NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Presentation:
The consolidated financial statements include the accounts of Sanderson Farms, Inc. (the “Company”) and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Certain reclassifications have been made to prior year financial statements to conform to the current year's presentation, including cash flow reclassifications for tax benefits from vesting of restricted stock in relation to the Company's retrospective adoption of Accounting Standards Update No. 2016-09, "Improvements to Employee Share-Based Payment Accounting." Refer to the "Impact of Recently Issued Accounting Standards" sub-section below for a description of the resulting reclassification to the cash flow statement items previously reported for the years ended October 31, 2016 and October 31, 2015.
Business:
The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared chicken items. The Company’s net sales and cost of sales are significantly affected by market price fluctuations of its principal products sold and of its principal feed ingredients, corn and other grains.
The Company sells to retailers, distributors and casual dining operators primarily in the southeastern, southwestern, northeastern and western United States. Management periodically performs credit evaluations of its customers’ financial condition and generally does not require collateral.
One
customer accounted for more than 10% of consolidated sales for each of the years ended
October 31, 2017
,
2016
and
2015
. Sales to that customer accounted for
17.0%
,
17.5%
, and
16.2%
of the Company’s consolidated net sales in fiscal
2017
,
2016
, and
2015
, respectively. Shipping and handling costs are included as a component of cost of sales.
Generally, revenue is recognized in connection with a transaction when the Company has agreed to sell, and our customer has agreed to purchase, a specific quantity of product, when delivery has occurred, when the price to the buyer has been fixed, and when collectability is reasonably assured. For most customers, this occurs when the product is delivered to customers. Revenue on certain international sales is recognized upon transfer of title, which may occur at varying times between shipment and delivery. Revenue is recognized as the net amount estimated to be received after deducting estimated amounts for discounts, cooperative advertising allowances, product terms and other items.
RECONCILIATION OF GROSS SALES TO NET SALES DOLLARS (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Category
|
Description
|
|
Fiscal Year 2017
|
|
Fiscal Year 2016
|
|
Fiscal Year 2015
|
Fresh Ice Packed Chicken
|
Gross Sales
|
|
$
|
585.0
|
|
|
$
|
438.5
|
|
|
$
|
399.1
|
|
Commissions
|
|
(4.3
|
)
|
|
(4.2
|
)
|
|
(4.1
|
)
|
Sales and Customer Allowances
|
|
(15.6
|
)
|
|
(14.1
|
)
|
|
(12.8
|
)
|
Other
(1)
|
|
(18.0
|
)
|
|
(13.5
|
)
|
|
(13.5
|
)
|
Net Sales
|
|
547.1
|
|
|
406.7
|
|
|
368.7
|
|
Chill Pack Chicken
|
Gross Sales
|
|
1,061.1
|
|
|
999.9
|
|
|
1,057.6
|
|
Commissions
|
|
(4.6
|
)
|
|
(4.4
|
)
|
|
(4.6
|
)
|
Sales and Customer Allowances
|
|
(5.6
|
)
|
|
(5.7
|
)
|
|
(6.5
|
)
|
Other
(1)
|
|
(6.2
|
)
|
|
(5.6
|
)
|
|
(5.3
|
)
|
Net Sales
|
|
1,044.7
|
|
|
984.2
|
|
|
1,041.2
|
|
Frozen Chicken
|
Gross Sales
|
|
224.5
|
|
|
144.0
|
|
|
178.3
|
|
Commissions
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
Sales and Customer Allowances
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
(1)
|
|
(0.6
|
)
|
|
(0.5
|
)
|
|
(0.6
|
)
|
Net Sales
|
|
223.9
|
|
|
143.5
|
|
|
177.6
|
|
Fresh Vacuum Sealed Chicken
|
Gross Sales
|
|
1,359.8
|
|
|
1,085.7
|
|
|
1,010.6
|
|
Commissions
|
|
(1.5
|
)
|
|
(1.9
|
)
|
|
(1.7
|
)
|
Sales and Customer Allowances
|
|
(9.9
|
)
|
|
(9.4
|
)
|
|
(9.0
|
)
|
Other
(1)
|
|
(9.3
|
)
|
|
(7.5
|
)
|
|
(7.7
|
)
|
Net Sales
|
|
1,339.1
|
|
|
1,066.9
|
|
|
992.2
|
|
Minimally Prepared Chicken
|
Gross Sales
|
|
172.4
|
|
|
186.0
|
|
|
187.7
|
|
Commissions
|
|
(0.8
|
)
|
|
(0.4
|
)
|
|
(0.5
|
)
|
Sales and Customer Allowances
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Other
(1)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Net Sales
|
|
170.8
|
|
|
185.1
|
|
|
186.8
|
|
Mechanically Deboned Chicken
|
Gross Sales
|
|
16.6
|
|
|
29.7
|
|
|
37.0
|
|
Commissions
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales and Customer Allowances
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
Net Sales
|
|
16.6
|
|
|
29.7
|
|
|
37.0
|
|
Totals
|
Gross Sales
|
|
3,419.4
|
|
|
2,883.8
|
|
|
2,870.3
|
|
Commissions
|
|
(11.2
|
)
|
|
(10.9
|
)
|
|
(11.0
|
)
|
Sales and Customer Allowances
|
|
(31.5
|
)
|
|
(29.4
|
)
|
|
(28.4
|
)
|
Other
(1)
|
|
(34.5
|
)
|
|
(27.4
|
)
|
|
(27.4
|
)
|
Net Sales
|
|
$
|
3,342.2
|
|
|
$
|
2,816.1
|
|
|
$
|
2,803.5
|
|
|
|
(1)
|
Other deductions include short weights, miscellaneous deductions, credit memos, rebates and other items.
