sold, partially
offset by a 4.9% decrease in the average sales price of prepared chicken products sold. During fiscal 2019, the Company sold
129.9 million pounds of prepared chicken products, up from 106.0 million pounds sold during fiscal 2018.
Cost of sales for fiscal 2019 was $3,158.3 million as compared to $2,974.7 million during fiscal 2018, an increase of
$183.6 million, or 6.2%. Excluding poultry products sold to the Company's prepared chicken plant, cost of sales of poultry
products sold during fiscal 2019 and fiscal 2018 were $2,935.4 million and $2,784.7 million, respectively, which represents a
3.3% increase in the average cost of sales of poultry products. As illustrated in the table below, which for comparative
purposes includes poultry products sold to the Company's prepared chicken plant, and excludes poultry products processed
and sold under our agreement with House of Raeford Farms as described in "Note (2)," the increase resulted primarily from a
$0.0272 per pound increase, or 7.3%, in other costs of sales of poultry products, partially offset by a decrease in the cost of
feed per pound of broilers processed of $0.0012, or 0.5%.
31
Poultry Cost of Sales
(In thousands, except per pound data)
Fiscal Year 2019
Fiscal Year 2018
Incr/(Decr)
Description
Beginning Inventory
Feed in broilers processed
All other cost of sales
Less: Ending Inventory
$
Dollars
30,973
1,167,953
1,854,915
35,121
$
Per lb.
0.3686
0.2532
0.4021
0.3868
Dollars
$
37,769
1,141,866
1,682,657
30,973
Total poultry cost of sales $ 3,018,720 (1) $
0.6548
$ 2,831,319
Per lb.
0.4437
0.2544
0.3749
0.3686
0.6318
$
(1)
(2) $
$
Dollars
(6,796)
26,087
172,258
4,148
Per lb.
$ (0.0751)
(0.0012)
0.0272
0.0182
$ 187,401
$
0.0230
Pounds:
Beginning Inventory
Poultry processed
84,020
4,613,576
Poultry sold
4,610,279 (1)
Ending Inventory
90,805
85,120
4,488,400
4,481,459
84,020
(2)
(1)(2)
Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken
plant.
Note (2) - On April 17, 2017, the Company announced that it had agreed to process chickens grown by House of Raeford
Farms at the Company's processing facility located in St. Pauls, North Carolina. House of Raeford Farms, a private
company headquartered in Rose Hill, North Carolina, operates poultry grow-out operations and processing facilities in four
southeastern states. The House of Raeford Farms Teachey, North Carolina, facility was severely damaged by a fire in late
February 2017. Under the terms of the agreement, the Company purchased, processed and sold chickens grown by House of
Raeford Farms through mid-December 2017. During fiscal 2018, the Company processed and sold approximately 14.2
million pounds as a result of this agreement. For comparative purposes, those pounds and the associated direct and indirect
costs have been excluded from the data set forth in this table.
Other costs of sales of poultry products consist primarily of labor, packaging, freight, maintenance and repairs, utilities,
antimicrobial interventions, contract grower pay, chick costs and certain fixed costs. These non-feed related costs of poultry
products sold increased by $0.0272 per pound processed, or 7.3%, during fiscal 2019 as compared to fiscal 2018. During
fiscal 2019, other costs of sales of poultry products benefited from the reversal of the $9.6 million live inventory write-down
recorded during the fourth quarter of fiscal 2018. Excluding the benefit from that reversal, other costs of sales of poultry
products increased by $0.0292 per pound processed, or 7.8%, during fiscal 2019 as compared to fiscal 2018. Part of this
increase is attributable to inefficiencies at the Company's new Tyler, Texas facilities, which began initial operations during
January 2019. A new facility's other costs of sales per pound processed will be higher compared to similar complexes until
reaching full capacity. Excluding the Tyler facilities and the benefit from the reversal of the live inventory write-down, the
other costs of sales would have increased by $0.0190 per pound processed, or 5.1%. This increase is primarily attributable to
higher labor and antimicrobial intervention expenses, in addition to higher recognized freight expenses. The increase in
amounts recognized as freight expense is attributable to the Company's adoption of Accounting Standards Update ("ASU")
2014-09, Revenue from Contracts with Customers. While adoption of the standard had no effect on the Company's net
income during fiscal 2019, freight expense was negatively impacted during the period, and that negative impact to freight
expense was offset by a corresponding increase to revenue. For more information regarding the Company's adoption of ASU
2014-09 in relation to freight expense, refer to "Part II, Item 8, Notes to Consolidated Financial Statements, Note 1 -
Significant Accounting Policies."
During fiscal 2019, costs of sales of the Company’s prepared chicken products were $222.9 million as compared to
$190.0 million during fiscal 2018, an increase of $32.9 million, or 17.3%, primarily attributable to a 22.6% increase in the
pounds of prepared chicken products sold.
The Company recorded a charge of $2.8 million to reduce the value of live broiler inventories on hand at October 31,
2019 from cost to net realizable value. In periods where the Company estimates that the cost to grow live birds in inventory
to a marketable age and then process and distribute those birds will be lower in the aggregate than the anticipated sales
proceeds, the Company values the broiler inventories on hand at cost and accumulates costs as the birds are grown to a
marketable age subsequent to the balance sheet date. In periods where the Company estimates that the cost to grow live birds
32
in inventory to a marketable age and then process and distribute those birds will be higher in the aggregate than the
anticipated sales proceeds, the Company will make an adjustment to lower the value of live birds in inventory to the net
realizable value. The Company recorded a charge of $9.6 million at October 31, 2018 to reduce the value of live broiler
inventories on hand from cost to net realizable value.
Selling, general and administrative ("SG&A") costs during fiscal 2019 were $211.1 million, a decrease of $10.8 million
compared to the $222.0 million of SG&A during fiscal 2018. The following table shows the components of SG&A costs for
the twelve months ended October 31, 2019 and 2018.
Selling, General and Administrative Costs
(in thousands)
Description
Advertising expense
Trainee expense
Start-up expense (Tyler, Texas complex)
Stock compensation expense
All other SG&A expenses
Employee Stock Ownership Plan ("ESOP") expense
Depreciation expense - machinery and equipment
Sanderson Farms Championship expense
Administrative salaries
Legal expense
Third-party sales commissions
Total SG&A
$
Twelve months ended
October 31, 2019
11,071
$
Twelve months ended
October 31, 2018
Increase/(Decrease)
(21,553)
16,254
9,361
11,786
62,653
3,000
7,067
8,817
45,108
25,102
10,922
211,141
$
$
32,624 $
21,553
13,394
15,702
64,705
2,000
5,801
6,325
42,288
17,573
—
221,965 $
(5,299)
(4,033)
(3,916)
(2,052)
1,000
1,266
2,492
2,820
7,529
10,922
(10,824)
Regarding the table above, the decrease in advertising expense is the result of the Company's decision to scale back its
television and radio advertising during fiscal 2019. The change in start-up expense in any particular period relates to the stage
of the start-up process in which a facility under construction is in during the period. Non-construction related expenses, such
as labor, training and office-related expenses for a facility under construction are recorded as start-up expense until the
facility begins operations. As a facility moves closer to actual start-up, the expenses incurred for labor, training, etc. increase.
As a result, amounts classified as start-up expenses will increase period over period until the facility begins production. Once
production begins, the expenses from that point forward are recorded as costs of goods sold. The decrease in stock
compensation expense is the result of the number of shares earned for the performance shares granted on November 1, 2017,
being lower as compared to the number of shares earned for the performance shares granted on November 1, 2016. Stock
compensation is further described in "Part II, Item 8, Notes to Consolidated Financial Statements, Note 9 - Stock
Compensation Plans." The increase in legal expenses is primarily attributable to our ongoing defense of the litigation
described in "Part I, Item 3. Legal Proceedings" of this Form 10-K. The increase in third-party sales commissions is
attributable to the Company's adoption of ASU 2014-09, Revenue from Contracts with Customers. While adoption of the
standard had no effect on the Company's net income during fiscal 2019, SG&A expenses were negatively impacted during
the period, and the negative impact to SG&A expenses was offset by a corresponding increase to revenue. For more
information regarding the Company's adoption of ASU 2014-09 and the relation to SG&A expenses, refer to "Part II, Item 8,
Notes to Consolidated Financial Statements, Note 1 - Significant Accounting Policies."
The Company’s operating income during fiscal 2019 was $68.0 million as compared to an operating income during
fiscal 2018 of $29.7 million. The increase in operating income resulted primarily from higher average selling prices and a
2.5% increase in pounds sold, partially offset by a 3.6% increase in average costs of goods sold.
The Company recorded no interest income during fiscal 2019, as compared to $2.9 million in interest income during
fiscal 2018. Interest expense during fiscal 2019 and fiscal 2018 was $4.2 million and $2.1 million, respectively. The decrease
in interest income during fiscal 2019, as compared to fiscal 2018, is the result of the Company not having excess cash to
invest during fiscal 2019 as it did in fiscal 2018. The increase in interest expense during fiscal 2019, as compared to fiscal
2018, resulted from higher outstanding debt during fiscal 2019, as compared to fiscal 2018.
33
The Company’s effective tax rate for fiscal 2019 was 16.5% as compared to (101.0)% for fiscal 2018. The Company’s
effective tax rate differs from the statutory federal rate due to discrete items, state income taxes, certain nondeductible
expenses for federal income tax purposes and certain state and federal tax credits. As described in our financial statement
footnote "Note 7 - Income Taxes," the revaluation of our deferred taxes using the tax rate enacted during our first quarter of
fiscal 2018 resulted in a $37.5 million discrete income tax benefit recognized during the first quarter of fiscal 2018. During
fiscal 2019, the Company recognized an approximately $2.1 million discrete income tax benefit due to certain income tax
credits. There were no other material discrete items affecting the comparative periods, with the exception of discrete
adjustments related to stock-based compensation. Excluding the effects of discrete items, the Company's effective tax rate for
fiscal 2019 and 2018 would have been approximately 23.6% and 33.0%, respectively.
As of October 31, 2019, the Company's long-term deferred income tax liability was $74.1 million as compared to $62.8
million at October 31, 2018, an increase of $11.3 million. The increase is primarily attributable to the Company's decision to
take bonus depreciation on qualifying assets placed in service during fiscal 2019.
The Company’s net income during fiscal 2019 was $53.3 million, or $2.41 per share, as compared to net income during
fiscal 2018 of $61.4 million or $2.70 per share. The decrease in net income for fiscal 2019 as compared to fiscal 2018 is
primarily attributable to a higher effective tax rate and higher average costs of goods sold, partially offset by higher average
selling prices and an increase in pounds sold. Details related to each of the aforementioned drivers of the changes in net
income have been discussed above.
EXECUTIVE OVERVIEW OF RESULTS — 2018
During fiscal 2018, the Company's volume increased compared to fiscal 2017, as our St. Pauls, North Carolina facility
reached full capacity; however, our margins declined significantly during fiscal 2018, when compared to fiscal 2017,
reflecting significantly lower average sales prices and higher average costs of goods sold. Driving our fiscal 2018 results
were significantly lower market prices for products produced at our plants that process larger birds and sold primarily to food
service customers. To a lesser extent, lower average market prices for products produced at our plants that process medium
sized birds and primarily sold to retail grocery store customers and for products sold to export customers also contributed to
the lower average selling prices. We believe our lower average selling prices domestically reflected to some extent pressures
from lower wholesale prices for, and abundant supplies of, competing proteins, and we believe uncertainty regarding trade
negotiations abroad negatively affected export demand. Our higher average costs of goods sold reflected slightly higher feed
costs per pound of chicken processed and an increase in other costs of goods sold, details of which are described in the
"Results of Operations" section below.
The Company recorded a charge of $9.6 million, to reduce the value of live broiler inventories on hand at October 31,
2018 from cost to net realizable value, which negatively impacted fiscal 2018 earnings per share by approximately $0.32 per
share. Results for the fourth quarter and fiscal year 2018 also reflect costs and inefficiencies resulting from two hurricanes
that made landfall during the quarter that affected operations in North Carolina and Georgia.
While overall prices paid for feed grains were higher during fiscal 2018 as compared to fiscal 2017, feed formulation
changes and improved broiler performance partially offset the higher prices. As a result, the average feed cost in broiler
flocks processed was higher by 1.3%.
RESULTS OF OPERATIONS — 2018
Net sales for fiscal 2018 were $3,236.0 million as compared to $3,342.2 million for fiscal 2017, a decrease of $106.2
million or 3.2%. Net sales of poultry products for fiscal 2018 and fiscal 2017 were $3,028.5 million and $3,171.3 million,
respectively, a decrease of $142.8 million or 4.5%. The decrease in net sales of poultry products resulted from a 9.2%
decrease in the average sales price of poultry products sold, partially offset by a 5.2% increase in the pounds of poultry
products sold. During fiscal 2018, the Company sold 4,443.4 million pounds of poultry products, up from 4,223.4 million
pounds during fiscal 2017. The additional pounds of poultry products sold primarily resulted from an 8.0% increase in the
number of chickens sold, while average bird weights decreased 1.8%. During fiscal 2018, the Company's St. Pauls processing
facility, which began initial operations during January 2017, processed approximately 61.6 million head, or 10.2% of the
Company's total head processed during the period, and sold approximately 530.4 million pounds of poultry products, or
11.9% of the Company's total poultry pounds sold during the period. By comparison, the St. Pauls facility processed
approximately 29.5 million head during fiscal 2017, or approximately 5.2% of the Company's total head processed during the
period, and sold approximately 255.1 million pounds of poultry products during fiscal 2017, or approximately 6.0% of the
Company's total poultry pounds sold during the period. Overall, market prices for poultry products decreased during fiscal
2018 as compared to fiscal 2017. Urner Barry average market prices for boneless breast, tenders, jumbo wings, bulk leg
quarters and boneless thighs decreased during fiscal 2018 compared to fiscal 2017 by 16.7%, 11.3%, 25.2%, 5.5% and 5.8%,
34
respectively. The Company's average selling prices for chicken products sold to retail grocery store customers decreased
slightly during fiscal 2018, but continued to reflect good demand. Net sales of prepared chicken products during fiscal 2018
and 2017 were $207.5 million and $170.9 million, respectively, an increase of 21.4%, resulting from a 24.4% increase in the
pounds of prepared chicken products sold, partially offset by a 2.4% decrease in the average sales price of prepared chicken
products sold. During fiscal 2018, the Company sold 106.0 million pounds of prepared chicken products, up from 85.2
million pounds sold during fiscal 2017.
Cost of sales for fiscal 2018 was $2,974.7 million as compared to $2,700.7 million during fiscal 2017, an increase of
$274.1 million, or 10.1%. Excluding poultry products sold to the Company's prepared chicken plant, cost of sales of poultry
products sold during fiscal 2018 and fiscal 2017 were $2,784.7 million and $2,544.3 million, respectively, which represents a
4.0% increase in the average cost of sales of poultry products. As illustrated in the table below, which for comparative
purposes includes poultry products sold to the Company's prepared chicken plant, and excludes poultry products processed
and sold under our agreement with House of Raeford Farms as described in “Note (2),” the increase resulted primarily from a
$0.0179 per pound increase, or 5.0%, in other costs of sales of poultry products and an increase in the cost of feed per pound
of broilers processed of $0.0032, or 1.3%.
Poultry Cost of Sales
(In thousands, except percentages and per pound data)
Fiscal Year 2018
Fiscal Year 2017
Incr/(Decr)
Description
Beginning Inventory
Feed in broilers processed
All other cost of sales
Less: Ending Inventory
Dollars
$
37,769
1,141,866
1,682,657
30,973
Total poultry cost of sales
$ 2,831,319
(1)
(2)
Pounds:
Beginning Inventory
Poultry processed
Poultry sold
85,120
4,488,400 (2)
4,481,459 (1)(2)
Ending Inventory
84,020
$
Per lb.
0.4437
0.2544
0.3749
0.3686
Dollars
$
15,378
1,061,793
1,508,765
37,769
$
Per lb.
0.3397
0.2512
0.3570
0.4437
$
Dollars
22,391 $
80,073
173,892
(6,796)
Per lb.
0.1040
0.0032
0.0179
(0.0751)
$
0.6318
$ 2,548,167
(1)(2) $
0.6090
$ 283,152 $
0.0228
45,272
4,226,781
4,184,365
85,120
(2)
(1)(2)
Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken
plant.
Note (2) - On April 17, 2017, the Company announced that it had agreed to process chickens grown by House of Raeford
Farms at the Company's processing facility located in St. Pauls, North Carolina. House of Raeford Farms, a private
company headquartered in Rose Hill, North Carolina, operates poultry grow-out operations and processing facilities in four
southeastern states. The House of Raeford Farms Teachey, North Carolina, facility was severely damaged by a fire in late
February 2017. Under the terms of the agreement, the Company purchased, processed and sold chickens grown by House of
Raeford Farms through mid-December 2017. During fiscal 2018, the Company processed and sold approximately 14.2
million pounds as a result of this agreement, as compared to approximately 64.0 million pounds during fiscal 2017. For
comparative purposes, those pounds and the associated direct and indirect costs have been excluded from the data set forth
in this table.
Other costs of sales of poultry products consist primarily of labor, packaging, freight, maintenance and repairs, utilities,
antimicrobial interventions, contract grower pay, chick costs and certain fixed costs. These non-feed related costs of poultry
products sold increased by $0.0179 per pound processed, or 5.0%, during fiscal 2018 as compared to fiscal 2017. During
fiscal 2017, other costs of sales of poultry products include approximately $20.2 million of expenses related to the
Company’s bonus award program, as compared to no such expenses during fiscal 2018. Excluding those bonus-related
expenses, other costs of sales of poultry products increased by $0.0227 per pound processed, or 6.5%, during fiscal 2018
compared to fiscal 2017. This increase is primarily attributable to higher labor, contract grower pay, antimicrobial
interventions, and freight costs, along with higher fixed costs across our operations. These higher costs were partially offset
by efficiencies realized at the St. Pauls, North Carolina facilities, which were in the early stages of operation during fiscal
35
2017 and reached full capacity during April 2018. Excluding the St. Pauls facilities and bonus-related expenses, other costs
of sales of poultry products would have increased by approximately $0.0347 per pound processed, or 10.0%.
During fiscal 2018, costs of sales of the Company’s prepared chicken products were $190.0 million as compared to
$156.4 million during fiscal 2017, an increase of $33.6 million, or 21.5%, primarily attributable to a 24.4% increase in the
pounds of prepared chicken products sold.
The Company recorded a charge of $9.6 million to reduce the value of live broiler inventories on hand at October 31,
2018 from cost to net realizable value. In periods where the Company estimates that the cost to grow live birds in inventory
to a marketable age and then process and distribute those birds will be lower in the aggregate than the anticipated sales
proceeds, the Company values the broiler inventories on hand at cost and accumulates costs as the birds are grown to a
marketable age subsequent to the balance sheet date. In periods where the Company estimates that the cost to grow live birds
in inventory to a marketable age and then process and distribute those birds will be higher in the aggregate than the
anticipated sales proceeds, the Company will make an adjustment to lower the value of live birds in inventory to the net
realizable value. No such charge was required at October 31, 2017.
SG&A costs during fiscal 2018 were $222.0 million, an increase of $5.7 million compared to the $216.3 million of
SG&A during fiscal 2017. The following table shows the components of SG&A costs for the twelve months ended October
31, 2018 and 2017.
