|
|
Item 1.
|
Financial Statements
|
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
|
|
|
|
|
|
|
|
|
|
April 30,
2019
|
|
October 31,
2018
|
|
(Unaudited)
|
|
(Note 1)
|
Assets
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
96,938
|
|
|
$
|
121,193
|
|
Accounts receivable, net
|
126,889
|
|
|
121,932
|
|
Receivable from insurance companies
|
5,983
|
|
|
7,094
|
|
Inventories
|
285,473
|
|
|
240,056
|
|
Refundable income taxes
|
5,611
|
|
|
32,974
|
|
Prepaid expenses and other current assets
|
52,250
|
|
|
43,240
|
|
Total current assets
|
573,144
|
|
|
566,489
|
|
Property, plant and equipment
|
2,091,324
|
|
|
1,961,497
|
|
Less accumulated depreciation
|
(923,947
|
)
|
|
(873,909
|
)
|
|
1,167,377
|
|
|
1,087,588
|
|
Other assets
|
7,211
|
|
|
5,363
|
|
Total assets
|
$
|
1,747,732
|
|
|
$
|
1,659,440
|
|
Liabilities and stockholders’ equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
98,451
|
|
|
$
|
128,936
|
|
Dividends payable
|
7,089
|
|
|
—
|
|
Accrued expenses
|
61,932
|
|
|
69,953
|
|
Total current liabilities
|
167,472
|
|
|
198,889
|
|
Long-term debt
|
100,000
|
|
|
—
|
|
Claims payable and other liabilities
|
10,056
|
|
|
9,865
|
|
Deferred income taxes
|
69,492
|
|
|
62,793
|
|
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—22,154,245 and 22,099,780 at April 30, 2019 and October 31, 2018, respectively
|
22,154
|
|
|
22,100
|
|
Paid-in capital
|
85,409
|
|
|
81,269
|
|
Retained earnings
|
1,293,149
|
|
|
1,284,524
|
|
Total stockholders’ equity
|
1,400,712
|
|
|
1,387,893
|
|
Total liabilities and stockholders’ equity
|
$
|
1,747,732
|
|
|
$
|
1,659,440
|
|
See notes to condensed consolidated financial statements.
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,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net sales
|
$
|
845,229
|
|
|
$
|
813,474
|
|
|
$
|
1,588,617
|
|
|
$
|
1,585,422
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
Cost of sales
|
740,833
|
|
|
703,410
|
|
|
1,449,233
|
|
|
1,405,511
|
|
Selling, general and administrative
|
49,230
|
|
|
55,037
|
|
|
107,765
|
|
|
107,612
|
|
|
790,063
|
|
|
758,447
|
|
|
1,556,998
|
|
|
1,513,123
|
|
Operating income
|
55,166
|
|
|
55,027
|
|
|
31,619
|
|
|
72,299
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest income
|
—
|
|
|
905
|
|
|
—
|
|
|
1,324
|
|
Interest expense
|
(1,173
|
)
|
|
(506
|
)
|
|
(1,682
|
)
|
|
(1,029
|
)
|
Other
|
2
|
|
|
4
|
|
|
2
|
|
|
6
|
|
|
(1,171
|
)
|
|
403
|
|
|
(1,680
|
)
|
|
301
|
|
Income before income taxes
|
53,995
|
|
|
55,430
|
|
|
29,939
|
|
|
72,600
|
|
Income tax expense (benefit)
|
13,359
|
|
|
13,482
|
|
|
7,136
|
|
|
(20,554
|
)
|
Net income
|
$
|
40,636
|
|
|
$
|
41,948
|
|
|
$
|
22,803
|
|
|
$
|
93,154
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.83
|
|
|
$
|
1.84
|
|
|
$
|
1.03
|
|
|
$
|
4.08
|
|
Diluted
|
$
|
1.83
|
|
|
$
|
1.84
|
|
|
$
|
1.03
|
|
|
$
|
4.08
|
|
Dividends per share
|
$
|
0.32
|
|
|
$
|
0.32
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
See notes to condensed consolidated financial statements.
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands, except shares and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
Common Stock
|
|
Paid-In
Capital
|
|
Retained
Earnings
|
|
Total
Stockholders’
Equity
|
Shares
|
|
Amount
|
|
|
|
Balance at October 31, 2017
|
22,802,690
|
|
|
$
|
22,803
|
|
|
$
|
134,999
|
|
|
$
|
1,275,060
|
|
|
$
|
1,432,862
|
|
Net income - First Quarter 2018
|
—
|
|
|
—
|
|
|
—
|
|
|
51,206
|
|
|
51,206
|
|
Cash dividends ($0.32 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,305
|
)
|
|
(7,305
|
)
|
Stock compensation plan transactions
|
26,208
|
|
|
26
|
|
|
(4,188
|
)
|
|
—
|
|
|
(4,162
|
)
|
Amortization of unearned compensation
|
—
|
|
|
—
|
|
|
5,730
|
|
|
—
|
|
|
5,730
|
|
Balance at January 31, 2018
|
22,828,898
|
|
|
$
|
22,829
|
|
|
$
|
136,541
|
|
|
$
|
1,318,961
|
|
|
$
|
1,478,331
|
|
Net income - Second Quarter 2018
|
—
|
|
|
—
|
|
|
—
|
|
|
41,948
|
|
|
41,948
|
|
Cash dividends ($0.32 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,308
|
)
|
|
(7,308
|
)
|
Stock compensation plan transactions
|
7,509
|
|
|
7
|
|
|
1,042
|
|
|
—
|
|
|
1,049
|
|
Amortization of unearned compensation
|
—
|
|
|
—
|
|
|
3,934
|
|
|
—
|
|
|
3,934
|
|
Balance at April 30, 2018
|
22,836,407
|
|
|
$
|
22,836
|
|
|
$
|
141,517
|
|
|
$
|
1,353,601
|
|
|
$
|
1,517,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
Common Stock
|
|
Paid-In
Capital
|
|
Retained
Earnings
|
|
Total
Stockholders’
Equity
|
Shares
|
|
Amount
|
|
|
|
Balance at October 31, 2018
|
22,099,780
|
|
|
$
|
22,100
|
|
|
$
|
81,269
|
|
|
$
|
1,284,524
|
|
|
$
|
1,387,893
|
|
Net loss - First Quarter 2019
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,833
|
)
|
|
(17,833
|
)
|
Cash dividends ($0.32 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,089
|
)
|
|
(7,089
|
)
|
Stock compensation plan transactions
|
53,688
|
|
|
53
|
|
|
(2,126
|
)
|
|
—
|
|
|
(2,073
|
)
|
Amortization of unearned compensation
|
—
|
|
|
—
|
|
|
2,313
|
|
|
—
|
|
|
2,313
|
|
Balance at January 31, 2019
|
22,153,468
|
|
|
$
|
22,153
|
|
|
$
|
81,456
|
|
|
$
|
1,259,602
|
|
|
$
|
1,363,211
|
|
Net income - Second Quarter 2019
|
—
|
|
|
—
|
|
|
—
|
|
|
40,636
|
|
|
40,636
|
|
Cash dividends ($0.32 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,089
|
)
|
|
(7,089
|
)
|
Stock compensation plan transactions
|
777
|
|
|
1
|
|
|
1,628
|
|
|
—
|
|
|
1,629
|
|
Amortization of unearned compensation
|
—
|
|
|
—
|
|
|
2,325
|
|
|
—
|
|
|
2,325
|
|
Balance at April 30, 2019
|
22,154,245
|
|
|
$
|
22,154
|
|
|
$
|
85,409
|
|
|
$
|
1,293,149
|
|
|
$
|
1,400,712
|
|
See notes to condensed consolidated financial statements.