|
Sales of offal are considered by-products; accordingly, these amounts reduce cost of sales and totaled
$32.6 million
,
$27.8 million
and
$31.2 million
in fiscal
2017
,
2016
and
2015
, respectively.
The Company sells certain of its products either directly to foreign markets or to U.S. based customers who resell the product in foreign markets. These foreign markets for fiscal 2017 and 2016 were primarily Mexico, Central Asia and the Middle East. For fiscal 2015, these foreign markets were primarily Mexico, Russia, China, Eastern Europe, the Middle East and the Caribbean. These export sales for fiscal years
2017
,
2016
and
2015
totaled approximately
$268.5 million
,
$213.5 million
and
$207.8 million
, respectively. The Company does not believe that the amount of sales attributable to any single foreign country
is material to its total sales during any of the periods presented. The Company’s export sales are facilitated through independent food brokers located in the United States and the Company’s internal sales staff.
Use of Estimates:
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents:
The Company considers all highly liquid investments with maturities of
ninety days
or less when purchased to be cash equivalents.
Allowance for Doubtful Accounts:
In the normal course of business, the Company extends credit to its customers on a short-term basis. Although credit risks associated with our customers are considered minimal, the Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts based on an individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivable balances. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve is recorded to reduce the receivable to the amount expected to be collected. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due us could be reduced by a material amount and the allowance for doubtful accounts and related bad debt expense would increase by the same amount.
Inventories:
Processed and prepared inventories and inventories of feed, eggs, medication and packaging supplies are stated at the lower of cost (average method) or market value.
Live poultry inventories of broilers are stated at the lower of cost or market value and breeders at cost less accumulated amortization. The costs associated with breeders, including breeder chicks, feed, medicine and grower pay, are accumulated up to the production stage and amortized over
nine months
using the straight-line method.
When the projected cost to complete, process and sell broilers in live inventory exceeds the expected market value for the finished product, the Company reduces the value of live inventories from cost to market.
Property, Plant and Equipment:
Property, plant and equipment is stated at cost. Depreciation of property, plant and equipment is provided by the straight-line method over the estimated useful lives of
15
to
39
years for buildings and
3
to
12
years for machinery and equipment. During fiscal 2016 and 2015, the Company capitalized interest of
$0.3 million
and
$0.5 million
, respectively, related to new facilities under construction at the time in Laurel, Mississippi, St. Pauls, North Carolina, and Palestine, Texas. During fiscal 2017, the Company recorded
no
capitalized interest.
Impairment of Long-Lived Assets:
The Company continually reevaluates the carrying value of its long-lived assets based on events or changes in circumstances which indicate that the carrying value may not be recoverable. As part of this reevaluation and when indicators are present, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposal. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss, based on the fair value of the assets, is recognized through a charge to operations.
Self-Insurance Programs:
Insurance expense for workers’ compensation benefits and employee-related health care benefits are estimated using historical experience and actuarial estimates. The Company accrues expenses in its workers’ compensation and employee benefit plans for both known claims as well as claims incurred but not reported. Stop-loss coverage is maintained with third party insurers to limit the Company’s total exposure. Management regularly reviews the assumptions used to recognize periodic expenses. Any resulting adjustments to accrued claims are reflected in current operating results. There are no material adjustments to expenses accrued in prior periods in current expenses.
Advertising and Marketing Costs:
The Company expenses advertising costs as incurred. Advertising costs are included in selling, general and administrative expenses and totaled
$40.7 million
,
$25.1 million
and
$13.1 million
for fiscal
2017
,
2016
and
2015
, respectively.
Income Taxes:
Deferred income taxes are accounted for using the liability method and relate principally to depreciation expense, stock based compensation programs and self-insurance programs accounted for differently for financial and income tax purposes.
Valuation allowances are recorded when it is more likely than not some or all of a deferred tax asset will not be realized.
The Company is periodically audited by taxing authorities and considers any adjustments, interest, and penalties incurred as a result of the audits in computing and reporting income tax expense. Any audit adjustments could have a material impact on the Company’s effective tax rate. Tax periods for fiscal years 2014 through 2017 remain open to examination by federal and state taxing jurisdictions to which the Company is subject.
Share-Based Compensation:
The Company accounts for all share-based payments to employees, including grants of restricted stock and performance-based shares, in the income statement based on their fair values. For performance-based shares, the Company recognizes expense when management determines the performance criteria are probable of being met.
