safm-20210430

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

___________________________

FORM 10-Q

___________________________

(MARK ONE)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-14977

___________________________

Sanderson Farms, Inc.

(Exact name of registrant as specified in its charter)

___________________________


Mississippi			64-0615843
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

127 Flynt Road, Laurel, Mississippi 39443

(Address of principal executive offices) (Zip Code)

(601) 649-4030

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $1 par value per share	SAFM	NASDAQ

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 and post such files). Yes ☒ No ☐

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-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 ☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $1 Par Value Per Share: 22,330,986 shares outstanding as of May 25, 2021.

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TABLE OF CONTENTS

SANDERSON FARMS, INC. AND SUBSIDIARIES


PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements (Unaudited)	3
	Condensed consolidated balance sheets—April 30, 2021 and October 31, 2020	3
	Condensed consolidated statements of operations—Three and six months ended April 30, 2021 and 2020	4
	Condensed consolidated statements of stockholders' equity—Three and six months ended April 30 , 2021 and 2020	5
	Condensed consolidated statements of cash flows—Six months ended April 30 , 2021 and 2020	6
	Notes to condensed consolidated financial statements—April 3 0 , 2021	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
PART II. OTHER INFORMATION		34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 6.	Exhibits	36
INDEX TO EXHIBITS		37
SIGNATURES		38

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares)


	April 30, 2021		October 31, 2020
	(Unaudited)		(Note 1)
Assets
Current assets:
Cash and cash equivalents	$	122,911	$	49,061
Accounts receivable, net	188,870		147,546
Receivable from insurance companies	3,951		—
Inventories	347,442		290,007
Refundable income taxes	12,519		33,977
Prepaid expenses and other current assets	57,503		57,544
Total current assets	733,196		578,135
Property, plant and equipment, net	1,231,106		1,224,746
Right of use assets	32,198		40,785
Other assets	6,696		5,365
Total assets	$	2,003,196	$	1,849,031
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	136,257	$	111,463
Dividends payable	9,826		—
Accrued expenses	101,911		98,663
Lease liabilities	13,059		13,981


Total current liabilities	261,053		224,107
Long-term debt	55,000		25,000
Claims payable and other liabilities	12,361		12,175
Deferred income taxes	145,353		141,672
Long-term lease liabilities	19,139		26,804
Commitments and contingencies
Stockholders’ equity:
Preferred Stock:
Series A Junior Participating Preferred Stock, $100 par value: authorized 500,000 shares, none issued
Par value to be determined by the Board of Directors: authorized 4,500,000 shares; none issued
Common Stock, $1 par value: authorized 100,000,000 shares; issued and outstanding shares—22,332,310 and 22,251,071 at April 30, 2021 and October 31, 2020, respectively	22,332		22,251
Paid-in capital	94,616		90,420
Retained earnings	1,393,342		1,306,602
Total stockholders’ equity	1,510,290		1,419,273
Total liabilities and stockholders’ equity	$	2,003,196	$	1,849,031

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)


	Three Months Ended April 30,				Six Months Ended April 30,
	2021		2020		2021		2020
Net sales	$	1,133,880	$	844,711	$	2,043,186	$	1,667,789
Cost and expenses:
Cost of sales	941,936		832,283		1,781,258		1,655,807

Selling, general and administrative	64,245		56,214		120,844		105,699
	1,006,181		888,497		1,902,102		1,761,506
Operating income (loss)	127,699		(43,786)		141,084		(93,717)
Other income (expense):

Interest expense	(697)		(1,783)		(1,335)		(2,971)
Other	13		3		16		5
	(684)		(1,780)		(1,319)		(2,966)
Income (loss) before income taxes	127,015		(45,566)		139,765		(96,683)
Income tax expense (benefit)	30,104		(51,684)		33,376		(64,225)
Net income (loss)	$	96,911	$	6,118	$	106,389	$	(32,458)
Earnings (loss) per share:
Basic	$	4.34	$	0.28	$	4.76	$	(1.48)
Diluted	$	4.34	$	0.28	$	4.76	$	(1.48)
Dividends per share	$	0.44	$	0.32	$	0.88	$	0.64

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)

(In thousands, except shares and per share amounts)