Selling, General and Administrative Costs
(in thousands)
Description
Start-up expense (Tyler, Texas complex)
Legal services expense
All other SG&A
Administrative salary expense
Trainee expense
Charter aircraft expense
Depreciation expense - machinery and equipment
Stock compensation expense
Marketing expense
Start-up expense (St. Pauls, North Carolina complex)
Bonus award program expense
Employee Stock Ownership Plan ("ESOP") expense
Total SG&A
$
Twelve months ended
October 31, 2018
13,394
17,573
68,863
42,288
21,553
2,167
5,801
15,702
32,624
—
—
2,000
221,965
$
$
$
Twelve months ended
October 31, 2017
403 $
7,879
61,847
36,193
16,182
900
4,555
16,952
34,272
4,022
15,098
18,000
216,303 $
Increase/(Decrease)
12,991
9,694
7,016
6,095
5,371
1,267
1,246
(1,250)
(1,648)
(4,022)
(15,098)
(16,000)
5,662
Regarding the table above, the change in start-up expense in any particular period relates to the stage of the start-up
process in which a facility under construction is in during the period. Non-construction related expenses, such as labor,
training and office-related expenses for a facility under construction are recorded as start-up expense until the facility begins
operations. As a facility moves closer to actual start-up, the expenses incurred for labor, training, etc. increase. As a result,
amounts classified as start-up expenses will increase period over period until the facility begins production. Once production
begins, the expenses from that point forward are recorded as costs of goods sold. The increase in legal expenses was
primarily attributable to our ongoing defense of the litigation described in “Part II, Item 3. Legal Proceedings” of this Form
10-K. The increases in trainee expense and administrative salaries were primarily attributable to increases in personnel that
coincide with the Company's growth plans. The decrease in bonus expense, payouts of which are based on profitability, was
the result of profitability not reaching the required levels for payout of that incentive. The decrease in ESOP expense, payouts
of which are based on profitability, was attributable to the difference in the level of profitability between fiscal 2018 and
2017. The increase in all other SG&A expenses was the result of a net increase in various other categories of SG&A costs.
The Company’s operating income during fiscal 2018 was $29.7 million as compared to an operating income during
fiscal 2017 of $425.2 million. The decrease in operating income resulted primarily from lower average selling prices and
higher average costs of goods sold, partially offset by a 5.6% increase in pounds sold.
36
Interest income during fiscal 2018 and fiscal 2017 was $2.9 million and $1.2 million, respectively. Interest expense
during fiscal 2018 and fiscal 2017 was $2.1 million and $1.9 million, respectively.
The Company’s effective tax rate for fiscal 2018 was (101.0)% as compared to 34.1% for fiscal 2017. The Company's
effective tax rate differs from the statutory federal rate due to discrete items, state income taxes, certain nondeductible
expenses for federal income tax purposes and certain state and federal tax credits. As described in our financial statement
footnote "Note 6 - Income Taxes," the revaluation of our deferred taxes using the tax rate enacted during our first quarter of
fiscal 2018 resulted in a $37.5 million discrete income tax benefit recognized during the first quarter of fiscal 2018. There
were no other material discrete items affecting the comparative periods, with the exception of routine discrete adjustments
related to stock-based compensation. Excluding the effects of discrete items, the Company's effective tax rate for fiscal 2018
and 2017 would have been approximately 33.0% and 34.9%, respectively.
As of October 31, 2018, the Company's long-term deferred income tax liability was $62.8 million as compared to $91.9
million at October 31, 2017, a decrease of $29.1 million. The decrease is primarily attributable to the revaluation of our
deferred taxes as described in our financial statement footnote “Note 6 - Income Taxes,” partially offset by the Company's
decision to take bonus depreciation on qualifying assets placed in service during fiscal 2018. United States generally accepted
accounting principles (“U.S. GAAP”) requires that deferred tax assets and liabilities be measured using the enacted tax rate
expected to be in effect when the temporary differences from which the deferred taxes arose are expected to be settled. Prior
to the enactment of the Tax Cuts and Jobs Act, our deferred taxes were measured using the enacted 35.0% federal income tax
statutory rate. Following enactment, we remeasured our deferred taxes using a 23.3% blended federal income tax statutory
rate for temporary differences that were expected to reverse in fiscal 2018 and a 21% federal income tax statutory rate for
temporary differences that were expected to reverse after fiscal 2018.
The Company’s net income during fiscal 2018 was $61.4 million, or $2.70 per share, as compared to net income during
fiscal 2017 of $279.7 million or $12.30 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s working capital, calculated by subtracting current liabilities from current assets, at October 31, 2019,
was $365.4 million, and its current ratio, calculated by dividing current assets by current liabilities, was 2.7 to 1. The
Company’s working capital and current ratio at October 31, 2018, were $367.6 million and 2.8 to 1, respectively. These
measures reflect the Company’s ability to meet its short term obligations and are included here as a measure of the
Company’s short term market liquidity. The Company’s principal sources of liquidity available during fiscal 2019 included
cash on hand, cash flows from operations, and funds available under the Company’s revolving credit facility. As described
below, the Company is a party to a revolving credit facility dated March 21, 2019 with a maximum available borrowing
capacity of $1.0 billion. As of October 31, 2019 the Company had borrowed $55.0 million and had approximately $21.6
million outstanding in letters of credit, leaving $923.4 million of borrowing capacity available under the facility. As of
December 18, 2019, the Company had borrowed $85.0 million under the facility and had approximately $23.1 million
outstanding in letters of credit, leaving $891.9 million available under the facility.
The Company’s cash position at October 31, 2019 and October 31, 2018, consisted of $95.4 million and $121.2
million, respectively, in cash and cash equivalents. The Company’s ability to invest cash is limited by covenants in its
revolving credit agreement to short term investments. All of the Company’s cash at October 31, 2019 and October 31, 2018,
was held in bank accounts and highly-liquid investment accounts. There were no restrictions on the Company’s access to its
cash, and such cash and cash investments were available to the Company on demand to fund its operations.
Cash flows provided by operating activities during fiscal 2019 and fiscal 2018 were $206.8 million and $131.4 million,
respectively. Cash flows from operating activities increased by $75.4 million, resulting from three primary factors. First,
during fiscal 2019, the Company realized higher margins due to an increase in average selling prices, as compared to fiscal
2018, which more than offset the increase in average costs of goods sold during the same comparative periods. Secondly, the
change in cash bonuses paid by the Company, which totaled approximately $36.0 million during fiscal 2018, as compared to
no cash bonuses paid during fiscal 2019, caused cash flows from operating activities to increase. The bonuses paid during
fiscal 2018 related to fiscal 2017 performance. Lastly, the change in cash paid or received for income taxes during fiscal
2019, as compared to fiscal 2018, caused an increase in cash flows from operating activities. During fiscal 2019, the
Company's net cash receipts from income taxes totaled approximately $25.6 million, as compared to approximately $40.0
million in net cash paid for income taxes during fiscal 2018. Offsetting the increases described above is the additional
funding required for inventories, largely attributable to the Company's new Tyler, Texas facilities. During fiscal 2019,
inventory levels increased by approximately $49.9 million, as compared to a decrease of approximately $3.1 million during
fiscal 2018.
37
Cash flows provided by operating activities during fiscal 2018 and fiscal 2017 were $131.4 million and $409.0 million,
respectively. The change in cash flows from operating activities resulted from offsetting circumstances. During fiscal 2018,
the Company's selling prices per pound were 8.3% lower as compared to fiscal 2017. The effect of the lower selling prices
was partially offset by a decrease in cash paid for income taxes of approximately $99.9 million, net of refunds received.
Cash flows used in investing activities during fiscal 2019, 2018 and 2017, were $248.5 million, $306.7 million and
$165.9 million, respectively. The Company’s capital expenditures during fiscal 2019 of $249.5 million included
approximately $67.1 million related to construction at the Tyler, Texas complex and approximately $9.4 million related to
final payments made under purchase agreements for delivery of new aircraft. The Company’s capital expenditures during
fiscal 2018 were $308.9 million and included approximately $156.5 million related to construction at the Tyler, Texas
complex, $29.3 million related to progress or final payments made under the aircraft purchase agreements and approximately
$4.7 million for expansion of the prepared chicken facility in Flowood, Mississippi. The Company's capital expenditures
during fiscal 2017 were $166.8 million and included approximately $29.0 million related to progress payments made under
the aircraft purchase agreements, approximately $26.3 million related to construction at the St. Pauls, North Carolina
complex, approximately $12.4 million related to construction at the Tyler, Texas complex and approximately $9.4 million for
expansion of the prepared chicken facility in Flowood, Mississippi. Excluding expenditures related to construction and new
aircraft during fiscal 2019, 2018 and 2017, the Company’s capital expenditures for those years were $173.0 million, $118.4
million and $89.7 million, respectively.
Cash flows provided by or (used in) financing activities during fiscal 2019, 2018 and 2017 were $15.9 million,
$(122.8) million and $(57.9) million, respectively. During fiscal 2019, the Company borrowed a net of $55.0 million under
its revolving credit facility, purchased shares valued at $9.4 million pursuant to the Company's Stock Incentive Plan as
amended and restated on February 11, 2016, under which shares were withheld to satisfy tax withholding obligations and
paid approximately $28.4 million in dividends to its shareholders. During fiscal 2018, the Company repurchased and
canceled 823,385 shares of its common stock in open-market transactions at an average price of $101.37 per share and
purchased shares valued at $11.7 million pursuant to the Company's Stock Incentive Plan as amended and restated on
February 11, 2016, as described above. Additionally, the Company paid approximately $29.0 million in dividends to its
shareholders. During fiscal 2017, the Company purchased shares valued at $10.0 million pursuant to the Company's Stock
Incentive Plan as amended and restated on February 11, 2016, as described above. Additionally, the Company paid
approximately $46.4 million in dividends to its shareholders, of which approximately $22.7 million resulted from a special
cash dividend paid during the fourth quarter of fiscal 2017.
As of December 18, 2019, the Company’s fiscal 2020 capital budget is approximately $198.3 million. The Company
expects the 2020 capital budget to be funded by cash on hand, internally generated working capital, cash flows from
operations and, as needed, borrowings under the Company’s revolving credit facility. The Company had $891.9 million
available under the revolving line of credit as of December 18, 2019. The fiscal 2020 capital budget includes an aggregate of
approximately $41.5 million for multiple large-scale equipment and building upgrades at multiple complexes, approximately
$15.0 million for construction of a new hatchery to replace the hatchery currently in service in Laurel, Mississippi, and
approximately $11.3 million to purchase new vehicles that in previous years would have been leased. These vehicles
primarily consist of semi-tractors and trailers that are used to haul the Company's live birds and feed. Excluding the budgeted
amounts for the items detailed above, the fiscal 2020 capital budget is approximately $130.5 million. These amounts are
estimates and are subject to change as we move through fiscal 2020.
In the first quarter of fiscal 2019, the Company began initial operations at a new poultry processing complex in and
around Tyler, Texas. The completed complex consists of a hatchery, feed mill, processing plant and waste water treatment
facility, with the capacity to process 1.3 million chickens per week. The facility steadily increased production throughout
fiscal 2019 and is currently operating at approximately seventy-five percent (75%) of capacity. Before the complex can reach
full production, we will need to enter into contracts with a sufficient number of independent contract poultry producers to
house the live inventory and hire and train the remainder of our workforce. See "The construction and potential benefits of
our new facilities are subject to risks and uncertainties" in the Risk Factors section of this Annual Report.
On October 2, 2017, the Company filed a shelf registration statement on Form S-3 to register for possible future sale
shares of the Company's common and/or preferred stock. An indeterminate amount of common stock and preferred stock
may be offered by the Company in amounts, at prices and on terms to be determined by the board of directors if and when
shares are issued. The registration statement became automatically effective upon filing with the SEC on October 2, 2017.
The Company regularly evaluates both internal and external growth opportunities, including acquisition opportunities
and the possible construction of new assets, and conducts due diligence activities in connection with such opportunities. The
cost and terms of any financing to be raised in conjunction with any growth opportunity, including the Company’s ability to
38
raise debt or equity capital on terms and at costs satisfactory to the Company, and the effect of such opportunities on the
Company’s balance sheet, are critical considerations in any such evaluation.
Revolving Credit Facility
The Company is a party to a revolving credit facility dated March 21, 2019, with a maximum available borrowing
capacity of $1.0 billion. Under the credit facility, the Company may not exceed a maximum debt to total capitalization ratio
of 50%. The Company has a one-time right, at any time during the term of the agreement, to increase the maximum debt to
total capitalization ratio then in effect by five percentage points in connection with the construction of a new poultry complex
for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of
its intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth
requirement that at October 31, 2019, was $998.6 million. The credit is unsecured and, unless extended, will expire on
March 21, 2024. As of October 31, 2019, the Company had borrowed $55.0 million under the facility, and had approximately
$21.6 million outstanding in letters of credit, leaving $923.4 million of borrowing capacity available under the facility. As of
December 18, 2019, the Company had borrowed $85.0 million under the facility and had approximately $23.1 million
outstanding in letters of credit, leaving $891.9 million of borrowing capacity available under the facility. For more
information about the facility, see Item 1.01 of our Current Report on Form 8-K filed March 27, 2019.
Contractual Obligations
Obligations under long-term debt; non-cancelable operating leases; purchase obligations relating to feed grains, other
feed ingredients and packaging supplies; construction contracts and claims payable relating to the Company’s workers’
compensation insurance policy at October 31, 2019, were as follows:
Contractual Obligations
Operating leases
Long-term debt
Purchase obligations:
Feed grains, feed ingredients and packaging
supplies
Construction contracts and other
Claims payable
Total
Off-balance Sheet Arrangements
$
Total
47,774
55,000
$
Less than
1 Year
15,363
Payments Due By Period (in thousands)
3-5
1-3
Years
Years
22,919 $
—
—
$
9,382
55,000
199,097
8,996
20,587
$ 331,454
199,097
8,996
9,687
$ 233,143
$
—
—
10,900
33,819 $
—
—
64,382
More than
5 Years
110
—
—
—
110
$
$
The Company does not have any off-balance sheet arrangements material to our financial position or results of
operations as of October 31, 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and
assumptions, and the differences could be material. Descriptions of accounting estimates the Company considers critical
follow.
Inventories
Processed and prepared inventories and inventories of feed, eggs, medication and packaging supplies are stated at the
lower of cost (average method) or net realizable value. When market prices for poultry are low and feed grains are high, the
Company may be required to write down the carrying values of processed poultry and live inventories to net realizable value,
which would increase the Company’s cost of sales.
39
Live poultry inventories of broilers are stated at the lower of cost or net realizable value and breeders at cost less
accumulated amortization. The cost associated with broiler inventories, consisting principally of chicks, feed, medicine and
payments to the growers who raise the chicks for us, are accumulated during the growing period. The cost associated with
breeder inventories, consisting principally of breeder chicks, feed, medicine and grower payments are accumulated during the
growing period. Capitalized breeder costs are then amortized over nine months using the straight-line method. Mortality of
broilers and breeders is charged to cost of sales as incurred. If market prices for chicks, feed or medicine or if grower
payments increase (or decrease) during the period, the Company could have an increase (or decrease) in the market value of
its inventory as well as an increase (or decrease) in cost of sales. Should the Company decide that the nine month
amortization period used to amortize the breeder costs is no longer appropriate as a result of operational changes, a shorter (or
longer) amortization period could increase (or decrease) the cost of sales recorded in future periods. High mortality from
disease or extreme temperatures would result in abnormal charges to cost of sales to write-down live poultry inventories.
The Company recorded a charge of $2.8 million to reduced the value of live broiler inventories on hand at October 31,
2019 from cost to net realizable value, because the estimated net realizable value for all broiler flocks in inventory was lower
than the estimated cost to complete those live broiler inventories. In periods where the Company estimates that the cost to
grow live birds in inventory to a marketable age and then process and distribute those birds will be lower in the aggregate
than the anticipated sales proceeds, the Company values the broiler inventories on hand at cost and accumulates costs as the
birds are grown to a marketable age subsequent to the balance sheet date. In periods where the Company estimates that the
cost to grow live birds in inventory to a marketable age and then process and distribute those birds will be higher in the
aggregate than the anticipated sales proceeds, the Company will make an adjustment to lower the value of live birds in
inventory to the net realizable value. The significant judgments that management makes in order to assess the net realizable
value of its broiler inventory include estimating future selling prices of finished products and the related cost of sales,
primarily feed costs, to complete. The Company recorded a charge of $9.6 million to reduce the value of live broiler
inventories on hand at October 31, 2018 from cost to net realizable value. Breeders are generally not subject to lower of cost
or net realizable value reserves due to their longer production lives.
Accrued Self Insurance
Insurance expense and the related reserve for workers’ compensation benefits and employee-related health care
benefits are estimated using historical experience and actuarial estimates. The Company utilizes an outside third party
specialist to assist management in estimating the reserve ultimately recorded in the financial statements. The Company
accrues expenses in its workers’ compensation and employee benefit plans for both known claims as well as claims incurred
but not reported. Stop-loss coverage is maintained with third party insurers to limit the Company’s total exposure.
Management regularly reviews the assumptions used, such as estimated claims incurred but not reported and the estimated
development of reported claims, to recognize periodic expenses. Any resulting adjustments to accrued claims are reflected in
current operating results. There are no material adjustments to expenses accrued in prior periods in current expenses. If
historical experience proves not to be a good indicator of future expenses, if the third-party actuaries with which management
engages were to use different actuarial assumptions, if there is a negative trend in the Company’s claims history, or if
changes are made to the assumptions used to calculate the reserves, there could be a significant increase or decrease in cost of
sales depending on whether these expenses increased or decreased, respectively.
Performance Share Plans
The Company enters into performance share agreements that grant certain officers and key employees the right to
receive shares of the Company’s common stock, subject to the Company’s achievement of certain performance measures.
The performance measures in each outstanding agreement relate to the Company’s average return on equity and average
return on sales over a two year performance period. There is an additional one-year service-based vesting period during
which the holder must be employed by the Company to be eligible to receive the shares that met the performance measures.
The Company must estimate, at the end of each reporting period, the probability that all or some portion of the shares will be
earned at the end of the total three year vesting period. In making this estimate, the Company considers, among other factors,
the current and projected grain costs and chicken volumes and pricing, as well as the amount of commitments to procure
grain at a fixed price throughout the performance period. Due to the high level of volatility of these commodity prices and the
impact that the change in pricing can have on the Company’s results, the Company’s assessment of probability can change
from period to period and can result in a significant revision to the amounts accrued related to the awards. The accounting for
these awards requires the Company to accrue over the three year vesting period the estimated amounts that will be earned
with adjustments made during the service period using the cumulative catch up method. With respect to the fiscal 2017
awards, which vested and were issued effective October 31, 2019, the Company expensed a total of approximately $7.7
million, of which $5.2 million was recorded during fiscal 2018 and $2.5 million was recorded during fiscal 2019. With
respect to the fiscal 2018 awards, the Company has accrued $1.3 million as of October 31, 2019, based on the Company’s
40
determination that achievement of the applicable performance based criteria for those agreements is probable at a level
between the threshold and target return on sales performance measures. Because of the volatility of the factors previously
discussed and considering actual operating results through October 31, 2019, which were below the threshold level, as of
October 31, 2019 the Company was unable to determine that it was probable that awards from outstanding agreements
entered into on November 1, 2018 would be earned, and therefore has not accrued any amount for those awards. Had the
Company determined that it was probable that the maximum amount of those outstanding awards would be earned, an
additional $4.9 million would have been accrued as of October 31, 2019.