Earnings Per Share:
Basic earnings per share is based upon the weighted average number of common shares outstanding during the year. Share-based payment awards entitling holders to receive non-forfeitable dividends before vesting are considered participating securities and thus included in the calculation of basic earnings per share. These awards are included in the calculation of basic earnings per share under the two-class method. The two-class method allocates earnings for the period between common shareholders and other security holders. The participating awards receiving dividends are allocated the same amount of income as if they were outstanding shares. Diluted earnings per share includes any dilutive effects of options, warrants, restricted stock and convertible securities.
Fair Value of Financial Instruments:
The Company sometimes holds certain items that are required to be disclosed at fair value, primarily cash equivalents and 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.
At
October 31, 2017
and
October 31, 2016
, the fair value of the Company's cash and cash equivalents approximated their carrying value due to the short maturity of these financial instruments and were categorized as a Level 2 measurement. Inputs used to measure fair value were primarily recent trading prices and prevailing market interest rates.
Impact of Recently Issued Accounting Standards:
During fiscal 2017, the Company early-adopted Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting. The provisions of this update that materially affected our consolidated financial statements, or could potentially materially affect them in the future, require all
income tax effects of stock awards to be recognized in the statement of operations during the period the awards vest or are settled, rather than recording excess tax benefits or deficiencies in additional paid-in capital, and require the related amounts to be presented as operating activities on the statement of cash flows, rather than financing activities. During the period of adoption, the standard requires the Company to account for the transactions as if the standard had been adopted on the first day of the fiscal year in which it was adopted. As a result of adoption, our income tax expense for fiscal 2017, was reduced by approximately
$3.3 million
from excess tax benefits, approximately
$676,000
of which were previously recorded as additional paid-in-capital during our first quarter of fiscal 2017. Additionally, excess tax benefits are now presented as operating activities on the statement of cash flows, rather than financing activities. The Company chose to apply that provision retrospectively, and as a result, reclassified approximately
$3.9 million
and
$2.6 million
, respectively, of excess tax benefits recognized during fiscal 2016 and 2015 from financing activities to operating activities. Additional provisions from this guidance relate to accounting for forfeitures and the presentation of an employee's use of shares to satisfy the employer's statutory tax withholding obligations. Adoption of those two provisions did not have a material effect on our consolidated financial statements. The Company has elected to account for forfeitures as they occur, rather than estimating forfeitures when determining the amount of compensation cost to recognize each period. The Company will continue to present employees' use of shares to satisfy our statutory withholding obligations as financing activities on the statement of cash flows.
In May 2017, the Financial Accounting Standards Board ("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 interim and annual periods beginning after December 15, 2017, our fiscal 2019. Early adoption is permitted. The impact this guidance will have on our 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 March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost. The guidance requires the service cost component of defined benefit pension plans and other post-retirement benefit plans to be reported in the same line item or items as other compensation costs arising from the services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be reported outside of operating income. The guidance is effective for interim and annual periods beginning after December 15, 2017, our fiscal 2019. 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, which 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 disclosures of key information about the 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.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The guidance requires an entity to measure inventory at the lower of cost or net realizable value and is effective for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016, our fiscal 2018. Early adoption is permitted and the prospective transition method should be applied. We do not expect adoption to have a material effect on our consolidated financial statements.
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. Early adoption is permitted for annual reporting periods and interim periods within those annual reporting periods beginning after December 15, 2016. Companies have the option to adopt retrospectively or modified retrospectively with a cumulative effect adjustment. The Company expects to adopt this standard as of November 1, 2018, the beginning of our fiscal 2019, using the modified retrospective approach. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements. Although we are still evaluating the impact, we do not currently expect adoption to have a material effect on our consolidated financial statements, other than additional disclosure requirements.
2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Live poultry-broilers and breeders
|
$
|
161,575
|
|
|
$
|
143,554
|
|
Feed, eggs and other
|
35,361
|
|
|
40,834
|
|
Processed poultry
|
37,769
|
|
|
15,378
|
|
Prepared chicken
|
12,207
|
|
|
13,640
|
|
Packaging materials
|
5,853
|
|
|
6,900
|
|
|
$
|
252,765
|
|
|
$
|
220,306
|
|
3. Prepaid expenses
Prepaid expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Parts and supplies
|
$
|
25,293
|
|
|
$
|
23,022
|
|
Prepaid insurance
|
6,691
|
|
|
6,084
|
|
Other prepaid expenses
|
6,636
|
|
|
5,453
|
|
|
$
|
38,620
|
|
|
$
|
34,559
|
|
4. Accrued expenses
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Accrued bonuses
|
$
|
36,028
|
|
|
$
|
441
|
|
Workers’ compensation claims
|
8,351
|
|
|
7,971
|
|
Accrued wages
|
11,574
|
|
|
8,415
|
|
Accrued rebates
|
6,753
|
|
|
6,761
|
|
Accrued vacation
|
8,223
|
|
|
6,721
|
|
Accrued property taxes
|
9,318
|
|
|
8,710
|
|
Accrued payroll taxes
|
11,383
|
|
|
9,209
|
|
Other accrued expenses
|
9,538
|
|
|
9,690
|
|
|
$
|
101,168
|
|
|
$
|
57,918
|
|
5. Long-Term debt obligations
The Company had no long-term debt obligations at October 31, 2017 or October 31, 2016. The Company is a party to a revolving credit facility dated
April 28, 2017
, as amended on November 22, 2017, with a maximum available borrowing capacity of
$900.0 million
. The facility has annual capital expenditure limitations of
$100.0 million
,
$105.0 million
,
$110.0 million
,
$115.0 million
,
$120.0 million
and
$125.0 million
for fiscal years 2017 through 2022, respectively, and permits up to
$15.0 million
of the unused capital expenditure limitation from fiscal year 2016 to be carried over to the fiscal year 2017; thereafter, up to
$20.0 million
of the unused limitation for any fiscal year starting with fiscal year 2017 may be carried over to the next fiscal year. The normal capital expenditure limitation for fiscal 2017 was
$115.0 million
(including
$15.0 million
carried over from fiscal 2016), and the normal limitation for fiscal 2018 is
$125.0 million
(including
$20.0 million
carried over from fiscal 2017).