SANDERSON FARMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
April 30,
|
|
2019
|
|
2018
|
Operating activities
|
|
|
|
Net income
|
$
|
22,803
|
|
|
$
|
93,154
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
62,379
|
|
|
53,859
|
|
Amortization of share-based compensation
|
5,907
|
|
|
10,623
|
|
Live inventory adjustment
|
(9,600
|
)
|
|
—
|
|
Provision for losses (recoveries) on accounts receivable
|
(1,500
|
)
|
|
—
|
|
Deferred income taxes
|
6,699
|
|
|
(25,765
|
)
|
Change in assets and liabilities:
|
|
|
|
Accounts receivable - trade
|
(3,457
|
)
|
|
(6,732
|
)
|
Accounts receivable - insurance
|
1,111
|
|
|
—
|
|
Income taxes
|
27,363
|
|
|
(33,779
|
)
|
Inventories
|
(35,817
|
)
|
|
(14,981
|
)
|
Prepaid expenses and other assets
|
(9,160
|
)
|
|
1,161
|
|
Accounts payable
|
(10,738
|
)
|
|
6,970
|
|
Accrued expenses and other liabilities
|
(6,193
|
)
|
|
(38,485
|
)
|
Total adjustments
|
26,994
|
|
|
(47,129
|
)
|
Net cash provided by operating activities
|
49,797
|
|
|
46,025
|
|
Investing activities
|
|
|
|
Capital expenditures
|
(162,268
|
)
|
|
(126,928
|
)
|
Net proceeds from sale of property and equipment
|
880
|
|
|
892
|
|
Net cash used in investing activities
|
(161,388
|
)
|
|
(126,036
|
)
|
Financing activities
|
|
|
|
Payment of debt issuance costs
|
(2,225
|
)
|
|
—
|
|
Borrowings from revolving line of credit
|
100,000
|
|
|
—
|
|
Proceeds from issuance of restricted stock under stock compensation plans
|
479
|
|
|
894
|
|
Payments from issuance of common stock under stock compensation plans
|
(3,829
|
)
|
|
(5,603
|
)
|
Dividends paid
|
(7,089
|
)
|
|
(7,305
|
)
|
Net cash provided by (used in) financing activities
|
87,336
|
|
|
(12,014
|
)
|
Net change in cash and cash equivalents
|
(24,255
|
)
|
|
(92,025
|
)
|
Cash and cash equivalents at beginning of period
|
121,193
|
|
|
419,285
|
|
Cash and cash equivalents at end of period
|
$
|
96,938
|
|
|
$
|
327,260
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
Capital expenditures included in accounts payable
|
$
|
5,174
|
|
|
$
|
17,304
|
|
Dividends payable
|
$
|
7,089
|
|
|
$
|
7,307
|
|
See notes to condensed consolidated financial statements.
SANDERSON FARMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 30, 2019
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, 2019
are not necessarily indicative of the results that may be expected for the fiscal year ending
October 31, 2019
.
The condensed consolidated balance sheet at
October 31, 2018
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, 2018
.
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 2 - 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 guidance is effective for annual reporting periods,
and interim periods within those annual reporting periods, beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
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 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. 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.
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 will be accounted for in the same manner. That is, in both instances, revenue will be reported gross of any freight charge, and all freight costs will be 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 the second quarter of fiscal 2019, we recognized revenue of approximately
$6.7 million
related to those freight charges, as compared to approximately
$4.6 million
recognized as a reduction to cost of sales during the second quarter of fiscal 2018. During the first six months of fiscal 2019, we recognized revenue of approximately
$13.3 million
related to those freight charges, as compared to approximately
$8.5 million
recognized as a reduction to cost of sales during the first six months of fiscal 2018.
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 the second quarter of fiscal 2019, we recognized approximately
$2.6 million
in commissions as selling, general and administrative expenses, as compared to approximately
$2.8 million
recognized as a reduction to revenue during the second quarter of fiscal 2018. During the first six months of fiscal 2019, we recognized approximately
$5.3 million
in commissions as selling, general and administrative expenses, as compared to approximately
$5.2 million
recognized as a reduction to revenue during the first six months of fiscal 2018.
Disaggregation of Revenue
The following table disaggregates our net sales by product category (in millions):
|
|
|
|
|
|
|
|
|
Product Category
|
Three Months Ended April 30, 2019
|
|
Six Months Ended April 30, 2019
|
Fresh, chill-packed chicken
|
$
|
269.3
|
|
|
$
|
537.8
|
|
Fresh, vacuum-sealed chicken
|
330.8
|
|
|
590.8
|
|
Fresh, ice-packed chicken
|
132.4
|
|
|
232.4
|
|
Minimally prepared chicken
|
62.0
|
|
|
119.4
|
|
Frozen chicken
|
44.1
|
|
|
92.7
|
|
Other
|
6.6
|
|
|
15.5
|
|
Total net sales
|
$
|
845.2
|
|
|
$
|
1,588.6
|
|
NOTE 3—INVENTORIES
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
Inventory type
|
April 30, 2019
|
|
October 31, 2018
|
Live poultry-broilers and breeders
|
$
|
186,586
|
|
|
$
|
150,980
|
|
Feed, eggs and other
|
40,390
|
|
|
37,965
|
|
Processed poultry
|
33,327
|
|
|
30,973
|
|
Prepared chicken
|
17,572
|
|
|
13,591
|
|
Packaging materials
|
7,598
|
|
|
6,547
|
|
Total Inventories
|
$
|
285,473
|
|
|
$
|
240,056
|
|
NOTE 4—STOCK COMPENSATION PLANS
Refer to Note 8 and Note 9 of the Company’s
October 31, 2018
audited financial statements in the Company's
2018
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, 2019
was
$3.0 million
and
$5.9 million
, respectively, as compared to total stock based compensation expense of
$4.4 million
and
$10.6 million
, respectively, for the
three and six
months ended
April 30, 2018
.