Income Taxes
The Company determines its effective tax rate by estimating its permanent differences resulting from differing
treatment of items for financial and income tax purposes. The Company is periodically audited by taxing authorities and
considers any adjustments made as a result of the audits in computing the Company’s income tax expense. Any audit
adjustments affecting permanent differences could have an impact on the Company’s effective tax rate.
Deferred income taxes are accounted for using the liability method and relate principally to depreciation expense, stock
based compensation programs and self-insurance programs accounted for differently for financial and income tax purposes.
Valuation allowances are recorded when it is more likely than not some portion or all of a deferred tax asset will not be
realized.
Contingencies
The Company recognizes the costs of legal defense for the legal proceedings to which it is a party in the periods
incurred. After a considerable analysis of each case, the Company determines the amount of reserves required, if any. At this
time, the Company has not accrued any reserve for any legal proceedings. Future reserves may be required if losses are
deemed reasonably estimable and probable due to changes in the Company’s assumptions, the effectiveness of legal
strategies, or other factors beyond the Company’s control. Future results of operations may be materially affected by the
creation of reserves or by accruals of losses to reflect any adverse determinations in these legal proceedings.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09,
Scope of Modification Accounting, which amends the requirements related to accounting for changes to stock compensation
awards. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017, our fiscal 2019. The Company adopted this guidance during the first quarter of fiscal 2019, and it did not
have an impact on our consolidated financial statements. The impact this guidance will have on our future consolidated
financial statements will depend on the nature and extent of future changes, if any, to the terms and conditions of the
Company's Stock Incentive Plan.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which changes the criteria for
recognizing revenue. ASU 2014-09 was amended by ASU 2015-14 to defer the effective date by one year. The guidance also
modifies the related disclosure requirements, clarifies guidance for multiple-element arrangements and provides guidance for
transactions that were not addressed fully in previous guidance. The guidance, as amended, is effective for annual reporting
periods, and interim periods within those annual reporting periods, beginning after December 15, 2017, our fiscal 2019. The
Company adopted this guidance using the modified retrospective transition method during the first quarter of fiscal 2019, and
it did not have a material impact on our consolidated financial statements. Under the modified retrospective method, prior
periods were not adjusted. Additionally, based on our contract assessments, no cumulative-effect adjustment was made to the
opening balance of retained earnings. For further information regarding the Company's revenue, refer to "Part I, Item 1,
Notes to Condensed Consolidated Financial Statements, Note 1 - Significant Accounting Policies and Note 2 -
Disaggregation of Revenue."
In June 2018, the FASB issued ASU 2018-07, Improvements to Non-employee Share-Based Payment Accounting, which
expands the scope of Topic 718, Compensation - Stock Compensation, to include all share-based payment transactions in
which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based
payment awards. The guidance is effective for annual periods, and interim periods within those annual periods, beginning
after December 15, 2018, our fiscal 2020. Early adoption is permitted. We do not expect adoption to have a material effect on
our consolidated financial statements.
41
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which intends to provide financial
statement users with more decision-useful information about the expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each reporting date. The guidance is effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2019, our fiscal 2021. Early adoption is
permitted. We do not expect adoption to have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. The guidance is intended to increase transparency and
comparability among companies by requiring an entity that is a lessee to recognize on the balance sheet the right-of-use
assets and lease liabilities arising from all leases with terms, as defined by the guidance, of greater than twelve months. The
guidance also requires disclosure of key information about leasing arrangements. The Company is required to adopt this
guidance during the first quarter of fiscal 2020, and we used the transition method that requires a cumulative-effect
adjustment to the beginning balance of retained earnings during the period of adoption, rather than restating prior-period
financial statements. This guidance also provides certain practical expedients, including a practical expedient package during
transition. We utilized this package, which allowed the Company to carry forward its determination of whether a lease exists,
the classification of a lease, and whether initial direct lease costs exist for purposes of transition to the new standard. We have
implemented processes for administering the Company's leases and facilitating compliance with the new guidance. See "Part
I, Item 1, Notes to Condensed Consolidated Financial Statements, Note 11 - Commitments and Contingencies" for the total
amount of the Company's noncancelable operating lease commitments. Management intends to purchase assets going
forward, rather than entering into additional long-term leases. Upon adoption, based on our review of the Company's lease
agreements and assessments performed to date, we expect to recognize right-of-use assets and lease liabilities of
approximately $53.0 million, primarily related to transportation equipment. We do not expect adoption to have a material
effect on our consolidated statements of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The Company is a purchaser of certain commodities, primarily corn and soybean meal, for use in manufacturing feed
for its chickens. As a result, the Company’s earnings are affected by changes in the price and availability of such feed
ingredients. Feed grains are subject to volatile price changes caused by factors described below that include weather, size of
harvest, transportation and storage costs and the agricultural policies of the United States and foreign governments. The price
fluctuations of feed grains have a direct and material effect on the Company’s profitability.
Generally, the Company commits to purchase feed ingredients for deferred delivery from one month to nine months
after the time of the commitment. The grain purchases are made directly with our usual grain suppliers, which are companies
in the business of regularly supplying grain to end users, and do not involve options to purchase. Such purchases occur when
our chief operating decision maker concludes that market factors indicate that prices at the time the grain is needed are likely
to be higher than current prices, or where, based on current and expected market prices for the Company’s poultry products,
our chief operating decision maker believes he can purchase feed ingredients at prices that will allow the Company to earn a
reasonable return for its shareholders. The Company sometimes purchases its feed ingredients for prompt delivery to its feed
mills at market prices at the time of such purchases. Market factors considered by our chief operating decision maker in
determining whether or not and to what extent to buy grain for deferred delivery include:
• Current market prices;
• Current and predicted weather patterns in the United States, South America, China and other grain producing
areas, as such weather patterns might affect the planting, growing, harvesting and yield of feed grains;
• The expected size of the harvest of feed grains in the United States and other grain producing areas of the world as
reported by governmental and private sources;
• Current and expected changes to the agricultural policies of the United States and foreign governments;
• The relative strength of United States currency and expected changes therein as it might impact the ability of
foreign countries to buy United States feed grain commodities;
• The current and expected volumes of export of feed grain commodities as reported by governmental and private
sources;
• The current and expected use of available feed grains for uses other than as livestock feed grains (such as the use
of corn for the production of ethanol, which use is impacted by the price of crude oil); and
• Current and expected market prices for the Company’s poultry products.
42
The Company purchases physical grain, not financial instruments such as puts, calls or straddles that derive their value
from the value of physical grain. Thus, the Company does not use derivative financial instruments as defined in ASC 815,
“Accounting for Derivatives for Instruments and Hedging Activities,” or any market risk sensitive instruments of the type
contemplated by Item 305 of Regulation S-K. The Company does not enter into any derivative transactions or purchase any
grain-related contracts other than the physical grain contracts described above.
Although the Company does not use derivative financial instruments as defined in ASC 815 or purchase market risk
sensitive instruments of the type contemplated by Item 305 of Regulation S-K, the commodities that the Company does
purchase for physical delivery, primarily corn and soybean meal, are subject to price fluctuations that have a direct and
material effect on the Company’s profitability as mentioned above. During fiscal 2019, the Company purchased
approximately 120.5 million bushels of corn and approximately 1.2 million tons of soybean meal for use in manufacturing
feed for its live chickens. A $1.00 change in the average market price paid per bushel for corn would have impacted the
Company’s cash outlays for corn by approximately $120.5 million in fiscal 2019. Likewise, a $10.00 change in the price paid
per ton for soybean meal would impact the Company’s cash outlays by approximately $11.6 million.
Although changes in the market price paid for feed grains impact cash outlays at the time the Company purchases the
grain, such changes do not immediately impact cost of sales. The cost of feed grains is recognized in cost of sales at the same
time that the sales of the chickens that consume the feed grains are recognized. Thus, there is a lag between the time cash is
paid for feed ingredients and the time the cost of such feed ingredients is reported in cost of goods sold. For example, corn
delivered to a feed mill and paid for one week might be used to manufacture feed the following week. However, the chickens
that eat that feed might not be processed and sold for another 48-65 days, and only at that time will the costs of the feed
consumed by the chicken become included in cost of goods sold.
During fiscal 2019, the Company’s average feed cost per pound of broilers processed totaled $0.2532 per pound. Feed
costs per pound of broilers processed consist primarily of feed grains, but also include other feed ingredients such as
vitamins, fat and mineral feed supplements. The average feed cost per pound is influenced not only by the price of feed
ingredients, but also by the efficiency with which live chickens convert feed into body weight. Factors such as weather,
poultry husbandry, quality of feed ingredients and the quality and health of the bird, among others, affect the quantity of feed
necessary to mature chickens to the target live weight and the efficiency of that process. Generally, however, a $1.00 change
in the average price paid per bushel of corn fed to a chicken during its life would have affected average feed cost per pound
of broilers processed by $0.0261, based on the quantity of grain used during fiscal 2019. Similarly, a $10.00 change in the
average price paid per ton of soybean meal would have influenced the average feed cost per pound of broilers processed by
$0.0025 during fiscal 2019.
The following table shows the impact of hypothetical changes in the price of corn and soybean meal on both the
Company’s cash flow and cost of goods sold, based on quantities actually purchased in fiscal 2019:
Feed Ingredient
Corn
Soybean meal
Quantity Purchased
during Fiscal 2019
120.5 million bushels $
1.2 million tons
$
Hypothetical Price
Change
1.00 per bushel $
10.00 per ton
$
Impact on Cash
Outlay
120.5 million $
11.6 million $
Ultimate Impact on
Feed Cost per
Pound of broilers
Processed
0.0261 / lb processed
0.0025 / lb processed
The Company’s interest expense is sensitive to changes in the general level of interest rates in the United States, and
when the Company is indebted, it typically maintains certain of its debt as fixed rate in nature to mitigate the impact of
fluctuations in interest rates. Although the Company had no fixed-rate debt on its balance sheet at October 31, 2019,
management believes the potential effects of near-term changes in interest rates on the Company's debt are not material.
The Company is a party to no other market risk sensitive instruments requiring disclosure.
43
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Sanderson Farms, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sanderson Farms, Inc. and subsidiaries (the Company) as
of October 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity, and cash flows for each
of the three years in the period ended October 31, 2019, and the related notes and financial statement schedule listed in the
Index at Item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at October 31, 2019 and 2018,
and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2019, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of October 31, 2019, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated December 19, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express
an opinion on the Company's financial statements and schedule based on our audits. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
44
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit
matters or on the accounts or disclosures to which they relate.
Description of the
Matter
Live Inventory Valuation Analysis
The Company’s live poultry inventories of broilers are stated at the lower of cost or net realizable
value. The Company recorded an adjustment in the amount of $2.8 million to value its live broiler
inventory at estimated net realizable value rather than cost as of October 31, 2019. As described
in Note 1 to the consolidated financial statements, in periods where the Company estimates that
the cost to grow live birds in inventory to a marketable age and then process and distribute those
birds will be higher in the aggregate than the anticipated sales proceeds, the Company will make
an adjustment to lower the value of live birds in inventory to the net realizable value. The Company
measures the live inventory valuation adjustment using estimates associated with selling prices
and the related cost of sales (primarily feed costs) for poultry products.
Auditing the live inventory valuation analysis is complex due to the highly judgmental nature of
estimating selling prices for poultry products and the related cost of sales (primarily feed costs) for
these products. These estimates have a significant effect on the identification and measurement of
a live inventory valuation adjustment.
How We Addressed the
Matter in Our Audit
We tested controls that address the risks of material misstatement relating to the identification and
measurement of a live inventory valuation adjustment. For example, we tested controls over
management’s review of the live inventory valuation analysis, the significant assumptions related
to selling prices and costs of sales (primarily feed costs) and the related data inputs.
To test the live inventory valuation analysis, our audit procedures included, among others,
evaluating the significant assumptions discussed above and the underlying data used by the
Company. We tested projected selling prices by reviewing actual selling prices as well as
considering changes in poultry market indices subsequent to the balance sheet date. We tested
estimated cost of sales by considering actual costs including feed costs incurred subsequent to the
balance sheet date. We also considered changes in corn and soybean meal market indices
subsequent to the balance sheet date. In addition, we tested the completeness and accuracy of the
underlying data used in the live inventory valuation analysis by agreeing the information to the
Company’s accounting records.
45
Description of the
Matter
Workers' Compensation Reserve
The workers’ compensation reserve totaled $20.5 million at October 31, 2019. As discussed in
Note 1 to the consolidated financial statements, the Company's reserve for workers’ compensation
is based on both known claims and estimates for claims incurred but not reported ("IBNR"). The
Company utilizes various actuarial methodologies and analysis that contemplate known claims and
IBNR claims to estimate the reserve. The IBNR portion of the reserve is based on an analysis
performed by management’s external actuarial specialist and considers a variety of factors,
including the frequency and severity of losses, changes in claims reporting and resolution patterns,
third-party recoveries, insurance industry practices, the regulatory environment and legal
precedent.
Auditing the workers’ compensation reserve is complex and required the involvement of
specialists due to the actuarial methodologies used in the measurement of the reserve. These
methodologies have a significant effect on the workers’ compensation reserve.
How We Addressed the
Matter in Our Audit
We tested controls that address the risks of material misstatement relating to the measurement of
the workers’ compensation reserve. For example, we tested controls over management’s review of
the actuarial analysis of the workers’ compensation reserve, including the assessment of the
appropriateness of the actuarial methodologies used and the data inputs provided to the actuaries.
To test the workers’ compensation reserve, our audit procedures included, among others,
evaluating the actuarial methodologies and analysis used and the underlying claims data provided
by management to its actuaries. We involved our actuarial specialist to assist in our evaluation of
the methodologies and analysis applied by management’s actuary in determining the reserve. For
example, we performed an independent calculation of a range of reasonable reserve balances using
the Company’s historical claims data and similar actuarial methodologies, and compared the
Company’s recorded reserve to the range developed by our actuarial specialist. In addition, we
tested the completeness and accuracy of the underlying claim data provided by the Company to its
actuarial specialist.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1986.
New Orleans, Louisiana
December 19, 2019
46
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance of $1,260 in 2019 and $3,260 in 2018
Receivable from insurance companies
Inventories
Refundable income taxes
Prepaid expenses
Total current assets
Property, plant and equipment:
Land and buildings
Machinery and equipment
Construction-in-process
Accumulated depreciation
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued expenses
Total current liabilities
Long-term debt, less current maturities
Claims payable and other liabilities
Deferred income taxes
Commitments and contingencies
Stockholders’ equity:
Preferred Stock:
Series A Junior Participating Preferred Stock, $100 par value: authorized shares-
500,000; none issued - Par value to be determined by the Board of Directors:
authorized shares-4,500,000; none issued
Common Stock, $1 par value: authorized shares-100,000,000; issued and outstanding
shares - 22,203,920 in 2019 and 22,099,780 in 2018
Paid-in capital
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
47
October 31,
2019
2018
(In thousands,
except share data)
95,417 $
131,778
445
289,928
6,612
56,931
581,111
121,193
121,932
7,094
240,056
32,974
43,240
566,489
892,089
1,236,095
11,149
2,139,333
(953,473)
1,185,860
7,163
1,774,134 $
716,754
1,017,368
227,375
1,961,497
(873,909)
1,087,588
5,363
1,659,440
132,741 $
82,940
215,681
55,000
11,646
74,132
128,936
69,953
198,889
—
9,865
62,793
22,204
86,010
1,309,461
1,417,675
1,774,134 $
22,100
81,269
1,284,524
1,387,893
1,659,440
$
$
$
$
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
2019
Years ended October 31,
2018
(In thousands, except per share data)
2017
Net sales
Cost and expenses:
Cost of sales
Live inventory adjustment
Selling, general and administrative
Operating income
Other income (expense):
Interest income
Interest expense
Other
Income before income taxes
Income tax expense (benefit)
Net income
Earnings per share:
Basic
Diluted
Dividends per share
$
3,440,258
$ 3,236,004 $
3,342,226
3,158,323
2,800
211,141
3,372,264
67,994
2,974,739
9,600
221,965
3,206,304
29,700
2,700,684
—
216,303
2,916,987
425,239
—
(4,156)
9
(4,147)
63,847
10,553
53,294
2.41
2.41
1.28
$
$
$
$
2,911
(2,066)
12
857
30,557
(30,874)
61,431 $
2.70 $
$
2.70
$
1.28
1,167
(1,886)
10
(709)
424,530
144,785
279,745
12.30
12.30
2.04
$
$
$
$
See accompanying notes.
48
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Balance at October 31, 2016
Net income - Fiscal 2017
Cash dividends ($2.04 per share)
Stock compensation plan transactions
Amortization of unearned
i
Balance at October 31, 2017
Net income - Fiscal 2018
Cash dividends ($1.28 per share)
Purchase of common stock
Stock compensation plan transactions
Amortization of unearned
i
Balance at October 31, 2018
Net income - Fiscal 2019
Cash dividends ($1.28 per share)
Stock compensation plan transactions
Amortization of unearned
i
Balance at October 31, 2019
Shares
22,693,225
—
—
109,465
—
22,802,690
—
—
(823,385)
120,475
—
22,099,780
—
—
104,140
—
22,203,920
$
$
$
Amount
Total
Stockholders’
Equity
Retained
Earnings
Paid-In
Capital
(In thousands, except shares and per share amounts)
125,855
—
—
(5,733)
14,877
134,999
22,693
—
—
110
—
22,803
$ 1,041,714 $ 1,190,262
279,745
(46,399)
(5,623)
14,877
1,432,862
279,745
(46,399)
—
—
1,275,060
61,431
(28,966)
(23,001)
—
—
1,284,524
53,294
(28,357)
—
—
61,431
(28,966)
(83,463)
(8,742)
14,771
1,387,893
53,294
(28,357)
(5,490)
10,335
$ 1,309,461 $ 1,417,675
—
—
(823)
120
—
22,100
—
—
104
—
22,204
$
—
—
(59,639)
(8,862)
14,771
81,269
—
—
(5,594)
10,335
86,010
See accompanying notes.
49
Sanderson Farms, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Amortization of share-based compensation
Live inventory adjustment (net of prior period reversal)
Provision for losses (recoveries) on accounts receivable
Deferred income taxes
Loss on asset disposals
Change in assets and liabilities:
Accounts receivable - trade
Accounts receivable - insurance
Inventories
Income taxes
Prepaid expenses and other assets
Accounts payable
Accrued expenses, claims payable and other liabilities
Total adjustments
Net cash provided by operating activities
Investing activities
Capital expenditures
Net proceeds from sale of property and equipment
Net cash used in investing activities
Financing activities
Borrowings from revolving line of credit
Payments on revolving line of credit
Payments for debt issuance costs
Dividends paid
Repurchase of common stock
Proceeds from issuance of restricted stock under stock compensation
Payments from issuance of common stock under stock compensation
l
l
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Income taxes paid
Interest paid, net
Non-cash investing activities:
Capital expenditures included in accounts payable
$
See accompanying notes.