The credit facility also permits capital expenditures up to
$200.5 million
on the construction of a new poultry processing complex in Lindale, Mineola and Smith County, Texas, up to
$210.0 million
on the construction of a potential additional new poultry complex, up to
$15.0 million
on expansion of the Company's existing prepared chicken facility in Flowood, Mississippi, up to
$60.0 million
on a potential new prepared chicken facility, and up to
$70.0 million
on the purchase of three new aircraft. As amended on November 22, 2017, the facility also excludes from the normal capital expenditure limits certain capital projects in an aggregate amount of up to
$135.0 million
. These additional projects, which include the construction of a new feed mill, and other expansions, equipment and changes to the Laurel, Collins, McComb and Hazlehurst, Mississippi complexes; the Waco, Palestine and Brazos, Texas complexes; the Moultrie, Georgia complex; and the Kinston, North Carolina complex, are each subject to their own expenditure limitations.
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 any of the three aforementioned new complexes for the four fiscal quarters beginning on the first day of the fiscal quarter during which the Company gives written notice of its intent to exercise this right. The Company has not exercised this right. The facility also sets a minimum net worth requirement that at
October 31, 2017
, was
$980.2 million
. The credit is unsecured and, unless extended, will expire on April 28, 2022. As of
October 31 and December 13, 2017, the Company had
no
outstanding draws under the facility, and had approximately
$19.7 million
outstanding in letters of credit, leaving
$880.3
million of borrowing capacity available under the facility.
The Company has the option to borrow funds under the revolving line of credit based on the Prime interest rate or the Libor interest rate plus a spread ranging from
0.25%
to
1.50%
. The spread on Libor borrowings and the commitment fee for the unused balance of the revolving credit agreement are determined based upon the Company’s leverage ratio as follows:
|
|
|
|
|
|
|
|
|
Level
|
Leverage Ratio
|
|
Spread
|
|
Commitment Fee
|
1
|
< 25%
|
|
0.25
|
%
|
|
0.20
|
%
|
2
|
≥ 25% and < 35%
|
|
0.50
|
%
|
|
0.25
|
%
|
3
|
≥ 35% and < 45%
|
|
1.00
|
%
|
|
0.30
|
%
|
4
|
≥ 45%
|
|
1.50
|
%
|
|
0.35
|
%
|
6. Income Taxes
Income tax expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Current expense:
|
|
|
|
|
|
Federal
|
$
|
117,611
|
|
|
$
|
67,880
|
|
|
$
|
101,605
|
|
State
|
11,024
|
|
|
7,613
|
|
|
11,704
|
|
|
128,635
|
|
|
75,493
|
|
|
113,309
|
|
Deferred expense (benefit):
|
|
|
|
|
|
Federal
|
15,452
|
|
|
27,983
|
|
|
4,169
|
|
State
|
1,804
|
|
|
1,194
|
|
|
1,043
|
|
Change in valuation allowance
|
(1,106
|
)
|
|
(954
|
)
|
|
(431
|
)
|
|
16,150
|
|
|
28,223
|
|
|
4,781
|
|
|
$
|
144,785
|
|
|
$
|
103,716
|
|
|
$
|
118,090
|
|
Significant components of the Company’s deferred tax assets and liabilities are outlined below.
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
$
|
116,431
|
|
|
$
|
96,027
|
|
Prepaid and other assets
|
2,154
|
|
|
2,243
|
|
Total deferred tax liabilities
|
118,585
|
|
|
98,270
|
|
Deferred tax assets:
|
|
|
|
Accrued expenses and accounts receivable
|
11,941
|
|
|
10,572
|
|
Inventory
|
348
|
|
|
493
|
|
Compensation on restricted stock
|
13,606
|
|
|
10,591
|
|
State income tax credits
|
14,050
|
|
|
15,229
|
|
Other
|
165
|
|
|
166
|
|
Valuation allowance
|
(13,423
|
)
|
|
(14,529
|
)
|
Total deferred tax assets
|
26,687
|
|
|
22,522
|
|
Net deferred tax liabilities
|
$
|
91,898
|
|
|
$
|
75,748
|
|
The increase in the Company's deferred tax liability is primarily attributable to the Company's decision to take bonus depreciation on qualifying assets placed in service during fiscal 2017. The value of assets placed in service during fiscal 2017 is significant due to the start-up of the Company's new St. Pauls, North Carolina facilities.