Fiscal Year 2020	Common Stock			Paid-In Capital		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at October 31, 2019	22,203,920	$	22,204	$	86,010	$	1,309,461	$	1,417,675
Net loss - first quarter 2020	—	—		—		(38,576)		(38,576)
Cash dividends ($0.32 per share)	—	—		—		(7,113)		(7,113)
Stock compensation plan transactions	25,292	25		(4,721)		—		(4,696)
Amortization of unearned compensation	—	—		2,082		—		2,082
Balance at January 31, 2020	22,229,212	$	22,229	$	83,371	$	1,263,772	$	1,369,372
Net income - second quarter 2020	—	—		—		6,118		6,118
Cash dividends ($0.32 per share)	—	—		—		(7,117)		(7,117)
Stock compensation plan transactions	10,362	10		1,099		—		1,109
Amortization of unearned compensation	—	—		1,960		—		1,960
Balance at April 30, 2020	22,239,574	$	22,239	$	86,430	$	1,262,773	$	1,371,442


Fiscal Year 2021	Common Stock			Paid-In Capital		Retained Earnings		Total Stockholders’ Equity
	Shares	Amount
Balance at October 31, 2020	22,251,071	$	22,251	$	90,420	$	1,306,602	$	1,419,273
Net income - first quarter 2021	—	—		—		9,478		9,478
Cash dividends ($0.44 per share)	—	—		—		(9,824)		(9,824)
Stock compensation plan transactions	74,564	75		(1,667)		—		(1,592)
Amortization of unearned compensation	—	—		2,147		—		2,147
Balance at January 31, 2021	22,325,635	$	22,326	$	90,900	$	1,306,256	$	1,419,482
Net income - second quarter 2021	—	—		—		96,911		96,911
Cash dividends ($0.44 per share)	—	—		—		(9,825)		(9,825)
Stock compensation plan transactions	6,675	6		1,514		—		1,520
Amortization of unearned compensation	—	—		2,202		—		2,202
Balance at April 30, 2021	22,332,310	$	22,332	$	94,616	$	1,393,342	$	1,510,290

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Six Months Ended April 30,
	2021		2020
Operating activities
Net income (loss)	$	106,389	$	(32,458)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	81,618		75,474
Amortization of share-based compensation	5,751		5,173
Live inventory adjustment (net of prior period reversal)	—		(2,800)

Deferred income taxes	3,681		57,256
Loss on asset disposals	46		238
Change in assets and liabilities:
Accounts receivable - trade	(41,324)		(294)
Accounts receivable - insurance	(3,951)		445
Income taxes	21,458		(120,760)
Inventories	(57,435)		(4,749)
Prepaid expenses and other assets	41		(6,242)
Right of use assets	8,587		8,733
Lease liabilities	(8,587)		(8,733)
Accounts payable	23,209		(8,159)
Accrued expenses and other liabilities	4,092		(353)
Total adjustments	37,186		(4,771)
Net cash provided by (used in) operating activities	143,575		(37,229)
Investing activities
Capital expenditures	(86,345)		(129,691)
Net proceeds from sale of property and equipment	452		207
Net cash used in investing activities	(85,893)		(129,484)
Financing activities



Payment of debt issuance costs	(1,877)		—
Borrowings from revolving line of credit	30,000		145,000

Proceeds from issuance of restricted stock under stock compensation plans	523		600
Payments from issuance of common stock under stock compensation plans	(2,655)		(5,861)
Dividends paid	(9,823)		(7,113)
Net cash provided by financing activities	16,168		132,626
Net change in cash and cash equivalents	73,850		(34,087)
Cash and cash equivalents at beginning of period	49,061		95,417
Cash and cash equivalents at end of period	$	122,911	$	61,330
Supplemental disclosure of non-cash investing and financing activities:
Capital expenditures included in accounts payable	$	5,117	$	5,588
Dividends payable	$	9,826	$	7,117

See notes to condensed consolidated financial statements.

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SANDERSON FARMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

April 30, 2021

NOTE 1—ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three and six months ended April 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending October 31, 2021.

The condensed consolidated balance sheet at October 31, 2020 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for its fiscal year ended October 31, 2020.

New Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses, 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. We adopted ASU 2016-13 during our first quarter of fiscal 2021, and adoption did not have a material effect on our consolidated financial statements. Under the new standard, we are required to record on our balance sheet an allowance for expected credit losses, which is estimated utilizing historical experience and current and expected economic conditions. Our allowance for expected credit losses is recorded on the accounts receivable, net line of the Condensed Consolidated Balance Sheets and is immaterial to our financial position.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Accounting Standards Codification 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020, our fiscal 2022. We are currently evaluating the impact of this new guidance on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. This guidance, which became effective on March 12, 2020, and can be applied through December 31, 2022, has not affected our consolidated financial statements. We have a revolving credit facility that references LIBOR, and we are assessing how this standard may be applied to specific contract modifications through December 31, 2022.