50
2019
Years ended October 31,
2018
(In thousands)
2017
$
53,294
$
61,431
$
279,745
135,420
12,552
(6,800)
(2,000)
11,339
1,175
(7,846)
6,649
(43,072)
26,362
(14,338)
18,517
15,548
153,506
206,800
(249,503)
996
(248,507)
125,000
(70,000)
(2,225)
(28,357)
—
942
(9,429)
15,931
(25,776)
121,193
95,417
3,106
4,043
10,209
$
$
$
$
110,896
16,371
9,600
—
(29,105)
—
16,936
(7,094)
3,109
(39,623)
(4,132)
24,077
(31,053)
69,982
131,413
(308,875)
2,201
(306,674)
—
—
—
(28,966)
(83,463)
1,320
(11,722)
(122,831)
(298,092)
419,285
121,193
40,090
2,054
24,921
$
$
$
$
100,337
17,376
—
610
16,150
—
(15,130)
—
(32,459)
(9,341)
(4,279)
12,013
43,931
129,208
408,953
(166,768)
853
(165,915)
—
—
(2,416)
(46,399)
—
983
(10,032)
(57,864)
185,174
234,111
419,285
139,990
1,867
10,966
$
$
$
Sanderson Farms, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the accounts of Sanderson Farms, Inc. (the “Company”)
and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in
consolidation.
Business: The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and
other prepared chicken items. The Company’s net sales and cost of sales are significantly affected by market price
fluctuations of its principal products sold and of its principal feed ingredients, corn and other grains.
Revenue Recognition: The Company sells to retailers, distributors and casual dining operators primarily in the southeastern,
southwestern, northeastern and western United States. Management periodically performs credit evaluations of its customers’
financial condition and generally does not require collateral. The Company recognizes revenue in connection with a contract
in which the Company has agreed to sell, and a customer has agreed to purchase, specific quantities of product at agreed-
upon prices and when the Company's performance obligation related to that contract has been satisfied. In the majority of its
contracts with customers, the Company's performance obligation is satisfied when delivery of the product has occurred, either
at the customer's facility or the Company's facility, depending on the terms of each contract. In a small number of contracts,
ownership of the product passes from the Company to the customer at some point during transit, at which time the
performance obligation is satisfied and revenue is recognized. Gross revenue and related receivables are recognized based on
the transaction price within the contract and are reduced by estimated or known amounts for items such as rebates, discounts,
cooperative advertising allowances and other various items to arrive at net revenue. During fiscal 2019, 2018 and 2017, these
reductions to revenue totaled approximately $66.5 million, $79.2 million and $77.2 million, respectively.
The cost incurred for shipping and handling activities to deliver the product to the customer is recognized in cost of sales
during the period in which the corresponding revenue is recognized. Where shipping and handling activities occur after the
customer has obtained control of the product, the Company has elected to account for those expenses as fulfillment costs in
cost of sales, rather than an additional promised service. This accounting treatment is the same as the accounting treatment
prior to the Company's adoption of ASU 2014-09, Revenue from Contracts with Customers. The Company has, prior to the
adoption of ASU 2014-09, accounted for freight one of two ways. First, when the Company's agreement with its customer did
not authorize the Company to invoice the customer separately for freight, the Company attempted to negotiate a higher price,
and paid freight costs associated with the sale. In these instances, that cost was booked as an expense in cost of sales. In some
instances, the Company's agreements with its customers authorize the Company to invoice the customer for freight costs
separately on its invoice to the customer. Under these arrangements, the Company has previously accounted for freight by
recognizing revenue net of the freight costs. Subsequent to the adoption of ASU 2014-09, both arrangements are accounted
for in the same manner. That is, in both instances, revenue is reported gross of any freight charge, and all freight costs are
accounted for as cost of sales. Because we adopted ASU 2014-09 using the modified-retrospective transition method, we did
not restate prior-period financial statements, and the separately-invoiced freight costs from periods prior to fiscal 2019 remain
presented as a reduction to cost of sales. During fiscal 2019, we recognized revenue of approximately $24.9 million related to
those freight charges, as compared to approximately $20.0 million and $13.7 million, respectively, recognized as a reduction
to cost of sales during fiscal 2018 and fiscal 2017.
Due to the nature of our contracts, commissions associated with such contracts provide only a short-term benefit (i.e. less
than one year); therefore, with our adoption of ASU 2014-09, we recognize costs of commissions paid to third-party brokers
as selling, general and administrative expenses effective as of November 1, 2018. Prior to our adoption of ASU 2014-09,
those commissions were recognized as a reduction of revenue. Because we transitioned using the modified-retrospective
method, we did not restate prior-period financial statements, and those commissions from periods prior to fiscal 2019 remain
presented as a reduction to revenue. During fiscal 2019, we recognized approximately $10.9 million in commissions as
selling, general and administrative expenses, as compared to approximately $11.0 million recognized as a reduction to
revenue during fiscal 2018.
Two customers each accounted for more than 10% of consolidated sales for the year ended October 31, 2019. Sales to those
customers accounted for 15.8% and 11.8%, respectively, of the Company's net sales during fiscal 2019. The same two
customers each also accounted for more than 10% of consolidated sales for the year ended October 31, 2018. Sales to those
customers accounted for 14.3% and 10.5%, respectively, of the Company's net sales during fiscal 2018. One customer
accounted for more than 10% of consolidated sales for the year ended October 31, 2017. Sales to that customer accounted for
17.0% of the Company’s net sales during fiscal 2017.
51
Sales of offal are considered by-products; accordingly, these amounts reduce cost of sales and totaled $31.1 million, $34.4
million and $32.6 million in fiscal 2019, 2018 and 2017, respectively.
The Company sells certain of its products either directly to foreign markets or to U.S. based customers who resell the product
in foreign markets. These foreign markets for fiscal 2019 and 2018 were primarily Mexico, Cuba, Central Asia and the
Middle East, and for fiscal 2017 were primarily Mexico, Central Asia and the Middle East. These export sales for fiscal years
2019, 2018 and 2017 totaled approximately $284.5 million, $215.8 million and $268.5 million, respectively. The Company
does not believe that the amount of sales attributable to any single foreign country is material to its total sales during any of
the periods presented. The Company’s export sales are facilitated through independent food brokers located in the United
States and the Company’s internal sales staff.
Use of Estimates: The preparation of the consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with maturities of ninety days or less when
purchased to be cash equivalents.
Allowance for Doubtful Accounts: In the normal course of business, the Company extends credit to its customers on a short-
term basis, generally less than twenty-one days. Although credit risks associated with our customers are considered minimal,
the Company routinely reviews its accounts receivable balances and records provisions for probable doubtful accounts based
on an individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of
receivable balances. In circumstances where management is aware of a specific customer’s inability to meet its financial
obligations to the Company, a specific reserve is recorded to reduce the receivable to the amount expected to be collected. If
circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s
ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a
material amount and the allowance for doubtful accounts and related bad debt expense would increase by the same amount.
Inventories: Processed and prepared inventories and inventories of feed, eggs, medication and packaging supplies are stated
at the lower of cost (average method) or net realizable value.
Live poultry inventories of broilers are stated at the lower of cost or net realizable value, and breeders at cost less
accumulated amortization. The costs associated with breeders, including breeder chicks, feed, medicine and grower pay, are
accumulated up to the production stage and amortized over nine months using the straight-line method.
In periods where the Company estimates that the cost to grow live birds in inventory to a marketable age and then process
and distribute those birds will be lower in the aggregate than the anticipated sales proceeds, the Company values the broiler
inventories on hand at cost and accumulates costs as the birds are grown to a marketable age subsequent to the balance sheet
date. In periods where the Company estimates that the cost to grow live birds in inventory to a marketable age and then
process and distribute those birds will be higher in the aggregate than the anticipated sales proceeds, the Company will make
an adjustment to lower the value of live birds in inventory to the net realizable value. The significant judgments that
management makes in order to assess the net realizable value of its broiler inventory include estimating future selling prices
of finished products and the related cost of sales, primarily feed costs, to complete. The Company recorded a charge of
$2.8 million at October 31, 2019 and of $9.6 million at October 31, 2018 to reduce the values of live broiler inventories on
hand at those dates from cost to net realizable value.
Property, Plant and Equipment: Property, plant and equipment is stated at cost. Depreciation of property, plant and
equipment is provided by the straight-line method over the estimated useful lives of 15 to 39 years for buildings and 3 to 12
years for machinery and equipment.
Impairment of Long-Lived Assets: The Company continually reevaluates the carrying value of its long-lived assets based on
events or changes in circumstances which indicate that the carrying value may not be recoverable. As part of this reevaluation
and when indicators are present, the Company estimates the future cash flows expected to result from the use of the asset and
its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss, based on the fair value of the assets, is recognized through a charge to
operations.
Self-Insurance Programs: Insurance expense for workers’ compensation benefits and employee-related health care benefits
are estimated using historical experience and actuarial estimates. The Company utilizes an outside third party specialist to
52
assist management in estimating the reserve ultimately recorded in the financial statements. The Company accrues expenses
in its workers’ compensation and employee benefit plans for both known claims as well as claims incurred but not reported.
Stop-loss coverage is maintained with third party insurers to limit the Company’s total exposure. Management regularly
reviews the assumptions used to recognize periodic expenses. Any resulting adjustments to accrued claims are reflected in
current operating results. There are no material adjustments to expenses accrued in prior periods in current expenses. The
total amounts recorded for the Company's reserve for workers' compensation benefits as of October 31, 2019 and October 31,
2018 are $20.5 million and $18.4 million, respectively.
Advertising and Marketing Costs: The Company expenses advertising costs as incurred. Advertising costs are included in
selling, general and administrative expenses and totaled $19.9 million, $38.9 million and $40.7 million for fiscal 2019, 2018
and 2017, respectively.
Income Taxes: Deferred income taxes are accounted for using the liability method and relate principally to depreciation
expense, stock based compensation programs and self-insurance programs accounted for differently for financial and income
tax purposes.
Valuation allowances are recorded when it is more likely than not some or all of a deferred tax asset will not be realized.
The Company is periodically audited by taxing authorities and considers any adjustments, interest, and penalties incurred as a
result of the audits in computing and reporting income tax expense. Any audit adjustments could have a material impact on the
Company’s effective tax rate. Tax periods for fiscal years 2016 through 2019 remain open to examination by federal and state
taxing jurisdictions to which the Company is subject.
Share-Based Compensation: The Company accounts for all share-based payments to employees, including grants of
restricted stock and performance-based shares, in the income statement based on their fair values. For performance-based
shares, the Company recognizes expense when management determines the performance criteria are probable of being met.
The Company recognizes forfeitures of share-based payments during the period in which the forfeitures occur.
Earnings Per Share: Basic earnings per share is based upon the weighted average number of common shares outstanding
during the year. Share-based payment awards entitling holders to receive non-forfeitable dividends before vesting are
considered participating securities and thus included in the calculation of basic earnings per share. These awards are included
in the calculation of basic earnings per share under the two-class method. The two-class method allocates earnings for the
period between common shareholders and other security holders. The participating awards receiving dividends are allocated
the same amount of income as if they were outstanding shares. Diluted earnings per share includes any dilutive effects of
options, warrants, restricted stock and convertible securities.
Fair Value of Financial Instruments: The Company holds certain items that are required to be disclosed at fair value,
primarily debt instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. A three-level hierarchy is followed for disclosure to show the extent and level
of judgment used to estimate fair value measurements:
Level 1 – Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical
assets or liabilities as of the reporting date.
Level 2 – Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly
observable as of the reporting date through correlation with market data, including quoted prices for similar assets and
liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are
valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used
in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted
markets for substantially the full term of the financial instrument.
Level 3 – Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and
reflect the use of significant management judgment. These values are generally determined using pricing models for which
the assumptions utilize management’s estimates of market participant assumptions.
Fair values for debt are based on quoted market prices or published forward interest rate curves and were categorized as
Level 2 measurements. The fair value and carrying value of the Company's borrowings under its revolving credit facility
were as follows:
53
Total Debt (in millions)
$
53.3
$
55.0
$
October 31, 2019
October 31, 2018
Fair Value
Carrying Value
Fair Value
Carrying Value
—
— $
Impact of Recently Issued Accounting Standards: In May 2017, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2017-09, Scope of Modification Accounting, which amends the requirements related
to accounting for changes to stock compensation awards. The guidance is effective for annual periods, and interim periods
within those annual periods, beginning after December 15, 2017, our fiscal 2019. The Company adopted this guidance during
the first quarter of fiscal 2019, and it did not have an impact on our consolidated financial statements. The impact this
guidance will have on our future consolidated financial statements will depend on the nature and extent of future changes, if
any, to the terms and conditions of the Company's Stock Incentive Plan.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which changes the criteria for
recognizing revenue. ASU 2014-09 was amended by ASU 2015-14 to defer the effective date by one year. The guidance also
modifies the related disclosure requirements, clarifies guidance for multiple-element arrangements and provides guidance for
transactions that were not addressed fully in previous guidance. The guidance, as amended, is effective for annual reporting
periods, and interim periods within those annual reporting periods, beginning after December 15, 2017, our fiscal 2019. The
Company adopted this guidance using the modified retrospective transition method during the first quarter of fiscal 2019, and
it did not have a material impact on our consolidated financial statements. Under the modified retrospective method, prior
periods were not adjusted. Additionally, based on our contract assessments, no cumulative-effect adjustment was made to the
opening balance of retained earnings. For further information regarding the Company's revenue, refer to the revenue
discussion within this footnote above, as well as "Part I, Item 1, Notes to Condensed Consolidated Financial Statements, Note
2 - Disaggregation of Revenue."
In June 2018, the FASB issued ASU 2018-07, Improvements to Non-employee Share-Based Payment Accounting, which
expands the scope of Topic 718, Compensation - Stock Compensation, to include all share-based payment transactions in
which a grantor acquires goods or services to be used or consumed in a grantor's own operations by issuing share-based
payment awards. The guidance is effective for annual periods, and interim periods within those annual periods, beginning
after December 15, 2018, our fiscal 2020. Early adoption is permitted. We do not expect adoption to have a material effect on
our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which intends to provide financial
statement users with more decision-useful information about the expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each reporting date. The guidance is effective for annual periods,
and interim periods within those annual periods, beginning after December 15, 2019, our fiscal 2021. Early adoption is
permitted. We do not expect adoption to have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. The guidance is intended to increase transparency and
comparability among companies by requiring an entity that is a lessee to recognize on the balance sheet the right-of-use
assets and lease liabilities arising from all leases with terms, as defined by the guidance, of greater than twelve months. The
guidance also requires disclosure of key information about leasing arrangements. The Company is required to adopt this
guidance during the first quarter of fiscal 2020, and we used the transition method that requires a cumulative-effect
adjustment to the beginning balance of retained earnings during the period of adoption, rather than restating prior-period
financial statements. This guidance also provides certain practical expedients, including a practical expedient package during
transition. We utilized this package, which allowed the Company to carry forward its determination of whether a lease exists,
the classification of a lease, and whether initial direct lease costs exist for purposes of transition to the new standard. We do
not intend to utilize the hindsight practical expedient. We have implemented processes for administering the Company's
leases and facilitating compliance with the new guidance. See "Part I, Item 1, Notes to Condensed Consolidated Financial
Statements, Note 11 - Commitments and Contingencies" for the total amount of the Company's noncancelable operating lease
commitments. Management intends to purchase assets going forward, rather than entering into additional long-term leases.
Upon adoption, based on our review of the Company's lease agreements and assessments performed to date, we expect to
recognize right-of-use assets and lease liabilities of approximately $53.0 million, primarily related to transportation
equipment. We do not expect adoption to have a material effect on our consolidated statements of operations and cash flows.
54
2. Disaggregation of Revenue
The following table disaggregates our net sales by product category (in millions):
Product Category
Fresh, vacuum-sealed chicken
Fresh, chill-packed chicken
Fresh, ice-packed chicken
Prepared chicken
Frozen chicken
Other
Total net sales
3. Inventories
Inventories consisted of the following:
Live poultry-broilers (net of reserve) and breeders
Feed, eggs and other
Processed poultry
Prepared chicken
Packaging materials
Total inventories
Fiscal Year 2019
$
$
1,310.2
1,137.7
511.5
240.8
213.0
27.1
3,440.3
Fiscal Year 2018
1,139.3
$
1,158.3
503.6
207.6
211.5
15.7
3,236.0
$
Fiscal Year 2017
$
$
1,339.1
1,044.7
547.1
170.8
223.9
16.6
3,342.2
October 31,
2019
2018
(In thousands)
$
$
179,870 $
47,417
35,121
20,032
7,488
289,928 $
150,980
37,965
30,973
13,591
6,547
240,056
The increase in live inventories is attributable to an increase in the quantity of live birds in inventory at the Company's Tyler,
Texas facility as it increased production during fiscal 2019, as well as the value at which the Company's live poultry
inventories of broilers are recorded. In periods where the Company estimates that the cost to grow live birds in inventory to a
marketable age and then process and distribute those birds will be lower in the aggregate than the anticipated sales proceeds,
the Company values the broiler inventories on hand at cost and accumulates costs as the birds are grown to a marketable age
subsequent to the balance sheet date. In periods where the Company estimates that the cost to grow live birds in inventory to
a marketable age and then process and distribute those birds will be higher in the aggregate than the anticipated sales
proceeds, the Company will make an adjustment to lower the value of live birds in inventory to the net realizable value. The
significant judgments that management makes in order to assess the net realizable value of its broiler inventory include
estimating future selling prices of finished products and the related cost of sales to complete. The Company recorded a charge
of $2.8 million at October 31, 2019 and of $9.6 million at October 31, 2018 to reduce the values of live broiler inventories on
hand at those dates from cost to net realizable value.
The increases in feed, eggs and other, processed poultry and packaging materials inventories are also attributable to an
increase in the inventory volume at the Tyler, Texas facility.
The increase in prepared chicken inventory is attributable to the mix of the different finished products in inventory at October
31, 2019, as compared to October 31, 2018, as well as an increase in production volume at the Company's prepared chicken
facility in Flowood, Mississippi. During fiscal 2019, the facility processed approximately 129.1 million pounds of prepared
chicken products, as compared to approximately 107.6 million pounds during fiscal 2018. Approximately 1.2 million pounds
of that increase was in inventory at October 31, 2019, representing an approximately 12% increase in inventory volume.