Included in the deferred tax assets at
October 31, 2017
, are North Carolina Investing in Business Property Credit and North Carolina Jobs Credits totaling
$11.7 million
, as well as Georgia Job Tax Credits totaling
$2.3 million
. The North Carolina Investing in Business Property Credit provides a
7%
investment tax credit for property located in a North Carolina development area, the North Carolina Creating Jobs Credit provides a tax credit for increased employment in North Carolina, and the Georgia Job Tax Credit provides a tax credit for creation and retention of qualifying jobs in Georgia. It is management’s opinion that the majority of the North Carolina and Georgia income tax credits will not be utilized before they expire, and a
$13.4 million
valuation allowance has been recorded as of
October 31, 2017
. These credits expire between fiscal years
2017
and
2023
.
At the end of each reporting period, the Company evaluates all available information at that time to determine if it is more likely than not that some or all of these credits will be utilized. As of
October 31, 2017
,
2016
, and
2015
, the Company determined that a total of
$627,000
,
$700,000
, and
$350,000
, respectively, would be recovered. Accordingly, those amounts were released from the valuation allowance and benefited deferred tax expense in the respective periods.
The differences between the consolidated effective income tax rate and the federal statutory rate of
35.0%
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31,
|
|
2017
|
|
2016
|
|
2015
|
|
(In thousands)
|
Income taxes at statutory rate
|
$
|
148,585
|
|
|
$
|
102,437
|
|
|
$
|
116,932
|
|
State income taxes
|
9,038
|
|
|
7,007
|
|
|
8,757
|
|
State income tax credits
|
(606
|
)
|
|
(948
|
)
|
|
(342
|
)
|
Federal income tax credits
|
(390
|
)
|
|
(390
|
)
|
|
(90
|
)
|
Federal manufacturers deduction
|
(11,527
|
)
|
|
(8,425
|
)
|
|
(10,714
|
)
|
Excess tax benefits
|
(3,345
|
)
|
|
—
|
|
|
—
|
|
Nondeductible expenses
|
3,506
|
|
|
2,482
|
|
|
3,234
|
|
Other, net
|
630
|
|
|
2,507
|
|
|
744
|
|
Change in valuation allowance
|
(1,106
|
)
|
|
(954
|
)
|
|
(431
|
)
|
Income tax expense
|
$
|
144,785
|
|
|
$
|
103,716
|
|
|
$
|
118,090
|
|
7. Earnings Per Share
Certain share-based payment awards entitling holders to receive non-forfeitable dividends before vesting are considered participating securities and thus included in the calculation of basic earnings per share, to the extent they are dilutive. These awards are included in the calculation of basic earnings per share under the two-class method. The two-class method allocates earnings for the period between common shareholders and other security holders. The participating awards receiving dividends are allocated the same amount of income as if they were outstanding shares.
The following table presents earnings per share (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended
|
|
October 31, 2017
|
|
October 31, 2016
|
|
October 31, 2015
|
Net income
|
$
|
279,745
|
|
|
$
|
188,961
|
|
|
$
|
216,001
|
|
Distributed and undistributed (earnings) to unvested restricted stock
|
(4,285
|
)
|
|
(2,930
|
)
|
|
(4,172
|
)
|
Distributed and undistributed earnings to common shareholders — Basic
|
275,460
|
|
|
186,031
|
|
|
211,829
|
|
Weighted average shares outstanding — Basic
|
22,393
|
|
|
22,225
|
|
|
22,243
|
|
Weighted average shares outstanding — Diluted
|
22,393
|
|
|
22,225
|
|
|
22,243
|
|
Earnings per common share — Basic
|
$
|
12.30
|
|
|
$
|
8.37
|
|
|
$
|
9.52
|
|
Earnings per common share — Diluted
|
$
|
12.30
|
|
|
$
|
8.37
|
|
|
$
|
9.52
|
|
8. Employee Benefit Plans
The Company has an Employee Stock Ownership Plan (“ESOP”) covering substantially all employees. Contributions to the ESOP are made in cash at the discretion of the Company’s Board of Directors. Total contributions to the ESOP were
$18,000,000
,
$12,300,000
, and
$15,000,000
in fiscal
2017
,
2016
, and
2015
, respectively. Contributions to the ESOP vary in amount, as the contributions are based on profitability.
The Company has a 401(k) Plan which covers substantially all employees after one year of service. Participants in the Plan may contribute up to the maximum allowed by Internal Revenue Service regulations. The Company matches
100%
of employee contributions to the 401(k) Plan up to
3%
of each employee’s salary, and
50%
of employee contributions between
3%
and
5%
of each employee’s salary. The Company’s contributions to the 401(k) Plan totaled
$8,472,000
in fiscal
2017
;
$7,404,000
in fiscal
2016
; and
$6,670,000
in fiscal
2015
.