During the
six
months ended
April 30, 2019
, participants in the Company’s Management Share Purchase Plan ("MSPP") elected to receive a total of
4,126
shares of restricted stock at an average price of
$116.13
per share instead of a specified percentage of their cash compensation, and the Company issued
984
matching restricted shares. During the
three and six
months ended
April 30, 2019
, the Company recorded compensation expense for the MSPP shares, included in the total stock based compensation expense above, of
$105,000
and
$196,000
, respectively, as compared to
$103,000
and
$165,000
, respectively, during the
three and six
months ended
April 30, 2018
.
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, 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 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, 2018 totaled
74,650
. As of
April 30, 2019
, the Company could not determine that achievement of the applicable performance based criteria is probable due to 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. The target number of shares specified in the agreements executed on November 1, 2017 totaled
53,850
. As of April 30, 2019, the Company could not determine that achievement of the applicable performance based criteria is probable due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
The Compensation Committee of the Company's Board of Directors has determined that the performance share agreements entered into on November 1, 2016 have been earned at a level between the threshold and target levels for the return on equity performance criterion and between the target and maximum levels for the return on sales criterion, subject to the satisfaction of the additional
one
-year service period ending on October 31, 2019. Accordingly, the
three and six
months ended
April 30, 2019
include compensation expense of
$0.7 million
and
$1.3 million
, respectively, related to those agreements, as compared to compensation expense of
$1.5 million
and
$4.8 million
, respectively, during the
three and six
months ended
April 30, 2018
. Because management's initial determination of probability was made during the three months ended January 31, 2018, and because the accrual is made using the cumulative catch-up method, the compensation expense recorded during the first half of fiscal 2018 related to the agreements entered into on November 1, 2016 was greater than that recorded during the first half of fiscal 2019. As of
April 30, 2019
, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2016 totaled
85,159
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 six months of the service period ending October 31, 2019. The Company will recognize the remaining
$1.3 million
of unearned compensation related to these shares over the remaining service period.
Had the Company determined that it was probable that the maximum amount of those outstanding awards from the agreements entered into on November 1, 2017 and November 1, 2018 would be earned, an additional
$7.8
million and
$2.5
million, respectively, would have been accrued as of
April 30, 2019
.
The Company's compensation cost related to performance share agreements is summarized as follows (in thousands, except number of shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Date of Performance Share Agreement
|
|
Number of shares issued (actual (a) or estimated (e))
|
|
April 30, 2019
|
|
April 30, 2018
|
|
April 30, 2019
|
|
April 30, 2018
|
November 1, 2015
|
|
145,197 (a)
|
|
$
|
—
|
|
|
$
|
828
|
|
|
$
|
—
|
|
|
$
|
1,674
|
|
November 1, 2016
|
|
85,159 (e)
|
|
650
|
|
|
1,519
|
|
|
1,263
|
|
|
4,845
|
|
November 1, 2017 (1)
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
November 1, 2018 (1)
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total compensation cost
|
|
|
|
$
|
650
|
|
|
$
|
2,347
|
|
|
$
|
1,263
|
|
|
$
|
6,519
|
|
Note (1) - As of April 30, 2019, the Company could not determine that achievement of the applicable performance-based criteria is probable for the agreements entered into on November 1, 2017 and 2018 due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
On November 1, 2018, the Company granted
74,650
shares of restricted stock to certain officers and key management employees. The restricted stock had a grant date fair value of
$102.18
per share and will vest on
November 1, 2022
. On February 14, 2019 the Company granted an aggregate of
13,684
shares of restricted stock to all of its non-employee directors. The restricted stock had a grant date fair value of
$120.61
per share and vests
one
,
two
or
three years
from the date of grant. The Company also has unvested restricted stock grants outstanding that were granted during prior fiscal years to its officers, key employees and outside directors. The aggregate number of shares outstanding at
April 30, 2019
related to all unvested restricted stock grants totaled
286,795
. During the
three and six
months ended
April 30, 2019
, the Company recorded compensation expense, included in the total stock based compensation expense above, of
$2.2 million
and
$4.4 million
,
respectively, related to restricted stock grants, as compared to
$1.9 million
and
$3.9 million
, respectively, during the
three and six
months ended
April 30, 2018
. The Company had
$16.7 million
in unrecognized share-based compensation costs as of
April 30, 2019
, which will be recognized over a weighted average remaining vesting period of approximately
2 years
.
NOTE 5—EARNINGS PER SHARE
Certain share-based payment awards described in Note 4 - Stock Compensation Plans above entitling holders to receive non-forfeitable dividends before vesting are considered participating securities and thus are 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 vested shares.
The following table presents earnings per share.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 30, 2019
|
|
April 30, 2018
|
|
(in thousands except per share amounts)
|
Net income
|
$
|
40,636
|
|
|
$
|
41,948
|
|
Distributed and undistributed (earnings) to unvested restricted stock
|
(597
|
)
|
|
(598
|
)
|
Distributed and undistributed earnings to common shareholders—Basic
|
$
|
40,039
|
|
|
$
|
41,350
|
|
Weighted average shares outstanding—Basic
|
21,830
|
|
|
22,511
|
|
Weighted average shares outstanding—Diluted
|
21,830
|
|
|
22,511
|
|
Earnings per common share—Basic
|
$
|
1.83
|
|
|
$
|
1.84
|
|
Earnings per common share—Diluted
|
$
|
1.83
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
April 30, 2019
|
|
April 30, 2018
|
|
(in thousands except per share amounts)
|
Net income
|
$
|
22,803
|
|
|
$
|
93,154
|
|
Distributed and undistributed (earnings) to unvested restricted stock
|
(340
|
)
|
|
(1,329
|
)
|
Distributed and undistributed earnings to common shareholders—Basic
|
$
|
22,463
|
|
|
$
|
91,825
|
|
Weighted average shares outstanding—Basic
|
21,822
|
|
|
22,506
|
|
Weighted average shares outstanding—Diluted
|
21,822
|
|
|
22,506
|
|
Earnings per common share—Basic
|
$
|
1.03
|
|
|
$
|
4.08
|
|
Earnings per common share—Diluted
|
$
|
1.03
|
|
|
$
|
4.08
|
|
|
|
|
|
NOTE 6—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 long-term debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2019
|
|
October 31, 2018
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
Total Debt (in millions)
|
$
|
96.6
|
|
|
$
|
100.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 7—COMMITMENTS AND CONTINGENCIES
Litigation
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.