55
4. Prepaid expenses
Prepaid expenses consisted of the following:
Parts and supplies
Prepaid insurance
Other prepaid expenses
Total prepaid expenses
5. Accrued expenses
Accrued expenses consisted of the following:
Workers’ compensation claims
Accrued wages
Accrued rebates
Accrued vacation
Accrued property taxes
Accrued payroll taxes
Other accrued expenses
Total accrued expenses
6. Long-Term debt obligations
Long-term debt obligations consisted of the following:
Revolving credit facility with banks (weighted average rate of 3.3% at October 31, 2019)
Less current maturities of long-term debt
Total long-term debt
October 31,
2019
2018
(In thousands)
33,617 $
8,859
14,455
56,931 $
28,287
8,232
6,721
43,240
October 31,
2019
2018
(In thousands)
9,687 $
19,525
13,529
10,592
11,331
8,290
9,986
82,940 $
9,020
14,142
7,828
8,554
9,453
9,034
11,922
69,953
$
$
$
$
October 31,
2019
2018
(In thousands)
$
$
55,000 $
—
55,000 $
—
—
—
The Company is a party to a revolving credit facility dated March 21, 2019, with a maximum available borrowing capacity of
$1.0 billion. Under the credit facility, the Company may not exceed a maximum debt to total capitalization ratio of 50%. The
Company has a one-time right, at any time during the term of the agreement, to increase the maximum debt to total
capitalization ratio then in effect by five percentage points in connection with the construction of a new poultry complex for
the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its
intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth
requirement that at October 31, 2019, was $998.6 million. The credit is unsecured and, unless extended, will expire on
March 21, 2024. As of October 31, 2019, the Company had borrowed $55.0 million, and had approximately $21.6 million
outstanding in letters of credit, leaving $923.4 million of borrowing capacity available under the facility. As of December 18,
2019, the Company had borrowed $85.0 million, and had approximately $23.1 million outstanding in letters of credit, leaving
$891.9 million of borrowing capacity available under the facility.
56
The Company has the option to borrow funds under the revolving line of credit based on the Prime interest rate or the Libor
interest rate plus a spread ranging from 0.25% to 1.50%. The spread on Libor borrowings and the commitment fee for the
unused balance of the revolving credit agreement are determined based upon the Company’s leverage ratio as follows:
Level
1
2
3
4
< 25%
≥ 25% and < 35%
≥ 35% and < 45%
≥ 45%
Leverage Ratio
Spread
Commitment Fee
0.25 %
0.50 %
1.00 %
1.50 %
0.20 %
0.25 %
0.30 %
0.35 %
The aggregate annual maturities of long-term debt at October 31, 2019 are as follows (in thousands):
Fiscal Year
2024
7. Income Taxes
Amount
55,000
55,000
$
$
On December 22, 2017, during our fiscal 2018, the Tax Cuts and Jobs Act of 2017 ("TCJA") was enacted. Changes as a
result of the TCJA that either affected the Company during fiscal 2018 or will affect future periods include, but are not
limited to, a reduction of the corporate income tax rate from 35.0% to 21.0%, bonus depreciation provisions that allow
entities to fully expense qualified property during the year of purchase, the elimination of the domestic production activities
deduction beginning in our fiscal 2019, the allowance of a deduction for foreign-derived intangible income, changes to
Internal Revenue Code ("IRC") Section 162 regarding the deductibility of excessive employee remuneration for certain
employees, and the elimination of net operating loss ("NOL") carryback provisions. Section 15 of the IRC stipulates that our
fiscal 2018 was subject to a blended statutory tax rate of 23.3%, which was based on a calculation of the number of days
during fiscal 2018 that were subject to a 35.0% statutory rate and the number of days during fiscal 2018 that were subject to a
21.0% statutory rate. Fiscal 2019 was subject to a 21.0% statutory rate for the entire year, and fiscal 2017 was subject to a
35.0% statutory rate for the entire year.
Our financial statements for fiscal 2018 were materially affected by the changes enacted by the TCJA. U.S. GAAP requires
that the effects from changes in tax laws be recognized in the period in which the new law is enacted, which for the TCJA
was our first quarter of fiscal 2018. Since the TCJA was enacted on December 22, 2017, which is during our first fiscal
quarter, we were required to remeasure our deferred tax assets and liabilities using the enacted tax rate expected to apply
when the temporary differences from which the deferred taxes arose were expected to be settled. This revaluation of our
deferred taxes resulted in a $37.5 million discrete income tax benefit and a corresponding reduction to net deferred tax
liabilities during the first quarter of fiscal 2018.
Our effective tax rates for fiscal 2019, 2018 and 2017 were 16.5%, (101.0)% and 34.1%, respectively. During the periods
presented, income tax expense (benefit) consisted of the following:
57
Current expense (benefit):
Federal
State
Deferred expense (benefit):
Federal
State
Change in valuation allowance
Income tax expense (benefit)
2019
Years Ended October 31,
2018
(In thousands)
2017
$
$
(735)
(51)
(786)
13,966
2,753
(5,380)
11,339
10,553
$
(600) $
(1,169)
(1,769)
(28,845)
2,146
(2,406)
(29,105)
(30,874) $
$
117,611
11,024
128,635
15,452
1,804
(1,106)
16,150
144,785
Significant components of the Company’s deferred tax assets and liabilities are outlined below.
Deferred tax liabilities:
Property, plant and equipment
Prepaid and other assets
Total deferred tax liabilities
Deferred tax assets:
Accrued expenses and accounts receivable
Inventory
Compensation on restricted stock
State income tax credits
Other
Valuation allowance
Net operating loss
Total deferred tax assets
Net deferred tax liabilities
October 31,
2019
2018
(In thousands)
$
$
148,505 $
1,911
150,416
8,172
1,155
7,528
9,333
1,272
(5,637)
54,461
76,284
74,132 $
88,351
1,751
90,102
7,814
2,862
8,280
12,235
654
(11,017)
6,481
27,309
62,793
The increase in the Company's deferred tax liability is primarily attributable to the Company's decision to take bonus
depreciation on qualifying assets placed in service during fiscal 2019.
Included in the deferred tax assets at October 31, 2019, is a federal NOL carryforward of $255.4 million. All of the NOL
carryforward was incurred subsequent to the enactment of the TCJA and therefore has an indefinite carryforward period. The
Company has significant deferred tax liabilities, primarily related to property, plant and equipment, which are expected to
reverse and allow for the full utilization of the NOL carryforward. As such, the Company has not recorded a valuation
allowance related to the NOL carryforward. Also included in the deferred tax assets are North Carolina Investing in Business
Property Credit and North Carolina Jobs Credits totaling $4.9 million, as well as Georgia Job Tax Credits totaling $2.6
million. The North Carolina Investing in Business Property Credit provides a 7% investment tax credit for property located in
a North Carolina development area, the North Carolina Creating Jobs Credit provides a tax credit for increased employment
in North Carolina, and the Georgia Job Tax Credit provides a tax credit for creation and retention of qualifying jobs in
Georgia. It is management’s opinion that the majority of the North Carolina and Georgia income tax credits will not be
utilized before they expire, and a $5.6 million valuation allowance has been recorded as of October 31, 2019. The North
Carolina credits began to expire during fiscal 2018, and the remaining credits expire between fiscal years 2020 and 2023.
58
At the end of each reporting period, the Company evaluates all available information at that time to determine if it is more
likely than not that some or all of these credits will be utilized. As of October 31, 2019, 2018, and 2017, the Company
determined that a total of $1.8 million, $0.7 million, and $0.6 million, respectively, would be recovered. Accordingly, those
amounts were released from the valuation allowance and benefited deferred tax expense in the respective periods.
The differences between the consolidated effective income tax rate and the federal statutory rate effective during the
applicable year presented are as follows:
Income taxes at statutory rate
Discrete benefit resulting from TCJA
State income taxes
State income tax credits
Expiration of state income tax credits
Federal income tax credits
Federal manufacturers deduction
Excess tax benefits
Nondeductible expenses
Change in valuation allowance
Other
Income tax expense (benefit)
8. Earnings Per Share
2019
Years Ended October 31,
2018
(In thousands)
2017
13,408
—
1,189
(2,139)
4,121
(474)
—
(1,388)
1,786
(5,380)
(570)
10,553
$
$
7,132 $
(37,505)
1,014
(804)
4,117
(460)
—
(1,638)
1,890
(5,297)
677
(30,874) $
148,585
—
9,038
(606)
642
(390)
(11,527)
(3,345)
3,506
(1,106)
(12)
144,785
$
$
Certain share-based payment awards entitling holders to receive non-forfeitable dividends before vesting are considered
participating securities and thus included in the calculation of basic earnings per share, to the extent they are dilutive. These
awards are included in the calculation of basic earnings per share under the two-class method. The two-class method allocates
earnings for the period between common shareholders and other security holders. The participating awards receiving
dividends are allocated the same amount of income as if they were outstanding shares.
The following table presents earnings per share (in thousands).
October 31, 2019
53,294
$
(778)
52,516
21,829
21,829
2.41
2.41
$
$
$
$
$
For the years ended
October 31, 2018
October 31, 2017
279,745
61,431 $
(878)
60,553
22,429
22,429
2.70 $
2.70 $
(4,285)
275,460
22,393
22,393
12.30
12.30
Net income
Distributed and undistributed (earnings) to unvested restricted
Distributed and undistributed earnings to common shareholders —
k
Basic
Weighted average shares outstanding — Basic
Weighted average shares outstanding — Diluted
Earnings per common share — Basic
Earnings per common share — Diluted
59
9. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (“ESOP”) covering substantially all employees. Contributions to the
ESOP are made in cash at the discretion of the Company’s Board of Directors. Total contributions to the ESOP were $3.0
million, $2.0 million, and $18.0 million in fiscal 2019, 2018, and 2017, respectively. Contributions to the ESOP vary in
amount, as the contributions are based on profitability.
The Company has a 401(k) Plan which covers substantially all employees after one year of service. Participants in the Plan
may contribute up to the maximum allowed by Internal Revenue Service regulations. The Company matches 100% of
employee contributions to the 401(k) Plan up to 3% of each employee’s salary, and 50% of employee contributions between
3% and 5% of each employee’s salary. The Company’s contributions to the 401(k) Plan totaled $10.9 million in fiscal 2019;
$10.1 million in fiscal 2018; and $8.5 million in fiscal 2017.
10. Stock Compensation Plans
On February 17, 2005, the shareholders of the Company approved the Sanderson Farms, Inc. and Affiliates Stock Incentive
Plan (the “Plan”). The Plan allows the Company’s Board of Directors to grant certain incentive awards including stock
options, stock appreciation rights, restricted stock, and other similar awards. The Company was authorized to award up to
2,250,000 shares under the Plan. On February 17, 2011, the shareholders approved changes to the plan to increase the shares
that may be issued under the plan from 2,250,000 to 3,500,000 shares and to increase the number of shares that may be
granted in the form of restricted stock from 562,500 to 1,562,500 shares. On February 11, 2016, the shareholders approved
the authorization of an additional 700,000 shares issuable under the plan, for a total of 4,200,000 authorized shares. The
shareholders also approved an increase in the number of shares issuable as restricted stock from 1,562,500 to 2,112,500
shares.
Pursuant to the Plan, the Company’s Board of Directors approves agreements for the issuance of restricted stock to directors,
executive officers and other key employees. Restricted stock granted in fiscal 2019, 2018 and 2017, vests three to four years
from the date of grant. The vesting schedule is accelerated upon death, disability, the participant’s termination of employment
after reaching retirement eligibility by reason of retirement, or upon a change in control, as defined in the Plan. Restricted
stock grants are valued based upon the closing market price of the Company’s common stock on the date of grant and are
recognized as compensation expense over the vesting period. Compensation expense related to restricted stock grants totaled
$8.4 million, $7.5 million and $7.4 million during fiscal 2019, 2018 and 2017, respectively.
A summary of the Company’s restricted stock activity and related information is as follows:
Outstanding at October 31, 2016
Granted during fiscal 2017
Vested during 2017
Forfeited during 2017
Outstanding at October 31, 2017
Granted during fiscal 2018
Vested during 2018
Forfeited during 2018
Outstanding at October 31, 2018
Granted during fiscal 2019
Vested during 2019
Forfeited during 2019
Outstanding at October 31, 2019
Number of
Shares
293,810 $
83,587 $
(69,294) $
(6,874) $
301,229 $
65,250 $
(84,696) $
(2,352) $
279,431 $
88,334 $
(77,031) $
(6,464) $
284,270 $
Weighted
Average Grant
Price
68.65
91.71
55.50
78.22
77.86
145.33
68.82
108.31
96.10
105.01
88.37
104.95
100.76
The Company had $12.5 million in unrecognized share-based compensation costs related to the 284,270 unvested shares as
of October 31, 2019, that will be recognized over a weighted average period of 1 year, 6 months.
60
Also pursuant to the Plan, the Company’s Board of Directors approves Management Share Purchase Plan agreements (the
“Purchase Plan”) that authorize the issuance of shares of restricted stock to the Company’s directors, executive officers and
other key employees. Pursuant to the Purchase Plan, non-employee directors may elect to receive up to 100 percent of their
annual retainer and meeting fees in the form of restricted stock. Other participants may elect to receive up to 15 percent of
their salary and up to 75 percent of any bonus earned in the form of restricted stock. The purchase price of the restricted stock
is the closing market price of the Company’s common stock on the date of purchase. The Company makes matching
contributions of 25 percent of the restricted shares purchased by participants. Restricted stock issued pursuant to the Purchase
Plan vests after three years or immediately upon death, disability, or change in control, as defined. If an employee terminates
employment after attaining eligibility for retirement, or a non-employee director retires upon the expiration of his or her
board term, the participant’s Purchase Plan shares vest immediately. If a participant’s employment or service as a director is
terminated for any other reason prior to the three-year vesting period, the participant forfeits the matching contribution and
the Company may, at its option, repurchase restricted stock purchased by the participant at the price paid by the participant.
Matching contributions are recognized as compensation expense over the vesting period. During fiscal 2019, 2018 and 2017,
the participants purchased a total of 7,350; 10,697; and 9,605 shares of restricted stock pursuant to the Purchase Plan, valued
at an average price of $128.20, $123.45, and $112.84, per share, respectively, and the Company issued 1,741; 2,565; and
2,290 matching shares, valued at an average price of $128.20, $123.45, and $112.84 per share, respectively. During fiscal
2019, 2018 and 2017, the participants vested in a total of 17,142; 17,040; and 17,034 shares of restricted stock pursuant to the
Purchase Plan, valued at an average price of $89.08, $80.38, and $80.62, per share, respectively. During fiscal 2019, 2018
and 2017, the participants forfeited a total of 321; 259; and 1,461 shares of restricted stock pursuant to the Purchase Plan,
respectively. Compensation expense related to the Company’s matching contribution totaled approximately $351,000,
$289,000 and $392,000 in fiscal 2019, 2018 and 2017, respectively.
During fiscal 2019, 2018 and 2017, the Company entered into performance share agreements that grant certain officers and
key employees the right to receive shares of the Company’s common stock, subject to the Company’s achievement of certain
performance measures. The performance share agreements specify a target number of shares that a participant can receive
based upon the Company’s average return on equity and average return on sales, as defined, during a two-year performance
period beginning November 1 of each performance period. Although the performance share agreements have a two-year
performance period, they are subject to an additional one year period during which the participant must remain employed by
the Company before they are paid out. If the Company’s average return on equity and average return on sales exceed certain
threshold amounts for the performance period, participants will receive 50 percent to 200 percent of the target number of
shares, depending upon the Company’s level of performance. Accruals for performance shares begin during the period
management determines that achievement of the applicable performance based criteria is probable at some level. In
estimating the probability of the number of shares that will be awarded, the Company considers, among other factors, current
and projected grain costs and chicken volumes and pricing, as well as the amount of the Company's commitments to procure
grain at a fixed price throughout the performance period. Due to the high level of volatility of these commodity prices and the
impact that the change in pricing can have on the Company’s results, the Company’s assessment of probability can change
from period to period and can result in a significant revision to the amounts accrued related to the arrangements, as the
accruals are adjusted using the cumulative catch-up method of accounting.
The target number of shares specified in the performance share agreements entered into on November 1, 2018 totaled 74,650.
As of October 31, 2019, the Company could not determine that achievement of the applicable performance based criteria is
probable due to actual operating results for the first year of the two-year performance period falling below threshold levels,
and the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
The Company also has performance share agreements in place with certain officers and key employees that were entered into
on November 1, 2017. During fiscal 2019, the Company determined based on combined results of fiscal 2018 and 2019, that
achievement of the return on equity criterion for the November 1, 2017 agreements is not probable; however, the Company
has determined that achievement of the return on sales criterion is probable at a level between the threshold and target levels.
Accordingly, because the accrual is made using the cumulative catch-up method, fiscal 2019 includes compensation expense
of $1.3 million, as compared to no compensation expense recorded during fiscal 2018 related to the agreements entered into
on November 1, 2017. As of October 31, 2019, the aggregate number of shares estimated to be awarded related to the
performance share agreements entered into on November 1, 2017 totaled 13,127 shares. Since the performance period for
those agreements has ended, the actual number of shares that will be awarded can change only due to potential forfeitures
during the remaining twelve months of the service period ending October 31, 2020. The Company will recognize the
remaining $0.7 million of unearned compensation related to these shares over the remaining service period.
The Compensation Committee of the Company's Board of Directors determined that the performance shares granted
November 1, 2016, were earned at a level between the threshold and target levels for the return on equity criterion and
between the target and maximum levels for the return on sales criterion. Accordingly, fiscal 2019 includes compensation
61
expense of $2.5 million, related to those agreements, as compared to $5.2 million during fiscal 2018. Because management's
initial determination of probability was made during fiscal 2018, and because the accrual is made using the cumulative catch
up method, the compensation expense recorded during fiscal 2018 related to the agreements entered into on November 1,
2016, was greater than that recorded during fiscal 2019. A total of 84,511 shares from the agreements entered into on
November 1, 2016 vested and were issued on October 31, 2019.
Had the Company determined that it was probable that the maximum amount of those outstanding awards from the
agreements entered into on November 1, 2018 would be earned, an additional $4.9 million would have been accrued as of
October 31, 2019.
A summary of the Company's compensation cost related to performance share agreements is as follows (in thousands):
Date of Performance Share Agreement
November 1, 2014
November 1, 2015
November 1, 2016
November 1, 2017
November 1, 2018 (1)
Total compensation cost
Number of shares
issued (actual (a) or
estimated (e))
102,193 (a) $
October 31, 2019
—
145,197 (a)
84,511 (a)
13,127 (e)
— (e)
$
—
2,504
1,270
—
3,774
$
$
For the years ended
October 31, 2018
October 31, 2017
2,787
— $
3,341
5,238
—
—
8,579 $
6,752
—
—
—
9,539
Note (1) - As of October 31, 2019, the Company could not determine that achievement of the applicable performance-based
criteria is probable for the agreements entered into on November 1, 2018 due to the uncertainties discussed above, and
therefore recorded no compensation expense related to those agreements.
11. Commitments and Contingencies
The Company has approximately 17,055 employees, approximately 2,046 of whom are covered by collective bargaining
agreements. Each collective bargaining agreement has a grievance procedure and no strike-no lockout clauses that should
assist in maintaining stable labor relations at the applicable facility.
The Company has vehicle and equipment operating leases that expire at various dates through fiscal 2023. Rental expense
under these leases totaled approximately $20.3 million, $19.0 million, and $17.0 million during fiscal 2019, 2018 and 2017,
respectively. The minimum lease payments of obligations under non-cancelable operating leases at October 31, 2019 were as
follows:
Fiscal Year
2020
2021
2022
2023
2024
2025
Amount
(in millions)
15.4
13.1
9.8
7.5
1.9
0.1
47.8
$
$
At October 31, 2019, the Company’s estimated outstanding contractual obligations for feed grains, feed ingredients,
packaging supplies, construction projects and new equipment totaled $208.1 million, with the entire amount due in fiscal
2020.
The timing of expenditures related to the obligations discussed above is subject to change as the contracts mature.