9. Stock Compensation Plans
On February 17, 2005, the shareholders of the Company approved the Sanderson Farms, Inc. and Affiliates Stock Incentive Plan (the “Plan”). The Plan allows the Company’s Board of Directors to grant certain incentive awards including stock options, stock appreciation rights, restricted stock, and other similar awards. The Company was authorized to award up to
2,250,000
shares under the Plan. On February 17, 2011, the shareholders approved changes to the plan to increase the shares that may be issued under the plan from
2,250,000
to
3,500,000
shares and to increase the number of shares that may be granted in the form of restricted stock from
562,500
to
1,562,500
shares. On February 11, 2016, the shareholders approved the authorization of an additional
700,000
shares issuable under plan, for a total of
4,200,000
authorized shares. The shareholders also approved an increase in the number of shares issuable as restricted stock from
1,562,500
to
2,112,500
shares.
Pursuant to the Plan, the Company’s Board of Directors approves agreements for the issuance of restricted stock to directors, executive officers and other key employees. Restricted stock granted in fiscal
2017
,
2016
and
2015
, vests
three
to
four
years from the date of grant. The vesting schedule is accelerated upon death, disability, the participant’s termination of employment after reaching retirement eligibility, by reason of retirement, or upon a change in control, as defined. Restricted stock grants are valued based upon the closing market price of the Company’s common stock on the date of grant and are recognized as compensation expense over the vesting period. Compensation expense related to restricted stock grants totaled
$7,445,000
;
$6,459,000
; and
$6,452,000
during fiscal
2017
,
2016
and
2015
, respectively.
A summary of the Company’s restricted stock activity and related information is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted
Average Grant
Price
|
Outstanding at October 31, 2014
|
566,050
|
|
|
$
|
49.39
|
|
Granted during fiscal 2015
|
77,600
|
|
|
$
|
82.75
|
|
Vested during 2015
|
(327,988
|
)
|
|
$
|
44.98
|
|
Forfeited during 2015
|
(1,362
|
)
|
|
$
|
62.15
|
|
Outstanding at October 31, 2015
|
314,300
|
|
|
$
|
62.16
|
|
Granted during fiscal 2016
|
101,935
|
|
|
$
|
71.58
|
|
Vested during 2016
|
(119,407
|
)
|
|
$
|
54.09
|
|
Forfeited during 2016
|
(3,018
|
)
|
|
$
|
67.82
|
|
Outstanding at October 31, 2016
|
293,810
|
|
|
$
|
68.65
|
|
Granted during fiscal 2017
|
83,587
|
|
|
$
|
91.71
|
|
Vested during 2017
|
(69,294
|
)
|
|
$
|
55.50
|
|
Forfeited during 2017
|
(6,874
|
)
|
|
$
|
78.22
|
|
Outstanding at October 31, 2017
|
301,229
|
|
|
$
|
77.86
|
|
The Company had
$10.8 million
in unrecognized share-based compensation costs related to the
301,229
unvested shares as of
October 31, 2017
, that will be recognized over a weighted average period of
1 year, 7 months
.
Also pursuant to the Plan, the Company’s Board of Directors approves Management Share Purchase Plan agreements (the “Purchase Plan”) that authorize the issuance of shares of restricted stock to the Company’s directors, executive officers and other key employees. Pursuant to the Purchase Plan, non-employee directors may elect to receive up to
100 percent
of their
annual retainer and meeting fees in the form of restricted stock. Other participants may elect to receive up to
15 percent
of their salary and up to
75 percent
of any bonus earned in the form of restricted stock. The purchase price of the restricted stock is the closing market price of the Company’s common stock on the date of purchase. The Company makes matching contributions of
25 percent
of the restricted shares purchased by participants. Restricted stock issued pursuant to the Purchase Plan vests after three years or immediately upon death, disability, or change in control, as defined. If an employee terminates employment after attaining eligibility for retirement, or a non-employee director retires upon the expiration of his or her board term, the participant’s Purchase Plan shares vest immediately. If a participant’s employment or service as a director is terminated for any other reason prior to the
three
-year vesting period, the participant forfeits the matching contribution and the Company may, at its option, repurchase restricted stock purchased by the participant at the price paid by the participant. Matching contributions are recognized as compensation expense over the vesting period. During fiscal
2017
,
2016
and
2015
, the participants purchased a total of
9,605
;
15,075
; and
15,395
shares of restricted stock pursuant to the Purchase Plan, valued at an average price of
$112.84
,
$84.71
, and
$78.53
, per share, respectively, and the Company issued
2,290
;
3,650
; and
3,734
matching shares, valued at an average price of
$112.84
,
$84.71
, and
$78.53
per share, respectively. During fiscal
2017
,
2016
and
2015
, the participants vested in a total of
17,034
;
16,746
; and
21,540
shares of restricted stock pursuant to the Purchase Plan, valued at an average price of
$80.62
,
$57.41
, and
$51.06
, per share, respectively. During fiscal
2017
,
2016
and
2015
, the participants forfeited a total of
1,461
;
484
; and
112
shares of restricted stock pursuant to the Purchase Plan, respectively. Compensation expense related to the Company’s matching contribution totaled approximately
$392,000
,
$313,000
and
$297,000
in fiscal
2017
,
2016
and
2015
, respectively.