NOTE 2—REVENUE

Revenue Recognition

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 smaller 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. 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.

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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. Revenue is reported gross of any freight charge that is separately invoiced to a customer, and all freight costs are accounted for as cost of sales.

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, we recognize costs of commissions paid to third-party brokers as selling, general and administrative expenses.

Disaggregation of Revenue

The following tables disaggregate our net sales by product category:


Product Category	Three Months Ended April 30, 2021		Three Months Ended April 30, 2020
	(in thousands)
Fresh, chill-packed chicken	$	387,328	$	343,165
Fresh, vacuum-sealed chicken	428,661		265,258
Fresh, ice-packed chicken	193,757		130,798
Frozen chicken	71,924		62,187
Prepared chicken	46,498		38,810
Other	5,712		4,493
Total net sales	$	1,133,880	$	844,711


Product Category	Six Months Ended April 30, 2021		Six Months Ended April 30, 2020
	(in thousands)
Fresh, chill-packed chicken	$	763,580	$	630,432
Fresh, vacuum-sealed chicken	722,779		576,554
Fresh, ice-packed chicken	325,438		251,261
Frozen chicken	135,327		108,861
Prepared chicken	85,413		90,192
Other	10,649		10,489
Total net sales	$	2,043,186	$	1,667,789

NOTE 3—INVENTORIES

Inventories consisted of the following:


Inventory type	April 30, 2021		October 31, 2020
	(in thousands)
Live poultry-broilers and breeders	$	223,762	$	180,013
Feed, eggs and other	60,290		53,318
Processed poultry	41,645		32,952
Prepared chicken	12,555		16,142
Packaging materials	9,190		7,582
Total Inventories	$	347,442	$	290,007

NOTE 4—PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, net, consisted of the following:

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Description	April 30, 2021		October 31, 2020
	(in thousands)
Land and buildings	$	952,118	$	931,674
Machinery and equipment	1,382,694		1,350,725
Work-in-process	38,014		16,914
	2,372,826		2,299,313
Less accumulated depreciation	(1,141,720)		(1,074,567)
Property, plant and equipment, net	$	1,231,106	$	1,224,746

NOTE 5—STOCK COMPENSATION PLANS

Refer to Note 10 and Note 11 of the Company’s October 31, 2020 audited financial statements in the Company's 2020 Annual Report on Form 10-K for further information on our employee benefit plans and stock based compensation plans, respectively. Total stock based compensation expense during the three and six months ended April 30, 2021 was $3.1 million and $5.8 million, respectively, as compared to total stock based compensation expense of $2.4 million and $5.2 million, respectively, for the three and six months ended April 30, 2020.

During the six months ended April 30, 2021, participants in the Company’s Management Share Purchase Plan ("MSPP") elected to receive a total of 3,662 shares of restricted stock at an average price of $142.88 per share instead of a specified percentage of their cash compensation, and the Company issued 869 matching restricted shares. During the three and six months ended April 30, 2021, the Company recorded compensation expense for the MSPP shares, included in the total stock based compensation expense above, of $125,000 and $200,000, respectively, as compared to $48,000 and $104,000, respectively, during the three and six months ended April 30, 2020.

During fiscal 2021, 2020 and 2019, 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, there is an additional one-year period during which the participant must remain employed by the Company before the shares are paid out. If the Company's average return on equity and average return on sales meet or 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 executed on November 1, 2020 totaled 87,350. As of April 30, 2021, the Company could not determine that achievement of the applicable performance based criteria is probable due to operating results to date 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, 2019. The target number of shares specified in those agreements totaled 56,575. As of April 30, 2021, the Company could not determine that achievement of the applicable performance based criteria is probable due to operating results to date and the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.

The performance period has lapsed for the performance share agreements that were entered into on November 1, 2018, and the Company's average return on equity and average return on sales did not meet the threshold amounts defined by those agreements. As a result, no compensation expense has been recorded related to those agreements.

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Had the Company determined that it was probable that the maximum amount of those outstanding awards from the agreements entered into on November 1, 2019 and November 1, 2020 would be earned, an additional $9.0 million and $3.7

SEC Form 10-Q filed by Sanderson Farms, Inc.