Between September 2, 2016 and October 13, 2016, Sanderson Farms, Inc. and our subsidiaries were named as defendants,
along with 13 other poultry producers and certain of their affiliated companies, in multiple putative class action lawsuits filed
by direct and indirect purchasers of broiler chickens in the United States District Court for the Northern District of Illinois.
The complaints allege that the defendants conspired to unlawfully fix, raise, maintain, and stabilize the price of broiler
chickens, thereby violating federal and certain states’ antitrust laws, and also allege certain related state-law claims. The
62
complaints also allege that the defendants fraudulently concealed the alleged anticompetitive conduct in furtherance of the
conspiracy. The complaints seek damages, including treble damages for the antitrust claims, injunctive relief, costs, and
attorneys’ fees. As detailed below, the Court has consolidated all of the direct purchaser complaints into one case, and the
indirect purchaser complaints into two cases, one on behalf of commercial and institutional indirect purchaser plaintiffs and
one on behalf of end-user consumer plaintiffs. The cases are part of a coordinated proceeding captioned In re Broiler Chicken
Antitrust Litigation.
On October 28, 2016, the direct and indirect purchaser plaintiffs filed consolidated, amended complaints, and on November
23, 2016, the direct and indirect purchaser plaintiffs filed second amended complaints. On December 16, 2016, the indirect
purchaser plaintiffs separated into two cases. On that date, the commercial and institutional indirect purchaser plaintiffs filed
a third amended complaint, and the end-user consumer plaintiffs filed an amended complaint.
On January 27, 2017, the defendants filed motions to dismiss the amended complaints in all of the cases, and on November
20, 2017, the motions to dismiss were denied. On February 7, 2018, the direct purchaser plaintiffs filed their third amended
complaint, adding three additional poultry producers as defendants. On February 12, 2018, the end-user consumer plaintiffs
filed their second amended complaint, in which they also added three additional poultry producers as defendants, along with
Agri Stats. On February 20, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fourth amended
complaint. On November 13, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fifth amended
complaint, adding three additional poultry producers as defendants. On November 28, 2018, the end-user consumer plaintiffs
filed their third amended complaint. On January 15, 2019, the direct purchaser plaintiffs filed their fourth amended
complaint, and the commercial and institutional indirect purchaser plaintiffs filed their sixth amended complaint. Both the
direct purchaser plaintiffs and the commercial and institutional indirect purchaser plaintiffs added two new poultry producers
as defendants, as well as Agri Stats. On April 29, 2019, the end-user consumer plaintiffs filed their fourth amended
complaint. The parties are currently engaged in discovery, subject to the limited stay discussed below.
Between December 8, 2017 and September 13, 2019, additional purported direct-purchaser entities individually brought
thirty-three separate suits against 19 poultry producers, including Sanderson Farms, and Agri Stats in the United States
District Court for the Northern District of Illinois, the United States District Court for the District of Kansas, the United
States District Court for the Western District of Arkansas, and the United States District Court for the District of Puerto Rico.
These suits allege substantially similar claims to the direct purchaser class complaint described above; certain of the suits
additionally allege related state-law and common law claims, and related claims under federal and Georgia RICO statutes.
Those suits filed in the Northern District of Illinois are now pending in front of the same judge as the putative class action
lawsuits. On June 26, 2018, the defendants filed a motion to transfer the case filed in the District of Kansas to the Northern
District of Illinois, and that motion was granted on September 13, 2018. On June 7, 2019, the plaintiffs filed a motion to
transfer the case filed in the Western District of Arkansas to the Northern District of Illinois, and that motion was granted on
June 11, 2019. On July 24, 2019, one of the defendants filed a motion to transfer the case filed in the District of Puerto Rico
to the Northern District of Illinois, and that motion was granted on July 25, 2019. On July 22, 2019, the Company moved to
dismiss in part those direct-purchaser complaints that allege claims under federal and Georgia RICO statutes against it. The
motion was fully briefed on September 20, 2019, and a hearing on the motion is scheduled for December 18, 2019. On
October 18, 2019, defendants moved to dismiss the case filed by the Commonwealth of Puerto Rico on its behalf and on
behalf of its citizens. The motion will be fully briefed on January 21, 2020. The parties are currently engaged in discovery,
subject to the limited stay discussed below. It is possible additional individual actions may be filed.
The Company is aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the United
States Department of Justice, Antitrust Division, a subpoena that included a request to produce all discovery in the case to a
grand jury. On June 27, 2019, the Court in In re Broiler Chicken Antitrust Litigation permitted the United States Department
of Justice to intervene in the case, as well as ordered certain discovery stayed until September 27, 2019. Before the discovery
stay expired on September 27, 2019, the United States Department of Justice asked the Court in In re Broiler Chicken
Antitrust Litigation to extend the discovery stay for an additional six months. On September 25, 2019, the Court granted the
additional stay of not less than three months. On October 16, 2019, after further consideration, the Court extended the stay
until June 27, 2020.
The Company received a grand jury subpoena in connection with the United States Department of Justice Antitrust Division
investigation on September 9, 2019. The Company is complying with the subpoena and producing documents as requested.
We intend to continue to defend the lawsuits vigorously; however, the Company cannot predict the outcome of these actions.
If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our
financial position and results of operations.
Sanderson Farms, Inc.; Joe F. Sanderson, Jr., the Chairman of the Registrant’s Board of Directors and its Chief Executive
Officer; and D. Michael Cockrell, director and Chief Financial Officer, were named as defendants in a putative class action
63
lawsuit filed on October 28, 2016, in the United States District Court for the Southern District of New York. On March 30,
2017, the lead plaintiff filed an amended complaint adding Lampkin Butts, director, Chief Operating Officer, and President,
as a defendant, and on June 15, 2017, the lead plaintiff filed a second amended complaint. The complaint alleges that the
defendants made statements in the Company’s SEC filings and press releases, and other public statements, that were
materially false and misleading in light of the Company’s alleged, undisclosed violation of the federal antitrust laws
described above. The complaint also alleges that the material misstatements were made in order to, among other things,
“artificially inflate and maintain the market price of Sanderson Farms securities.” The complaint alleges the defendants
thereby violated the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder, and, for the individual defendants, Section 20(a) of the Exchange Act,
and seeks damages, interest, costs and attorneys’ fees. On January 19, 2018, the Court granted the defendants’ motion to
dismiss and entered judgment for the defendants. On January 31, 2018, the plaintiff filed a notice of appeal to the United
States Court of Appeals for the Second Circuit. The appeal was fully briefed, and the Court of Appeals heard oral argument
on August 31, 2018. On December 10, 2019, the Court of Appeals affirmed the District Court's decision granting the
defendants' motion to dismiss.
On January 30, 2017, the Company received a letter from an attorney representing a putative shareholder demanding that the
Company take action against current and/or former officers and directors of the Company for alleged breach of their fiduciary
duties. The shareholder asserted that the officers and directors (i) failed to take any action to stop the alleged antitrust
conspiracy described above, despite their alleged knowledge of the conspiracy, and (ii) made and/or caused the Company to
make materially false and misleading statements by failing to disclose the alleged conspiracy. The shareholder also asserted
that certain directors engaged in “insider sales” from which they improperly benefited. In addition to demanding that the
officers and directors be sued, the shareholder also demanded that the Company adopt unspecified corporate governance
improvements. On February 9, 2017, pursuant to statutory procedures available in connection with demands of this type, the
Company’s board of directors appointed a special committee of qualified directors to determine, after conducting a
reasonable inquiry, whether it was in the Company’s best interests to pursue any of the actions demanded in the shareholder’s
letter. On April 26, 2017, the special committee reported to the Company’s board of directors its determination that it was not
in the Company’s best interests to take any of the demanded actions at that time, and that no governance improvements
related to the subject matter of the demand were needed. On May 5, 2017, the special committee’s counsel informed the
shareholder’s counsel of the committee’s determination. As of the date of filing of this report, and to the Company’s
knowledge, no legal proceedings related to the shareholder’s demand have been filed.
On January 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with four other poultry
producers and certain of their affiliated companies, in a putative class action lawsuit filed in the United States District Court
for the Eastern District of Oklahoma. On March 27, 2017, Sanderson Farms, Inc. and our subsidiaries were named as
defendants, along with four other poultry producers and certain of their affiliated companies, in a second putative class action
lawsuit filed in the United States District Court for the Eastern District of Oklahoma. The Court ordered the suits
consolidated into one proceeding, and on July 10, 2017, the plaintiffs filed a consolidated amended complaint. The
consolidated amended complaint alleges that the defendants unlawfully conspired by sharing data on compensation paid to
broiler farmers, with the purpose and effect of suppressing the farmers’ compensation below competitive levels. The
consolidated amended complaint also alleges that the defendants unlawfully conspired to not solicit or hire the broiler
farmers who were providing services to other defendants. The consolidated amended complaint seeks treble damages, costs
and attorneys’ fees. On September 8, 2017, the defendants filed a motion to dismiss the amended complaint, on October 23,
2017, the plaintiffs filed their response, and on November 22, 2017, the defendants filed a reply. On January 19, 2018, the
Court granted the Sanderson Farms defendants’ motion to dismiss for lack of personal jurisdiction. The motion to dismiss the
complaint filed in the Eastern District of Oklahoma on its merits is pending as to the remaining defendants. On February 21,
2018, the plaintiffs filed a substantially similar lawsuit in the United States District Court for the Eastern District of North
Carolina against Sanderson Farms and our subsidiaries and another poultry producer. The plaintiffs subsequently moved to
consolidate this action with the Eastern District of Oklahoma action in the Eastern District of Oklahoma for pre-trial
proceedings, with the defendants in support thereof. That motion was denied. On July 13, 2018, the defendants moved to
dismiss the lawsuit in the Eastern District of North Carolina, and briefing was completed on September 4, 2018. On January
15, 2019, the Court granted in part the defendants’ motion to dismiss and stayed the action in the Eastern District of North
Carolina pending resolution of the action in the Eastern District of Oklahoma. No discovery has taken place to date. We
intend to defend this case vigorously; however, the Company cannot predict the outcome of this action. If the plaintiffs were
to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position
and results of operations.
On February 21, 2017, Sanderson Farms, Inc. received an antitrust civil investigative demand from the Office of the Attorney
General, Department of Legal Affairs, of the State of Florida. Among other things, the demand seeks information related to
the Georgia Dock Index and other information on poultry and poultry products published by the Georgia Department of
Agriculture and its Poultry Market News division. The Company is cooperating fully with the investigative demand, and we
have responded to all requests received to date; however, we are unable to predict its outcome at this time. Separately, the
64
Company has become aware that certain plaintiffs’ counsel in In re Broiler Chicken Antitrust Litigation received from the
Office of the Attorney General, Department of Legal Affairs, of the State of Florida, an antitrust civil investigative demand
that includes a request to produce all documents submitted by the recipients to the Department of Justice relating to In re
Broiler Chicken Antitrust Litigation. The Company is also aware that certain plaintiffs’ counsel in In re Broiler Chicken
Antitrust Litigation received from the Louisiana Department of Justice - Office of the Attorney General a Civil Investigation
Demand that included a request to produce all deposition transcripts from the civil litigation.
On June 22, 2017, the Company was named as a defendant in a lawsuit filed in the United States District Court for the
Northern District of California. The complaint, which was brought by three non-profit organizations (the Organic Consumers
Association, Friends of the Earth, and Center for Food Safety) alleged that the Company is violating the California Unfair
Competition Law and the California False Advertising Law by representing that its poultry products are “100% Natural”
products raised with “100% Natural” farming procedures. Among other things, the plaintiffs alleged that the Company’s
products contain residues of human and animal antibiotics, other pharmaceuticals, hormones, steroids, and pesticides.
Plaintiffs sought an order enjoining the Company from continuing its allegedly unlawful marketing program and requiring
the Company to conduct a corrective advertising campaign; an accounting of the Company’s profits derived from the
allegedly unlawful marketing practices; and attorneys’ fees, costs and interest. On August 2, 2017, the Company moved to
dismiss the lawsuit on various grounds. On August 23, 2017, the plaintiffs filed an amended complaint, which included
substantially similar allegations as the original complaint, and the Company filed a motion to dismiss the amended complaint
on September 13, 2017. On February 9, 2018, the Court denied the Company’s motion to dismiss. An initial scheduling
conference was held on March 1, 2018, and discovery started thereafter. On June 25, 2018, the plaintiffs amended their
complaint for a second time, including to remove allegations that USDA had found the Company’s chicken samples to
contain residues of antibiotics or other substances. On July 9, 2018, the Company filed a motion to dismiss the second
amended complaint. On July 18, 2018, during the pendency of that motion, the parties stipulated to the voluntary dismissal of
one of the plaintiff organizations (the Organic Consumers Association). The other two plaintiffs continued to prosecute their
claims. On September 11, 2018, the Court granted the motion to dismiss the second amended complaint with leave to amend
the complaint, and on October 2, 2018, the remaining plaintiffs filed a third amended complaint. The third amended
complaint alleged that the Company misleads consumers with regard to (1) the presence of unnatural residues in its chicken
products; (2) the fact that it uses antibiotics in raising its chickens; (3) the conditions in which it raises its chickens; and (4)
the risks of human antibiotic resistance caused by the Company’s use of antibiotics. On October 16, 2018, the Company
filed a motion to dismiss the third amended complaint, and on December 3, 2018, the Court denied that motion. Fact
discovery concluded on March 18, 2019. On April 1, 2019, Sanderson filed a motion to dismiss for lack of subject matter
jurisdiction on grounds that the remaining plaintiffs lacked standing. The Court held a hearing on the Company’s motion on
May 30, 2019. On July 31, 2019, the Court granted Sanderson’s motion without prejudice, stating that dismissal for lack of
standing must be without prejudice, but denied the plaintiffs leave to amend their complaint. On October 8, 2019, the Court
taxed $12,701 in costs in favor of Sanderson as the prevailing party.
On August 30, 2019, plaintiffs filed a notice of appeal of the District Court’s order of dismissal before the United States
Court of Appeals for the Ninth Circuit. Under the briefing schedule ordered by the Court of Appeals, plaintiffs’ opening brief
is due on January 8, 2020, and Sanderson’s response brief is due on February 7, 2020. Briefing is scheduled to be complete
by the end of February 2020, and oral argument is likely to be scheduled for late 2020 or early 2021. We intend to vigorously
defend the appeal. However, the Company cannot predict the outcome of this action. If the plaintiffs were to prevail, the
Company’s reputation and marketing program could be materially, adversely affected, which could have a material, adverse
effect on our financial position and results of operations.
On August 30, 2019, Sanderson Farms, Inc. and its Foods and Processing Divisions, as well as seventeen other poultry
producers and their affiliates; Agri Stats, Inc.; and Webber, Meng, Sahl and Company, Inc. (“WMS”), were named in a
putative class action filed in the United States District Court for the District of Maryland. To date, three other nearly identical
putative class action complaints, each seeking to represent the same putative class, have been filed. The complaints, brought
on behalf of non-supervisory production and maintenance employees at broiler chicken processing plants, allege that the
defendants unlawfully conspired by agreeing to fix and depress the compensation paid to them, including hourly wages and
compensation benefits, from January 1, 2009 to the present. The plaintiffs claim that broiler producers shared competitively
sensitive wage and benefits compensation information in three ways: (1) attending in-person meetings in Destin, Florida; (2)
receiving Agri Stats reports, as well as surveys taken and published by WMS; and (3) directly exchanging wage and benefits
information with plant managers at other defendant broiler producers. Plaintiffs allege that this conduct violated the Sherman
Antitrust Act.
On November 12, 2019, the Court ordered that the four putative class action complaints would be consolidated for all pretrial
purposes. The Court ordered plaintiffs to file their consolidated complaint on or before November 14, 2019. Defendants’
motions to dismiss the consolidated complaint were filed on November 22, 2019. Briefing was scheduled to be completed on
or before February 28, 2020; however, on November 26, 2019, plaintiffs notified defendants that they intend to file an
amended consolidated complaint. Additional motions to dismiss likely will follow, after which the parties will wait for a
65
decision on the defendants' motion to dismiss from the trial court. We intend to defend these cases vigorously; however, the
Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for
damages, which could have a material, adverse effect on our financial position and results of operations.
On October 11, 2019, three named plaintiffs - Daniel Lentz, Pam La Fosse, and Marybeth Norman - filed, in the United
States District Court for the Northern District of California, a nationwide class action against Sanderson Farms, Inc. on behalf
of a putative class of all individuals and businesses throughout the United States who purchased one or more Sanderson
chicken products in the prior four years. The lawsuit alleges that the named plaintiffs and other class members purchased
Sanderson chicken products based on misleading representations in Sanderson’s advertising. Specifically, the plaintiffs in this
case allege that Sanderson’s advertising (including, but not limited to, on its website, television commercials, radio
advertisements, social media, print magazines, billboards, and trucks) misleads consumers into believing that (i) Sanderson’s
chickens were not given antibiotics or other pharmaceuticals, (ii) the chickens were raised in a “natural” environment, (iii)
there is no evidence that the use of antibiotics or other pharmaceuticals in poultry contributes to the evolution of antibiotic-
resistant bacteria, and (iv) Sanderson’s chicken products do not contain antibiotic or pharmaceutical residues. Plaintiffs allege
that (i) Sanderson “routinely” feeds antibiotics and pharmaceuticals to its chickens, (ii) Sanderson raises its chickens indoors
in “unnatural” indoor conditions amounting to “intensive confinement” and without natural light (iii) there is “extensive”
reliable evidence that the use of antibiotics in poultry contributes to antibiotic-resistant bacteria, and (iv) Sanderson’s
chickens have been found to contain antibiotic and pharmaceutical residue. The Complaint asserts five causes of action under
California and North Carolina law. The plaintiffs seek injunctive relief directing Sanderson to correct its practices and to
comply with consumer protection laws nationwide. The plaintiffs also seek monetary, compensatory, statutory, and punitive
damages, as well as attorneys’ and experts’ fees, costs, and expenses. Sanderson has not yet responded to the Complaint.
Sanderson’s response is due on December 20, 2019. We intend to defend this lawsuit vigorously; however, the Company
cannot predict the outcome of this action. If the plaintiffs were to prevail, the Company could be liable for damages, which
could have a material, adverse effect on our financial position and results of operations.
The Company is involved in various other claims and litigation incidental to its business. Although the outcome of these
matters cannot be determined with certainty, management, upon the advice of counsel, is of the opinion that the final
outcome of currently pending matters, other than those discussed above, should not have a material effect on the Company's
consolidated results of operations or financial position.
The Company recognizes the costs of legal defense for the legal proceedings to which it is a party in the periods incurred.
After a considerable analysis of each case, the Company has determined that no accrual is required for any of the foregoing
matters as of October 31, 2019. Future reserves may be required if losses are deemed reasonably estimable and probable due
to changes in the Company’s assumptions, the effectiveness of legal strategies, or other factors beyond the Company’s
control. Future results of operations may be materially affected by the creation of reserves or by accruals of losses to reflect
any adverse determinations in these legal proceedings.