During fiscal
2017
,
2016
and
2015
, the Company entered into performance share agreements that grant certain officers and key employees the right to receive shares of the Company’s common stock, subject to the Company’s achievement of certain performance measures. The performance share agreements specify a target number of shares that a participant can receive based upon the Company’s average return on equity and average return on sales, as defined, during a
two
-year performance period beginning November 1 of each performance period. Although the performance share agreements have a
two
-year performance period, they are subject to an additional
one
year period during which the participant must remain employed by the Company before they are paid out. If the Company’s average return on equity and average return on sales exceed certain threshold amounts for the performance period, participants will receive
50 percent
to
200 percent
of the target number of shares, depending upon the Company’s level of performance. Accruals for performance shares begin during the period management determines that achievement of the applicable performance based criteria is probable at some level. In estimating the probability of the number of shares that will be awarded, the Company considers, among other factors, current and projected grain costs and chicken volumes and pricing, as well as the amount of the Company's commitments to procure grain at a fixed price throughout the performance period. Due to the high level of volatility of these commodity prices and the impact that the change in pricing can have on the Company’s results, the Company’s assessment of probability can change from period to period and can result in a significant revision to the amounts accrued related to the arrangements, as the accruals are adjusted using the cumulative catch-up method of accounting.
The target number of shares specified in the performance share agreements entered into on November 1, 2016 totaled
68,350
. As of October 31, 2017, the Company could not determine that achievement of the applicable performance based criteria is probable due to the uncertainties discussed below, 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, 2015. During fiscal 2017, the Company determined based on combined results of fiscal 2016 and 2017, that achievement of the applicable performance based criteria for the November 1, 2015 agreements is probable at a level between the target and maximum levels. Accordingly, because the accrual is made using the cumulative catch-up method, fiscal 2017 includes compensation expense of
$6,752,000
, as compared to
no
compensation expense recorded during fiscal 2016 related to the agreements entered into on November 1, 2015. As of October 31, 2017, the aggregate number of shares estimated to be awarded related to the performance share agreements entered into on November 1, 2015 totaled
145,777
shares. Since the performance period for those agreements has ended, the actual number of shares that will be awarded can change only due to potential forfeitures during the remaining twelve months of the service period ending October 31, 2018. The Company will recognize the remaining unearned compensation related to these shares over the remaining service period.
The Compensation Committee of the Company's Board of Directors has determined that the performance shares granted November 1, 2014, have been earned at the maximum level. Accordingly, fiscal 2017 includes compensation expense of
$2,787,000
, related to those agreements, as compared to
$5,876,000
during fiscal 2016. Because management's initial determination of probability was made during fiscal 2016, and because the accrual is made using the cumulative catch up method, the compensation expense recorded during fiscal 2016 related to the agreements entered into on November 1, 2014, was greater than that recorded during fiscal 2017. A total of
102,193
shares from the agreements entered into on November 1, 2014 vested and were issued on October 31, 2017.
Had the Company determined that it was probable that the maximum amount of those outstanding awards from the agreements entered into on November 1, 2015 and November 1, 2016 would be earned, an additional
$0.7 million
and
$4.1 million
, respectively, would have been accrued as of
October 31, 2017
.
A summary of the Company's compensation cost related to performance share agreements is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares issued (actual (a) or estimated (e))
|
|
For the years ended
|
Date of Performance Share Agreement
|
|
October 31, 2017
|
|
October 31, 2016
|
|
October 31, 2015
|
November 1, 2012
|
186,951
|
(a)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,891
|
|
November 1, 2013
|
146,169
|
(a)
|
|
—
|
|
|
3,165
|
|
|
6,428
|
|
November 1, 2014
|
102,193
|
(a)
|
|
2,787
|
|
|
5,876
|
|
|
—
|
|
November 1, 2015
|
145,777
|
(e)
|
|
6,752
|
|
|
—
|
|
|
—
|
|
November 1, 2016 (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total compensation cost
|
|
|
$
|
9,539
|
|
|
$
|
9,041
|
|
|
$
|
9,319
|
|
Note (1) - As of October 31, 2017, the Company could not determine that achievement of the applicable performance-based criteria is probable for the agreements entered into on November 1, 2016 due to the uncertainties discussed above, and therefore recorded no compensation expense related to those agreements.
10. Commitments and Contingencies
The Company has approximately
14,669
employees, approximately
1,840
of whom are covered by collective bargaining agreements. Each collective bargaining agreement has a grievance procedure and no strike-no lockout clauses that should assist in maintaining stable labor relations at the applicable facility.