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, adding three additional poultry producers as defendants. On November 13, 2018, the commercial and institutional indirect purchaser plaintiffs filed their fifth amended complaint. 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.
Between December 8, 2017 and April 25, 2019, additional purported direct-purchaser entities individually brought twenty-five separate suits against nineteen poultry producers, including Sanderson Farms, and Agri Stats in the United States District Court for the Northern District of Illinois and the United States District Court for the District of Kansas. These suits allege substantially similar claims to the direct purchaser class complaint described above. Those 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. The parties are currently engaged in discovery. It is possible additional individual actions may be filed. Separately, the Company has become 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 includes a request to produce all discovery in the case to a grand jury. 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. That appeal is now fully briefed, and the Court of Appeals heard oral argument on August 31, 2018. The Company is awaiting a ruling on the appeal. If the plaintiffs were to prevail in the action, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On January 30, 2017, the Company received a letter from 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. 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 is in the Company’s best interests to pursue any of the actions asserted in the shareholder’s letter. On April 26, 2017, the special committee reported to the Company’s board of directors its determination that it is not in the Company’s best interests to take any of the demanded actions at this time, and that no governance improvements related to the subject matter of the demand are needed at this time. 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. 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. 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.
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 seek 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 includes 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. On February 13, 2018, the Company filed a motion for sanctions under Federal Rule of Civil Procedure 11 on the basis that Plaintiffs and their counsel knowingly included false or inaccurate statements and unsupported allegations in their complaints and other filings. The Court denied that motion on April 2, 2018. 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 continue 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 plaintiffs filed a third amended complaint. The third amended complaint alleges 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, and the parties are currently engaged in expert discovery. On April 1, 2019, the Company filed a motion to dismiss for lack of subject matter jurisdiction on grounds that the remaining plaintiffs lacked standing. The motion is scheduled for a hearing on May 30, 2019. The Company continues to vigorously defend itself; 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.
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 April 30, 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.
NOTE 8—CREDIT AGREEMENT
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
April 30, 2019
, was
$970.4 million
. The credit is unsecured and, unless extended, will expire on
March 21, 2024
. As of
April 30, 2019
, the Company had borrowed
$100.0 million
, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$874.7 million
of borrowing capacity available under the facility. As of May 29, 2019, the Company had borrowed
$80.0 million
under the facility, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$894.7
million of borrowing capacity available under the facility.
NOTE 9—INCOME TAXES
The Company’s estimated annual effective tax rates for the
three and six
months ended
April 30, 2019
were
24.7%
and
23.8%
, respectively, as compared to
24.3%
and
(28.3)%
, respectively, for the
three and six
months ended
April 30, 2018
. During the first quarter of fiscal 2018, the revaluation of our deferred taxes using the tax rate enacted by the Tax Cuts and Jobs Act during that quarter resulted in the recognition of a
$37.5 million
discrete income tax benefit. There were no other material discrete items affecting either period. Excluding the effects of discrete items, the Company's estimated annual effective tax rate for the
six
months ended
April 30, 2019
would have been approximately
24.5%
, as compared to an estimated annual effective tax rate of
24.4%
for the
six
months ended
April 30, 2018
. The Company estimates its effective tax rate for the full fiscal year
2019
, exclusive of discrete items, will be approximately
24.5%
. As of
April 30, 2019
, the Company's deferred income tax liability was
$69.5 million
as compared to
$62.8 million
at
October 31, 2018
,
an increase
of
$6.7 million
.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of the Company’s Annual Report on Form 10-K for its fiscal year ended
October 31, 2018
.
This Quarterly 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 our latest 10-K and 10-Q reports, and to the following:
(1)
Changes in the market price for the Company’s finished products and feed grains, both of which may fluctuate substantially and exhibit cyclical characteristics typically associated with commodity markets.
(2)
Changes in economic and business conditions, monetary and fiscal policies or the amount of growth, stagnation or 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.
(3)
Changes in the political or economic climate, trade policies, laws and regulations or the domestic poultry industry of 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.
(4)
Changes in laws, regulations, and other activities in government agencies and similar organizations applicable to the Company and the poultry industry and changes in laws, regulations and other activities in government agencies and similar organizations related to food safety.
(5)
Various inventory risks due to changes in market conditions, including, but not limited to, the risk that net realizable 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.
(6)
Changes in and effects of competition, which is significant in all markets in which the Company competes, and the 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)
Changes in accounting policies and practices adopted voluntarily by the Company or required to be adopted by accounting principles generally accepted in the United States.
(8)
Disease outbreaks affecting the production, performance and/or marketability of the Company’s poultry products, or the contamination of its products.
(9)
Changes in the availability and cost of labor and growers.
(10)
The loss of any of the Company’s major customers.
(11)
Inclement weather that could hurt Company flocks or otherwise adversely affect the Company's operations, or changes in global weather patterns that could affect the supply and price of feed grains.
(12)
Failure to respond to changing consumer preferences and negative or competitive media campaigns.
(13)
Failure to successfully and efficiently start up and run a new plant or integrate any business the Company might acquire.
(14)
Unfavorable results from currently pending litigation and proceedings, or litigation and proceedings that could arise in the future.
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 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 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, marketing and distribution. 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.
Consistent with the poultry industry, the Company’s profitability is substantially affected by the market prices for its finished products and feed grains, both of which may fluctuate substantially 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.
In March 2017, the Company announced the selection of sites in Lindale, Mineola and Smith County, Texas, for the construction of a new poultry processing complex. 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 initial phase of operations of the new complex began during the first quarter of fiscal 2019. 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 our workforce. See "The construction and potential benefits of our new facilities are subject to risks and uncertainties" in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.