12. Quarterly Financial Data (unaudited)
Fiscal Year 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
(Unaudited)
$
$
845,229
104,396
40,636
1.83
945,152 $
121,008
53,362
906,489
18,743
(22,871)
(1.05)
$
$
2.41 $
Net sales
Gross profit
Net income (loss)
Diluted earnings (loss) per share
$
$
743,388
34,988
(17,833)
(0.82)
66
Fiscal Year 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Net sales
Gross profit
Net income (loss)
Diluted earnings (loss) per share
$
$
771,948
69,847
51,206
2.24
(In thousands, except per share data)
(unaudited)
$
$
813,474
110,064
41,948
1.84
852,434 $
70,866
11,475
798,148
888
(43,198)
(1.95)
$
$
0.50 $
As described below, the Company's adoption of ASU 2014-09 during fiscal 2019 affects the comparability between the two
tables above.
During the first, second, third and fourth fiscal quarters of fiscal 2018, $3.9 million, $4.6 million, $6.1 million and
$5.4 million, respectively, of freight separately invoiced to customers were recorded as a reduction to cost of goods sold,
rather than being recorded as net sales subsequent to the adoption of ASU 2014-09 during our first quarter of fiscal 2019.
This change affects the comparability of the net sales lines above.
During the first, second, third and fourth fiscal quarters of fiscal 2018, $2.5 million, $2.7 million, $2.9 million and
$2.9 million, respectively, of third-party sales commissions were recorded as a reduction to net sales, rather than being
recorded as SG&A expenses subsequent to the adoption of ASU 2014-09 during our first quarter of fiscal 2019. This change
affects the comparability of the net sales and gross profit lines above.
For a more detailed discussion of the Company's adoption of ASU 2014-09, refer to "Part II, Item 8, Notes to Consolidated
Financial Statements, Note 1 - Significant Accounting Policies."
13. Common Stock Repurchases
During fiscal 2018, the Company purchased 823,385 shares of its common stock in open-market transactions at an average
price of $101.37 per share. In accordance with ASC 505-30, the Company elected to allocate the excess of the repurchase
price over par value between paid-in capital and retained earnings. As a result, approximately $59.6 million of the excess
repurchase price over par value was allocated to paid-in capital and approximately $23.0 million was allocated to retained
earnings. The Company made no common stock repurchases during fiscal 2019, except for those made pursuant to the
Company's Stock Incentive Plan, as amended and restated on February 11, 2016, under which shares were withheld from
plan participants to satisfy tax withholding obligations.
14. Insurance Receivable
The Company's financial statements as of October 31, 2018 include a $7.1 million receivable from insurance carriers for
property damage and expenses incurred as a result of Hurricane Florence and Hurricane Michael, net of the applicable self-
insured retention and deductibles. The Company's applicable insurance policy includes a $2.5 million self-insured, eroding
retention per policy year, which was completely eroded as a result of Hurricane Florence, and additional $250,000
deductibles per occurrence. As a result, the Company's operating results for fiscal 2018 include $2.75 million in charges for
damaged property and expenses incurred as a result of Hurricane Florence and $250,000 in charges for damaged property and
expenses incurred as a result of Hurricane Michael. Additionally, the Company's operating results for fiscal 2018 include
unrecognized lost revenue and reduced margins which were the direct result of the hurricanes, and calculations of those
claims are ongoing. Recovery of the lost revenue and reduced margins will be recognized once the calculations of the claims
and negotiations with the insurance carriers are complete. The Company will seek reimbursement for all of its insured losses,
including the unrecognized lost profits and reduced margins. As of December 18, 2019, the Company has received from its
insurance carriers payments totaling approximately $11.3 million related to the Hurricane Florence and Hurricane Michael
claims.
67
Sanderson Farms, Inc. and Subsidiaries
Valuation and Qualifying Accounts
Schedule II
Balance at
Beginning
of Period
Charged
(Credited) to
Costs and
Expenses
Charged to
Other
Accounts
(In Thousands)
Deductions
Describe
Balance at
End of
Period
$
3,260
$
(2,000)
$
—
$
1,260
$
3,260
$
—
$
—
$
3,260
$
2,650
$
610
$
—
$
3,260
Classification
Year Ended October 31, 2019
Deducted from accounts receivable:
Allowance for doubtful accounts
Totals
Year Ended October 31, 2018
Deducted from accounts receivable:
Allowance for doubtful accounts
Totals
Year Ended October 31, 2017
Deducted from accounts receivable:
Allowance for doubtful accounts
Totals
_________________
68
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be
disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
As of October 31, 2019, an evaluation was performed under the supervision and with the participation of the
Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s
management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure
controls and procedures were effective as of October 31, 2019.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fourth quarter ended
October 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s
management has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31,
2019. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control — Integrated Framework (2013 framework). Based on our assessment
we have concluded that, as of October 31, 2019, the Company’s internal control over financial reporting is effective based on
those criteria.
Attestation Report of the Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young LLP, has provided an attestation report on the
Company’s internal control over financial reporting as of October 31, 2019.
Item 9B. Other Information
Not applicable.
69
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Sanderson Farms, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Sanderson Farms, Inc. and subsidiaries’ internal control over financial reporting as of October 31, 2019, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Sanderson Farms, Inc. and subsidiaries (the
Company) maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019, based
on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States)(PCAOB), the consolidated balance sheets of the Company as of October 31, 2019 and 2018, and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended October 31, 2019,
and the related notes and schedule and our report dated December 19, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New Orleans, Louisiana
December 19, 2019
70
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
As permitted by General Instruction G(3) to Form 10-K, reference is made to the information concerning the Directors
of the Registrant and the nominees for election as Directors appearing in the Registrant’s definitive proxy statement filed or
to be filed with the Commission pursuant to Rule 14a-6(b). Such information is incorporated herein by reference to the
definitive proxy statement.
Information concerning the executive officers of the Registrant is set forth in Item 4A of Part I of this Annual Report.
The Registrant also incorporates by reference, as permitted by General Instruction G(3) to Form 10-K, information
appearing in its definitive proxy statement filed or to be filed with the Commission pursuant to Rule 14a-6(b) related to the
filing of reports under Section 16 of the Securities Exchange Act of 1934.
The Registrant has a standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act,
whose members are Suzanne T. Mestayer (Chair), Phil K. Livingston, (Vice Chair), John H. Baker, III, Fred Banks, Jr.,
David Barksdale, Edith Kelly-Green, Robert C. Khayat and Gail J. Pittman. All members of the audit committee are
independent directors under the listing standards of the NASDAQ Stock Market LLC. The Registrant’s Board of Directors
has determined that Edith Kelly-Green, Phil K. Livingston and Suzanne T. Mestayer are audit committee financial experts.
The Registrant has adopted a code of ethics that applies to its senior financial personnel, including its chief executive
officer, chief financial officer and chief accounting officer. The Registrant will provide a copy of the code of ethics free of
charge to any person upon request to:
Sanderson Farms, Inc.
P.O. Box 988
Laurel, Mississippi 39441
Attn.: Chief Financial Officer
Requests can also be made by phone at (601) 649-4030.
Item 11.
Executive Compensation
As permitted by General Instruction G(3) to Form 10-K, reference is made to the information concerning remuneration
of Directors and executive officers of the Registrant appearing in the Registrant’s definitive proxy statement filed or to be
filed with the Commission pursuant to Rule 14a-6(b). Such information is incorporated herein by reference to the definitive
proxy statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
As permitted by General Instruction G(3) to Form 10-K, reference is made to the information concerning beneficial
ownership of the Registrant’s Common Stock, which is the only class of the Registrant’s voting securities, appearing in the
Registrant’s definitive proxy statement filed or to be filed with the Commission pursuant to Rule 14a-6(b). Such information
is incorporated herein by reference to the definitive proxy statement.
The following table provides information as of October 31, 2019, with respect to compensation plans (including
individual compensation arrangements) under which equity securities of the Registrant are authorized for issuance. The
Registrant has no equity compensation plan not approved by security holders. All outstanding awards were issued under the
Registrant’s Stock Incentive Plan approved by shareholders on February 17, 2005, as most recently amended and approved
by shareholders on February 11, 2016. No further options or other awards may be granted under the Stock Option Plan. There
are 4,200,000 shares of common stock authorized for issuance under the Stock Incentive Plan.
71
Plan category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
(a) Number of
securities to be issued
upon exercise of
outstanding options,
warrants and
rights (1)
157,477
—
157,477
(b) Number of
securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column
(a)(2)
374,477
—
374,477
_________________
(1) This column reflects 13,127 performance shares outstanding at October 31, 2019, that have been earned and that are
subject to an additional one year, service-based vesting period ending on October 31, 2020, before they can be issued,
and 144,350 unearned performance shares at October 31, 2019, at the maximum level. However, management could not
determine that achievement of the applicable performance based criteria is probable for those unearned performance
shares. This column does not include the 84,511 fiscal 2017 performance shares that were issued on October 31, 2019.
(2) This column reflects the 1,379,519 shares of restricted stock granted to participants under the Stock Incentive Plan, the
303,345 shares of restricted stock purchased by or granted to participants under the MSPP provisions of the Stock
Incentive Plan, the 920,685 earned performance shares that have been issued or are expected to be issued under the Stock
Incentive Plan, and the 144,350 unearned outstanding performance shares that could be earned as described in footnote
(1) above, in each case since the inception of the plan and net of forfeitures, but including shares withheld to satisfy tax
withholding obligations.
Item 13.
Certain Relationships and Related Transactions and Director Independence
As permitted by General Instruction G(3) to Form 10-K, information, if any, required to be reported by Item 13 of
Form 10-K, with respect to transactions with management and others, certain business relationships, indebtedness of
management, and transactions with promoters, is set forth in the Registrant’s definitive proxy statement filed or to be filed
with the Commission pursuant to Rule 14a-6(b). Such information, if any, is incorporated herein by reference to the
definitive proxy statement.
Item 14.
Principal Accounting Fees and Services
As permitted by General Instruction G(3) to Form 10-K, information required to be reported by Item 14 of Form 10-K
is set forth in the Registrant’s definitive proxy statement filed or to be filed with the Commission pursuant to Rule 14a-6(b).
That information is incorporated by reference into this Form 10-K.
72
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(a)
The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS:
The following consolidated financial statements of the Registrant are included in Item 8:
Consolidated Balance Sheets — October 31, 2019 and 2018
Consolidated Statements of Operations — Years ended October 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity — Years ended October 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows — Years ended October 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements — October 31, 2019
2. FINANCIAL STATEMENT SCHEDULES:
The following consolidated financial statement schedules of the Registrant are included in Item 8:
Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted as they are not required, are not applicable or the required information is set forth in the
Financial Statements or notes thereto.
3. EXHIBITS:
The following exhibits are filed with this Annual Report or are incorporated herein by reference:
Exhibit
Number
3.1
3.2
4.1*
10.1+
10.2+
10.3+
10.4+
10.5+
Description
Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 filed with the
Registrant’s Quarterly Report on Form 10-Q for the Quarter ended on July 31, 2015.)
By-Laws of the Registrant, amended and restated as of October 24, 2017. (Incorporated by reference to
Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on October 24, 2017.)
Description of capital stock.
Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan, as amended and restated effective
November 1, 2013. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form
10-K for the year ended October 31, 2013.)
First Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
July 23, 2014. (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
for the year ended October 31, 2016.)
Second Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as
of May 2, 2016. (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
for the year ended October 31, 2016.)
Third Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
October 20, 2016. (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-
K for the year ended October 31, 2016.)
Fourth Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
January 19, 2017. (Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 2017.)
73
Exhibit
Number
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+*
10.18+
10.19+
10.20+
10.21
10.22
Description
Fifth Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
October 19, 2017. (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-
K for the year ended October 31, 2017.)
Sanderson Farms, Inc. and Affiliates Stock Incentive Plan, as amended and restated on February 11, 2016.
(Incorporated by reference to Exhibit 4.3 to the Registrant's registration statement on Form S-8 filed by the
Registrant on February 11, 2016, Registration No. 333-209481.)
Sanderson Farms, Inc. Bonus Award Program Effective November 1, 2018. (Incorporated by reference to
Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K on January 30, 2019.)
Sanderson Farms, Inc. Supplemental Disability Plan effective September 1, 2008. (Incorporated by reference
to Exhibit 10 to the Current Report on Form 8-K filed by the Registrant on October 1, 2008).
Form of Share Purchase Agreement between the Registrant and its non-employee directors who participate
in its management share purchase plan, as amended. (Incorporated by reference to Exhibit 10.2 filed with
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2007.)
Form of Share Purchase Agreement between the Registrant and its officers and employees who participate
in its management share purchase plan, as amended. (Incorporated by reference to Exhibit 10.1 filed with
the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended April 30, 2008.)
Form of Restricted Stock Agreement between the Registrant and its officers and employees who are granted
restricted stock with a four-year vesting period (for awards granted on or after November 1, 2013).
(Incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year
ended October 31, 2013.)
Form of Restricted Stock Agreement between the Registrant and its non-employee directors who are granted
restricted stock, as amended. (Incorporated by reference to Exhibit 10.4 filed with the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended April 30, 2007.)
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2017). (Incorporated by reference to Exhibit 10.22 to the Registrant's Annual
Report on Form 10-K for the year ended October 31, 2016.)
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2018). (Incorporated by reference to Exhibit 10.20 to the Registrant's Annual
Report on Form 10-K for the year ended October 31, 2017.)
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2019). (Incorporated by reference to Exhibit 10.20 to the Registrant's Annual
Report on Form 10-K for the year ended October 31, 2018.)
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2020).
Employment Agreement dated as of November 1, 2015 between the Registrant and Joe F. Sanderson, Jr.
(Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K/A on
January 13, 2016.)
Employment Agreement dated as of November 1, 2015 between the Registrant and Lampkin Butts.
(Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K/A on
January 13, 2016.)
Employment Agreement dated as of November 1, 2015 between the Registrant and D. Michael Cockrell.
(Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K on
November 2, 2015.)
Lease Agreement dated as of December 1, 2004, between Moultrie-Colquitt County Development
Authority, as Lessor, and Sanderson Farms, Inc. (Processing Division) as Lessee. (Incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2005.)
Bond Purchase Loan Agreement between Moultrie-Colquitt County Development Authority, as Issuer, and
Sanderson Farms, Inc. (Processing Division), as Purchaser. (Incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2005.)
74
Exhibit
Number
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
21
23*
31.1*
31.2*
32.1**
32.2**
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Description
Credit Agreement dated April 28, 2017 by and among Sanderson Farms, Inc., BMO Harris Bank N.A., as
Agent, and the Banks party thereto. (Incorporated by reference to Exhibit 10.1 filed with the Registrant's
Current Report on Form 8-K on May 4, 2017.)
Guaranty Agreement dated April 28, 2017 of Sanderson Farms, Inc. (Foods Division), Sanderson Farms,
Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division). (Incorporated by reference to
Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K filed May 4, 2017.)
First Amendment to the Credit Agreement by and among Sanderson Farms, Inc., BMO Harris Bank N.A., as
Agent, and the Banks party thereto, dated as of November 22, 2017. (Incorporated by reference to Exhibit
10.1 filed with the Registrant's Current Report on Form 8-K on November 29, 2017.)
Second Amendment to the Credit Agreement by and among Sanderson Farms, Inc., BMO Harris Bank N.A.,
as Agent, and the Banks party thereto, dated as of June 14, 2018. (Incorporated by reference to Exhibit 10.1
filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2018.)
Credit Agreement, dated March 21, 2019, by and among Sanderson Farms, Inc., BMO Harris Bank, N.A. as
agent for the Banks defined therein, and the Banks party thereto. (Incorporated by reference to Exhibit 10.1
filed with the Registrant’s Current Report on Form 8-K on March 27, 2019.)
Guaranty Agreement dated March 21, 2019 of Sanderson Farms, Inc. (Foods Division), Sanderson Farms,
Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division). (Incorporated by reference to
Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K on March 27, 2019.)
Lease Agreement dated as of July 1, 2006, between Adel Industrial Development Authority as Lessor, and
Sanderson Farms, Inc. (Production Division) as Lessee. (Incorporated by reference to Exhibit 10.1 filed with
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2006.)
Bond Purchase Agreement dated as of July 31, 2006, between Sanderson Farms, Inc. (Production Division)
as Purchaser and Adel Industrial Development Authority as Issuer. (Incorporated by reference to Exhibit
10.2 filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2006.)
List of Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21 to the Registrant’s Annual
Report on Form 10-K for the year ended October 31, 2002.)
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer.
Certification of Chief Financial Officer.
Section 1350 Certification.
Section 1350 Certification.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
*
**
+
Filed herewith.
Furnished herewith.
Management contract or compensatory plan or arrangement.
75
QUALIFICATION BY REFERENCE
Any statement contained in this Annual Report concerning the contents of any contract or other document filed as an exhibit
to this Annual Report or incorporated herein by reference is not necessarily complete, and in each instance reference is made
to the copy of the document filed.
Item 16. Form 10-K Summary
None.
INDEX TO EXHIBITS:
The following exhibits are filed with this Annual Report or are incorporated herein by reference:
Exhibit
Number
3.1
3.2
4.1*
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
Description
Restated Articles of Incorporation of the Registrant. (Incorporated by reference to Exhibit 3.1 filed with the
Registrant’s Quarterly Report on Form 10-Q for the Quarter ended on July 31, 2015.)
By-Laws of the Registrant, amended and restated as of October 24, 2017. (Incorporated by reference to
Exhibit 3 filed with the Registrant’s Current Report on Form 8-K on October 24, 2017.)
Description of capital stock.
Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan, as amended and restated effective
November 1, 2013. (Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form
10-K for the year ended October 31, 2013.)
First Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
July 23, 2014. (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K
for the year ended October 31, 2016.)
Second Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as
of May 2, 2016. (Incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K
for the year ended October 31, 2016.)
Third Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
October 20, 2016. (Incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-
K for the year ended October 31, 2016.)
Fourth Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
January 19, 2017. (Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended January 31, 2017.)
Fifth Amendment to the Sanderson Farms, Inc. and Affiliates Employee Stock Ownership Plan dated as of
October 19, 2017. (Incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-
K for the year ended October 31, 2017.)
Sanderson Farms, Inc. and Affiliates Stock Incentive Plan, as amended and restated on February 11, 2016.
(Incorporated by reference to Exhibit 4.3 to the Registrant's registration statement on Form S-8 filed by the
Registrant on February 11, 2016, Registration No. 333-209481.)
Sanderson Farms, Inc. Bonus Award Program Effective November 1, 2018. (Incorporated by reference to
Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K on January 30, 2019.)
Sanderson Farms, Inc. Supplemental Disability Plan effective September 1, 2008. (Incorporated by reference
to Exhibit 10 to the Current Report on Form 8-K filed by the Registrant on October 1, 2008).
Form of Share Purchase Agreement between the Registrant and its non-employee directors who participate
in its management share purchase plan, as amended. (Incorporated by reference to Exhibit 10.2 filed with
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2007.)
Form of Share Purchase Agreement between the Registrant and its officers and employees who participate
in its management share purchase plan, as amended. (Incorporated by reference to Exhibit 10.1 filed with
the Registrant’s Quarterly Report on Form 10-Q for the Quarter ended April 30, 2008.)
76
10.12+
10.13+
10.14+
10.15+
10.16+
10.17+*
10.18+
10.19+
10.20+
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
Form of Restricted Stock Agreement between the Registrant and its officers and employees who are granted
restricted stock with a four-year vesting period (for awards granted on or after November 1, 2013).
(Incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year
ended October 31, 2013.)
Form of Restricted Stock Agreement between the Registrant and its non-employee directors who are granted
restricted stock, as amended. (Incorporated by reference to Exhibit 10.4 filed with the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended April 30, 2007.)