The Company has vehicle and equipment operating leases that expire at various dates through fiscal
2022
. Rental expense under these leases totaled approximately
$17.0 million
,
$13.7 million
, and
$11.6 million
during fiscal
2017
,
2016
and
2015
, respectively. The minimum lease payments of obligations under non-cancelable operating leases at
October 31, 2017
were as follows (in millions):
|
|
|
|
|
Fiscal Year
|
Amount
|
2018
|
$
|
11.7
|
|
2019
|
9.4
|
|
2020
|
7.0
|
|
2021
|
4.5
|
|
2022
|
1.2
|
|
|
$
|
33.8
|
|
At
October 31, 2017
, the Company’s estimated contractual obligations for feed grains, feed ingredients, and packaging supplies totaled
$174.7 million
, with the entire amount due in less than one year.
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 will consist of a hatchery, feed mill, processing plant and waste water treatment facility. Construction commenced on this project during the fourth quarter of fiscal 2017, and initial operations of the new complex are expected to begin during the first calendar quarter of 2019. The Company estimates the total investment in the complex will be approximately
$200.5 million
. As of October 31, 2017, the Company has entered into commitments relating to the new complex totaling approximately $
115.7 million
.
As of October 31, 2017, the Company has outstanding commitments totaling
$36.2 million
related to purchase agreements for future delivery of aircraft. These commitments are expected to be paid as follows:
$32.2 million
during fiscal 2018 and
$4.0 million
during fiscal 2019.
The timing of expenditures related to the obligations discussed above is subject to change as the contracts mature.
Between September 2, 2016 and October 13, 2016, Sanderson Farms, Inc. and our subsidiaries were named as defendants, along with 13 other poultry producers and certain of their affiliated companies, in multiple putative class action lawsuits filed
by direct and indirect purchasers of broiler chickens in the United States District Court for the Northern District of Illinois. The complaints allege that the defendants conspired to unlawfully fix, raise, maintain and stabilize the price of broiler chickens, thereby violating federal and certain states' antitrust laws, and also allege certain related state-law claims. The 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. The lawsuits will now move into discovery, and we intend to continue to defend them vigorously; however, the Company cannot predict the outcome of these actions. If the plaintiffs were to prevail, the Company could be liable for damages, which could have a material, adverse effect on our financial position and results of operations.
On December 8, 2017, nine purported direct purchaser entities individually brought suit against 16 poultry producers and Agri-Stats in the United States District Court for the Northern District of Illinois alleging substantially similar claims to the direct purchaser class complaint described above. The Company has not yet been served, and it is possible additional individual actions may be filed.
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 June 29, 2017, the defendants filed a motion to dismiss the amended complaint, on August 15, 2017, the plaintiffs filed their response, and on September 15, 2017, the defendants filed a reply to the response. The motion is now fully briefed and awaiting decision. The lawsuit is in an early stage and the defendants intend to defend it 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 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. Oral argument on the motion to dismiss is scheduled on January 19, 2018. The lawsuit is in its early stages, and we intend to defend it 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 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. The Company has filed a motion to dismiss the amended complaint, and is awaiting a ruling on that motion. An initial scheduling conference is currently scheduled for January 18, 2018. The lawsuit is in its early stages, and we intend to defend it vigorously; 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.
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 determines the amount of reserves required, if any. At this time, the Company has not accrued any reserve for any matters. 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.
11. Quarterly Financial Data (unaudited)
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|
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Fiscal Year 2017
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|
First
Quarter (1)
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|
Second
Quarter (1)
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(In thousands, except per share data)
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|
|
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(Unaudited)
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|
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Net sales
|
$
|
688,346
|
|
|
$
|
802,038
|
|
|
$
|
931,901
|
|
|
$
|
919,941
|
|
Gross profit
|
81,955
|
|
|
146,755
|
|
|
239,316
|
|
|
173,516
|
|
Net income
|
24,025
|
|
|
67,015
|
|
|
115,834
|
|
|
72,871
|
|
Diluted earnings per share
|
$
|
1.06
|
|
|
$
|
2.95
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|
|
$
|
5.09
|
|
|
$
|
3.20
|
|
Note (1) - Net income and Diluted earnings per share for the first and second quarters differ from the financial statements previously filed for those interim periods due to the Company's adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, during the third quarter of fiscal 2017. As a result of adoption, our income tax expense for the nine months ended July 31, 2017, was reduced by
$952,000
from excess tax benefits. Approximately
$852,000
, or
$0.04
per share, of the benefit was attributable to transactions that occurred during the first quarter of fiscal 2017, and approximately
$72,000
, or
$0.01
per share, of the benefit was attributable to transactions that occurred during the second quarter of fiscal 2017.
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Fiscal Year 2016
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|
First
Quarter
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|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
(In thousands, except per share data)
|
|
|
|
(unaudited)
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|
|
Net sales
|
$
|
605,166
|
|
|
$
|
692,089
|
|
|
$
|
727,991
|
|
|
$
|
790,811
|
|
Gross profit
|
50,105
|
|
|
113,813
|
|
|
129,428
|
|
|
160,655
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Net income
|
10,681
|
|
|
47,602
|
|
|
54,716
|
|
|
75,962
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|
Diluted earnings per share
|
$
|
0.47
|
|
|
$
|
2.11
|
|
|
$
|
2.42
|
|
|
$
|
3.36
|
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