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
April 30, 2019
, was
$970.4 million
. The credit is unsecured and, unless extended, will expire on
March 21, 2024
. As of
April 30, 2019
, the Company had borrowed
$100.0 million
under the facility, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$874.7 million
of borrowing capacity available under the facility. As of May 29, 2019, the Company had borrowed
$80.0 million
under the facility, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$894.7 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.
EXECUTIVE OVERVIEW OF RESULTS
The Company's margins were relatively flat during the second quarter of fiscal 2019, when compared to the same period a year ago, reflecting increases in average selling prices and average costs of goods sold. The higher average selling prices were attributable to improved demand for products produced at our plants that process larger birds, sold primarily to food service and export customers, as well as for products produced at our plants that process medium sized birds, primarily sold to retail grocery store customers. There are extensive reports that African Swine Fever has killed a significant percentage of the hog herd in China. Due to the wide range of estimates, however, the extent of the loss is uncertain. A significant loss could have an effect on the global supply, demand and prices for alternative proteins, including our products.
Our higher average cost of goods sold reflect a slight increase in 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.
When combined, prices paid for corn and soybean meal were slightly higher during the second quarter of fiscal 2019 as compared to the same period a year ago. Those higher prices were partially offset by improved broiler performance, and the result was a slight increase in feed costs in broiler flocks processed as compared to the second quarter of fiscal 2018. We have priced a portion of our corn and soybean meal needs through September 2019. Both corn and soybean balance tables remain healthy, but, due to the planting delays caused by wet conditions across the Midwest, prices have recently trended higher.
Historically, when a significant number of acres intended for corn have been planted after May 31, corn yields have declined, which could lead to higher cash market prices for corn. We are unable to predict whether and to what extent wet weather will affect grain prices. Had we priced our remaining fiscal 2019 needs at May 29, 2019 cash market prices, our cost of feed grains based on fiscal 2018 volumes would be approximately $31.4 million lower during fiscal 2019 as compared to fiscal 2018.
RESULTS OF OPERATIONS
Net sales for the
second
quarter ended
April 30, 2019
were
$845.2 million
as compared to
$813.5 million
for the
second
quarter ended
April 30, 2018
,
an increase
of
$31.8 million
, or
3.9%
. Net sales of poultry products for the
second
quarter ended
April 30, 2019
and
2018
, were
$782.9 million
and
$768.6 million
, respectively,
an increase
of
$14.3 million
, or
1.9%
. The
increase
in net sales of poultry products resulted from a
3.5%
increase
in the average sales price of poultry products sold, partially offset by a
1.5%
decrease
in the pounds of poultry products sold. During the
second
quarter of fiscal
2019
, the Company sold
1,051.4 million
pounds of poultry products to outside customers, down from
1,067.9 million
pounds during the
second
quarter of fiscal
2018
. The decrease in pounds of poultry products sold to outside customers was primarily attributable to a 9.4 million pound increase in the quantity of poultry products transferred internally to our prepared chicken facility. During the second quarter of fiscal 2019, 21.5 million pounds of poultry products were transferred to the prepared chicken facility, as compared to 12.0 million pounds transferred during the second quarter of fiscal 2018. Overall, market prices for poultry products increased during the
second
quarter of fiscal
2019
as compared to the same quarter of fiscal
2018
. When compared to the
second
quarter of fiscal
2018
, Urner Barry average market prices for tenders, jumbo wings and boneless thigh meat increased by 4.4%, 32.7% and 3.5%, respectively, while average market prices for boneless breast meat and leg quarters decreased by 2.4% and 7.0%, respectively. Average realized prices for chicken products sold to retail grocery store customers slightly decreased during the second quarter of fiscal 2019, as compared to the second quarter of fiscal 2018, but continue to reflect stable demand. Net sales of prepared chicken products for the quarters ended
April 30, 2019
and
2018
were
$62.3 million
and
$44.9 million
, respectively, representing
an increase
of
38.8%
. This
increase
resulted from a
46.0%
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 the
second
quarter of fiscal
2019
, the Company sold
33.3 million
pounds of prepared chicken products,
up
from
22.8 million
pounds during the
second
quarter of fiscal
2018
.
Net sales for the first
six
months of fiscal
2019
were
$1,588.6 million
, as compared to
$1,585.4 million
for the first
six
months of fiscal
2018
,
an increase
of
$3.2 million
, or
0.2%
. Net sales of poultry products for the first
six
months of fiscal
2019
and
2018
were
$1,468.6 million
and
$1,500.0 million
, respectively,
a decrease
of
$31.4 million
, or
2.1%
. The decrease in the net sales of poultry products resulted from a 2.7% decrease in the pounds of poultry products sold, partially offset by a slight increase in the average sales price of poultry products sold. During the first
six
months of fiscal
2019
, the Company sold
2,116.1 million
pounds of poultry products to outside customers, down from
2,173.8 million
pounds during the first
six
months of fiscal
2018
. The decrease in pounds of poultry products sold to outside customers was primarily attributable to a 21.8 million pound increase in the quantity of poultry products transferred internally to our prepared chicken facility. Overall, market prices for poultry products increased during the first
six
months of fiscal
2019
as compared to the same period of fiscal
2018
. When compared to the first
six
months of fiscal
2018
, Urner Barry average market prices for tenders, jumbo wings and boneless thigh meat increased by 2.5%, 12.4% and 4.6%, respectively, while average market prices for boneless breast meat and leg quarters decreased by 4.7% and 14.9%, respectively. Average realized prices for chicken products sold to retail grocery store customers were relatively flat during the first
six
months of fiscal
2019
, as compared to the same period of fiscal 2018, and continue to reflect stable demand. Net sales of prepared chicken products for the
six
months ended
April 30, 2019
and
2018
were
$120.0 million
and
$85.4 million
, respectively, representing
an increase
of
40.5%
. This
increase
resulted from a
49.2%
increase
in the pounds of prepared chicken products sold, partially offset by a
5.8%
decrease
in the average sales price of prepared chicken products sold. During the first
six
months of fiscal
2019
, the Company sold
64.7 million
pounds of prepared chicken products,
up
from
43.3 million
pounds during the first
six
months of fiscal
2018
.