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2017). (Incorporated by reference to Exhibit 10.22 to the Registrant's Annual
Report on Form 10-K for the year ended October 31, 2016.)
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2018). (Incorporated by reference to Exhibit 10.20 to the Registrant's Annual
Report on Form 10-K for the year ended October 31, 2017.)
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2019). (Incorporated by reference to Exhibit 10.20 to the Registrant's Annual
Report on Form 10-K for the year ended October 31, 2018.).
Form of Performance Share Agreement between the Registrant and its employees who are granted
performance shares (for fiscal 2020).
Employment Agreement dated as of November 1, 2015 between the Registrant and Joe F. Sanderson, Jr.
(Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K/A on
January 13, 2016.)
Employment Agreement dated as of November 1, 2015 between the Registrant and Lampkin Butts.
(Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K/A on
January 13, 2016.)
Employment Agreement dated as of November 1, 2015 between the Registrant and D. Michael Cockrell.
(Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K on
November 2, 2015.)
Lease Agreement dated as of December 1, 2004, between Moultrie-Colquitt County Development
Authority, as Lessor, and Sanderson Farms, Inc. (Processing Division) as Lessee. (Incorporated by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2005.)
Bond Purchase Loan Agreement between Moultrie-Colquitt County Development Authority, as Issuer, and
Sanderson Farms, Inc. (Processing Division), as Purchaser. (Incorporated by reference to Exhibit 10.2 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2005.)
Credit Agreement dated April 28, 2017 by and among Sanderson Farms, Inc., BMO Harris Bank N.A., as
Agent, and the Banks party thereto. (Incorporated by reference to Exhibit 10.1 filed with the Registrant's
Current Report on Form 8-K on May 4, 2017.)
Guaranty Agreement dated April 28, 2017 of Sanderson Farms, Inc. (Foods Division), Sanderson Farms,
Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division). (Incorporated by reference to
Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K filed May 4, 2017.)
First Amendment to the Credit Agreement among Sanderson Farms, Inc. and BMO Harris Bank N.A. as
Agent for the Banks defined therein dated as of November 22, 2017. (Incorporated by reference to Exhibit
10.1 filed with the Registrant's Current Report on Form 8-K on November 29, 2017.)
Second Amendment to the Credit Agreement among Sanderson Farms, Inc. and BMO Harris Bank N.A. as
Agent for the Banks defined therein dated as of June 14, 2018. (Incorporated by reference to Exhibit 10.1
filed with the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2018.)
Credit Agreement, dated March 21, 2019, by and among Sanderson Farms, Inc., BMO Harris Bank, N.A. as
agent for the Banks defined therein, and the Banks party thereto. (Incorporated by reference to Exhibit 10.1
filed with the Registrant’s Current Report on Form 8-K on March 27, 2019.)
Guaranty Agreement dated March 21, 2019 of Sanderson Farms, Inc. (Foods Division), Sanderson Farms,
Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division). (Incorporated by reference to
Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K on March 27, 2019.)
77
10.29
10.30
21
23*
31.1*
31.2*
32.1**
32.2**
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Lease Agreement dated as of July 1, 2006, between Adel Industrial Development Authority as Lessor, and
Sanderson Farms, Inc. (Production Division) as Lessee. (Incorporated by reference to Exhibit 10.1 filed with
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2006.)
Bond Purchase Agreement dated as of July 31, 2006, between Sanderson Farms, Inc. (Production Division)
as Purchaser and Adel Industrial Development Authority as Issuer. (Incorporated by reference to Exhibit
10.2 filed with the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2006.)
List of Subsidiaries of the Registrant. (Incorporated by reference to Exhibit 21 to the Registrant’s Annual
Report on Form 10-K for the year ended October 31, 2002.)
Consent of Independent Registered Public Accounting Firm.
Certification of Chief Executive Officer.
Certification of Chief Financial Officer.
Section 1350 Certification.
Section 1350 Certification.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
_________________
*
**
+
Filed herewith.
Furnished herewith.
Management contract or compensatory plan or arrangement.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
SANDERSON FARMS, INC.
By:
/s/ Joe F. Sanderson, Jr.
Chairman of the Board and Chief Executive Officer
Date: December 19, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and as of the dates indicated.
/s/ Joe F. Sanderson, Jr.
Joe F. Sanderson, Jr.,
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ Lampkin Butts
Lampkin Butts, Director,
President and Chief Operating Officer
/s/ D. Michael Cockrell
D. Michael Cockrell,
Director, Treasurer, Chief Financial Officer and Chief Legal
Offi
(Principal Financial Officer)
/s/ Tim Rigney
Tim Rigney,
Secretary and Chief Accounting Officer
(Principal Accounting Officer)
/s/ John H. Baker, III
John H. Baker, III,
Director
/s/ Fred Banks, Jr.
Fred Banks, Jr.,
Director
/s/ David Barksdale
David Barksdale,
Director
/s/ John Bierbusse
John Bierbusse,
Director
/s/ Toni Cooley
Toni Cooley,
Director
/s/ Beverly Wade Hogan
79
12/19/2019
12/19/2019
12/19/2019
12/19/2019
12/19/2019
12/19/2019
12/19/2019
12/19/2019
12/19/2019
12/19/2019
Beverly Wade Hogan,
Director
/s/ Edith Kelly-Green
Edith Kelly-Green,
Director
/s/ Robert C. Khayat
Robert C. Khayat
Director
/s/ Phil K. Livingston
Phil K. Livingston,
Director
/s/ Suzanne T. Mestayer
Suzanne T. Mestayer,
Director
/s/ Sonia Pérez
Sonia Pérez,
Director
/s/ Gail Jones Pittman
Gail Jones Pittman,
Director
12/19/2019
12/20/2018
12/19/2019
12/14/2017
12/19/2019
12/19/2019
80
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of Sanderson Farms, Inc. is not meant to be a complete
description of each security. The description is qualified by reference to our articles of incorporation (including our certificate
of designations) and by-laws. Some of the matters discussed below may have anti-takeover effects, such as:
EXHIBIT 4.1
•
•
•
•
•
•
•
the Mississippi Shareholder Protection Act,
the authority of our board of directors to issue preferred stock, and
the provisions of our articles of incorporation and by-laws relating to:
supermajority voting requirements,
advance notification of nominations for director and stockholder proposals,
the classification of our board, and
special meetings of stockholders.
These provisions may discourage or prevent other persons from offering to acquire us, even on terms that might be favorable
to our stockholders.
Authorized Capital Stock
Our authorized capital stock consists of 100,000,000 shares of common stock, par value $1.00 per share, and
5,000,000 shares of preferred stock, of which 500,000 shares are designated as Series A Junior Participating Preferred Stock,
par value $100 per share.
Common Stock
The holders of outstanding shares of our common stock are entitled to one vote per share with respect to all matters
that are required by law to be submitted to stockholders. There are no cumulative voting rights. Each holder of common stock
is entitled to share in dividends declared by our board of directors in proportion to the number of shares the stockholder
owns, subject to any preferred dividend rights of future holders of our preferred stock. Dividends on the common stock are
non-cumulative.
If our company is voluntarily or involuntarily liquidated or dissolved, the holders of all shares of our common stock
will share equally in assets available for distribution to holders of common stock, but only after all of our prior obligations
are paid, including liquidation preferences granted to any future holders of preferred stock. Shares of our common stock are
fully paid and non-assessable once they are issued and paid for.
The holders of our common stock have no preemptive, redemption or conversion rights, nor do they have any
preferential right to purchase or subscribe for any unauthorized but unissued capital stock or any securities convertible into
our common stock.
Preferred Stock
Our articles of incorporation authorize our board of directors, without further action by our stockholders, to issue up
to 5,000,000 shares of preferred stock and to fix the preferences, limitations and relative rights of the preferred stock. The
board may determine whether the shares may be redeemed and, if so, the redemption price and the terms and conditions of
redemption, the amount payable to preferred stockholders in the event of voluntary or involuntary liquidation of our
company, sinking fund provisions for the redemption or purchase of shares, and any terms and conditions on which shares
may be converted. We currently have no preferred stock outstanding.
81
The issuance of shares of preferred stock by our board of directors as described above may adversely affect the
rights of the holders of our common stock. For example, preferred stock may rank prior to the common stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of common
stock. The issuance of shares of preferred stock may discourage third party bids for our common stock or may otherwise
adversely affect the market price of the common stock.
Our board of directors is permitted to issue series of preferred stock with features that would deter a hostile takeover
of our company. This could adversely affect the holders of our common stock. Our articles of incorporation attempt to
preserve this potential deterrent effect by providing that any amendment reducing the number of authorized shares of
common stock or preferred stock, or modifying the terms or conditions fixed by the board of directors with respect to any
series of preferred stock, would require the favorable vote of at least 75% of the total common stock outstanding. However,
this special voting requirement would not apply when:
•
•
•
•
at least two-thirds of the board recommends the amendment, and
no person or entity, other than certain members of the Sanderson family, together with persons related to that person
or entity, beneficially owns more than:
20% of the outstanding shares of common stock, or
20% or more of the total voting power entitled to vote on the amendment.
Certain Charter, By-Law and Statutory Provisions
Classified Board of Directors. Our articles of incorporation divide the members of our board of directors into three
classes, which are designated Class A, Class B and Class C. The members of each class serve for a three-year term. The
terms are staggered, so that each year the term of only one of the classes expires. Staggering directors’ terms makes it more
difficult for a potential acquirer to seize control of a target company through a proxy contest, even if the acquirer controls a
majority of our stock, because only one-third of the directors stand for election in any one year.
Limitation of Liability and Indemnification of Directors and Officers. Our articles of incorporation provide that our
directors and officers will not be liable to us or our stockholders for money damages for any action, or any failure to take any
action, except for:
•
•
•
•
the amount of a financial benefit received by a director to which he is not entitled,
an intentional infliction of harm on us or our stockholders,
liability for unlawful distributions of our assets or unlawful redemptions or repurchases of our stock, or
an intentional violation of criminal law.
The by-laws provide that we must indemnify our directors and officers for actions against them as our directors and
officers to the fullest extent permitted by law, except for actions we bring against them directly.
Special Meetings of Stockholders. Our chairman, any vice chairman, the president or the board of directors must call
a special meeting whenever one is requested or demanded by a stockholder holding 10% or more of all the shares entitled to
vote on any issue that the stockholder proposes for consideration at the special meeting. The articles of incorporation
authorize the board to increase this percentage in its discretion.
Stockholder Voting Requirements. Our by-laws provide that in general, action on a matter (other than the election of
directors) by the stockholders is approved if more votes are cast in favor of the action than votes cast against the action at a
meeting at which a quorum is present. Our stockholders may act by a written consent instead of a meeting of stockholders,
but only if the written consent is signed by all of our stockholders having voting power on the proposed action. The effect of
this is to eliminate stockholder action by written consent, because it would be impractical to obtain the consent of every
stockholder. Directors are elected at the annual meeting of stockholders at which their terms expire or at any special meeting
of stockholders called for the purpose of electing directors if they receive the affirmative vote of a majority of the shares
entitled to vote and represented at the meeting, if a quorum is present.
82
Our articles of incorporation require the affirmative vote of two-thirds of the outstanding shares of our common
stock in order to:
1. amend certain provisions of the articles of incorporation (unless, in some circumstances, the amendment has been
recommended by two-thirds of the board);
(5) approve a merger, share exchange, consolidation, sale of all or substantially all of our assets or a similar transaction;
and
1
remove a director.
Advance Notice Requirements for Director Nominations and Stockholder Proposals. Our by-laws provide that our
stockholders may nominate candidates for election as directors and may propose matters to be voted on at annual or special
meetings of stockholders. The stockholder making a nomination or proposal must deliver a timely notice to us and comply
with specified notice procedures contained in our by-laws. Generally, the by-laws require that stockholders give notice of
nominations or proposals not earlier than 120 days or later than 90 days before the anniversary of the last annual meeting (or
in the case of a special meeting, not earlier than 120 days or later than 90 days before the date of the special meeting).
Amendment of Bylaws. Our board of directors may amend or repeal the by-laws or adopt new by-laws by a majority
vote. If any person, other than members of the Sanderson family, owns 20% or more of the outstanding stock or 20% or more
of the total voting power entitled to vote on the matter, then changes to the by-laws concerning the following matters require
the vote of 2/3 of the directors then in office:
1
1
1
4
classes of directors;
the filling of director vacancies;
super majority voting requirements;
cumulative voting; and
(15) classes of stock including preferences, limitations and relative rights.
Stockholders may amend or repeal by-laws or adopt new by-laws by a majority vote.
Mississippi Shareholder Protection Act. We amended our articles of incorporation to incorporate substantially all of
the provisions of the Mississippi Shareholder Protection Act as it existed on April 21, 1989. Under the articles of
incorporation, we may not enter into any business combination with a 20% stockholder other than certain members of the
Sanderson family unless:
•
holders of two-thirds of the shares not owned by the 20% stockholder approve the combination;
(1) two-thirds of the directors who would continue in office after the transaction approve the combination; or
(1) the aggregate amount of the offer meets certain fair price criteria.
The articles of incorporation provide that only in very limited circumstances will amendments to these provisions apply to
business combinations with stockholders who were 20% stockholders at the time the amendments were adopted or approved.
83
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statements (Form S-8 No. 033-67474 and Form S-8 No. 333-92412) pertaining to the Sanderson Farms,
Inc. and Affiliates Stock Option Plan,
(2) Registration Statements (Form S-8 No. 333-123099, Form S-8 No. 333-172315 and Form S-8 No. 333-209481)
pertaining to the Sanderson Farms, Inc. and Affiliates Stock Incentive Plan, and
(3) Registration Statement (Form S-3 No. 333-220760) of Sanderson Farms, Inc.
of our reports dated December 19, 2019, with respect to the consolidated financial statements and schedule of Sanderson
Farms, Inc. and the effectiveness of internal control over financial reporting of Sanderson Farms, Inc. included in this Annual
Report (Form 10-K) of Sanderson Farms, Inc. for the year ended October 31, 2019.
/s/ Ernst & Young LLP
New Orleans, Louisiana
December 19, 2019
84
EXHIBIT 31.1
I, Joe F. Sanderson, Jr., certify that:
CERTIFICATION
•
•
•
•
I have reviewed this annual report on Form 10-K of Sanderson Farms, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
•
•
•
•
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
•
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
•
•
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
December 19, 2019
/s/ Joe F. Sanderson, Jr.
Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
85
EXHIBIT 31.2
I, D. Michael Cockrell, certify that:
CERTIFICATION
•
•
•
•
I have reviewed this annual report on Form 10-K of Sanderson Farms, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
•
•
•
•
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
•
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
•
•
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
December 19, 2019
/s/ D. Michael Cockrell
Treasurer, Chief Financial Officer and Chief Legal Officer
(Principal Financial Officer)
86
CERTIFICATION PURSUANT TO
18 U.S.C. 1350
EXHIBIT 32.1
In connection with the Annual Report of Sanderson Farms, Inc. (the “Company”) on Form 10-K for the year ended
October 31, 2019 (the “Report”), I, Joe F. Sanderson, Chairman and Chief Executive Officer of the Company, certify that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ Joe F. Sanderson, Jr.
Joe F. Sanderson, Jr.
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
December 19, 2019
87
CERTIFICATION PURSUANT TO
18 U.S.C. 1350
EXHIBIT 32.2
In connection with the Annual Report of Sanderson Farms, Inc. (the “Company”) on Form 10-K for the year ended
October 31, 2019 (the “Report”), I, D. Michael Cockrell, Treasurer and Chief Financial Officer of the Company, certify that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ D. Michael Cockrell
D. Michael Cockrell
Treasurer, Chief Financial Officer and Chief Legal Officer
(Principal Financial Officer)
December 19, 2019
88
Performance Graph
The following graph presents a comparison of the five-year cumulative total stockholder return among the Company, the
NASDAQ Composite Index, and a group of peer companies. The peer group consists of the following companies: Pilgrim’s
Pride, Inc. and Tyson Foods, Inc. (the “Peer Group Index”). The Company selected the Peer Group Index because the return
reflected in the Peer Group Index presents stockholders with a comparison of total stockholder return with other publicly held
companies in our industry.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Sanderson Farms, Inc., the NASDAQ Composite Index,
and a Peer Group
$250
$200
$150
$100
$50
$0
10/14
10/15
10/16
10/17
10/18
10/19
Sanderson Farms, Inc.
NASDAQ Composite
Peer Group
*$100 invested on 10/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending October 31.
10/14
10/15
10/16
10/17
10/18
10/19
Sanderson Farms, Inc.
NASDAQ Composite
Peer Group
100.00
100.00
100.00
84.36
110.39
99.63
111.45
114.78
151.84
188.00
150.51
171.73
125.12
165.16
130.69
198.70
189.56
192.49
89
Board of Directors
Joe F. Sanderson, Jr.
Chairman of the Board and Chief
Executive Officer, Sanderson Farms, Inc.
Lampkin Butts
President and Chief Operating Officer,
Sanderson Farms, Inc.
John H. Baker, III
Proprietor, John H. Baker Interests
Fred Banks, Jr.
Senior Partner, Phelps Dunbar LLP
David Barksdale
Principal, Alluvian Capital
John Bierbusse
Retired Vice President and Manager of
Research Administration,
A.G. Edwards, Inc.
Mike Cockrell
Chief Legal and Financial Officer and
Treasurer, Sanderson Farms, Inc.
Toni D. Cooley
Chief Executive Officer,
the Systems Group companies
Edith Kelly-Green
Partner, The KGR Group
Beverly Wade Hogan
Retired President, Tougaloo College
Phil K. Livingston
Retired Chairman and Chief Executive
Officer, Deposit Guaranty National Bank
of Louisiana
Suzanne T. Mestayer
Owner and Managing Principal,
ThirtyNorth Investments, LLC
Sonia Pérez
President, AT&T
Southest States
Gail Jones Pittman
Chief Executive Officer, Gail Pittman, Inc.
Executive Officers
Joe F. Sanderson, Jr.
Chairman and
Chief Executive Officer
Lampkin Butts
President and
Chief Operating Officer
Corporate Information
Corporate Offices
Sanderson Farms, Inc.
127 Flynt Road
Post Office Box 988
Laurel, Mississippi 39443
(601) 649-4030
www.sandersonfarms.com
Mike Cockrell
Chief Legal and Financial Officer and
Treasurer
Tim Rigney
Secretary and
Chief Accounting Officer
Transfer Agent
Computershare Investor Services
PO Box 505000
Louisville, Kentucky, 40233-5000
888-810-7452
www.computershare.com/investor
Independent Registered Public
Accounting Firm
Ernst & Young LLP
Suite 3900
701 Poydras Street
New Orleans, Louisiana 70139
(504) 581-4200
Form 10-K
The Annual Report on Form 10-K, including
the financial statements and schedules
thereto, for the year ended October 31,
2019, as well as other information about
Sanderson Farms, may be obtained
without charge by writing to Mr. Mike
Cockrell, Chief Legal and Financial Officer
and Treasurer, at the Company’s corporate
offices, or by visiting the Company’s web
site at www.sandersonfarms.com.
Sanderson Farms, Inc.
127 Flynt Road, Post Office Box 988
Laurel, Mississippi 39443
www.sandersonfarms.com