Cost of sales for the
second
quarter of fiscal
2019
was
$740.8 million
as compared to
$703.4 million
during the
second
quarter of fiscal
2018
,
an increase
of
$37.4 million
, or
5.3%
. Cost of sales of poultry products during the
second
quarter of fiscal
2019
, as compared to the
second
quarter of fiscal
2018
, was
$682.9 million
and
$660.3 million
, respectively, which represents a
5.1%
increase
in the cost of sales per pound of poultry products. As illustrated in the table below, which for comparative purposes includes poultry products transferred to the Company's prepared chicken plant, the
increase
in the cost of sales per pound of poultry products resulted from a
$0.0348
per pound, or 9.4%,
increase
in other costs of sales of poultry products and
an increase
in the cost of feed per pound of broilers processed of
$0.0075
, or
3.0%
.
Poultry Cost of Sales
(In thousands, except per pound data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
April 30, 2019
|
|
Three Months Ended
April 30, 2018
|
|
Incr/(Decr)
|
Description
|
Dollars
|
|
Per lb.
|
|
Dollars
|
|
Per lb.
|
|
Dollars
|
|
Per lb.
|
Beginning Inventory
|
$
|
27,175
|
|
|
$
|
0.4041
|
|
|
$
|
31,855
|
|
|
$
|
0.4405
|
|
|
$
|
(4,680
|
)
|
|
$
|
(0.0364
|
)
|
Feed in broilers processed
|
275,411
|
|
|
0.2541
|
|
|
269,204
|
|
|
0.2466
|
|
|
6,207
|
|
|
0.0075
|
|
All other cost of sales
|
438,322
|
|
|
0.4044
|
|
|
403,443
|
|
|
0.3696
|
|
|
34,879
|
|
|
0.0348
|
|
Less: Ending Inventory
|
33,327
|
|
|
0.4259
|
|
|
30,428
|
|
|
0.3745
|
|
|
2,899
|
|
|
0.0514
|
|
Total poultry cost of sales
|
$
|
707,581
|
|
(1)
|
$
|
0.6596
|
|
|
$
|
674,074
|
|
(1)
|
$
|
0.6242
|
|
|
$
|
33,507
|
|
|
$
|
0.0354
|
|
Pounds:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Inventory
|
67,244
|
|
|
|
|
72,322
|
|
|
|
|
|
|
|
Poultry processed
|
1,084,008
|
|
|
|
|
1,091,576
|
|
|
|
|
|
|
|
Poultry sold
|
1,072,820
|
|
(1)
|
|
|
1,079,909
|
|
(1)
|
|
|
|
|
|
Ending Inventory
|
78,247
|
|
|
|
|
81,259
|
|
|
|
|
|
|
|
Note (1) - For comparative purposes, includes the costs and pounds of product sold to the Company's prepared chicken plant.
Other costs of sales of poultry products consists 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
$0.0348
per pound processed, or
9.4%
, during this year’s
second
fiscal quarter compared to the same quarter a year ago. Part of this increase is attributable to inefficiencies at the Company's new Tyler, Texas facilities, which began initial operations during the last month of the first quarter of fiscal 2019. A new facility's other costs of sales per pound processed will be higher compared to similar complexes until the new complex reaches full capacity. Excluding the Tyler facilities, other costs of sales would have increased by $0.0211 per pound processed, or 5.7%. This increase is primarily attributable to higher contract grower pay, labor, maintenance and repair, and freight costs. The increase in freight cost 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 the second quarter of fiscal 2019, freight cost was negatively impacted during the quarter, and the negative impact to freight cost was offset by a corresponding increase to revenue. For more information regarding the Company's adoption of ASU 2014-09, refer to "Part I., Item 1., Notes to Condensed Consolidated Financial Statements, Note 2 - Revenue."
Cost of sales of the Company’s prepared chicken products during the
second
quarter of fiscal
2019
were
$57.9 million
as compared to
$43.1 million
during the same quarter a year ago,
an increase
of
$14.8 million
, or
34.2%
. This increase was primarily attributable to a
46.0%
increase
in the pounds of prepared chicken sold, partially offset by an 8.1% decrease in the average cost per pound of prepared chicken products sold.
Cost of sales for the first
six
months of fiscal
2019
was
$1,449.2 million
, as compared to
$1,405.5 million
during the first
six
months of fiscal
2018
,
an increase
of
$43.7 million
, or
3.1%
. Cost of sales of poultry products during the first
six
months of fiscal
2019
, as compared to the first
six
months of fiscal
2018
, was
$1,341.1 million
and
$1,327.2 million
, respectively, which represents a
1.0%
increase
in the cost of sales per pound 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
in the cost of sales per pound of poultry products resulted from a
$0.0284
per pound, or 7.7%,
increase
in other costs of sales of poultry products and
an increase
in the cost of feed per pound of broilers processed of
$0.0041
, or
1.7%
.
Poultry Cost of Sales
(In thousands, except per pound data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
April 30, 2019
|
|
Six Months Ended
April 30, 2018
|
|
Incr/(Decr)
|
Description
|
Dollars
|
|
Per lb.
|
|
Dollars
|
|
Per lb.
|
|
Dollars
|
|
Per lb.
|
Beginning Inventory
|
$
|
30,973
|
|
|
$
|
0.3686
|
|
|
$
|
37,769
|
|
|
$
|
0.4437
|
|
|
$
|
(6,796
|
)
|
|
$
|
(0.0751
|
)
|
Feed in broilers processed
|
536,262
|
|
|
0.2497
|
|
|
534,961
|
|
|
0.2456
|
|
|
1,301
|
|
|
0.0041
|
|
All other cost of sales
|
849,339
|
|
|
0.3955
|
|
|
799,492
|
|
|
0.3671
|
|
|
49,847
|
|
|
0.0284
|
|
Less: Ending Inventory
|
33,327
|
|
|
0.4259
|
|
|
30,428
|
|
|
0.3745
|
|
|
2,899
|
|
|
0.0514
|
|
Total poultry cost of sales
|
$
|
1,383,247
|
|
(1)
|
$
|
0.6413
|
|
|
$
|
1,341,794
|
|
(1) (2)
|
$
|
0.6159
|
|
|
$
|
41,453
|
|
|
$
|
0.0254
|
|
Pounds:
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Inventory
|
84,020
|
|
|
|
|
85,120
|
|
|
|
|
|
|
|
Poultry processed
|
2,147,661
|
|
|
|
|
2,178,010
|
|
(2)
|
|
|
|
|
|
Poultry sold
|
2,157,001
|
|
(1)
|
|
|
2,178,693
|
|
(1) (2)
|
|
|
|
|
|
Ending Inventory
|
78,247
|
|
|
|
|
81,259
|
|
|
|
|
|
|
|
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 the six months ended April 30, 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 consists 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
$0.0284
per pound processed, or
7.7%
, during the first
six
months of fiscal
2019
, as compared to the same period a year ago. During the first
six
months of fiscal 2019, other costs of sales of poultry products include a 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 cost of sales of poultry products increased by $0.0328 per pound processed, or 8.9%, during the first
six
months of fiscal 2019, as compared to the same period a year ago. Part of this increase is attributable to inefficiencies at the Company's new Tyler, Texas facilities, which began initial operations during the last month of the first quarter of fiscal 2019. A new facility's other costs of sales per pound processed will be higher compared to similar complexes until the new complex reaches full capacity. Excluding the Tyler facilities, other costs of sales would have increased by $0.0214 per pound processed, or 5.8%. This increase is primarily attributable to higher contract grower pay, labor, antimicrobial intervention, maintenance and repair, and freight costs. The increase in freight cost 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 the first six months of fiscal 2019, freight cost was negatively impacted during the period, and the negative impact to freight cost was offset by a corresponding increase to revenue. For more information regarding the Company's adoption of ASU 2014-09, refer to "Part I., Item 1., Notes to Condensed Consolidated Financial Statements, Note 2 - Revenue."
The Company recorded the value of live broiler inventories on hand at
April 30, 2019
at cost. When market conditions are favorable, 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, process, and distribute those birds will be higher in the aggregate than the anticipated sales price, 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
April 30, 2019
or
April 30, 2018
.
Selling, general and administrative ("SG&A") costs during the
second
quarter of fiscal
2019
were
$49.2 million
,
a decrease
of
$5.8 million
compared to the
$55.0 million
during the
second
quarter of fiscal
2018
. SG&A costs during the six months ended
April 30, 2019
were
$107.8 million
,
an increase
of
$0.2 million
compared to the
$107.6 million
during the six months ended
April 30, 2018
. The following tables include the components of SG&A costs for the
three and six
months ended
April 30, 2019
and
2018
.
Selling, General and Administrative Costs
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Three Months Ended
April 30, 2019
|
|
Three Months Ended
April 30, 2018
|
|
Increase/(Decrease)
|
Advertising expense
|
$
|
3,049
|
|
|
$
|
8,799
|
|
|
$
|
(5,750
|
)
|
Start-up expense (Tyler)
|
—
|
|
|
2,412
|
|
|
(2,412
|
)
|
Stock compensation expense
|
2,754
|
|
|
4,228
|
|
|
(1,474
|
)
|
Trainee expense
|
4,390
|
|
|
5,642
|
|
|
(1,252
|
)
|
Legal expense
|
6,148
|
|
|
5,526
|
|
|
622
|
|
Administrative salaries
|
11,306
|
|
|
10,553
|
|
|
753
|
|
All other SG&A
|
21,583
|
|
|
17,877
|
|
|
3,706
|
|
Total SG&A
|
$
|
49,230
|
|
|
$
|
55,037
|
|
|
$
|
(5,807
|
)
|
Selling, General and Administrative Costs
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Six Months Ended
April 30, 2019
|
|
Six Months Ended
April 30, 2018
|
|
Increase/(Decrease)
|
Start-up expense (Tyler)
|
$
|
9,361
|
|
|
$
|
3,258
|
|
|
$
|
6,103
|
|
Legal expense
|
11,704
|
|
|
8,118
|
|
|
3,586
|
|
Administrative salaries
|
22,485
|
|
|
20,764
|
|
|
1,721
|
|
Trainee expense
|
9,093
|
|
|
10,831
|
|
|
(1,738
|
)
|
Stock compensation expense
|
5,494
|
|
|
10,279
|
|
|
(4,785
|
)
|
Advertising expense
|
6,481
|
|
|
17,573
|
|
|
(11,092
|
)
|
All other SG&A
|
43,147
|
|
|
36,789
|
|
|
6,358
|
|
Total SG&A
|
$
|
107,765
|
|
|
$
|
107,612
|
|
|
$
|
153
|
|
Regarding both tables 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 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 expense is primarily attributable to our ongoing defense of the litigation described in "Part II, Item 1. Legal Proceedings" of this Form 10-Q. The decrease in stock compensation expense is the result of management determining during the first quarter of fiscal 2018 that it was probable the performance shares granted on November 1, 2016 would be earned at some level. Accordingly, a catch-up accrual was recorded during the first quarter of fiscal 2018 and normal monthly accruals were made during the second quarter of fiscal 2018. No such accruals for any performance shares granted after November 1, 2016 were made during the first or second quarters of fiscal 2019, because management is currently unable to determine that it is probable that the performance shares granted on November 1, 2017 and November 1, 2018 will be earned. Stock compensation is further described in "Part I, Item 1, Notes to condensed consolidated financial statements, Note 4 - Stock Compensation Plans." 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 increase in all other SG&A expenses is primarily 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 the second quarter and first six months of fiscal 2019, SG&A expenses were negatively impacted during the periods, 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, refer to "Part I., Item 1., Notes to Condensed Consolidated Financial Statements, Note 2 - Revenue."
The Company’s operating
income
for the
three and six
months ended
April 30, 2019
was
$55.2 million
and
$31.6 million
, respectively, as compared to operating
income
for the
three and six
months ended
April 30, 2018
of
$55.0 million
and
$72.3 million
, respectively. The decrease in operating margin for the six months ended
April 30, 2019
, as compared to the same period a year ago, resulted primarily from higher average costs of goods sold combined with relatively flat average selling prices.
The Company recognized no interest income during the
second
quarter and first
six
months of fiscal
2019
, as compared to
$0.9 million
and
$1.3 million
, respectively, of interest income during the
second
quarter and first
six
months of fiscal 2018. Interest expense during the
second
quarter and first
six
months of fiscal
2019
was
$1.2 million
and
$1.7 million
, respectively, as compared to
$0.5 million
and
$1.0 million
, respectively, during the
second
quarter and first
six
months of fiscal
2018
. During the first quarter of fiscal 2019, the Company capitalized approximately $0.3 million of interest costs related to the construction of the new complex in Lindale, Mineola and Smith County, Texas,
The Company’s estimated annual effective tax rates for the
three and six
months ended
April 30, 2019
were
24.7%
and
23.8%
, respectively, as compared to
24.3%
and
(28.3)%
, respectively, for the
three and six
months ended
April 30, 2018
. During the first quarter of fiscal 2018, the revaluation of our deferred taxes using the tax rate enacted by the Tax Cuts and Jobs Act during that quarter resulted in the recognition of a $37.5 million discrete income tax benefit. There were no other material discrete items affecting the comparative periods. Excluding the effects of discrete items, the Company's estimated annual effective tax rates for the first
six
months of fiscal
2019
and
2018
would have been approximately 24.5% and 24.4%, respectively. The Company estimates its effective tax rate for the full fiscal year
2019
, exclusive of discrete items, will be approximately 24.5%.
As of
April 30, 2019
, the Company's deferred income tax liability was
$69.5 million
as compared to
$62.8 million
at
October 31, 2018
,
an increase
of
$6.7 million
.
During the
three and six
months ended
April 30, 2019
, the Company’s net
income
was
$40.6 million
, or
$1.83
per share, and
$22.8 million
, or
$1.03
per share, respectively. For the
three and six
months ended
April 30, 2018
, the Company’s net income was
$41.9 million
, or
$1.84
per share, and
$93.2 million
, or
$4.08
per share, respectively. The decrease in net income for the first six months of fiscal 2019 as compared to the same period in fiscal 2018 is primarily attributable to a higher tax rate, which is due to the discrete benefit recognized during the first quarter of fiscal 2018 and no such benefit recognized during the first six months of fiscal 2019, and higher average costs of goods sold, partially offset by slightly higher average selling prices.
Liquidity and Capital Resources
The Company’s working capital, calculated by subtracting current liabilities from current assets, at
April 30, 2019
was
$405.7 million
, and its current ratio, calculated by dividing current assets by current liabilities, was
3.4
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 during fiscal
2019
include cash on hand at October 31, 2018, 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
April 30,
2019, the Company had borrowed
$100.0 million
under the facility, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$874.7 million
of borrowing capacity available under the facility. As of May 29, 2019, the Company had borrowed
$80.0 million
under the facility, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$894.7 million
of borrowing capacity available under the facility.
The Company’s cash position at
April 30, 2019
and
October 31, 2018
consisted of
$96.9 million
and
$121.2 million
, respectively, in cash and short-term cash investments. 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
April 30, 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 was available to the Company on demand to fund its operations.
Cash flows provided by operating activities during the
six
months ended
April 30, 2019
totaled
$49.8 million
, as compared to cash flows provided by operating activities of
$46.0 million
during the
six
months ended
April 30, 2018
. Cash flows from operating activities
increased
by
$3.8 million
, resulting from offsetting cash flows. During the first six months of fiscal 2019, the Company realized lower margins due to an increase in the average cost of goods sold, as compared to the fist six months of fiscal 2018, which more than offset the slight increase in average selling prices during the same comparative periods. The lower margins were partially offset by the change in cash paid or received for income taxes during the first six months of fiscal 2019, as compared to the first six months of fiscal 2018. During the first six months of fiscal 2019, the Company's net cash receipts from income taxes totaled approximately $26.9 million, as compared to approximately $39.0 million in net cash paid for
income taxes during the first six months of fiscal 2018. Further offsetting the lower margins is the change in cash bonuses paid by the Company, which totaled approximately $36.0 million during the first three months of fiscal 2018, as compared to no cash bonuses paid during the first three months of fiscal 2019. The bonuses paid during the first three months of fiscal 2018 related to fiscal 2017 performance.
Cash flows used in investing activities during the first
six
months of fiscal
2019
and
2018
were
$161.4 million
and
$126.0 million
, respectively. The Company’s capital expenditures during the first
six
months of fiscal
2019
were approximately
$162.3 million
, and included approximately $54.8 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. Capital expenditures for the first
six
months of fiscal
2018
were
$126.9 million
, including approximately $41.2 million related to construction at the Tyler, Texas complex and approximately $24.3 million related to progress payments made under the aircraft purchase agreements.
Cash flows provided by financing activities during the
six
months ended
April 30, 2019
totaled
$87.3 million
, as compared to cash flows used in financing activities of
$12.0 million
during the
six
months ended
April 30, 2018
. The change in cash flows from financing activities is primarily attributable to the Company's borrowing $100.0 million under its revolving credit facility during the first six months of fiscal 2019, as compared to no borrowings during the first six months of fiscal 2018.
As of May 20, 2019, the Company’s capital budget for fiscal
2019
, excluding operating leases, is approximately $255.0 million. The Company expects the
2019
capital budget to be funded by internally generated working capital, cash flows from operations and, as needed, funds available under the Company's revolving credit facility. The fiscal
2019
capital budget includes approximately $70.5 million combined for multiple large-scale equipment upgrades and corresponding building upgrades at multiple complexes, approximately $55.5 million for the final stages of construction of the Company's new Tyler, Texas complex, and approximately $9.4 million for final payments due under purchase agreements for delivery of new aircraft. Excluding the budgets for the projects detailed above, the fiscal
2019
capital budget is approximately $119.6 million. These amounts are estimates and are subject to change as we move through fiscal
2019
.
In March 2017, the Company announced the selection of sites in Lindale, Mineola and Smith County, Texas, for the construction of a new poultry processing complex. 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 initial phase of operations of the new complex began during the first quarter of fiscal 2019. 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 our workforce. See "The construction and potential benefits of our new facilities are subject to risks and uncertainties" in the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.
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 production 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 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
April 30, 2019
, was
$970.4 million
. The credit is unsecured and, unless extended, will expire on
March 21, 2024
. As of
April 30, 2019
, the Company had borrowed
$100.0 million
under the facility, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$874.7 million
of borrowing capacity available under the facility. As of May 29, 2019, the Company had borrowed
$80.0 million
under the facility, and had approximately
$25.3 million
outstanding in letters of credit, leaving
$894.7 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.
Critical Accounting Estimates
We consider accounting policies related to allowance for doubtful accounts, inventories, long-lived assets, accrued self-insurance, performance share plans, income taxes and contingencies to be critical accounting estimates. These policies are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended
October 31, 2018
.
New Accounting Pronouncements
In May 2017, the FASB issued 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 2 - 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 guidance is effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2018, our fiscal 2020. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.